Strategic Management and Organizational Change

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SECOND EDITION

James A. Johnson

Caren C. Rossow

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Theory, Behavior, and Development

S E C O N D E D I T I O NHealth Organizations

James A. Johnson, PhD, MPA, MSc Professor, School of Health Sciences

Central Michigan University and

Visiting Professor, St. George’s University Grenada, West Indies

Caren C. Rossow, DHA, MSA, RN, FACHE Assistant Professor, College of Health Sciences

Indiana University

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Library of Congress Cataloging-in-Publication Data Names: Johnson, James A., 1954- editor. | Rossow, Caren C., editor. Title: Health organizations : theory, behavior, and development / edited by James A. Johnson, Ph.D., M.P.A., M.Sc., Caren C. Rossow, DHA, MSA, RN, FACHE. Description: Second edition. | Burlington, Massachusetts : Jones & Bartlett Learning, [2018] | Includes bibliographical references and index. Identifiers: LCCN 2017019273 | ISBN 9781284109825 (pbk : casebound) Subjects: LCSH: Health services administration. | Organizational behavior. | Organizational sociology. Classification: LCC RA971 .H398 2018 | DDC 362.1068--dc23 LC record available at https:// lccn.loc.gov/2017019273

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DEDICATION

To James Allen Johnson IV, Joseph Mark Johnson, and Arianna Elizabeth Johnson

JAJ

To Emily Jillian Carr and Addison Olivia Carr

CCR

IN MEMORIAM

To those who have passed since the first edition:

M. Nicholas Coppola (chapter author)

Reuben R. McDaniel (chapter author)

and

Elizabeth R. Johnson (daughter and artist)

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PART 1 Organization Theory and Foundations 1 Chapter 1 Introduction to the Study of Health Organizations . . . . .3 Chapter 2 Anatomy and Physiology of Organization Theory . . . . . .9 Chapter 3 Classical Theories of Organization . . . . . . . . . . . . . . . . . .23 Chapter 4 Modern Theories of Organization . . . . . . . . . . . . . . . . . . .35 Chapter 5 Complexity and Postmodern Theories

of Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

Chapter 6 Organizational Leadership Theory . . . . . . . . . . . . . . . . . .59

PART 2 Organization Behavior and Dynamics 83 Chapter 7 Human Behavior and Motivation

in Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . .85

Chapter 8 Group Dynamics and Teams in Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . .99

Chapter 9 Power and Politics in Health Organizations . . . . . . . . . 113 Chapter 10 Conflict Theory and Interpersonal

Dynamics in Health Organizations . . . . . . . . . . . . . . . . 122

Chapter 11 Models of Leadership Strategy and Influence for Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . 133

Chapter 12 Decision Making, Analytics, and Communication in Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . . 155

Brief Contents

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Brief Contents v

Chapter 13 Pathology and Dysfunction in Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . . 175

Chapter 14 Diversity and Organizational Culture in Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . . 185

PART 3 Organization Development and Change 207 Chapter 15 Ethics and Values in Health Organizations . . . . . . . . . 209 Chapter 16 Physician and Clinician Leadership

in Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . . 221

Chapter 17 Governance and Board Development in Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . . 232

Chapter 18 Organizational Change and Sustainability in Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . . 251

Chapter 19 Organization Development and Crisis Management in Health Organizations . . . . . . . . . . . . . 268

Index 275

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Contents Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii

Contributors and Collaborators . . . . . . . . . . . . . . . . xiv

About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv

PART 1 Organization Theory and Foundations 1

Chapter 1 Introduction to the Study of Health Organizations . . . . . . . 3

Studying Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Beyond The Classroom . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Chapter 2 Anatomy and Physiology of Organization Theory . . . . . . . 9

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

What Is Theory? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Anatomy of Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Physiology of Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Learning Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Chapter 3 Classical Theories of Organization . . . . . . . . . . . . . 23

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

Scientific Management . . . . . . . . . . . . . . . . . . . . . . . . . .24

Administrative Principles . . . . . . . . . . . . . . . . . . . . . . . . .26

Bureaucratic Principles . . . . . . . . . . . . . . . . . . . . . . . . . . .28

Human Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

Administrative Behavior . . . . . . . . . . . . . . . . . . . . . . . . .32

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

Chapter 4 Modern Theories of Organization . . . . . . . . . . . . . 35

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

General Systems Theory . . . . . . . . . . . . . . . . . . . . . . . . .36

Contingency Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

Transaction Cost Economics . . . . . . . . . . . . . . . . . . . . .38

Resource Dependence Theory . . . . . . . . . . . . . . . . . . .40

Institutional Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Population Ecology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Chapter 5 Complexity and Postmodern Theories of Organization . . . . . 47

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

Systems Approach in Health . . . . . . . . . . . . . . . . . . . . .48

Complexity Theory in Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50

Emerging Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . .50

Complex Adaptive Systems . . . . . . . . . . . . . . . . . . . . . .52

Managing Health Organizations as Complex Adaptive Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

Chapter 6 Organizational Leadership Theory . . . . . . . . . . . . . . . . . . . . 59

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

Defining Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

A Chronological Review of Leadership Theory . . . .61

Leadership Phase Evolution . . . . . . . . . . . . . . . . . . . . . .63

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73

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Contents vii

PART 2 Organization Behavior and Dynamics 83

Chapter 7 Human Behavior and Motivation in Health Organizations . . . . . 85

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86

Theories of Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . .86

Motivation in the Work Environment . . . . . . . . . . . . .90

Changes in Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . .95

Motivation and Learning . . . . . . . . . . . . . . . . . . . . . . . . .95

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97

Chapter 8 Group Dynamics and Teams in Health Organizations . . . . . 99

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Groups and Teams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Group Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Groups and Teams in Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . 101

Roles, Diversity, and Trust . . . . . . . . . . . . . . . . . . . . . . 104

Group Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Performance and Group Effectiveness . . . . . . . . . 106

Group Phenomena . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Chapter 9 Power and Politics in Health Organizations . . . . . . . . . . . . . 113

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

Sources of Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

Politics in Health Organizations . . . . . . . . . . . . . . . . 117

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

Chapter 10 Conflict Theory and Interpersonal Dynamics in Health Organizations . . . . 122

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Theories of Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Sources of Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

Interpersonal Relationships . . . . . . . . . . . . . . . . . . . . 128

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

Chapter 11 Models of Leadership Strategy and Influence for Health Organizations . . . . . . . . . . . . 133

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

Strategic Prescription One: The Dynamic Culture Leadership Model . . . . . . . . . . . . . . . . . . . 134

Strategic Prescription Two: The Omnibus Leadership Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

Tactical Prescription: The Inter-Professional Team Model: PAARP . . . . . . . . . . . . . . . . . . . . . . . . . 144

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

Chapter 12 Decision Making, Analytics, and Communication in Health Organizations . . . . 155

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

Decision Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

Reality-Based Models: Garbage Can Model Overview . . . . . . . . . . . . . . . . . . . . . . . . 158

Tools of Decision Making . . . . . . . . . . . . . . . . . . . . . . 161

Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

Chapter 13 Pathology and Dysfunction in Health Organizations . . . . . . . . . . . . 175

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

Health Organization Groups and Professions . . . .176

Complexity and Work Intensity . . . . . . . . . . . . . . . . 177

Ambiguous and Conflicting Cultures . . . . . . . . . . . 178

Organizational Decline . . . . . . . . . . . . . . . . . . . . . . . . 179

Management and Organizational Dysfunction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

Organizational Well-Being . . . . . . . . . . . . . . . . . . . . . 181

Treatment and Prognosis . . . . . . . . . . . . . . . . . . . . . . 182

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

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viii Contents

Chapter 14 Diversity and Organizational Culture in Health Organizations . . . . . . . . . . . . 185

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186

The Business Case for Diversity . . . . . . . . . . . . . . . . . 187

The True Meaning of Diversity and Inclusion . . . 191

The Impact of Prejudice . . . . . . . . . . . . . . . . . . . . . . . . 192

Diversity Management . . . . . . . . . . . . . . . . . . . . . . . . . 193

Managing Diversity, Inclusion, and Health Equity in the LGBT Community . . . . . . . . . . . . . . 194

Disability and the Workplace . . . . . . . . . . . . . . . . . . . 195

Aging in the Workplace . . . . . . . . . . . . . . . . . . . . . . . . 198

Diversity and Inclusion Impact on Care Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

Components of an Effective Diversity Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

Diversity in Healthcare Leadership: Two Major Studies . . . . . . . . . . . . . . . . . . . . . . . . . . 201

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

PART 3 Organization Development and Change 207

Chapter 15 Ethics and Values in Health Organizations . . . . . . . . . . . . 209

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

Ethical Theories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

Ethical Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212

Organizational Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . 213

Institutional Ethics Committee . . . . . . . . . . . . . . . . 213

Decision-Making Tools . . . . . . . . . . . . . . . . . . . . . . . . 213

Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215

Ethical Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215

Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216

Factors That Influence Culture . . . . . . . . . . . . . . . . . 216

Cultural Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218

The Purpose of Health Organizations . . . . . . . . . . 218

Cultural Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

Ethics-Focused Culture . . . . . . . . . . . . . . . . . . . . . . . . 219

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

Chapter 16 Physician and Clinician Leadership in Health Organizations . . . . . . . . . . . . 221

Introduction—The Case for Leadership . . . . . . . . 222

Separation of Power . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

The 1990s—Integration Begins . . . . . . . . . . . . . . . . 224

Physician Values and Accountabilities . . . . . . . . . . 224

Effective Physician Leadership . . . . . . . . . . . . . . . . . 225

Physician Leadership—Early Pitfalls . . . . . . . . . . . . . 226

Cultivating Leadership Skills . . . . . . . . . . . . . . . . . . . 226

From Clinician to Leader—Essential Changes in Mindset . . . . . . . . . . . . . . . . . . . . . . . . . 227

Leadership Training Programs . . . . . . . . . . . . . . . . . . 227

Nursing Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

Interdisciplinary Education and Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228

The Future: Physician and Clinician Leaders . . . . 229

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

Chapter 17 Governance and Board Development in Health Organizations . . . . . . . . . . . . 232

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

Board Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

Board Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

Board Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

Board Meeting Format . . . . . . . . . . . . . . . . . . . . . . . . . 235

The Relationship Between Senior Management and the Board . . . . . . . . . . . . . . . . 237

Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

Financial Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

Operating Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

Strategic Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

Oversight of Patient Care and Resource Utilization . . . . . . . . . . . . . . . . . . . . . . . . . 241

Changing Board Models . . . . . . . . . . . . . . . . . . . . . . . 243

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Contents ix

Effective Governance: Cultures and Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244

Board Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244

Board Member Education . . . . . . . . . . . . . . . . . . . . . . 246

Board Development . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

Current Issues and Controversies . . . . . . . . . . . . . . . 248

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

Chapter 18 Organizational Change and Sustainability in Health Organizations . . . . 251

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252

Organizational Development: Framework for Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253

Creating the Capacity to Change . . . . . . . . . . . . . . 257

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

Chapter 19 Organization Development and Crisis Management in Health Organizations . . . . 268

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269

Development Practice and Philosophy . . . . . . . . . 269

Development in a Changing World . . . . . . . . . . . . 269

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .275

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Acknowledgments A special thanks to Michael Brown, Danielle Bessette, and the always helpful team at Jones & Bartlett Learning. Furthermore, we would like to acknowledge the various contributors to the first and second editions of this book, along with the many students who have used the text and provided valuable feedback and input

leading to improvements in the second edition. Lastly, we acknowledge the many social scien- tists, organizational theorists, and health pro- fessionals who continue the advancement of our understanding of organizations in health- care, public health, and the myriad related enti- ties involved in health improvement.

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Foreword ▸ Excerpt from First

Edition Until now, there has been no integrated view on health organization theory. This book comes as a much-needed initiative of Dr. James Allen Johnson and a group of schol- ars and experts in an attempt to fill a void existent in health administration education. It provides an integrated view of organization theory, organization behavior, and organiza- tion development, making it one of the first books on the integration of these three critical interconnected domains. Integrated knowl- edge and understanding are needed in health care in order to prepare organizations for an uncertain future. This compendium of knowl- edge will attract significant attention from the healthcare administration and public health academic communities with its potential to enhance the professional development and education of our future leaders.

Lorenzo Gonzalez, MD, DHA Former Secretary of Health, Puerto Rico

▸ Second Edition Having known Dr. James Johnson for over 20 years, as a friend, colleague, and co-author, I am pleased to write this foreword for the second edi- tion of Health Organizations. Much has changed since the first edition appeared in 2009. The three-part focus of this book—theory, behavior, and development—brings students and scholars current on the dynamic changes and continuous improvements we see in health organizations. Today, perhaps more than ever, we are in need of this book to better prepare healthcare leaders and managers for the challenges facing our health- care system. This book is both comprehensive in its scope and rich in its diversity of topics. With the addition of Dr. Caren Rossow and a select group of guest authors to his team, Dr. Johnson has yet again produced a book that students will find an essential part of their health administra- tion education. Furthermore, they will come to know this book as a valuable resource they will turn to many times after graduation.

Leiyu Shi, DrPH, MBA, MPA Professor, Johns Hopkins University

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xii

Preface

The first edition of this book was written to address a significant need in health administration education. While at that time—about 10 years ago—there were many textbooks available for courses in organiza- tional behavior, there were few that addressed organization theory and even fewer that dis- cussed organization development in health care. Many university professors and instruc- tors, as they do now, preferred to have a text that addressed all three domains. Drawing upon the expertise and experience of col- leagues in various disciplines from univer- sities, government, and hospitals, I brought these three interconnected domains together. Both the first and the second editions address the domains in three sections: Part I, Organi- zation Theory; Part II, Organization Behavior; and Part III, Organization Development, each containing key chapters that discuss founda- tions, research, and new directions. Further- more, for the second edition, I enlisted the help of a friend and colleague, Dr. Caren Rossow. She brought extensive clinical and leadership experience to the project and was instrumental in the process of updating the book, while also bringing new material, studies, and perspec- tives into the second edition.

A summary of the three overarching themes in Parts I, II, and III are as follows:

Organization Theory and Foundations: Health organizations are complex human sys- tems that have evolved over time and continue to do so. There have been many theories draw- ing from the fields of psychology, sociology, economics, political science, anthropology, and, lately, physics in an attempt to explain

the phenomenon of organization. Each of the theories has changed as social science and behavioral research offered new findings and perspectives on human behavior in groups and larger aggregates. The classical theories of organization were primarily mechanistic and relied heavily on the knowledge advanced in the industrial age. Modern organization the- ory takes more of a systems approach that accounts for human dynamics and change. Today, emerging theories draw upon new insights from biology and physics, where orga- nizations are seen as complex adaptive systems interconnected with the larger environment. Postmodern theory and our increasing under- standing of complexity take us even further.

Organization Behavior and Dynamics: By virtue of the distinct care mission, health organizations have unique behavioral qual- ities. This book examines power, influence, conflict, motivation, group dynamics, values, communication, and leadership in the context of caring and the striving for the well-being of patients, families, employees, and the commu- nities being served.

Additionally, the realities of organization dysfunction and stakeholder dynamics are addressed.

Health organizations are composed of highly credentialed professionals who func- tion under considerable scrutiny within many prescribed guidelines. The challenge of managing in this environment can be daunt- ing. However, effectiveness can be improved by achieving a higher level of understand- ing of individual, group, and organization behavior.

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Preface xiii

Organization Change and Development: Lastly, health organizations are not static. The one constant, as with all systems, seems to be change. Leaders and managers are tasked to facilitate and manage the change that is inev- itable in modern organizations. This can best be done in a systematic, planned way, utiliz- ing approaches found in organization devel- opment and team building. This section of the book helps the student and practitioner use theories of organization and knowledge of organization behavior in ways that foster change in productive and sustainable ways, resulting in better outcomes. Team develop- ment, board development, physician/clinician development, and organization development and learning are all addressed. Challenges such as disaster preparedness, globalization, and sustainability are also discussed.

As you read the book and engage in the discussions recommended in each chapter, it is important to remember the significant

responsibility you have as a current or future healthcare manger and leader. You will have a responsibility to yourself, coworkers, the organization, and the individuals and com- munities you serve. Part of this responsibility can be met by committing to life-long learn- ing and continuously seeking to better under- stand physical and social phenomena. This includes an understanding of organizations as human-created systems. As our insightful col- league Margaret Wheatley once said, “Rather than thinking of organization as an imposed structure, plan, design, or role, it is clear that in life, organization arises from the interactions and needs of individuals who have decided to come together.” It is in this coming together that a meaningful purpose begins to manifest and then the great potential of health organi- zations making the world a better place for all fully emerges.

James A. Johnson, PhD, MPA, MSc

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xiv

Contributors and Collaborators Lee W . Bewley, MHA, PhD, FACHE University of Kentucky

Gwen Burbank, MBA, MEd, MA St. George’s University

Mark A . Cwiek, MHA, JD, FACHE Central Michigan University

Mark L . Diana, MBA, MSIS, PhD Tulane University

Rupert M . Evans, Sr ., MPA, DHA, FACHE Governors State University

James A . Johnson, MPA, MSc, PhD Central Michigan University

and St. George’s University

Gerald R . Ledlow, MHA, PhD, FACHE University of Texas, Health Sciences Branch

Peter C . Olden, MHA, PhD University of Scranton

Caren C . Rossow, RN, MSA, DHA, CIH, FACHE Indiana University

Leiyu Shi, MPA, MBA, DrPH Johns Hopkins University

James H . Stephens, DHA, FACHE Georgia Southern University

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About the Authors Dr. James A. Johnson is a Full Professor of health administration and policy at Central Michigan University, where he teaches courses in comparative health systems, organizational behavior, and health systems thinking. Dr. John- son is also a Visiting Professor at St. George’s University in Grenada, West Indies, and the former Chairman of the Department of Health Administration and Policy at the Medical Uni- versity of South Carolina, where he was also an Associate Professor of Family Medicine. He has been an active researcher and health sci- ence writer, with over 100 journal articles and 15 books published. One recent book with a worldwide audience is Comparative Health Systems: Global Perspectives, Second Edition, in which he and co-researchers analyzed the health systems of 20 different countries. He is also the co-author/editor with Leiyu Shi, Johns Hopkins University, of the third edition of Pub- lic Health Administration: Principles for Popu- lation-Based Management. Most recently he co-authored, with Doug Anderson, the book Systems Thinking for Health. Dr. Johnson is the past editor of the American College of Health- care Executives (ACHE) Journal of Healthcare Management and currently a Contributing Editor for the Journal of Health and Human Services Administration, and global health edi- tor for the Journal of Human Security and Resil- ience. He works closely with the World Health Organization (WHO) in Geneva, Switzerland, and Heart to Heart in Belize, Central Amer- ica on international projects, often involving students. He is a regular delegate to the World Public Health Congress, most recently in Cal- cutta, India. His work and travels have taken

him to over 45 countries so far. Dr. Johnson has been an invited lecturer at Oxford Uni- versity (England); Beijing University (China); University of Dublin (Ireland); University of Colima (Mexico); St. George’s University (Grenada); and University of Pretoria (South Africa), as well as universities, associations, and health organizations within the United States, including visiting or adjunct professorships at University of Michigan and Auburn University. Additionally, he has served on many boards, including the Scientific Advisory Board of the National Diabetes Trust Foundation, Board of the Association of University Programs in Health Administration (AUPHA), Advisory Board of the Alliance for the Blind and Visu- ally Impaired, Board President of Charleston Lowcountry AIDS Services, Advisory Board of the Joint Africa Working Group, Board of Directors of the Africa Research and Develop- ment Center Advisory, Board of the Center for Collaborative Health Leadership, and Board of Advisors for Health Systems of America. Dr. Johnson completed an MPA in healthcare administration from Auburn University and a PhD at Florida State University, where he specialized in health policy and organization development.

Dr. Caren C. Rossow is an Assistant Professor of healthcare administration at the Vera Z. Dwyer College of Health Sciences, Judd Leighton School of Business, and the College of Liberal Arts and Sciences at Indi- ana University of South Bend. Currently, Dr. Rossow teaches graduate and under- graduate courses in healthcare management,

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xvi About the Authors

health policy and advocacy, ethics, and healthcare human resource management. Prior to her academic appointment, she worked over 30 years in a number of divi- sions and director and management posi- tions in community hospitals and regional healthcare systems. She has a comprehen- sive background in various healthcare ser- vice lines and is experienced in planning, operations, logistics, finance, and human resource management. Since completing her doctorate she has presented internationally and authored peer-reviewed articles and book chapters. Her research interests include

international health, pandemics, health sys- tems in crisis, and organizational and bio- medical ethics. Dr. Rossow has participated in 12 study abroad and service learning trips to five countries, most recently co-leading trips to both Sweden and Belize. Dr. Rossow completed an MSA at the College of Business, University of Notre Dame, and a CIH (Cer- tificate in International Health) and DHA at the Dow College of Health Professions, Cen- tral Michigan University. Dr. Rossow is also a registered nurse (RN) and a Fellow in the American College of Healthcare Executives (FACHE).

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PART 1

Organization Theory and Foundations “It is with theories as with wells; you may see to the bottom of the deepest if there be any water there, while another shall pass for wondrous profound when it is merely shallow, dark, and empty.”

— Jonathan Swift

CHAPTER 1 Introduction to the Study of Health Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

CHAPTER 2 Anatomy and Physiology of Organization Theory . . . . . . . . . . . . . . . . . . . . . . . 9

CHAPTER 3 Classical Theories of Organization . . . . . . . . . . . 23

CHAPTER 4 Modern Theories of Organization . . . . . . . . . . . . 35

CHAPTER 5 Complexity and Postmodern Theories of Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

CHAPTER 6 Organizational Leadership Theory . . . . . . . . . . . 59

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CHAPTER 1

Introduction to the Study of Health Organizations

As long as there have been human endeavors, there have been people engaged in organiz-ing.1 Perhaps, even nature itself, as a system, is involved in the processes of organizing. As described by James Johnson, “organizations are complex, multifaceted, adaptive social sys- tems.”2 Health administrators, and managers, in order to be effective in helping their organizations accomplish their missions and in turn serve their communities, must have a solid understanding of human behavior and how it is manifested in the organizational setting. As Johnson further asserts, “at its most fundamental level, the study of organizational behavior is the study of human behavior.” There is extensive and long-standing research on human behavior and organizations provided by the fields of psychology, sociology, systems science, behavioral economics, political science, anthropology, and the various other social sciences.

Probably, the natural emergence of organization grew out of our instinct for survival. In the hostile world of early humankind, food, shelter, and safety needs usually required cooperative efforts, and cooperative efforts required some form of organization. Certainly, the patriarchal sys- tem vested leadership in the heads of early families. The oldest member of the family was the most experienced and presumed to be the wisest member of the family and thus was the natural leader.

Complex forms of organization were required and did evolve as families grew into tribes and tribes evolved into nations. The earliest written record, the clay tablets of the Sumerians, recorded division of labor and supervision practices. In Sumerian society, as in many others since then, the wisest and best leaders were thought to be the priests and other religious leaders.

Likewise, the ancient Babylonian cities developed very strict codes, such as the Code of Hammurabi. King Nebuchadnezzar used color codes to control production of the hanging gardens, and there were weekly and annual reports, norms for productivity, and rewards for piecework.

The Egyptians organized their people, including slaves, to build cities and pyramids. Con- struction of one pyramid built around 5000 bce required the labor of 100,000 people working for approximately 20 years. Planning, organizing, and controlling were essential elements.

China perfected military organization based on line-and-staff principles and used these same principles in the early Chinese dynasties. Confucius wrote parables that offered practical sugges- tions for public administration.

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performance and success as leaders in their future careers.

▸ Studying Organizations

Studying organization theory and learning about organization dynamics can be exciting, interesting, revealing, and rewarding. How- ever, it may involve a different kind of learn- ing than some students are used to. This text has many theories, principles, concepts, and abstract ideas—that is the nature of the mate- rial. Compared to some subjects and courses, the content is less exact and objective and has fewer absolutes. For example, answers to questions may be “contingent” on context or situations—just like what we experience with organizations in the real world. Students who come from “hard science” backgrounds or clinical professions might have to adjust to become comfortable with ambiguity and the “it all depends” concept. Students can learn about organizations and “bring to life” the conceptual content of this chapter by using methods presented in the rest of this chapter. By using these active learning methods and working with the content of this text, the stu- dents will increase understanding of organiza- tion theory, behavior, and development. These methods are interactive and may overlap.

Higher-Level Thinking In the 1950s, Bloom’s taxonomy of educational objectives identified the following six cogni- tive domains or levels of learning.3

1. Knowledge (e.g., identify, define, list, describe)

2. Comprehension (e.g., rewrite, explain, predict, summarize)

3. Application (e.g., compute, modify, prepare, use)

4. Analysis (e.g., simplify, outline, exam ine, diagram)

The city-states of ancient Greece were commonwealths, with councils, courts, admin- istrative officials, and boards of generals. Socrates talked about management as a skill separate from technical knowledge and expe- rience. Plato wrote about specialization and proposed notions of a healthy republic led by “philosopher kings.”

Many think the Roman Empire was so successful because of the Romans’ great abil- ity to organize the military and conquer new lands. Similarly, those sent to govern the far-flung parts of the empire were effective administrators and were able to maintain rela- tionships with the other provinces and the empire as a whole.

There are numerous other ancient exam- ples of organization development, such as Hannibal leading a massive army across the Alps, Alexander the Great building a vast interconnected empire, and the first emperor of China building the Great Wall. Many of the practices employed today in leading, manag- ing, and administering modern organizations have their origins in antiquity.

The Industrial Revolution of the 19th century created a need for new thinking and the refinement of old thinking. However, modern management theory, as discussed in this text and applied specifically to health organizations, is primarily a phenomenon of the 20th century, with even newer theoretical constructs and practices now emerging in the early 21st century.

Today organizations have become a con- stant part of people’s lives worldwide. Most people spend their professional lives working in an organization. Additionally, they spend their personal lives in and with organizations (e.g., churches, soccer leagues, clubs, and civic groups). The advance of health organizations can best be described as rapid and increas- ingly diverse and complex. Thus, students who intend to become healthcare managers will benefit by studying organization theory, behav- ior, and development. Understanding health organizations will undoubtedly improve their

4 Chapter 1 Introduction to the Study of Health Organizations

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4. Human dimension (learning about self, others; enabling them to func- tion and interact effectively)

5. Caring (new forms of feelings, interest, or values)

6. Learning how to learn (learning about the process of learning itself; special value which enables one to continue learning more effectively

Undergraduate education is likely to emphasize lower levels of learning, whereas graduate education should move toward higher levels of learning. The Commission on Accreditation of Healthcare Management Education (CAHME) defines lower level learning as Bloom’s Taxonomy level 1 knowl- edge ( learning/recall) while higher level learn- ing uses more complex skills; Bloom’s level 3 application (using learned material in new sit- uations) to level 6 Evaluation (assessing/judg- ing).6 Students can develop understanding of organizations by using all of these domains of thinking, especially the higher ones. That will help later in careers, because managing health organizations requires much analysis, synthe- sis, and evaluation.

Faculty instructors will likely create assign- ments and class activities that require higher- level thinking. Students will benefit from these and should work hard in completing them. For example, faculty instructors may require stu- dents to analyze a local health organization by applying concepts (e.g., mission, goals, struc- ture, and culture) from this text. Students might be asked to compare and contrast a primary care medical group with a safety net primary care clinic. These types of learning activities can be done alone or in small groups. The more a stu- dent does these assignments and discusses them with others, the more the student will develop the ability to think about organizations (health organizations, in particular).

Besides fulfilling assignments and activ- ities that come from courses and faculty, students may develop their own exercises. Students should get in the habit of examining,

5. Synthesis (e.g., combine, catego- rize, develop, plan)

6. Evaluation (e.g., compare, contrast, justify, assess)

Although this taxonomy has significant staying power, there are more recent adapta- tions. One example is in 2000 Anderson and Krathwohl suggested a newer, more action- oriented model:4

Remembering = Knowledge (lowest)

Understanding = Comprehension

Applying = Application

Analyzing = Analysis

Evaluating = Evaluation

Creating = Synthesis

Furthermore in 2013, Fink suggested a new paradigm, the Taxonomy of Significant Learning:5

1. Foundational knowledge (the need for students to know something; the ability to understand)

2. Application (the ability to engage in a new kind of action)

3. Integration (the ability to see and understand the connection between different things)

Studying Organizations 5

Evaluation

Synthesis

Analysis

Application

Understanding

Knowledge

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to apply the concepts and principles in this text to the urgent problem of medical errors and to “cross the quality chasm” in healthcare. Case studies also provide realistic problems for which students can try ideas and discuss them with others to consider various possible solu- tions. Finally, students might conduct an orga- nizational analysis, in which they analyze a health organization from an organization the- ory perspective.8 Students would select a health organization and then use concepts from this text to examine the organization’s mission, goals, structure, culture, groups, teams, coor- dination, learning, and so forth.

Students can develop their understanding through discussion in small groups (in which students may feel more comfortable) and then in the class as a whole. In their discussions, stu- dents can practice group skills, reflect on their group’s behavior and interaction, and expe- rience organizational behavior principles in their small groups. Students may also debate current issues related to topics in this text: Should health organizations change radically or incrementally? Should organizations empower employees more? After the debate, students can reflect on the process and dynamics of the group activity.

Students can also learn about and study organizations by interacting with managers and clinicians working in healthcare settings. Students can tour organizations and then ask healthcare executives specific questions based on chapters and theories in this text. Perhaps, students will also want to shadow a manager and observe the organizational behavior first hand. A more substantial approach to applied learning is fieldwork, such as an administra- tive internship or residency, typically done after coursework is completed.

Competency Development Health administration education at the graduate level is becoming more competen- cy-based, similar to graduate education in other professional fields. Health organizations’

analyzing, and evaluating organizations. By doing so, they will begin to develop a mental framework with which they can examine and understand organizations during their careers. Physicians develop a mental framework with which they examine and understand patients. Managers need to develop a mental framework with which they can examine and understand organizations. Students are also urged to reflect on what they learn and then try to link it to their own personal experiences. Students can reflect on organizations they have worked in or interacted with by using theory, principles, and concepts presented in this text: Which of these have they observed in organizations? Which approaches to organization seem most com- mon? Which of these would students prefer in a work situation?

Experiential Learning Students can strengthen their learning of this text’s theories, principles, concepts, terms, and methods by using experiential learning. Didactic classroom learning is important, but it is not sufficient to only learn about organiza- tion. Faculty can provide experiential learning opportunities and students should enthusias- tically pursue these to more fully learn what is offered in this text. This includes the following:

1. Problem-solving 2. Case studies 3. Organizational analysis 4. Small group discussions (practicing

organization behavior) 5. Debate 6. Interviewing healthcare executives 7. Film and video assignments

Educator and philosopher John Dewey reported almost a century ago that an effec- tive way to learn is through solving meaning- ful problems.7 Students, with guidance from faculty and others, should engage themselves in solving problems of organization theory, behavior, and development in health organiza- tions. For example, students can suggest how

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education, experiences, stage-of-career, and other factors, students should approach this text and its academic course with the goal of developing their competencies. This will serve all very well throughout their professional careers.

Integrative Learning As can be seen in the Table of Contents, orga- nization theory, behavior, and development include many topics and subtopics. Thus, stu- dents are urged to try to integrate these while

stakeholders expect healthcare managers to demonstrate competencies.9–10 Employers, professional associations (e.g., Association of University Programs in Health Admin- istration, American College of Healthcare Executives, and American Public Health Asso- ciation), and accreditors (e.g., Commission on Accreditation of Healthcare Management Education and Council on Education for Pub- lic Health) expect health administration stu- dents—especially at the graduate level—to become competent in organization theory, behavior, learning, administration, and man- agement. The Council on Education for Public Health (CEPH) places considerable impor- tance on management and administration by identifying “Management Competences” for public health education and practice. The Association of Schools and Programs of Public Health provides a list of core competencies in the managerial and leadership domains.11

Postgraduate education may lead to advancement to a Fellow status (board certi- fication in healthcare management) demon- strating leadership, expertise, competency, ethical conduct, and a lifelong commitment to education and professional development. The American College of Healthcare Executives (ACHE) measures the proficiency for success- ful performance in the healthcare executive job in the Board of Governors Examination in Healthcare Management in the 10 core knowledge areas listed in BOX 1-1.12

Students’ competencies should be deter- mined by multiple factors—including the stu- dents themselves. The old saying “you can lead a horse to water but you can’t make it drink” applies here. Students themselves must want— and take responsibility—to learn and become competent. Faculty can lead students to the skills, knowledge, and abilities presented in this text. Then students must invest the time, energy, and effort needed to learn, study, prac- tice, think, and eventually develop compe- tencies in organization theory, behavior, and development. While achievement of compe- tencies will vary based on each student’s prior

BOX 1.1 Ten Core Knowledge Areas for Healthcare Management

1. Business—marketing, business planning, and strategic planning

2. Finance—financial management process for capital, budget, and accounting

3. Governance and Organizational Structure—authority and accountability at all levels

4. Health Care—healthcare delivery, managed care, and future trends

5. Healthcare Technology and Information Management—information systems for clinical and decision management

6. Human Resources—strategic workforce planning

7. Laws and Regulations—impact of current and future government regulations, communication

8. Management—planning, organizing, directing, and controlling

9. Professionalism and Ethics—meeting needs of professional staff, modeling codes of conduct, and ethical decision making

10. Quality and Performance Improvement—quality improvement framework programs

Modified from ACHE Board of Governors http://ache.org/mbership/ credentialing/EXAM/ReferenceManual/BOGExamReferenceManual_ KnowledgeAreas.pdf Accessed 2/1/17

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http://ache.org/mbership/credentialing/EXAM/ReferenceManual/BOGExamReferenceManual_KnowledgeAreas.pdf

theories that can be tested out in the world of practice. This is indeed one way a profession grows and how individuals come to be integral in that growth. Hopefully, the study of organi- zations will be an empowering experience and an enjoyable endeavor.

References 1. Johnson JA, Breckon DJ. Managing Health Education

and Promotion Programs: Leadership Skills for the 21st Century. Sudbury: Jones and Bartlett; 2007.

2. Johnson JA. Introduction to Public Health Manage- ment, Organizations, and Policy. Clifton Park, NY: Delmar-Cengage; 2013.

3. Bloom BS, ed. Taxonomy of Educational Objectives, Handbook I: Cognitive Domains. New York: Longmans, Green; 1956.

4. Anderson LW, Krathwohl DR. A Taxonomy for Learning, Teaching and Assessment: A Revision of Bloom’s Taxonomy of Educational Objectives. White Plains, NY: Longman; 2001.

5. Fink LD. Creating Significant Learning Experiences: An Integrated Approach to Designing College Courses. 2nd ed. San Francisco, CA: Josey-Bass; 2013:34–37.

6. Commission on Accreditation of Healthcare Manage- ment Education. Candidacy Application Handbook. July 2014:ix.

7. Dewey J. Democracy and Education. New York: Macmillan; 1916.

8. Olden PC. Teaching organization theory for health care management: Three applied learning methods. J Health Adm Educ. 2006;23:39–52.

9. Bradley E. Use of evidence in implementing competency-based healthcare management teaching. J Health Adm Educ. 2003;20:287–304.

10. Campbell CR, Lomperis AMT, Gillespie KN, Arrington B. Competency-based health care manage- ment education. J Health Adm Educ. 2006;23:135–168.

11. Johnson JA, Shi L. Overview of public health adminis- tration. In: Shi L, Johnson JA, eds. Public Health Adminis- tration: A Population Based Approach to Management. 3rd ed. Burlington: Jones and Bartlett; 2014.

12. American College of Healthcare Executives. Board of Governors Examination Reference Manual: Knowledge Areas. 2017.

reading the text and studying organizations. Think about how organization structure is related to the mission, and how those are related to the external environment. Think about how group behavior is affected by organizational culture. Discuss relationships and interactions among the theories, concepts, principles, and ideas in this text. And of course, the topics in this text are only some of what must be learned in a health administration curriculum and its many courses. Students may strengthen their understanding of this text’s content by men- tally integrating it with the content of other texts and courses: How is organizational mis- sion related to financial management? How does human resources management affect organizational development? How does stra- tegic planning influence organizational out- comes? Are there reciprocal relationships? By thinking about these questions and discussing them with others, students can learn about health organizations in ways that are theoret- ically solid and practically useful.

▸ Beyond The Classroom Many often claim that there is nothing more useful than a good theory. Health organiza- tions and their leaders have at their core theo- ries of action that guide them and shape them as they change and develop. The successful manager is a leader who fully understands organization theory, who is a keen observer of organization behavior, and who facilitates change in ways that foster organization devel- opment. Each student who reads this text has the opportunity to take a significant step in becoming just such a leader. In fact some of the readers may go on to develop their own

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CHAPTER 2

Anatomy and Physiology of Organization Theory

LEARNING OBJECTIVES

■ Describe the anatomy and physiology of theory. ■ Distinguish between the analogy of anatomy vs. physiology as it pertains to social and

behavioral phenomena. ■ Explain what theoretical elements are and how they relate. ■ Explain the utility of theory in the study of organization behavior. ■ Describe a conceptual model. ■ Describe how conceptual models relate to theory. ■ Develop your own conceptual model and theory. ■ Describe the importance of theory in relation to other chapters in this text.

OVERVIEW

This chapter is foundational in that it goes to the heart of what theory is and why it is important to the study of organizations and other social phenomena. It provides a foundation for readers to appreciate the significance of theory. Furthermore, we emphasize the utility of theories, concepts, and models in our own self-improvement and in organizational development and sustainability.

With sincere appreciation for the many concepts developed by M. Nicholas Coppola as they appeared in the First Edition of Health Organizations

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roots therein, researchers, executives, and leaders are forced to make decisions based on opinions and individual heuristics rather than science and literature. Individuals who fail to understand the complexities of theory and how to adequately describe, model, and interpret theoretical models to their advan- tage will have a distinct disadvantage in the modern workforce. Lastly, an understand- ing of theory is a necessary precursor to building conceptual models for the practice community. Model building is a necessary precursor to performance-based management development, system examination, policy for- mulation, and conducting quantitative anal- ysis. However, understanding the process of building empirically measurable models may be one of the more underrepresented aspects in leadership development today.

As stated in Kilpatrick and Johnson’s Handbook of Health Administration and Policy, “Theories help us to appreciate the fact that not all behavior and phenomena are random; much behavior is in fact predictable…The- ories suggest patterns, and if we understand those patterns, we may be able to engage in better decision-making and more effective managerial practices.”2

This chapter describes what a theory “is,” what the individual parts of theory are (anatomy), and how these elements interre- late within a theoretical model (physiology). This chapter also describes how theories can be used to generate hypotheses, appropriate management research questions, metrics for benchmarking, and process improvement ini- tiatives. Finally, understanding how theories help in the development of conceptual mod- els assists in developing organization vision, mission, goal, and benchmarking objectives.

▸ What Is Theory? Theory is the primordial soup from which research questions, problem statements, and variables of interest are derived. Students

▸ Introduction

The word theory comes from the Greek word theoria, which means “to look at” or “to contemplate.” Plato spe- cifically applied this to the contemplation of the world of “forms.” In modern times, this certainly could be extended to include organizations. This chapter is adapted from Nicholas Coppola’s concepts and work that appeared in the first edition of this text, Johnson’s Health Organizations.1 It discusses the anatomy and physiology of theory while providing important tools and skills that will enable the reader to not only understand, model, and describe complex theories, but also have the ability to deconstruct theory into individual components. This is a very important skill for understanding many of the important concepts in the rest of this text. Failing to understand theory and theo- retical elements will make it very difficult to understand the meaning of other important concepts presented in this text.

Why Study Theories of Organization? Understanding the theoretical properties of complex issues is important to managers and leaders in health organizations. They are continually placed in positions where it is necessary to have a greater understanding of complex models that relate to organizational life cycles, sustainability, bureaucracy, insti- tutional dynamics, employee satisfaction, economic demands, and organizational effi- ciency, effectiveness, and value—to name only a few leader priorities that theory can help explain. As a result, understanding the value of theory is significant to the survival of any organization. Furthermore, understanding the complex parts and relationships within theory assists executives in framing problems, devel- oping alternatives, and researching solutions. Without an understanding of theory and the

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valuable to the profession or the advancement of knowledge.

As the organizational sciences have advanced over the last century, scholars have convergent thoughts in reference to theoretical elements and concepts. It is now possible to conceptually represent theory by suggesting biological metaphors and, even more recently, metaphors from physics. In this regard, elements of theory can be regarded as a “physical” unit where there is both anatomy and physiology.

Anatomy and Physiology of Theory The anatomy of theory can be broken down into specific units of analysis, just as one might do when looking at human anatomy. These units include the theory itself, followed by sub- ordinate constructs, variables, and operation- alized measures. An environment of discussion surrounds these elements. This enclosure is called bounded rationality. When discussing theoretical constructs, variables, and mea- sures, it is first necessary to frame these ele- ments within a plausible discussion group. By framing constructs, variables, and measures in a bounded rationality, an “out-of-bounds” area is presented that helps researchers stay within certain parameters of discussion.

Contained within this bounded ratio- nality is the physiology of theory. The phys- iology of theory describes the interaction among constructs, variables, and measures, as well as other elements. In this regard, the interaction of constructs within theory is helpful for developing propositional state- ments. This is important in the early stages of qualifying theoretical relationships before quantitative data are available for testing or disconfirmation. Forming a more concrete and testable relationship within theory are the relationships between variables known as hypotheses. Propositional and hypothetical relationships are discussed in detail later in the chapter.

should avoid “inventing” their own theory for solving management research. Numerous theories are available in the literature that will help them investigate issues relating to organi- zations, teams, and individuals. This text dis- cusses and describes many such theories.

It is important to know that there is no one accepted definition of theory within the orga- nization literature. In layman’s terms, a theory is an advanced form of an idea or an opinion that has some base in the empirical world. A leading theoretical scholar, Samuel Bacharach, has suggested, “a theory is a statement of rela- tions among concepts within a set of boundary assumptions and constraints.” Bacharach also suggests that a theory is a coherent narrative composed of assumptions, abstract reasoning, and speculation, which describes and explains an observed or experienced phenomenon’s constructs, their interrelationships, and their boundaries. Bacharach goes on to suggest that a theory should answer the question of how, when, and why, and that a theory should be logically consistent, able to be tested, and sub- ject to disconfirmation (or falsification).3

Other authors have suggested that a the- ory must explain why variables and constructs come about and why they connect, while others assert that the purpose of theory is to chal- lenge and extend existing knowledge, within the limits of the critical bounding assump- tions, through concise organization and clear communication of an idea. Additional authors identify the purpose of theory as bringing the components of a complex phenomenon together in one understandable whole. Finally, others suggest that the purpose of theory is to extend existing knowledge, within the limits of the critical bounding assumptions, through concise organization and clear communica- tion of an idea.4–6 Regardless of definition, a theory must be capable of support by quali- tative measures or quantitative data. If a the- ory is incapable of initial development based on qualitative or quantitative properties, the burgeoning theory may not have evolved past the opinion or idea phase and may not be

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description” of the key elements of a study. The conceptual model should be parsimonious (simple) and should offer graphic representa- tions of theoretical elements that help outsid- ers understand the issue(s) being investigated at a glance. A conceptual model may include the actual theory, as well as constructs, vari- ables, measures, confounders, and contextual factors; however, some conceptual models may only consider specific constructs as well as cer- tain elements specific to the unit of analysis under study. Many of the models presented in this text will include a discussion of the actual theory itself, while other models may only present constructs for discussion.

Also, contained within the bounded ratio- nality of theory are contextual factors and con- founders. Contextual factors are generally known elements that exist in the same environment as constructs, variables, and measures. The interac- tion of contextual factors on certain constructs and variables may be known in advance and can be controlled for through awareness and inter- vention. Confounders are properties in the envi- ronment that are generally not known in advance and may have interactive effects with theory that are not forecasted—or are difficult to predict.

FIGURE 2-1 depicts theory as a conceptual model for visual representation and under- standing. A conceptual model is a “conceptual

FIGURE 2-1 Conceptual Model of Theory

12 Chapter 2 Anatomy and Physiology of Organization Theory

Variable A Variable B Variable C Variable D

Bounded Rationality

Measures:

Construct Construct

Contextual Factors

Anatomy & Physiology of Theory

Physiology of Theory

Related by Propositions

Variable A relates to Variable B through a Hypothesis

Theory Confounder

Construct Construct

Variable A Variable B

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For example, an apple possesses empiricism insofar that it can be tasted, touched, seen, and smelled. It does not matter that the apple does not make noise. Because an apple possesses four of the five empirical senses, we can say that an apple is not a construct. This is because it can be rationalized through empirical prop- erties. Any physical element or property that can be described through at least one of the five senses does not qualify as a construct.

A classic example of a construct is qual- ity. Quality is a construct that cannot be dis- cussed without identifying it through other measurable properties or variables.9, 10 The classic statement “quality is in the eye of the beholder” generalizes the difficult problem we have describing quality. The discussions of other latent variables (such as efficiency, effectiveness, performance, satisfaction, orga- nizational survival, leadership, success, and motivation) are all examples of constructs. This text discusses many of these constructs that cannot be universally discussed without first assigning empirical properties to them. The empirical property used to describe con- structs is variables.

Variables Flowing from constructs are variables. Vari- ables are empirical units that are capable of identification through one of the five senses. Accordingly, a variable is an element that has precise meaning in the physical world. Generally, variables are universally under- stood and easily described. Weight is a good example of a variable. When discussing the concept of weight with peers or colleagues, universally understood concepts of pounds, ounces, or tons are immediately recognized as valid descriptors of weight. If a variable is incapable of a generalized descriptor, it may cause problems in describing theory. How- ever, if the builder of the theoretical concept makes a careful argument for the use of certain variables—and defines them appropriately— the variable may have utility in helping frame

The modeling of theory in Figure 2-1 is based on the early work on model building suggested by Bacharach, empirical measure- ment techniques in healthcare suggested by Wan, as well as simple, elegant, and consistent theoretical models suggested by other authors. This pictorial description and the relationship between theoretical parts will become clearer as the chapter progresses.7, 8

▸ Anatomy of Theory Constructs The building blocks of theory are constructs. Throughout this text, students will encounter dozen of constructs. As a result, it is critical to the study of organization behavior to have a clear understanding of what a construct is. Failing to have a clear understanding of con- structs will result in an inability to understand many of the concepts in subsequent chapters of this text.

Before defining a construct, it is first nec- essary to establish a rule for how constructs relate to theory. One constraint is that a valid theory must be capable of identification through at least two constructs. Failing to iden- tify a theory by at least two constructs (simi- lar to Figure 2-1) results in what scholars call tautology. Tautology implies a never- ending redundant cycle. The classic tautological state- ment is “The sky is blue because it reflects the ocean, while the ocean is blue because it reflects the sky.” This statement fails to clar- ify where the blue came from—the sky or the ocean. As a result, we are left in a revolving argument with no resolution. Accordingly, in order to adequately discuss theoretical proper- ties, it is necessary to have two or more con- structs in order to properly frame theoretical concepts and issues.

By definition, a construct is a latent variable that lacks empiricism (taste, touch, sight, smell, or sound). Elements that are empirical have tangible, physical properties.

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is possible to operationalize age in several dif- ferent ways: one, as a continuous variable; two, as a binary variable; and three, as a categorical variable (see TABLE 2-1).

In Table 2-1, we arbitrarily establish cut- off points for categorical and dichotomous variables that help support the issue under study. The categorical description of age could have also been classified using quarter century marks or separated by 5-year increments. The selection of a category is up to the executive analyzing the data. Finally, if the executive is interested in partitioning Medicare recipients from non-Medicare recipients, the age break at 65 provides the opportunity to analyze the two different groups.

Not all variables lend themselves to operationalized measures through all three metrics. For example, the variable racial cate- gory does not lend itself to a continuous mea- sure. The most appropriate nomenclature for race is a category where the researcher selects racial categories of interest in the study for analysis.

The process of operationalizing measures is critically important in medicine, business, education, and many other applied profes- sions. A requirement to gather, manage, and measure outcomes from data is a continu- ous process. However, before collecting and

the model. Similar to the tautological rule discussed previously, each construct within a theoretical model must be described using two or more variables.

Measures Operationalized measures derive from vari- ables. Measures are operationalized descrip- tions of variables that must be capable of numerical identification. Operationalizing is the process of quantifying a variable using appropriate, numerical-descriptive terms. Additionally, measures must be universally understood and are classically categorized as continuous (1 to n with n equal to infinity), dichotomous or binary (yes or no, on or off, etc.), or finally, categorical (such as Caucasian, African American, Latino, etc.). If measures are incapable of being operationalized through continuous, dichotomous, or categorical iden- tification, the measure may not have enough precise significance to be valid in describing or testing the theoretical model under study.

Variables should be capable of several different methods of operationalization. For example, the variable age can be operational- ized as a continuous, categorical, or a binary variable depending on how the researcher chooses to define and measure the age variable. The following section discusses this process.

Operationalizing Measures In order to operationalize the variable age, we first must associate the variable with a spe- cific unit of analysis (such as an organization, team, or individual). Next, we create a brief definition of the variable age that supports the unit of analysis under study. For example, we may say that age is defined as the number of years associated with a human individual’s life. This statement includes two important fea- tures. One, it qualifies age in terms of years. Second, it provides a reference group for age where a potential range for a life span is uni- versally understood. Given this information, it

TABLE 2-1 Operationalized Age Variable

Define age as the number of years associated with a human individual’s life.

Continuous: 1 to n.

Categorical: 0–10, 11–20, 21–30, 31–40, 41–50, 51–60, 61–70, 71–80, 81–90, 91–100, n > 101.

Binary: Medicare eligible? Yes or No (with Medicare eligibility being 65 years of age or older).

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keep in mind the assumptions of the test when building a code sheet. For example, paramet- ric and nonparametric tests require different assumptions, and these should be considered in the code sheet. While there are numerous examples for building a code sheet to demon- strate how data are operationalized in a study, TABLE 2-2 provides one proven example of suc- cess. The following code sheet is created for the variable “education.”

In this code sheet of a single variable, each column contains very specific and mutually exclusive information about the variable that assists in measuring the theory under study.

1. Label: The actual name of the variable used.

2. Description: Define the variable here.

3. Operationalization: How is it coded?

Contextual Factors Contextual factors are either variables or con- structs that exist in the bounded rationality of the theory under study. Contextual factors gen- erally have a known impact on the suggested relationships within the theoretical model. For example, in the proposed example of a con- ceptual model of nervousness in FIGURE 2-2, we can suggest that variables of physical appear- ance and an individual’s speech pattern may be good indicators of an individual’s level of

analyzing data, operationalize it in a consistent and logical manner. The Balanced Score Card developed by Kaplan and Norton is an exam- ple of a quality tool that requires executives to select and define not only constructs of interest to measure but also valid and reliable variables capable of identification through operational- ized measures that provide meaningful data for trend analysis.11

Similar to variables and constructs, at least two operationalized measures should be considered for each variable in order to avoid tautological issues. While oftentimes it may only be necessary to operationalize a variable one way and achieve finality in the measure- ment process, it is always a good idea to strat- egize alternative methods of measurement for each operationalized measure.

Code Sheets The last step in operationalizing variables is the construction of a code sheet. Whenever testing variables in a hypothetical relationship, it is not the variables being tested but rather the operationalized units of the variables. This is a necessary precursor to loading data into statistical software like SPSS, SAS, Minitab, or Excel. When we operationalize data for statis- tical software manipulation, we create code sheets.

A code sheet is a very simple explana- tion of how operationalized units of a variable will be used in the study. The researcher must

TABLE 2-2 Code Sheet Example for Variable Education

Label Description Operationalized

Education Highest education degree obtained by member

Categorical 1 = HS 2 = Community College 3 = 4 yr undergraduate (BA, BS) 4 = Masters (MHA, MBA, MPH) 5 = Doctorate (PhD, DHA, MD)

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unaware of in advance and cannot control for until after they are identified through alter- nate means. Confounders are spoilers or wild card factors that are usually identified after a conceptual model is built and testing begins. After confounders are identified through experimental testing or other means, they can be classified as contextual factors and controlled.

Confounding variables can have a significant effect on theoretical and concep- tual models. Unfortunately, it is impossi- ble to forecast the grave nature of the effect until after the confounder presents itself. The concept of controlling for confounders is a difficult subject and better addressed in a course on experimental design or quantita- tive analysis. However, an understanding of the likelihood that confounders are present in the environment and can affect assumptive outcomes of models is a necessary tenet of model building.

▸ Physiology of Theory Propositions The physiology of theory can be described in terms of the relationships. Two of these rela- tionships are expressed in terms of hypoth- eses and propositions. A proposition is a statement of opinion, based on some degree of preliminary study or heuristics, that is offered as a true or valid statement. While the statement may not always be true or valid, it is offered as such until evidence of disconfirmation is provided. The saying that “Time is Endless” is an example of a propo- sitional statement between constructs (see FIGURE 2-3). In this example, Time is one con- struct and is related to a second construct of Endless in order to form a propositional statement. The propositional statement can be helpful in the development of new oppor- tunities for research and the formulation of new knowledge. The statement also assists in

nervousness. We might also suggest that the variables of physical appearance can be opera- tionalized through measures of sweating (indi- vidual is or is not) and breathing heavy—a yes or no binary measure as well.

We may continue to suggest that speech is a good indicator of nervousness. If an individual is stuttering (yes or no), and if the individual is shout- ing (yes or no), the individual may be nervous. It may certainly be reasonable to suggest that if an individual is sweating, breathing heavy, shouting, and stuttering, the person may be nervous.

However, if we fail to take into account contextual factors, such as heat (perhaps it is a 100-degree day), the individual’s physical condi- tion (perhaps they are overweight and just walked up several flights of stairs), and the individual’s medical condition (perhaps they are hard of hearing and on medication that impairs speech), it is possible to come to a completely incorrect assessment based on physical characteristics. In essence, contextual factors are elements in the environment that affect the outcomes of the constructs or measures we are trying to study. Contextual factors are difficult to identify in advance, but necessary to consider when build- ing conceptual models of phenomenon.

Confounders Similar to contextual factors, confounders are variables that exist in the bounded rational- ity of the environment that the researcher is

FIGURE 2-2 Conceptual Model of Nervousness

16 Chapter 2 Anatomy and Physiology of Organization Theory

Nervous Contextual

factors

Physical appearance Speech

M1: Sweating Y/N M2: Breathing heavy Y/N

M1: Stuttering Y/N M2: Shouting Y/N

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statement using the modeling techniques dis- cussed earlier. After this exercise, students will be able to understand the complex nature and difficulty in not only drawing conceptual models, but also operationalizing and defining them.

Although difficult to model and often resulting in different interpretive outcomes, several research articles reviewing health- care delivery and leadership have utilized the proposition methodology to investigate con- struct relationships over the years.12 Recent studies in manager competencies, critical thinking, and quality outcome assessment have also successfully used the proposi- tion methodology to review phenomenon.13 Although sometimes referred to as concept mapping within the literature, the techniques and methodologies are similar. Regardless of name, the strength of utilizing the proposi- tional technique is that it assists in generat- ing propositional statements that can be used to guide the development of new variables to help define complex issues.14

Hypothesis A hypothesis is a testable relationship between two variables. Furthermore, the purpose of hypothesis testing is to discover causal rela- tionships between variables. Hypothesis statements are the foundation for all organi- zational research and form the basis for the advancement of knowledge. When writing a hypothesis, the researcher needs to follow very strict rules of design. From a reductionist point of view, in comparing two variables in a hypothetical relationship, there are generally five common methodologies for analysis.

1. One assumption is that there is no difference between variable 1 and variable 2 (null hypothesis).

2. The second assumption is that as one variable increases the other remains the same (positive relationship).

answering questions about the relationships between constructs.

Another classic example of a proposi- tional statement combining constructs is “the right to bear arms.” This propositional state- ment is offered as a statement of fact as if it was true; however, the interpretive nature of this proposition continues to be readdressed in America every year.

It is no small wonder why the brightest legal minds in our country have debated on the meaning of this propositional statement for over 200 years. This propositional state- ment has also been interpreted differently by nearly every state in the union. Addition- ally, there continues to be new interpretive legislation regarding the propositional state- ment “the right to bear arms” every year (see FIGURE 2-4).

The difficulty with interpreting this prop- ositional statement is the complex nature surrounding three culturally partisan latent variables of “rights,” “bear,” and “arms.” As an exercise, students are encouraged to try to come up with two variables for each con- struct in the propositional statement, define each variable with two operationalized mea- sures, and discuss contextual factors and confounders. Students are also encouraged to draw a conceptual model of this propositional

FIGURE 2-3 Propositional Statement

FIGURE 2-4 Propositional Statement of the Right to Bear Arms

Physiology of Theory 17

Time Endless Time is Endless

The Right to Bear Arms

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It is incorrect to suggest that the hypothet- ical relationship is “proved” due to the fact that all hypothetical relationships are supported or not supported. It is incorrect parlance to suggest that a hypothesis is proved.

Hypothesis testing is often the way that the overall theory is falsified. Falsification is achieved through empirical testing of the various oper- ationalized measures in theory. As a result, if a theory is not testable, the theory is not falsifiable in principle, and from an empirical viewpoint, is worthless to the field under study. For this reason, the falsifiability of theory is a necessary property of science. For a more detailed overview of designing and testing hypothetical relation- ships, encourage students to refer to their course text in research methods or quantitative analysis.

Research Questions Building conceptual models supports the ini- tial development of research questions. It is never a good idea to use opinions for guid- ing research questions; rather, sound research questions should flow elegantly and easily from a given conceptual model. Similar to theory itself, positing research questions requires the understanding of certain rules and constraints in advance. For example, a research question supporting a conceptual model may include one or more of the following elements:

1. It must include the primary unit of analysis in the statement (i.e., organization, team, or individual).

2. It may include a reference to the environment, a construct, variable, or a contextual factor within the bounded rationality.

3. It may include the methodological tools used for measurement.

3. The third assumption is that as one variable decreases the other remains the same (negative relationship),

4. The fourth and fifth assumptions suggest that both variables will increase or both variables will decrease.

There may be some exceptions to these guidelines based on experimental design; however, these five hypothetical relationships form the basis for all hypothesis testing.

As an example, a classic hypothetical relationship may seek to discover the rela- tionship between weight and blood pressure. One potential testable hypothesis may sug- gest that as weight increases, blood pressure increases. In this instance, weight may be classified as a continuous operationalized measure in pounds (1 to n), while blood pressure may be similarly classified as a continuous measure of systolic and diastolic indicators (again 1 to n). The same relation- ship can be tested with dichotomous units, a simple yes or no for weight increase, and a similar yes or no for outcome of blood pres- sure (see FIGURE 2-5).

In this example, it is first necessary to have a baseline for comparison and capture initial measures for both weight and blood pressure.

Baseline measures: Weight 185 pounds and blood pressure of 120/65

Measure after 6 months: Weight 205 pounds and blood pressure of 135/80

A simple visual inspection supports our initial hypothesis statement. If weight increased, but blood pressure remained the same, or decreased, we would fail to support our hypothesis.

FIGURE 2-5 Hypothesis Example

18 Chapter 2 Anatomy and Physiology of Organization Theory

As weight increases, blood pressure increases

Weight Blood pressure

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principles, we can conceptually model McClel- land’s theory of motivation.15 (This theory will be discussed in more detail in Chapter 6.)

In this instance, define motivation as the goal-directed behavior of individuals work- ing in an organization. McClelland’s theory of motivation suggests that if an employer wants to motivate his or her employees, there are three distinct foci for doing this. McClelland sug- gests that an employer should consider placing emphasis on three things: constructs of affilia- tion, power, and achievement. For the purpose of this conceptual model, we will use only the constructs of affiliation and achievement to demonstrate the utility of building the model. Remember that conceptual model building is as much an art as a science, and so it is not always necessary to model all the parts of the theory.

The first step in the process is to com- pletely define all the parts we are measuring and studying. Since we have already identified the theory, the second step is to identify our constructs. In our model (see FIGURE 2-6), we define affiliation as the types of opportunities

4. It must be a simple expression of one statement.

The following is an example of a good research question:

How do we measure the efficiency of hos- pitals with regression analysis?

Note this research question has a unit of analysis (hospital), a primary construct (effi- ciency), and the tool to measure efficiency (regression analysis). Other details reference the research question can be addressed in other parts of the study.

Theoretical Application Throughout this text, students will have the opportunity to learn about many different the- ories. Although not all the theories presented in this text lend themselves to easy conceptual modeling through the techniques discussed earlier in the chapter—all are capable of the- oretical and conceptual modeling if careful study and analysis of the theory is performed. As a demonstration of the theoretical modeling

FIGURE 2-6 McClelland’s Application of a Conceptual Model

Physiology of Theory 19

Affiliation Achievement

McClelland’s Theory of Motivation

Affiliating with professional organizations leads to

achievement

Professional organizations

M1 – Join Y/N M2 – Advance Y/N

OCB

M1 – # social events 1–n M2 – # of volunteers for extra work 1–n

Accomplishment

M1 – # of awards 1–n M2 – # of deadlines met on time 1–n

Advancement

M1 – Promotion rate Y/N M2 – # of promotions per unit 1–n

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As a test of one potential hypothesis, we could suggest the following:

Hypothesis 1: Individuals who join pro- fes sional organizations have higher pro- motion rates than individuals who do not join professional organizations.

Once data are collected on each mea- sure, and outcomes are known, this hypoth- esis can be tested. In this way, the theory can be supported or unsupported by hypothesis testing.

Not represented in this conceptual model are our bounded rationality, possible con- founders, and contextual factors. These ele- ments are important to consider when building theoretical or conceptual models, although it is not always necessary to include all parts of the anatomy and physiology of theory in each model. Only the parts necessary to convey the intent of the model are required.

As a teaching tip, students should notice in the aforementioned model that “advance- ment” is used as a measure of the professional organization variable and as the variable itself for the achievement construct. Similarly, “accomplishment” is used as a variable in this model; however, in a different model accom- plishment may be used as a construct. If a construct is defined based on empirical prop- erties, then it can be used as a variable—and sometimes as a measure. It is always incum- bent on the builder of the theory to remember that there is both an art and science to model building. The science captures the anatomy and physiology of theory and the rules and constraints therein. However, it is incumbent on the builder to recognize the opportunities and possibilities in applying those elements. As long as elements are carefully defined, and sound research methodologies are used based on literature, the building of conceptual mod- els becomes easy with practice.

employees have within the organization to join or participate in groups. In our suggested model, we define one group specifically as pro- fessional organizations. A professional organi- zation may be something like the American Medical Association (AMA), American College of Healthcare Executives (ACHE), a professional honor society, or some other professional organization. We operationalize professional organizations through two mea- sures of joining (operationalized as a dichoto- mous variable of yes or no), and advancing in that organization—perhaps to the standing of Fellow (yes or no).

We may also suggest that the affiliation construct can be measured through the num- ber of organization citizenship behaviors (OCB) within the organization. This might be measured by the number of social activities per month the employees in the organization engage in (measured by a continuous variable of 1 to n). We can also measure this construct by collecting data on how many people vol- unteer for extra work within the organization.

Apply the same methodology to the con- struct of achievement where this construct is measured by two variables of advancement and accomplishment. Define advancement as the promotion rate within the organization and the number of opportunities for advancement. Operationalize accomplishment by the number of awards an individual received and the total number of successful projects met on time.

A suggested propositional statement might be that affiliating with professional organizations leads to achievement. At face value, this propositional statement makes sense because it may be assumed that joining or advancing in a professional organization might make the employee more knowledge- able of job skills and, therefore, more likely to be promoted or become more efficient in his or her job. This may also be called face or construct validity.

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develop two variables and two measures for the latent variables. See FIGURE 2-7.

Exercise 2 1. Model the theory of motivation using

two constructs, four variables, and eight measures. See FIGURE 2-8.

2. Use your measures to write two hypoth- eses relating to your theory.

▸ Conclusion This chapter discussed what a theory is, the anat- omy and physiology of theory, and provided a short application of model building technique as it applies to McClelland’s theory of motiva- tion. The anatomy of theory includes constructs, variables, measures, confounders, and contex- tual factors within a bounded rationality. The physiology of theory includes the relationships between constructs called propositions, and the relationships between variables called hypoth- eses. When properly modeled and operational- ized, an aptly built model of theory is essential in falsifying, supporting, and testing the theory.

Review/Discussion Questions 1. How can conceptual model building be

used to explain the difficulty in under- standing propositional phrases like the right to bear arms or healthcare is a right?

2. Why is the understanding of confound- ers necessary in the development of conceptual models?

3. What is the difference between theory and a conceptual model?

4. What are the key differences between the anatomy of theory and the physiol- ogy of theory?

5. Why is it possible for a term to be used as a construct, variable, or measure? What must the builder consider before using the selected term?

▸ Learning Activities Exercise 1

1. Using the theoretical and conceptual modeling techniques you have learned, FIGURE 2-7 Chapter Exercise 1

Learning Activities 21

Individual intelligence

Individual health

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3. Posit a proposition between your two constructs. a. Hypothesis 1 b. Hypothesis 2 c. Proposition d. Question: Where might you get

data for these hypotheses?

References 1. Coppola MN. Anatomy and physiology of theory. In:

Johnson JA, ed. Health Organizations. 1st ed. Sudbury: Jones and Bartlett; 2008;9–26.

2. Fried BJ. The application of organizational theory and behavior. In: Kilpatrick AO, Johnson JA, eds. Handbook of Health Administration and Policy. New York: Marcel-Dekker;1999:705.

3. Bacharach SB. Organizational theories: Some criteria for evaluation. Acad Manage Rev. 1989;14:490–495.

4. Whetten DA. What constitutes a theoretical contribution? Acad Manage J. 1989;14:490–495.

5. DiMaggio PJ. Comments on “what theory is not.” Adm Sci Q. 1995;40:391–397.

6. Weick KE. What theory is not, theorizing is. Adm Sci Q. 1995;40:385–390.

7. Bacharach SB. Organizational theories: Some criteria for evaluation. Acad Manage Rev. 1989;14:490–495.

8. Wan TTH. Evidence-Based Health Care Management— Multivariate Modeling Approaches. Netherlands: Kluwer Publishers; 2002.

9. Donabedian A. Evaluating the quality of medical care. Milbank Meml Fund Q. 1966;44:166–206.

10. Lesneski CD, Honore PA, Clancy C. Public health and healthcare quality. In: Shi L, Johnson JA, eds. Public Health Administration. 3rd ed. Burlington: Jones & Bartlett; 2014;599–622.

11. Niven PR. Balanced Scorecard Evolution. Wiley; 2014.

12. Coppola MN. A propositional perspective of leadership: Is the wrong head on the model? Jrnl Intl Res Bus Disc: Bus Res Yearbook, International Academy of Business Disciplines. 2004;11:620–625.

13. Edmondson KM, Smith DF. Concept mapping to facilitate veterinary students’ understanding of fluid and electrolyte disorders. Teach Learn Med. 1998;10:21–33.

14. Simpson E, Courtney M. Critical thinking in nursing education: Literature review. Int J Nurs Pract. 2002;8:89–98.

15. Johnson JA. Introduction to Public Health Manage- ment, Organizations, and Policy. New York: Delmar- Cengage; 2013.

FIGURE 2-8 Chapter Exercise 2

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CHAPTER 3

Classical Theories of Organization

LEARNING OBJECTIVES

■ Trace the evolution of early major theories of organization. ■ Be able to distinguish key attributes of each theory from the others. ■ Understand and explain contributions of scientific management. ■ Understand and explain contributions of administrative theory. ■ Understand and explain contributions of bureaucratic principles. ■ Understand and explain contributions of human relations. ■ Understand and explain contributions of administrative behavior. ■ Gain insight into the value of understanding a wide range of theories.

OVERVIEW

This chapter provides the foundational and historical background for the study of organization theory. All of the major categories such as scientific management, administrative theory, and bureaucratic theory are presented here and will serve to inform the reader as he or she moves forward in the text. The elements and context of each of these theories are provided in a chronological and categorical way.

Contributing Authors: Peter C. Olden and Mark L. Diana

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▸ Scientific Management

Frederick W. Taylor, in his classic writings on management, stated “in the past the man has been first; in the future the system must be first,” to help the worker achieve maximum pro- ductivity and efficiency and then be properly rewarded.3 He believed that better management could help both the employer and the employee achieve greater prosperity while reducing what he perceived to be enormous waste, loss, and inefficiency throughout industries and the United States in general. Taylor argued that rather than management just searching for “better workers,” it should apply systematic sci- entific management. Taylor (1895, 1903, 1911) had come to believe that management was a true science based on defined laws, principles, methods, and techniques, and that this science could be applied to all kinds of activities for big increases in productivity and efficiency. Based on that approach, he led the development of scientific management in the late 1800s and early 1900s.3–5 His work was extended by Frank and Lillian Gilbreth6 and Henry Gantt.7, 8

Taylor argued and demonstrated that an individual worker’s tasks could be scientifically analyzed to determine how to achieve increased output with decreased energy and resource utilization. He conducted extensive studies of workers manufacturing steel that considered, for example, the design of a tool, availability of a tool for a worker, how a tool was held, how a tool was moved, and so forth. Taylor demonstrated his methods and proved their results, and so others came to see his ideas were not unproven theory but instead were proven to work. An early study and experiments at the Bethlehem Steel Plant with pig iron workers became legendary.3

When Taylor developed his ideas in the early 20th century, managers and workers were generally antagonistic toward each other. However, Taylor believed that both groups shared common interests and that each could not succeed without the other. Further, he

▸ Introduction

Organizing workers to achieve goals is perhaps as old as the human species, but the development of organization theory is much newer. Classical views of man- agement began in the late 19th and early 20th centuries with the Industrial Revolution. Facto- ries grouped together hundreds and thousands of workers into a much bigger scale of operations than before. Along with larger factories, there came larger universities, government agencies, hospitals, and other businesses and enterprises. This led to new problems of organizing and managing workers for maximum attainment of goals such as efficiency and productivity.

Theories of organization then evolved from different perspectives and schools of thought, and Perrow later grouped them into two broad categories: the mechanical school and the human relations school.1 The mechan- ical approach to organizations viewed orga- nizations as machines and emphasized, for example, centralized authority, division of labor, and rules. The human relations approach viewed organizations as groups of people and emphasized, for example, trust in employ- ees, interpersonal dynamics, and delegated authority. Alternatively, March and Simon divided classical organization theory into two contents—that which focused on physical pro- duction (e.g., Taylor’s time and motion stud- ies) and that which focused on larger problems of grouping workers and coordinating their work (e.g., Weber’s writings on bureaucracy).2

The purpose of this chapter is to briefly explain the main contributions of five import- ant approaches to organization theory: sci- entific management, administrative theory, bureaucratic principles, human relations, and administrative behavior. This is important for understanding the origin and intent of many management practices still in use today, either in part or in whole. The chapter next explains each of these five perspectives and then fin- ishes with a summary, review questions, learn- ing activities, and references.

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because rates were based on weak standards and tradition. Taylor based rates on scientific empir- ical analysis and measurement that workers felt were fair, and Taylor expected this approach to be embraced by workers and managers alike.3

Taylor identified several main principles of scientific management:

1. Managers develop a science to determine the best way to perform each element of work.

2. Managers scientifically select the best worker for each job.

3. Managers scientifically educate, train, and develop the worker for the job.

4. Managers cooperate with workers and assure work follows scientific methods.

5. Managers share almost equally with workers the responsibility for work results.3

Taylor’s work became known as scientific management, which was very different for man- agers and workers. It led to better understanding and cooperation between both groups, because they used empirical measurement, the scientific method, experimentation, and research man- agement to maximize output and minimize effort. This approach was applied to work con- ditions, equipment, procedures, and employee selection. It led to more worker specializa- tion, which created the need for coordination, departmentalization, and other administrative principles discussed later. It also led to manage- ment control, because once work standards were set and agreed upon, managers could measure actual work achieved by an employee and com- pare it to standards. In this way, Taylor’s focus on the specifics of the one best way to work also led to numerous changes in management and structure within the organization.3

Scientific management studied repetitive, simple, physical tasks in factory production or clerical work that could be clearly broken down and identified, and which had few mental or cog- nitive elements. The Gilbreths sought to further

believed both groups—not just the workers— were responsible for solving productivity and efficiency problems. Thus, he argued that management should assume more responsibil- ity for results than it previously had.

One way Taylor believed that managers could help workers was to help them work in “the one best way.” Too often, workers were left to figure out for themselves how to get their work done. Often, the same task might be done in dozens of ways, with some ways more efficient than others. Taylor believed there was “one best way” and one best tool or imple- ment to perform a task, and he applied scien- tific methods to find it. The “one best method and best implement can only be discovered or developed through a scientific study and anal- ysis of all of the methods and implements in use, together with accurate, minute, motion and time study . . . and the gradual substitution of science for rule of thumb.”3 This approach to management (sometimes called “Taylorism” or the Taylor System) required more planning and designing of work, and then training of workers to perform work in “the one best way.”

Although Taylor’s ideas began by focusing on individual workers, they expanded to man- agement and led to new management processes and methods. Every day, Taylor expected man- agers to plan and write out in detailed instruc- tions the next day’s work tasks, methods, tools, time allowances, and so forth to enable workers to be more productive with less effort and waste. Further, the managers were to establish meth- ods, rules, standards, actions, physical motions, tools, techniques, and systems—“the best way”—and then help workers understand all of this. In this way, managers and workers would be cooperative partners in achieving improved results. Managers were expected to pay higher wages to the laborers, so that everyone would gain from the higher productivity and output. Rue and Byars noted that piecework schemes (that pay workers based on the number of items produced regardless of the time taken to produce them) had previously been tried in production.9 Those payment plans were mostly unsuccessful,

Scientific Management 25

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part of scientific management was concerned with utilization of human beings in organiza- tions. They referred to scientific management as “physiological organization theory” because it included analysis of employees’ physiologi- cal constraints of production.2 Morgan argued that the scientific approach to management mechanized people and de-humanized the workplace.11 Further, it separated the “hand” of workers from the “brain” of managers. However, others (e.g., Rue and Byars) believed Taylor was concerned about helping both managers and employees improve production while improv- ing work conditions and pay for employees.9 Indeed, Taylor advocated higher rates of pay for workers who increased production.

Perrow identified several limitations of the scientific management school. First, labor and labor unions gained power, which led manage- ment to cooperate and share more with employ- ees and move away from rigid views of people as machines. Second, changing markets required businesses to adapt and change to meet new customer preferences. Frequent and sometimes rapid change did not work well with rigid scien- tific management. Third, social ideas and politi- cal viewpoints emerged that did not support the harsh authoritarian management that existed in some businesses imbued with scientific man- agement. Finally, the search for leaders of large growing organizations increased the realization that people, leaders, and organizations were not machines but social systems involving human relationships.1

▸ Administrative Principles

While the scientific management approach advanced the performance of individual tasks in an organization, not much theory had yet been developed for organizing different tasks into jobs, jobs into work units, and work units into departments. Minimizing the cost of production would require an organization to

deconstruct work into basic activities—grasp, reach, turn, etc.—and established time standards.6 However, this was confounded by the realization that the time to perform such actions depended on many other factors. They also analyzed mus- cle fatigue, speed, effort, skill, and other factors of human performance. Later disciples of Tay- lor (e.g., Henry Gantt and Carl Barth) expanded scientific management and applied it to other businesses and types of organizations, including those in municipal government and education.

The scientific management approach became widespread early in the 20th century, replacing traditional methods and “rule of thumb” standards. Many managers accepted it. However, some did not accept it because they felt it interfered with or reduced managers’ role, judg- ment, and ability. As Scott points out, these stud- ies and changes led to higher-level studies and changes in how work was organized, how tasks were sequenced and assigned, who was selected to perform particular tasks, and how production could be maximized.10 To do this, managers had to look at not only individual tasks and workers, but also at how those tasks and workers were connected to others, which meant rationalizing, coordinating, and sequencing communication, processes, and many aspects of production. The work of laborers was changed and so too was the work of managers. Managers’ decisions no lon- ger were personal or arbitrary; they were based on scientific analysis and experiments that led to more output and productivity.

Along with some managers, some workers resented this new approach because it standard- ized and proscribed much of their daily work. March and Simon stated that it studied men as accessories to machines for routine produc- tive tasks and tried to prescribe their work to increase production. This approach sought to improve productivity of an inefficient organ- ism (person) by carefully prescribing precise steps and methods of work. This converted a “general-purpose mechanism, such as a person, into a more efficient special-purpose mecha- nism,”2 and thus was a form of mechanization and automation. March and Simon believed that

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10. Order, with a place for everything and everyone

11. Equity, based on kindness and justice 12. Stability of personnel and person-

nel planning 13. Individual initiative, to plan and

then help implement the plan 14. Esprit de corps, harmony, unity in

the organization

Fayol believed management was a process based on these principles and that these princi- ples are applicable to all types of organizations. Thus, his ideas form a general theory of admin- istration that sought to form broad principles of administration to guide the management of organizations. These were “top-down” rather than the “bottom-up” approaches of Taylor. Two important concepts— specialization and coordination—were emphasized. As can be seen, these principles helped form organiza- tional design based on hierarchical levels and chain of command for control, with workers having a single boss, jobs being specialized by tasks and activities, and then jobs being grouped into departments. Line and staff work were distinguished from each other, in which line work contributed directly to achieving organizational goals, while staff work sup- ported the line work. These principles were to be flexible; Fayol expected managers to adapt them to particular situations.13

Gulick and Urwick (1937, p. 22) also developed administrative principles by describing administrative concepts including division of work, coordination of work, span of control, unity of command (one boss), top- down and bottom-up approaches to design- ing organizations, and executive functions. In doing so, they helped build on—and corrected problems of—Taylor’s work. For example, their unity of command principle was developed because multiple bosses caused inefficiency and conflict. They claimed that even “Taylor fell into this error in setting up separate fore- men to deal with machinery, with materials,

consider relationships, coordination, and pos- sible synergies among tasks, jobs, work units, and departments. Further, it would depend on the volume of work and whether there was enough need for a particular task to make it a full-time job or combine it with other tasks to make a full-time job. Principles for developing these kinds of structures emerged in the work of Fayol and Gulick and Urwick among others.

Based on his experience in management, Henri Fayol developed a more complete the- ory of administration and is often considered the first writer to do so.12 Unlike Taylor, who examined work from the level of the individ- ual employee, Fayol examined organizational management from the perspective and role of top managers. Thus, his work is more about managing an organization than just managing a worker. His classic book General and Indus- trial Management was published in 1916, and a revised translation of it by Gray explains Fayol’s 14 management principles that are considered universally applicable to managing organizations. Drawing from Fayol, Gray, and Rue and Byars, these principles are summa- rized below:9, 13, 14

1. Division and specialization of work 2. Authority, based on the formal

position rather than the person 3. Discipline, based on obedience and

respect 4. Unity of command, so an employee

takes orders from only one boss 5. Unity of direction, coming from

one boss and plan for activities that have the same objective

6. Placing group interests above indi- vidual interests

7. Pay, based on factors that are fair, uniform, and understood

8. Centralization, based on the situ- ation, authority, and communica- tion channels

9. Line of authority or scalar chain, to show formal communication channels

Administrative Principles 27

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much to group work based on process (special- ized jobs) versus purpose (self-containment). More self- containment means less coordination cost—but also less economy of specialization.

Gulick and Urwick also helped form the executive function by identifying and describ- ing the work of the chief executive. They asked “What work does a chief executive perform?” They then answered “POSDCORB.” That was their acronym for planning, organizing, staffing, directing, coordinating, reporting, and budget- ing. These seven functions may be subdivided so that the work is organized and performed by more than one person if necessary. When an organization is large, these functions should be divided among subparts of the organization.14

This approach continued to evolve with contributions from other writers. For example, Mooney further developed principles includ- ing coordination, scalar (hierarchical) levels of authority and responsibility, delegation, staff work, and function (duties).15

While these principles helped formulate a theory of management and organization, some of them were criticized as being too simplistic, contradictory, and based on dubious assump- tions.16, 17 At this point in the development of organization theory, “there is a tendency to view the employee as an inert instrument” without consideration of individual behavior, motivation, and variability.”2 Despite these shortcomings, these administrative principles helped develop organization theory, structure, and design. The criticisms led to the realization that broad prin- ciples may not apply to every situation or orga- nization (there are limits to the applicability of principles); they are contingent on other factors.

▸ Bureaucratic Principles Concurrent with development of scientific man- agement and administrative principles was the work of Max Weber in developing bureaucracy theory. Weber was a sociologist, economist, and political scientist who studied civilization and society. He wrote in the early 20th century

with speed, etc., each with the power of giving orders directly to the individual workman.”14

They did much work to develop depart- mentalization and grouping of work units both vertically and horizontally, realizing that both should be considered. Departmentalization of work units could be based on purpose and pro- cess, and the work itself could be grouped based on purpose, process, clients, or location. When grouping work by purpose—group all tasks, jobs, resources, etc. needed to completely accomplish a certain purpose—then the work is self-contained within a single department. Self-containment means everything (labor, resources, etc.) needed by a work unit to accomplish its work (pur- pose) is contained within that work unit, so it can achieve its purpose independently of what happens elsewhere in the organization. This approach has advantages. It helps ensure comple- tion of a particular purpose or project by putting it completely under the control of a single per- son (department director) who has control over all necessary staff, experts, services, and workers needed to accomplish the entire project and pur- pose. The department does not have to depend on or wait for others outside of the department director’s control. It does not have to deal with inter-departmental conflicts, which might have to be resolved by a higher- level manager, and in any event would cause delays and interference. It minimizes coordination time, cost, and energy. More self- containment means less coordination with other work units in the organization. How- ever, there is less specialization, which increases costs, as discussed next.

Grouping work based on process is basing work on skills and the types of work performed. When grouping all secretarial work in one department, economies are achieved by having a highly specialized focused department. How- ever, when grouping work based on specialized processes, increased coordination is required with other work units that need the specialized work to complete their purpose. These potential economies are lost when work of various skills is grouped together based on purpose (rather than process). So, an organization must decide how

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of knowledge. This is the feature of it, which makes it specifically rational.”12 This knowledge includes, of course, the technical knowledge that is the basis for selection into an office. But, there is also knowledge from knowing the history and experience in an organization and having access to knowledge in office files.

The purest form of exercised legal author- ity is found in a bureaucratic administrative staff. It is an ideal form, with these principles:19

1. Staff are free personally and subject to the organization’s authority only for their impersonal official work.

2. Staff are organized in a clear hier- archy of offices (bureaus) with a higher level one controlling those beneath it (rather than control based on personal loyalty of people).

3. Each office has clearly defined divi- sion of labor and duties and com- petencies, and it is managed based on written documents in files.

4. An office is filled by open free selection and appointment rather than election.

5. Staff are selected and appointed based on technical qualifications and ability, rather than personal loyalty and relationships.

6. Staff are paid by fixed salaries based largely on rank in the hierar- chy and responsibility.

7. An office is the sole or main occu- pation of a person in that office.

8. An office is part of a career in which someone can be promoted up the hierarchy based on achieve- ment and/or seniority.

9. Staff employment in an office is separate from ownership of rights, property, equipment, and other means of work production in that office; the office (not the hired worker) owns the means of pro- duction and rights of an office.

in German; his work was translated by Gerth and Mills (1946) and Henderson and Parsons (1947) and brought to the United States. Weber strongly believed in the bureaucratic form of organization that included hierarchical struc- ture, promotion based on merit rather than per- sonal relationships, impersonal rules, and other principles of organization. He believed this was superior to prior forms of organization such as feudalism or patrimony.18, 19

Weber began by identifying three types of legitimate authority based on three different views of what was legitimate.19 The different views were as follows:

1. Rational (legal authority)—based on the “legality” of normative rules and on the right of those in authority under those rules to give commands.

2. Traditional (traditional author- ity)—based on the sanctity of long-standing traditions and the legitimate status of those who use authority under those traditions.

3. Charismatic (charismatic author- ity)—based on devotion to exceptional heroism, sanctity, or character of a person and the nor- mative patterns of that person.

Weber thought the traditional and rational- legal forms were the most stable for administrative structures because charismatic leaders even- tually lose influence or pass away. The rational grounds for authority rest “on a belief in the ‘legality’ of patterns of normative rules and the right of those elevated to authority under such rules to issue commands (legal authority).”12

“In the case of legal authority, obedience is owed to the legally established impersonal order. It extends to the persons exercising the author- ity of office under it only by virtue of the for- mal legality of their commands and only within the scope of authority of their office.”12 This contrasted to authority based on feudalism’s tradition, religion’s charisma, or heredity’s cha- risma. “Bureaucratic administration means fun- damentally the exercise of control on the basis

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granted rather than being tested.20, 21 His work was further criticized for not distinguishing between two sources of authority—line authority based on position and staff authority based on special expertise.22, 23 Nonetheless, he contributed much to the development of organization theory.

▸ Human Relations A catalyst for the human relations movement was the Hawthorne Studies, which began in 1924 and studied how physical working con- ditions affected worker productivity. Inves- tigators conducted experiments by adjusting lighting, rest periods, and other factors at the Western Electric Hawthorne Plant near Chicago. As Western Electric executive C. G. Stoll stated in the classic book on the Haw- thorne Studies, the “work described in this volume grew out of our experience in other investigations, which revealed a considerable deficiency in our knowledge of the intangi- ble factors in the work situation that affect the morale and productive efficiency of shop workers. . . .24 The human reactions, of peo- ple engaged in productive work, have a much more important effect on their morale and efficiency than had previously been realized.”25

Like in scientific management, the unit of analysis for the human relations approach was often the individual worker, though work groups and cliques were later studied. During more than 10 years of study, the research used observations, experiments, and interviews. No clear relation- ship was found between working conditions and worker productivity. In some cases productivity improved even when work conditions worsened (e.g., less lighting), and sometimes productivity improved for both the test group and the control group. Psychologists, who then joined the study, concluded that other factors beyond the physi- cal working conditions—such as peer norms, recognition, teamwork, participation, and cooperation—affected workers and their pro- ductivity. Behavioral and social sciences offered insights and theories to better understand

10. Staff are subject to strict systematic rules, norms, discipline, and control of their work, decisions, actions, and performance in that office and must obey impersonal orders given by officials in their official positions; these systematic rules were known and fairly stable (rather than vague and subject to arbitrary change).

These principles were interrelated so that they combined to form a system of administra- tion. Weber believed that once a bureaucracy was established, it would likely remain perma- nent since it would be difficult to destroy such an organization. Bureaucratic principles com- prised a tool for leaders to have their legiti- macy supported by rules and law. Bureaucracy had rules, procedures, and preset routines in a defined administrative system. This approach was both rational and legal and carried the force of rational thought and the laws.

While Weber considered this the ideal orga- nization for efficiency, he realized it had short- comings. The bureaucratic form of organization has precision, unity, continuity, is unambigu- ous, and is thus technically superior to other organizational forms the way a well-designed machine is technically superior. However, to do this, the bureaucracy must eliminate human emotions such as love and hate from business. Bureaucracies thus become dehumanized. Rules are valued and followed closely to the point of minimizing creativity, individuality, and ini- tiative. In this way, Weber himself realized that the human aspects of work were reduced as administrative work became mechanized the way machines mechanized production. “The individual bureaucrat cannot squirm out of the apparatus in which he is harnessed. . . . He is only a single cog in an ever- moving mecha- nism, which prescribes to him an essentially fixed route of march” in an impersonal, methodically integrated organization of official functions.18 Also, like previous writers and theories, Weber and his work were criticized later for having too many unproven propositions that were taken for

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workers lost a feeling of security, camaraderie, informal membership, and group belonging.10 When mechanical processes, new technology, and engineered job design were implemented, workers’ social relationships at work changed and became unstable and insecure.

Barnard helped advance human relations by writing about his experiences as president of the NJ Bell Telephone Company. Unlike the Hawthorne Studies that viewed individual workers and work groups, Barnard viewed the entire organization and believed in hierarchy, authority, and clear formal communication. His views and theory emphasized the cooperative social relations among human beings in an orga- nization, and he conceptualized organizations as systems that integrate the cooperative purpose- ful efforts of its individual workers. Barnard articulated the need for individuals to cooper- ate with others in order to accomplish things they could not do alone. Creating cooperative relationships formed a system of parts (people) that, to survive, had to meet the purposes of the system and of the individuals in the system. Bar- nard believed this required that people accept the system’s purpose, be willing to cooperate, and communicate effectively with other parts (people) in the system. Those three conditions were the necessary and sufficient conditions to have an organization, and they become the basis of Barnard’s theory of formal organization.27

Barnard had been a student at Harvard and afterwards maintained his relationship with the Harvard faculty conducting the Haw- thorne experiments. They all came to see that a worker was not just an economic worker— there were also social, psychological, and behavioral dimensions of the worker. The nec- essary cooperation had to be developed and fostered by organizational leaders using social, behavioral, and moral motivators and rewards (not just material rewards). Barnard’s theory of administration also placed importance on the informal organization and extensive com- munication throughout the organization. He wrote in detail about conditions necessary for effective communication with authority and

workers and organizations, and management of them. Organizations now had further rea- son to think workers were not just economi- cally motivated— they were also socially and psychologically motivated. Workers were more complex than previously realized and were not always rational. Thus, the Hawthorne Studies helped launch the human relations approach to management, although their methods and con- clusions were later questioned by some.

Trained in listening, interviewing, and helping others express themselves, Hawthorne researchers, over a period of years, interviewed thousands of workers who spoke confiden- tially and eagerly. It was realized that workers as individuals want to confidentially express their thoughts and feelings about things in their lives—personal and work-related—to some- one (in this case, researchers) who would listen with care and interest.26 Human relations theory thus evolved to include the idea that managers should pay attention to workers’ complaints and to warnings that workers are upset about some- thing. In these studies, groups and their informal social control of work and work behavior were found to be important for both the internal work- ings of the group and how the group externally interacted with other parts of the organization. The industrial organization was a social organi- zation. Work cliques, through their norms, roles, and memberships, affected workers’ attitudes and productivity. Commenting on studies of wiremen at the Hawthorne plant, “their behavior at work could not be understood without con- sidering the informal organization of the group and the relation of this informal organization to the total social organization of the company.”25 Further, “the behavior of no one person in an industrial organization . . . can be regarded as motivated strictly by economic or logical consid- erations. . . . Non-economic motives, interests, and processes, as well as economic, are funda- mental to behavior in business, from the board of directors to the very last man in the organiza- tion.”25 Elton Mayo interpreted the results of the Hawthorne Studies and generally concluded that in the work setting of the Industrial Revolution,

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Earlier work (e.g., by Taylor) assumed that when facing a situation that required a decision, man- agers were rational people who could conceive of the possible alternatives, identify the conse- quences of each alternative, calculate the utility of alternative choices, and then choose an optimal decision. March and Simon thought otherwise. They believed man had limited ability to obtain all necessary information, identify all appropriate alternatives, objectively determine consequences, and rationally evaluate choices. Human beings instead had “bounded rationality” because they were only capable of mentally processing a lim- ited amount of information. Further, available information, perceived alternatives, and antic- ipated consequences were partly determined by the social and organizational environment, which therefore should be included in a theory of managerial decision making. Managers—and people in general—usually select a satisfactory alternative rather than going through the much more difficult process of searching for and deter- mining an optimal decision.

Another contribution of March and Simon was their distinction between routine and non-routine problem solving.2 When problems arise that have been repeatedly encountered before, the person or organization will quickly form a problem definition, possible responses, and a process for selecting a response. Organiza- tions may form written policies and procedures for how to handle routine situations and prob- lems in order to simplify and expedite how they are handled. These routine problems are han- dled easily with established processes, checklists, forms, procedures, and so forth. However, when a new or uncommon problem arises, the person or organization must develop a problem definition, search for alternatives, gather information for a decision, and form a decision- making process. All of that requires time, resources, and other costs, so the organization must also decide how much time, effort, and resources to expend to make a decision. This often leads to satisficing— accepting the first satisfactory solution that can be found rather than continue to spend resources searching for and evaluating other choices.

leadership. Together, these approaches created interpersonal relations, cohesion, and motiva- tion for workers to stay and work toward the organization’s overarching purpose. Humane leadership and fair treatment of employees was another aspect of Barnard’s work.27

Flowing from all this came organiza- tional research investigating culture, behavior, groups, leadership, workers’ personality traits, supervision, worker satisfaction, job design, and participation in decision making.25, 28–31 Research found that some elements of the mechanistic approach—specialization, routin- ization, and centralization—negatively affected employee morale and loyalty. Employee auton- omy, creativity, and freedom gained credence.

▸ Administrative Behavior

Herbert Simon was skeptical of earlier work by Fayol and Taylor, criticizing some of the writing as based on faulty, limited assumptions. He also disliked commonly used administrative princi- ples that to him were mere proverbs with terms (e.g., “purpose” and “centralization”) that lacked rigorous definition and conceptual meaning.2, 17 Consequently, they were not universally appli- cable. After dissecting four administrative principles and showing how they contradict themselves in some situations, Simon concluded “none of the four survived in very good shape, for in each case there was found, instead of a univocal principle, a set of two or more mutu- ally incompatible principles apparently equally applicable to the administrative situation.”17

Unlike Taylor, who considered “economic man” as fully informed and able to calculatedly make the best economic decision for his own self-interests, March and Simon assumed that man was limited in his ability to identify and evaluate alternatives and thus would settle for an acceptable solution rather than the best solu- tion or decision.2 They theorized administrative behavior by the “administrative man” rather than economic behavior by the “economic man.”

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of the Industrial Revolution. Taylor’s scien- tific management applied scientific methods, analysis, and measurement to work in order to improve productivity and efficiency. Addition- ally, scientific management expected managers to plan and organize tasks more efficiently so that individual workers could perform their work more efficiently. Fayol’s administrative principles created a theory of administration for grouping tasks into jobs, jobs into work units, and work units into departments; his approach emphasized specialization and coordination. Gulick and Urwick extended administrative theory by developing departmentalization based on purpose, process, clients, time, and location. Weber created bureaucratic principles based on rational legal authority of a position (office), which made organizations impersonal. These principles formed a stable system of organizational administration based on hierar- chy, division of labor, systematic rules, imper- sonal orders, and files (records) for each office.

The human relations movement (of the Hawthorne Studies and later Barnard) recog- nized that workers were human beings with feelings, personal needs, and variable perfor- mance that was influenced by psychosocial fac- tors in the work setting. Simon’s administrative behavior theory of decision making assumed that managers had limited cognitive ability to evaluate alternatives, thus they would “satisfice” (accept the first satisfactory solution available).

Taylor, Simon, and the human relations school focused largely on the individual worker, whereas Fayol and Weber addressed the organization. Focus on the individual assumed that improving the ability of the individual to work would lead to increases in performance and productivity. Similarly, an organizational focus assumed that the proper structure would improve performance and productivity. Scientific management, adminis- trative principles, bureaucratic principles, and administrative behavior assumed organizations could be made rational by applying impersonal structures, hierarchies, goals, principles, plans, positions, legal-rational authority, rules, and

A second aspect of this was Simon’s theory of hierarchical goals in which one level’s means were a lower level’s ends. The work performed at the lowest level of the organization was just a means to accomplish the end purpose of the second-most lowest level, whose work was just a means by which to achieve the end purpose of the next higher level of the organization. These hierarchical means-ends relationships among organizational levels guided the decisions made by each worker, work unit, department, division, etc., so that decisions made at one level (e.g., a worker or department) would help achieve the end purpose of the next higher level. In this way, each worker and work unit sufficiently focused toward the end purpose of the organization. These approaches to decision making were nec- essary because of people’s bounded rationality or limited cognitive ability.2 This view reflected that organizational life had too many alternatives that required too much information to fully process if a person were to consider all possible alter- natives for a decision. Thus, organizations set rules, premises, and boundaries in which deci- sions must be made. Like the nested means-ends sequences, they helped to rationalize decision making in organizations and integrate the many decisions that are made each day throughout an organization.

“Administrative theory is peculiarly the theory of intended and bounded rationality— of the behavior of human beings who satisfice because they have not the wits to maximize.”17 A person’s rationality is limited by a triangle of three factors: mental habits, abilities, skill, and speed; values and motives; and knowledge of the immediate problem and of how to make a decision. These factors will vary for a person over time and in different situations. Thus, all of these factors must be included in adminis- trative theory for decision making.

▸ Conclusion Theories of organization began to develop in response to the large businesses and factories

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11. Morgan G. Creative Organization Theory. Newbury Park, CA: Sage Publications, Inc.; 1989.

12. Boone LE, Bowen DD. The Great Writings in Management and Organization Behavior. New York: Random House; 1987.

13. Fayol H. General and Industrial Management. London: Pittman; 1916.

14. Gulick L, Urwick L. Papers on the Science of Administration. New York: Institute of Public Administration, Columbia University; 1937.

15. Mooney JD. The Principles of Organization. New York: Harper & Brothers Publishers; 1947.

16. Massie JL. Management theory. In: March JG, ed. Handbook of Organizations. Chicago: Rand McNally; 1965; 25–40.

17. Simon HA. Administrative Behavior. 2nd ed. New York: Macmillan; 1957.

18. Weber M. Essays in Sociology, translated and edited by Gerth H, Mills CW. New York: Oxford University Press; 1946.

19. Weber M. The Theory of Social and Economic Organization, translated by Henderson AM, Parsons T, eds. New York: Oxford University Press; 1947.

20. Blau PM, Scott WR. Formal Organizations. San Francisco: Chandler; 1962.

21. Udy SH. “Bureaucracy” and “rationality” in Weber’s organization theory. Am Sociol Rev. 1959;24:791–795.

22. Dalton M. Conflicts between staff and line managerial officers. Am Sociol Rev. 1950;15(June):342–351.

23. Thompson VA. Modern Organization. New York: Knopf; 1961.

24. Carey A. The Hawthorne studies: A radical criticism. Am Sociol Rev. 1967;32(June):403–416.

25. Roethlisberger FG, Dickson WJ. Management and the Worker. Cambridge, MA: Harvard University Press; 1939.

26. Mayo E. The Social Problems of an Industrial Civilization. Boston: Graduate School of Business Administration, Harvard University; 1945.

27. Barnard CI. The Functions of the Executive. Cambridge, MA: Harvard University Press; 1938.

28. Homans GC. The Human Group. Harcourt, Brace. New York; 1950.

29. Katz D, Kahn R. Some recent findings in human relations. In: Swanson E, Newcomb T, Hartley E, eds. Readings in Social Psychology. New York: Holt, Reinhart, and Winston; 1952; 12–32.

30. Lewin K. Resolving Social Conflicts. New York: Harper & Brothers; 1948.

31. Stogdill RM, Coons AE. Leader Behavior: Its Description and Measurement. Columbus, OH: Columbus Bureau of Business Research, Ohio State University; 1957.

controls. The human relations approach, while focused on the individual, was also concerned with other (not necessarily rational) aspects of an individual’s participation in organizational life. This included study of such things as lead- ership, job redefinition, participatory decision making, motivation, and morale.

Review/Discussion Questions 1. How are scientific management, admin-

istrative theory, bureaucratic principles, and human relations similar? How are they different?

2. Which principles and theories in this chapter assume “the economic man?” What other assumptions of human behavior influenced early organization management theory?

3. How did criticisms of some classi- cal management theories lead to new theories?

4. Which principles of classical manage- ment theory are still used today?

References 1. Perrow C. The short and glorious history of

organization theory. Organ Dyn. 1973;2:3–15. 2. March JG, Simon HA. Organizations. New York: John

Wiley & Sons, Inc.; 1958. 3. Taylor FW. The Principles of Scientific Management.

New York: Harper & Brothers Publishers; 1911. 4. Taylor FW. A Piece Rate System. NY: McGraw Hill; 1895. 5. Taylor FW. Shop Management. New York: Harper and

Row; 1903. 6. Gilbreth FB, Gilbreth L. Applied Motion Study. New

York: Sturgis & Walton Company; 1917. 7. Gantt H. Organizing for Work. New York: Harcourt,

Brace and Howe; 1919. 8. Gantt H. Industrial Leadership. New York: Association

Press; 1921. 9. Rue LW, Byars LL. Management Theory and Application.

4th ed. Homewood, IL: Richard D. Irwin, Inc.; 1986. 10. Scott WR. Organizations, Rational, Natural, and

Open Systems. 5th ed. Upper Saddle River, NJ: Prentice Hall; 2003.

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CHAPTER 4

Modern Theories of Organization

LEARNING OBJECTIVES

■ Distinguish between open and closed systems. ■ Distinguish between rational and natural systems. ■ Understand and explain contributions of general systems theory. ■ Understand and explain contributions of contingency theory. ■ Understand and explain contributions of transaction cost economics. ■ Understand and explain contributions of resource dependence theory. ■ Understand and explain contributions of institutional theory. ■ Understand and explain contributions of population ecology. ■ Gain insight into the potential utility of these theories in health organizations.

OVERVIEW

This chapter provides descriptions and context for a wide range of organization theories that have arisen in the modern era. Most of these are still very influential in the understanding of organizational phenomena and the human behaviors associated with health organizations. Two theories in particular provide overarching perspectives that can be seen influencing many others presented later in this book; they are general systems theory and contingency theory.

Contributing Authors: Mark L. Diana and Peter C. Olden

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economics, resource dependence theory, insti- tutional theory, and population ecology.

▸ General Systems Theory

General systems theory was founded in the late 1950s by Ludwig von Bertalanffy to develop an approach to systems that crossed disciplinary boundaries.4 Bertalanffy believed that the various scientific disciplines, in developing their own theoretical frameworks, became isolated from each other with communication between them increasingly difficult. Further, he believed there were common elements in many of these frameworks that crossed the boundaries between biology, physics, psy- chology, sociology, and so on. The common element these scientists studied was systems.

A system can be defined as a set of interde- pendent parts.5 Boulding developed a systems typology with nine levels of increasing complex- ity.6 In general terms, the simpler or less complex a system is, the more tightly connected the com- ponent parts are and the more specific and con- strained their behavior is. Alternatively, the more complex the system, the looser the connections between parts, which lends more flexibility to the system. In addition, the types of flows between the system’s parts, and between the system and its environment, change as the complexity of the system changes. In general, system-flows move from materials and energy in less complex sys- tems to information in more complex systems. Systems that are more complex are also capable of renewal, self- maintenance, growth, and change.

One more important concept that is a part of Boulding’s typology is that systems are hierarchical. That is, as systems become more complex, they incorporate the characteristics of the less complex systems below them in the typology. The following is a summary of Boul- ding’s typology:

1. Frameworks—the structural com- ponents of systems; the “geography

▸ Introduction

Most of the organization theorists discussed in Chapter 3 examined and thought about organizations as entities closed off from their environments. Suchman phrased it this way: “Resources mate- rialized at factory gates, production technologies ‘revealed’ themselves to engineers, and prod- ucts evaporated off loading docks. . . .”1 These early theorists generally viewed organizations as rational entities seeking improved efficiency and performance, which resulted in classifying their theories as rational systems models. There were two important exceptions to this pattern. The human relations school viewed organiza- tions as organic entities concerned with work- ers’ needs and wants more than with efficiency and performance; thus, it is classified as a nat- ural system model. Administrative behavior, which introduced the concept of bounded ratio- nality, was the first theoretical framework to suggest that organizations might be influenced by events outside of their boundaries.

Beginning in the 1960s and continuing to the present, organizational scientists began to develop models that explicitly incorporated the environment. Scott and others have clas- sified these theories as open-systems mod- els.2, 3 Scott’s classification scheme follows the development of organization theories through two phases that each have two subphases. The two phases are the closed-systems model and later the open-systems models. The two sub- phases took place twice—once during the closed-model phase and then again during the open-model phase. These subphases were the transition from rational models to natu- ral models. Thus, there were closed-rational systems models followed by closed-natural systems models. Then, after acknowledging the environment, there were the open-rational systems models followed by the open-natural systems models. This chapter next explains the theories that fall under these last two categories, specifically the general systems theory, contingency theory, transaction cost

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8. Social—“The unit of such systems is not perhaps the person—the individual human as such—but the ‘role’—that part of the person which is concerned with the organization or situation in question, and it is tempting to define social organiza- tions, or almost any social system, as a set of roles tied together with channels of communication.”6, p. 205 The person can also affect the role, so this level “. . . is human life and society in all its complexity and richness.”6, p. 205

9. Transcendental—“. . . the ultimates and absolutes and the inescapable unknowables, and they also exhibit systematic structure and relation- ship.”6, p. 205

Boulding thought most social science research focused on level two of his typology, with some work at level three, although the subject matter involved level eight. Because of the hierarchical nature of systems, how- ever, studying a system at a lower level is still useful to understanding the system. For example, many managerial control systems within organizations function as cybernetic systems. In addition, highly complex sys- tems can be broken down into component sub-systems to make the complexity more manageable.

General systems theory helped to propel organization theory into the open systems era, where the environment plays a prominent role. Katz and Kahn were instrumental in bringing general systems theory approaches to organi- zation theory by including it in the first edition of their textbook written in 1966.2, 7

▸ Contingency Theory Lawrence and Lorsch coined the term con- tingency theory in 1967, although the prior work of Burns and Stalker and Woodward helped to lay the foundation.8–10 Subsequent

and anatomy of the universe—the patterns of electrons around a nucleus, the pattern of atoms in a molecular formula” all the way up to “the mapping of the earth, the solar system, the astronomical uni- verse.”6, p. 202

2. Clockworks—simple dynamic sys- tems that function like a clock, such as the motion of the planets and moons in the solar system.

3. Thermostat or cybernetic systems that maintain an equilibrium, but the equilibrium point can be changed within the limits of the system.

4. Open systems—self-maintaining structures that utilize a throughput of resources from their environ- ment. “This is where life begins to differentiate itself from not-life . . . the existence of even the simplest living organism is inconceivable without ingestion, excretion and metabolic exchange.”6, p. 203

5. Genetic-societal (plants)—systems that have developed a division of labor with differentiated and mutu- ally dependent parts, and that have separated their appearance (phe- notype) from their genetic makeup (genotype); also called blueprint growth systems, as they reproduce using preprogrammed instructions (through seeds or eggs) rather than duplication.

6. Animal—have highly specialized information processing capabil- ities (eyes, ears, etc.) and a highly developed nervous system that organizes the information into an image or knowledge structure of the environment as a whole.

7. Human—possess self-consciousness; “. . . he not only knows but knows that he knows,”6, p. 204 and characterized by the capacity for speech.

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its environment. When a contingency variable changes, misfit occurs between the organiza- tion and its environment and the organization then adapts its structure to improve fit with the environment. Donaldson labeled this model the structural adaptation to regain fit (SARFIT) model.

The notion that there is no one best way to organize contrasts with ideas of early theorists, some of whom searched for that one best way. Though compelling, contingency theory is not without its problems. Chief among criticisms of contingency theory are:

1. a focus on the reaction of the orga- nization to its environment with a seeming lack of acknowledgment that the organization can alter its environment;

2. a proliferation of contingency vari- ables, many of which are not well defined;

3. a poor definition of the concept of fit; and

4. a poor definition of what con- stitutes improved organizational performance.14

▸ Transaction Cost Economics

Transaction cost economics (TCE) was first proposed by Coase and then developed more fully by Williamson.15–19 Transaction cost eco- nomics, as its name implies, has its origins in economics rather than sociology, and it focuses on individual transactions or exchanges of goods or services between buyer and seller. An organization has three choices when it comes to obtaining a good or service: purchase it on the market, produce it internally, or some combi- nation of the two, such as a joint venture. Man- agers must decide which of these approaches to use, but because of bounded rationality (the concept developed by March and Simon), there

work by Galbraith and Donaldson expanded the framework.11–13 The underlying theme of contingency theory is that there is no one best way to organize. Instead, features of the envi- ronment within which an organization exists determine the structure that will enable an organization to perform best. In other words, the best structure for an organization is con- tingent on aspects of its environment. These aspects are called contingencies, or contin- gency variables, and include, for example, size, technology, geography, and uncertainty. Aspects of the organizational structure that are contingent upon these environmental characteristics include the degree of formal- ization, differentiation, decentralization, and integration.

Lawrence and Lorsch proposed that the whole organization did not necessarily face the same contingencies, but instead various sub- units within the organization faced differing environments and contingencies.8 Thus, struc- tural features should also differ. The greater the variation of environments faced by indi- vidual sub-units within the organization, the greater the need for differentiation, and so the greater subsequent demand on coordination and control. Lawrence and Lorsch therefore saw contingency theory operating at both the sub-unit level and the organization level.

Galbraith focused more on the demand for information processing within the organi- zation as the complexity and uncertainty of the environment increased.11, 12 The more complex and uncertain the environment, the greater the demand on the organization for effective information processing that would lead to better decisions and increased performance. Structural features of the organization— including formalization, hierarchy, and decentralization—would need to be designed to maximize information processing.

Donaldson developed a variation of con- tingency theory that proposed an adaptive response of the organization to its structural fit with its environment.13 In this model, an initial state of fit exists between the organization and

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The more specific the asset, the higher the transaction cost. Frequency simply refers to the number of times a transaction takes place. The more frequent the transaction, the higher the cost. Uncertainty increases the cost of transactions because it worsens the effect of bounded rationality. Williamson devel- oped a framework that incorporates these elements that can be used to predict under what conditions organizations will conduct transactions externally and when they will internalize transactions. When asset specific- ity is low, always leave transactions to the mar- ket, regardless of the amount of uncertainty or other characteristics of the transaction. When all asset specificity, uncertainty, and frequency are high, do transactions internally. Interme- diate levels of these variables can lead to forms of organization other than markets or hierar- chies, such as joint ventures.

Transaction cost economics does not directly address issues of organization structure and performance. Williamson’s argument is that the need to reduce transaction costs explains why not all transactions take place in the mar- ket, and thus gives rise to hierarchies or orga- nizational structures that allow for monitoring and control of these transactions. Therefore, organizations arise from a rational approach to economizing on transactions, rather than through a conscious management decision to organize in a certain fashion. Further, Wil- liamson argues that reducing transaction costs results in a more efficient organization that can be more successful than otherwise.

There are many criticisms of TCE, per- haps most notably those of Perrow and those of Ghoshal and Moran.21, 22 Perrow’s critique con- sists of two main points. First, he argues that all of the factors that contribute to increased transaction costs in the market— opportunism, uncertainty, bounded rationality, and so on— also exist within the firm. In fact, Perrow points out that Williamson acknowledges this explicitly in markets and hierarchies.16 How- ever, once acknowledged, Williamson does not return to this problem, and essentially leaves

are conditions under which managers can- not account for all possibilities.20 Williamson argues that the costs of transactions are useful in helping managers make this decision.

Transaction costs arise from the need to monitor the other party in the transac- tion. This need to monitor stems from both bounded rationality and opportunism. This latter concept is the possibility that the other party may behave opportunistically, a behav- ior Williamson characterizes as “self-interest seeking with guile.” The potential for oppor- tunistic behavior depends on the nature of the transaction. In situations where the exchanged good or service is generic in nature and there are many sources of the good or ser- vice, there is little potential for such behavior, and the parties to the exchange do not need to know anything about each other’s needs. In such cases, the transaction costs are low and the good or service can be purchased in the market with little concern for monitor- ing. If, on the other hand, the good or service is highly specific to the buyer’s needs, there are likely to be fewer sources, and the buyer becomes susceptible to opportunistic behav- ior and higher transaction costs. In such cases, Williamson argues that the organization can reduce its susceptibility to opportunism and enforce monitoring of the transaction more economically by internalizing the exchange, or producing the good or service itself rather than purchasing it outside. Thus, an organiza- tion adds structures that define its boundaries in response to the need to reduce transaction costs, which helps to explain why vertical integration takes place. Williamson calls this internalization hierarchy.

Transaction costs were difficult to mea- sure, so Williamson added factors to the threat of opportunism that indicate the transaction cost: the type of transaction and the degree of uncertainty. The type of transaction is deter- mined by its asset specificity and frequency. Asset specificity refers to the degree of substi- tutability of the transaction, or how easily it can meet the needs of different organizations.

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book The External Control of Organizations: A Resource Dependence Perspective.25 The book’s title makes it clear that Pfeffer and Salancik viewed the external environment as capable of exerting control over the organization. This external control is exercised through the orga- nization’s need for resources that are controlled by external entities. All organizations require resources to function, because they are open sys- tems, and no organization can internally provide all its required resources. This need to acquire resources from external entities makes the orga- nization dependent on those outside entities. The degree of dependency varies with both the importance of the resource to the organization and the scarcity of the resource (how many sup- pliers there are).

Resource dependence theory offers a framework for understanding and predicting the actions of organizations to environmental pressures. More specifically, resource depen- dence theory suggests that organizations will take actions to secure the resources needed to function and survive. Resource dependence theory views organizations as existing in open systems within which they must contend with other organizations and entities for needed resources. Thus, control of the organization shifts from within the organization to outside the organization, reducing organizational con- trol to the extent that other entities control access to the needed resources.

Resource dependence predicts that orga- nizations will consciously scan the environ- ment and adopt strategic responses to better manage acquisition of resources. Usually the goal is to improve the performance of the organization, either as outcomes, products, or some form of change. The focus of the theory is on resources and the organization’s behavior in its attempts to acquire those resources. A fun- damental proposition of the theory is that an organization cannot supply all of the resources needed for its survival and so must enter into relationships with entities in its environment to obtain those resources. Pfeffer and Salancik term this interdependence.

the ability of an organization to reduce internal transaction costs as a given, primarily through fiat. Second, Perrow argues that the motiva- tion for vertical integration is market power and dominance, not efficiency gains through reduced transaction costs.

Ghoshal and Moran’s critique focuses on the concept of opportunism.22 They argue that Williamson’s formulation of opportunism does not adequately address its components, spe- cifically the differences between the tendency to behave opportunistically and opportunistic behavior itself. Further, they argue that the ability of organizations to control opportunistic behavior through fiat and other types of rational controls may actually lead to increased levels of opportunistic behavior within the organiza- tion. The result is a self- fulfilling prophecy and an endless feedback loop between the level of opportunistic behavior and the controls insti- tuted to prevent it. Ghoshal and Moran argue that this situation could well result in sapping the competitive ability of the organization.

More recently, Slater and Spencer have criticized TCE on the basis of the apparent contradiction between the notion of bounded rationality on the one hand, and the elaborate system for efficiently organizing transactions on the other.23 How is it that managers, so con- strained by bounded rationality, cannot deter- mine all of the potential pitfalls of conducting transactions but are able to analyze the char- acteristics of those transactions and determine the most efficient governance structure for organizing those transactions? Despite these criticisms, there is much empirical research to support transaction cost economics, partic- ularly in the case of the relationship between asset specificity and vertical integration.24

▸ Resource Dependence Theory

Pfeffer and Salancik developed the resource dependence theory primarily in their 1978

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with the other conditions listed above. Con- ceivably this control could reach the level of direct administrative control, where the exter- nal entity makes managerial decisions for the organization. The result is that organizations will develop strategies that minimize depen- dence on others or increase dependence of others on them. To be effective, organizations must satisfy the demands of those in its envi- ronment from which it requires support, in the form of needed resources.

There are two primary methods that orga- nizations will use to manage resource depen- dency. They can stockpile resource inventories and thereby reduce dependence on external entities, although this does not alter the under- lying insecurity. Or, they may seek to establish some type of inter-organizational relationship to increase resource stability and predictability. To ultimately obtain resources needed for con- tinued survival, resource dependence theory then predicts that organizations will undertake a variety of inter-organizational relationships to gain some control over their environ- ment and resources. These relationships can take the form of joint ventures, associations, diversification, vertical integration, mergers, and co-optation of those that control needed resources. This view of organizational action in response to the environment requires that managers be proactive in scanning the envi- ronment to detect resource risks and oppor- tunities, and that they take actions to reduce resource uncertainty and dependence.

▸ Institutional Theory Institutional theory developed out of the work of Meyer and Rowan, Meyer and Scott, and DiMaggio and Powell. It attempts to explain organizational behavior and structure from a cognitive and cultural viewpoint.26–28 This is in sharp contrast to contingency the- ory and resource dependence theory, both of which take a strategic view of organizational behavior and structure. All three theories

The theory predicts organizational behav- ior by analyzing the degree of control the organi- zation has over resources held by other entities, the degree of need for those resources, and the degree of access to alternatives. When needed resources are scarce or not under the control of the organization, the organization must act upon the environment to secure the resources or it will cease to exist. Another way to view this is that external entities will be able to exert control over the organization under these conditions:

1. The resource is critical to the oper- ation of the organization.

2. The external entity controls the resource and there are few or no alternative sources for the resource.

3. The organization does not control resources critical to the function- ing of the external entity.

4. The outputs of the organization are visible enough for the external entity to be able to judge compli- ance with its demands.

5. Satisfaction of the demands of the external entity does not face legal restrictions and does not con- flict with satisfaction from other components of the environment with which the organization is interdependent.

6. The organization does not control the formulation of the external entity’s demands.

7. The organization is capable of meeting the demands.

These conditions clearly demonstrate Pfeffer and Salancik’s view of organizations as interdependent.

Therefore, this dependence on the envi- ronment gives power and influence over the organization to those external entities pos- sessing control over needed resources. The degree of control relates to the degree to which the external entities are able to control the resources needed by the organization, along

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as acting inappropriately if it does not comply with these norms, and thus it will not be con- sidered legitimate. The cognitive pillar refers to the “. . . rules that constitute the nature of reality and the frames through which meaning is made.”30, p. 40 This refers to the idea that orga- nizations should look and behave like other similar types of organizations.

Scott nicely synthesizes these concepts, and this synthesis makes evident the power of institutions in shaping organizational behavior and structure in a variety of ways. Institutions give rise to a rationalized image of the legitimate structure and appearance of organizations in the same field. An organi- zational field is defined as “. . . those orga- nizations that, in the aggregate, constitute a recognized area of institutional life: key suppliers, resource and product consumers, regulatory agencies and other organizations that produce similar services or products.”31 These rationalized images are referred to as rationalized myths because they focus on external legitimacy rather than internal effi- ciency. In fact, adherence to these myths may adversely affect technical efficiency. How- ever, the institutional forces are so powerful that failure by the organization to adhere to the image of a legitimate organization may threaten its access to needed resources and support, both internal and external, and threaten its very survival. If organiza- tions act in generally unacceptable ways, as defined by the institutions in the environ- ment that the organization is subject to, their resources and support may be threatened or withdrawn. Because highly institutionalized organizations may have significant conflict between the need for both external legiti- macy and technical efficiency, organizations will attempt to decouple elements of their production structure from their legitimizing activities. This decoupling serves to insulate the technical core of the organization from the activities of the organization focused on gaining external legitimacy. The result is

are open- systems theories and as such, they acknowledge the role and influence of the environment on organizational behavior and structure. They also allow for adaptive responses to the environment by the organiza- tion. Contingency and resource dependence theories are rational systems models, how- ever, which pre-suppose the organization’s responses to the environment are based on objective environmental scanning and ratio- nal responses chosen to improve efficiency. In contrast, institutional theory is skeptical of this rational model, and proposes instead that organizational responses are often based on factors that have little or no relationship to organizational efficiency.

The concept of an institution is central to institutional theory. Scott and Meyer devel- oped the following definition of institutions: “Institutions are symbolic and behavioral sys- tems containing representational, constitutive, and normative rules together with regulatory mechanisms that define a common mean- ing system and give rise to distinctive actors and action routines.”29, p. 68 Scott gives a simi- lar definition: “Institutions consist of cogni- tive, normative, and regulative structures and activities that provide stability and meaning to social behavior. Institutions are transported by various carriers—cultures, structures, and routines—and they operate at multiple levels of jurisdiction.”30, p. 34

These regulative, normative, and cogni- tive elements are central to both definitions. Scott refers to these as the Three Pillars of Institutions. The regulative pillar refers to how institutions constrain and regulate behavior. Regulation is coercive through the applica- tion of rules, laws, and sanctions. An organi- zation that does not abide by these regulatory constraints will have its legitimacy challenged through legal sanction. The normative pillar refers to “. . . normative rules that place pre- scriptive, evaluative, and obligatory dimen- sions on social life.”30, p. 37 Normative pressures are applied through social obligation, or the belief by the organization that it will be viewed

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▸ Population Ecology Population ecology has been developed through the work of Hannan and Freeman and Aldrich.32–36 Based on natural biological selec- tion theories and the work of Charles Darwin, population ecology assumes that organizations have life cycles including birth, growth, mat- uration, decay, death, and distinction. This theory holds that some processes of change in organizational populations parallel processes of change in biologic populations. It focuses on the issue of organizational survival rather than efficiency and argues that organizations are powerless to control their destiny because the environment selects organizations best suited to survive. A striking difference between this and other organization theories is that popu- lation ecology focuses on populations of orga- nizations rather than single organizations or people inside organizations.

There are four key assumptions to this theory. First, it assumes that the environment differentially selects organizations for survival based on “fit” between organizational forms and environmental characteristics. Second, new organizations are always appearing, which leads to continuous changes within organiza- tional populations. Third, organizations are subject to inertial pressures, meaning it is dif- ficult for organizations to change. Finally, it assumes that organizations must struggle to remain competitive in the marketplace and survive.

Population ecology argues that popula- tions of organizations evolve through different life stages. First, a large number of variations (analogous to mutations in biology) appear in a population of organizations. These vari- ations expand the variety of organizational forms in the environment. Next, selection occurs in which some organizations find niches and survive while others do not and die. Market forces, competition, and/or inter- nal structural characteristics determine which specific organizations find niches. When insufficient demand for a firm’s product exists

there may be a difference between what an organization does and what it portrays itself as doing.

Institutional pressures cause organiza- tions in the same field to become similar over time in a phenomenon called isomorphism. DiMaggio and Powell cite this homogeneity in organizational forms and practices as one of the driving forces behind the development of institutional theory.31 They argue that in the early stages of the life cycle of an organizational field, there may be a considerable diversity of form and approach, but that as a field becomes well established, homogeneity develops. This inexorable move toward isomorphism is driven by three mechanisms discussed below: coercive forces, mimetic pressures, and nor- mative pressures.

First, coercive isomorphism is the result of formal and informal pressures exerted by other organizations. These organizations may be governmental and regulatory agen- cies that make and enforce laws and rules the organization must comply with or face some sort of penalty. Coercive forces may also arise from higher levels of the organization, as in the case of standardized policies and proce- dures enforced by the parent organization of a multi-level system. Second, mimetic iso- morphism occurs when organizations model themselves on other organizations that exter- nally are favorably viewed. This behavior is a response to uncertainty. When uncertainty is high, organizations will mimic the structures and behaviors of other organizations that appear successful, assuming these other orga- nizations face the same type of uncertainty. Mimetic behavior can also be an effort to gain legitimacy. Third, normative isomorphism arises primarily from professionalization in two ways. Formal education instills a com- mon cognitive reference that becomes viewed as legitimate, and, therefore, other approaches are considered illegitimate. And, the extensive professional network that develops with these professions serves to disseminate normative rules across the profession.

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organizations are at the mercy of their envi- ronments, since they either “fit” into a niche and survive, or are “selected out” and fail. This clearly relegates the managerial role to that of an observer on the sidelines at the mercy of the environment, unable to do anything much to enhance the organization’s chances of survival.

Although older organizations often do not adapt to survive in changing environments, population ecologists also propose that newer organizations will fail more frequently than older ones. This liability of newness results from the costs of learning new roles and tasks, capital constraints on new roles, a lack of infor- mation about normal procedures, and unsta- ble links to clients, supporters, and customers. Further, the growth of organizational popula- tions follows a distinct pattern that depends on population density. Early in the development of a population, new organizations are created slowly and fail at high rates. As the number of organizations in the population increases, competition eventually causes consolidation, slowing the growth and eventually leading to a gradual decline in the population. This den- sity dependence results in a curvilinear growth curve for new organizations.

▸ Conclusion Modern theories of organization are open- systems theories that made the same transition from rational models to natural models as the earlier closed-system theories made. General systems theory is a meta-theory that attempts to apply general characteristics of systems to theories in a wide variety of disciplines, including management. Contingency theory is a rational model that maintains there is no one best way to organize, but that the best struc- ture for an organization depends on its fit with its environment. Transaction cost economics is also a rational model that focuses on trans- actions between buyers and sellers. According to this approach, the nature of the transaction

in the market, and when insufficient resources are available to an organization, the environ- ment selects that organization out of the popu- lation; that organization dies. Third, retention occurs and a few organizations grow large and become institutionalized in the environment. Those that “fit” with the current environment survive, reproduce, and transmit their values. Certain technologies, products, and services become highly valued by the environment and others do not. The environment is always changing and if the dominant organizational forms fail to adapt to external changes, other organizations gradually replace them. Organi- zations that do not “fit” with the environment grow old, lose energy, and often cannot or won’t adapt quickly enough to survive.

Hannan and Freeman propose that orga- nizations operate under internal or external constraints that impede their adaptation to a changing environment.32, 33 These constraints result in structural inertia, a central concept in population ecology. Structural inertia occurs because organizations must produce services and products reliably and account rationally for their decisions and actions. These pres- sures result in highly standardized routines that inhibit organizational change. Prior investments, decisions, commitments, culture, and beliefs also create inertia that deters exist- ing firms from adapting to changing external environments.

Population ecology also assumes that environmental resources are structured niches, whose existence and characteristics the organizations cannot affect. Each pop- ulation of organizations must find a niche sufficient to support it, or else it will decline and eventually fail or give way to new organi- zational forms. When niches in the environ- ment fade away, existing firms may no longer have a niche to support them. Population ecologists maintain there are definite limits to the degree to which autonomous strategic choices are available for organizations. They view organizations as severely limited in their ability to adapt to different niches. As a result,

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3. Which modern organization theo- ries assume managers can strategically direct their organizations, and which assume managers essentially cannot?

4. Which principles of modern manage- ment theory do you see in use today the least? Which theories assume the ability of the organization to affect the envi- ronment and which do not?

References 1. Suchman MC. Managing legitimacy: Strategic

and institutional approaches. Acad Manage Rev. 1995;20:571–610.

2. Scott WR. Organizations: Rational, Natural, and Open Systems. 5th ed. Upper Saddle River, NJ: Prentice Hall; 2003.

3. Thompson JD. Organizations in Action: Social Science Bases of Administrative Theory. New York: McGraw Hill; 1967:192.

4. Bertalanffy LV, Rapoport A, eds. General systems: Yearbook of the society for the advancement of general systems theory. General Systems Theory. Vol. 1. Ann Arbor, MI: The Society; 1956.

5. Nicholson N, Schuler RS, Van de Ven AH, eds. The Blackwell Encyclopedic Dictionary of organizational behavior. In: Cooper CL, Argyris C, eds. The Blackwell Encyclopedia of Management. Oxford: Blackwell Publishers; 1998.

6. Boulding K. General systems theory: The skeleton of science. Manage Sci. 1956;2:197–208.

7. Katz DN, Kahn RL. The Social Psychology of Organizations. 2nd ed. New York: John Wiley; 1978.

8. Lawrence PR, Lorsch JW. Organization and Environ ment: Managing Differentiation and Integration. Boston: Graduate School of Business Administration, Harvard University; 1967.

9. Burns T, Stalker GM. The Management of Innovation. London: Tavistock; 1961.

10. Woodward J. Industrial Organization: Theory and Practice. London: Oxford University Press; 1965.

11. Galbraith J. Designing Complex Organizations. Reading, MA: Addison-Wesley; 1973.

12. Galbraith J. Organization Design. Reading, MA: Addison-Wesley; 1977.

13. Donaldson L. American AntiManagement Theories of Organization: A Critique of Paradigm Proliferation. Cambridge, New York: Cambridge University Press; 1995:263.

14. Hrebiniak LG. The organization and environment research program: Overview and critique. In: Van de Ven

determines whether it is best for the organiza- tion to conduct the transaction in the market- place, internally, or some combination such a joint venture.

Resource dependence theory is a rational model that focuses on the resources an organi- zation needs, and which entities control those resources. The more control external entities have over important resources, the more con- trol they have over the organization. The orga- nization responds to external control by trying to reduce its dependence on the resource, or by gaining control over the resource itself.

Institutional theory is a natural model that focuses on how institutions affect the way organizations structure themselves and behave. The institutional pressures come from normative, cognitive, and coercive sources, and these pressures tend to make organiza- tions in the same organizational field resemble each other over time.

Population ecology is a natural model that examines populations of organizations, rather than individual organizations. Popula- tion ecology is modeled after biological the- ories. It argues that organizations are subject to forces of adaptation based on variation, selection, and retention—like living organ- isms. Population ecologists argue that orga- nizations are difficult to adapt to changing environments, and that the environment is beyond the control of managers to under- stand, so managers have little effective ability to determine the survival of entire popula- tions of organizations.

Review/Discussion Questions 1. How are general systems theory, con-

tingency theory, transaction cost eco- nomics, resource dependence theory, institutional theory, and population ecology similar? How are they different?

2. Which theories in this chapter assume a “rational model,” and which assume a “natural model?”

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