AN O V ER V IEW

AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

1 Define organization theory.
2 Compare organization theory and organizational behavior.
3 Explain the value in studying organization theory.
4 Describe the systems perspective.
5 Describe the life-cycle perspective.
6 Discuss how systems and life cycles are part of the biological
metaphor.

Introduction___________________________________________________
THE CELESTIAL SEASONINGS' STORY
If you walk into you local supermarket and find the aisle where coffee
and tea products are displayed, odds are you'll see boxes of herbal teas
with animated pictures of bears frolicking under waterfalls, chipmunks
blowing gold trumpets, and buffalo charging out of the sunset. The teas
will have names like Mo's 24, Sleepytime, Red Zinger, Emperor's Choice,
Cinnamon Rose, Almond Sunset, and Morning Thunder. The company
that brings these teas to your supermarket is Celestial Seasonings, Inc. In
1988 the company had sales in excess of $40 million. It has made its
founders— Mo Siegel and John Hay— millionaires. But Celestial Season­
ings wasn't always a large, multimillion-dollar organization. In fact, it
has grown from the most humble of beginnings.’
In the summer of 1971, Mo Siegel and John Hay were in their early

1
2 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

twenties and lived in Boulder, Colorado. Both were "free spirits"— more
interested in religion, music, and health than the security of an eight-to-
five job. But even free spirits have to eat, so Mo and John decided to
make and sell herb teas.
Mo and John spent their summer days picking herbs in the canyons
surrounding Boulder. Meanwhile, their wives— Peggy Siegel and Beth
Hay— sewed bulk tea bags: ten thousand bulk tea bags that first summer!
The two couples screened the hundreds of pounds of herbs that the men
had collected and mixed them into a concoction that would eventually
be called Mo's 24. The mixture would then be crammed into the bulk
tea bags and marked. The completed products— which they sold under
the brand name of Celestial Seasonings— were sold to natural food stores
in the Boulder area.
During the first few years, the people that made up Celestial Sea­
sonings were nothing more than a group of friends and relatives. There
were no job descriptions, no production lines, and little specialization
of labor. The way the group made decisions was fully in keeping with
the values of the founders. Informal meetings were held once a week. It
was not unusual for these meetings to last eight hours, while participants
dwelled on such topics as the philosophical attributes of tea bags. There
were volleyball games during every lunch hour.
But something began to happen in the mid-1970s that changed Ce­
lestial Seasonings' structure dramatically. Demand for their herbal teas
was exploding. They were moving out of health food stores and into
Safeways and A&Ps. More people had to be hired to meet the increased
demand. When Celestial Seasonings had been merely two friends and
their wives, it could adjust rapidly to new conditions because everyone
knew everyone else's job. Communication was easy— they all worked in
the same small room. But with more people came the need to develop
a more formal structure within which to make and sell their herbal teas.
Today Celestial Seasonings employs more than two hundred people who
work out of five buildings in the Boulder area. There are departments,
production lines, and written job descriptions. The simple days of four
people doing everything are gone. Herbs are received in one warehouse
and then taken to a highly automated factory for cleaning, milling, and
blending. Blending, for instance, is carefully done by specialists to ensure
consistency of flavor. On a good day workers will blend eight tons or
more of tea into fifteen varieties.
Not surprisingly, Celestial Seasonings has lost a large degree of its
"one big happy family" atmosphere. With specialization and depart­
mentalization came the separation of management from workers. Profes­
 CHAPTER 1 / AN OVERVIEW 3

sionals now abound. Executives— many specializing in production, ad­

vertising, and distribution— were hired away from PepsiCo, General Foods,
Quaker Oats, and Procter & Gamble. The company has expanded into
the beauty-products field with a natural shampoo/conditioner and is ac­
tively looking for new-product opportunities.

Mo Siegel and John Hay created an organization. The means by

which four people made a few thousand dollars worth of tea was
no longer efficient for making forty different kinds of herbal teas,
with herbs imported from thirty-five countries, and generating sales
in excess of $40 million a year. This kind of volume requires a
coordinated structure of people doing specific work tasks. People
doing similar activities had to be grouped together into depart-
ments. And increasing layers of management were required to co-
ordinate the departmental activities. Additionally, formal written
policies, regulations, and rules had to be introduced to facilitate
coordination and to ensure that all employees were treated con-
sistently and fairly.
Celestial Seasonings' success is as much a result of having de-
veloped a proper structure of planned and coordinated effort as it
is of good marketing. The profitable manufacturing and selling of
tea requires obtaining raw materials, running efficient production
operations, shipping the finished product on time and to the right
place, developing new products, and many other activities. But
Celestial Seasonings is not unique. The providing of any product
or service requires planned coordination. As we’ll demonstrate, an
understanding of organization theory can help managers effec-
tively coordinate their resources and make for more efficient pro-
vision of products or services.

SOM E BASIC D EFIN ITIO N S

The Celestial Seasonings story illustrates the creation and growth

of an organization. But what precisely do we mean by the term
organization? Perhaps not as obviously, Mo Siegel and John Hay
were also involved with organization structure, organization design,
and organization theory. Since all four terms are important and are
often confused, let’s clarify them.
4 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

What Is an Organization?

An organization is a consciously coordinated social entity, with a

relatively identifiable boundary, that functions on a relatively con-
tinuous basis to achieve a common goal or set of goals. That's a
mouthful of words, so let us break it down into its more relevant
parts.
The words consciously coordinated imply management. Social
entity means that the unit is composed of people or groups of people
who interact with each other. The interaction patterns that people
follow in an organization do not just emerge; rather, they are pre-
meditated. Therefore, because organizations are social entities, the
interaction patterns of their members must be balanced and har-
monized to minimize redundancy yet ensure that critical tasks are
being completed. The result is that our definition assumes explic-
itly the need for coordinating the interaction patterns of people.
An organization has a relatively identifiable boundary. This
boundary can change over time, and it may not always be perfectly
clear, but a definable boundary must exist in order to distinguish
members from nonmembers. It tends to be achieved by explicit or
implicit contracts between members and their organizations. In
most employment relationships, there is an implicit contract where
work is exchanged for pay. In social or voluntary organizations,
members contribute in return for prestige, social interaction, or
the satisfaction of helping others. But every organization has a
boundary that differentiates who is and who is not part of that
organization.
People in an organization have some continuing bond. This
bond, of course, does not mean lifelong membership. On the con-
trary, organizations face constant change in their memberships,
although while they are members, the people in an organization
participate with some degree of regularity. For a salesperson at
Sears Roebuck, that may require being at work eight hours a day,
five days a week. At the other extreme, someone functioning on a
relatively continuous basis as a member of the National Organi-
zation for Women may attend only a few meetings a year or merely
pay the annual dues.
Finally, organizations exist to achieve something. These “some-
things” are goals, and they usually are either unattainable by in-
dividuals working alone or, if attainable individually, are achieved
more efficiently through group effort. While it is not necessary for
 CHAPTER 1 / AN OVERVIEW 5

all members to endorse the organization’s goals fully, our definition

implies general agreement with the mission of the organization.
Notice how all the parts of our definition align with the entity
that Mo Siegel and John Hay created. The goals of Celestial Sea-
sonings are to provide health-related products, at a profit, in an
environment that is a good place to work. Mo and John hired
people; then they developed a formal set of patterns by which these
people were required to interact (including specialized tasks to
perform and a hierarchy of managers and workers). Members of
Celestial Seasonings are identified as employees, managers, or
owners. In return for their work effort, they receive compensation.
Finally, the organization’s life exists beyond that of any of its mem-
bers. Employees can quit, but they can be replaced so that the
activities they perform can be carried on. In fact, Mo and John
were able to sell out their interests in Celestial Seasonings with
minimal impact upon the operations of the company.

W hat Is Organization Structure?

Our definition of organization recognizes the need for formally

coordinating the interaction patterns of organization members.
Organization structure defines how task are to be allocated, who
reports to whom, and the formal coordinating mechanisms and
interaction patterns that will be followed.
We define an organization’s structure as having three compo-
nents: complexity, formalization, and centralization. We review
each in detail in Chapter 4.
Complexity considers the extent of differentiation within the
organization. This includes the degree of specialization or division
of labor, the number of levels in the organization’s hierarchy, and
the extent to which the organization’s units are dispersed geo-
graphically. As tasks at Celestial Seasonings became increasingly
specialized and more levels were added in the hierarchy, the or-
ganization became increasingly complex. Complexity, of course, is
a relative term. Celestial Seasonings, for instance, has a long way
to go to approach the complexity of a General Electric or an IBM,
where there are hundreds of occupational specialties, nearly a dozen
levels between production workers and the chief executive officer,
and organizational units dispersed in countries throughout the
world.
6 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

The degree to which an organization relies on rules and pro-

cedures to direct the behavior of employees is formalization. Some
organizations operate with a minimum of such standardized guide-
lines; others, some of which are even quite small in size, have all
kinds of regulations instructing employees as to what they can and
cannot do.
Centralization considers where the locus of decision-making au-
thority lies. In some organizations, decision making is highly cen-
tralized. Problems flow upward, and the senior executives choose
the appropriate action. In other cases, decision making is decen-
tralized. Authority is dispersed downward in the hierarchy. It is
important to recognize that, as with complexity and formalization,
an organization is not either centralized or decentralized. Central-
ization and decentralization represent two extremes on a contin-
uum. Organizations tend to be centralized or tend to be decentral-
ized. The placement of the organization on this continuum, however,
is one of the major factors in determining what type of structure
exists.

What Is Organization Design?

Our third term—organization design—emphasizes the manage-

ment side of organization theory. Organization design is concerned
with constructing and changing an organization's structure to
achieve the organization's goals. Constructing or changing an or-
ganization is not unlike building or remodeling a house. Both begin
with an end goal. The designer then creates a means or plan for
achieving that goal. In house construction, that plan is a blueprint.
In organization building, the analogous document is an organi-
zation chart.
As you proceed through this text, you will see a consistent
concern with offering prescriptions for how organizations can be
designed to facilitate the attainment of the organization's goals.
This concern should not be surprising, as this book is intended for
business students and managers. You are probably more interested
in learning how to design organizations than merely knowing how
organizations function. You have a managerial perspective, con-
sistently looking for the application potential in concepts. When
organization theory is studied from the perspective of the needs of
 CHAPTER 1 / AN OVERVIEW 7

managers and future managers, it is oriented heavily toward or-

ganization design.

What Is Organization Theory?

From our previous definitions, it is not too difficult to deduce what

we mean by the term organization theory. It is the discipline that
studies the structure and design of organizations. Organization
theory refers to both the descriptive and prescriptive aspects of the
discipline. It describes how organizations are actually structured
and offers suggestions on how they can be constructed to improve
their effectiveness. At the end of this chapter, we introduce a model
that identifies explicitly the major subparts that make up this dis-
cipline we call organization theory. Chapter 2 presents a brief over-
view of the evolution of organization theory over time.

Contrasting Organization Theory and

Organizational Behavior

Since we’re clarifying terminology, it might be helpful in this sec-

tion to differentiate the subject m atter of organization theory (OT)
from that of organizational behavior (OB). Many students of man-
agement and organizations will take courses in both areas, and a
brief comparison of the two should assist you in understanding
their different terrains as well as their areas of overlap.
Organizational behavior takes a micro view—emphasizing in-
dividuals and small groups. It focuses on behavior in organizations
and a narrow set of employee performance and attitude variables—
employee productivity, absenteeism, turnover, and job satisfaction
are those most frequently looked at. Individual behavior topics
typically studied in OB include perception, values, learning, mo-
tivation, and personality. Group topics include roles, status, lead-
ership, power, communication, and conflict.
In contrast, organization theory takes a macro perspective. Its
unit of analysis is the organization itself or its primary subunits.
OT focuses on the behavior o f organizations and uses a broader
definition of organizational effectiveness. OT is concerned not only
with employee performance and attitudes but with the overall
organization’s ability to adapt and achieve its goals.
8 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

This micro-macro distinction creates some overlap. For in-

stance, structural factors have an impact on employee behavior.
So students of OB should consider the structure-behavior rela-
tionship. Similarly, some micro topics are relevant to the study of
OT. But where micro and macro issues overlap, their emphasis is
often different. For instance, the topic of conflict in OB tends to
focus on interpersonal and intragroup conflicts that derive from
personality differences and poor communication. Conflict, when
studied by organization theorists, emphasizes problems of inter-
unit coordination. While the student of OB is likely to see all con-
flicts as “people” problems, the student of OT tends to see the same
conflict as resulting from flaws in the organization's design. The
issue, of course, is not that one is right and the other is wrong.
Rather, OB and OT merely emphasize different levels of organi-
zational analysis.

W H Y STUD Y O RG A N IZA TIO N TH EORY?

To this point, we have assumed that you are aware of the value of
studying organization theory. This may be an incorrect assump-
tion. Therefore, before we go any further, let us address the ques-
tion directly: Why study OT?
Organizations are the dominant form of institutions in our
society. You were probably born in a hospital, and you will prob-
ably be put to rest by a mortuary. Both are organizations. The
schools that educate us are organizations, as are the stores where
we buy our food, the companies that make our automobiles, and
the people who take our income tax, collect our garbage, provide
for our military defense, and print our daily newspapers.
Organizations pervade all aspects of contemporary life—soci-
ety as a whole, the economy, and even our personal lives. It is not
unreasonable, then, to expect us to want to understand this phe-
nomenon that is so intertwined in our lives. Even though you may
have no desire to apply your knowledge, you may simply seek an
answer to why organizations with which you interact (and by which
you will probably be employed) are structured the way they are.
At a more sophisticated level, you may want to replace your
intuitive theories of organization with ones that have been derived
scientifically and systematically. Whether or not you study organ-
 CHAPTER 1 / AN OVERVIEW 9

izations formally, you carry around with you a set of theories about
how organizations operate. You go to the Department of Motor
Vehicles to get your driver’s license renewed; you make a reser-
vation with an airline; you talk to the loan officer at your bank
about arranging a student loan; you order it "your way” at the
local fast-food hamburger outlet. You undertake all these activities
by using some "theory” about how each of these organizations
operates and why its members behave as they do. So the issue is
not whether you should use theories for dealing with organiza-
tions—reality tells us that we use such theories every day. Doesn’t
it make sense to use theories that have undergone systematic study?
When we use the phrase systematic study, we mean looking at
relationships, attempting to attribute causes and effects, and bas-
ing our conclusions on scientific evidence; that is, data gathered
under controlled conditions and measured and interpreted in a
reasonably rigorous manner. The objective is to replace intuition
or that "gut feeling” one has as to "why organizations are designed
as they are” or "what works best when” with scientifically-based
theories.
Probably the most popular reason for studying OT is that you
are interested in pursuing a career in management. You want to
know how organizations operate, have that knowledge based on
some scientific evidence, and then use the knowledge for con-
structing and changing an organization’s structure to achieve the
organization’s goals. In other words, you expect to practice organ-
ization design as a manager, administrator, personnel analyst, or-
ganizational specialist, or the like.
The final reason for studying OT may not be very exciting, but
it is pragmatic—it may be a requirement for a particular degree
or certificate you are seeking. You may perceive yourself as a cap-
tive in a required course, believing that studying OT may offer no
obvious end that has value to you. If this is the case, then the
studying of OT is only a means toward that end. It is hoped that
one of the earlier reasons holds more relevance for you.

THE B IO LO G IC A L M ETA PH OR

A metaphor is a popular device for making comparisons. It can be

extremely helpful for explaining or providing insight into the work-
10 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

ings of two phenomena, one of which you already understand fairly

well. In this section, we are going to look at organizations (a phe-
nomenon with which we'll assume you are technically unfamiliar)
as if they were living organisms like plants, animals, or human
beings (phenomena with which we’ll assume you are reasonably
familiar). We call this comparison the biological metaphor.
One caveat before we proceed. Some scholars have questioned
whether the biological metaphor is appropriate for application to
organizations.*12 For example, while few would argue that organi-
zations are born, grow, and require continual nourishment for sur-
vival, organizations are not predestined to die as all living organ-
isms are. Death may be a part of biological life, but it is not inevitable
for organizations. So the metaphor is not perfect. Nevertheless, it
has become an increasingly popular conceptual framework for un-
derstanding organizations. As you’ll see, like living organisms, or-

CLOSE-UP

TEN DIFFERENT WAYS OF LOOKING

AT ORGANIZATIONS, OR WHAT YOU
SEE IS WHAT YOU GET!

Organizations have been conceptualized in numerous ways.34The fol­

lowing represent some of the more frequently used descriptions:

1. R atio n a l e n tit ie s in p u r s u i t o f g o a ls. Organizations exist to

achieve goals, and the behavior of organizational members
can be explained as the rational pursuit of those goals.
2. C o a litio n s o f p o w e rf u l c o n s tit u e n c ie s . Organizations are made
up of groups, each of which seeks to satisfy its own self-
interest. These groups use their power to influence the dis­
tribution of resources within the organization.
3. O p e n s y s t e m s . Organizations are input-output transforma­
tion systems that depend on their environment for survival.
4. M e a n in g - p r o d u c in g s y s te m s . Organizations are artificially
created entities. Their goals and purposes are symbolically
created and maintained by management.
 CHAPTER 1 / AN OVERVIEW 11

ganizations grow, pass through predictable stages of development,

undergo a series of predictable transitions, and deteriorate if the
energy they put out isn’t replaced by new inputs. Describing or-
ganizations as systems and as proceeding through a life cycle should
give you new insights into their makeup.

The Systems Perspective

There is wide agreement among organizational theorists that a

systems perspective offers important insights into the workings of
an organization.4 The following pages introduce the idea of sys-
tems, differentiate open from closed systems, and demonstrate how
an open-systems approach can help you to conceptualize better
just what it is that organizations do.

5. Loosely coupled systems. Organizations are made up of rel­

atively independent units that can pursue dissimilar or even
conflicting goals.
6. Political systems. Organizations are composed of internal
constituencies that seek control over the decision process in
order to enhance their position.
7. Instruments of domination. Organizations place members into
job "boxes" that constrain what they can do and individuals
with whom they can interact. Additionally, they are given a
boss who has authority over them.
8. Information-processing units. Organizations interpret their
environment, coordinate activities, and facilitate decision
making by processing information horizontally and vertically
through a structural hierarchy.
9. Psychic prisons. Organizations constrain members by con­
structing job descriptions, departments, divisions, and stan­
dards of acceptable and unacceptable behaviors. When ac­
cepted by members, they become artificial barriers that limit
choices.
10. Social contracts. Organizations are composed of sets of un­
written agreements whereby members perform certain be­
haviors in return for compensation.
12 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

Definition of a System. A system is a set of interrelated and inter-

dependent parts arranged in a manner that produces a unified
whole. Societies are systems, and so too are automobiles, plants,
and human bodies. They take inputs, transform them, and produce
some output.
The unique characteristic of the systems viewpoint is the in-
terrelationship of parts within the system. Every system is char-
acterized by two diverse forces: differentiation and integration. In
a system, specialized functions are differentiated, which replace
diffuse global patterns. In the human body, for instance, the lungs,
heart, and liver are all distinct functions. Similarly, organizations
have divisions, departments, and like units separated out to per-
form specialized activities. At the same time, in order to maintain
unity among the differentiated parts and form a complete whole,
every system has a reciprocal process of integration. In organiza-
tions, this integration is typically achieved through devices such
as coordinated levels of hierarchy; direct supervision; and rules,
procedures, and policies. Every system, therefore, requires differ-
entiation to identify its subparts and integration to ensure that the
system doesn’t break down into separate elements.
Although organizations are made up of parts or subsystems,
they are themselves subsystems within larger systems. Just as the
human heart is a subsystem within the body’s physiological sys-
tem, the Graduate School of Business at the University of Texas
at Austin is a subsystem within the UT-Austin system. If we focus
our attention on UT-Austin as the system, then we also recognize
that it functions as part of the larger suprasystem of the University
of Texas campuses (which include Austin, Dallas, El Paso, and San
Antonio, among others). So not only are there systems but there
are subsystems and suprasystems. The classification of these three
depends on the unit of analysis. If we focus our attention on the
Graduate School of Business and make it the system, then UT-
Austin becomes the suprasystem, and departments within the
graduate school, such as accounting and management, become the
subsystems.

Types of Systems. Systems are classified typically as either closed

or open. Closed-system thinking stems primarily from the physical
sciences. It views the system as self-contained. Its dominant char-
acteristic is that it essentially ignores the effect of the environment
on the system. A perfect closed system would be one that receives
 CHAPTER 1 / AN OVERVIEW 13

no energy from an outside source and from which no energy is

released to its surroundings. More idealistic than practical, the
closed-system perspective has little applicability to the study of
organizations.
The open system recognizes the dynamic interaction of the
system with its environment. A simplified graphic representation
of the open system appears in Figure 1-1.
No student of organizations could build much of a defense for
viewing organizations as closed systems. Organizations obtain their
raw materials and human resources from the environment. They
further depend on clients and customers in the environment to
absorb their output. Banks take in deposits, convert these deposits
into loans and other investments, and use the resulting profits to
maintain themselves, to grow, and to pay dividends and taxes. The
bank system, therefore, interacts actively with its environment,
which is made up of people with savings to invest, other people in
need of loans, potential employees looking for work, regulatory
agencies, and the like.
Figure 1-2 provides a more complex picture of an open system
as it would apply to an industrial organization. We see inputs of

FIGURE 1-1 B a s i c O p e n S y s te m

E nv iro nm e nt

System

E n viro nm en t

-,
FIGURE 1 -2 A n I n d u s t r ia l O r g a n iz a t io n as a n O p e n S y s t e m

Techn ica l Processing

Co re
(T ran sfo rm ation
of raw material
into finished
product)
 CHAPTER 1 / AN OVERVIEW 15

materials, labor, and capital. We see a technological process cre-

ated for transforming raw materials into finished product. The
finished product, in turn, is sold to a customer. Financial institu-
tions, the labor force, suppliers, and customers are all part of the
environment, as is government.
If you stop to think about it for a moment, it is difficult to
conceive of any system as being fully closed. All systems must have
some interaction with their environments if they are to survive.
Probably the most relevant way in which to look at the closed-
open dichotomy is to consider it as a range rather than as two
clearly separate classifications. In this way, we can explain that
the degree to which a system is opened or closed varies within
systems. An open system, for instance, may become more closed
if contact with the environment is reduced over time. The reverse
would also be true. General Motors, from its inception through the
early 1960s, operated as if it were basically a closed system. Man-
agement decided on the products it wanted to sell, produced those
products, and offered them to customers. GM assumed that what-
ever it made would sell, and for decades it was right. Government
was generally benign, and consumer-advocate groups were non-
existent or had little influence. GM virtually ignored its environ-
ment, for the most part, because its executives saw the environment
as having almost no impact on the company’s performance. While
some critics of GM still attack the firm for being too insulated from
its environment, GM has certainly become more open. The actions
of consumer groups, stockholders, government regulators, and for-
eign competition have forced GM to interact with, and be more
responsive to, its environment. So while it may not be the model
for an open system, GM is more open today than it was thirty years
ago.

Characteristics of an Open System. All systems have inputs, trans-

formation processes, and outputs. They take things such as raw
materials, energy, information, and human resources and convert
them into goods and services, profits, waste materials, and the like.
Open systems, however, have some additional characteristics that
have relevance to those of us studying organizations.5
1. Environment awareness. One of the most obvious charac-
teristics of an open system is its recognition of the interdependency
between the system and its environment. There is a boundary that
16 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

separates it from its environment: Changes in the environment

affect one or more attributes of the system, and, conversely, changes
in the system affect its environment.
Without a boundary there is no system, and the boundary or
boundaries determine where systems and subsystems start and
stop. Boundaries can be physical, like the clear lines that separate
the United States from its neighbors to the north and south. They
also can be maintained psychologically through symbols such as
titles, uniforms, and indoctrination rituals. At this point, it is suf-
ficient to acknowledge that the concept of boundaries is required
for an understanding of systems and that their demarcation for the
study of organizations is problematic.
The interdependency of a system and its environment was highly
visible in the early 1980s when Chrysler Corporation was fighting
to keep its head above water and avoid bankruptcy. Chrysler's
dilemma was to a large degree created by its environment—ag-
gressive foreign competition, OPEC nations that had run up the
price of gasoline during the 1970s, and the U.S. government's de-
termination to fight inflation by keeping interest rates high. Such
environmental forces had hit hard at Chrysler's product line, which,
through most of the 1970s, was made up of large, expensive, high-
fuel-consuming automobiles. Although General Motors and Ford
faced the same environment, they had a larger volume of sales over
which to spread the investment of billions of dollars necessary to
retool and produce smaller and more efficient cars. GM and Ford
also had substantially stronger financial positions. So Chrysler was
clearly affected by its environment. But interestingly, the rela-
tionship between Chrysler and its environment was two-way. Sup-
pliers, the state of Michigan, the United Automobile Workers union,
and the federal government (by way of loan guarantees) were all
affected by Chrysler's problems. While few organizations have the
impact on their environment of a Chrysler Corporation, the fact
remains that all open systems affect their environment to some
degree.
2. Feedback. Open systems continually receive information
from their environment. This helps the system to adjust and allows
it to take corrective actions to rectify deviations from its prescribed
course. We call this receipt of environmental information feed-
back; that is, a process that allows a portion of the output to be
returned to the system as input (such as information or money) so
 CHAPTER 1 / AN OVERVIEW 17

as to modify succeeding outputs from the system. In the case of

Chrysler Corporation, management was able to respond success-
fully to its problems because it effectively read the feedback it
received and adjusted accordingly. The public’s favorable response
to the fuel-efficient K-cars, attractive convertibles, Caravan wa-
gons, and rigorous quality-control measures all were achieved be-
cause Chrysler’s management successfully read the feedback it got
from its environment.
3. Cyclical character. Open systems are cycles of events. The
system’s outputs furnish the means for new inputs that allow for
the repetition of the cycle. This was demonstrated in Figure 1-2;
the revenue received by the customers of the industrial firm must
be adequate enough to pay creditors and the wages of employees
and to repay loans if the cycle is to be perpetuated and the survival
of the organization maintained.
4. Negative entropy. The term entropy refers to the propensity
of a system to run down or disintegrate. A closed system, because
it does not import energy or new inputs from its environment, will
run down over time. In contrast, an open system is characterized
by negative entropy—it can repair itself, maintain its structure,
avoid death, and even grow because it has the ability to import
more energy than it puts out.
5. Steady state. The input of energy to arrest entropy main-
tains some constancy in energy exchange resulting in a relatively
steady state. Even though there is a constant flow of new inputs
into the system and a steady outflow, on balance the character of
the system remains the same. Your body will replace most of its
dying cells in any given year, but your physical appearance alters
very little. So while an open system is active in processing inputs
to outputs, the system tends to maintain itself over time.
6. Movement toward growth and expansion. The steady-state
characteristic is descriptive of simple or primitive open systems.
As the system becomes more complex and moves to counteract
entropy, open systems move toward growth and expansion. This
is not a contradiction of the steady-state thesis.
To ensure their survival, large and complex systems operate
in a way to acquire some margin of safety beyond the immediate
level of existence. The many subsystems within the system, to avoid
entropy, tend to import more energy than is required for its output.
18 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

The result is that the steady state is applicable to simple systems

but, at more complex levels, becomes one of preserving the char-
acter of the system through growth and expansion. We see this in
our bodies as they attempt to store fat. We see it too among large
corporations and government bureaucracies that, not satisfied with
the status quo, attempt to increase their chances of survival by
actively seeking growth and expansion.
A final point on this characteristic needs to be made: The basic
system does not change directly as a result of expansion. The most
common growth pattern is one in which there is merely a multi-
plication of the same type of cycles or subsystems. The quantity of
the system changes while the quality remains the same. Most col-
leges and universities, for instance, expand by doing more of the
same thing rather than by pursuing new or innovative activities.
7. Balance o f maintenance and adaptive activities. Open sys-
tems seek to reconcile two, often conflicting, activities. Mainte-
nance activities ensure that the various subsystems are in balance
and that the total system is in accord with its environment. This,
in effect, prevents rapid changes that may unbalance the system.
In contrast, adaptive activities are necessary so that the system
can adjust over time to variations in internal and external de-
mands. So whereas one seeks stability and preservation of the
status quo through the purchase, maintenance, and overhaul of
machinery; the recruitment and training of employees; and mech-
anisms such as the provision and enforcement of rules and pro-
cedures, the other focuses on change through planning, market
research, new-product development, and the like.
Both maintenance and adaptive activities are required if a sys-
tem is to survive. Stable and well-maintained organizations that
do not adapt as conditions change will not endure long. Similarly,
the adaptive but unstable organization will be inefficient and un-
likely to survive for long.
8. Equifinality. The concept of equifinality argues that there
are a number of ways to skin a cat. More exactly, it states that a
system can reach the same final state from differing initial con-
ditions and by a variety of paths. This means that an organizational
system can accomplish its objectives with varied inputs and trans-
formation processes. As we discuss the managerial implications of
organization theory, it will be valuable for you to keep the idea of
equifinality in mind. It will encourage you to consider a variety of
 CHAPTER 1 / AN OVERVIEW 19

solutions to a given problem rather than to seek some rigid optimal

solution.

Importance of the Systems Perspective. The systems point of view

is a useful framework for students of management to conceptualize
organizations. For managers and future managers, the systems
perspective permits seeing the organization as a whole with in-
terdependent parts—a system composed of subsystems. It pre-
vents, or at least deters, lower-level managers from viewing their
jobs as managing static, isolated elements of the organization. It
encourages all managers to identify and understand the environ-
ment in which their system operates. It helps managers to see the
organization as stable patterns and actions within boundaries and
to gain insights into why organizations are resistant to change.
Finally, it directs managers’ attention to alternative inputs and
processes for reaching their goals.
However, the systems perspective should not be viewed as a
panacea. The system’s framework has its limitations, the most
telling being its abstractness. It is one thing to argue that every-
thing depends on everything else. It is a much different thing to
offer suggestions to managers on what precisely will change, and
to what degree, if a certain action is taken. Its value, therefore, lies
more in its conceptual framework than in its direct applicability
to solving managers’ organizational problems.

The Life-Cycle Perspective

As noted earlier in this chapter, organizations are born, grow, and

eventually die (though it may take a hundred years or more). New
organizations are formed daily. At the same time, every day hundreds
of organizations close their doors, never to open again. We espe-
cially see this birth and death phenomenon among small busi-
nesses. They pop up and disappear in every community. In this
section, we will build on the biological metaphor of organizations
proceeding through life-cycle stages. Like human beings, we will
argue, all organizations are born, live, and die. Also, like human
beings, some develop faster than others and some do a far better
job of aging than others, but the metaphor remains an interesting
way to conceptualize the life of an organization.
20 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

Definition of a Life Cycle. A life cycle refers to a pattern of pre-

dictable change. We propose that organizations have life cycles
whereby they evolve through a standardized sequence of transi-
tions as they develop over time. By applying the life-cycle metaphor
to organizations, we are saying that there are distinct stages through
which organizations proceed, that the stages follow a consistent
pattern, and that the transitions from one stage to another are
predictable rather than random occurrences.

Life-Cycle Stages. The life-cycle concept has received a great deal

of attention in the marketing literature. The life cycle is used to
show how products move through four stages: birth or formation,
growth, maturity, and decline. The implication for management
is that the continual introduction of new products is required if
the organization is to survive over the long run.
We could use the same four stages in describing organizations,
but organizations are not products. Organizations have some unique
characteristics, which require some modifications in our descrip-
tion. Research on the organization life cycle leads us to a five-stage
model:6
1. Entrepreneurial stage. This stage is synonymous with the
formation stage in the product life cycle. The organization is in its
infancy. Goals tend to be ambiguous. Creativity is high. Progress
to the next stage demands acquiring and maintaining a steady
supply of resources.
2. Collectivity stage. This stage continues the innovation of the
earlier stage, but now the organization's mission is clarified. Com-
munication and structure within the organization remains essen-
tially informal. Members put in long hours and demonstrate high
commitment to the organization.
3. Formalization-and-control stage. The structure of the or-
ganization stabilizes in the third stage. Formal rules and proce-
dures are imposed. Innovation is deemphasized, while efficiency
and stability are emphasized. Decision makers are now more en-
trenched, with those in senior authority positions in the organi-
zation holding power. Decision making also takes on a more con-
servative posture. At this stage, the organization exists beyond the
presence of any one individual. Roles have been clarified so that
the departure of members causes no severe threat to the organi-
zation.
 CHAPTER 1 / AN OVERVIEW 21

4. Elaboration-of-structure stage. In this stage, the organiza-

tion diversifies its product or service markets. Management searches
for new products and growth opportunities. The organization
structure becomes more complex and elaborated. Decision making
is decentralized.
5. Decline stage. As a result of competition, a shrinking m ar-
ket, or similar forces, the organization in the decline stage finds
the demand for its products or services shrinking. Management
looks for ways to hold markets and look for new opportunities.
Employee turnover, especially among those with the most saleable
skills, increases. Conflicts increase within the organization. New
people assume leadership in an attempt to arrest the decline. De-
cision making is centralized in this new leadership.

Do all organizations proceed through the five stages? Not nec-

essarily!7 If possible, management would like to avoid having the
organization reach stage five. However, excluding this stage from
our model assumes that organizations follow an unending growth
curve or at least hold stable. This obviously is an optimistic as-
sumption. No organization, or society for that matter, can endure
for eternity. But some can last for a very long time and outlive any
of their members. Standard Oil (now Exxon) and U.S. Steel (now
USX), for example, are both more than eighty years old. The U.S.
government has been around for more than two hundred years.
Whether these examples are now in the decline stage is question-
able, but certainly our model must recognize decline and even the
possibility of death.
Do the life-cycle stages correlate with an organization’s chron-
ological age? Not at all! Observation confirms that some organi-
zations have reached stages three and four in less than five years
after being formed, while others are forty years old and still in
their collectivity stage. In fact, some successful organizations seek
to stay in the early stages. For instance, the management of Apple
Computer has explicitly stated a commitment to try to remain in
stage two as long as it can.8
A final question: Can we reconcile our five-stage organization
life-cycle model with the more traditional four-stage model of for-
mation, growth, maturity, and decline? The answer is yes. As shown
in Figure 1-3, formation and the entrepreneurial stage are syn-
onymous. Collectivity is essentially comparable with growth. Stages
three and four in our model—formalization and elaboration—ap-
hj FIGURE 1-3 O rg a n iza tio n a l L ife C y c le
fO

1. Entrepreneurial 2. Collectivity Stage 3. Formalization- 4. Elaboration- , Decline stage

stage • Informal and-control of-structure • High employee
• Ambiguous communication stage stage turnover
goals and structure • Formalization • More • Increased conflict
• High creativity • High commitment of rules complex • Centralization
• Stable structure
structure • Decentral­
• Emphasis ization
on • Diversified
efficiency markets
 CHAPTER 1 / AN OVERVIEW 23

pear to align reasonably well with maturity. Finally, of course,

decline is consistent in both models.

Importance of the Life-Cycle Perspective. Viewing organizations in

a life-cycle perspective offsets the tendency to look at organizations
as static entities. Organizations are not snapshots; they are motion
pictures. They evolve and change. Using the life-cycle perspective
makes us aware when we assess or describe an organization that
it hasn't always been the way it is nor will it always be the same
in the future.
Additionally, the life-cycle metaphor is valuable when we con-
sider what management can do to make an organization more
effective. The actions that are appropriate for a given problem
when the organization is growing may be very different if that
problem occurs in the decline stage. As a case in point, Chapter 17
will specifically address how managing in a declining organization
makes very different demands on a manager than managing during
growth.

C O M IN G A TTR A CTIO N S:
TH E PLAN O F TH IS B O O K

Almost every issue within the field of OT can be cataloged as an

answer to one of five questions:
1. How do we know if an organization is successful?
2. What are the components of an organization?
3. What determines the structure of an organization?
4. What options do managers have for designing their organization
and when should each be used?
5. How do you apply a knowledge of organization theory to the res-
olution of current management problems?

Because these five questions are the critical ones in OT, it is

only logical that answers to them should be the framework for a
textbook on OT. This logic has not been lost on your author. Let
us preview the content of this book and demonstrate how it leads
to answering the five questions.
The issue of an organization’s success is subsumed under the
24 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

topic of organizational effectiveness. This is the dependent variable.

It is the primary object of our attention. But what constitutes
organizational effectiveness is, itself, problematic. In Chapter 3,
four approaches to defining and measuring organizational effec-
tiveness are presented. The chapter considers what it is that or-
ganizations are trying to do, how various constituencies may define
and appraise the same organization's effectiveness differently, and
provides guidelines to help you evaluate an organization's effec-
tiveness.
Organization structure has a definite but complicated mean-
ing. As noted previously, the three primary components or dimen-
sions of an organization are complexity, formalization, and cen-
tralization. They represent the variables that, when combined, create
different organizational designs. Chapter 4 takes an in-depth look
at each of these dimensions of organization structure.
The most vocal debate in OT surrounds the question of what
determines structure. Attention has focused on five determinants:
the organization's overall strategy; size or the number of people
employed by the organization; the degree of routineness in the
technology used by the organization to transform its inputs into
finished products or services; the degree of uncertainty in the or-
ganization's environment; and the self-serving preferences of those
individuals or groups who hold power and control in the organi-
zation.
The first four of these determinants have been labeled "contin-
gency variables" because their supporters argue that structure will
change to reflect changes in these variables.9 So, for example, if
structure is contingent on size, a change in size will result in a
change in the organization's structure. The power-control per-
spective, however, is noncontingent. Its supporters propose that,
in all instances, an organization's structure is determined by the
interests of those in power and these powerholders will always
prefer the structural design that will maximize their control. In
Chapters 5 through 9, we review the five determinants and assess
under what conditions each can become the major cause of an
organization's structure.
If we want to manage an organization's design, we need to
know what structural alternatives are at our disposal. And given
the various structural types, what are the strengths and weaknesses
of each of them. Under what conditions is each preferable? Chapter
10 demonstrates that, by mixing and matching the structural com-
 CHAPTER 1 / AN OVERVIEW 25

ponents of complexity, formalization, and centralization, we can

develop five basic organizational design options. Each is then re-
viewed and evaluated. Chapters 11 and 12 provide a more in-depth
look at two of these options: bureaucracy and adhocracy. The former
is currently the most popular design among large organizations;
the latter has increasingly been called "the design of the future.”
Certain issues are currently receiving the bulk of attention by
organizational theorists as they attem pt to offer solutions to or-
ganizational problems currently plaguing managers. These include
managing the environment, organizational change, organizational
conflict, organizational culture, and evolution. Chapters 13 through
17 look at each of these issues and demonstrate how OT concepts
can assist in their management. Following Chapter 17, you’ll find
a set of cases. They provide additional opportunities to apply OT
concepts to the solution of management problems.
Figure 1—4 summarizes the plan of this book and how it has
been translated into topics and chapters. Our primary concern is
with the impact various structures have on effectiveness. There-
fore, we begin with a discussion of organizational effectiveness.
Then we define structural components and the determinants of
structure. This is followed by a section on the various design op-
tions that can be constructed out of the structural components.
Attention is continually focused on linking structural designs with
effectiveness. That is, after reviewing the various structural op-
tions, you should be able to ascertain under what conditions each
is preferable. The section on applications demonstrates how OT
concepts relate to five current managerial issues.
A final point needs to be made before we proceed to the sum-
mary. This point is: OT concepts apply to subunits of an organi-
zation as well as to the overall organization. Although we will focus
in this book on the structure and design of entire organizations,
that is not the only level of analysis to which this book is applicable.
The concepts you will be introduced to in the following chapters
are relevant to analyzing divisions, departments, and similar sub-
units within organizations as well as to organizations in their en-
tirety. In fact, most large organizations are too diverse and inter-
nally heterogeneous to be treated as a singular structural entity.
So when we say that an organization is structured in a certain
singular way, in many cases this is a generalization. A closer look
typically reveals several different structural forms within most
organizations, especially the large and complex ones.
26 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

FIGURE 1-4 F ra m ew o rk fo r A n a ly zin g O rg a n iza tio n T h e o r y

D eterm ina nts of A p p lica tio n s

O rg anization S tructure • Managing the
• Strateg y (Cha p . 5) en viro nm ent (Cha p . 13)
• Orga nizatio n • Managing organizational
size (Chap . 6) change (Cha p . 14)
• Tech no log y • Managing orga nizational
(Cha p . 7) co n flict (Ch ap . 15)
• En viro nm ent • Managing organiza tiona l
(Cha p . 8) cu ltu re (Cha p . 16)
• P ow er-con tro l • Managing organiza tiona l
(Ch ap . 9) evolution (Cha p. 17)

Orga nizatio n
Structu re
(Chap . 4)

Orga nizatio nal Designs

• Design o p tion s
(Chap . 10)
• B u rea u cra cy (Cha p . 11)
• A d h o c ra cy (Cha p . 12)

SUMMARY
An organization is a consciously coordinated social entity, with a relatively
identifiable boundary, that functions on a relatively continuous basis to
achieve a common goal or set of goals. Organization structure is made up
of three components: complexity, formalization, and centralization. Or-
ganization design is the constructing and changing of structure to achieve
the organization's goals. Organization theory is the discipline that studies
the structure and design of organizations.
There is no single reason for studying organization theory. It may be
merely to understand organization structure. It may be to develop sys-
 CHAPTER 1 / AN OVERVIEW 27

tematic theories of organizations. For many, OT is studied because they

expect to be making choices about how organizations will be designed.
Realistically, it must also be noted that some study OT not for any direct
personal end but rather as a means for fulfilling requirements for a degree
or certificate.
The biological metaphor is used to depict organizations as systems
that evolve through life-cycle stages. Organizations are described as open
systems—made up of interrelated and interdependent parts that produce
a unified whole that interacts with its environment. The distinct stages
through which organizations evolve are entrepreneurial, collectivity, for-
malization and control, elaboration of structure, and decline.

FOR REVIEW AND D ISCU SSIO N

1. Are all groups organizations? Discuss.

2. Is a small business, with only two or three employees, an organization?
3. Is OT a prescriptive or a descriptive discipline?
4. How can the systems perspective help you better understand organ-
izations?
5. Compare open and closed systems.
6. Give an example of (a) negative entropy and (b) equifinality.
7. How can a system be stable yet directed toward growth?
8. Are death rates of public-sector organizations lower than their private-
sector counterparts? If so, what does this suggest in terms of organ-
izational life cycles?
9. The birth of a human being is explicitly defined—the emergence of
the child from the birth canal. When is an organization bom?
10. "An organization is, to some degree, a product of its history.” Discuss
this statement in light of the life cycle.
11. Is organizational decline inevitable? Defend your position.
12. Contrast organization structure and design.
13. Contrast organizational behavior and organization theory.
14. What is the value of OT for managers? For nonmanagers?
15. For each of the following organizations, identify their inputs, trans-
formation processes, outputs, relevant subsystems, and environment.
Be as specific as possible.
a. the Ford Motor Company
b. the Roman Catholic church
c. the Dallas Cowboys football team
d. U.S. Air Force
e. St. Joseph's Hospital in Philadelphia
f. a local drugstore
28 PART I / INTRODUCTION: WHAT'S IT ALL ABOUT?

NOTES
1The material on Celestial Seasonings has been adapted from Eric Mor-
gen thaler, "Herb Tea's Pioneer: From Hippie Origins to $16 Million a
Year," Wall Street Journal, May 7, 1981, p. 1; Nora Gallagher, "We're More
Aggressive Than Our Tea," Across the Board, July-August 1983, pp. 46-
50; "Kraft is Celestial Seasoning's Cup of Tea,” Business Week, July 28,
1986, p. 73; and "An Herbal Tea Party Gets a Bitter Response,” Business
Week, June 20, 1988, p. 52.
2John R. Kimberly, "The Life Cycle Analogy and the Study of Organiza-
tions: Introduction," in J. R. Kimberly and R. H. Miles, eds., The Organ-
izational Life Cycle (San Francisco: Jossey-Bass, 1980), pp. 6-9.
3 See, for example, Gareth Morgan, Images of Organization (Beverly Hills,
Calif.: Sage Publications, 1986).
4 See Donde P. Ashmos and George P. Huber, "The Systems Paradigm in
Organization Theory: Correcting the Record and Suggesting the Future,”
Academy of Management Review, October 1987, pp. 607-21.
5This section adapted from Daniel Katz and Robert L. Kahn, The Social
Psychology of Organizations, 2d ed. (New York: John Wiley, 1978), pp. 23-
JO .
6Adapted from Kim S. Cameron and David A. Whetten, "Models of the
Organization Life Cycle: Applications to Higher Education,” Research in
Higher Education, June 1983, pp. 211-24.
7James Cook, "Bring On the Wild and Crazy People,” Forbes, April 28,
1986, p p .54-56.
8Ann M. Morrison, "Apple Bites Back,” Fortune, February 20, 1984, pp.
86- 100.
9 See, for instance, George Schreyogg, "Continency and Choice in Organ-
ization Theory," Organization Studies, no. 3, 1980, pp. 305-26; and Henry
L. Tosi, Jr., and John W. Slocum, Jr., "Contingency Theory: Some Sug-
gested Directions,” Journal of Management, Spring 1984, pp. 9-26.