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Chapter 10 Organizational Theory Organization - a group of people, or a social unit with some purpose. Theory - A proposition - or set of propositions - that tries to explain something Here - how a set of individuals or group of people will behave in varying work situations People have been trying to figure out how to get organized since recorded history. During the exodus from Egypt, Jethro, the father-in-law of Moses, urges Moses to delegate authority over the tribes of Israel along hierarchical lines (1491 B.C.) Exodus Chapter 18, Verses 13 to 27 Adam Smith 's, The Wealth of Nations - 1776 Discusses the optimal organization of a pin factory. The economic rational of the factory system and the division of labor. Adam Smith was part of classical organization theory. Called the classical school of organization theory. Classical Theory Classical theory dominated US industry into the 1930's The fundamental tenets were: 1. Organizations exist to accomplish production and economic goals 2. There is one best way to organize for production 3. Production is maximized through specialization/division of labor In the 1930's there was Neoclassical Organization Theory. All they really did was criticize and challenge the classical school. Finally in the late 1940's into the early 1960's developed Modern Structural Organization Theory. Until then companies worked under the assumption that "the boss knows best". Structural theories fundamental tenets are: 1. Motivation 2. Group and inter-group behavior 3. Leadership 4. Work teams and empowerment Organization Theory encompasses a body of knowledge directed toward building an organization that can efficiently accomplish the objectives of the firm. Provides a basis for assigning tasks. Resulting authority-responsibility relationships. Chain of command. It is the human element, interpersonal relationships, in and outside the work place, that make organizing interesting, challenging, and frustrating. Staff & Line Relationships Line Personnel Have direct authority and responsibility relationships pertaining to the principal product or service of the firm. Direct the actions of others. Give orders. Staff & Line Relationships Line Personnel Responsible for carrying out entire activities, from beginning to end, relating to a decision. Follow chain-of-command - solid lines represent authority-responsibility relationships. Are generally identified with activity performed. Act, make decisions. Line Relationships

Staff & Line Relationships Staff Personnel Bypass chain-of-command process and provide an efficient means of information transfer. Provide advice. Make suggestions. Staff & Line Relationships Perform studies, make reports, make recommendations, but do not carry out the entire activity that leads to a decision. May advise across departmental lines. Generally focus on company issues from view-point of a specific discipline or specialty area. Departmentalization Assigning responsibility for accomplishing many tasks into separate operating units. Requires identification of necessary tasks, separating work units into efficient sizes and assigning authority-responsibility relationships Departmentalization Departmentalization according to Function Product Customer Geographic Function Activities of departments associated with accomplishing a specific function Production, marketing, harvesting, irrigation, processing, quality control, sales and research. Rationale behind approach is the expected efficiency gains from specialization. Disadvantage is that everyone focuses on taking care of their particular functional area without adequate regard or consideration of overall impact of their combined decisions on company profits. Product Organizing the business activities of the company according to product or service. Fertilizer, seed, chemical, equipment, tillage Involves grouping diverse functional activities such as manufacturing, selling, and shipping under one administrative unit Rationale for the product method is that the cumulative effect of being able to coordinate all functions for a particular product under one administrative unit outweighs any possible efficiencies that might have been gained through a functional divi sion. Customer Wholesale division handles sales to wholesalers, retail division handles sales to retailers and direct sales handles sales to consumers. Geographic West Coast, Southern, Midwest, Mountain, and Northeast divisions. There is no best system or method for dividing up the work tasks and assigning responsibility to departments. Staff or Service Departments Not line activity departments because their central focus is to assist the business or other departments in performing specific necessary functions not directly related to primary revenue producing activities of the firm Staff - legal department Service - accounting or payroll Organizational Guidelines General guidelines are more appropriate than fixed rules.

There must be clear lines of authority running from the top to the bottom of the organization. No one in the organization should report to more than one line supervisor. Everyone in the organization should know to whom they report, and who reports to them. Responsibility and authority of each supervisor should be clearly defined. Responsibility should always be coupled with the corresponding authority. Accountability of a higher authority for acts of her subordinates is absolute. Responsibility should be delegated as far down the line as possible. Number of levels of authority should be kept to a minimum. Work of every person in the organization should be confined as much as possible to performance of a single leading function. Line functions should be separated from staff functions, and adequate emphasis should be placed on important staff activities. There is a limit to number of positions that can be coordinated by a single supervisor. Organization should be flexible, so that it can be adjusted to changing conditions. Organization should be kept as simple as possible. Span-of-control There is a limit to number of employees any one manager can properly supervise. If a supervisor has a wide span-of-control she is supervising activities of many people. If span-of-control is narrow few subordinates report to her. Number of employees a supervisor can affectivity handle depends upon several factors. Task being performed. Level of training and education of the supervisor and subordinates. Ability of the supervisor. Several guidelines concerning span-of-control may be useful in specific situations. Wide span-of-control is possible in most assembly line situations where each employee has only a few repetitive tasks to perform. Wide span-of-control is possible in situations where subordinates are highly educated. Narrow span-of-control is advisable when cost of making an error or wrong decision is high. History indicates that a wide span-of-control is more productive in long-run. Cost & Profit Centers Establishing cost and profit centers for departments within an organization permits large firms advantages of entrepreneurial spirit found in smaller firms. In a large firm it is possible to have several units that are efficient and several that are inefficient. Accounting and management information records are kept for each management unit where each becomes either a profit center or cost center. Cost Centers Accounting concept whereby a particular unit keeps track of its costs by appropriate categories, e.g., labor, equipment, materials and supplies and then allocates its costs to profit centers which use its services. Budget is prepared before accounting period begins, accurate records are kept, and actual costs are compared with budgeted costs. If actual costs are out-of-line with budgeted costs, the source of deviation is investigated. Profit Centers Charge "market rates" for products produced or services provided. If "revenues" exceed costs, the profit center makes a profit and vice versa. Factors faced in operating profit centers Determining "market prices" for equipment. Whether it is possible to obtain comparable rates to use in fair pricing. Whether cost or profit centers better serve the firm's overall objectives. Quality and timing of service are also important.

If the unit is one of important business activities of the company it should be a profit center. If the unit is primarily a service unit it can be either a cost or profit center. Accountability and Departmentalization Accountability entails being able to trace results of good or poor performance to actions of specific individuals so that good performance can be rewarded and poor performance corrected. Accountability is more difficult to maintain if functional approach to departmentalization is used. When there are several units working together to produce a product or service it is difficult to assign accountability. In some cases efficiencies gained may offset lack of accountability.

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