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Organizational theory is one of the most vibrant areas in sociological research. Scholars from many subfields, (medical sociology, political sociology, ...
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Organizations: Theoretical Debates and the Scope of Organizational Theory*
Neil Fligstein Department of Sociology University of California Berkeley, Ca. 94720 U.S.A.
August 2001
*This paper was prepared for the Handbook of Sociology edited by Craig Calhoun, Chris Rojek, and Bryan Turner (Sage Press, forthcoming). I would like to thank Craig Calhoun for his comments on the paper.
Introduction
Organizational theory is one of the most vibrant areas in sociological research. Scholars from many subfields, (medical sociology, political sociology, social movements, education) have felt compelled to study organizational theory because of the obviously important role that complex organizations play in their empirical research. But scholars who do not do organizational theory are often struck at how arcane the debates are within organizational theory. They also think most of organizational theory is about firms and thus, the theory does not seem to have much application to other kinds of social arenas. The purpose of this paper is to present a way to make sense of the various strands of organizational theory. Organizational theories have three origins: Max Weber’s original work on bureaucracies which came to define the theory for sociologists, a line of theory based in business schools that had as its focus, the improvement of management control over the work process, and the industrial organization literature in economics. Unlike many fields in sociology, organizational theory has been a multidisciplinary affair since World War II, and it is difficult to understand its central debates without considering its linkages to business schools and economics departments. These three original lines of scholarship began to intertwine during the 1960s. There was a broad consensus around the theoretical perspective that could be called either the strategic contingencies or rational adaptation approach. The 1970s until the mid 1980s witnessed a critique of the rational adaptation perspective and the proliferation of alternative theories. I review many of these theories including institutional theory, Marxist, population ecology, power and the political-cultural approach, network
if one theory of organizations is right, then other theories of organization must be wrong. It is this assumption that has driven much of the development of organizational theory. Organizational theory takes as its main object of study, the complex or formal organization (or what I will just call organizations) as a given. It is assumed that organizations have goals, hierarchy, rules, definitions of membership, and active conceptions of career paths for their members. Organizational theory is concerned with how the internal organizational structure works to motivate participants and produce outcomes consistent with the goals of those who control the organization. It is also interested in how the world external to an organization effects what goes on inside of a particular organization. Finally, it is concerned with how the internal organization and the external world can effect organizational survival. There are three questions that all theories take up. One of the most basic questions in organization theory is the degree to which organizations persist because they are efficient. Some argue that competition forces organizations to allocate their resources in the most efficient manner. Others argue that organizational survival might depend on other factors, such as power and legitimacy in their environment. Even if one believes competition is an important force, competition varies across environments and hence, in some environments, there may be fewer pressures to allocate resources efficiently (Leibenstein, 1978). In this case, an organizational structure might persist because it has no competitors. Organizations could also aid their survival by coopting important actors in their environment. Creating monopolies, oligopolies, or cartels are ways to lessen competition (Pfeffer, 1981). Organizations might also get governments to intervene on their behalf for the good of
society. Not surprisingly, the economic and managerial literatures tend to start with the efficiency assumption, while the sociological literature has tended to be more agnostic about the question of efficiency. Sociologists are perfectly prepared to believe that organizational actors often find themselves in murky worlds where organizational survival is not so tenuous. They also think that organizational actors will do anything they can to survive, and the efficient allocation of resources might only be one such strategy to do so. A related question concerns the degree to which organizations exist in environments that create hard or soft constraints. All organizations need to get resources in order to survive. Their relationship to their environment can have a decisive effect on their survival opportunities. Some organizational theories stress how environments are given as facts, produce high constraints for organizations, and contain a great deal of competition (Hannan and Freeman, 1977). These theories tend to argue that the organizations that survive are those with the best fit to the environment. Other theories tend to argue that environments are social constructions or “enactments” (Meyer and Rowan, 1977). These theories imply that people within a given organization can construct courses of action to try and coopt their environments. This cooptation can be in the face of hard or soft constraints. Organizations in soft environments might find themselves with fewer pressures. Even organizations in environments with hard constraints might be able to migrate to environments that are more conducive to survival. Generally, efficiency might be more important in environments where competition is high and organizations have few strategies to control competition or exit. However, if there is too much competition or resource scarcity, even organizations that might be functioning
and help them fend off their competitors (ie. other states or less organized groups such as the nobility or peasantry). As they got bigger and controlled more resources, the larger modern states literally killed off or absorbed the smaller states. Firms, for Weber, evolved using a similar hierarchical structure. Bureaucratic structures helped firms to organize to compete with other firms. Weber thought that firms proved to be efficient because if workers did what owners wanted, products would be cheaply and reliably produced and firms could effectively compete with other firms. Competition between governments and competition between firms resulted in organizations dominating the world of states and the economy. Weber’s analysis of bureaucracy was part of his more general theory of modern society. Weber felt that organizations were not just “tools” to accomplish goals, but they were systems of power. Organizational actors seek out power for themselves and attempt to enrich themselves at the expense of others. They could do this in any way possible including violent or illegal methods. One common way for organizations to aid their survival is to enlist states in their efforts. Weber’s theory of class, status, and power was essentially a theory about how various groups in society would organize, create political parties, and try to take over state bureaucracies in order to direct privileges to themselves or their groups. Firms or industries could lobby with states to promote rules and laws that favored their interests. Here, organizational survival could turn on political connections and not efficiency. Weber also thought that the issue of legitimacy could be important to organizational survival in several ways. First, people who worked in organizations had to be convinced to accept the authority of those who ran the organization. Careers, a sense of duty, and
salaries worked to promote this legitimacy. Second, organizations needed to be more legitimate in terms of the general society. So, the people who worked for governments had to convince citizens that the rules and processes that kept them in power were at some level in the public interest. Firms also had to attain some legitimacy in order for them to survive and prosper. They had to be perceived to be pursuing legitimate goals (ie. producing something of value) in legitimate ways (by competing to produce the best product at the best price). Weber argued that the rational-legal order underlying modern states and firms became a form of legitimate authority. To the degree that governments and firms became legitimate vehicles of social organization from the perspective of citizens and workers, this increased the likelihood of their organizational survival. (Figure 1 about here) Weber’s analysis has been hugely influential, particularly in sociology. He identified the large organization as the modern way to organize. He understood that it was more efficient (ie. it beat out its rivals), and he was able to ground its legitimacy in his more general theory of society and institutions. Weber also reflected quite well the duality in organizational theory. At one level, Weber was convinced that organizations were efficient and that accounted for why they came to organize states and firms. But at another level, Weber realized that the entire system was political, there were interests at stake, and organizational survival could be attained by other means. Weber was not alone in understanding that the organization was at the heart of the modern economy and polity. Figure 1 presents a diagram with the three strands of organizational theory and their evolution over time. I will briefly review the strands in order to set up the ultimate convergence around rational adaptation theory.^1
Schumpeter was opposed to institutionalism in economics (Swedberg, 1991). Unlike Berle and Means, Schumpeter thought the large modern corporation was efficient, adaptive, and always on the search for new products and technology (1939). He saw it as the engine of capitalism, because it organized production and innovation efficiently. Schumpeter emphasized how firms had to compete or innovate or they would be out of business. His views would later find their way into discussions in transaction cost theory and evolutionary economics. These approaches to the firm never totally disappeared. The issues raised by these economists fed into the intellectual ferment surrounding “rational adaptation” theory and the subsequent reactions to it. Indeed, the “new institutional economics” gets its main inspiration from these “old” institutional economics I just described. But, in the mainstream of economics, the firm disappeared as an object of analysis during the 1940s and 1950s. Neoclassical economics, with its focus on price theory and mathematics, came to develop a subfield called industrial organization. The basic idea was that the structure of markets should be determined by the costs and nature of market inputs, ie. land, labor, and capital. The price system would force entrepreneurs to make the right kinds of investments in plants and thus, the number, size, and integration of firms would reflect entrepreneurs making the right choices. Firms that would survive would be those that found the right mix of investments (see Stigler, 1968 for a set of essays on these questions; for a textbook statement, see Caves, 1980). The main issue in industrial organization economics became trying to identify when market structures were in fact efficient and alternatively, when firms were seeking out oligopoly or monopolies. The main measurement used for these purposes was the
concentration ratio which represented the percentage of sales or assets that a small number of firms came to hold in a given market. The question was whether or not this ratio reflected economies of scale and scope or instead, the power of firms to monopolize. Industrial organization economics was not really interested in what went on in the firm, but only in the overall market structure as indexed by the concentration of producers. The firm was viewed here as a black box and it was unpacking this black box that became the center of the new institutional economics. The third strand of thought in organizational theory originates with the practical concerns of managers. As soon as the large corporation emerged at the turn of the 20th century, the question of how best to organize it came into being. Taylor provided the most famous perspective (1911). He viewed the main problem of managers as figuring out how to cut labor costs by reducing the discretion of workers and increasing managerial control over their labor process. He viewed this primarily as an engineering problem that involved breaking down the tasks workers were asked to perform and reducing the number of motions and actions each worker would contribute to a product. During the 1930s, scholars at the Harvard Business School pioneered an alternative to Taylor, what was called the “human relations” school (Perrow, 1988, ch. 3.). The basic idea recognized that the people who worked for a firm had to be motivated in order to do their jobs effectively. This meant that human psychology came into play in every interaction in factories and offices. The “human relations” school began when Roethlisberger and Dickson (1947) undertook a number of famous experiments at the Hawthorne Western Electric Plant where they demonstrated that workers productivity increased under any form of attention. The most interesting and important theoretical
New management came in and tried to impose a more bureaucratic order to end the power of informal arrangements. Workers resisted this and the whole organization started to come apart. Gouldner’s work shows that the informal structures of work organizations played a huge role in their ability to function. The final set of studies came at Weber in a more quantitative fashion. Many scholars began by trying to verify if bureaucracies worked like Weber suggested. They created a set of measures to look at how many levels of hierarchy existed, how wide the span of control was in organizations, and how centralized decision making was. Blau and Scott (1962) published Formal Organizations that is the classic study in the structuralist tradition. As the 1960s proceeded, however, more and more studies began to doubt the basic outlines of Weber’s model of bureaucracy. Instead of finding organizations as hierarchical, predictable, and unchanging, scholars were discovering that organizations were flexible and constantly changing. Hage and Aiken (1970) summarize this line of work.
THE CONVERGENCE AROUND RATIONAL ADAPTATION
I am, of course, reconstructing the story of the development of organizational theory with an eye towards seeing how the three schools of organizational thought begin to converge during the 1960s. An astute reader might decide that my point of view produces more convergence than there might have really been. My defense, is that scholars, particularly in sociology and business schools, began to read one another’s work during the 1960s and they collectively contributed to finding common ground. While economists
working in the field of industrial organization have been less oriented towards work in the other disciplines, a few have read more widely. Not surprisingly, economists in business schools have been the most interested in this work. Business schools and journals of management have brought together scholars interested in a field called macro- organizational behavior. My cursory history of organizational thought shows why scholars from these fields might come to orient themselves to each other. Economists, scholars in business schools, and sociologists understood that organizations were at the core of modern life. How organizations worked, whether they were efficient, and if they could adapt to changing circumstances were questions that motivated scholars in all three fields. In the mainstream of economics, firms were not an important object of study circa, 1960. But for economists in business schools, the puzzle of how and why firms worked and the idea that scholars could help make them work better, provided an impetus to try and advance the theory of the firm. For scholars who were teaching management in business schools, their main task was to train people to become managers (ie. MBAs). They had a huge interest in generating a theory that gave managers an important and heroic role in the functioning of firms. They realized that firms were about managing people and gaining cooperation. But, they needed some ways to understand how this problem resulted in the structure of the organization itself. Finally, sociologists began to realize that Max Weber’s view of bureaucracies was an “ideal type”. Organizations did not totally conform to his ideas and they looked much more political, adaptable, and less highly organized than Weber thought.
could set sales quotas for each of their product divisions. Divisional managers will set goals for each of their product sales managers. To attain that target, the division manager knows that salespeople have to make five calls a day. The procedure for the product sales manager is to monitor the sales people to insure that they are making their calls. For the salespeople, their goal is to make those calls. If the overall goal is not being met, managers have information on how each salesperson is doing; ie. how many calls they make and what are the results of the calls. In this way, the general goals of the organization can be set quite high up. Lower down in the organization, goals are implemented and procedures are put in place to attain those goals. If in a given quarter, sales dip overall in the firm, then the higher level managers can figure out exactly which products are meeting goals and which ones are not. They can also attempt to figure out why the goals are not being met. Is it the procedures (ie. processes), the people who are working for you (ie. are they shirking), or the market (is it turning down)? This feedback can be used to undertake new courses of action. These kind of feedback loops can be installed at many levels of the organization. This means that it might be theoretically possible to solve a problem before it reached crisis proportions. So, for example, if sales for a particular product started to slow, a lower level manager might discover this by watching inventory. They could then shift production lines to products which were selling more quickly. They could also pass this kind of information back to the sales department. Simon and March created the grounds for a powerful synthesis for organizational theory by producing a model of actors that was more realistic. Instead of assuming the people had perfect information and were able to undertake courses of action that perfectly
maximized the use of resources, they realized that people had limited information and attention. Simon and March also hinted at how this affected the problem of motivating people to cooperate. If managers could not constantly surveil their employees, they could devise methods to minimize their opportunities to not act in the interests of the organization. Organizational design, the setting of goals, and the creation of standard operating procedures all worked to solve problems of bounded rationality on the part of higher up managers and constrain and monitor the performance of lower down participants. In doing so, they produced a powerful theory that helped solve many of the main problems that organizations faced: figuring out how to organize, motivating people within the organization to do their jobs, monitoring the performance of employees, and most importantly, opened up the possibility of using the organizational structure to respond to changes in the markets in which the firm was producing. Their theory was not only analytic, but it was proscriptive. You could teach managers how to engage in organizational design that would motivate and monitor employees. You could also help them understand how to create reliable organizations by building standard operating procedures to make actions simpler. So, for example, Cyert and March (1963) discovered that department stores used a standard operating procedure to set retail prices by simply doubling wholesale prices for goods. Organizational design meant that scholars could help managers simplify the types of information necessary to evaluate whether or not the organization was being successful in its main markets. By evaluating that information (ie. the degree to which parts of the organization were meeting organizational goals), managers could make adjustments on the run. These adjustments could be relatively simple, like slowing down the production of a certain product. If many
During the 1960s, there was a great deal of empirical work that began to examine the ways in which organizational structures were different across different markets or environments (Lawrence and Lorsch, 1967; Child, 1973; Thompson, 1967). The basic theoretical approach in this literature was consistent with the rational adaptation model developed by Simon and March. It assumed that entrepreneurs and managers would build organizations that would allow them to respond to external problems by monitoring the goals and standard operating procedures in the organization. But, these perspectives offered two factors that would figure into how managers would do this. First, the technology of the firm would have a big effect on how it was organized. Generally, it was thought that complex technologies would require more complex organizational structures while simpler technologies would result in simpler organizations. Second, the nature of competition mattered as well. In industries or markets where competition was strong and market change was rapid, firms had to be more nimble and constantly adapting while in industries or markets where competition was less, firms could look more like slow Weberian bureaucracies. This approach to understanding organizational life came to be called strategic contingencies. The basic idea was that managers and entrepreneurs built their organizations according to the contingencies of their technology and environments. They would figure out what these were and strategically create organizational structures and procedures to help mitigate the effects of these factors. This literature eventually evolved to the view that an organization’s dependence on its environment was the most important factor to explain its internal goals and structure. This view became known as resource dependence theory (Pfeffer and Salancik, 1978).
Circa the early 1970s, organizational theory looked as if it had created a theory that would solve all of its main problems. It could explain how organizations worked given the bounded rationality of actors and it could offer advice to managers about how to structure and re-structure their organizations to make them work better. It could also explain why some organizations looked different than others by focusing on differences in technology and competition. Smart managers and entrepreneurs could build more efficient organizations by understanding their environments and creating good organizational designs to fit those conditions. If they had the right design they could constantly monitor the environment by monitoring their ability to attain their internal goals and make adjustments as necessary.
REACTIONS TO RATIONAL ADAPTATION
As is often the case in the academy, as soon as a conventional wisdom emerges, dissidents appear and begin to take it apart. The 1970s and 1980s were a period of great intellectual ferment in the field of organizational studies. Scholars were attacking the conventional wisdom of the rational adaptation and strategic contingencies models. These attacks came many directions and reflected dissatisfaction with all or some of the assumptions of the model. One of the main sets of criticisms came from those who were trying to understand the nature of the environment more clearly. On one side were scholars who wanted to embrace stronger forms of environmental determinism. They saw competition and scarce resources as determinative for organizational survival (these scholars created resource dependence theory, population ecology, and economic
