Skip to main content
Select Source:

Organization Theory

Organization Theory

An organization, by its most basic definition, is an assembly of people working together to achieve common objectives through a division of labor. An organization provides a means of using individual strengths within a group to achieve more than can be accomplished by the aggregate efforts of group members working individually. Business organizations are formed to deliver goods or services to consumers in such a manner that they can realize a profit at the conclusion of the transaction. Over the years, business analysts, economists, and academic researchers have pondered several theories that attempt to explain the dynamics of business organizations, including the ways in which they make decisions, distribute power and control, resolve conflict, and promote or resist organizational change. As Jeffrey Pfeffer summarized in New Directions for Organization Theory, organizational theory studies provide "an interdisciplinary focus on a) the effect of social organizations on the behavior and attitudes of individuals within them, b) the effects of individual characteristics and action on organization, c) the performance, success, and survival of organizations, d) the mutual effects of environments, including resource and task, political, and cultural environments on organizations and vice versa, and e) concerns with both the epistemology and methodology that undergird research on each of these topics."

Of the various organizational theories that have been studied in this realm, the open-systems theory has emerged as perhaps the most widely known, but others have their proponents as well. Indeed, some researchers into organizational theory propound a blending of various theories, arguing that an enterprise will embrace different organizational strategies in reaction to changes in its competitive circumstances, structural design, and experiences.


Modern organization theory is rooted in concepts developed during the beginnings of the Industrial Revolution in the late 1800s and early 1900s. Of considerable import during that period was the research done by of German sociologist Max Weber (18641920). Weber believed that bureaucracies, staffed by bureaucrats, represented the ideal organizational form. Weber based his model bureaucracy on legal and absolute authority, logic, and order. In Weber's idealized organizational structure, responsibilities for workers are clearly defined and behavior is tightly controlled by rules, policies, and procedures.

Weber's theories of organizations, like others of the period, reflected an impersonal attitude toward the people in the organization. Indeed, the work force, with its personal frailties and imperfections, was regarded as a potential detriment to the efficiency of any system. Although his theories are now considered mechanistic and outdated, Weber's views on bureaucracy provided important insight into the era's conceptions of process efficiency, division of labor, and authority.

Another important contributor to organization theory in the early 1900s was Henri Fayol. He is credited with identifying strategic planning, staff recruitment, employee motivation, and employee guidance (via policies and procedures) as important management functions in creating and nourishing a successful organization.

Weber's and Fayol's theories found broad application in the early and mid-1900s, in part because of the influence of Frederick W. Taylor (18561915). In a 1911 book entitled Principles of Scientific Management, Taylor outlined his theories and eventually implemented them on American factory floors. He is credited with helping to define the role of training, wage incentives, employee selection, and work standards in organizational performance.

Researchers began to adopt a less mechanical view of organizations and to pay more attention to human influences in the 1930s. This development was motivated by several studies that shed light on the function of human fulfillment in organizations. The best known of these was probably the so-called Hawthorn Studies. These studies, conducted primarily under the direction of Harvard University researcher Elton Mayo, were conducted in the mid-1920s and 1930s at a Western Electric Company plant known as the Hawthorn Works. The company wanted to determine the degree to which working conditions affected output.

Surprisingly, the studies failed to show any significant positive correlation between workplace conditions and productivity. In one study, for example, worker productivity escalated when lighting was increased, but it also increased when illumination was decreased. The results of the studies demonstrated that innate forces of human behavior may have a greater influence on organizations than do mechanistic incentive systems. The legacy of the Hawthorn studies and other organizational research efforts of that period was an emphasis on the importance of individual and group interaction, humanistic management skills, and social relationships in the workplace.

The focus on human influences in organizations was reflected most noticeably by the integration of Abraham Maslow's "hierarchy of human needs" into organization theory. Maslow's theories introduced two important implications into organization theory. The first was that people have different needs and therefore need to be motivated by different incentives to achieve organizational objectives. The second of Maslow's theories held that people's needs change over time, meaning that as the needs of people lower in the hierarchy are met, new needs arise. These assumptions led to the recognition, for example, that assembly-line workers could be more productive if more of their personal needs were met, whereas past theories suggested that monetary rewards were the sole, or primary, motivators.

Douglas McGregor contrasted the organization theory that emerged during the mid-1900s to previous views. In the 1950s, McGregor offered his renowned Theory X and Theory Y to explain the differences. Theory X encompassed the old view of workers, which held that employees preferred to be directed, wanted to avoid responsibility, and cherished financial security above all else.

McGregor believed that organizations that embraced Theory Y were generally more productive. This theory held that humans can learn to accept and seek responsibility; most people possess a high degree of imaginative and problem-solving ability; employees are capable of effective self-direction; and that self-actualization is among the most important rewards that organizations can provide their workers.


Traditional theories regarded organizations as closed systems that were autonomous and isolated from the outside world. In the 1960s, however, more holistic and humanistic ideologies emerged. Recognizing that traditional theory had failed to take into account many environmental influences that impacted the efficiency of organizations, most theorists and researchers embraced an open-systems view of organizations.

The term "open systems" reflected the newfound belief that all organizations are uniquein part because of the unique environment in which they operateand that they should be structured to accommodate unique problems and opportunities. For example, research during the 1960s indicated that traditional bureaucratic organizations generally failed to succeed in environments where technologies or markets were rapidly changing. They also failed to realize the importance of regional cultural influences in motivating workers.

Environmental influences that affect open systems can be described as either specific or general. The specific environment refers to the network of suppliers, distributors, government agencies, and competitors with which a business enterprise interacts. The general environment encompasses four influences that emanate from the geographic area in which the organization operates. These are:

  • Cultural values, which shape views about ethics and determine the relative importance of various issues.
  • Economic conditions, which include economic upswings, recessions, regional unemployment, and many other regional factors that affect a company's ability to grow and prosper. Economic influences may also partially dictate an organization's role in the economy.
  • Legal/political environment, which effectively helps to allocate power within a society and to enforce laws. The legal and political systems in which an open system operates can play a key role in determining the long-term stability and security of the organization's future. These systems are responsible for creating a fertile environment for the business community, but they are also responsible for ensuringvia regulations pertaining to operation and taxationthat the needs of the larger community are addressed.
  • Quality of education, which is an important factor in high technology and other industries that require an educated work force. Businesses will be better able to fill such positions if they operate in geographic regions that feature a strong education system.

The open-systems theory also assumes that all large organizations are comprised of multiple subsystems, each of which receives inputs from other subsystems and turns them into outputs for use by other subsystems. The subsystems are not necessarily represented by departments in an organization, but might instead resemble patterns of activity.

An important distinction between open-systems theory and more traditional organization theories is that the former assumes a subsystem hierarchy, meaning that not all of the subsystems are equally essential. Furthermore, a failure in one subsystem will not necessarily thwart the entire system. By contrast, traditional mechanistic theories implied that a malfunction in any part of a system would have an equally debilitating impact.


Organizations differ greatly in size, function, and makeup. Nevertheless, the operations of nearly all organizationsfrom the multinational corporation to a newly opened delicatessenare based on a division of labor; a decision-making structure; and rules and policies. The degree of formality with which these aspects of business are approached vary tremendously within the business world, but these characteristics are inherent in any business enterprise that utilizes the talents of more than one person.

Organizations practice division of labor both vertically and horizontally. Vertical division includes three basic levelstop, middle, and bottom. The chief function of top managers, or executives, typically is to plan long-term strategy and oversee middle managers. Middle managers generally guide the day-to-day activities of the organization and administer top-level strategy. Low-level managers and laborers put strategy into action and perform the specific tasks necessary to keep the organization operating.

Organizations also divide labor horizontally by defining task groups, or departments, and assigning workers with applicable skills to those groups. Line units perform the basic functions of the business, while staff units support line units with expertise and services. In general, line units focus on supply, production, and distribution, while staff units deal mostly with internal operations and controls or public relations efforts.

Decision-making structures, the second basic organizational characteristic, are used to organize authority. These structures vary from operation to operation in their degree of centralization and decentralization. Centralized decision structures are referred to as "tall" organizations because important decisions usually emanate from a high level and are passed down through several channels until they reach the lower end of the hierarchy. Conversely, flat organizations, which have decentralized decision-making structures, employ only a few hierarchical levels. Such organizations are typically guided by a management philosophy that is favorably disposed toward some form of employee empowerment and individual autonomy.

A formalized system of rules and policies is the third standard organizational characteristic. Rules, policies, and procedures serve as templates of managerial guidance in all sectors of organizational production and behavior. They may document the most efficient means of accomplishing a task or provide standards for rewarding workers. Formalized rules provide managers with more time to spend on other problems and opportunities and help ensure that an organization's various subsystems are working in concert. Ill-conceived or poorly implemented rules, of course, can actually have a negative impact on business efforts to produce goods or services in a profitable or satisfactory manner.

Thus, organizations can be categorized as informal or formal, depending on the degree of formalization of rules within their structures. In formal organizations, say researchers, management has determined that a comparatively impersonal relationship between individuals and the company for which they work is viewed as the best environment for achieving organizational goals. Subordinates have less influence over the process in which they participate, with their duties more clearly defined.

Informal organizations, on the other hand, are less likely to adopt or adhere to a significant code of written rules or policies. Instead, individuals are more likely to adopt patterns of behavior that are influenced by a number of social and personal factors. Changes in the organization are less often the result of authoritative dictate and more often an outcome of collective agreement by members. Informal organizations tend to be more flexible and more reactive to outside influences. But some critics contend that such arrangements may also diminish the ability of top managers to effect rapid change.


By the 1980s several new organizational system theories received significant attention. These included Theory Z, a blending of American and Japanese management practices. This theory was a highly visible one, in part because of Japan's well-documented productivity improvementsand the United States' manufacturing difficultiesduring that decade. Other theories, or adaptations of existing theories, emerged as well, which most observers saw as indicative of the ever-changing environment within business and industry.

The study of organizations and their management and production structures and philosophies continued to thrive throughout the 1990s. Indeed, an understanding of various organizational principles continues to be seen as vital to the success of all kinds of organizationsfrom government agencies to businessof all shapes and sizes, from conglomerates to small businesses. The study continues and although academics are far from a single theory of organization development each serious academic undertaking adds to the knowledge base on the subject. The changes in the ways in which we communicate and others brought about by advances in technology will likely create more opportunity for study. As our societies change, so to do the ways in which our organizations operate.


Hatch, Mary Jo. Organization Theory: Modern, Symbolic, and Postmodern Perspectives. OUP-USA, 1997.

Nickelson, Jack A., and Todd R. Zenger. "Being Efficiently Fickle: A dynamic theory of organizational choice." Organizational Science. September-October 2002.

Pfeffer, Jeffrey. New Directions for Organization Theory: Problems and Prospects. Oxford University Press, 1997.

Putnam, Linda L., and Fredrick M. Jablin. New Handbook of Organizational Communications: Advances in Theory, Research, and Methods. Sage Publications Inc., December 2004.

Wagner-Tsukamoto, Sigmund. Human Nature and Organization Theory. Edward Elgar Publishing, 2003.

                                Hillstrom, Northern Lights

                                 updated by Magee, ECDI

Cite this article
Pick a style below, and copy the text for your bibliography.

  • MLA
  • Chicago
  • APA

"Organization Theory." Encyclopedia of Small Business. . 20 Jul. 2017 <>.

"Organization Theory." Encyclopedia of Small Business. . (July 20, 2017).

"Organization Theory." Encyclopedia of Small Business. . Retrieved July 20, 2017 from

Organization Theory

Organization Theory





Organization theory is a theoretical perspective which conceives of organizations as complex social actors and investigates how the structures they adopt affect their behavior. The field takes a broad view of the term structure including not only formal structure, but also informal and network relationships and cultural and cognitive aspects of the organizations. As such, it addresses broad questions of how and why organizations come to be, take the forms they do, behave as they do, and survive or fail. With its focus on organizations as a collective entity, organization theory complements organizational behavior, which focuses on individuals and small groups within the larger field of organization studies.


Organization theory was derived from several fields, including sociology, economics, anthropology, and political science. Many scholars in these fields have influenced organization theory, including Émile Durkheim, Karl Marx, Adam Smith, and Max Weber. Of these, Weber most directly influenced organization theory with his work on authority and bureaucracy.

Writing around the turn of the twentieth century, Weber identified two sources of authority that dominated previous social organization: traditional authority, vested in established patterns of behavior passed down through generations, and charismatic authority, vested in an individuals powers of attraction and influence over others. He also identified a third form, rational-legal authority, in which authority is vested in individuals selected based on rules and legally binding processes designed to identify those best qualified to exercise it. This rational-legal authority is the basis of Webers theory of bureaucracy, in which he posited that organizing in this manner could generate remarkable social advances comparable in magnitude to the economic advances of the Industrial Revolution. Furthermore, Webers ideal view of rationality comprised two types: substantive rationality, which determines what a social groups goals, values, and ideals should be, and formal rationality, which governs how a social group allocates resources and measures progress toward those goals and ideals. In an oft-quoted passage he warned that formal rationality without substantive rationality could lead to a dehumanizing iron cage. While some critics suggest that early English translations of Weber did not sufficiently reflect the true spirit of his work, Weber has nevertheless provided a foundation upon which much of organization theory has been built.

Building on Weber and others, more recent organization theorists have generally emphasized two primary perspectives on the nature and function of organizations, which have been elaborated into a number of influential theories of organizations. The first of these perspectives considers organizations as rational and efficient solutions to various problems associated with cooperation, complexity, and uncertainty. The second perspective considers organization not on the basis of its rational structure and function but rather on the basis of its social meaning and value.


Some of the earliest theories of organizations emerged in the wake of the Industrial Revolution and were characterized by the search for universal organizing principles. Influential among these early theorists were Frederick Taylor and Henri Fayol, whose work can be characterized as the application of mechanical and industrial engineering principles to the management and control of human labor. However, in the 1960s organization theorists turned attention from universal organizing principles to theories that argued that ideal organization structures were not one-size-fits-all, but instead contingent on various factors within the organization and its environment.

In 1967, Paul Lawrence and Jay Lorsch introduced contingency theory, which claimed that the best way to organize depends upon the characteristics of an organizations environment. Lawrence and Lorsch argued that organizations environments vary widely and that organizations come to reflect this variety by rationally adopting structures best suited to their environments. They showed that the degree of volatility and uncertainty in an organizations environment affects things like the formalization of an organizations structure, the centrality of its decision making, the time horizon upon which it focuses, and how it divides itself into departments and its tasks. Lawrence and Lorschs emphasis on contingencies proved influential, and several other contingency-based theories of organizations emerged in the 1970s. Among these are agency theory, transaction cost economics, and resource dependence theory.

Agency theory focuses on the fact that, in organizations, one person (the agent ) acts at the behest of another (the principal ). This principalagent relationship exists in organizations between stockholders and managers and between managers and employees. Agency theorists assume that both agents and principals have self-interests and that these interests frequently diverge. This creates a need for principals to monitor the agents, which is difficult and expensive since agents often have more expertise than principals and cannot be continuously and directly observed. Agency theorists therefore depict organizational structures as rational attempts to establish complex yet efficient systems of cooperation, which differ from organization to organization and task to task depending on the information asymmetry between principals and agents.

Transaction cost economics (TCE) is closely related to agency theory, but instead of emphasizing how organization structures govern internal principalagent relationships, TCE emphasizes that organizations are rational and efficient solutions to managing the relationship between itself and other organizations in its environment. Oliver Williamson, who introduced TCE in the mid-1970s, argues that small-scale transactions (i.e., simple and immediate exchanges of goods and services) do not require organizations; however, as transactions become more complex and uncertain, organizations are needed to monitor and limit the liabilities of these risks. TCE also explains organizational boundaries on the basis of transaction costs: Functions for which the costs of external transactions are too great are brought inside the organization, while those available for less total cost elsewhere are performed externally.

The resource dependence view of organizations, like TCE, emphasizes an organizations relationship to other organizations but focuses on how an organizations structures are contingent on the nature and scarcity of the resources it needs to operate rather than on the complexity and uncertainty of its transactions. More so than the other contingency-based theories, the resource dependence view emphasizes the role of management in negotiating the dependencies resulting from an organizations resource needs, and specifies a number of strategies that firms may undertake to do this under different dependency conditions.

The rational/efficient assumptions within contingency-based theories of organizations also underlie the theories of population ecology and co-evolution, which conceptualize the environment shared by organizations in the same or related fields as an ecosystem. These theorists employ ecological and evolutionary mechanisms, (e.g., variation, selection, specialization) to explain how organizations come to be and survive or fail. In this stream of research, organizational success, failure, and form are contingent upon environmental adaptation, fit, and population density.


Another approach to addressing the questions of how organizations come into being and why they take the forms they do is based on the conception of organizations as embodiments of value and meaning. Many of these theories can be traced to Peter Berger and Thomas Luckmanns The Social Construction of Reality (1966), in which they suggest that, in the context of social science, knowledge and reality are subjectively created rather than objectively discovered. Theories based on this approach shift their emphasis from identifying efficient ways of organizing to understanding the purpose or meaning derived from organizing a particular way. The shift was essentially a move from Webers formal rationality to substantive rationality, which critics held had been slighted by modernist social science and its natural preference for formal rationality.

One example of this branch of organization theory comes under the generic heading of institutional theory, which grows out of the concept of social institutions. While diverse definitions of institutions abound, reflecting the evolution and variety of theories under this rubric, common to all of them is the idea of stable patterns of social interaction that over time become vested with value and power. Within organization theory, institutions were first associated with the processes by which leaders infuse organizational structures or processes with value beyond their technical requirements, resulting in their reproduction and stability. In this stream of research, sometimes termed old institutionalism, the focus is on creating meaning and infusing values from within the organization.

This is contrasted with neo-institutional theory, or new institutionalism, which focuses on how external aspects of the context in which organizations exist affect their structures and processes. In a seminal piece from 1983, Paul DiMaggio and Walter Powell suggested the similarity among organizations in a field was the result of their common environment, which comprised three distinct forces for conformity: coercive forces, such as a common regulatory environment; normative forces, such as professionalization and standardized professional education (e.g., accounting); and mimetic forces, in which organizations copy visible or successful others when facing uncertainty. The idea that processes and structures result from passively adapting to external pressures contrasted directly with old institutionalism, which theorized they were actively infused with value from within. Later, in response to criticisms that neo-institutional conceptions of organizations were too passive and static, neo-institutionalists highlighted institutional change, where organizations dynamically adapt to changing institutional environments, and institutional entrepreneurship, where actors actively shape the institutional environments in which they exist. These advances, along with the concept of institutional work, have blurred the distinctions between old and new institutionalism.

These blurred distinctions are also evident in organizational culture and organizational identity, both of which focus on how organizations enact meaning within their social contexts. Organizational identity theorists address the issues of who we are as an organization and show a similar focus on the reproduced social meaning (i.e., what is enduring, central, and distinctive) within an organization, and how that affects the structures and processes of organizations. Work on organizational culture focuses directly on the meaning systems of organizations at three levels: artifacts, the rituals and symbols employed in an organization; values, the conscious beliefs about what should or should not be; and assumptions, the deeply held and often unconscious beliefs that guide how members make sense of an organization. Consistent with the work on the social construction of reality, this suggests that organizational action flows from values about what should or should not be, but is constrained by assumptions about what is or can be.

SEE ALSO Authority; Bureaucracy; Culture; Durkheim, Émile; Industrialization; Institutionalism; Marx, Karl; Models and Modeling; Modernism; Organizations; Peace; Principal-Agent Models; Rationality; Smith, Adam; Taylorism; Transaction Cost; Values; Weber, Max


Astley, W. Graham, and Andrew H. Van de Ven. 1983. Central Perspectives and Debates in Organization Theory. Administrative Science Quarterly 28 (2): 245273.

Berger, Peter, and Thomas Luckmann. 1966. The Social Construction of Reality. New York: Doubleday.

Clegg, Stewart R., David Courpasson, and Nelson Phillips. 2006. Power and Organizations. Thousand Oaks, CA: Sage.

DiMaggio, Paul J. and Walter W. Powell. 1983. The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields. American Journal of Sociology 48 (2): 147160.

Hatch, Mary Jo, and Ann L. Cunliffe. 2006. Organization Theory: Modern, Symbolic, and Postmodern Perspectives, 2nd ed. Oxford: Oxford University Press.

Lawrence, Paul R. and Jay W. Lorsch. 1967. Differentiation and Integration in Complex Organizations. Administrative Science Quarterly 12 (1): 147.

Lawrence, Thomas B., and Roy Suddaby. 2006. Institutions and Institutional Work. In The Sage Handbook of Organization Studies, eds. Stewart R. Clegg, Cynthia Hardy, Thomas Lawrence, and Walter Nord, 215254. London: Sage.

Scott, W. Richard. 2002. Organizations: Rational, Natural, and Open Systems, 5th ed. Englewood Cliffs, NJ: Prentice Hall.

Tsoukas, Haridimos, and Christian Knudsen, eds. 2003. The Oxford Handbook of Organization Theory: Meta-theoretical Perspectives. Oxford: Oxford University Press.

Weber, Max. 1925. The Theory of Social and Economic Organization. Trans. by A. M. Henderson and Talcott Parsons. New York: Free Press, 1947.

Rich DeJordy

Bradley A. Almond

Cite this article
Pick a style below, and copy the text for your bibliography.

  • MLA
  • Chicago
  • APA

"Organization Theory." International Encyclopedia of the Social Sciences. . 20 Jul. 2017 <>.

"Organization Theory." International Encyclopedia of the Social Sciences. . (July 20, 2017).

"Organization Theory." International Encyclopedia of the Social Sciences. . Retrieved July 20, 2017 from

Organization Theory

Organization Theory

Organization theory is a broad field with roots in sociology. Anthropologists, philosophists, and political scientists have contributed greatly to the field. Organization theory as a topic for managers, as opposed to scholars, has come about fairly recently. For example, political scientists trace many ideas back to Ancient Rome or even before. Philosophers reach even farther back in time, and anthropologists have been interested in organization in terms of how groups arrange social systems and status systems as long as there has been a field of anthropology.

Although it is difficult to pinpoint when managers became interested in theories of organization, some suggest it was around the 1940s, when the writings of the German sociologist and engineer, Max Weber, were translated into English. Although Weber's lifework was spent trying to understand why capitalism arose first in Western Europe rather than in Asia, American managers lifted Weber's notion of bureaucracy out of these studies to explain then-modern forms of organizations that coincided with what Weber had described among Western European organizations. These organizations had reduced the influence of patriarchal styles of management to systems in which job positions, rather than the people in those positions, provided the source of authority.

Phillip Selznick became well known for studying goal conflict and power struggles during the U.S. government's subsidy of the Tennessee Valley Authority, which was an effort to put unemployed Americans to work producing electricity for the Tennessee Valley area. In the 1950s Herbert Simon studied how managers make decisions when information is complex but incomplete. The 1960s brought about research elaborating why the closed-system mentality of organizationsthe idea that organizations have little reciprocal interaction with their environmentswas not accurate. The result was a shift to viewing organizations as open systems that are intertwined with their environments in such a way that reciprocal interdependence is created. Managers began to realize that society has a profound effect on organizations, as organizations also have a profound effect on society.

Taken in total, then, organization theory as a management topic of interest was born out of non-management research. Bureaucracy, authority, goal conflict, power, managerial decision-making, and interaction between organizations and their environments are all topics of concern among today's organization theorists, but none of these ideas arose from management research.

Management research has borrowed from these various fields to attempt to answer two questions that are of specific interest to managers: Why do organizations exist and how do they function? With respect to the first question, it seems reasonable to argue that organizations exist to provide society with a level of goods and services that would otherwise be unattainable. With respect to the second, how organizations function, organizations combine human skills, knowledge, technology, and material resources to produce goods and services.

The broadest variant of organization theory looks at the relationship between organizations and their social and natural environments, as originated by open-system theorists. One branch of Western moral philosophy conceives of organizations as having a social contract with society, whereby they are granted legitimacy for the purpose of serving the social good. This constructive purpose includes the production of goods and services and their fair allocation. Yet organizations can also cause negative social outcomes. Negative externalities include the social problems associated with monopolies, unsafe products, and the unfair treatment of employees, as well as the ecological problems posed by industrial accidents and industry-related pollution of the natural environment.

Because of the existence of negative externalities, organization theory is influenced by the concept of social control that can be found in political science, economics, and sociology. Social control refers to the laws, regulations, and social customs that are meant to minimize the negative impacts of organizational activities. Because organization theorists address social control, they also examine the nature of the relationship between organizations and their regulatory agencies.

The anthropological view derives from the knowledge that standards of social control reflect the underlying assumptions, values, and beliefs of cultures. The restraints or expectations placed on organizations, therefore, can vary across societies. The stakeholder model of organizations is useful for demonstrating this form of cultural relativism. The stakeholder model depicts an organization as surrounded by a variety of constituent groups, such as customers, social activists, regulators, the media, stockholders, and regulatory agencies.

Stakeholder expectations, in turn, can depend upon cultural affiliations. For example, employees in the United States tend to expect more active participation in the work contract than do employees in Japan. Thus, a Japanese firm with operations in the United States may face employment laws and employee views of justice and fairness that differ from those of the home country. When the scope of organization theory is widened to include international issues such as the activities of multinational corporations in host environments, the impact of cultural relativism must be acknowledged.

Although organization theory never loses sight of the importance of the organizational-societal interface (and this is one distinguishing feature between organization theory and organization behavior), it also deals with what goes on inside organizations. Weber's classical theory of bureaucracy, for example, was followed by research on the more informal aspects of organizational life. This line of inquiry is strongly influenced by the insight that organizational activity can involve less-than-rational processes that yield unexpected consequences, including the negative externalities mentioned above. Hence, although organizations ideally exist as tools for constructive social purposes, these purposes can be subverted by the constraints on rational decision processes within organizations.

Contemporary theorists use many metaphors to guide their investigations into the suboptimal and even non-rational decisions enacted in organizations. These metaphors include those that suggest organizations are systems of power and political intrigue, miniature cultures, chaos, temples, theaters, machines, families, and jungles. These metaphors arise through shared meaning that has been socially constructed and generally agreed upon, thus subconsciously institutionalizing the specific, agreed-upon metaphor for certain organizations.

Organization theorists are interested in why organizations exist and how these social systems function. This interest has yielded a body of research on the organizational-societal relationship and the formal and informal aspects of organizational life, yet there is no single answer to either of these root issues.

Since 2001 some management theories have come under criticism for the role they may have played in corporate scandals at firms such as Enron and Tyco. The late London Business School scholar, Sumanatra Ghoshal, argued that business schools and MBA programs taught amoral management ideas that drastically deemphasized responsibility and ethics. Likewise, Malcolm Salter warned that another scandal like Enron could only be avoided if companies created, organizational processes and structures that promote effective management and ethical behavior. However, these business scandals also yielded new avenues of research. Enron emails that became public after the scandal and subsequent investigations have provided insight into how communication and informal networks function inside an organization.

SEE ALSO Mechanistic Organizations; Organic Organizations; Organizational Analysis and Planning


Brown-Johnson, N., and S.B. Droege. Reflections on the Generalization of Agency Theory: Cross-cultural Considerations. Human Resource Management Review 14, no. 3 (2004): 32535.

Diesner, Jana, Terrill L. Frantz, and Kathleen M. Carley. Communication Networks from the Enron Email Corpus It's Always About the People. Enron Is No Different. Compuational & Mathematical Organization Theory. 11, no. 3 (2005).

Ghoshal, Sumantra. Bad Management Theories Are Destroying Good Management Practices. Academy of Management Learning and Education 4, no. 1 (2005).

Salter, Malcolm. Innovation Corrupted: The Origins and Legacy of Enron's Collapse. Cambridge: Harvard University Press, 2008.

Vázquez, Xosé H. Allocating Decision Rights on the Shop Floor: A Perspective from Transaction Cost Economics and Organization Theory. Organization Science 15, no. 4 (2004): 46381.

Zajac, Edward J., and James D. Westphal. The Social Construction of Market Value: Institutionalization and Learning Perspectives on Stock Market Reactions. American Sociological Review 69, no. 3 (2004): 43358.

Cite this article
Pick a style below, and copy the text for your bibliography.

  • MLA
  • Chicago
  • APA

"Organization Theory." Encyclopedia of Management. . 20 Jul. 2017 <>.

"Organization Theory." Encyclopedia of Management. . (July 20, 2017).

"Organization Theory." Encyclopedia of Management. . Retrieved July 20, 2017 from

organization theory

organization theory, sociology of organizations In practice these terms are used interchangeably, although the former has a slightly wider remit than the latter as it also covers work by non-sociologists, including those who are concerned to provide advice to management on how organizations should be designed and operated.

As various forms of organization pervade social life some difficulty also attaches to the definition of those which are the subject-matter of the sociology of organizations. In a useful discussion of this problem David Silverman (The Theory of Organizations, 1970) has suggested that the ‘formal organizations’ with which this branch of sociology is concerned have three distinguishing features: they arise at an ascertainable moment in time; as artefacts they exhibit patterns of social relations which are less taken for granted than those in non-formal organizations (such as the family) and which organizational participants often seek to co-ordinate and control; consequently, considerable attention is paid to the nature of these social relations, and to planned changes in them.

Early organization theory developed along two parallel tracks, reflecting its dual sociological and managerial origins. The growth of industrial societies in the nineteenth century involved the expansion of large-scale organizations—especially those of the factory and the state. The former of these gave rise to the doctrines of scientific management, associated with Frederick William Taylor, and the latter provided the exemplar which Weber had in mind when developing his idealtypical account of the structure of bureaucracy. Both these theories concentrated on analysing the structures of organizations; that is, the nature of the various positions occupied by organizational personnel, the powers and duties attaching to these positions, and their relationship to the work required to carry out the explicitly stated goals of the organization. Both also viewed organizations as hierarchical structures, essential for the managerial control of work.

However, in the 1930s and 1940s, a variety of studies (such as those of the Human Relations Movement, by Chester Barnard, and the now classic study of the Tennessee Valley Authority by the sociologist Philip Selznick) opened up a second area for analysis: the study of the social processes occurring in organizations, often with a particular emphasis on how informal, ‘unofficial’ social relations could constrain or even subvert the official goals of the organization, and with organizations as co-operative rather than hierarchically controlled social institutions.

There now exists an immense variety of sociological studies of organizations and theories about them. Indeed, most of the major schools of sociological theory have contributed to this literature. Stewart Clegg and David Dunkerley (Organization, Class and Control, 1980) identify four major groupings among the diverse approaches. These are as follows.

Typologies of organizations: involving attempts to classify organizations according to a variety of key characteristics, such as who benefits from their operations, or how they obtain compliance from their members. Works by Peter Blau, Amitai Etzioni, Robert Blauner, and Tom Burns and G. M. Stalker are among the best known of such studies.

Organizations as social systems: an approach particularly identified with Talcott Parsons's structural-functionalist theory of action and with Philip Selznick and Robert Merton's more focused work on organizations. Organizations consist of social systems in interaction with other social systems (therefore ‘open systems’) whose values and goals are oriented to those of the wider society. According to Parsons, key requirements for organizational maintenance (which is seen to be the overriding goal of any organization) are those which apply to all social systems; namely, adaptation, goal attainment, integration, and pattern (or value) maintenance. Organizations as empirically contingent structures: an approach particularly associated, in the United Kingdom, with research at the University of Aston. The typological and social systems approaches have difficulty in clearly defining the organization as a theoretical object. (Is it defined solely by a set of typological characteristics? Or, if it is an open system, where are the system boundaries to be drawn?) The Aston Programme applies insights derived from psychology, together with statistical techniques such as scaling and factor analysis, to relate measures of organizational performance to different dimensions of organizational structure (such as the degree of specialization of tasks and centralization of authority). The latter are then related to independent contextual variables such as size, technology, and location of the enterprise. This essentially empiricist approach is subject to all the usual criticisms which apply to such a methodology.

Organizations as structures of action: approaches which focus on the circumstances determining the actions of individuals in organizations. An early contribution was made by Herbert A. Simon's work on satisficing. Later work, for example by David Silverman, is influenced by phenomenological sociology (especially ethnomethodology) and interactionism (see SYMBOLIC INTERACTIONISM). Instead of reifying the organization (referring to organizational goals and needs as if the organization, like a human being, could have such things) organizations are here analysed as the outcome of motivated people attempting to resolve their own problems. They are socially constructed by the individual actions of members having habituated expectations of each other. This approach throws doubt on whether it makes sense to refer to organizations as institutions which pursue organizational goals. In any event, there have been many studies which show (for example) that official goals may bear no relationship to actual or operative goals; that organizations frequently have multiple and conflicting goals; and that goal displacement may occur. The informal culture of work within organizations has been and continues to be extensively studied by sociologists influenced by the Chicago School of sociology. This tradition is illustrated in the work of, for example, William F. Whyte (Human Relations in the Restaurant Industry, 1948)
, Donald Roy (‘Quota Restriction and Goldbricking in a Machine Shop’, American Journal of Sociology, 1952)
, and Howard Becker (Boys in White, 1961)

A great deal of organization theory has been criticized for its normative (in this case pro-managerial) bias; for its individualistic analysis of the members of organizations (that is, for being more informed by psychological, than by sociological perspectives); and for embodying an inadequate analysis of how wider relations of power and control in society affect and are affected by organizations (in other words for concentrating mainly on the internal exercise of managerial authority and attempts to subvert it).

For some reason textbooks on organization theory tend to be rather dull—a curious phenomenon since the many case-studies of organizations are usually quite the opposite. Notable exceptions in the textbook field include R. M. Jackson , The Political Economy of Bureaucracy (1982)
and Lex Donaldson 's more polemical In Defence of Organization Theory (1985)

Cite this article
Pick a style below, and copy the text for your bibliography.

  • MLA
  • Chicago
  • APA

"organization theory." A Dictionary of Sociology. . 20 Jul. 2017 <>.

"organization theory." A Dictionary of Sociology. . (July 20, 2017).

"organization theory." A Dictionary of Sociology. . Retrieved July 20, 2017 from