Organizations, as a class, are socially constructed innovations, deliberately designed as solutions to problems. Although some forms of organization, such as churches and armies, have been around for centuries, only since the Industrial Revolution have complex organizations assumed the form people take for granted today. Because they are shaped by the contexts or environments in which they are established, contemporary organizations reflect the impact of their historical origins in societies characterized by growing affluence and conflicts over the control and distribution of wealth. Organizations come in a bewildering variety of forms because they have been explicitly designed to deal with a wide range of problems and because they have emerged under widely varying environmental conditions.
THE IMPORTANCE OF ORGANIZATIONS
Why are complex organizations important? Organizations, which produce goods, deliver services, maintain order, and challenge the established order are the fundamental building blocks of modern societies, and the basic vehicles through which collective action is undertaken. The prominence of organizations in contemporary society is apparent when we consider some consequences of their actions.
Organizations coordinate the actions of people in pursuit of activities too broad in scope to be accomplished by individuals alone. Railroads were the first large corporations in the United States, arising because small autonomous merchants and traders could not effectively coordinate the passage of long-distance shipments. In the twentieth century, the production of mass-market consumption goods, such as automobiles and electric appliances, was made possible by the rise of large, vertically integrated manufacturing firms. Similarly, in the public sector, the implementation of government social policies has necessitated the development of large government agencies that process thousands of cases on a universalistic, impersonal basis.
The concentration of power in organizations contributes not only to the attainment of large-scale goals in modern societies, but also to some major social problems. When organizations focus on attaining specific goals, such as making profits for shareholders, they may neglect the side effects or externalities of their actions. Examples include air and water pollution and the careless disposal of unwanted hazardous materials by large manufacturers. The manufacture of unsafe consumer products and instances of large-scale fraud and collusion also illustrate the capacity of organizations to do harm as well as good.
Increasingly, major tasks in society are addressed not by single organizations but instead by networks of interdependent organizations. Interorganizational arrangements pool the efforts of numerous specialized organizations in pursuit of a common end. For example, automobiles are produced in vertical production networks centered on assemblers that maintain ongoing relationships with multiple tiers of suppliers responsible for the manufacture and delivery of components. However, in the industrial districts of northern Italy, textile production occurs within horizontal production networks consisting of small and specialized firms that employ flexible machinery and temporarily cooperate with one another for particular projects. Cooperation enables them to adapt to changing market demands and to learn from one another. Likewise, services for the severely mentally ill are delivered by independent but interrelated agencies providing specific medical and social services. Many large-scale motion pictures are produced not by self-contained studios, but rather by combinations of producers, directors, cinematographers, and other personnel assembled only for the duration of a particular project. Ongoing arrangements involving hospitals, doctors, and university laboratories have been created by the National Cancer Institute to coordinate cancer research and treatment. As these examples demonstrate, interorganizational arrangements give organizations the flexibility to address the unique features of specific cases, while avoiding the rigidities sometimes found in very large organizations.
DEFINITIONS OF ORGANIZATIONS
What are complex organizations? A simple definition is that organizations are goal-directed, boundary-maintaining, socially-constructed systems of human activity. Some definitions add other criteria, such as deliberateness of design, the existence of status structures, patterned understandings between participants, orientation to an environment, possession of a technical system for accomplishing tasks, and substitutability of personnel (Scott 1998).
Goal orientation and deliberate design of activity systems are distinctive features discriminating between organizations and other collectivities, such as families and small groups. Organizations are purposive systems in which members behave as if they are committed to the organization's goals, although individual participants might personally feel indifferent toward those goals or even alienated from their organizations. Concerted collective action toward an apparent common purpose also distinguishes organizations from social units such as friendship circles, audiences, and mass publics. Because many organizational forms are now institutionalized in modern societies, people readily turn to them or construct them when a task or objective exceeds their own personal abilities and resources (Meyer and Rowan 1977; Zucker 1988).
Organizations have activity systems—or technologies—for accomplishing work, which can include processing raw materials, information, or people. Activity systems consist of bounded sets of interdependent role behaviors; the nature of the interdependencies is often contingent upon the techniques used.
Other key elements of organizations, such as socially constructed boundaries, are shared with other types of collectivities. The establishment of an "organization" implies a distinction between members and nonmembers, thus marking off organizations from their environments. Maintaining this distinction requires boundary-maintenance activity, because boundaries may be permeable, and thus some organizations establish an authoritative process to enforce membership distinctions. For example, businesses have human resource management departments that select, socialize, and monitor employees, and voluntary associations have membership committees that perform similar functions. Distinctive symbols of membership may include unique modes of dress and special vocabularies.
Within organizations, goal attainment and boundary maintenance manifest themselves as issues of coordination and control, as authorities construct arrangements for allocating resources or integrating workflows. These internal structures affect the perceived meaning and satisfaction of individual participants by, for example, differentially allocating power and affecting the characteristics of jobs. Control structures, which shape the way participants are directed, evaluated, and rewarded are constrained by participants' multiple external social roles, some complementing, but others conflicting with organizational roles.
Organizations, with few exceptions, are incomplete social systems that are not self-sufficient and thus depend on interchanges with their environments. Therefore, goal setting by owners or leaders must take into account the sometimes contrary preferences of organizations and other actors, because activity systems are fueled by resources obtained from outsiders. For example, participants must be enticed or coerced into contributing to the organization's activities: businesses pay people to work for them, while voluntary nonprofit organizations may offer more intangible benefits, such as sociable occasions.
Over the past few decades, organizational sociology has gradually expanded its scope to include more of the external elements associated with organizational life. Initially, theorists emphasized relatively tangible features: environments were seen as stocks of resources (such as raw materials, capital, or personnel) and information. To the degree that resources are scarce or concentrated in a few hands, organizations are more dependent on their environments and may be vulnerable to exploitation or external control by outsiders (Pfeffer and Salancik 1978). To the degree that information is dispersed, heterogeneous, or subject to change, organizations confront problems of uncertainty.
Much research has been devoted to understanding how organizations deal with the problems of dependence and uncertainty that environments pose. Some organizations respond internally, by developing specialized structures and processes. For example, boundary-spanning personnel are charged with dealing with actors outside the organization, acquiring resources, and disposing of products; they thereby enable others in the technical core to work under more certain conditions. Some organizations respond externally, by building bridges that stabilize their ties to environments. They use interorganizational devices such as long-term contracts and working agreements, joint programs or alliances, and interlocking directorates (Mizruchi and Galaskiewicz 1993).
More recent scholarship has stressed the socially constructed, institutional aspects of environments. Organizations must be attentive to these external aspects to acquire and maintain legitimacy and social standing. Scott (1995) distinguished between regulative, normative, and cognitive-cultural understandings of institutions. Regulative institutions are external systems of rules, often established by states, to which organizations must conform. External rules may be prescriptive, such as when a law requires that publicly traded corporations have boards of directors with at least three members. Rules may also be proscriptive, such as when regulatory bodies or courts prohibit particular trade practices and ownership patterns.
Normative institutions are sets of beliefs and values shared by organizations and their participants about the morally appropriate way in which to organize activities. Professional associations are common sources of normative prescriptions, enforced through processes such as certification. Cognitive institutions are cultural frames or scripts that constitute the social forms seen as natural and taken for granted in a given society. In contemporary society, the idea of organizations itself is institutionalized; legitimate pursuit of an activity often requires the formation of an organization because of the widespread belief that this is an efficient, effective, and fair manner in which to proceed (Meyer and Rowan 1977).
The number of organizations in industrial societies is very large. Over five million businesses with at least one employee existed in the United States in 1998, and there were thousands of governmental agencies, nonprofit organizations, and voluntary associations (Aldrich 1999). Social scientists have developed various schemes to describe the diversity of organizations. For example, the North American Industry Classification System (Office of Management and the Budget 1997) classifies establishments by their products and the processes used to make them. Organizations can also be classified according to their goals or the social functions they serve (Parsons 1960), or on the basis of the prime beneficiaries of organizational actions: owners, members, clients, or the general public (Blau and Scott 1962). Another classification contrasts generalist and specialist organizations and hypothesizes that each type thrives in a different kind of environment (Hannan and Freeman 1989).
Industrial societies contain a large number of organizations, with three characteristics of special note. First, the size distribution of businesses and nonprofit organizations is highly skewed, with a large number of very small organizations. In 1990, approximately 90 percent of the five million firms in the United States with employees employed fewer than twenty people. Over 98 percent employed fewer than one hundred workers (Small Business Administration 1994). Employment statistics were very similar in the European Union (ENSR 1993), with about 93 percent of firms employing fewer than ten workers, although the figure varied by nation. In 1994, most of the 4.3 million corporations in the United States had fewer than $one hundred,000 in assets, and they accounted for less than 0.3 percent of all corporate assets. Thus, most organizations are fairly vulnerable to environmental forces and must adapt to them or disband.
Second, although the number of large organizations is small, they have achieved a dominant share of revenues and assets. Business organizations are highly stratified by size, and large firms have more resources with which to resist and counter environmental pressures. In 1994, the top 0.002 percent of corporations, each with a quarter-billion or more in assets, held about 83 percent of all corporate assets. In 1992, the fifty largest manufacturing firms in the United States accounted for about 24 percent of value added and about 13 percent of employment, and the two hundred largest firms accounted for 42 percent of value added and around 25 percent of employment (U.S. Bureau of the Census 1996).
Third, smaller organizations still employ a relatively large share of all workers. In the United States, about 39 percent of all employees work in firms that employ fewer than one hundred workers. In particular industries, such as agriculture and construction, substantially more than half the work force is employed in organizations with fewer than one hundred workers. In the European Union, firms with fewer than one hundred workers employ about 55 percent of the labor force, although variation across nations is substantial. For example, in Germany and the United Kingdom, firms larger than one hundred employ more than half the labor force, whereas in Greece and Italy, such firms employ only about 20 percent of the labor force (ESNR 1993).
Populations of organizations in modern societies are constantly undergoing processes of expansion, contraction, and change. Some organizations are founded in a flash of creative energy and then disband almost immediately, whereas others emerge slowly and then last for decades. Some organizations adapt readily to every environmental challenge, whereas others succumb to the first traumatic event they face. Sociologists have turned their attention to these vital events surrounding the reproduction and renewal of organizational populations, focusing on three processes: foundings, transformations, and disbandings (Aldrich 1999; Hannan and Freeman 1989).
New organizations are established fairly frequently, although systematic data on founding rates are available only for businesses. Studies in the United States and other Western industrialized nations show that about ten businesses are founded per year for every one hundred businesses active at the start of the year. In the United States, approximately 4 to 6 percent of the adult population in the mid-1990s has engaged in some activities with an intent to start a business, and about half of them actually succeeded in their initial efforts (Reynolds and White 1997). Explanations for variations in rates of organizational foundings have stressed the characteristics of opportunity structures, the organizing capacities of groups, and strategies adopted by entrepreneurs as they take account of opportunities and resources available to them (Aldrich and Wiedenmayer 1991).
Societal demands for special-purpose organizations increased with urbanization and with economic, political, and social differentiation, while the resources required to construct organizations grew more abundant with the development of a money economy and the spread of literacy (Stinchcombe 1965). The spread of facilitative legal, political, and other institutions also played a major role, by creating a stable, predictable context within which entrepreneurs could look forward to appropriating the gains from organizational foundings. Occasional periods of political upheaval and revolution stimulate foundings by freeing resources from previous uses, and thus massive changes occurred in the organizational populations of Eastern Europe in the 1990s. For example, centralized health care systems were disbanded with the demise of state socialist regimes, and there is a good deal of flux in the organizations within this sector (Mechanic and Rochefort 1996).
Transformations occur when existing organizations adapt their structures to changing conditions. The issue of how frequently and under what conditions organizations change has provoked some of the most spirited debates in organizational sociology. Strategic choice-theorists have argued for managerial autonomy and adaptability, whereas ecological and institutional theorists have tended to stress organizational inertia and dependence. Research has moved away from polarizing debates and reframed the question of transformation, asking about the conditions under which organizations change and whether changes occur more frequently in core or peripheral features (Singh and Lumsden 1990).
In the 1980s and 1990s, growing awareness of techniques for performing dynamic analyses have produced some useful studies of transformation, such as those on diversification, top executive changes, and changes in corporate form (Fligstein 1991). These studies tell us that changes do occur, although they do not report whether rates of change go up or down over an organization's life cycle. Most of these studies are of the very largest business firms, for which data are publicly available, and not for representative samples.
If all newly founded organizations lived forever, the study of organizational change would be confined to issues of founding, adaptation, and inertia. Research has shown that organizations disband at a fairly high rate, however, and a sizable literature has grown up on organizational mortality (Baum 1996; Singh 1990). Organizations can cease to exist as separate entities in two ways: by completely dissolving—the process by which the vast majority of organizations disband—or by becoming part of a different entity through merger or acquisition. Throughout the 1990s, between two and six thousand mergers and acquisitions a year took place, amounting to less than 1 percent of the incorporated firm population in any given year (Aldrich 1999). For example, in 1994, mergers and acquisitions involved about one-tenth of one percent of all corporate assets. By contrast, between 1976 and 1984, the annual rate of dissolution in the business population of the United States was about 10 percent (Small Business Administration 1994).
Age and size are the strongest predictors of how long an organization will survive. Young organizations disband at a substantially higher rate than older ones; a conservative estimate is that only half of new organizations survive more than five years. Internally, new organizations depend upon the cooperation of strangers who must be taught new routines, some of which are unique to particular organizations (Stinchcombe 1965). Externally, new organizations must penetrate niches in potentially hostile environments, overcoming competitors and establishing their legitimacy with potential members, customers, suppliers, and others. Survival beyond infancy is easier when an organization adopts a form that has already been institutionalized and is widely regarded as legitimate and proper (Zucker 1988). Population ecologists have given special attention to the density of an organizational form—the number of organizations of a given kind—in their analyses of vital rates. Density is thought to be an indicator both of the acceptance or legitimacy of a form (which raises foundings and decreases disbandings) and of the number of competitors attempting to survive within a given environmental niche (which reduces foundings and increases disbandings). The life chances of an organization initially increase—though not smoothly—as density rises, and then decrease as competition intensifies.
SOURCES OF INTERNAL DIVERSITY AMONG ORGANIZATIONS
All models of organizations as coherent entities can be reduced to two basic views. The systemic view sees organizations as social systems, sustained by the roles allocated to their participants, whereas an associative perspective treats organizations as associations of self-interested parties, sustained by the rewards the participants derive from their association with the organization (Swanson 1971). These two views each have a venerable heritage in the social sciences. Despite subtle variations, all perspectives on organizations ultimately use one or both of these models.
Institutional, functionalist, and ecological perspectives rely on a systemic model, viewing organizations as relatively coherent, stable entities. Such models emphasize the activity systems in organizations that are deliberately designed to accomplish specific goals. Formal structures of organizations, including a division of labor, authority relationships, and prescribed communication channels, are treated as fulfilling a purposeful design. For example, an institutional approach emphasizes member socialization and other processes that make the transmission of shared meanings easier. Ecological models usually treat organizations as units that are being selected for or against by their environments, and thus assume that organizations cohere as units.
Interpretive and more micro analytic views rely more on an associative model, leading to the expectation that organizations are constantly at risk of dissolution (March and Olsen 1976). For example, in the interpretive view, the reproduction of organizational structure depends on participants resubscribing to, or continually negotiating, a shared understanding of what they jointly are doing. Some cultural theories of organization emphasize the different, conflicting views that coexist within one organization (Martin 1992).
Views of organizations as marketplaces of incentives (Dow 1988), bundles of transactions (Williamson 1981), or arenas of class conflict (Clegg 1989), are in harmony with the associative view, insofar as they focus on actors' contributions to sustaining interaction. Indeed, organizational economics views organizations primarily as mechanisms for mediating exchanges among individuals, arguing that they arise only when market coordination has proven inadequate (Williamson 1981). One variant on this approach, agency theory, focuses on the relationships between self-interested principals (such as owners or stockholders) and the self-interested agents (such as workers or managers) engaged on behalf of principals. The self-interests of these actors may be divergent, and hence agency theory examines how systems of incentives, monitoring, and coordination can be designed to align the activities of agents with the objectives of principals, at minimal cost.
These complementary views of organizations—the associative and the systemic—highlight the sources of two fundamental problems of social organization, those of differentiation and integration. Some differentiation occurs through the division of labor among different roles and subunits; for example, employees may be divided into departments such as sales, finance, and manufacturing. Differentiation pressures also arise because participants sometimes bring widely varying expectations to the same organization. Differentiation is thus a centrifugal force threatening the coherence of social units. Integration, by contrast, refers to procedures for maintaining coherence, as diverse roles are linked and activities coordinated to sustain an organization as a coherent entity. Examples of integrative processes include the holding of weekly departmental meetings or the circulation of inter office memos.
Differentiation increases organizational complexity because it increases the extent and nature of specialization (Blau 1972). Complexity increases with the number of different components, and may be horizontal (tasks spread over many roles or units), vertical (many levels in a hierarchy of authority), or spatial (many operating sites). Complexity also increases when tasks are grouped by product/market (soap, paper products, or foods) or by function (finance, production, or marketing).
Problems of coordination are present for any activity system, but especially for a complex one. Many concepts used to describe organization structure involve alternative processes used in attempts to achieve integration. One scheme, for example, identified five coordinating mechanisms: direct supervision, three forms of standardization, and mutual adjustment (Mintzberg 1983). With direct supervision, or simple control, decision making is highly centralized: persons at the top of a hierarchy make decisions that lower level personnel simply carry out. This coordination pattern was prevalent in preindustrial organizations, and today is especially likely within small organizations (Edwards 1979).
Coordination also can be attained through standardizing work processes, skills, or outputs. Work processes may be standardized through formalization, that is, the development of rules and procedures. Examples include rules for processing orders, for assembling and packaging products, or for conducting screening interviews for clients. A formalized organization may appear decentralized, since few explicit commands are given, and lower-level participants have freedom in making decisions within the rules. The rules may, however, be so restrictive as to leave little room for discretion. A variant on process standardization is technical control; here, rules and procedures—and thereby coordination and control—are built into the design of machinery, as in an assembly line. Most worker discretion is eliminated by the structure of the technical system, and what remains is centralized in the upper echelons of the organization.
Standardization of skills involves considerable training and indoctrination of personnel, so that participants will carry out organizational policies with minimal oversight. Organizations employing large numbers of professionals are likely to rely on this coordination strategy (Von Glinow 1988). Professional participants enjoy considerable autonomy in making decisions, but their prior socialization sets most decision premises for them.
By producing products with standard properties, subunits of an organization are able to work independently of one another; if they use each other's outputs, the standards tell them what to anticipate. For example, large clothing firms produce massive runs of identical garments, and thus the various departments within firms know precisely what to expect from one another as they follow daily routines. Similar purposes are served by precise tolerances for parts used in manufacturing machinery and information systems designed to permit easy sharing of data within offices.
In small, young organizations, coordination is achieved by the simple mutual adjustment of personnel to one another. This form of coordination is also found in larger organizations working on complex, novel tasks, for which innovation is at a premium, such as consulting firms or research and development units. In such organizations, the activities of participants are reciprocally contingent, rather than sequentially ordered as in an assembly line. Formal structural devices have been advocated as ways of facilitating mutual adjustment under complex circumstances, such as integrating managers and project teams into matrix-management structures.
Standardization, bureaucratization, and formalization have done much to enable organizations to perform repetitive work efficiently. The same phenomena contribute to some well-known organizational pathologies; in particular, these coordination devices tend to reduce flexibility. In the 1990s, organizations struggled to develop less rigid structures for accomplishing work. Efforts to achieve flexibility included reductions in size, expansion of the scope of employee responsibilities through cross-training and broadened job descriptions, reductions in layers of management, and maintenance of long-term relationships with suppliers as an alternative to vertical integration. Many of these devices rely on strengthening the internal social networks that link an organization's personnel as well as the external ones linking it to the environment. Such linkages enable organizations to remain adaptable, cope with market uncertainties, and take advantage of opportunities for learning.
Complex organizations are the building blocks of industrial and post industrial societies, enabling people to accomplish tasks otherwise beyond their individual competencies. Organizations also help create and sustain structures of opportunities and constraints that affect nearly every aspect of societies. Sociologists and other social scientists are grappling with a variety of complementary and conflicting perspectives on organizations, ranging from microanalytic interpretive views to macroevolutionary institutional and ecological views. Regardless of perspective, research on organizations has shown its capacity to interest, inform, and provoke us, as sociologists investigate these social constructions that figure so prominently in our lives.
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Howard E. Aldrich
Peter V. Marsden