Organizational Economics Theory : A Fundamental And Universal Problem Of Organizations

Organization structure developed from the ancient times of hunters and collectors in tribal organizations through highly royal and clerical power structures to industrial structures and today’s post-industrial structures. According to B.Mohr Lawrence Taylor in the early part of the organizational structure theory, Taylor, Fayol and Weber commented on the importance of structure to be efficient and effectively without the slightest question that whatever structure is necessary, people can fashion it. Organizational structure is a matter of choice.

          An organization, in its simplest form, is comprised of people brought together to achieve a common goal whether it be solving a problem, selling a product or providing a service. The existence of the organization is wholly dependent on the collective body of individuals involved and it is these individuals that are the driving force behind the success or failure of a company. The relationships that connect the people within the organization dictate how the culture is developed and perceived.

This situation can lead to negative consequences for a business when its executives or management direct the organization to act in the best interest of themselves instead of the best interest of its owners or shareholders. Stockholders of the enterprise can keep this problem from arises by attempting to align the interest of management with that of themselves. This normally occurs through incentive pay, stock compensation, or other similar incentive packages that now cause the managers financial success to be tied to that of the company (Garcia, Rodriguez-Sanchez, & Fdez-Valdivia, 2015; Cui, Zhao, & Tang, 2007; Bruhl, 2003; Carols & Nicholas,

It is depicted that modern organizations tend to incorporate the aspects of the open systems with those of the natural and rational perspectives. Examples include the institutional, transaction cost, and the contingency and the contingency theories. Organizations adopt the open system that accommodates the other two theoretical perspectives for it to exist (Davis & Scott, 2006). These organizations tend to have structures that are based on the processes, the products, and the function.

Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2009). Managerial economics and organizational architecture. Chicago: Irwin.

Kessler, E. H. (Ed.) (2013). Encyclopedia of management theory (Vols. 1-2). Thousand Oaks, CA: SAGE Publications Ltd. doi: 10.4135/9781452276090

Brickley, J.A., Smith, C.W., & Zimmerman, J.L. (2009). Managerial economics and organizational architecture. (5th ed.) New York: McGraw Hil/Irwin.

Classical organizational theory evolved during the first half of this century. Formal organizational study spans the fields of business administration, economics, political science, statistics, sociology, psychology, and public administration. It represents the merger of scientific management, bureaucratic

John McCarthy and Mayer Zald, are attributed to the concept of “Resource Mobilization Theory” by linking formal organization to that of firms.

Kessler, E. H. (Ed.) (2013). Encyclopedia of management theory (Vols. 1-2). Thousand Oaks, CA: SAGE Publications Ltd. doi: 10.4135/9781452276090

In the early 1980s, Henry Mintzberg’s, constructed the organizational archetypes. In this model Mintzbeg introduces five types of organization structure and how they influence the functions of organizations. On the organizational model there are five categories which are: Entrepreneurial, Machine (Bureaucracy), Professional bureaucracy, The Divisional (Diversified), and Adhocracy. Entrepreneurial organization consists of one large unit with one or a few top managers. The organization is relatively unstructured and informal compared with other types of organization, and the lack of standardized systems allows the organization to be flexible.

Economic science teaches us that due to their subjective needs, individuals have subjective preferences, and hence different interest. Occasionally different subjective interests give rise to conflicts of interest between contracting partners. These conflicts of interest may result in turn, in one or both parties undertaking actions that may be against the interest of the other contracting partner. The primary reason for the divergence of objectives between managers and shareholders has been attributed to separation of ownership (shareholders) and control (management) in corporations. As a consequence, agency problems

Corporate management has evolved over the years becoming a complicated process even to the most refined managers. Classical management styles can no longer be relied upon to organize efficiently the several factors that come into play in the modern business world.

² (R. Duncan, Organizational dynamics (1979), W. Alan Randolf, Gregory G.Dess , Academy of Management Review (1984)

Proponents of the knowledge-based theory of the firm point out that this one sided concentration on incentive conflicts in the economics of organizational literature overlooks the production side of the firm. Langlois and Foss, for example, argue that the literature has unreflectively relied on a dichotomy between productive aspects and exchange aspects of the firm, that is, on a dichotomy between production costs and exchange costs. In analyzing exchange costs the literature recognizes that exchange itself is not costless, but involves transaction costs from imperfect knowledge and opportunism. But in analyzing production costs, there has been an embedded agreement that price theory tells us all we need to know about production. As Langlois and Foss point out, however, it is very likely that knowledge about how to produce is imperfect and that knowledge about how to link together one person’s (or organization’s) productive knowledge with that of another is imperfect. These twin issues of capabilities and coordination are discrete from the hazards of astringent that other traditional beliefs have focused on. Both knowledge resources and (imperfect) production costs can be said to vary depending on the attributes of a production process, in the same way that transaction costs differ depending on the asset attributes of investment projects. Thus, instead of holding technology constant across alternative modes of organization as a