Organizational Theory Taxonomy
Title and Theorist Name
Example of Theory
Other Attributes Agency Theory, Jensen & Meckling, 1972-1976
The agency theory applies classical economic thinking to problems of organizational control and design (Tosi, 2009). Agency theory offers a useful way of understanding the complex authority relationship between top management and the board of directors. An agency relationship is when one personal “the principal” delegates decision-making authority or control to another “the agent” (Jones, 2010).
In 2005, Time Warner came under attack because top management had made many acquisitions such as AOL that did not led to increased innovation, efficiency, and higher profits which creates an agency problem that the agency theory addresses (Jones, 2010).
Agency theory views a firm as a legal entity that serves as a nexus for a complex set of formal and informal contracts among different individuals. A typical firm consists of the shareholders or the boards of directors are principals, and top managers or CEOs are agents (Jones, 2010).
Agency theory dictates that principals will try to bridge the informational asymmetries by installing information systems for monitoring (Shapiro, 2005). Contingency Theory, Burns & Stalker, 1961
The contingency theory shows how some organizational designs will adapt to the environment, depending on the nature of the environment. The contingency theory assumes that in a relatively stable environment, a bureaucratic structure may be more effective than one that approaches a more loosely structured form (Tosi, 2009).
An example is how technology and research and development can influence sales and marketing as well as customers and competitors (Jones, 2010).
The contingency theory describes how the structure of an organization is affected by the external environment which can lead to better economic performance.
When technological and market environments were uncertain and prone to rapid change, there was a loose, organic organization; when the environment was more predictable and stable, a traditional bureaucracy seemed to be more effective (Tosi, 2009). Transaction Cost Theory, Williamson, 1975
The transaction cost theory shows how transaction costs, environmental certainty, and opportunities explain how organizations emerge to manage conditions where markets are not efficient in regulating mechanisms (Tosi, 2009).
Transaction costs are defined as the costs of negotiating, monitoring, and governing exchanges between people.
Transaction costs also occur when organizations exchange resources or information (Jones, 2010)
Health care is an example of how large transaction costs can be and the importance of reducing them. Over 40% of the U.S. healthcare budget is spent handling exchanges between doctors, hospitals, the government, insurance companies, and other parties.
Transaction cost theory consists of three governance modes: markets, internal organization, and a form of market contracting (Tosi, 2009).
The goal of the organization is to minimize the costs of exchanging resources in the environment and the costs of managing exchanges inside the organization (Jones, 2010).
HMOs were formed due to the desire to reduce transaction costs. Resource dependence theory, Pfeffer & Salancik, 1978
Organizations depend on their environment for the resources they need to survive and grow. According to the resource dependence theory, the goal of an organization is to minimize its dependence on other organizations for the supply of scarce resources in its environment and to find ways to influence them to secure needed resources (Jones, 2010).
The PC industry is a great example. PC makers such as HP, Acer, Lenovo, and Dell depend on Samsung, Nvidia, and Intel, which supply memory chips and microprocessors. They also depend on electronic chains such as Best Buy that stock their products, and on schools systems and corporate customers that...
References: Jones, G. R. (2010). Organizational theory, design, and change (6th ed.). Upper Saddle River, NJ: Prentice Hall.
Mizruchi, M. S. (September 2007). Managerial Capitalism, Entrepreneurial Capitalism, and the Decline of the American Corporate Elite. Systematic Dynamics of the Global Economy, 1(1), 4-19.
Newstrom, J. W. (2011). Organizational behavior: Human behavior at work (13th ed.). Boston, MA: McGraw-Hill.
Shapiro, S. P. (2005). Agency Theory. Annual Review of Sociology, 31(1), 263-284.
Tosi, H. L. (2009). Theories of organization. Los Angeles, CA: SAGE.
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