Organizational context
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Abstract
As the business environment becomes more fluid and complex, many kinds of challenges arise for an organization to compete and survive in the market. Some organizations overcome these challenges by continuously optimizing and improving their standard operations whereas some other organization, executing projects to projects in order to serve the demands which are more tailored in details and contexts. Thus, to assess the performance and effectiveness of the organization, it is important to look into its organizational structure which gives the foundation of the organization's operational style.
This is because the shape of an organization determines how effectively the organization’s decision-making and communication systems work [1]. The organizational structure influences how people in the organization works together, for instance in a tall organization with many levels of managers, a manager may try to take credits from the hard work that his team puts in, and thus, resulting in lower-level employees being less motivated to work. The structure can also effects the quality of work that different department produces. This may due to miscommunicated goals between the managers and the employees as commonly, the more levels that the information is delivered, the more distorted the information becomes. Overall, by looking from different perspectives to the organizational structure, namely the organization's height and width, mechanistic and organic properties, integration level, one can potential recognize the success level of the organization.
Organizational Theory
Organizational theory is the study of how organizations function and how they affect and are affected by the environment in which they operate [1]. Essentially, an organization groups resources in the environment to create values for the society. This value could be in the form of products or services. The process of value creation has three stages: input, conversion, and output. By going through the stages, the organizational values are created consecutively and how much value is created at each stage is determined by the chosen method of work.
For example, the quality of raw materials will determine the base quality of the final product given the same amount of work done to in the conversion process. Moreover, the conversion stage also contributes to the amount of value created too as it determines how the final product will be made and delivered to the customers. The quality of the product will be subjected to the how skilled the organization is in process of value creation and also abilities to respond to the environmental changes. As the value proposition is delivered to the customers, the environment is affected by the value realized by the customers which induce the dynamics of forces in the environment. The organization receive capital resources, knowledge, and experience from their delivery by which these resources are circled back to the organizational input stage again to repeat the value creation process.
Organizational Environment
The organizational environment is the set of pressures and forces surrounding an organization that have the potential to affect the way it operates and its ability to acquire scarce resources [1]. It can be distinguished into two levels: specific environment and general environment. Specific environment consists of forces from the organization's stakeholder groups that directly affect an organization’s value creation process, namely customers, distributors, unions, competitors, suppliers, and government. General environment, on the other hand, consists of intangible forces which are induced by the society, namely demographic and cultural forces, international forces, political forces, technological forces, economic forces, and environmental forces.
Organizational Effectiveness
The survival of an organization depends on how effective the organization is in obtaining the scarce resources, from the environment of which it is in, and creating value. Thus, an effective organization is the one that can implement one or more of the following approaches [1]:
- external resource approach: to have control over its external environment and attract resources and customers
- internal systems approach: to innovate new skills and capability to adapt to the changing environment to improve the way they function
- technical approach: to develop new facilities through technological improvement which helps the organization deliver the value to the customers in a timely and cost-effective manner
The mentioned three approaches build the way for the organization to achieve its goals. In turn, the organizational goals are then used to assess the effectiveness of the organization as are set to reflect the organization's vision and mission.
Stakeholders
For an organization to be able to create value, it needs the resources and instructions in order to do so. Here, this is where stakeholders play an important role in driving the organization. Stakeholders are the people who have an interest, claim, or stake in an organization, in what it does, and in how well it performs [1]. They participate in the organization with the aim to gain inducements through making contributions to the organizational activities, based on their roles and abilities. There are many types of stakeholders, of which they contribute to the organization through different means with expectation for different inducements. Generally, the stakeholders of an organization can be distinguished into two main groups based on their involvement in the organizational value creation process: inside stakeholder and outside stakeholder. The inside stakeholders include shareholder, managers, and workforce who are directly involved in carrying out the value creation process. On the other hand, the outside stakeholders include all entities which are a part of the organizational environment and perceived to be affected by the organization's activity.
As each stakeholder is motivated to put in contributions by their own set of self-interests and personal goals. The organization must be monitored by the management body to ensure that all the stakeholders are working in an effective and efficient way while not putting their personal agendas over the common goal. For example, an organization that operates in a very dynamic environment should continuously search for ways to coordinate their employees to keep their ability to create value for the organization at a desired level. As shareholders evaluate an organization by the return they receive on their investment [1], the top management body should motivate the stakeholders with new proposition of inducements that fit the changing situations as well.
Organizational Design
Organizational Design is the process by which managers select and manage aspects of structure and culture so that an organization can control the activities necessary to achieve its goals [1]. The organizational design is manifest explicitly in the form of the organizational chart which clearly states the roles of the employees and the delegation of authority. The principle behind designing the organizational chart is managing the differentiation which lays the foundation of establishing the division of labor.
Differentiation
Differentiation is the process by which an organization allocates people and resources to organizational tasks and establishes the task and authority relationships that allow the organization to achieve its goals [1]. Accordingly, the organization has higher degree of specialization as the employees are grouped into subunits. The subunits can be in the form of functions or divisions. A function is a subunit composed of people with similar professional background and set of knowledge and skills working with a specific set of tasks. On the other hand, a division is a subunit composed of people who have different backgrounds with different knowledge and skills set, working collectively to create a specific output. Thus, the number of different subunits, functions and divisions, that an organization possesses is a measure of the organization’s complexity [1]. The more subunits are established, the more specialized is of the tasks allocated among them, in turn, the higher control over the organizational activities.
Applying differentiation to an organization results in an organizational chart with two dimensions: vertical and horizontal. In the vertical dimension of the organizational chart, the roles of the employees are differentiated in terms of amount of authority that each role is able to have, resulting in a hierarchy. Generally, the top level managers hold more authority as they direct and control the activities in the organization while lower level employees have less authority as their roles emphasize more in the execution of tasks and activities. Vertical differentiation refers to the way an organization designs its hierarchy of authority and creates reporting relationships to link organizational roles and subunits [1]. On the other hand, Horizontal differentiation refers to the way an organization groups organizational tasks into roles and roles into subunits (functions and divisions) [1]. The roles are horizontally differentiated based on the task responsibilities. This leads to the division of labor which promotes specialization of employees in specific set of abilities to create value.
Overall, it is important that the organization implement an appropriate level of vertical and horizontal differentiations which facilitate the work process towards the organizational goals.
Applications
Facilitate workflow in the organization
It is crucial to build the organizational chart that promotes the working style which reflects the goals. Different organizational charts embed different level of authority and control, by which affect the organizational culture and interrelation between people in the organization. Thus, the organizational chart can be used to engineer the working process to be carried out in a strategic way. For example, a high degree of control in the organization can obstruct the organization's ability to innovate or change. So, for organizations that produce innovation as their value proposition, their organizational chart should be designed to have low vertical differentiation as it reduces the approval steps from the upper managers, resulting in higher rate of innovation.
Improve effectiveness of the organization
It is inevitable that the environment of an organization is changed by uncontrollable factors. Here, the organization has to adapt its strategy to ensure their competitiveness and survival in the new environment. By looking from the organizational context, changing the organizational chart can help the organization adapt to the changing environment as it enables the organization to have more or less control of the environment, resulting in their ability to obtain the scarce resources and create value. For example, the organizations whose business are heavily rely on the online channel may need to consider establishing a legal department to ensure that the work process of the organization conforms to the new rules and regulations, about doing online business, from the government.
Limitations
One main limitation of applying the organizational theory to any operational context is that there is no universal solution in designing organizational chart. The best organizational chart design for an organization depends highly on the environment that the organization is in. Thus, it is important to comprehend the complexity and dynamics of the organizational environment and establish the work process, through delegation of authority and division of labor, that promote organizational effectiveness.
