In a broad intellectual tour, Phin Upham takes us through a set of theories of organizations using the core propositions contingency theory, resource-dependence theory, transaction-cost theory, institutional theory, and organizational population ecology.  Using these intellectual frameworks be looks as organizational structure and its functions, authority, the environment. Lastly, Phin asks what, if anything, do organizations maximize?

Organizational theories are divided into many, many schools of thought. These schools posit different tenants, take on different simplifying assumptions, and use very different methodologies.  Given that there are these divides in the field, it is an interesting question to ask why?  One possible explanation is that they are not mutually contradictory, but that they deal with different sorts of organizations and that they are thus a jigsaw puzzle of the truth – neither contradicting each other nor stepping on each others toes.  But while many organizational views focus on different domains, this happy state does not seem to hold (at least not always).  It does seem that theories posit different, conflicting, or at least mutually exclusive, causal inferences, basic driving forces, etc.  Thus, we might hope, different schools are each pursuing a different facet of organizations, viewing reality through differently colored glasses.  Thus, one might argue that they each illuminate a different aspect of reality, perhaps sometimes overstating its importance, but nevertheless all valuable.  This is a possibility I will discuss. Lastly, we could view this multiplicity of views, this quagmire of predictions, this tangle of tenants as indicative of some fundamental inscrutability of reality, some fundamental limitation of the field.  If organizations are either 1) enormously, hopelessly complex or 2) societal embedded reality – where organizations exist – is not neatly or easily partitioned into cause-effect or static models (i.e. changes over time) then this provides a reason for the lack of unity of organizational theories.  Is this quilt work of theories is a good thing for the field of organizational theory, or at least necessary for the field.  Other fields, such as physics, for example, are neater and more universal with their theories (though complexities and conflicting theories emerge there too so it is hard to say whether this is a type of token distinction!).  So we will explore “what is it about organizational theory that produces conflicting or non-complementary theories?” and “what effect does this have on the field?”. While each of the above points could be a book (or a library of books) I will attempt to begin an exploration into these questions.  While answering these questions, I will draw on contingency theory (Thompson, Lawrence and Lorsch), resource-dependence theory (Pfeffer, Burt), transaction-cost theory (Williamson), institutional theory (principally Selznick, Scott, Meyer and Rowan, DiMaggio and Powell), and organizational population ecology (Carroll and Hannan) in order to attempt to reify these theoretical considerations with specific examples.

Each theory of organizations can be seen to have some core propositions which capture the essence of that approach.  While there will be much confusion and simplification in the presentation of these propositions in substation for the richness and details of the works themselves, it is necessary in this essay and for simplicity and clarity.

The first organizational theory I will discuss is contingency theory, which will be represented by Lawrence and Lorsch (1967) and James Thomson (1967).  Thompson identifies one of the core tenants of contingency theory when he argues that 1) each complex organization will be differently structures due to the complexity of its task environments and the multiplicity of its technologies (and the better the ‘fit’ of the organization, the better its performance tends to be).  So, in a nutshell, organizations respond to environment.  Lawrence and Lorsch add some nuance to this finding when they develop the idea that formality of organizational structure varies positively with environmental complexity.  In other words, the more certain the environment he more tight the organization will control its members.  This leads to my second core tenant of contingency theory 2) organizations not only respond to their environment, but where the environment is uncertain, they must construct an organizational view of the environment (which can subsequently be buffered or protected or modified).  This has enormous implications for organizational variation which results both from this uncertainty about the present and also uncertainly about the future.  Since organizational outcomes, according to Thompson, are often ambiguous in their desirability, and because the organization is incomplete in its knowledge of cause and effect, it is often hard for organizations to see if/where they went wrong.  Lastly, contingency theory sees high performance for an organization related to inter-organizational subunit “fit” (different from larger organizational fit).  So the subunits and even the relationships between workers must be appropriate to the locally relevant environment.  Ultimately, a successful organization in contingency theory synthesizes high differentiation and integration – which rests on effective interdepartmental practices to resolve conflict.  There is a potential tension here between “fitting ones local environment” and “contributing to the organization.”  The more complex an environment, the more differentiation there will be and the more “buffering” to integrate the organization.

Another important, and related, OT framework is resource-dependence theory which will be represented by Pfeffer and Salancik (1978), and  Burt (1983).  In some ways this theory is reminiscent of the contingency theory just discussed.  Both see organizations as fundamentally responding to the environment.  But resource dependence theory is more pro-active in how organizations benefit from their environment – i.e. organizations coopt structural holes, they aggressively pursue places in the market where there is uncertainty or a lack of integration.  Organizations in this second view are jockeying for position in the organizational landscape.  1) organizations are attempting to coopt uncertainty and structural holes through (partial) control of resources, both social and physical.  Contingency theory reads as more passive, like the SCP paradigm before Caves’ essay argues that Structure and conduct were exogenous as well as indigenous.  While resource dependence does not argue strongly for the exogenous creation of structural holes and uncertainty through organizational manipulation, it does imply that organizations attempt to position themselves on “rough” spots in the environment and take a rent for “smoothing” them out.  Burt, for example, points out that an organization uses its social networks to gain access to and combine different resources that other organizations might not have access too (he uses a study or corporate directorship, among other things).  “establishments in a manufacturing industry can obtain high profits to the extent that they have high profits (i.e. enjoy high structural autonomy)” where there is low competition in their field and high competition in their suppliers and customers.  So an organization is attempting to put itself into a unique or hard to copy place in the environment and hope to provide services from which it can extract rents. Pfeffer argues that bigger is better since the organization can combine many resources and (hopefully) provide hard to copy services. 2) organizations who achieve above average rents are doing so in this framework through Richardian “scarcity rents” over resources which they have limited control and lastly 3) it is not how well organizations fit their environment, but which environment they choose to fit and where they place themselves in it that determines organizational success and identity.

Oliver Williamson, developing the idea of transaction costs introduced by Coase, has developed a unique and interesting view of organizations.  He argues that organizations form because some transactions are more efficiently done within the structure of an organization than without it. Further, organizational boundaries will be determined by which transactions an organization ought to efficiently internalize.  External transaction are vulnerable to opportunism (“self-interest with guile”), contractual difficulties (both the time and expense of writing individual contracts, and the threat of opportunism that rests when circumstances change), uncertainty (mutually agreed upon routines within organizations can be used to reduce coordination costs – he draws from Simon) and search costs (no need to find or test the expertise of another party each time).  So, in a way, organizations are there to control the environment where it is efficient to do so.  He writes extensively about the legal contexts of organizations and how contracts could be structures.  He speaks less about the social contexts (i.e. culture of trust) and how this effects transaction costs.  The transaction cost view of organizations can be seen to be saying (i.e. core propositions are) 1) organizations due to market failures, and certain tasks are more efficiently done within organizations and these will be internalized 2) transactions within organizations are bounded, prescribed and controlled through different mechanisms than in markets and 3) markets are flawed because of the combination of a) bounded rationality and uncertainty/complexity and b) opportunism and small numbers and c) informational compactedness.  In many ways this appears in form to be similar to the resource dependence view (since both deal with controlling or bridging problem areas in environment, but their content are very different. While the resource dependence view sees this environmental roughness as a function of coincidental and changing social situations or market structures, Williamson sees it more as a function of human nature and intrinsic psychological and structural attributes.

Institutional theory is also a very distinct and interesting field.  It is here represented by Selznick (57), Scott (2000 but 1^st edition before), Meyer and Rowan (1977), DiMaggio and Powell (1983). Since there are so many authors here, a few quotes on their views of organizations would be helpful in order to see where they interconnect.  “Organizations are multi-faceted, durable social structures made up of symbolic elements, social activities and resources.  … although institutions control and contain, they also support and empower activities and actors.  Because they are not static, they should be viewed as both states and processes of institionalization/deinstitionilization.” – Scott.  Scott also complains of the lack of focus on the institutional level of analysis, saying that in the past where more structural or industry-level consideration were prevalent. Selznick, relatedly, saw organizations as a “technical instrument for mobilizing human energies and directing them to certain aims” and he was institutionalization as “to infuse with value beyond the technical requirements of the task at hand.”  He saw institutions as resistant to change and to be deeply steeped in social and psychological realities. Meyer and Rowan said “institionalization involves the processes by which social processes, obligation, or actualities come to tale on a rule like status in social thought and action.”  Further, “institionalised products, services, technique, policies, and programs act as powerful myths, and many organizations adopt them ceremonially.”  Lastly, DiMaggio and Powell said “organizations compete not just for resources and customers, but for political power and intuitional legitimacy, for social as well as economic fitness.”

The reoccurring themes here, can be seen to be 1) organizations are deeply social, incorporating routines, myths, legitimation, and symbols, and habits.  2) organizations exist in the social world and so must coopt and/or worry about its social systems and social perception as well as its industry place and 3) organizations are built up due to historical forces that allow for legitimization and socialization, they are complex, multi-faceted, and durable social and economic intuitions.  To a much greater extent than past views I have discussed, this school sees organizations as social and socially constructed, as multi-faceted and durable beyond their immediate market position.  Further, and importantly, organizational differentiation or homogeneity might be as much a function of social copying or imitation of best practices as of some structural necessity or rational design.  It is harder to see, though, what directs an organization, who and how one controls such an organization, and what the functions of such an organization are.  Selznick attempt to address many of these points, with particular emphasis on the penultimate point.

Lastly, the organizational ecology view, pioneered by Glenn Carroll and Michael Hannan, has been, especially in the early 90’s, an influential view. The methodological differentiations are the most immediate and obvious. Organizational ecology is based on birth and death rates of organizations (largely), usually deals with populations of organizations, assumes that organizations remain relatively unchanged over time (organizational structure is hard to change), and tends to rely on some notion of organizational age as crucial.  Corporations in this view are entities with a formal structure of formal organizations, e.g. business firms, political parties, interest groups. An organizational population is “an instantiation of an organizational form.  The focus of this approach is on populations of firms not individual firms.  It is interested in the development and change if industries over time via organizational founding, growth, decline, transformation, mortality.  One major contribution of this field was the idea of “liability of newness” which was very well developed here.  New organizations tend to die and older ones tend to live (unless there is environmental change, at which time old organizations can experience a liability of age due to organizational recalcitrance).  There is also a liability of smallness, etc..  1) The (or, more generously, “An”) interesting perspective on organizations are on aggregate, looking at age, size, populations, etc. as metrics.  2) Organizations do not change much, so viewing their survivability from a birth-death perspective is accurate to measure that organizational form 3) Organizations are a part of a population, an age group, a size group, and a structure group which will largely determine how long they life, how well they do, etc (with the independent variable being the environment which determines which factors help or hurt).

I have gone some way into synthesizing these ideas as I discussed them. This is partially because the ideas of these different schools play with each other and partly because the best way to explain what something IS is sometimes to explain what it is NOT.  Thus, my discussion here of organizational structure and its functions has largely been covered.  I will attempt a brief synthesize and categorize the schools, drawing some specific comparisons, but, again, this past of the question is largely covered above.  The different school vary in many respects when thinking about organizational structure and its functions.  Contingency theory, resource dependency theory, and population ecology largely saw the organizational structure to be determined by environment.  This is a gross categorization since RDT deals with the idea of cooptation extensively and sees organizations aggressively pursuing and adapting themselves to structural holes and paces of uncertainty.  Also, it is not clear to me in organizational ecology where structural forms COME FROM only that they emerge in groups and populations.  Whether this convergence informs is due to the environment (a new technology, a change in the demands of the customers, etc) or some sort of mimetic consensus, I as not sure.  It is likely highly related to environment, though, due to the conformity of populations in this view (if not, why would there not be 5 populations in an industry founded by socially cohesive mimetic groups who pursue different forms?  Why not more unobserved heterogeneity?).  But these three schools can be seen as grouped in this way when they are grouped against the most socially constructed and school of institutional theory.

Institutional theory takes a more historical and social perspective on the form of organizations, where mimetic, cultural, historical, etc. factors are large players in organizational function and size.  Lastly, these two groups can be differentiated form the transaction cost school which, I think relies most heavily on its justification on human nature.  The firm exists and looks the way it does largely due to failures resulting from human nature. So it is not that organizations are so very efficient, as other schools often posit, but that markets fail and organizations try to make up for that failure by placing a new structure in there interstices.  Now which firms survive or no is probably a matter of the first schools’ industry structure ideas, but the TCE view is very different form the Org. Ec. View in that, among other things, the TCE view allows for more organizational change and takes a more inter-firm methodological view.  So we have divided the structural views from the historical/social views, from the human nature views.

In terms of organizational purpose, the views also differ, but here they again divide up differently than before.  Contingency theory, resource dependency theory, transaction cost theory can be seen as having relatively pure profit maximizes (or, inversely, loss minimizers, as with TCE) at their helm.  Institutional theory would defend the idea that an organization has multiple goals, many not realized.  Lastly, Organizational Ecology takes by default the profit maximizing view, but it is not particularly interested in this kind of question.  In some ways, the view is shaded by the evolutionary idea that organisms have no purpose, just the spontaneous need to propagate.  Can structure be seen to have this property too, with humans as the alleles?

The question of authority is a particularly interesting one.  Contingency theory has, for lack of a better candidate, and to take the risks of isomorphism, the environment as its ultimate authority.  Firms must fit themselves to this.  It is whomever has less organizational identity, it sometimes seems, whomever is most stretched along the contours of the environment, that has the advantage.  This is an exaggeration, but authority in this view is at least largely on the firm unit level since each unit must fit its specific competitive environment.  Resource dependence, on the other hand, I think, takes a slightly more proactive view of organizations.  Firms position themselves along specific places in the environment so there must be some group of people who can see there spots and maneuver the organization around them.  But strong leadership is not discussed deeply.  There is a tone is this view that if you are stretched along a structural hole, or very near one, you can take advantage of it, otherwise it is much more difficult.  Transaction cost theory sees human nature as the underlying authority for organization.  Government and social conditions provide a mediating influence on the type of organizations, but organizations are nevertheless internalizing what human nature fails to be able to do in markets. So leadership here is at the top of an organization who commands certain tasks to be internalized based on the efficiency “fit” between human nature and organizations.

Institutional theory has a hodge-podge of views on authority.  This most explicit is Selznick’s Leadership in administration which argues that an organization is lead by a powerful leader who determines what the more values of the organization are and these core values are crucial for firm cohesiveness, direction, and survival.  Organizational Ecology again has a neutered view of leadership for an organization.  The founding structure of an organization is paramount, there is little anyone or anything can do to change this.  It is in this analysis that one can see the profound differences of these schools most clearly.  Where does power lie?  Where does change come from?  Why do some organizations fail and some succeed?  Leadership, whether it is seen to be on the unit level, on the CEO level, or coming from some exogenous and uncaring natural feature of the environment or history of the organization often provides the answer.

It is a given in economics that rational humans (homo economus) maximize utility.  But this idea, even in such a well developed set of theories, leaves many questions:  what is the tradeoff between future utility and present utility?  Others utility and my own?  What constitutes utility specifically (happiness, freedom, pleasure, life meaning)?  It is a similar dictum that organizations maximize profit, at least in the modern world. But this leaves many of the same questions and the different schools we have discusses highlight these troubling questions very effectively.  While contingency theory sees a pretty simply profit maximization story, resource based theory sees a more complex social-maximization/profit maximization tradeoff which can be seen as a hedging for future potential profit gains.  Transaction cost theory is constructed as more of a loss minimizer than a profit maximizer due to its framework.  Institutional theory sees multiple goals, some even conflicting, that drive an organizations, including social ones. Lastly, one could pragmatically say that since organizational ecology measures life spans more than profit, that this field sees a “successful firm or population” as maximizing longevity and/or structural dominance.

Now we address in wrapping up, one of the central questions we started with:  do these theories conflict or simply deal with different sorts of organizations. I think that, fundamentally, they do conflict – but this is all right.  If course there are some differences in focus that could be pointed out, and I will do this before continuing on this point.  Contingency theory (Thompson, Lawrence and Lorsch), I think applies particularly appropriately to manufacturing firms where firms are attempting to fit demand and where variation of sub-units is important on a product basis while resource dependence probably applies to services better since it deals with providing some sort of bridge between structural holes or roughness that another firms might not be able to do. Transaction cost theory probably best applies to large firms and to manufacturing firms since it is very much about minimizing costs (and cost is vital in manufacturing) and bridging large gaps in coordination.  This also implies that TCE is particularly fitting for some aspects of governmental analysis (such as fire trucks, police, national defense) since one major role of government is to overcome coordination problems resulting from opportunism (such as the free-rider problem). But TCE would be less appropriate in other governmental branches (social services) and some non-profits. Intuitional theory is certainly best in large corporation and governmental analysis.  Selznick comes to mind since his leadership in Administration was, Marshall argued, inspired by his experiences in the military.  Lastly, Org. Ec. Fits best with small for-profit manufacturing firms since it deals with populations that are relatively inflexible and have commensurable production ends.

Bendix, Stinchcombe and Guillen speak about the cultural, ideological and cultural factors that can affect organizational form.  This perspective is largely ignored by the toeries discussed even though it is an important mediator to how strongly these theories hold in any particular society. Partially they are ignored because intuitional theory is largely focused on western capitalistic systems in the 20^th century, particularly in America. Also, these factors are simply too complex o synthesize into every theory without loosing this theories’ power and understandability.  Dore did a wonderful job in his US-Japan comparison of showing the importance of such cultural norms.  In international business this is an emerging and important study.  I think these theories are right not to focus on ideological and cultural issues, though more study would be fascinating on this topic. The open ended nature of this study, and its subjectiveness in all but extreme cases make it a important but largely intractable problem.  The increasing homogeneity of world culture since the breakdown of the Soviet Union and the spread of capitalism might make this question less important as capitalism norms spread.  Thus, I do not think that this oversight is a fatal blow to the models presented, though I do think that they help illustrate and important characteristic of these models – that they are purposeful and conscious simplifications of a much more complex reality in order to generate meaning and some measure of lucidity to an otherwise bewildering world of firms and organizations.

While these theories can be seen to apply best in certain realms, this leaves us asking if this means that they are compatible or not.  I would argue that their world views are often incompatible with each other.  For example, while there are compatibilities in the legitimization part of institutional theory and population ecology there are many other ways (leadership, structure) in which they are fundamentally different views of the world.  Nevertheless, I do not therefore conclude that some are right and some wrong.  It could be that the world of organizations is simply too complex to understand without heuristics and partial truths.  So in order to understand firms theorists are forces to take simplistic, necessarily wrong, but pragmatic views of firms and unfairly generalize on them in order to get causal and academic mileage.  This leads to a group of partial truths which must be seen as such, and which must be treated as tools which are right for some occasions and situations and wrong for others.  Thus, this multiplicity of conflicting and simultaneously valuable perspectives may be an inherent and even vital attribute of organizational studies.

Phin Upham has a PhD in Applied Economics from the Wharton School (University of Pennsylvania).  Phin is a Term Member of the Council on Foreign Relations.  He can be reached at phin@phinupham.com

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