How to think about organizations

This post is the first part of a series in which I’ll attempt to sketch out some thinking that I’ve found useful in terms of understanding organizations. A lot of my work as an editor and writer focuses on how organizations work, and here I’m hoping to synthesize ideas I’ve found valuable, and present them as I think about them myself. I’ll try to cite my main influences in each post, but I’m borrowing from a wide range of sources and will inevitably fail to credit each and every influence.

This post is about how to think about organizations at the highest level. The next will be about how organizations are, well, organized. And the last one will be about what makes them successful.

What is an organization?

Here’s a definition by Richard Scott, a sociologist at Stanford:

“Organizations are groups whose members coordinate their behavior in order to accomplish shared goals or to put out a product.”

Three ways to think about organizations

Scott has a different way of breaking up theories of organizations, which I’ve included at the bottom. What follows is my own thinking on simple models for analyzing organizations:

The market view

Firms respond to incentives in the market. The emphasis here is on external conditions and financial pressures; firms come into being to capture market opportunities, and change strategy to maximize profits. The individuals in the firm are less important than the incentives the firm faces and perhaps the structure of the market. Per Ronald Coase, the boundaries of the firm are shaped by transaction costs. Managers exist to serve the interests of shareholders, which by and large means maximizing financial returns.

The managerial view

Organizations pursue specific goals, as directed by management. Power is formalized, and the perspectives and priorities of leadership matter in terms of how the organization will act. Conflicts and differing incentives can exist between members of the leadership team, leading to rival factions and internal politics, but it’s still the top management that matters most in shaping how the organization behaves.

The sociological view

The actions of an organization are deeply shaped by its culture, and by the preferences, incentives, and coalitions not just of management but of all the organization’s participants. Culture often influences organizational structure, rather than just the other way around. And management’s decision-making is shaped and constrained by the rest of the organization.

Using the three models

In the market model, standard microeconomic thinking helps explain an organization’s behavior and predict its actions. In the simplest econ 101 view, the organization (a private sector firm, typically) enters and exits markets in response to opportunities. In more complicated analyses, game theory helps explain how the rational actor (org) competes against other rational actors.

In the managerial view, the statements by management help explain and predict what an organization will do. If the founder of a company cares deeply about a project, it will go forward. If the board decides that a technology is the future of an industry, expect investment. Organizations that are “well run” — managed by competent people — succeed, and those run by incompetent managers fail.

In the sociological view it’s most important to understand the organizational culture and the internal politics. What do employees think the organization’s purpose is? Are they excited about a new market? Who in the organization stands to benefit if it adopts a new technology, and who might stand in its way?

These models may be biased toward understanding standard for-profit firms, but I’d argue they’re also useful lenses for thinking about other types of organizations, from nonprofits to nontraditional organizations like open source collaborations.

Further resources and influences

More on that definition of organizations by Richard Scott, a sociologist at Stanford, via his colleague Daniel McFarland who teaches a course on Coursera about organizations:

Here’s Richard Scott’s mapping of organizational theories, also via McFarland’s course. You’ll see a lot of the same issues are raised, but my thinking does not map clearly onto his. My managerial view is a combination of his rational and natural theories; my sociological view is a mix of his natural and open theories; and he doesn’t really have a corollary to the market view, though aspects of both rational and open overlap with it.

Another good set of theories about organizations comes from Graham Allison’s seminal book on the Cuban Missile Crisis, The Essence of Decision. Here’s the Wikipedia entry, which gives an overview of his three theories of organizational decision-making.

If you’re new to economics and want an introduction to what I called the market view above, check out Marginal Revolution University’s introductory video on competitive firms. More videos here.

And, of course, working at HBR plenty of what we’ve published has influenced my thinking on all of the above. I’ll draw on some of that more directly in future posts.