Exploring the Paradigm Wars Essay Example

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11Exploring the Paradigm Wars in Organisation Theory

Exploring the Paradigm Wars in Organisation Theory

Exploring the Paradigm Wars in Organisation Theory

Introduction

Through organisational theory, it has become possible to develop varieties of schools of thought focused on the understanding of the relationship between organisations and the external environment. Agency theory emphasizes on the relationship between shareholders and the management. This relationship has been considered a crucial determination the types of policies and strategies that organisations develop towards realizing their goals and objectives (Evans & Evans, 2008). The deterministic theory stresses on the essence of environmental factors and powers in the determination of the choices and decisions made by the management to cope with varieties of challenges faced by organisations. This essay will be engaged in an in-depth analysis of agency and determinist theory and their contribution to organisational management. This will be followed by an assessment of the possibility of merging the two theories into a universal theory for understanding organisational action.

Agency theory

Agency theory is a school thought that focuses on the conflict of interest between parties that have varied interest in the same assets. The theory is based on the conflict between the management and shareholders. In explaining the nature of conflicts, the theory considers the shareholders as principals who hire the services of managers who are their agents (Chetty & Saez, 2007). The principal hires or delegates responsibilities to the agent that he is unwilling or unable to perform. The theory seeks ways of dealing with the problem of how to align the objectives and goals of the principal and the agent so that they are not in conflict. According to the agency theory, this is the agency problem (Chetty & Saez, 2007). The theory also seeks to ensure that the agent and the principal reconcile their differences as a technique of risk management within an organisation. This implies that agency theory emanates when co-operating parties have differences in their attitudes towards understanding of risks. The theory attempts to provide a description of the relationship between the conflicting parties through a metaphor of a contract. This is through the suggestion that organisations can be viewed as a nexus of loosely defined contracts between resource holders (Chetty & Saez, 2007).

In addressing the conflict between the management and the shareholders, the agency theory stresses that even among the shareholders it is possible for conflicts of interests to arise. Such conflicts may be related to the percentage of the profits accrued by an organisation that should be paid in the form of dividends and the percentage that should be retained for capital investment purposes and for future investment. This theory asserts that such conflicts arise when there is disagreement on the social responsbility and ethical policies the define operations in an organisation (Evans & Evans, 2008).

The agency theory recognizes that the imbalance in the capital and labour markets may be considered as one of the major contributors to the conflict of interests between the agent and the principal. This is because the agent (the management) in such an environment will often seek the maximization of their interests at the expense of those of the principal (Jensen & Meckling, 2010). The ability of the management to maximize their interests instead of those of the organisation can because of asymmetric information. Through such information, the management will develop a better understanding than the shareholders on the extent to which they are able to meet the objectives of the latter (Jensen & Meckling, 2010). Evidence of self-interested managerial attributes comprises the consumption of certain organisational resources in the form of prerequisites while avoiding the optimal risk positions. In such situations, risk-avoiding managers often bypass profitable opportunities where the shareholders would prefer to invest. In such situations, the shareholders often recognize that the organisation, through the management makes decisions contrary to their best interests (Jensen & Meckling, 2010). The shareholders consider the management to be working in accordance with their interest when there is an increase in the current share prices and earnings per share, an increase in dividend per share and d improvement in the organisations social responsbility management. Furthermore, the management of such organisations often seeks to improve on the wealth and size of the organisation through an expansion of its activities (Evans & Evans, 2008).

According to the agency theory, for organisation to operate with the objective of satisfying the interest of the shareholders, it is necessary to dedicate financial resources to serve the interests of the managers in the form of agency cost (Wessels, 2010). Agency cost are those financial expenses borne by the shareholders with the objective of encouraging the management to be involved in the maximization of shareholder wealth rather than their own self-interests (Wright et al, 2013). Agency theory recognizes the types of agency cost which include the auditor cost for monitoring of managerial activities. Restructuring the business units of an organisation and managerial hierarchy attract expenditures aimed at structuring an organisation in ways that limit undesirable managerial attributes (Chetty & Saez, 2007). Remuneration of the management in the form of salaries and benefits motivates them towards the relation of organisation objectives and the company. For an organisation to ensure effective operations while minimizing agency cost, it will be important to develop policies that ensure that managerial compensation is tied to performance (Jensen & Meckling, 2010).

Deterministic theory

Determinist theory states that in the process of making decision about the operationalization of an organisation, the management if it does not act in absolute autonomy but the decisions are influenced by external factors beyond the control of the management (Steiner & Wilson, 2011). This means that the policies and structures developed by organisations are often meant to align with the prevailing factors in the external environment that control the market. Market forces determine the directions that organisations must take to maintain their effectiveness and competitive advantage (Haider, 2015). The objective of any organisation is to deliver service or products to their target customers with the goal of making profits. This means that an organisation that does not make profits will cease to exist because exits cost of operations will surpass the revenue it generates in the form of profit making it difficult to sustain such operations (Demers, 2007).

The determinist theory asserts that everything that happens is a result of a chain of causation. This means that inasmuch as it is impossible to influence market force, it is possible to predict probable changes or development in the market based on a series of trends that define operations and activities within these markets (Steiner & Wilson, 2011). An organisation hires managers and other personnel who are experts in different fields such as marketing, production, promotion and planning. Through such expertise, the management will be able to assess the trends within its market and develop strategies on how to ensure that the organisation thrives in different markets. The determinist theory asserts that in the process of developing such plans and organisation must be able to develop a contingency plans which will act as alternative to the original plan in cases where the forces in the market fail to adhere to the original plan by the management (Chetty & Saez, 2007).

According to the determinist theory, the market is dynamic and largely predictable. This means the decisions and choices that the management of any organisation makes does not occur out of an autonomous human agency but from external stimuli and forces habits such that the consciousness of freedom mainly rests on oblivion of antecedents of the decisions and choices (Haider, 2015). From a managerial perspective, when an organisation realizes that its policies and strategies towards growth and development in the market are ineffective there will be need for the management to engage in a process of revising these policies as a technique of aligning them to the prevailing market forces (Haider, 2015). This also explains the need for periodic redefinition of organisational targets because the markets are largely dynamic and the policies developed by organisations must be flexible change. Such flexibility ensures that through the skills and knowledge of the management on the prevailing conditions in the market it becomes possible to establish a competitive position in the market (Demers, 2007).

In the process of making decisions on organisational progress, the management functions on the understanding that it does not operates out of freedom to enact policies and laws in accordance with their feelings but through the consideration of the external factors and forces that affect the ability of the organisation to realize its mandate. The success of an organisation is reflected in the price of its shares, the dividends paid to the shareholders and the policies of addressing its social responsibilities (Haider, 2015). This means that in the process of assessing the forces in the market the management must be involved in process of determining the best techniques of aligning the external forces and powers with organisational objectives. Such a process requires deliberation. In the process of deliberating, it is the responsbility of the management to assess how the existing market structures, prevailing culture, and available resources can be manipulated in ways that enhance the profitability of the organisation (Richardson, 2005).

According to determinist theory, the causal conditions are sufficient in acting as evidence to substantiate the choices made by the management in an organisational context. This is based on the realization that organisations do not have sufficient power to manipulate and influence the direction of the external environmental forces (Haider, 2015). The desire to abide by the demands of these forces may make an organisation irrelevant in the market because the products or services they provide to the market may not be effective in meeting the demands of the target customers. When an organisation fails to meet the needs of the customers, the management can be perceived as inefficient in terms of necessitating effective and relevant policies aligned to market demands (Haider, 2015). This also implies that the management only acts as representatives of the external forces within organisations who must use the available resources in producing goods and services whose relevance to the needs of the target consumers can be determined by the extent to which they are culture specific. Conflicts within an organisation arise when the policies do not meet market demands (Richardson, 2005).

For organisations to realize success in terms of their ability to enhance market share and competitive advantage, the management must involve the expertise of varieties of its employees. This is because both internal and external stakeholders play a part in determining organisational success (Demers, 2007). This implies that through the involvement of internal stakeholders such as employees, the organisation will be able to develop informed policies aimed at addressing a plethora of needs by the customers (Haider, 2015). Furthermore, through effective social responsbility policies it will be easier for an organisation to develop a positive rapport with the society making it relatively easier to predetermine their behaviour, a crucial element in the development of future policies and strategies (Richardson, 2005).

Universal theory from merging deterministic and agency theory

While acknowledging the role of an external force in the determination of the policies and strategies that organisations develop for the realization of their interest, both agency and determinist theories are focused on different players. The agency theory is focused on the shareholder as the company owner who delegated responsibilities to the management with the objective that the latter will serve the interests of the former (Chetty & Saez, 2007). In determinist theory, the focus is on the external factors and powers over which the management does not have control. These powers determine the direction of the policies and strategies developed by the management in enhancing the position of the organisation in the market and the realization of a competitive advantage (Steiner & Wilson, 2011). The differences in the main areas of focus of these theories mean that they cannot be merged to provide a common explanation for organisational action.

The agency theory operates on the understanding that for an organisation through the activities of the management, to realize the interests of the shareholders, the latter must dedicate certain financial resources aimed at motivating the management to concentrate on the realization of stakeholder interests. Through the agency costs, the stakeholders are indirectly involved in organisational affairs and they influence the types of policies developed by the management (Chetty & Saez, 2007). In determinist theory the external factors plays a crucial role in determining the types of policies developed by organisations. However, despite operating externally they are not involved in the allocation of financial resources to influence the direction of policies and strategies. Instead, they are powerful entities that compel the management to act according to their demands (Haider, 2015). Both shareholders and external factors are indirectly involved in organisational management however, these theories cannot be used in providing a common explanation of organisational action because of the differences in the approaches used by shareholders and external factors in influencing organisational decisions.

Conclusion

The agency theory stresses that conflicts of interest between the management (agent) and the shareholders (principal) arise when there is disagreement on the social responsbility and ethical policies the define operations in an organisation. Determinist theory states that in the decision making process in an organisation, the management does not act in absolute autonomy but it is influenced by external factors beyond the control of the management. These theories cannot be used in providing a common explanation of organisational action because of the differences in the approaches used by shareholders and external factors in influencing organisational decisions.

References

Chetty, R & Saez, E. 2007. An agency theory of dividend taxation. Cambridge, Mass: National Bureau of Economic Research.

Demers, C. 2007. Organizational change theories: A synthesis. Los Angeles, CA: SAGE Publications.

Evans, J & Evans, J. 2008. Quality and performance excellence: management, organization, and strategy. Mason, OH: Thomson Business and Economics.

Genus, A. 2008. The management of change: Perspectives and practice. London: International Thomson Business Press.

Haider, A. 2015. Business technologies in contemporary organizations: Adoption, assimilation, and institutionalization. Hershey, PA : Business Science Reference

Jensen, M., & Meckling, W. 2010. Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics , 3, 305-60.

Richardson, K. A. 2005. Managing organizational complexity: Philosophy, theory and application. Greenwich, Conn: Information Age Publ.

Steiner, R & Wilson, M. 2011. The philosophy of freedom (the philosophy of spiritual activity): The basis for a modern world conception. Forest Row [East Sussex, U.K.: R. Steiner Press.

Wessels, D. W. 2010. Organizational structure, agency theory, and capital allocation. Springer-Verlag: Berlin Heidelberg

Wright, M., Donald, S., Kevin, K & and Igor, F. 2013. The Oxford handbook of corporate governance.