Exploring the Paradigm Wars in Organisation Theory Essay Example
13Exploring the Paradigm Wars in Organisation Theory
Exploring the Paradigm Wars in Organisation Theory
Exploring the Paradigm Wars in Organisation Theory
The field of organisational theory provides varieties of approaches essential in understanding organisational designs, structures and the relationships between organisations and their external environment. In addition, through organisational theory, it becomes easier to understand the behaviour of technocrats, stakeholders and the management within an organisation. Furthermore, this approach to understanding operations within organisations also provides an understanding of how organisations can cope with rapid changes in their environment. This paper will engage in critical analysis of determinist and agency theories in terms of their contributions to the understanding of organisational action. Furthermore, the paper will assess the possibility of reconciling these theories into a universal theory explaining organisational action.
Agency theory is based on the supposition that the major reasons for the existence of firms in the market are to engage in transaction cost (Fernando, 2009). This theory leads to the development of an understanding that organisations are a series of contracts, which are made with the aim of improving the wellbeing of these organisations in terms of their competitive advantage and market share (Fernando, 2009). According to this theory, the decisions and actions by the management are executed on behalf of the shareholders. The relationship between the management and the shareholders, according to the agency theory, is the relationship between the principal and the agent. The principal, the shareholders, hires the agent, the management, to perform the responsibilities that the former is unwilling or unable to perform (Evans, 2008). This theory is also based on the assumption that bot the agent and the principal are motivated by self-interest. This assumption dooms the agency theory to inexorable intrinsic conflict (Brink, 2011). From the theory, if both parties derive their motivations from self-interest then there is a high possibility that the agents will be more likely to develop policies that pursue self-interested objectives hence deviating and even conflicting with the goals and objectives of the principals. The conflict emanates from the assumption that agents are supposed to act on behalf of, and pursue the interests of the principals (Fernando, 2009).
The process of determining the extent to which the agent does not act or acts in accordance with the interest of the principal, proponent of the agency theory developed the standard of agency loss (Fernando, 2009). Agency loss implies the difference between the best possible outcome for the principal and the consequences of the actions of the agent (Evans, 2008). For instance, the agency cost can be placed at zero when the actions of the agent are consistent with the interest of the principal (Clegg & Bailey, 2008). However, the agency loss increases when the actions of the agent deviate from the interests of the principal. This means that when the actions of the agents are directed towards the satisfaction of their self-interest, against those of the principals, then the agency loss is placed as high (Clegg & Bailey, 2008).
The minimization of the agency loss is possible when two particular statements can be considered as true. The first statement is that the agent and the principal have common interests. This means that the agent and the principal have a common desire towards a specific outcome (Chetty & Saez, 2007). The second statement is that the principal possesses some knowledge about the consequences of the activities of the agent. This means that the principal understands the extent to which the actions of their agents serve their best interests (Chetty & Saez, 2007). If any of these statements is false, then the agency loss is most probably going to rise. These statements also imply that the principal has the role of monitoring and evaluating the actions that the agents make on their behalf. The process of evaluating the decisions requires some form of expenditure in the form of agency cost (Brink, 2011). Agency cost entails the intentions of the principal in regulating the behaviour of the agent by paying the latter some percentage of the financial resources (Chetty & Saez, 2007).. This is aimed at ensuring that the agent does not engage in corruption related activities that would harm the principal (Chetty & Saez, 2007). The harms, from the agency theory involve those activities that would deny the principal the opportunity of deriving benefits in the form of profits from the actions and the decisions of the agents (Clegg & Bailey, 2008). Through agency cost, agency theory presents the notion that it is necessary for the principal to provide the agents with some form of financial compensation as a way of motivating them and ensuring that their actions and decisions are aimed at boosting the economic wellbeing of the principal. This also implies that the agency cost is the financial expenses necessary in operationalization of an organisation (Chetty & Saez, 2007). The level of the agency cost will be effective in determining the effective techniques of governing organisations and the resulting behaviour in terms of minimizing conflicts between the management and shareholders (Idowu & Kiymet, 2014). Furthermore, through the agency costs, it becomes possible to determine the extent to which the management will be engaged in developmental initiatives aimed at improving the reputation and profitability of an organisation in accordance with the interests of the shareholders. According to agency theory, in the development of agency relationships, the agent has a moral responsbility towards the principal. This responsbility cannot be dismissed because the agent acts as an agent of another (Clegg & Bailey, 2008).
The agency theory has however been criticized on the assumption that it is dependent on the notion of self-interested agents whose objective is the maximization of tier personal economic wealth (Chetty & Saez, 2007). This means that the challenge for the agency theory is to get agents to set aside their personal interests or make decisions and take actions in ways that will maximize their personal wealth objectives while maximizing the interests of the principal (Hirschey, Kose & Makhija, 2009). To this extent, a standard of agency action and duty is a necessity. This is not because agents are universally selfish but because of the potential differences that exist between the interests of the principal and those of the agent. From the agency theory, conflicts within organisations can only be minimized when organisations develop policies on the expected actions of the agents regarding the realization of the objectives of an organisation (Idowu & Kiymet, 2014).
Deterministic theory asserts that the performance of an organisation is largely attributable to forces and factors within the environment. This means that in the process of executing their functions the role of the management is to assess and view the prevailing forces and factors and respond to them by developing effective polices and strategies that enhance organisational growth and development (Gauthier & Kupka, 2011). According to the determinist theory, every choice that the management makes is a result of the existence of an antecedent causal condition, which is considered necessary in the generation of particular choices. In the context of an organisation, for every choice made by the management there are sufficient conditions preceding the choice. This theory asserts that the choices made by the management can only be different if the causal conditions were also different. The causals conditions that influence the decision-making process for the management include a plethora of variables such as circumstances, habits, the structure of the existing social system, technological developments, existing resources, the dynamics of the industry and the prevailing organisation culture (Gauthier & Kupka, 2011).
In the process of making decisions on strategies of an organisation, the management does not operates in accordance with their free will but with consideration of the existing factors and forces that may affect the ability of the organisation to realize its objectives (Hitt, 2017). The main objective of any business entity is to ensure the realization of profits through the provision of certain products or services to target customers at a specified cost. The results of these activities are Profits aimed at satisfying the interests of the shareholders whose investments in the organisations are aimed at the realization of financial benefits. According to the determinist theory, shareholders of an organisation can only realize profits if the management develops polices that improve on the markets share and the competitive advantage of the organisation in the market (Fenwick, 2016). The process of developing such strategies will require the management to use their skills and knowledge in engaging in a process of deliberation. This is not an implication that the process of deliberating on different issues related to organisational success sis unaffected by environmental constraints such as the structure of the existing social system, availability of resources, institutional pressure, physical and legal constraints and the prevailing culture. These are the causal conditions that determinist consider sufficient in accounting for the choices made by the management (Gauthier & Kupka, 2011).
From the determinist theory, conflict between the stakeholders in an organisation does not arise because of the inability of the management to make profits for the organisation. However, conflicts arise when the policies and the strategies of an organisation are in conflict with the external environmental factors related to organisational operations (Atmanspacher & Bishop, 2002). Deterministic theory asserts that the management does not have the freedom of developing policies and strategies that are in accordance with their will but they draw their influence from the external environment (Gauthier & Kupka, 2011). The prevailing culture and pressure form the society can ensure that the management directs its policies and strategies towards the development of products that are in line with the cultural practices of the society in which the organisation operates (Gauthier & Kupka, 2011). While knowledge and skills of the management plays a critical role in the determination of the extent to which an organisation may manipulate different forces within the environment to realize its objective. The power of these forces in determining the direction of the strategies adopted by the organisation implies that the management acts according to the dynamics of the forces prevailing within its environment (Atmanspacher & Bishop, 2002).
According to the determinist theory, the market place can be considered as an independent entity because it controls itself. Organisations, through their management, have the responsbility of responding to changes in the market and they must ensure that the policies they develop are dynamic and flexible to continually anticipate and be revised according to the unexpected challenges and changing patterns that define consumer behaviour (Hitt, 2017). According to the deterministic theory, the management cannot structure an organisation without the consideration of the role of different environmental factors. This is based on the assumption that the social environment and the marketplace play an effective role in the determination of how organisations are structured. This also means that the objectives and goals of an organisation must focus on the techniques through which an organisation, by aligning itself with the forces and power of environmental factors can ensure its survival by generating profits and improving on its efficiency (Zimmermann, 2011).
Deterministic theory asserts that the success of an organisation is dependent on the prevailing environmental powers and forces. These underlying dependencies contribute have the possibility of contributing to relative vulnerabilities within organisations. This is because when the environment and organisation interact they create some form of tension necessary in the production of both environmental and organisational change (Zimmermann, 2011). This leads to the creation of an implicit power model defined by countervailing power and influence and the relative power of the environment and organisation. This means that the external stakeholders such as the society overtime play a vital role in the explanation of the prepotency of choice in the process of adapting to organisational change. According to the deterministic theory, if high organisational power is an implication of greater choice, and high stakeholder power can result in greater environmental determinism, then it is possible for a powerful organisation to confront its powerful stakeholders. This can be considered as an indication of the possibility of co-existence between high determinism and high choice (Hitt, 2017).
Merging deterministic and agency theory into a universal theory
According to agency theory, the shareholders, who are the principals, delegate responsbility that they cannot or are unwilling to execute to the management, the agents. This delegation of responsbility is attributable to the knowledge and skills of the agents. The shareholders consider these knowledge and skills to be essential in advancing their interests. The agency theory therefore implies that the sole purpose of the management is to engage in organisational activities with the objective of advancing the interests of the shareholders (Brink, 2011).
The deterministic theory identifies the management as the most essential decision makers in an organisation. However, the theory asserts that the management does not act as independent entities making decisions as free agents. Instead, the forces and factors that define the external environment influence the decisions by the management (Atmanspacher & Bishop, 2002). The theory implies that for the management to ensure organisational success, they must develop policies and strategies that are in agreement with the prevailing forces in the external environment. These forces are the externals shareholders such as the society. This theory denies the assumption that the management can act autonomously but acknowledges the assumption that the management can only use their skills and knowledge in the development of various techniques dedicated towards aligning organisational goals and objectives with the environmental forces (Atmanspacher & Bishop, 2002).
Both the deterministic and agency theories acknowledge the existence of external forces that influence the decision and the actions undertaken by the management in any organisation. While the agency theory acknowledges the power of the shareholders as principals delegating their power to the management for the realization of their interests, the determinist theory recognizes external environmental forces and powers as the main determinants of the types of strategies and objectives that organisations develop to ensure growth and development (Brink, 2011). These theories recognize that the management does not act out of their own freewill but their actions are determined by the desires of external powers. These theories also recognize the possibility of conflicts in organisations if the management fails to abide by the requirements of these external forces (Zimmermann, 2011).
Despite similarities, these theories cannot be merged into a universals theory. This is because of the differences in the source of external power influencing the decisions by the management. In agency theory, the management are representatives working to fulfil the desires of the shareholders. In deterministic theory, the external environment is the determinant of the types of decision and actions taken by the organisation. In agency theory, conflict is considered a possibility when the interests of the management are in conflict with those of the shareholders. However, in deterministic theory, the management can develop itself as the dominant force in the market to influence the forces essential in the decision-making process (Atmanspacher & Bishop, 2002). The different in underlying assumptions of these theories makes them incompatible.
According to agency theory, the decisions and actions by the management are executed on behalf of the shareholders. The principal, (shareholders), hires the agent (management), to perform the responsibilities that the former is unwilling or unable to perform. The deterministic theory identifies the management as the most essential decision makers in an organisation. However, the management does not act as independent entities but the forces and factors that define the external environment influence their decisions. Both the deterministic and agency theories acknowledge the existence of external forces that influence the decision and the actions undertaken by the management in any organisation. However, in deterministic theory, the management can develop itself as the dominant force in the market to influence the forces essential in the decision-making process while in agency theory, the management is representative working to fulfil the desires of the shareholders. The different in underlying suppositions of these philosophies makes them irreconcilable.
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Brink, A. 2011. Corporate governance and business ethics. Dordrecht: Springer Verlag.
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Clegg, S., & Bailey, J. R. 2008. International encyclopedia of organisation studies. Thousand Oaks: Sage Publications.
Evans, J. R. 2008. Quality and performance excellence: management, organisation, and strategy. Mason, OH: Thomson Business and Economics.
Fernando, A. C. 2009. Corporate governance: principles, policies and practices. New Delhi: Pearson Education.
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Zimmermann, N. 2011. Dynamics of drivers of organisational change. (Dynamics of drivers of organisational change.) Wiesbaden: Gabler Verlag / Springer Fachmedien Wiesbaden GmbH, Wiesbaden.
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