Organizations and Decisions

Organizations are groups of individuals who have joined together to perform particular tasks to achieve particular goals.

Organizations include schools, business, clubs, religious groups, hospitals, and governmental institutions.

Organizations are formed because groups of individuals can perform tasks more easily and at a lower cost than individuals operating alone can.

An organization performs tasks to achieve goals. The goals of an organization reflect the interests of their stakeholders.

The stakeholders include any parties that are affected by the organization: owners, creditors, employees, customers, government, and society.

Typical goals might include:

To survive, however, an organization must receive sufficient resources through sales, donations, or other means to support its expenditures.

To achieve these goals, an organization must continually adapt to a changing environment.

Organizational Structure

Although organizations form to achieve goals not easily achievable by individuals acting alone, not all individuals within the organization will agree on how the organization should operate.

Organizations have formal or informal structures that describe how decisions are made. An organization’s structure Opens in new window is composed of three related processes:

  1. assigning responsibilities,
  2. measuring performance, and
  3. rewarding individuals within the organization.

Assigning Responsibilities

The first components of the organizational structure determines the responsibilities of the different members of the organization. These responsibilities define the duties that a member of an organization is expected to perform.

The responsibilities of a particular individual within an organization are specified by that person’s job description Opens in new window.

Customer sales representatives in upscale stores such as Zara and Saks Fifth Avenue typically have the responsibility to sell products to customers, but cannot offer substantial price discounts. A manager must be called for that decision.

A division manager may have the responsibility of setting prices on products, but not the responsibility to borrow money through issuing debt. The responsibility to issue debt is usually retained by the president and the board of directors.

The organizational chart in Figure 1 represents the structure in a traditional firm. This type of organizational chart is frequently used to provide a hierarchy of responsibilities.

As firms adopt advanced manufacturing technologies, they often develop alternative organizational structure and charts that reflect these new management approaches.

Figure 1. A Sample Organization Chart Figure 1. A Sample Organization Chart | Source: SlideUpLift Opens in new window
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1.     Performance Measures

Organizations must also motivate individuals to perform their duties consistent with the goals of the firm. Individuals also have their own goals, which are not necessarily congruent with those of the organization.

The owners of the business want to maximize profits, whereas the employees want to maximize their own personal preferences.

To motivate individuals within the organization, there must be a system for measuring performance and rewarding individuals.

Performance measures are direct or indirect measures of output of individuals or groups of individuals within the organization.

Performance measures for a salesperson could include total sales and customer satisfaction based on a survey of customers.

Performance measures for a manufacturing unit could include meeting delivery schedules, cost of units produced, and percentage of defective units.

2.     Rewards

Performance measures are extremely important because rewards are generally based on them.

Rewards for individuals within an organization include wages and bonuses, prestige and greater responsibilities, promotions, and job security.

Since rewards are based on performance measures, individuals and groups are motivated to act to influence these measures. Therefore, the performance measures influence the direction of individual and group efforts within the organization.

A poor choice of performance measure can lead to conflicts within the organization and derail efforts to achieve organizational goals.

For example, measuring the performance of a call-center representative on the number of calls she takes per day will encourage her to reduce the time spent per customer, and potentially reduce the quality of the services she provides.


Historically, only individuals at the top of the organizational chart made decisions for the organization. The remaining employees simply did what they were told.

Organizations, however, have recognized that most individuals within the organization have knowledge that can be useful for decision making.

Factory employees often have better knowledge of the manufacturing process than do their superiors; salespeople usually know their customers better than the sales manager does.

To take advantage of this specialized knowledge, organizations have given these employees more responsibilities. This delegation of responsibilities is known as worker empowerment Opens in new window or decentralization.

Members of the organization must make two general types of decisions:

  1. planning decisions and
  2. control decisions.

1.     Planning Decisions

To accomplish the goals of the organization, managers must make decisions on what tasks should be performed and how to complete those tasks. Planning decisions occur at all levels of the organization.

Long-term planning decisions tend to be made by the top-level managers while short-term planning decisions tend to be made by individuals with fewer responsibilities.

The president of the organization is likely to make decisions on what product lines and services to offer and long-term financing.

For example, in 2011, Nokia reorganized its structure into two business units, Smart Devices and Mobile Phones.

Two other units, Markets and Services and Developer Experience, provided support for marketing and communications, and global services.

Once these decisions were made, business-unit managers at Nokia were given responsibility for bottom-line performance (profits), and the specific products and services to be developed and introduced in the market.

Lower-level managers made operational decisions to increase efficiency and reduce time to market.

Further restructuring have taken place to maintain a company structure aligned with its strategy and the threats of a competitive marketplace.

Planning decisions revolve around activities in the value chain. These activities include:

2.     Control Decisions

The managing, motivating, and monitoring of individuals within the organization is called control.

The purpose of control is to encourage members of the organization to work towards the goals of the organization.

Due to diverse individual preferences, organizational goals and those of individual members usually do not coincide.

For example, most organizations set the goal to maximize profits. Maximization of profits, however, may mean more hours of overtime for employees, which may not be in their best interests.

The organizational design Opens in new window and the assignment of responsibilities help to control decisions of members of the organization. For example, a purchasing manager is constrained to follow specific roles in making a purchase and can only make purchases above a specified amount with approval from a superior.

Control also encompass the choice of performance measures and a reward system. Performance measures and rewards based on those performance measures are used to motivate members of the organization.

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Organizations also control members through monitoring.

Monitoring includes the direct observation of members of the organization to verify that they are performing their duties correctly.

For example, telemarketing companies routinely record all telephone conversations or supervisors randomly monitor calls.

Monitoring could also be performed indirectly by observing the output of an individual. For instance, the monitoring of sales staff frequently includes comparing their sales targets to actual sales, as well as tracking the sales margin.

To motivate sales staff to provide the customer with what is preferred, some retailers monitor sales returns. These sales reports become part of the performance measures system. For instance, sales people often receive commission. Sales teams also may be rewarded based on store or product-line performance.

A university’s examinations and grades are a control system with which students are familiar. Grades and examinations are performance measures that provide students with incentives to work hard.

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