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Elements of the formal organization

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We have already said that the formal organization (the form in which the interactions within a real organization are explicitly organized) is only a formula, or means of coordinating actions, in order to achieve results which may help to satisfy human needs. This formula has at least two components:

a) Production system or production rules: these define the actions to be performed by those persons who are participants in the organization so that it may operate and achieve its purpose.

b) Incentive system or incentive rules: these define what these persons will receive in return for being members.

Anybody who participates in an organization contributes something and receives something in return for his involvement (although there may be cases in which a person only contributes or only receives). What a particular person contributes depends on his role in the production system; what a person receives depends on his role in the incentive system. The production system is that body of rules which governs the actions of individuals in order to achieve the desired results for the organization. The incentive system is that body of rules through which the benefits gained by these results are distributed among the organization's members.

Fig. 2 shows why, in many cases, an organization may be defined as a means by which individuals act upon their environment in order to achieve results which would not be achievable without the joint effort coordinated by the organization.


We have already seen that a formal organization is only a theoretical possibility. For this organization to actually exist, there must be people who want to and are capable of organizing themselves in this fashion. Before speaking of real organizations, however, it should be noted that a formal organization cannot be formed by just any pair of production and incentive systems. If the production system is unable to produce whatever is necessary for the incentive system to be applied, a formal organization defined by both systems would not be possible: it would be a theoretical nullity.

Very similar to this “impossible organization” are the utopian organizations which, in order to operate, require people or an environment which does not exist in reality. A large number of the “solutions” that are generally proposed to serious problems by a group of friends chatting about them could be categorized as utopian organizations.

We mention these extreme cases because they may help us gain insight into one aspect of a good understanding of real organizations; those which exist and are in operation, or those that may appear in reality at any time.

This aspect is the following: it is not enough merely to be possible (i.e., not contradictory or utopian) for a particular organization to actually exist. In order for an organization to exist and operate, three basic factors are required:

1. The formulation of certain goals or results which may be effectively achieved by implementing the production system, and whose achievement would enable the incentive

system to be implemented so that people will be satisfied:so that they actually receive what they expect from the organization.

2. That the people acting in the organization can do what the production system requires them to do.

3. That they actually want to do what the production system requires them to do.

These three points summarize what are considered to be the basic functions or tasks of an organization's managers: the body that governs an organization. Although they can be defined in a number of ways, they are usually given the following names:

1. Operational definition of purpose, which specifies the results to be achieved by the organization and how the organization's members must act in order to achieve them.

2. Structuring the definition of purpose: that is, finding the persons who can perform the different tasks specified by the operational definition and assigning the corresponding task to each of them.

3. Implementing the purpose: that is, making sure that each organization member is actually motivated to perform the tasks assigned to him.

Foundations of management

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