MGN409 Management Theory And Practice

Organizational theories refer to approaches that strive to analyze the different organization structures in the modern world. The proliferation of organizational theories can be dated back to early 18th century when British economists such as Max Weber and Fredrick Taylor who came up with the classical theories of organization. Since then there has been an emergence of different organizational theories some which contradict earlier theories, For instance, Weber’s theory was highly characterized by the belief that sociology was the key to success of any society. Taylor had a different school thought in that concentrated more on public administration. Their theories were later criticized by scholars who came before them. The likes of Henry Fayol later came with organization theories which introduced the science of Administration in the mainstream which championed for formal authority and tight supervision of the workforce to achieve a higher productivity (Dann,2009)

As a result, this paper is going to analyze the contribution made by agency theory and Determinist theory of organization and how they influence organization decisions. The further will further explore if there is a possibility of this two theories to merge and form a universal theory that may be used to influence decisions in organizations.

Agency theory refers to an organizational theory that tasks itself with explaining the relationship between agents and principals in a business entity. It is a theory that concerns itself with how these two parties will work together. Principal refers to the party which determines the work that is to be done. Agent on the other side is the party that does the actual work as proposed by the principal. Therefore in this arrangement, the principle will hire the agent to perform a function that he is unable to do. For instance, in many organizations, the principal is usually the shareholders of the company while the agent is usually the management of the company who are to perform the task laid down by the shareholders.

In many organizations, agency theory has been used as a tool for addressing problems that arise as a result of differences between the desires or goals set by the principal and the agent. Differences in goals between the agent and principal may arise now and then in an organization especially when the principal has little or no knowledge on the action of the agents. For instance, the management of a company may be having plans to open a new plant to expand into other markets. This will have an adverse effect on the short-term profitability of that organization. However, this might be in total contrast with the goals of investors who might have a desire for high growth from the short-term profits and may not be aware of this expansion plans (Chandra, 2007).

Another issue that is dealt with through the application of agency theory in an organization is the handling of risks that arises between the principal and the agent. For instance, the management of a company decides to invest and utilize resources on projects that are categorized as perilous. These agents may invest in such business since they are not the ones directly incurring the cost but the investors. Therefore the burden will squarely be on the principal’s pocket. This shows that the agent will always have a different risk tolerance when compared with the principal (Lee, Kotler,& Kotler,2011).

Financial institutions usually act as agents for their clients. Despite this, there are always conflicts of interest that arise as result of these agency relationships. For instance, the case of Goldman Sachs and ABACUS CDO. In this case, Goldman Sachs was found guilty of keeping crucial information on an investment deal from two of its clients who were competing against each other playing down the issue of conflict of interest that was clearly evident from the onset. The financial institution did not act in the best interest of its clients an obligation that the agent owes its principal at all times (Kotler,2011)

Financial advisors are also acting as agents on behalf of their clients. The clients trust them with their money and expect them to play an advisory role in which market is bets to invest in and when and where not to invest. In this case, the clients play the role of principal while the financial advisors pick the role of agents. This means the advisors have to fulfill every requirement of the customer

Agency theory usually operates under one particular assumption that self-interest motivates both the principal and the agent. However, this assumption has been seen as a weakness to the application of this theory. This is because many scholars believe that whenever there is a deviation from this common self-interest conflict may arise within the organization. For instance in a case whereby the agents have decided to pursue  interest or goals that are contrary with what has been set by the principal despite the fact that according to the theory agents are  supposed to act in the sole interest of  their  superiors who are the principals (Schoubben, & Van Hulle, 2008.)

This situation has led to the emergence of the term ‘Agency loss’ in the modern economics. This refers to the difference between the actions that might have been taken by the agent and the possible best outcome that had been projected by the principal. When there is a zero result on the difference, this means that the agent acted consistently by the principals set objectives. However if the agent deviates from the objectives set by the principal, there is always a rise in the agency loss (Malhotra, & Peterson, 2007).

Researchers on this theory have noted that agency loss can be minimized when the following conditions are true.

• One of the conditions is that both the principal and the agent must share a common interest. This means that both parties must have a desire for a similar outcome. Any deviation from this may increase the agency loss.
• The principal needs to be aware of the consequences of the activities carried out by the agent. This means that the principal needs to know whether the activities of the agent will lead to the achievement of the objectives set.

It is, therefore, evident from the above literature that one objection towards this theory is that it relies on the assumption of agents and principals having a common self-interest. The challenge to this assumption is that the principals must find a way to ensure that the agents will set aside their personal self-interest that does not align with the principals interest or figure out a way whereby the agents can be able to achieve their personal self-interest and at the same time achieve the set objectives that align with the principals interests (Chai, 2009).

This therefore calls for a standard of agency duty and accountability measure for the agents not because they will always put their personal interest in front of the principal’s interest but because the potential for such situations to occur is too high to be ignored (Chen,2009).

This is an organizational theory that asserts that the business has no control over the marketplace in which it operates in. This means that the market more or less controls itself and hence no amount of effort put by the organization can change the market situation. The only thing these businesses can do is to respond to the changes in the market and adapt to strategies that will keep them afloat in such markets (Berthon, Pitt, Plangger &  Shapiro,2012).

Various scholars have noted that the overall marketplace and social environment will always affect how an organization is a structure. For instance, a sharp focus on the strategy of a Global company like Coca-Cola reveals that the corporation always tailors its marketing strategy about the social environment and consumer demographic pattern. Their latest campaign advert is tailored to attract the youth and family. The advert portrays the soft drink as a vital drink that cannot miss whenever a family is having a get-together or social gathering. Such a campaign strategy depicts how Determinist theory is being applied by various organizations (Bell, 2011)

While analyzing determinist theory there various factors social factors that influence the marketplace that eventually affect the strategy that will be taken by an organization to penetrate this market. Some of these social factors include.

• Demographic Patterns – This refers to the consumer patterns of customers in the market which a business operates in. For instance, opening a beef selling business in a town in India may be catastrophic to the business owner since beef is a product of cattle which are considered as gods in this area. This means such a business will need to conform to the conditions of that market which is more receptive to vegetable products. This means that a business that wants to thrive in this market will be forced to sell vegetable products if it is to penetrate the market (Armstrong, Denize &  Kotler, 2014).
• Economic factors – This is another social factor that pundits believe will hurt the operations of any business. Economic changes in any market will hurt the business operating in that market. Issues to do with inflation and depreciation of local currency have forced many businesses to change their strategies to remain relevant in the market. The recent global recession saw many companies cut their costs and change their operation strategy for them to survive in the ever-changing volatile market (Asish, 2007).
• Political factors – Political factors may adversely affect the market in which a business operates in. Passing of trade laws that negatively impact on the operations of businesses by governments will in turn force organizations to re-strategize and seek ways it can remain afloat in such a volatile market (Achrol &  Kotler, 2012).

Looking at the above social factors, it is imperative to note that organizations cannot ignore the effect that social factors have on their operations. This explains the reason why despite many companies adopting the strategic structure theory they cannot turn a blind eye on the application of determinist theory. The social factors mentioned above will continue to affect the strategic decisions made by organizations. This means organizations always are forced to conform to some of the market conditions if they are to continue to operate within those markets (Christensen and  Lægreid, 2001).

One of the main weaknesses of the determinist theory is its assumption to the fact that businesses have totally no control over the market place conditions that affect the operation of these businesses. There exist some market conditions that the business has and can take control over. For instance the issue of consumer preference is a market condition that a business can manage. If the trend in the apparel market is fashionable coats with a picture of a certain celebrity, Businesses in this market can stock their stores with this particular product hence being on top the market once again. This assumption, therefore, is only valid on particular environmental factors that the business has no control over but not all (Talbot and Johnson, 2007)

Looking at the agency and determinist theories organizations can adopt a mixed method to organizational structure. It is possible to take elements from both theories and come up with a holistic structure that will serve the interest of the organization. For this to happen however organizations have to accept that some conditions in the market are unchangeable. Conditions such as consumer preference can be managed by the business however there those such as economic and political factors which the business has to adapt to since it has no control over them. Adopting agency theory in an organization is commendable since it will any the business top team to manage resources and set objectives that will be achieved since they can monitor the progress of the investment. When combined this two theories can work together for the benefit of an organization which wants to increase productivity while at the same time monitoring resources available.

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