Foundations of Organizational Strategy

Rating:
Summary: This collection of articles has only one weakness: its title
Review: Between the covers of this dryly titled and presumably tedious tome is a lively collection of a dozen essays spanning over twenty years of original thinking and outstanding scholarship by one of Harvard's foremost professors. Jensen, with a bit of help from colleagues such as Eugene Fama, Kevin Murphy, and the late William H. Meckling, attacks such diverse issues as the nature of man, the theory of the firm, residual claims and organizational form, agency costs, executive compensation, and organizational performance measurement.

In the author's words, "Economists have historically concentrated on the analysis of markets while treating the organizations in them as black boxes that act as profitmaximizing entities, (and)...behavioral organization theorists have largely focused on the internal aspects of organizations, ignoring the forces of markets in which those organizations exist." In this collection, Jensen bridges these two disparate views, utilizing rigorous economic analysis to forge a superior understanding of both the firm and the individuals who are its employees, partners, and owners.

Organizations, at the most basic level, are networks of individuals drawn together to accomplish a task. The most appropriate place to start is with a robust theory of the individual. Economists are typically accused of viewing individuals only as money-maximizing entities ("economic man"). Jensen demolishes this with an integrative model of the individual as resourceful, evaluative, and maximizing, or REMM. Four postulates exist in the REMM model: Every individual cares, each individual's wants are unlimited, each individual is a maximizer, and the individual is resourceful. The REMM model is contrasted against basic economic, sociological, and psychological models. The REMM model, a fusion derived from features of each, dominates each of its sources in explanatory power of behavior.

From this base, Jensen proceeds to explore diverse topics, including specific and general knowledge, and the role that knowledge possessed by individuals plays in organizational development and behavior, alienability of decision rights, residual claims and agency theory. Two of the dozen articles review how residual claims influence organizational structure. For example, Jensen observes that, in the financial industry, insurance companies and savings banks have been organized as "mutual" organizations in which the policyholders or depositors are the residual claimants, whereas commercial banking has nearly always been organized as stock companies. Further, professional services organizations have typically been organized as partnerships. There is no marketbased reason why an insurance company should choose to be a mutual rather than a stock company, or why a professional services firm could not be organized as a stock company with public ownership (as some have done or are considering). The role of the residual claimant, however, plays a powerful role in the organizational structure.

A welcome surprise was a chapter on executive compensation and CEO compensation. In essence, Jensen identifies the problem of CEO compensation as an agency problem, unchanged from the same agency problems identified by Adam Smith. Building on the framework in the earlier sections, he explores how changes in firm wealth impacts, or fails to impact, the wealth of the CEO. Jensen identified that in many situations, particularly in the largest organizations, increases in firm wealth had little impact on CEO wealth and, presumably, on CEO willingness to increase shareholder value.

CEO compensation packages today, with the emphasis on stock options and the commensurate possibility of immense financial rewards, are dramatically different than when Jensen and his colleagues wrote this and the other articles in the section. While no single individual or article can be credited with the sweeping changes in CEO compensation, there has been a surge in both the attention paid to and the subsequent increase in firm value since the publication of this work in CEO compensation. Jensen diagnosed the problem, and the alignment of CEO compensation and shareholder interests seems to be resolved.

This is not a traditional "popular" book on organizations; rather it is a collection of insightful concepts drawn from years of teaching and research. It is a coherent, orderly, economic explanation of how and why firms organize and the challenges inherent in small and large businesses. In Foundations of Organizational Strategy, Jensen opens the "black box" of the organization and provides a coherent and logical framework for understanding how and why organizations develop and operate in the market. His attempt succeeds admirably and will reward the reader with not only concepts and models of theoretical organizational behavior but also keen insight applicable in day-to-day organizational endeavors.

Edward J. "Kip" Smith

Rating:
Summary: Good Cross-boundary book
Review: This is an excellent book that is good for both academics and practicioners. Practicioners may find the indepth theory discussion a bit cumbersome, but it is worth the read to find the gems of wisdom.

The book is an excellent coverage of the basics of organization theory, covering enough economic theory to have it make sense.

An excellent book for graduate students that want to study organizations. Even if you are not an economics student, it will help you understand the language that the economic organizational theorists use.

Rating:
Summary: Good Cross-boundary book
Review: This is an excellent book that is good for both academics and practicioners. Practicioners may find the indepth theory discussion a bit cumbersome, but it is worth the read to find the gems of wisdom.

The book is an excellent coverage of the basics of organization theory, covering enough economic theory to have it make sense.

An excellent book for graduate students that want to study organizations. Even if you are not an economics student, it will help you understand the language that the economic organizational theorists use.