Performance-Driven Organizational Change: The Organizational Portfolio


Lex Donaldson

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  • Dedication

    To David J. Hickson teacher and mentor


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    This book is the fourth I have written about organization theory. The previous three books defended structural contingency theory and debated against its critics. The present book is different; there is no debate or criticism of other theories. Instead, the book offers a new theory and thus is wholly constructive in tone. It builds upon contingency theory and takes it off in a new direction. In the process, the focus widens considerably from organizational structure to include all aspects of the organization.

    Structural contingency theory research has sought in the past to identify which structures fit each of the contingency factors, such as size, strategy, technology, and so on. Thus incremental research contributions within this approach seek to add a new structural variable, identify a new contingency factor, or demonstrate the effect of fit on performance and so on. These are important refinements for the structural contingency approach, but they are not, however, the approach taken here. Structural contingency theory has postulated a particular model of how organizational structure changes in response to changes in the contingency factors. This adaptation process is the focus of the present inquiry.

    Structural contingency theory research argues that an organization with a structure that misfits its contingency factors has, as a consequence, lower organizational performance. However, this lower performance from misfit is not enough to cause the organization to change its structure and thereby regain fit and performance. Other causes of organizational performance have to be depressing it, so that, in combination with misfit, overall performance becomes low enough to cause structural change. Performance has to drop considerably because organizational managers seek to attain not maximum organizational performance but, rather, a satisfactory, or satisficing, level that is substantially below the maximum performance level. Thus an organization in misfit can remain there for a lengthy period until other causes force its performance below the satisficing level. In the 1980s I conducted an empirical test that confirmed this model. This caused me to start thinking about the way that performance drove organizational change.

    The more I thought about performance driving organizational change, the more numerous the insights that occurred to me about various implications of this basic idea. This took me off into areas that were not the customary province of organization theory. My thinking was informed by some ideas from finance and economics about risk, portfolios, business cycles, and competition. This seemed to mark a fruitful infusion from other disciplines with which traditionally organization theory has had little contact. The result is a formal theory consisting of a large number of propositions. The subject matter has broadened considerably from organizational structure to adaptive organizational change of any kind, such as change in strategy, human resource management, and information technology. Thus the topic is organizational change in general and in both of its two dimensions of organizational adaptation and growth.

    There is theoretical reason to believe, and empirical evidence to support, the idea that a crisis of poor organizational performance is required to trigger adaptive organizational change in many aspects of the organization. There has been much study of the politics and conflict that accompany organizational change and much research into the psychological processes of organizational change. These political and psychological theories have produced prescriptions about how to manage organizational change processes. Similarly, there has been much research to define which organizational designs and human resource management practices are optimal for each organizational situation, and this also leads to prescriptions. Thus there is much prescriptive advice on offer. Yet without a performance crisis, there is a good chance that needed organizational changes will not be forthcoming. Moreover, the adaptive change induced by the crisis creates the capacity for fresh organizational growth. Through a series of adaptations and resulting growth spurts, the organization grows larger and more effective. Hence the organization requires recurrent crises of poor performance. This argues for more study to better understand the dynamics whereby performance-driven organizational change comes about. Hopefully, the present book is a modest step toward providing a theoretical framework to guide future empirical research in this area.


    I should like to thank those who have supported me in this book project. Fred Hilmer, as Dean of the Australian Graduate School of Management from 1989 to 1996, generously provided me with the sabbatical leave to work on the book, and my colleagues in the Organizational Behavior group of the AGSM, such as Dexter Dunphy, Boris Kabanoff, and Bob Wood, encouraged me in my endeavors.

    Those in the Organizational Behavior Department of the Graduate School of Business at Northwestern University were good enough to have me spend my 6-month sabbatical with them where the first draft was completed. I enjoyed their good fellowship and made many friends there, including Paul Hirsch, Andy Hoffman, Willie Ocasio, and Marc Ventresca.

    The staff of the library at the AGSM, under Pam Taylor and then Sue Hornby, provided help in gathering sources and information. June Ohlson, as head of the Research Library of the Reserve Bank of Australia, helped find material on business cycles. We discussed the role of business cycles in organizational life extensively. As a freelance editor, June provided incisive, critical feedback on the book that made it more accessible and also improved its intellectual coherence.

    A number of scholars were kind enough to give me comments on draft chapters: Philip Bromiley, Richard Cyert, Jerald Hage, William McKelvey, Andrew Van de Ven, David Whetten, and Edward Zajac. Peter Heslin gave me comments on the entire book. I am grateful to them for their help, but, of course, I remain responsible for the errors and omissions in the final book.

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    About the Author

    Lex Donaldson is Professor of Organization Design at the Australian Graduate School of Management. He holds a B.Sc. in behavioral sciences from the University of Aston and a Ph.D. from the University of London. His research interests are organization theory, organizational structure, and corporate governance. He has authored six books, including For Positivist Organization Theory: Proving the Hard Core (Sage, 1996) and American Anti-Management Theories of Organization: A Critique of Paradigm Proliferation (Cambridge University Press, 1995). His professional activities include being on the editorial boards of Corporate Governance, Organization Studies, and the Strategic Management Journal. He has held visiting appointments at the universities of Aston, Iowa, Maryland, Northwestern, and Stanford. Address: Australian Graduate School of Management, University of New South Wales, Sydney, NSW 2052, Australia. [E-mail:]

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