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Foundations of Organizational Strategy [Hardcover]

by Michael C. Jensen
5.0 out of 5 stars  See all reviews (2 customer reviews)

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Book Description

November 30, 1998 0674643429 978-0674643420

In this volume, Michael Jensen and his collaborators present the foundations of an integrated theory of organizations. The theory assumes that organizations are equilibrium systems that, like markets, can be influenced, but cannot be told what to do; that human beings are rational and self-interested for the most part; and that information is costly to produce and transfer among agents. The theory also treats business organizations as entities existing in a system of markets (including financial, product, labor, and materials markets) that must be considered in the formulation of organizational strategy.

Jensen argues that the cost of transferring information makes it necessary to decentralize some decision rights in organizations and in the economy. This decentralization in turn requires organizations to solve the control problem that results when self-interested persons do not behave as perfect agents.

Capitalist economies solve these control problems through the institution of alienable decision rights. But because organizations must suppress the alienability of decision rights, they must devise substitute mechanisms that perform its functions. Jensen argues that three critical systems, which he calls the organizational rules of the game, are necessary to substitute for alienability in organizations: (1) a system for allocating decision rights among agents in the firm, (2) a system for measuring and evaluating performance in the firm, and (3) a system for rewarding and punishing individuals for their performance. These concepts offer a major competitive advantage for organizations.

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Editorial Reviews


This is the first time we have had a virtually complete exposition of Jensen's approach to what has become known as 'positivist agency theory' between one set of hard covers. It should thus be extremely welcome to every scholar who wishes to incorporate an agency perspective in his or her work...Jensen's book is a powerful tool in understanding the implications of this.
--Arthur Francis (Times Higher Education Supplement)

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 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...[This book] 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. Smith (Business Economics)

About the Author

Michael C. Jensen is Jesse Isidor Straus Professor of Business Administration Emeritus, Harvard Business School.

Product Details

  • Hardcover: 430 pages
  • Publisher: Harvard University Press (November 30, 1998)
  • Language: English
  • ISBN-10: 0674643429
  • ISBN-13: 978-0674643420
  • Product Dimensions: 1.5 x 6.5 x 9.8 inches
  • Shipping Weight: 1.5 pounds
  • Average Customer Review: 5.0 out of 5 stars  See all reviews (2 customer reviews)
  • Amazon Best Sellers Rank: #3,364,900 in Books (See Top 100 in Books)

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34 of 34 people found the following review helpful
By A Customer
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.
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1 of 2 people found the following review helpful
5.0 out of 5 stars Good Cross-boundary book March 20, 2001
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.
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