Foundations of Organizational Strategy by Michael C. Jensen (Harvard University Press)

Economists have historically concentrated on analyzing markets while glossing over the complexities of organizations inside those markets. Behavioral organization theorists, on the other hand, have focused on the internal workings of organizations, tending to ignore the larger market forces that affect them. "Today, however," says HBS professor Michael Jensen in the introduction to his latest book, Foundations of Organizational Strategy, "technological and historical developments . . . are blurring the boundaries and making the relationship between organizations and markets much more complex."

To address such complexities, Jensen, the School's Jesse Isidor Straus Professor of Business Administration, presents a new, integrated theory of organizations that draws on work he and other organizational experts have developed over the past 25 years. Jensen and his contributing authors reconceptualize organizations as equilibrium systems that exist in a larger system of markets - such as financial, product, labor, and materials markets. Observing that the information necessary for the functioning of an organization is costly to produce and disseminate throughout the enterprise, they maintain that an organization must decentralize its decision-making capacity.

But the age-old issue of centralization vs. decentralization oversimplifies the fundamental question, Jensen believes. "The issue is not whether to centralize or decentralize," he said in a recent Bulletin interview, "but rather which decision rights should be centralized and which decentralized." In the book, Jensen further argues that decentralizing decision rights creates control problems when individuals within the organization act in their own self-interest rather than in the interests of the whole. Thus, the decentralized organization must also develop new control systems.

Jensen asserts that there are three main elements in an organization's total strategy: competitive, organizational, and human. "It is now critical that firms explicitly formulate and implement organizational strategies that complement and are integrated with their competitive strategies," he says. "In addition, firms' strategies must take into account the constraints and forces that act on the organization through external market forces in financial, control, labor, supply, and product markets."

Jensen and his contributors detail three major systems that play a critical role in organizational strategy and help address control problems within the decentralized organization. They are a system for allocating decision rights among agents in the firm; a system for measuring and evaluating performance in the firm; and a system for rewarding and punishing individuals for their performance. The theory presented in this work, Jensen believes, promises a major competitive advantage to managers who are plotting strategic directions for their enterprises.

Ordering Books To order this and other books reviewed in the Bulletin call the Harvard Business School Coop: 617-499-3248; 617-547-5003 (fax) or visit Harvard University Press's Web Site: www.hup.harvard.edu.

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