Understanding Organizational Value Creation and Structure

Understanding Organizations

An organization is a tool used by people to coordinate their actions to obtain something they desire or value, while attempting to fulfill a common goal.

Organizations are a response to and a means of satisfying human needs. They provide goods and services, employ people, and bring together people and resources to produce products. Ultimately, organizations exist to create value.

Why Do Organizations Exist?

People working together to produce goods and services create more value than people working alone. Organizations exist for the following reasons:

• Increase specialization and the division of labor: Division of labor allows for specialization, enabling individuals to become experts at their jobs.
• Use large-scale technology:
  • Economies of scale: Cost savings that result when goods and services are produced in large volumes.
  • Economies of scope: Cost savings that result when an organization uses underutilized resources more effectively by sharing them across different products or tasks.
• Manage the external environment: The external environment consists of political, social, economic, and technological factors. Organizations must regularly exchange products and services for needed resources and manage these external pressures.
• Economize on transaction costs: These are the costs associated with negotiating, monitoring, and governing exchanges between people.
• Exert power and control: Organizations structure their members to efficiently produce products and services.

How Organizations Create Value

Value creation takes place at three stages: input, conversion, and output. Each stage is affected by the environment in which the organization operates.

1. Organizational Inputs

Resources include raw materials, capital (shareholder investments), human resources (staff and managers), knowledge, training, and customers.

2. Conversion Process

The transformation of inputs involves machinery, computers, and human skills (personnel training).

3. Organizational Outputs

Outputs consist of finished goods, services, dividends (for satisfied shareholders), and salaries.

4. The Organizational Environment

The environment includes customers, shareholders, suppliers, distributors, government regulations, and competitors. Organizations function as open systems that interact continuously with these external forces.