The Advantages of Analyzing Organizations as Incentive Mechanisms - Essay Example

?Discuss the advantages of analysing organizations as incentive mechanisms Introduction The increase of challenges in industries worldwide has notdiscouraged managers in organizations of various sizes and structure; on the contrary, in many cases, market pressures have led to the development of innovative strategies which have supported the long term growth of a firm – while in the past, the short term growth has been regarded as the priority when setting an organization’s strategic framework. Moreover, the increased competition has led managers to promote the improvement of inter-organizational relations, a strategy that has been proved particularly effective towards the development of a firm’s integration and performance. Through the decades, the analysis of the organizational needs and the market demands – for identifying the most effective organizational policies, has revealed the following fact: organizations are dynamic units, having the power to inspire their employees and influencing their rivals. In other words, it has been made clear that organizations can operate as incentive mechanisms for achieving the goals set by their strategic planners. Such perspective of modern organizations would be particularly important in order to understand the changes in organizational needs through the years and to identify an effective framework of action – meaning a plan for updating existing organizational policies – that would be best suit to the organizational aims; flexibility would be one of the key characteristics of such plan indicating the ability of the plan to be alternated in order to allow the development of the organization involved as an incentive mechanism. The terms and the characteristics of organizations as incentive mechanisms are presented in this paper focusing on the advantages of such perspective for both the organization, as an independent entity, and the organization’s stakeholders. 2. Organizations as incentive mechanisms The potentials of organizations to act as incentive mechanisms have been taken into consideration by theorists who studied the relationship between the organization and its environment. It has been proved that the use of organizations as such mechanisms would require the use of specific principles and rules – for criticizing these organization’s initiatives in the context of the specific role. In accordance with Herbert Simon (1991) the organizational behaviour should be primarily based on the organizational loyalty (in Knack 2003, p.237); using the above view, the following assumption can be produced: organizations cannot act as incentive mechanisms if loyalty across their units is not strong. Another requirement of the development of organizations as incentive mechanisms has been introduced through the study of Ledgerwood et al. (2006). In the above study it is explained that organizations can operate as incentive mechanisms only under the terms that the communication in the internal organizational environment is at high levels. It is further explained that such organizations can be easily transformed as of their structure, goals and operational activities, without being negatively affected as of their performance. The transformation of an organization from a NGO to a Micro Finance Institution is used as an example of the above phenomenon (Ledgerwood et al. 2006, 292). At the next level it is made clear that even when all measures have been taken regarding the quality of communication and cooperation within the organization, still it is possible that the organization fails to respond to its role as an incentive mechanism. In accordance with Ledgerwood et al. (2006, 292) one of the key reasons for this failure would be the inability of managers to identify the context of the organization’s incentives as being differentiated from the incentives of its employees. The incentives provided by the organization – acting as an incentive mechanism – are usually different from the incentives setting by individuals (employees) who are more likely to be objective and based on the employees’ needs and goals. On the contrary, organization, when acts as an incentive mechanism refers to policies and schemes that will benefit primarily the organization – as an economic entity – and not the interests of individuals, even if these interests are also taken into consideration when designing the relevant plans. For example, the introduction of a bonus scheme for rewarding the increased performance of employees aims primarily to help towards the development of organizational performance – however, the increase of employee performance is one of the terms that need to be met for the organizational growth to be achieved. The above example is used by Ledgerwood et al (2006, 292) in order to show the close relationship between the organizational and the individuals’ incentives and to highlight the use of the latter to serve the interests of the former. On the other hand, Alchian and Demsetz note that the successful performance of an organization as an incentive mechanism requires the existence of individuals that monitor the various phases of the relevant projects/ initiatives. It is explained that without the appropriate monitoring of organizational activities, there can be no fair application of the organizational provisions/ incentives. The example of the employees’ rewarding in accordance with their performance is mentioned as a characteristic case of such type: even if plans which can act as effective incentives are incorporated in the organizational policies, still the results will not be the expected ones. For instance, if there is no one to monitor the performance of employees within a particular organization, an increase in the remuneration of employees – that will act as an incentive for the increase of their performance – could not be established (Alchian and Demsetz, in Worthington et al. 2005, 44). In this way, the value of the organization as an incentive mechanism is eliminated. Under these terms, the success of an organization as an incentive mechanism seems to be related not just with the organizational loyalty and the inter-organizational communication but also with the organizational structure (allocation of tasks among employees or establishment of appropriate organizational units). 2.1. Advantages of analyzing organizations as incentive mechanisms In practice, the analysis of organizations as incentive mechanisms can result to a series of advantages – referring to the organizations as corporate units but also to the individuals, stakeholders, who have interests on the particular institutions. Theorists have described these advantages using different frameworks and approaches. In accordance with Balzat (2006) one of the most important advantage of using organizations as an incentive mechanism is the promotion of innovation across all their activities (Balzat 2006, 15). It is made clear that the specific benefit is related to a particular term: the internal and the external organizational environment need to be carefully reviewed and evaluated in advance ensuring that the use of organization as incentive mechanism will, actually, support innovation; if the resources available (employees, technology) are not appropriate for supporting innovative organizational plans, then there is no particular benefit for promoting the role of organization as an incentive mechanism (Balzat 2006, 15). On the other hand, Hoskisson et al. (2008) note that the use of organization as an incentive mechanism will result to the incorporation of a series of policies which are required for the development of such plan: the review of the competitors’ similar strategies and the relevant market trends. As a result, the organization’s awareness (understanding of its competitors’ position) and motivation (ability to respond to its competitors’ initiatives) will be increased (Hoskisson et al 2008, 177). Therefore, the position of the firm towards its competitors will be strengthen while its power to face the market pressures – referring mostly to the pressures caused by the development of substitute products/ services by the competitors – will be increased. From another point of view, the analysis of organizations as incentive mechanisms can lead to the better understanding of their goals and role; in many cases, the targets set by the organizational leaders do not reflect organizational aims or culture; this problem can be identified if the potential of the organization to act as an incentive mechanism is reviewed (Rugman et al 2005, 87). As noted above, the delegation of such tasks to the organization will require the examination and the analysis of its environment –mostly the internal organizational environment (for checking the quality of communication/ cooperation and the level of organizational loyalty). In this way, any gap between the organizational plans and the tools used for their achievement will be identified and appropriately covered. Another advantage related to the analysis of organizations as incentive mechanisms is the following one: within modern organizations usually the parties (shareholders) try to keep their independency towards the organizations’ operations – aiming to retain their rights in the organizational benefits but to be free from obligations for compensation – in cases of organizational failures. The analysis of organizations as incentive mechanisms will reveal the relationships among organizational stakeholders identifying the policies that would increase integration across the organizational units (Galbraith 2002, 74). Parties would be attracted to increase their role within the organization – sharing both the benefits and the losses – a fact that would increase the financial stability of the organization (Galbraith 2002, 74). 3. Conclusion One of the key characteristics of modern market is the continuous increase of competition in all industrial sectors; firms that are well prepared to face these pressures have more chances to survive – either in the short or the long term. The use of organizations as incentive mechanisms, in the context described above, can help these institutions to increase their integration and improve their policies; in this way, their competitiveness will be also developed. The benefits related to the analysis of organizations, as incentive mechanisms, are various – as already explained. However, it should be made clear that these benefits are not standardized; they may appear more or less in accordance with the policies used for the relevant activity but also with the responses of employees to the specific initiatives (Grandori 2001, 416). The existing organizational environment is, in any case, crucial for the successful completion of such tasks; the flexibility of the plans adopted and the use of well known, and already tested, strategic theories and frameworks could minimize the risks involved. References Balzat, M. (2006). An economic analysis of innovation: extending the concept of national innovation systems, Cheltenham, UK, Edward Elgar Publishing Galbraith, C. (2002). Strategies and organizations in transition, Emerald Group Publishing Grandori, A. (2001). Organization and economic behavior, London, Routledge Hoskisson, R., Hitt, M. (2008). Competing for Advantage, Cengage Learning Knack, S. (2003) Democracy, governance, and growth, University of Michigan Press Ledgerwood, J., White, V. (2006). Transforming microfinance institutions: providing full financial services to the poor, World Bank Publications Rugman, A., Verbeke, A. (2005) Analysis of multinational strategic management: the selected scientific papers of Alan M. Rugman and Alain Verbeke, Cheltenham, UK, Edward Elgar Publishing Worthington, I., Britton, C., Rees, A. (2005). Economics for business: blending theory and practice, Pearson Education Read More