What is an organization?

Sometimes it takes 20 years or so to return to the basics you learn in school, or maybe I am just not that fast. Recently, I started toying with the question "What is an organization?", and I only now feel this question has become meaningful.

Effective Performance Management will look different, based on how you view an organization. Many of the current methodologies are aimed at an organization as being a vehicle to maximize shareholder value. Although this definition may work for many people, somehow it doesn't work for me. I need a more inspiring definition.

The most common definition of an organization, if you look around a little, is "a group of people, sharing the same objectives". That one is better already. It's about people and what they would like to achieve. One problem though: "shared objectives" may sound logical in the definition, but in practice, the various stakeholders rarely share the same objectives!

I've recently been studying the field of "transaction cost economics" (TCE) a bit, and found a very interesting definition. According to TCE an organization consists of all activities where the costs of internal coordination are lower than the costs of market transactions.

What I like about this definition, is that it is "open". The definition suggests that organizations interact with other organizations via markets. This definition suggests that next to the "command and control" model (how our performance management currently looks, usually), there is the need for an approach to "collaborate and communicate". TCE takes a very cost based approach, but we can easily broaden that focus, to also include innovation, market access, economies of scale and other themes that are important to business. Where it is easier or better, or more efficient to interact with others, than to coordinate activities yourself, relationships should be forged.

This all leads to the definition that I like best, it defines an organization as a katalyst between stakeholders:

"An organization is a unique bond between stakeholders, through which each stakeholder can achieve objectives, that it could not achieve alone".

In other words, stakeholders need each other. They may not have the same objectives, but through the organization, they align them. Some bring capital, others supply labor, others are business partners, or for instance society provides us with an infrastructure to do business. This definition requires quite a bit of change in our current ways of thinking about performance management.

What is your favorite definition of an organization?

frank