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Foundations of Organizational Strategy

Foundations of Organizational Strategy

Michael C. Jensen

ISBN 9780674005648

Publication date: 03/02/2001

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.


  • 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


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

Book Details

  • 430 pages
  • 6-1/8 x 9-1/4 inches
  • Harvard University Press

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