Researchers have been coming up with theories about how management works for more than a century. The interest isn't just academic. By establishing the fundamentals of good management, researchers hoped to make business more efficient. Classical management theory treated businesses like machines. The neoclassical theory of management took the human factor into account.

The Classical Theory

The classical theory of management dates back to the 19th century. The big thinkers of the day conceived it as a way to streamline operations, increase productivity and enhance the bottom line. Classical theory advocates specialization of labor, centralized leadership and decision making and using financial rewards to motivate workers. Its key elements are:

  • Leadership is autocratic. The person in charge makes a decision, and the people below him carry it out. There's no need for the boss to consult with subordinates or employees.

  • Management is hierarchical. At the top of the hierarchy are the owners, directors and executives who set the long-range goals. Next come middle managers who apply the big-picture goals to their individual departments. At the bottom of the management hierarchy are the supervisors who directly interact with employees and handle daily problems.

  • Workers specialize. The classical theory was modeled on the assembly line. Every worker specializes in one part of the whole project. That makes them efficient, thus increasing productivity even though it limits their horizons.

  • Money gets results. If the company rewards hard work, employees will work harder.

The classical model was simple and made relationships and roles in the workplace easy to understand. Everyone had a clearly defined task. Nobody had to worry about other matters. However, the model approached workers as little more than cogs in a machine, an approach that fell out of favor in the 20th century.

Neoclassical Organization Theory

The neoclassical theory of management took the concepts of the classical theory and added social science. Rather than view workers as automatons whose performance rises in response to better pay, neoclassical organization theory says the personal, emotional and social aspects of work are stronger motivators.

The Hawthorne experiments were the game changer here. In 1924, Western Electric began a series of experiments at the Hawthorne plant in Chicago, seeing how changes including pay incentives, lighting levels and rest breaks affected performance. When it seemed that every change improved performance, the company wondered if constant change was stimulating employees to work harder. Trying to figure it out, they consulted with experts, including psychologist George Elton Mayo.

Beginning of the Neoclassical Approach

One of the managers at Hawthorne had already figured out that the test group performed better because management treated them better. Not only was the company paying them more attention, the group supervisor talked to them and interacted with them as individuals. The supervisor listened to their complaints and paid less attention to minor infractions.

Mayo interviewed the group and realized that they saw themselves as a united team. How they interacted with each other and what they expected of each other influenced their performance much more than management. Financial incentives didn't matter, but the support and approval of their colleagues on the team mattered a great deal.

Mayo concluded that the classical model was flawed. It approached the workplace as if it could be organized based on pure logic. In reality, personal, nonlogical and informal arrangements played just as big a role in productivity. The neoclassical theory of management was built around treating workers as people.

Roots of the Neoclassical Idea

Mayo's conclusions a century ago are commonplace now but were radical at the time:

  • Supervisors need to have good interpersonal skills. Aloof, autocratic management alienates employees.

  • Supervisors and managers should be trained in listening and interviewing skills.

  • Workers' personal problems and issues are a factor in the workplace.

  • If workers feel they have some control, they perform better.

  • Workers should be given opportunities to express any frustrations they have with the job.

  • Bonding with coworkers is a big part of job satisfaction for most employees.

  • A feeling of worth improves performance more than changes to the working conditions.

  • Focusing purely on efficiency and ignoring the human factor won't improve performance.

Mayo wasn't the first person to express these ideas, but the Hawthorne experiments went a long way toward showing they were valid.

Neoclassical Theory of Management

During the 20th century, other management theorists developed Mayo's critique of the classical model and developed the elements of the neoclassical management approach:

  • Human beings aren't robots. No matter how logically you structure an organization, human behavior can disrupt it.

  • Informal rules and arrangements affect how work is done more than the formal structure.

  • Rigid division of labor isolates workers, particularly those assigned to insignificant jobs.

    * The classical approach looks efficient on paper, but it's less effective in practice.

  • A manager's authority is based partly on his personal skills. It can't be reduced to a universal ratio like "one manager can handle up to 10 people."

  • Individual employees and managers have goals. They may not be the same as the goals of the organization.

  • Communication is important. Lines of communication have to be open and known to everyone, and they should be as short and direct as possible.

Neoclassical Pros and Cons

For management theorists, the great benefit of neoclassical theory is its improvement on classical management theory. The classical theory ignored the human element, whereas the neoclassical approach took individuals and their needs into account. Neoclassical theory drove a stake into the belief that management could and should be entirely mechanistic and logical.

Beyond that, the basic insights of the neoclassical organization theory were essential to all later theories, such as systems theory and contingency theory. Everything that came later built on the neoclassical core. Neoclassical research drew psychologists and sociologists into the study of management, making the discipline stronger.

One criticism of the neoclassical theory of management is that neoclassical theory never stood on its own. It was classical management theory with the human insights added in. It built on classical thinking rather than breaking away or replacing it. On top of that, the neoclassical approach is decades old. It has become outmoded. Newer theories such as situational and contingency theory see the limitations of the neoclassical theory of management:

  • It focuses on the organization and how it interacts with the people in it. It doesn't consider the surrounding environment.

  • It assumes there's one approach to running the company that will work consistently in any environment.

Newer Theories of Management

Both situational and contingency theories of management assume that a leader should be flexible. What works as a leadership style in one situation may flop in a different environment.

Situational leaders take stock of their employees and the current conditions in the workplace and outside the company. Then they adopt the management style that can best attain their goals in the current circumstances. Like a neoclassical manager, the situational leader has to understand people. However, they are more flexible and adaptive.

Like situational theory, contingency theory assumes different situations call for different management styles. Contingency theorists, however, believe that a manager's style is fixed and not something that can be changed to fit the environment. Success is contingent on the manager having the right style for a given situation. If the manager and situation don't match, then failure is inevitable.

Those are only two of the theories that have come to replace the neoclassical model.