A Formal Theory of Differentiation in Organizations

The expanding size of organizations gives rise to increasing subdivision of responsibilities, facilitates supervision and widens the span of control of supervisors, and simultaneously creates structural differentiation and problems of coordination that require supervisory attention. Large size, therefore, has opposite effects on the administrative component, reducing it because of an economy of scale in supervision, and raising it indirectly because of the differentiation in large organizations. The administrative costs of differentiation have feedback effects, which reduce the savings in administrative overhead large size effects, on the one hand, and stem the influence of size on differentiation, on the other. These inferences are derived from quantitative research on the employment security agencies in the United States and their subunits. The endeavor in this paper is to construct a systematic theory of differentiation in organizations consisting of two basic generalizations and nine propositions derivable from them, which can account for a considerable number of empirical findings. The two basic generalizations are: (1) increasing organizational size generates differentiation along various lines at decelerating rates; and (2) differentiation enlarges the administrative component in organizations to effect coordination.