CHAPTER -2

2. Strategy, Organization Design, and Effectiveness

2.1. Definition of strategy
An organizational goal is a specific set-point which an organization attempts to achieve. For
better understanding we can interpret it as a target towards which organizational efforts are
directed. These goals are highly influenced by the nature of organizational strategy. In other
words, organizational strategy is implemented by segregating various goals grouped together to
be executed one after another. Top management decides and sets the goals and determines the
direction it will take to accomplish it. This process of setting new strategic direction for the
organizations brings a lot of opportunities and threats for the management to deal with – for
which a careful SWOT analysis is required. There are certain key areas which can assist in
setting a new strategic direction for organizations including production, staff, customers,
systems, premises, quality and marketing.
Strategy is:
 A plan or course of action or a set of decision/rules making a pattern or creating a
common thread.
 A pattern or common thread related to the organization’s activities which are derived
from the policies, objectives and goals.
 Johnson and Scholes define strategy as: "Strategy is the direction and scope of an
organization over the long-term: which achieves advantage for the organization through
its configuration of resources within a challenging environment, to meet the needs of
markets and to fulfill stakeholder expectations".
2.2. What is an Organization Design?
The term ‘organizational design’ refers to how various parts of the organization and the distinct
elements are brought together to make it. It considers both, how these elements match together
and ways in which they may be analyzed and improved. Organizational design is the process by
which managers select and manage aspects of structure and culture so an organization can
control the activities necessary to achieve its goals. Continuous learning looks at five elements of
organization design: structure, tasks, systems, culture and strategy. Organization design is
presented as reflecting the way goals and strategies are implemented.

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Organization design is shown as the administration and execution of the strategic plan.
Organization direction is seen to be implemented through learning or efficiency orientation as
well as choices about information and control systems, the type of production technology, human
resource policies, culture and linkages to other organizations. This means that strategies are often
made within the structure of the organization, so that current design constraints or puts limits on
goals and strategy.
The design aspects broadly include how the organization is structured, the types and numbers of
jobs, and the processes and procedures. Broadly an organization is designed to realize a number
of objectives. These could be:
 To support the organization’s strategy. The structure should be designed in such a way as
to assure the realization of the organization’s goals and objectives;
 to arrange resources in the most efficient and effective way;
 to provide for the effective division of tasks and accountabilities among individuals
 to ensure effective co-ordination of the organization’s activities and clarify the decision-
making processes;
 to enhance and elucidate the lines of communication up, down and across the
organization;
 to permit for the effective monitoring and review of the organization’s activities;
 to endow with mechanisms for coping with change in markets, products and the internal
and external environments;
 to aid the handling of crises and problems(make decisions)
 to help to motivate, manage and give job satisfaction to individual members of the
organization; and
 to provide for management succession

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 2.3. Factor affecting organizational design
The primary factors that often affect organization design are: size, organization life cycle,
availability and need of raw materials, human and financial resource, environment,
strategy, and technology.

I. Size and Organization Design

Size is a main contingency factor that affects several aspects of structure. The size contingency
refers to the total number of employees who are to be organized. Size as a key structural
variable is subject to two schools of thought. The first approach, often called the “bigger is
better” model, presupposes that the per unit cost of production decreases as the organization
grows. In effect, bigger is said to be more efficient. The second approach i.e. “small is
beautiful” revolves on the law of diminishing returns. This approach asserts that oversized
organizations and subunits tend to be beleaguered by costly behavioral problems. Large and
impersonal organizations are said to trigger apathy and alienation, with resulting problems such
as turnover and absenteeism.

II. Environment and Organizational Design

Organizations, as open systems, need to receive various inputs from the environment and to sell
various outputs to their environment. Therefore, it is important to comprehend what the
environment is and what elements are likely to be important. The environment of an organization
may be defined as general or specific. The general environment is the set of cultural,
economic, legal-political, and societal conditions within the areas in which the organization
operates. The specific environment constitutes its owners, suppliers, distributors, government
agencies, and competitors with which an organization must interact to grow and survive. A
firm, typically, much more concerned over the composition of its specific environment than of
its general environment.
III. Strategy and Organizational Design

Strategy is one important factor that affects organization design. Ultimately, however
organization design is a result of numerous contingencies. Organizational strategy refers to the
way the organization positions itself in its setting in relation to its stakeholders, given the
organization’s resources, capabilities, and mission.

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2.4. Consequence of poor organizational design

Organizational design is the process by which managers select and manage aspects of structure
and culture so an organization can control the activities necessary to achieve its goals. The major
consequences of poor organization design are the following.

 Turnover /talented employee leave

 Wastage of different resource and difficult to acquire
 Conflict / crisis created

2.5. A Framework for Selecting Strategy and Design

Basically two types of strategies are popular at present: Porter’s Competitive Strategies (three
Generic Strategies) and Miles and Snow’s Strategy Typology

1. Porter’s Competitive Strategies (Three Generic Strategies)

These are in terms of cost focus and product focus. According to Michael Porter, companies
need to differentiate and place themselves differently from their competitors in order to build and
sustain a competitive advantage. Organizations have attempted to build competitive advantages
in various ways, but three underlying strategies appear to be essential in doing so: low cost,
differentiation, and focused.

a. Low Cost strategies

A low-cost strategy is based on an organization’s ability to provide a product or service at a
lower cost than its rivals. The organization’s design is functional, with accountability and
responsibility clearly assigned to various departments. A low-cost leadership strategy
(efficiency) is associated with strong, centralized authority and tight control, standard
operating procedures, and emphasis on efficient procurement and distribution systems.

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 b. Differentiation strategies
A differentiation strategy is based on providing customers with something that is unique
and makes the organization’s product or service distinctive from its competition. An
organization that chooses a differentiation strategy typically uses a product organization design
whereby each product has its own manufacturing, marketing, and research and development
(R&D) departments. A differentiation strategy, on the other hand, requires that employees be
constantly experimenting and learning. Structure is fluid and flexible, with strong horizontal
coordination. Empowered employees work directly with customers and are rewarded for
creativity and risk taking. The organization values research, creativity, and innovativeness over
efficiency and standard procedures.

c. Focused strategies
A focused strategy is designed to help an organization target a specific niche within an industry,
unlike both the low-cost and the differentiation strategies, which are designed to target industry-
wide markets. An organization that chooses a focused strategy may utilize any of a variety of
organization designs, ranging from functional to product to matrix to network, to satisfy their
customers’ preference. Those strategies create a defendable position in the long run and
outperforming competitors in a market. Some companies can successfully pursue more than one
approach.

With respect to advantage, managers determine whether to compete through lower cost or
through the ability to offer unique or distinctive products and services. Managers then determine
whether the organization will compete on a broad scope through competing in many customer
segments or a narrow scope through competing in a selected customer segment

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2. Miles and Snow’s Strategy Typology
1. The prospector strategy: To innovate, to take risks, and seek out new opportunities;
creativity more important than efficiency and fits with a dynamic changing environment. It
requires characteristics similar to a differentiation strategy, and the defender strategy takes an
efficiency approach similar to low-cost leadership.
2. Defender strategy: Opposite of prospector. It protects current market growth and seeks to
hold on to current customers but it neither innovates nor seeks to grow; concerned with stability.
3. The analyzer strategy attempts to balance efficiency for stable product lines with flexibility
of customers need by moderate emphasis on innovation, it is associated with a mix of
characteristics of the above strategies.
4. With a reactor strategy, managers have left the organization with no direction and no clear
approach to design
2.6. Assessing organizational effectiveness and Indicators of Organizational Effectiveness
Organizations are constructed to be the most effective and efficient social units. The actual
effectiveness of a specific organization is determined by the degree to which it realizes its
goals. The efficiency of an organization is measured by the amount of resources used to produce
a unit of output. Output is usually closely related to, but not identical with, the organizational
goals. For instance, Ford produces automobiles (its output), but its goal seems to be profit-
making. The unit of output is a measurable quantity of whatever the organization may be
producing. Organizational effectiveness can have a broad meaning that includes efficiency,
profitability, employee satisfaction, innovation rate and patient well-being. Organization
effectiveness can be defined as the ability of the organization to attain the goals set by itself
or by its ability to function well as a system or by its ability to satisfy its stakeholders.
Organizational effectiveness also understood as the degree to which an organization realizes it’s’
goals.
 Indicators of Organizational Effectiveness
 Quality of management.
 Workforce and productivity
 Quality of products/services
 Innovativeness and knowledge generation and utilization
 Achievement of goal and long-term investment value

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  Financial soundness and quality of life change
 Share holder satisfaction and Reduction of cost
 Market share relative to competitors
 Ability to attract, develops, and keeps talented people.
 Responsibility to the community and the environment
 Wise use of corporate assets
 Trust, accountability and number of client serve
2.7. Approaches to measure organizational effectiveness (Contingency effectiveness
approach, resource based approach, and internal process approach.
1. Contingency Effectiveness Approaches: Contingency approaches to measuring effectiveness
focus on different parts of the organization. Organizations bring resources in from the
environment, and those resources are transformed into outputs delivered back into the
environment.

2.The Internal Systems Approach: Innovation

Internal process approach looks at internal activities and assesses effectiveness by indicators of
internal health and efficiency. To be effective, an organization needs a structure and a culture
that foster adaptability and quick responses to changing conditions in the environment. The
organization also needs to be flexible so it can speed up decision making and create products and
services rapidly. Measures of an organization’s capacity for innovation include the length of time
needed to make a decision, the amount of time needed to get new products to market, and the

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amount of time spent coordinating the activities of different departments. These factors can often
be measured objectively quickly than its rivals. Improvements to internal systems that influence
employee coordination or motivation have a direct impact on an organization’s ability to respond
to its environment.
3. The External Resource Approach: Control
The external resource approach allows managers to evaluate how effectively an organization
manages and controls its external environment. For example, the organization’s ability to
influence stakeholders’ perceptions in its favor and to receive a positive evaluation by external
stakeholders is very important to managers and the organization’s survival. Similarly, an
organization’s ability to utilize its environment and to secure scarce and valuable resources is
another indication of its control over the environment. To measure the effectiveness of their
control over the environment, managers use indicators such as stock price, profitability, and
return on investment, which compare the performance of their organization with the performance
of other organizations. Top managers watch the price of their company’s stock very closely
because of the impact it has on shareholder expectations. Similarly, in their attempt to attract
customers and gauge the performance of their organization, managers gather information on the
quality of their company’s products as compared with their competitors’ products.
Top management’s ability to perceive and respond to changes in the environment or to initiates
change and be first to take advantage of a new opportunity is another indicator of an
organization’s ability to influence and control its environment. By their competitive attitude,
these companies signify that they intend to stay in control of their environment so they can
continue to obtain scarce and valued resources such as customers and markets. Managers know
that the organization’s aggressiveness, entrepreneurial nature, and reputation are all criteria by
which stakeholders (especially shareholders) judge how well a company’s management is
controlling its environment. In fast-changing environments where customers’ needs change and
evolve and where new groups of customers emerge as new technologies result in new kinds of
products and services, companies must learn to define and redefine their businesses to satisfy
those needs. Companies have to listen closely to their customers and decide how best to meet
their changing needs and preferences.

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