Organization Theory &

Design
Strategic Management and
Organizational Effectiveness
 Definition of
Strategic Management
Strategic Management
The set of managerial decisions and
actions that determines the long-run
performance of an organization
 Three Key Strategic Questions
1. Where is the organization now?
2. If no changes are made, where will the
organization be in one, two, five or ten
years? Are the answers acceptable?
3. If the answers are not acceptable, what
specific actions should management
undertake? What are the risks and payoffs
involved?
 Top Management: Strategic Direction

 Primary responsibility of top management

is to determine an organization’s goals,
strategy, and design thereby adapting the
organization to a changing environment
Top Management Role in Organizational
Direction, Design, and Effectiveness

External Environment
Opportunities Organization
Threats Design
Uncertainty
Resource Availability Structural Form – Effectiveness
learning vs.
Strategic Direction efficiency Outcomes
Information and Resources
Define Select control systems Efficiency
CEO, Top mission, operational Production Goal attainment
Management official goals, technology Competing values
goals competitive Human resource
Team strategies policies,
incentives
Organizational
culture
Internal Situation Inter-organizational
Strengths linkages
Weaknesses
Distinctive Competence
Leadership Style
Past Performance
 Strategy
 Through its strategy, the organization
seeks to use and develop core
competences to gain a competitive
advantage.
 Strategy allows the company to shape and
manage its domain to use existing
competences and develop new ones to
make it a better competitor.
 Competitive Advantage
Hallmark of High Performance Business

 Sources of Competitive Advantage:

 Core Competencies
 Value Chain
 The Value Chain
The value chain provides a map of firm capabilities
and allows systematic search for core competencies

Infrastructure
Activities
Support

M
Human Resources

ar
gi
Research and Development (Innovation)

n
Materials Procurement
Operations

Ma
Outbound

Marketing
Logistics
Inbound

Logistics

& Sales

Service

r gin
Primary Activities
 Characteristics of a
Core Competency
 Provides consumer benefits
 Difficult to imitate
 Can be leveraged to other products and/or
markets
 Sources of Core Competencies
1. Specialized Resources
1. Functional resources: the skills possessed
by an organization’s functional personnel
2. Organizational resources: the attributes
that give an organization a competitive
advantage such as the skills of the top-
management team or possession of valuable
and scarce resources
 2. Coordination Ability
 An organization’s ability to coordinate its
functional and organizational resources to
create maximum value
 Effective coordination of resources leads
to competitive advantage.
 Can be achieved through control systems
 Centralization or decentralization of authority
 Long-term Goals
 Difference between:
 Vision: Futuristic in intent – describes where an
organization would like to be in the next 5 – 10
years or more
 Strategy: Describes how the organization will
achieve its mission
 Mission: Typically define business operations,
focus on values, markets, and customers that
distinguish the organization
 Levels of Strategy
1. Functional-level strategy: a plan of action
to strengthen an organization’s functional and
organizational resources, as well as its
coordination abilities, in order to create core
competences
2. Business-level strategy: a plan to combine
functional core competences in order to
position the organization so that it has a
competitive advantage in its domain
 Levels of Strategy
3. Corporate-level strategy: a plan to use and
develop core competences so that the
organization can not only protect and enlarge
its existing domain but can also expand into
new domains
Importance of Functional-level Strategy

 To develop a competitive advantage,

an organization should:
1. Perform functional activities at a cost
lower than that of its rivals, or
2. Perform functional activities in a way
that clearly differentiates its goods
and services from those of its rivals
 Structural requirements
1. Low Cost leadership
 Strong central authority; tight controls
 Standard operating procedures
 Easy to use manufacturing technologies
 Highly efficient procurement and distribution
system
 Close supervision; limited employee
empowerment
 Frequent, detailed controlled reports
 Structural requirements
2. Focused Low Cost leadership
 Relies on, more or less, the same attributes as
in low cost leadership, focusing on a narrow
market
 Simple structure
 High centralization
 Low differentiation
 High Formalization
 Standardization
 Structural requirements
3. Broad Differentiation
 Acts in an organic, loosely knit way, with
strong coordination
 Creative flair, thinks “ out of the box”
 Strong capability in basic research
 Strong marketing abilities
 Rewards employee innovation
 Corporate reputation for quality or
technological leadership
 Structural requirements
4. Focused Differentiation
 Combination of the same policies as in broad
differentiation directed at a specific strategic
target market
 Values and rewards flexibility and customer
intimacy
 Measures cost of providing service and
maintaining customer loyalty
 Pushes empowerment to employees with
customer contact
Porter’s Competitive Strategies

Competitive Competitive
Scope Advantage Strategy Example
Low-Cost Dell,
Broad Low Cost Leadership Toyota
Broad Apple, BMW
Broad Uniqueness Differentiation

Focused Low-Cost Dentonic,

Narrow Low Cost Leadership Royal Crown
Cola
Focused Ferrari,
Narrow Uniqueness Differentiation Rolex
Low-Cost and Differentiation Advantages
 Corporate-level Strategy
 Involves search of new domain in which to
exploit and defend the ability to create value
 Vertical integration: a strategy in
which an organization takes over and
owns its suppliers or its distributors
 Related diversification: the entry into
a new domain that is related in some way
to an organization’s domain
 Unrelated diversification: the entry
into a new domain that is not related in
anyway to an organization’s core domain
Entering New Domains
 Corporate-level Strategy and
Structure
 For organizations operating in more than
one domain, a multidivisional structure is
appropriate.
 Conglomerate structure and unrelated
diversification
 Conglomerate structure: a structure in which
each business is placed in a self-contained division
and there is no contact between divisions
A Divisioanl Structure
 Structures for Related
Diversification
 Related diversification creates value by
sharing resources or transferring skills
from one division to another.
 Requires lateral communication between
divisions as well as vertical
communication between divisions and
headquarters
 Integrating roles and teams of functional
experts are needed to coordinate skills
and resource transfers.
 Corporate-level Strategy and
Culture
 Cultural values and the common
norms, rules, and goals that reflect
those values can greatly facilitate the
management of a corporate strategy.
 Organizations need to create cultures
that reinforce and build on the
strategy they pursue.
 Managerial Implications:
Corporate-Level Strategy
 Managers must analyze the
environment to protect existing
domains and exploit the firm’s core
competences. Managers should
evaluate costs and benefits associated
with entering a new domain and the
costs and benefits of various
strategies. Managers must match the
firm’s structure and culture to strategy.
 Miles & Snow’s Typology for Corporate
Strategy
1. Prospector:
 Strategy is to innovate, take risk, seek
out new opportunities (domains) and
grow
 Suited to dynamic, growing
environments, where creativity is more
important than efficiency
 Learning orientation, flexible, fluid,
decentralized structure
 Strong capability in research
 Miles & Snow’s Typology for Corporate
2. Defender:
Strategy
 Strategy is concerned with stability or even
retrenchment
 Seek to hold onto current domains; neither innovates
nor seeks to grow
 Concerned primarily with internal efficiency and control
to produce reliable, high-quality products for steady
customers
 Successful when the organization is in a mature
industry or stable environment
 Efficiency orientation, centralized authority and tight cost
controls
 Emphasis on production efficiency, low overhead
 Close supervision, little employee empowerment
 Miles & Snow’s Typology for Corporate
Strategy
3. Analyzer:
 Tries to maintain a stable business while
innovating on periphery
 Lies midway between prospector and defender
 Some products will be targeted toward stable
environments in which efficiency-based strategy is
designed to hold on to current customers
 Others will be targeted towards new, more
dynamic environment
 Balance efficiency and learning; tight cost controls
with flexibility and adaptability
 Efficient production for stable product lines,
emphasis on creativity, research , risk taking for
innovation
 Miles & Snow’s Typology for Corporate
Strategy
4. Reactor:
 This is not a strategy at all
 Reactors respond to environmental threats and
opportunities in ad hoc fashion
 Top management has not defined a long-range
plan or given organization explicit mission or
goals, so the organization takes whatever
action seems to meet immediate needs
 Design characters may shift abruptly
depending on current needs
 Contingency Factors
Affecting Organization Design

Envir Size/
o nmen Life C
t Technology ycle
Cul
tur
e
t egy
a
Str

Organizational Structure and Design

The Right Mix of Design Characteristics Fits the Contingency Factors

 Organizational Effectiveness
 Are you sure you know what effectiveness
is?
Toyota: Ford:
57.7 veh/empl/year 16.1 veh/empl/year
$630 labor cost/vehicle $2,379 labor
cost/vehicle
Earning $466 /vehicle $ 555 per vehicle
 Traditional Approaches
 The Goals Approach
 The Resource-based Approach
 The Internal-Processes Approach
Traditional Approaches to the Measurement of
Organizational Effectiveness

External Environment
Organization
Resource Internal Product and
Inputs activities Service
and Outputs
processes

Resource-based Internal Goal

approach process approach
approach
 The Goals Approach
 Organization’s effectiveness must be
appraised in terms of accomplishment of
ends rather than means
 It is the bottom line that counts
 Reported Goals
of U.S. Corporations
Goal % Corporations
Profitability 89
Growth 82
Market Share 66
Social Responsibility 65
Employee welfare 62
Product quality and service 60
Research and development 54
Diversification 51
Efficiency 50
Financial stability 49
Resource conservation 39
Management development 35
Source: Adapted from Y. K. Shetty, “New Look at Corporate Goals,”
California Management Review 22, no. 2, pp. 71-19.
 The Goal Approach
Assumptions:
Assumes that organizations are deliberate, rational,
goal seeking entities. As such, successful goal
accomplishment becomes an appropriate measure of
effectiveness.
Use of goals approach implies other assumptions if it is
to be valid
1. Organizations must have ultimate goals
2. These goals must be identified and defined well
enough to be understood
3. These goals must be few enough to be manageable
4. There must be general consensus or agreement on
these goals
5. Progress towards these goals must be measurable
 Goals Approach
Making Goals Operative
 The key decision makers would be the group
from which goals would be obtained
 They would be asked to state the specific
organizational goals
 Develop some measurement device to see how
well the goals are being met
 Most explicit application is “Management by
Objectives”
 Goals approach
Criticism:
 Whose goals? Goal Conflicts
 Official goals do not always reflect organization’s actual
goals. Official goals tend to be influenced strongly by
standards of social desirability
 An organization’s short-term goals are frequently
different from its long term goals. Which goals, short-
term or long-term, should be used?
 Organizations have multiple goals. They can compete
with each other and some times are even incompatible
(e.g. high product quality and low unit cost)
 Goals Approach
Value to managers:
1. Ensuring that input is received from all those having a
major influence on formulating goals even if they are
not part of senior management
2. Recognizing that organizations pursue both short-term
and long-term goals
3. Insisting on tangible, verifiable, and measurable goals
4. Viewing goals as dynamic entities that change over
time rather than as rigid or fixed statements of
purpose
 Systems-Resource Approach
 Combines the Resource-based approach with
Internal-Processes (Systems) approach
 Ends are not ignored; but they are only one element
in a more complex set of criteria. Systems model
emphasizes criteria that will increase the long-term
survival of the organization – such as the
organization’s ability to acquire resources, maintain
itself internally as a social organism, and interact
successfully with its external environment
 Focuses not so much on specific ends as on means
needed for the achievement of those goals
 Systems Resource Approach
Assumptions:
1. Organizations are made up of interrelated sub-
parts. If any one of these sub-parts performs
poorly, it will negatively affect the performance of
the whole system
2. Focus is on ensuring a continuous supply of
resources, and, having the means (technology) to
efficiently and effectively convert them into
outputs
3. Effectiveness requires awareness and successful
interactions with environmental constituencies
4. Survival requires a steady replenishment of those
resources being consumed
 Systems Resource Approach
 Looks at factors such as relations with the
environment to assure continued receipt of inputs
and favorable acceptance of outputs, flexibility of
responses to environmental changes, the
efficiency with which the organization transforms
inputs to outputs, the clarity of internal
communication, the level of conflict among
groups, and degree of employee job satisfaction
 Systems Resource can also be measured by
Organizational Effectiveness Ratios
 These could include Output/Input (O/I),
Transformations /Output (T/O) and Changes in
Input/Input (Δ I/ I) ratios etc.
 Examples of effectiveness measures
Ratios Org: Hospital University
O/I ROI Total number of Number of faculty
patients treated publications

T/ I Inventory Capital investment in Cost of

turnover medical technology information
systems
T/ O Sales Total number of Number of
volume patients treated students
graduated
▲I /I Change in Change in number of Change in student
Working patients treated enrollment
Capital
 Systems Resource Approach
Criticism:
1. Measurement of process variables such as
flexibility of responses to environmental
changes or clarity of internal communications
2. Should “means” assume priority over “ends”?
3. It focuses on the means necessary to achieve
effectiveness rather than on organizational
effectiveness itself
4. An organization could become obsessed with
systems and processes, losing sight of “why”
these systems and processes were needed in
the first place
 Systems Resource Approach
 Value to Managers:
 Managers who use systems-resource
approach to OE are less prone to look for
immediate results. They are less likely to
make decisions that trade off
organization’s long-term health and
survival for ones that would make them
look good in near term
 Contemporary Approaches to
Organizational Effectiveness
 Strategic Constituencies Approach
 Competing Values Approach
 The Strategic Constituencies Approach
 An effective organization is one that satisfies the
demands of those constituencies in its
environment (stakeholders) from whom it
requires support for its continued existence
 OE becomes an assessment of how successful
the organization has been in satisfying those
critical constituencies, on whom the future
survival of organization depends
 This approach is similar to type 3 theorists’
model
 The Competing Values Approach
 The criteria you value and use in
assessing organization effectiveness
depends on who you are and the interest
you represent
 Different constituencies (internal as well
as external) apply competing criteria
Diverse OE Criteria used by different constituencies:
Constituency Typical of criteria
Owners ROI, growth in earnings
Employees Compensation, fringe benefits,
satisfaction with working conditions
Customers Satisfaction with price, quality, service
Suppliers Satisfaction with payments, future sales
potential,
Creditors Ability to pay, indebtedness
Government
Agencies Compliance with laws, avoidance of
penalties and reprimands
 Competing Values Approach
 Indicators:
1. Focus: Whether dominant values concern issues that
are external or internal to the firm.
 Internal focus reflects management concern for well
being and efficiency of employees
 External focus represents an emphasis on well being
of the organization itself with respect to the
environment
2. Structure: Whether stability versus flexibility is the
dominant structural consideration
 Stability: Reflects a management value for top down
control
 Flexibility: Represents a value for adaptation and
change
 Effectiveness Values
for Two Organizations
STRUCTURE
Human
Relations FLEXIBILITY Open Systems
Emphasis Emphasis
F
O ORGANIZATION
C INTERNAL A EXTERNAL
U
S ORGANIZATION
Internal Process B Rational Goal
Emphasis Emphasis
CONTROL
 Competing Values and Organization Life Cycle
1. Entrepreneurial stage:
Organization is typified by innovation, creativity, and
marshaling resources. Getting external support is crucial.
The open system model emphasizes these criteria
2. Collective stage:
Strategic constituents are likely to include union,
employees. Management needs to create a sense of
family within the organization and develop member
commitment. This is consistent with the criteria
articulated in human relations model
3. Formalization and control stage:
Efficiency and orderliness are sought. The organization is
becoming mature and the strategic constituents at this
point – employees, leaders, suppliers, and customers,
evaluate the organization in terms of its stability and
productivity. Such constituencies will look to internal
processes and rational goal model
 Competing values and Organization life cycle

4. Elaboration of structure stage: Emphasis is on

monitoring the external environment. Strategic
constituents emphasize flexibility, ability to acquire
resources and growth rate. These criteria are best met
in the open systems model
5. Decline stage: strategic constituencies tend to be
similar to those found when organization is just
beginning. The concern is again with the ability of the
organization to innovate and acquire resources. Open
systems model should dominate in guiding
effectiveness evaluation