Organizational Effectiveness

How Do Managers Measure

Organizational Effectiveness?
Control: external resource approach
Monitors how effectively an organization manages
and controls its external environment

Innovation: internal system approach

Develops an organizations skills and capabilities to
change, adapt, and improve the way it functions

Efficiency: technical approach

Measures how efficiently an organization converts a
fixed amount of resources into finished goods and
services
2
Approaches to Measuring Effectiveness

3
Measuring Effectiveness: Organizational
Goals

Official goals: guiding principles that the

organization formally states in its annual
report and in other public documents

Operative goals: specific long- and short-term

goals that guide managers and employees as
they perform the work of the organization

4
Four Models of Effectiveness Values

STRUCTURE
Flexibility

Human Relations Emphasis Open Systems Emphasis

Primary Goal: human resource Primary Goal: growth,
development resource acquisition
F Subgoals: cohesion, morale, training Subgoals: flexibility, readiness,
O external evaluation
External
Internal
C
Internal Process Emphasis Rational Goal Emphasis
U
S Primary Goal: stability, equilibrium Primary Goal: productivity, efficiency,
profit
Subgoals: information management, Subgoals: planning, goal setting
communication

Control
COMPETING VALUE INDUSTRY VS
COMPANY (example)
 Organizational Effectiveness

Balanced Scorecard

An interconnected model for measuring performance in

four key areas: 1) customers, 2) finance, 3) internal
processes, and 4) learning and growth.

Each of these perspectives is stated in terms of the

companys objectives, performance measures, targets,
and initiatives, and all are harnessed to implement
corporate vision and strategy.
 Strategic Mapping

Customer Perspective Financial Perspective

Satisfaction
ROA
Trust

Internal
Business Cost Efficiency

Process Safety Productivity

Perfor.
Perspective

Learning and
Growth Competency Restructuring IT System

Perspective

Competing Values Analysis - APEX

COLLABORATE CREATE

CONTROL COMPETE
 Basic Challenges of
Organizational Design
 Differentiation

The process by which an organization allocates

people and resources to organizational tasks

Division of labor: the degree of specialization in the

organization
 Organizational Roles

Set of task-related behaviors required of a person by

his or her position in an organization
As the division of labor increases, managers specialize in
some roles and hire people to specialize in others
Specialization allows people to develop their individual
abilities and knowledge within their specific role

Organizational structure is based on a system of

interlocking roles
Building Blocks of Differentiation
 Function Types
Support functions: facilitate an organizations control of its relations with its environment and its
stakeholders
Purchasing, sales and marketing, public relations, and legal affairs

Production functions: manage and improve the efficiency of an organizations conversion processes
so that more value is created
Production operations, production control, and quality control

Maintenance functions: enable an organization to keep its departments in operation

Personnel, engineering, and cleaning services

Adaptive functions: allow an organization to adjust to changes in the environment

Research and development, market research, and long-range planning

Managerial functions: facilitate the control and coordination of activities within and
among departments
Acquisition of, investment in, and control of resources
 Vertical and Horizontal Differentiation
Hierarchy: a classification of people according to their relative
authority and rank

Vertical differentiation: the way an organization designs its

hierarchy of authority and creates reporting relationships to
link organizational roles and subunits
Establishes the distribution authority between levels

Horizontal differentiation: the way an organization groups

organizational tasks into roles and roles into subunits
(functions and divisions)
Roles differentiated according to their main task responsibilities

Spatial Differentiation
 Balancing Differentiation and Integration

Horizontal differentiation enables people to specialize

and become more productive
Specialization often limits communication between subunits
People develop subunit orientation

Integration enables coordination of various tasks,

functions, and divisions so that they work together and
not at cross-purposes
Balancing Differentiation and Integration

Horizontal differentiation is supposed to enable

people to specialize and become more productive
Specialization limits communication between subunits and
prevents them from learning from one another
People develop subunit orientation
 Integration

The process of coordinating various tasks, functions,

and divisions so that they work together and not at
cross-purposes
 Types of Integration Mechanisms

Hierarchy of authority - Dictates who reports to

whom
Direct contact - Managers meet face to face to
coordinate activities
Liaison roles: A specific manager is given
responsibility for coordinating with managers from
other subunits on behalf of their subunits
 Types of Integration Mechanisms

Task force: A temporary committee set up to handle

a specific problem
Task force members responsible for taking coordinating
solutions back to their respective functions for further
input and approval
Teams - A permanent task force used to deal with
ongoing strategic or administrative issues
Teams and Horizontal Coordination
 Relational Coordination

High level of horizontal coordination

Frequent, timely, problem-solving
communication
Relationships of shared goals, shared
knowledge, and mutual respect
 Types of Integration Mechanismscontd

Integrating role: A full-time position established

specifically to improve communication between
divisions
Focused on company-wide integration
Integrating department - A new department
intended to coordinate the activities of functions or
divisions
Created when many employees enact integrating roles
 Balancing Differentiation and Integration
Managers facing the challenge of deciding how and how
much to differentiate and integrate must:

Carefully guide the process of differentiation so that it develops the

core competences that give the organization a competitive advantage

Carefully integrate the organization by choosing appropriate

integrating mechanisms that allow subunits to cooperate and that
build up the organizations core competences
 Balancing Standardization and Mutual
Adjustment
Standardization: Conformity to specific models or
examples that are considered proper in a given
situation
Defined by rules and norms

Mutual adjustment: People use their judgment

rather than standardized rules to address problems,
guide decision making, and promote coordination
 Formalization: Written Rules

Formalization: The use of written rules and

procedures to standardize operations
Rules: Formal, written statement that specify the
appropriate means for reaching desired goals
Norms: Standards or styles of behavior that are considered
acceptable or typical for a group of people
Socialization: Organizational members learn the norms of
an organization and internalize these unwritten rules of
conduct
 Standardization versus Mutual Adjustment

Challenge facing managers is:

To find a way of using rules and norms to standardize
behavior
To allow for mutual adjustment to give managers
opportunity to discover new and better ways to achieve
goals
Balancing Centralization and Decentralization

Establishing a hierarchy of authority is supposed to

improve the way an organization functions because
people can be held accountable for their actions
As responsibility and risk taking decline so does
organizational performance, because its members
do not take advantage of opportunities
 Centralization versus Decentralization of
Authority

Centralized organization: Authority to make

important decisions is retained by managers at the
top of the hierarchy

Decentralized organization: Authority to make

important decisions about organizational resources
and to initiate new projects is delegated to
managers at all levels in the hierarchy
 Balancing Centralization and
Decentralization
Centralized organization: the authority to make important
decisions is retained by top level managers
Coordination by top keep the organization focused on its goals

Decentralized organization: the authority to make important

decisions is delegated to managers at all levels in the hierarchy
Promotes flexibility and responsiveness

Ideal balance entails:

Enabling middle and lower managers who are at the scene of the action to
make important decisions
Allowing top managers to focus on long-term strategy making
Lawrence & Lorsch: Differentiation, Integration,
and the Environment
Investigated how companies in different industries
differentiate and integrate their structures to fit the
environment
Three industries that experienced different
levels of uncertainty:
The plastics industry
The food-processing industry
The container or can-manufacturing industry
 Findings: Lawrence and Lorsch

When environment is perceived as more unstable

and uncertain:
Effective organizations are less formalized, more decentralized, and
rely more on mutual adjustment

When environment is perceived as stable and

certain:
Effective organizations have a more centralized, standardized, and
formalized structure
 Mechanistic and Organic Organizational
Structures
Mechanistic structures: designed to induce people to
behave in predictable ways
Decision-making authority is centralized
Subordinates are closely supervised
Information flows mainly in a vertical direction along a clearly
defined path
Hierarchy principal integrating mechanism
Tasks and roles coordinated primarily through standardization and
formal written rules
Best suited to organizations that face stable, unchanging
environments
 Mechanistic and Organic Organizational
Structures
Organic structures: structures that promote
flexibility, so people initiate change and can adapt
quickly to changing conditions

Decision making distributed throughout the hierarchy

Coordination is achieved through mutual adjustments
Status conferred by ability to provide creative leadership
Encourages innovative behavior
Suited to dynamic environments
 Efficiency versus
Learning Outcomes
Departmental Grouping
 Departmental Grouping Options

Functional Divisional Multifocused

Grouping Grouping Grouping

Horizontal Virtual Network

Grouping Grouping
 Types of Structure

Functional Structure
Divisional Structure
Matrix Structure
Horizontal Structure
Network Structure
Hybrid Structure
 Functional Structure

Activities grouped by common function

All specific skills and knowledge are
consolidated
Promotes economies of scale
Slow response to environmental changes
Prevalent approach but few companies can
respond in todays environment without
horizontal linkages
 Advantages of Functional Structure

Allows economies of scale/scope

Simplified mechanisms for control
Clear definition of responsibilities
Enables to accomplish functional goals
Opportunity for focused competencies
Disadvantages of Functional Structure

Slow response to environmental changes

May cause decisions to pile on top
Inability to manage diversity
Lack of coordination between functions
Involves restricted view of functional goals
 From Functional Structure to Divisional
Structure
Functional structure is appropriate if the
organization:
Limits itself to producing a small number of
similar products
Produces those products in one or a few
locations
Sells them to only one general type of client
or customer
 Divisional Structure
Product structure or strategic business units
Divisions organized according to products, services,
product groups
Good for achieving coordination across functional
departments
Suited for fast change
Loses economies of scale
Lacks technical specialization
Reorganization from Functional
to Divisional
 Advantages of Divisional Structure

Ability to concentrate on specific businesses

Can respond to fast change in environment
Leads to client satisfaction as responsibility and contact points
are clear
Ease of measurement of unit performance
Decentralizes decision making
Scope for management to focus on strategy
Clear division of labor between corporate and divisional
managers
Internal talent pool
 Disadvantages of Divisional Structure

Eliminates in-depth competence

Conflict between goals of divisions
Duplication of functions between divisions
Managing the corporate-divisional relationship: finding the
balance between centralization and decentralization
Coordination problems between divisions: divisions start
competing for resources and rivalry prevents cooperation
Transfer pricing: problems between divisions often revolve
around the transfer price
 Matrix Structure
Multi-focused with strong horizontal linkage
Conditions for Matrix:
1. Share resources across the organization
2. Two or more critical outputs required: products and technical
knowledge
3. Environment is complex and uncertain

Allows organization to meet dual demands

Largest weakness is that employees have two
bosses and conflicting demands
Sample Matrix Organization
 Matrix Structure
A design that groups people and resources in two
ways simultaneously
Shows a vertical flow of functional responsibility
and a horizontal flow of product responsibility
The members report to two superiors: the product
team manager and the functional manager
The team is the building block and principal
coordination and integration mechanism
 Advantages of Matrix Structure
Prevention of overlap of functions
Achieves coordination necessary to meet dual demands from
customers
Direct contact instead of bureaucracy
Provides opportunity for both functional and product skill
development
Development of managerial skill
The use of cross-functional teams reduces functional barriers
and subunit orientation
Maximizes use of skilled professionals, who move from
product to product as needed
 Disadvantages of Matrix Structure
Means participants need good interpersonal skills and
extensive training
Lack of clarity about responsibilities
Difficult to track profitability of products
High degree of conflict over priorities
Requires great effort to maintain power balance
Matrix lacks a control structure that leads employees to
develop stable expectations of one another
People are likely to experience a vacuum of authority and
responsibility
 Horizontal Structure

Organization around core processes

Processes refers to tasks and activities

Shift towards horizontal structure during

reengineering
Eliminates vertical hierarchy and
departmental boundaries
 Examples
Ford Motors used horizontal organization design, which involved
creation of a cross-functional team to handle the entire workflow
for developing and launching a new automobile model.
The team had individuals from research and product engineering.
Two team leaders, one with product development expertise, other
launching vehicles in the market
In the development phase, the team learnt customer requirements
firsthand, besides market research reports.
The research scientists and engineers shared a common office
space, had group lunches, and improved product design through
hallway chats.
Barclays Bank uses the horizontal design for its mortgage services,
incorporating legal and relocation services in addition to traditional
tasks such as loan sanctioning and credit assessment.
Sample Horizontal Structure
 Network Structure
A cluster of different organizations whose actions are
coordinated by contracts and agreements rather than
through a formal hierarchy of authority
Very complex as companies form agreements with
many suppliers, manufacturers, and distributors
Such agreements are necessary as the organization
outsources many of the value creation activities
involved in production and marketing goods and
services
Virtual Network Example
 Advantages of Network Structure
Concentration on core competence
High degree of flexibility
Allows quick scale and reach without huge investments in factories,
equipment, etc.,
Lowering of costs and complexities
Opportunity to leverage outsourced skills
If a network partner can perform a specific functional activity reliably,
and at a lower cost, production costs are reduced
Avoids the high bureaucratic costs of operating a complex organizational
structure
Allows an organization to act in an organic way
Network partners can be replaced if they do not perform up to standards
 Disadvantages of Network Structure

Lack of control over many functions

Unhealthy dependence on partners
Need for high degree of cooperation and considerable level
of mutual adjustment
Over-narrowing of expertise
Ability to control a complex value- creation process is
difficult because managers lack the means to effectively
coordinate and motivate the various network partners
 Hybrid Structure

Combination of various structure approaches

Tailored to specific needs

Often used in rapidly changing environments

Greater flexibility
 Hybrid Structure

Large complex organizations that have many

divisions make use of many different
structures
Each product divisions manager selects the
structure (product, geographic, matrix) that
best meets the needs of their particular
environment and strategy
 Application of Structural Design
Each structure meets different needs and is a tool
that can help managers be more effective
Structural alignment aligns structure with
organizational goals
Symptoms of Structural Deficiency:
Decision making is delayed or lacking quality
Organization cannot meet changing needs
Employee performance declines, needs are not meet
Too much conflict
 Strategic Design Steps
1. Generate design criteria
Drive the organization toward customer focus
Maximize capacity for organizational learning
Support individual and team accountability for results

2. Generate grouping alternatives

What kind of groupings would help meet the design criteria

3. Evaluate grouping alternatives

Goal is to rethink, refine, and reject various designs

4. Identify coordination requirements

For each grouping alternatives, think about how work and the flow of
information will be coordinated
 Strategic Design Steps
5. Generate structural linking mechanisms
Identify structural linking mechanisms that would address the coordination
requirements

6. Evaluate structural linking mechanisms

Each alternative can be rated keeping in mind the objectives and combined
and refined
7. Conduct impact analysis
Feasible set of alternatives can be subjected to the consequences it would
have on individuals, informal and formal organization, staffing, capital costs,
career concerns, leadership styles, skill requirements, etc.,

8. Refine and eliminate designs

 Static
Low U Less Information Functional
Simple
Functional
Dynamic High U High Information Lateral
Nature of
products and Static Low U Less Information
D
environment Yes

Dynamic High U High Information D, L

Complex:
Segmentable?
Static Low U Less Information F

No

Dynamic High U High Information F, L