CHAPTER 2: Strategy, Organization Design, and Effectiveness

Part 5: How Strategies Affect Organization Design

“Structure follows strategy” from The Visible Hand: The Managerial Revolution in
American Business.

The historian, Alfred Chandler, substantiated his 'Structure follows Strategy' thesis
based on four case studies of American conglomerates that dominated their industry
from the 1920's onward. Chandler described how the chemical company Du Pont, the
automobile manufacturer General Motors, the energy company Standard Oil of New
Jersey and the retailer Sears Roebuck developed over time.

Chandler showed that the need to restructure arose from a strategic shift driven by
new technologies and market changes. Changes in an organization’s strategy led to
new administrative problems which, in turn, required a new or refashioned structure
for the successful implementation of the new strategy.

Differentiation Strategy

Entails development of a product or service, that is unique for the customers, in terms
of product design, features, brand image, quality, or customer service.

The message that such a firm who utilize this strategy conveys to customers is that
you will pay a little bit more for our offerings, but you will receive a good value overall
because our offerings provide something special or valuable to you.

The organizational structure for differentiation strategy:

1. emphasizes in research and design to be able to develop unique and innovative

products
2. main function would be marketing that values and builds in mechanisms for
customer intimacy
3. formalization is limited so that new product ideas can emerge easily and change
is more readily accomplished
4. acts in a flexible, loosely knit way, with strong horizontal coordination
5. employees are allowed to use his or her discretion and ability to achieve an
outcome or meet a goal and rewards employee creativity, risk taking, and
innovative

Overall structure is organic/learning orientation approach.

Low-Cost Leadership Strategy

A firm following a cost leadership strategy offers products or services with acceptable
quality and features to a broad set of customers at a low price. They seek to combine
low per-unit profit with large sales to make a profit. Typically, but not always, they tend
to market to a large population base or a niche with a high demand volume.
The organizational structure for low-cost leadership strategy:

1. emphasizes on operation to be able to produce more products and be more

efficient
2. has standard operating procedures and emphasizes on process engineering
3. controlled through the vertical hierarchy, with decision-making authority
residing with upper-level managers which promotes efficient production
4. close supervision; routine tasks with limited employee empowerment

Part 6: Other Factors Affecting Organization Design

1. Environment

Organizations don't exist in a vacuum. The environment around the company is one
of the factors influencing organizational structure.

Some companies operate in stable, settled markets, selling products such as copier
paper or household cleaners that don't change much over time. A hierarchical, tightly
structured organization can work well in this situation, as the company doesn't have
to adapt to much change.

Tech companies, on the other hand, operate in an industry that's constantly

changing. To succeed they need an organizational structure that allows them to
adapt and change fast.

2. Technology

Advances in technology are the most frequent cause of change in organizations since
they generally result in greater efficiency and lower costs for the firm.

If outputs are standardized, product life-cycles are long, and consumer exceptions are
few, more bureaucratic or mechanistic structures will be suitable. Centralization of
decision making is also a character of organizations with routine technologies.
Moreover, coordination and control are contained within a centralized management
structure. The organization’s task is usually in the form of memos, reports and
procedures when it is analyzable and the communication is frequent.

When the demand for product change or output customization is high, a stable
organizational structure is inappropriate for controlling the production process. In order
to efficiently fulfill needs of customization and change, an adaptive structure is more
effective and advisable. For instance, in the Microsoft, the development of new
technology and product is a major mission in the fierce market competition. To achieve
the goal, employees and departments need to pay more attention to market demand
and other competitors. Therefore, flexible structure is essential to take effective
measures in terms of environmental changes.
3. Size and Life Cycle

It is observed that large organizations differ structurally from small ones in terms of
division of labor, rules and regulations, performance appraisal and budgeting
procedures.

In reality, if the organization is very small, it may not even have a formal structure.
Instead of following an organizational chart or specified job functions, individuals
simply perform tasks based on their likes, dislikes, ability, and/or need. Rules and
guidelines are not prevalent and may exist only to provide the parameters within
which organizational members can make decisions. Small organizations are very
often organic systems.

As an organization grows, however, it becomes increasingly difficult to manage

without more formal work assignments and some delegation of authority. Therefore,
large organizations develop formal structures. Tasks are highly specialized, and
detailed rules and guidelines dictate work procedures. Interorganizational
communication flows primarily from superior to subordinate, and hierarchical
relationships serve as the foundation for authority, responsibility, and control. The
type of structure that develops will be one that provides the organization with the
ability to operate effectively. That's one reason larger organizations are often
mechanistic—mechanistic systems are usually designed to maximize specialization
and improve efficiency.

With age; an organization incorporates standardized systems, procedures and

regulations. Like people, organizations evolve through stage of life cycle – birth,
youth, midlife and maturity. In the birth stage, the organization created by the
entrepreneur is informal, with no rules and regulations. Decision making is
centralized with the owner and tasks are not specialized.

In the youth stage, the organization is growing – it expands and hires more
employees. It incorporates division of labor and formal rules and policies. Decision
making is still with the owner although it is shared by few persons close to the owner.

In the midlife stage, the company has become quite large. It now has extensive sets
of rules, regulations, policies and systems to guide the employees. Control systems
are used, professionals are hired, tasks are decentralized and authority is delegated
to functional departments. In the maturity stage, rules, regulations, specialized staffs,
budgets, a refined division of labor and control systems are in place.
4. Culture

Culture is the set of values, norms, guiding beliefs, and understandings that is
shared by members of an organization and taught to new members as the correct
way to think, feel, and behave.5 It represents the unwritten, feeling part of the
organization.

An organizational culture that values team- work, collaboration, creativity, and open
communication, for example, would not function well with a tight, vertical structure
and strict rules and regulations.

Part 7: Assessing Organizational Effectiveness

In chapter 1 we have learned the difference between effectiveness and efficiency

wherein efficiency is Effectiveness is the degree to which an organization realizes its
goals while Organizational efficiency is the amount of resources used to produce a
unit of output.

Sometimes efficiency leads to effectiveness, but in other organizations, efficiency and

effectiveness are not related. Organization may achieve its profit goals but be
inefficient.

Overall effectiveness is difficult to measure in organizations. Organizations are large,

diverse, and fragmented. They perform many activities simultaneously, pursue
multiple goals, and generate many outcomes, some intended and some unintended.
Managers determine what indicators to measure in order to gauge the effectiveness
of their organizations. Studies and surveys have found that many managers have a
difficult time with the concept of evaluating effectiveness based on characteristics that
are not subject to hard, quantitative measurement.

Part 8: Traditional Effectiveness Approach

There are three Traditional Effectiveness Approach which are resource approach,
internal process approach and goal approach.

1. Resource Approach sees an organization as an open system. The

organization obtains inputs, participates in transformation processes, and
generates outputs. This approach emphasizes inputs over output. It sees
most organizations as entities which function in order to survive, at the
same time rivaling for scarce and valued resources. It assumes that the
organization consists of interrelated subsystems. If any sub-system
functions inefficiently, it is going to influence the performance of the whole
system.

2. Organizational effectiveness is assessed as internal organizational health

and effectiveness. According to Internal-Process Approach effectiveness is
the capability to get better at internal efficiency, co-ordination, commitment
and staff satisfaction.
3. The Goal Approach is also called rational-goal or goal-attainment
approach, it has its origins in the mechanistic view of the
organization. This approach assumes that organizations are planned,
logical, goal-seeking entities and they are meant to accomplish one or
more predetermined goals. Goal approach is worried with the output
side and whether or not the organization attains its goals with respect to
preferred levels of output. It sees effectiveness with respect to its
internal organizational objectives and performance.

 Profitability—the positive gain from business operations or investments after

expenses are subtracted
 Market share—the proportion of the market the firm is able to capture relative
to competitors
 Growth—the ability of the organization to increase its sales, profits, or client
base over time
 Social responsibility—how well the organization serves the interests of society
as well as itself
 Product quality—the ability of the organization to achieve high quality in its
products or services