Organization Theory

CHAPTER TWO

STRATEGY, ORGANIZATION DESIGN AND EFFECTIVENESS

2.1. The role of strategic direction on organization design.

As discussed in the first chapter, organization design is the administration and execution of
the strategic plan with structural forms. On the other hand, organizational strategies are any
actions taken by a company to achieve objectives. They are plans for interacting with the
competitive environment to achieve organizational goals.

An organization is created to achieve some purpose, which is decided by those who establish
and develop it, such as the chief executive officer (CEO) and the top management team. In a
for-profit business, this is generally in consultation with board members, investors and
creditors. It is this purpose and direction that shapes how the organization is designed and
managed. Indeed, top level managers decide the end purpose the organization exists for and
determine the direction it will take to accomplish it. The choice of goals and strategy
influences how the organization should be designed.

Organizational direction setting process begins with the assessment of the opportunities and
threats in the external environment that includes change resource availability etc. It is the
responsibility of the top level managers to also assess internal strengths and weaknesses of the
company. Therefor; a company’s strategic intent or direction reflects managers’ systematic
analysis of organizational and environmental factors.

Therefore; organization design is used to implement goals and strategy and thereby influences
the prospects of success. We will now discuss further the concept of organizational goals and
strategy, and in the latter part of this chapter, we discuss various ways to evaluate
organizational effectiveness.

2.2. Organization purpose

Every organization in the world exists for some purpose. One organizational purpose is
identified from another is using operative goals and missions.

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Missions are the overall/official goal of an organization. It is the organization’s reason

for existence and it describes organizations’ shared values, visions and beliefs. Mission
statements are often written down in a policy manual of the organization and serve as a
communication tool to current and prospective employees, customers, investors,
suppliers and competitors. For example Mission statement of AAU is to produce
competent graduates, provide need-based community service and produce problem-
solving research outputs through innovative and creative education, research and
consultancy service to foster social and economic development of the country. Visions,
Addis Ababa University aspires to be ranked among the top ten pre-eminent African
graduate and research universities in 2023.

Operative goals describe specific measurable outcomes and explain what the
organization is actually trying to do. They provide direction for the day-to-day decisions
and activities within departments. Some examples of these types of goals are;
performance goals, resource goals, market goals, employee development goals, goals for
innovation and change etc.

The Importance of goals

The above discussed goals that are official goals (missions) and operative goals are both
important but serve different purposes. Mission statements or official goals describe a
value system for the organization and set an overall purpose and vision while operative
goals are comparatively well defined and represent the primary tasks of the organization.

Employees are aware of what they are working toward with a sense of direction because
of the existence of operative goals in an organization. This can help to motivate
employees toward specific targets and important outcomes.

2.3. A framework for selecting strategy and design/structure

Most of us use goals and strategies as interchangeable, but goals define direction of a
journey and strategies define how to get there. For instance: a goal might be to achieve a
GPA of 4.00 while strategies could be to reach that goal includes class attendance, use of
library, class participation etc. strategies can include any number of techniques to
achieve the goal. One important aspect of formulating strategies is choosing whether to
engage in different activities from competitors or to pursue similar activities more
efficiently than competitors do.
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Two models for formulating strategies are the Porter model of competitive strategies and
Miles and Snow’s strategy typology. Each provides a framework for competitive action.
After describing the two models, we will discuss how the choice of strategies affects
organization design.

Porter’s competitive strategies

Michael E. Porter studied a number of business organizations and proposed that

managers can formulate a strategy that makes the organization more profitable and less
vulnerable if they understand five forces in the industry environment.

This theory is based on the concept that there are five forces that determine the competitive
intensity and attractiveness of a market. Porter’s five forces help to identify where power lies
in a business situation. This is useful both in understanding the strength of an organisation’s
current competitive position, and the strength of a position that an organisation may look to
move into.

Strategic analysts often use Porter’s five forces to understand whether new products or
services are potentially profitable. By understanding where power lies, the theory can also be
used to identify areas of strength, to improve weaknesses and to avoid mistakes.

1. Supplier power: an assessment of how easy it is for suppliers to drive up prices.

Large, powerful suppliers can charge higher prices, limit services or quality, and shift
costs to their customers, keeping more of the value for themselves.

2. Buyer power: an assessment of how easy it is for buyers to drive down prices.
Powerful customers, unlike powerful suppliers, can force down prices, demand better
quality or service, and drive up costs for the supplying organization.
3. Threat of substitution: the power of alternatives and substitutes for a company’s
product or service may be affected by changes in cost, new technologies, social trends
that will deflect buyer loyalty, and other environmental changes.
4. Threat of new entry: profitable markets attract new entrants, which erodes
profitability. Unless incumbents have strong and durable barriers to entry, for
example, patents, economies of scale, capital requirements or government policies,
then profitability will decline to a competitive rate. The threat of new entrants to an

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industry can create pressure for established organizations, which might need to hold
down prices or increase their level of investment.
5. Rivalry among existing competitors. among competitors is influenced by the
preceding four forces, as well as by cost and product differentiation
The main driver is the number and capability of competitors in the market. Many
competitors, offering undifferentiated products and services, will reduce market
attractiveness. The rivalry between Coke and Pepsi is a famous example. Recently,
Coke scored big with its sponsorship of the Beijing Olympics, but Pepsi’s creative
marketing had many Chinese consumers thinking it was an official sponsor too

In finding its competitive edge within these five forces, Porter suggests that a company can
adopt one of three strategies: differentiation, low-cost leadership, or focus.

Differentiation: In a differentiation strategy, organizations attempt to distinguish their

products or services from others in the industry. An organization may use advertising,
distinctive product features, exceptional service, or new technology to achieve a product
perceived as unique. This strategy usually targets customers who are not particularly
concerned with price, so it can be quite profitable. A differentiation strategy can reduce
rivalry with competitors and fight off the threat of substitute products because customers are
loyal to the company’s brand.

Low-Cost Leadership: this strategy tries to increase market share by keeping costs low
compared to competitors. With a low-cost leadership strategy, the organization aggressively
seeks efficient facilities, pursues cost reductions, and uses tight controls to produce products
or services more efficiently than its competitors. Low-cost doesn’t necessarily mean low-
price, but in many cases, low-cost leaders provide goods and services to customers at cheaper
prices. The low-cost leadership strategy is concerned primarily with stability rather than
taking risks or seeking new opportunities for innovation and growth. A low-cost position
means a company can achieve higher profits than competitors because of its efficiency and
lower operating costs.

Focus: in this strategy, the organization concentrates on a specific regional market or buyer
group. The company will try to achieve either a low-cost advantage or a differentiation
advantage within a narrowly defined market.

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Porter found that companies that did not consciously adopt a low-cost, differentiation, or
focus strategy achieved below-average profits compared to those that used one of the three
strategies. Many Internet companies have failed because managers did not develop
competitive strategies that would distinguish them in the marketplace. On the other hand,
Google became highly successful with a coherent differentiation strategy that distinguished it
from other search engines.

Therefore: the five forces strategy helps organizations to understand the factors affecting
profitability in a specific industry and can help to inform decisions relating to whether to
enter a specific industry , to increase capacity and developing competitive strategy.

Miles and snow’s strategy typology

Another strategy typology was developed from the study of business strategies by Raymond
Miles and Charles Snow. This strategy is based on the idea that managers seek to formulate
strategies that will be consistent with the external environment.

The four strategies that can be developed are the prospector, the defender, the analyzer,
and the reactor.

Prospector: is to innovate, take risks, seek out new opportunities and grow. It is important for
dynamic and growing environment where creativity is more important than efficiency.

Defender: is almost the opposite of the prospector. Rather than taking risks and seeking out
new opportunities, it is concerned with stability or even cost-cutting. This strategy seeks to
hold on to current customers, but it neither innovates nor seeks to grow. The defender is
concerned primarily with internal efficiency and control to produce reliable, high-quality
products for steady customers. This strategy can be successful when the organization exists in
a declining industry or a stable environment.

Analyzer: tries to maintain a stable business while innovating on the periphery. It lies
midway between the prospector and the defender. Some products will be targeted toward
stable environments in which an efficiency strategy designed to keep current customers is
used. Others will be targeted toward new, more dynamic environments, where growth is
possible. The analyzer attempts to balance efficient production for current product or service
lines with the creative development of new product lines.

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Reactor: is not really a strategy at all. Rather, reactors respond to environmental threats and
opportunities in an ad hoc way. In a reactor strategy, top management has not defined a long-
range plan or given the organization an explicit mission or goal, so the organization takes
whatever actions seem to meet immediate needs. Although the reactor strategy can sometimes
be successful, it can also lead to failed companies. Some large, once highly successful
companies are struggling because managers failed to adopt a strategy consistent with
consumer trends.

Emerging concepts in strategy

Strategy is a highly dynamic field. Managers and management scientists are always looking
for new approaches that will give them an edge over the competition. Typically this involves
looking at opportunities and challenges from an entirely different angle.

One interesting and newly emerging concept of strategy is Chan Kim and Renee Mauborgne’s
Blue Ocean Strategy. These management thinkers divide up markets into what they call ‘red
oceans’ and ‘blue ocean’ strategy. Red oceans are when companies compete against each
other in a crowded space and in market segments that are already being exploited: Although
strategy is useful in these areas, as Porter and Miles and Snow discuss, ultimately the red
oceans are crowded and returns on strategic innovation decline over time. By contrast, blue
oceans are companies find empty spaces that they can fill. Blue oceans describe industries or
business ideas that are not currently in existence, and so thus the size of the blue ocean market
space is unknown. Concepts for products or services that meet (or even define) consumers’
needs, and which are not currently in the marketplace, can take advantage of the ‘blue ocean’
space and generate strong profits.

How strategies affect organizational design

Organization design characteristics support the firm’s competitive approach and choice of
strategy for the firm has implications on internal organization characteristics. The following
figure shows how porter’s competitive and Miles and Snow’s strategy affect organizational
designs.

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Other factors affecting organizational design

 There are factors that affect organizational design other than strategy such as efficiency
and control versus learning and flexibility. These factors are conditioned or situation by
environment, size and life cycle, technology and organizational culture. These factors are
responsible for the organizational designs to achieve a good ‘fit’ with uncertain situations
or contingencies.

A rapidly changing environment may justify, managerially and technically, a more flexible
structure, with strong horizontal coordination and collaboration through teams or other
mechanisms. Likewise in principle design is intended to fit the workflow technology of the
organization.

2.4. Assessing organizational effectiveness.

Understanding organizational goals and strategies, as well as the concept of fitting design to
various contingencies, is a first step towards understanding organizational effectiveness. In
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this section we will explore the meaning of effectiveness and how effectiveness is measured
in organizations.

Effectiveness: Doing the right thing. It is a broad concept where official or operative
organizational goals are attained.

Efficiency: Doing things right. It refers to the internal workings of the organization. If one
organization can achieve a given production level with fewer resources than another
organization, it would be described as more efficient.

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.

In today’s organizations, top managers find out ways to measure effectiveness including the
use of ‘soft’ indications as ‘customer delight’ and employee satisfaction.

2.5. Contingency effectiveness approach, resource based approach, and internal

process approach

The following figure shows contingency approaches to measuring effectiveness focusing on

different parts of the organization.

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Goal approach

The goal approach to effectiveness consists of identifying an organization’s output goals and
assessing how well the organization has attained those goals. This is a logical approach
because organizations do try to attain certain levels of output, profit, or client satisfaction. The
goal approach measures progress toward attainment of those goals.

The important goals to consider are operative goals, because official goals (mission) tend to
be difficult to measure. Indicators tracked with the goal approach include:

o Profitability—the positive gain from business operations or investments after expenses

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

Resource-based approach

The resource-based approach looks at the input side of the transformation process. It assumes
organizations must be successful in obtaining and managing valued resources in order to be
effective. From a resource-based perspective, organizational effectiveness is defined as the
ability of the organization, in either absolute or relative terms, to obtain scarce and valued
resources and successfully integrate and manage them. The resource-based approach is
valuable when other indicators of performance are difficult to obtain. In many nonprofit and
social welfare organizations, for example, it is hard to measure output goals or internal
efficiency.

In a broad sense, resource indicators of effectiveness encompass the following dimensions:

 Bargaining position—the ability of the organization to obtain from its environment

scarce and valued resources, including financial resources, raw materials, human
resources, knowledge, and technology.
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 The abilities of the organization’s decision makers to perceive and correctly interpret
the real properties of the external environment.
 The abilities of managers to use tangible (e.g., supplies, people) and intangible (e.g.,
knowledge, corporate culture) resources in day-to-day organizational activities to
achieve superior performance.
 The ability of the organization to respond to changes in the environment

Internal process approach

In the internal process approach, effectiveness is measured as internal organizational health

and efficiency. An effective organization has a smooth internal process, employees are happy
and satisfied, and department activities cope with one another to ensure high productivity.
This approach does not consider the external environment. The important element in
effectiveness is what the organization does with the resources it has, as reflected in internal
health and efficiency. The best-known proponents of an internal process model are from the
human relations approach to organizations. Internal process indicators include: a strong,
adaptive corporate culture and positive work climate, operational efficiency, such as using
minimal resources to achieve outcomes, undistorted horizontal and vertical communication,
growth and development of employees.

The Balanced Score Card Approach to effectiveness

The balanced scorecard combines several indicators of effectiveness into a single framework,
balancing traditional financial measures with operational measures relating to a company’s
critical success factors.

1. Financial perspective: reflects a concern that the organization’s activities contribute

to improving short- and long-term financial performance. It includes traditional
measures such as net income and return on investment.
2. Customer service perspective: measure such things as how customers view the
organization, as well as customer loyalty and satisfaction.
3. Internal business process perspective: focus on production and operating statistics,
such as speed of order fulfillment and cost per order.
4. Learning and growth perspective: focusing on how well resources and human
capital are being managed for the company’s future. Measurements include such

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things as employee satisfaction and retention, amount of training people receive

business process improvements, and the introduction of new products.

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