Organizational Effectiveness: Learning Objectives
Organizational Effectiveness: Learning Objectives
Organizational Effectiveness: Learning Objectives
LEARNING OBJECTIVES
1. Explain why organizations exist and the purposes they serve.
2. Describe the relationship between organizational theory and organizational design and change,
and differentiate between organizational structure and culture.
3. Understand how managers can utilize the principles of organizational theory to design and
change their organizations to increase organizational effectiveness.
4. Identify the three principal ways in which managers assess and measure organizational
effectiveness.
5. Appreciate the way in which several contingency factors influence the design of organizations.
CHAPTER SUMMARY
This chapter discusses organizations, organizational theory, and the importance of organizational
design. An organization is a tool that people use to coordinate their actions to obtain something
they desire or valueto achieve their goals. Organizational theory is the study of how
organizations function and how they affect and are affected by the environment in which they
operate. Organizational structure is the formal system of task and authority relationships that
control how people coordinate their actions and use resources to achieve an organizations goals.
Organizational culture is the set of shared values and norms that control organizational members
interactions with each other and with suppliers, customers, and other people outside the
organization.
Organizations are value-creation systems that take inputs from the environment and use skills
and knowledge to transform these inputs into finished goods and services. The use of an
organization allows people jointly to increase specialization and division of labor, use large-scale
technology, manage the organizational environment, economize on transaction costs, and exert
power and controlall of which increase the value the organization can create.
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.
Organizational design has important implications for a companys competitive advantage, its
ability to deal with contingencies and manage diversity, its efficiency, its ability to generate new
goods and services, its control of the environment, its coordination and motivation of employees,
and its development and implementation of strategy. Organizational change is the process by
which organizations redesign and transform their structures and cultures to move from their
present state to some desired future state to increase their effectiveness. The goal of
organizational change is to find new or improved ways of using resources and capabilities to
increase an organizations ability to create value and hence performance.
Managers can use three approaches to evaluate organizational effectiveness: the external
resource approach, the internal systems approach, and the technical approach. Each approach is
associated with a set of criteria that can be used to measure effectiveness and a set of
organizational goals.
CHAPTER OUTLINE
1.1 What is an Organization?
Organizations are extremely important in todays world. Though organizations are intangible,
they have a role to play in all areas of our life. A grouping of people and other resources to
produce goods and services is the essence of organizing. An organization is a tool people use to
coordinate their actions to obtain something they desire or valuethat is, to achieve their goals.
Today organizations are rapidly growing in number as they seek to respond to the changing tastes
and needs of consumers. Entrepreneurship is the term used to describe the process by which
people recognize opportunities to satisfy needs and then gather and use resources to meet those
needs.
How Does an Organization Create Value?
Value creation takes place at three stages: input, conversion, and output. The way a given
organization uses human resources and technology to transform inputs into outputs determines
how much value is created at the conversion stage. Each stage is affected by the environment in
which the organization operates. The organizational environment is the set of forces and
conditions that operate beyond an organizations boundaries but affect its ability to acquire and
use resources to create value. (Refer to Figure 1.1)
Focus on New Information Technology: Amazon.com, Part 1
The success story of Amazon.com depicts how Jeff Bezos recognized the immense
entrepreneurial opportunity in the rapid growth of the Internet and used it optimally to become
extremely successful in the new electronic virtual marketplace.
Question: What was the realization that prompted Jeff Bezos entrepreneurial effort?
Notes_________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
1.2 Why do Organizations Exist?
The production of goods and services most often takes place in an organizational setting because
people working together to produce goods and services usually can create more value than
people working separately.
There are five reasons for the existence of organizations. (Refer to Figure 1.3)
helps organizational members to view and respond to the outside environment in different ways
and puts pressure on work groups and individuals to behave in certain ways.
Organizational change is the process by which organizations move from their present state to
some desired future state to increase their effectiveness. The goal of organizational change is to
find new or improved ways of using resources and capabilities to increase an organizations
ability to create value, and hence its performance. Organizational change can be understood as
the process of organizational redesign and transformation.
Organizational Insight 1.1: How Steve Jobs Learned How to Organize and Control Apple
This case study shows that though people who start new organizations may initially lack the
kinds of skills or knowledge to manage an organizations structure and culture effectively, they
can develop these skills over time. An understanding of the principles behind organizational
design and change helps in this learning process and deepens appreciation for the many subtle
technical and social processes that determine how organizations operate.
Question: What were the consequences of Jobs managerial style which he employed initially at
Apple?
Question: What was the first step taken by Jobs when he returned to Apple in 1997?
The Importance of Organizational Design and Change
Today managers are searching for new and better ways to coordinate and motivate their
employees to increase the value their organizations can create. Managers have recognized the
implications that organizational design and change have in increasing employee effectiveness,
dealing with contingencies, gaining a competitive edge and managing diversity. Increased global
competitive pressures and the increasing use of advanced IT has provided impetus to this trend
too.
Dealing with Contingencies
A contingency is an event that might occur and must be planned for. An organization can design
its structure in many ways to increase control over its environment. One part of the
organizational environment that is becoming more important and more complex is the global
environment.
Gaining Competitive Advantage
Competitive advantage is the ability of one company to outperform another because its managers
are able to create more value from the resources at their disposal. Competitive advantage springs
from core competences or managers skills and abilities that allow a company to develop a
strategy to outperform competitors and produce better products, or produce the same products
but at a lower cost. Strategy is the specific pattern of decisions and actions that managers take to
use core competences to achieve a competitive advantage and outperform competitors. An
organizations strategy is always changing in response to changes in the environment;
organizational design must be a continuously evolving managerial activity for a company to stay
ahead of the competition.
Organizational Insight 1.2: Groupon Forges Ahead
Groupon developed a strategy that aimed at leveraging its members collective buying power to
obtain deals from companies supplying goods and services that were hard to resist. This enabled
Groupon to capture customers and retain its competitive advantage.
Question: Why does Mason believe that investing in sales and marketing for Groupon is worthy?
Question: What is the power that Groupon gives individuals?
Managing Diversity
Today organizations have people from different races, genders, nationalities, minority groups,
and even immigrant populations working for them. Such a workforce requires care, attention,
and advance planning so the needs and concerns of all minorities are addressed. An organization
needs to design a structure and control system to make optimal use of the talents of a diverse
workforce and to develop an organizational culture that encourages employees to work together.
Promoting Efficiency, Speed, and Innovation
The capacity of organizations to create value increases enormously as organizations introduce
better ways of producing and distributing goods and services. This can be achieved through
specialization and the use of modern technology and newer and more efficient organizational
structures. Organizational design plays an important role in innovation, which is closely linked to
competitive advantage in organizations.
The Consequences of Poor Organizational Design
Organizational design affects company performance, yet employee roles are often neglected until
a crisis hits. One reason for decline is a loss of control over organizational structure and culture.
Talented employees leave, acquiring resources becomes difficult, and the value creation process
slows down. Managers are forced to change elements of structure and culture that derail strategy.
Organizational Insight 1.3: How Diverse Manufacturing Managers Can Help Increase
Product Quality
Hiring female employees in the automotive manufacturing industry that is a predominantly male
occupation is an unusual recruitment choice for Ford. However, it has strengthened the company
by changing the values and norms of its manufacturing culture, suggesting that diversity of
workforce has a role to play in organizational efficiency.
Question: How has hiring a growing number of women employees benefited Ford?
Notes_________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
1.4 How do Managers Measure Organizational Effectiveness?
Because managers are responsible for utilizing organizational resources in a way that maximizes
an organizations ability to create value, it is important to understand how they evaluate
organizational performance. Control, innovation, and efficiency are the three most important
processes managers use to evaluate how effectively the organization is creating value.
Control means having control over the external environment and having the ability to attract
resources and customers.
Innovation means developing an organizations skills and capabilities so the organization can
discover new products along with creating new organizational structures and cultures to adapt to
change.
Efficiency means developing modern production facilities using new information technologies
that can produce and distribute a companys products in a timely and cost-effective manner.
There are three approaches by which an organizations efficiency can be measured. (Refer to
Table 1.1)
The External Resource Approach: Control
This is a method used by managers to evaluate how effectively an organization manages and
controls its external 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 managements ability to perceive and respond to changes in the
environment or to initiate change and be first to take advantage of a new opportunity is another
indicator of an organizations ability to influence and control its environment.
The Internal Systems Approach: Innovation
This is a method that allows managers to evaluate how effectively an organization functions and
resources operate. To be effective, an organization needs a structure and a culture that fosters
adaptability and quick responses to changing conditions in the environment. Measures of an
organizations 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 amount of time spent coordinating
the activities of different departments.
Organizational Environment: The main source of uncertainty is the environment and the first
part of this book is devoted to understanding this connection. An organization must design its
structure to handle relationships with stakeholders in the external environment. Chapter 3
presents models that reveal why the environment is a major source of uncertainty.
Organizational Design: Chapters 4 through 8 examine the principles on which organizations
operate and the choices available for designing and redesigning their structures and cultures to
match the environment. The same basic problems occur in all work settings, and the purpose of
design is to develop a structure that will respond effectively to these challenges.
Organizational Change: The third part of the book deals with the many different issues
involved in changing and redesigning organizations. Included in this are different change
processes, such as restructuring, reengineering, and innovation management.
Notes_________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________