Strategic Management and Organizational Effectiveness
Content
Strategic Management and
Organizational Effectiveness
What is Strategy
Determination of the basic longterm goals and objectives of an
enterprise and the adoption of
courses of action and allocation of
resources necessary for carrying
out these goals”
“
Types of Goals
Official Goals / mission
Reason for existence
Describes organization’s vision, its shared value
and beliefs, and its reason for being
Typically defines business operations, focus on
values, markets, and customers that distinguish
the organization
Types of Goals
a.
b.
c.
d.
e.
f.
Operative goals:
Designate ends sought through actual operating
procedures of the organization and explain what
organization is actually trying to do
Describe specific measurable outcomes and often are
concerned with short term
Specific goals for each primary task each organization
must perform
Overall performance: profitability
Resources
Market
Employee Development
Innovation and change
productivity
Importance of Goals
Type of Goals
Purpose of Goals
Official Goals, mission:
Legitimacy
Operative goals:
Employee direction and motivation
Decision guidelines
Standard of performance
Top Management Role in Organization
Direction, Design, and Effectiveness
External Environment
Organization
Design
Opportunities
Threats
Uncertainty
Resource Availability
Strategic Direction
CEO, Top
Management
Team
Internal Situation
Strengths
Weaknesses
Distinctive Competence
Leadership Style
Past Performance
Define
mission,
official
goals
Select
operational
goals,
competitive
strategies
Structural Form –
learning vs.
efficiency
Information and
control systems
Production
technology
Human resource
policies,
incentives
Organizational
culture
Interorganizational
linkages
Effectiveness
Outcomes
Resources
Efficiency
Goal attainment
Competing values
The Strategy Imperative
Environment
Factors and
Organization
capabilities
Strategy
Structure
Chandler’s Strategy Structure Thesis
Studied close to hundred of America’s largest
corporations tracing their development from 1909 1960
Conclusion : Unless strategy follows structure
inefficiency would result
Stage 1:
Organizations typically begin with a single product or
line ( do only one thing, manufacturing, sales, or ware
housing)
The simplicity of this strategy is compatible with
simple structure
Decisions can be centralized in the hands of single
manager
Concluded that single product strategy requires high
centralization, low complexity and low formalization
Stage 2: Vertical integration
Organizations typically expand their activities
within the same industry
Vertical integration strategy makes increased
interdependence among organizational units and
creates a need for more complex coordination
The desired complexity is achieved is achieved
by redesigning the structure to form specialized
units based on functional grouping
Stage 3: Diversification
Growth proceeds into product diversification
A product diversification strategy demand a
structural form that allows for efficient allocation
of resources, accountability for performance, and
coordination between units
This can be achieved through multiple set of
independent divisions, each responsible for a
specified product line
Following Chandler’s theory successful
organizations that diversify should have a
different structure from that of a successful firm
that follow a single product strategy
Chandler’s Thesis
Time
Product
diversification
Strategy
Structure
t
t+1
Low
Simple
t+2
High
Functional
Divisional
The Research
Additional studies that duplicated Chandler’s work concludes
that the theory has validity but some distinct restrictions
Criticism
1. Chandler’s Sample of organization
Sample was not a cross section of organizations in general
Looked only at very large and powerful industrial business firms
Whether his findings would be applicable to small medium sized
organizations, service firms or those in public sector could not be
answered from the sample
2. Definition of strategy
When he used the term strategy he meant growth strategy.
Growth was his major concern not profitability
In organization effectiveness terms, a proper strategy in a la
Chandler is more likely to lead to a growth than increased
profitability
Contemporary Strategy Structure
Theory
1.
2.
3.
Contemporary important research on strategy –
structure relationship has been under taken by
Miles and Snow
Michael Porter
Danny Miller
Miles and Sow Four Strategic Types
1.
2.
3.
4.
Classify organization based on the rate at
which they change their products or markets
Identified four strategic types
Defenders
Prospectors
Analyzers
Reactors
Defenders
Seek stability by producing only a limited set of
products directed at narrow segment of total potential
market
Strives aggressively to prevent competitors entering
their turf
This is achieved through competitive pricing or
production of high quality products
Ignore developments and trends outside their
domains
Grow through market penetration or limited product
development
Little or no scanning of environment to find new
opportunities
Intensive planning oriented toward cost and other
efficiency issues
Structure is high on horizontal differentiation,
centralized control, and elaborate formal hierarchy for
communication
Prospectors
Their strength is in finding and exploiting new-product
and market opportunities
Innovating may be more important than high profitability
Their success depends on developing and maintaining
the capacity to survey a wide range of environmental
conditions, trends, and events
Invest heavily in personnel who can scan a wide range
of environment for potential opportunities
Since flexibility is critical the structure is also flexible
Rely on multiple technologies that have a low degree of
routinization and mechanization
Numerous decentralized units
Structure will be low in formalization and have
decentralized control with lateral as well as vertical
communication
Prospectors can not maximize profitability of its inherent
inefficiency
Analyzers
Capitalize on the best of both the preceding types
They seek to minimize risk and maximize opportunity for
profit
Move into new products or markets only after viability has
been proved by prospectors
Analyzers live by imitation
They essentially follow their smaller and more innovative
competitors superior products, but only after their
competitors have demonstrated that the market is there
Seek both flexibility and stability.
They achieve these goals by developing structure made up
of dual components
Parts of these organizations have high levels of
standardization, routinization, mechanization for efficiency
Other parts are adaptive to flexibility
In this way they seek structure to accommodate both
stable and dynamic areas of operations
Reactors
Represents a residual strategy
Describe the inconsistent and unstable patterns that
-
arise when one of the three strategies is pursued
improperly
In general reactors respond inappropriately, perform
poorly, and as result are reluctant to commit
themselves aggressively to a specific strategy for the
future
Reasons
Top management may have failed to make the
organization strategy clear
Management may not have fully shaped the
organization’s structure to fit the chosen strategy
Management may have maintained its current
strategy –structure relationship despite overwhelming
changes in environmental conditions
Miles and Snow Strategic Typologies
Strategy
Goals
Environment Structural
Characteristics
Defender
Stability and
efficiency
stable
Tight control, extensive
division of labor, high
degree of formalization,
centralized
Analyzer
Stability and
flexibility
changing
Moderately centralized
control, tight control over
current activities, looser
control for new
undertakings
Prospector
Flexibility
Dynamic
Loose structure, low
division of labor, low
degree of formalization,
decentralized
Environment Strategy Continuum
Little change
and uncertainty
Defender
Rapid change and
uncertainty
Reactor
Analyzer
Prospector
Porter’s Competitive Strategies
Low cost leadership
Organization be the low cost leader and not merely
be the contender for that position
The product and service be offered must be
perceived as comparable to that offered by rivals or
atleast acceptable to buyers
Structural characteristics
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
1.
Differentiation
Firm seeks to be unique in the industry in ways that
are widely valued by the buyers
May emphasize high quality, extraordinary services,
innovative design, technological capability, positive
brand image
The key is that the attribute chosen must be different
from those offered by rivals and significant enough to
justify premium that exceeds the cost of differentiation
Structural Characteristics
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
Focus
Either a cost advantage (cost focus) or
differentiation ( differentiation focus) in a
narrow segment
Structural Characteristics
Combination of above policies directed at
specific strategic targets
Values and rewards flexibility and customer
intimacy
Measures cost of providing service and
maintaining customer loyalty
Pushes empowerment to employees with
customer contact
Miller’s integrative Framework
Developed the four strategy dimensions of
innovation, marketing, differentiation, breadth and
cost control
1.
Innovation:
To what degree does an organization introduce
major new products or services
Does not mean a strategy merely for simple or
cosmetic changes from previous offerings but
rather a meaningful and unique innovations
2. Market differentiation
Strives to create customer loyalty by uniquely
meeting a particular need
It does not necessarily mean the organization is
producing a higher quality or more up-to-date
product
The organization seeks to create favorable image
for its product through advertising, market
segmentation, and prestige pricing
Limitations to strategy imperative
1.
Critics question the Strategy-structure imperative
on the following points
Degree of discretionary latitude the managers
actually have
Impact of strategy would be greater in the early
development period of an organization
- once personnel are hired, equipment purchased,
policies and procedures are established it becomes
very tough to change
- In infancy vested interests have yet to be
solidified
Capital to labor ratio in an organization will affect
the impact of strategy on the structure
- in labor intensive firm the managers have much
more flexibility, and hence discretion, to exercise
change and influence structure
Limitations to strategy imperative
2. The lag factor:
When management implements a new strategy there is often no
change in structure
- Does this suggest that structures do not follow strategy ?
Proponents of strategy-structure imperative points out that
structures respond to changes in strategy but slowly
At the extreme this lag argument can be considered as a “ cop
out”
More realistically this lag is not a purely a random phenomena
- some organizations are slower to adapt their structures to
changes in strategy than others
The major factor affecting response is the degree of competitive
pressures
- the less competition an organization faces the less rapid its
structural response?
- without competition the concern for efficiency is reduced
Where the organization faces minimal competition, there is likely
to be significant lag between changes in strategy and
modifications in structure
Could Strategy Follow Structure
Structures can motivate or impede strategic activity
as well as simply constrain strategic choices
- strategic decisions made in centralized structure are
typically going to have less diversity of ideas and are
more likely to be consistent over time
- in decentralized organization, where input is likely to
be diverse, and the people providing that input
change, depending on situation
The notion that structure has some preliminary
support
- a study of 110 large manufacturing firms found that
strategy followed structure
- another study of 54 firms found that structure
influences and constraints strategy rather than other
way around
Industry Structure Relationship
Industry
Strategy
Structure
• Distinguishing characteristics of the industry affect the strategies the companies
would choose
•Strategy may be intermediate step between the unique characteristics of the industry in
which the organization operates and strategy it implements to achieve the alignment
•Industries differ in terms of growth possibilities, regulatory constraints, barriers to
entry and mobility, etc.
•Knowing the industry in which the organization operates allows one to know about,
product life cycles, required capital investments, long term prospects, type of
production technologies, etc
•Take two variables that tend to differ by industry category: (a) capital requirements for
entry and product innovation
Capital requirements
High Example
Example
Aerospace
Product
innovation
Example
Metals and
Mining
low
a
c
Computer
software
b
d Example
Bicycle
manufacturers
Low
High
Low
High capital requirement tend to result in large organization, and a limited number of competitors
Type A and C industries will be highly structured and standardized. Type A being more decentralized to
facilitate rapid response to innovations
Type B and D because of low capital investment requirements will make up large number of small firms,
Type D will likely to have more division of labor, and more formalization
Type B organization will tend to have low formalization and more decentralization
Other Factors affecting
Organizational Design
Strategy is one factor that affects organization
Design
Organizational Design is a result of numerous
contingencies
The emphasis placed on efficiency and control
versus flexibility and learning is determined by
contingencies of
Strategy
Environment
Technology
Size
Life cycle and culture
Contingency Factors
Affecting Organization Design
Organizational Structure and Design
The Right Mix of Design Characteristics Fits the Contingency Factors
2-32
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© 2004
Assessing Organizational
Effectiveness
Overall effectiveness is difficult to measure in
organizations
Organizations are large, diverse, and fragmented
They perform many activities simultaneously,
pursue multiple goals, generate many outcomes
some intended and some unintended
Managers determine which indicators to measure
in order to gauge effectiveness
A number of approaches to measuring
effectiveness look at which measures
Contingency (Traditional)Approaches to
the Measurement of Organizational
Effectiveness
External Environment
Organization
Resource
Inputs
Resource-based
approach
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© 2004
Internal
activities
and
processes
Internal
process
approach
Product and
Service
Outputs
Goal
approach
Resource Based Approach
Looks at the input side of transformation process
It assumes organizations must be structured in
obtaining and managing valued resources in order to
be effective
Organizational effectiveness is defined as the ability
of the organization, either in absolute or relative terms
to obtain scarce and valued resources and
successfully integrate and manage them
Indicators:
Bargaining Position: The ability of an organization to
obtain from its environment scarce and valued resources,
including financial resources, raw materials, human
resources, knowledge and technology
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 and intangible
resources in day-to-day organizational activities to achieve
superior performance
Resource Based Approach
Usefulness:
Useful when other indicators of performance is
difficult to obtain
In many not-for profit and social welfare
organization it is hard to measure output goals or
internal efficiency
Number of PhD's is one example
Shortcomings:
Only vaguely considers the organizational link to
the needs of the customers in external
environment
A superior ability to acquire and use resources is
important only if resources and capabilities are
used to achieve something that meets the need in
the environment
Critics have challenged that approach assumes
stability in the market place and fails to
adequately consider the changing value of
various resources as the competitive environment
and customer needs change
Internal Process Approach
Effectiveness is measured as internal
organizational health and efficiency
An effective organization has a smooth well oiled
internal processes
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
Internal Process Approach
1.
2.
3.
4.
5.
6.
7.
Indicators:
Strong corporate culture and positive work
environment
Team sprit, group loyalty, and team work
Confidence, trust, and communication between
workers and management
Decision making near the source of
information, regardless of where sources on
the organizational chart
Undistorted horizontal and vertical
communication, sharing of relevant facts and
feelings
Rewards to managers for performance, growth,
and development of subordinates, and for
creating an effective work group
Interaction between the organization and its
parts, with conflicts that incur over projects
resolved in the interest of the organization
Internal Process Approach
Usefulness
Most managers believe that happy, committed,
actively involved employees and a positive corporate
culture are important measure of effectiveness
Shortcomings
Total output and organization’s relationship with
external environment are not evaluated
Evaluation of internal health and functioning are
subjective, because many aspects of inputs and
internal processes are not quantifiable
Represents a limited view organizational
effectiveness
Goal Approach
Identifying output goals and assessing how well the
organization have attained these goals
This is a logical approach because organizations do try to
attain certain levels output profit or client satisfaction
The goal approach measures progress towards attainment
of these goals
Indicators:
The important goals to consider are operative goals
Efforts to measure effectiveness have been more more
productive using operating goals than using official goals
Official goals tend to be abstract and difficult to measure,
operative goals reflect activities the organization is actually
performing
Organizations have multiple (and conflicting ) operating
goals
Reported Goals
of U.S. Corporations
Goal
% Corporations
Profitability
Growth
Market Share
Social Responsibility
Employee welfare
Product quality and service
Research and development
Diversification
Efficiency
Financial stability
Resource conservation
Management development
Source: Adapted from Y. K. Shetty, “New Look at Corporate Goals,”
California Management Review 22, no. 2 (1979), pp. 71-19.
89
82
66
65
62
60
54
51
50
49
39
35
The Goal Approach
1.
2.
3.
4.
5.
Assumptions:
Assumes that organizations are deliberate, rational,
goal seeking entities. As such, successful goal
accomplishment becomes an appropriate measure of
effectiveness.
Use of goal approach implies other assumptions if it is
to be valid
Organizations must have ultimate goals
These goals must be identified and defined well
enough to be understood
These goals must be few enough to be manageable
There must be general consensus or agreement on
these goals
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 is Management by Objectives
Goals approach
Problems:
Whose goals? Top Management goals? Who is
included who is excluded?
Official goals does not always reflect organization’s
actual goals. Official goals tend to be influenced
strongly by standard of social desirability
An organization short-term goals are frequently
different from its long term goals. Which goals shortterm or long-term should be used
Organizations have multiple goals. They can compete
with each other and some times are even
incompatible ( high product quality and low unit cost
Goals Approach
1.
2.
3.
4.
5.
Value to managers:
Ensuring that input is received from all those
having a major influence on formulating even
though if they are not the part of senior
management
Including actual goals by observing behavior of
organization members
Recognizing that organization pursue both shortterm and long-term goals
Insisting on tangible, verifiable, and measurable
goals
Viewing goals as a dynamic entities that change
over time rather than as rigid or fixed statements of
purpose
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
This approach is similar to systems view, yet it
has a different emphasis.
Both consider interdependencies, but the
strategic constituencies view is not concerned
with all organization’s environment. It seeks to
appease only those in the environment who can
threaten the organization’s survival
The strategic constituencies approach
1.
2.
3.
Assumptions:
Organizations are assumed to be political arenas
where vested interest compete for control over
resources.
OE becomes an assessment of how successful the
organization has been in satisfying those critical
constituencies, upon whom the future survival of
organization depends
Organization has number of constituencies with
different degrees of power, each trying to satisfy its
demands. Each constituency has a unique set of
values, so it is unlikely that their preferences will be in
agreement
Assumes that managers pursue a number of goals and
the goals represent a response to those interest
groups that control the resources necessary for
organization to survive
Making strategic constituencies operative
1.
2.
3.
4.
5.
Dominant coalition to identify the constituencies
critical for organization’s survival
Evaluate the list to determine the relative power of
each
Identifying expectations that these constituencies
hold for the organization
Comparing the various expectations, determining
common expectations, and those that are
incompatible, assigning relative weights, and
formulating preference order of these various
goals for the organization as a whole
This preference order represents the relative
power of the various strategic constituents
Typical OE criteria of selected strategic constituents
Constituent
Typical of criteria
Owners
Employees
ROI, growth in earnings
Compensation, fringe benefits,
satisfaction with working conditions
Satisfaction with price, quality, service
Satisfaction with payments, future sales
potential,
Ability to pay indebt-ness
Customers
Suppliers
Creditors
Government
Compliance with laws, avoidance of
agencies
penalties and reprimands
Strategic constituencies Approach
Problems
The Task of separating the strategic constituents is
easy to say but difficult to do in practice
What separates strategic constituencies from
almost strategic constituencies/ where do you cut
the set? Won’t the interests of each member in the
dominant coalition strongly affect what he/she
perceives as strategic
Identifying the expectations that the strategic
constituencies hold for the organization present a
problem
An Integrated Approach ( Competing
values)
The three approaches – goal, resource, and internal process to
organizational effectiveness offers a limited view of O.E
The competing values model tries to balance a concern with various
parts of the organization rather than focusing on one part
This approach acknowledges that organizations do many things and
have many outcomes
It combines many indicators of effectiveness into a single framework
The model is based on the assumption that there are disagreements
and competing viewpoints about what constitutes effectiveness
Managers sometimes agree over which are the moist important goals to
pursue and measure
Stakeholders have competing claims on what they want from
organization
The competing values model takes into account these complexities
Using a comprehensive list of performance indicators a panel of experts
rated the indicators for similarity
Thr analysis produced underlyingof effectiveness criteria that
represented management values in organizations
Competing – values approach
1.
2.
The criteria you value and use in assessing
an organization effectiveness depend on
who you are and the interest you represent
Assumption:
There is no “ best” criterion for evaluating
an organization’s effectiveness
There are common elements underlying any
comprehensive list of OE criteria and that
these elements can be combined in such a
way as to create basic set of competing
values
Competing – values approach
1.
2.
Indicators:
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 represent an emphasis on well being of
the organization itself with respect to the environment
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
Open Systems Emphasis
A combination of external focus and flexible
structure
Management’s primary goals are growth and
resource acquisition
The organization accomplishes these goals
through sub goals of flexibility, readiness, and a
positive external evaluation
The dominant value is establishing a good
relationship with the environment to acquire
resources and grow
The emphasis is similar in some ways to the
resource based approach
Competing Values Model
The rational Goal Model
Represents management management values of
structural control and external focus
The primary goals are productivity, efficiency and
profit
The organization wants to achieve output goals in
controlled way
The sub goals that facilitate this outcome are
planning and goal setting
This emphasis is similar in some ways to the
goal approach
The Internal Process Emphasis
It reflects the values of internal focus and structural
control
The primary outcome is a stable organizational
setting that maintains itself in orderly manner
Organizations that are well established in
environment and simply wants to maintain their
current position reflect this emphasis
Sub goals include mechanism for efficient information
management and communication
Although this part of competing value model is similar
in some ways to internal process approach it is less
concerned with human resources than with other
internal processes that lead to efficiency
The Human Relations Emphasis
Incorporates the values of an internal focus and
flexible structure
Man agent concern is for the development of
human resources
Employees are given opportunities for autonomy,
and development
Management works toward the subgoals of
cohesion, morale, and training opportunities
Organizations adopting this emphasis are more
concerned with employees than with the
environment
Competing values and Organization life cycle
1.
2.
3.
Entrepreneurial stage:
Organization is typified by innovation, creativity, and
marshalling resources. Getting external support is
crucial. The open system model emphasizes these
criteria
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
Formalization stage 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.
5.
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
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 system model should dominate in guiding
effectiveness evaluation
Effectiveness Values
for Two Organizations
F
O
C
U
S
STRUCTURE
Human
Relations
Emphasis
INTERNAL
FLEXIBILITY
ORGANIZATION
A
Internal Process
Emphasis
Open Systems
Emphasis
EXTERNAL
ORGANIZATION
B
Rational Goal
Emphasis
CONTROL
Value to Managers
Competing values acknowledges that multiple
criteria and conflicting interests underlie any effort at
defining and assessing OE
By reducing large number of effectiveness criteria
into four conceptually clear organizational models
the C.V approach can guide managers in identifying
the appropriateness of different criteria to different
constituents and in different life cycle stages
Definition
“ The degree to which an organization attains its
short-term (ends) and long-term (means) goals,
the selection of which reflects strategic
constituencies, the self interest of the evaluator,
and life stage of the organization.”
Organizational Effectiveness
What is Strategy
Determination of the basic longterm goals and objectives of an
enterprise and the adoption of
courses of action and allocation of
resources necessary for carrying
out these goals”
“
Types of Goals
Official Goals / mission
Reason for existence
Describes organization’s vision, its shared value
and beliefs, and its reason for being
Typically defines business operations, focus on
values, markets, and customers that distinguish
the organization
Types of Goals
a.
b.
c.
d.
e.
f.
Operative goals:
Designate ends sought through actual operating
procedures of the organization and explain what
organization is actually trying to do
Describe specific measurable outcomes and often are
concerned with short term
Specific goals for each primary task each organization
must perform
Overall performance: profitability
Resources
Market
Employee Development
Innovation and change
productivity
Importance of Goals
Type of Goals
Purpose of Goals
Official Goals, mission:
Legitimacy
Operative goals:
Employee direction and motivation
Decision guidelines
Standard of performance
Top Management Role in Organization
Direction, Design, and Effectiveness
External Environment
Organization
Design
Opportunities
Threats
Uncertainty
Resource Availability
Strategic Direction
CEO, Top
Management
Team
Internal Situation
Strengths
Weaknesses
Distinctive Competence
Leadership Style
Past Performance
Define
mission,
official
goals
Select
operational
goals,
competitive
strategies
Structural Form –
learning vs.
efficiency
Information and
control systems
Production
technology
Human resource
policies,
incentives
Organizational
culture
Interorganizational
linkages
Effectiveness
Outcomes
Resources
Efficiency
Goal attainment
Competing values
The Strategy Imperative
Environment
Factors and
Organization
capabilities
Strategy
Structure
Chandler’s Strategy Structure Thesis
Studied close to hundred of America’s largest
corporations tracing their development from 1909 1960
Conclusion : Unless strategy follows structure
inefficiency would result
Stage 1:
Organizations typically begin with a single product or
line ( do only one thing, manufacturing, sales, or ware
housing)
The simplicity of this strategy is compatible with
simple structure
Decisions can be centralized in the hands of single
manager
Concluded that single product strategy requires high
centralization, low complexity and low formalization
Stage 2: Vertical integration
Organizations typically expand their activities
within the same industry
Vertical integration strategy makes increased
interdependence among organizational units and
creates a need for more complex coordination
The desired complexity is achieved is achieved
by redesigning the structure to form specialized
units based on functional grouping
Stage 3: Diversification
Growth proceeds into product diversification
A product diversification strategy demand a
structural form that allows for efficient allocation
of resources, accountability for performance, and
coordination between units
This can be achieved through multiple set of
independent divisions, each responsible for a
specified product line
Following Chandler’s theory successful
organizations that diversify should have a
different structure from that of a successful firm
that follow a single product strategy
Chandler’s Thesis
Time
Product
diversification
Strategy
Structure
t
t+1
Low
Simple
t+2
High
Functional
Divisional
The Research
Additional studies that duplicated Chandler’s work concludes
that the theory has validity but some distinct restrictions
Criticism
1. Chandler’s Sample of organization
Sample was not a cross section of organizations in general
Looked only at very large and powerful industrial business firms
Whether his findings would be applicable to small medium sized
organizations, service firms or those in public sector could not be
answered from the sample
2. Definition of strategy
When he used the term strategy he meant growth strategy.
Growth was his major concern not profitability
In organization effectiveness terms, a proper strategy in a la
Chandler is more likely to lead to a growth than increased
profitability
Contemporary Strategy Structure
Theory
1.
2.
3.
Contemporary important research on strategy –
structure relationship has been under taken by
Miles and Snow
Michael Porter
Danny Miller
Miles and Sow Four Strategic Types
1.
2.
3.
4.
Classify organization based on the rate at
which they change their products or markets
Identified four strategic types
Defenders
Prospectors
Analyzers
Reactors
Defenders
Seek stability by producing only a limited set of
products directed at narrow segment of total potential
market
Strives aggressively to prevent competitors entering
their turf
This is achieved through competitive pricing or
production of high quality products
Ignore developments and trends outside their
domains
Grow through market penetration or limited product
development
Little or no scanning of environment to find new
opportunities
Intensive planning oriented toward cost and other
efficiency issues
Structure is high on horizontal differentiation,
centralized control, and elaborate formal hierarchy for
communication
Prospectors
Their strength is in finding and exploiting new-product
and market opportunities
Innovating may be more important than high profitability
Their success depends on developing and maintaining
the capacity to survey a wide range of environmental
conditions, trends, and events
Invest heavily in personnel who can scan a wide range
of environment for potential opportunities
Since flexibility is critical the structure is also flexible
Rely on multiple technologies that have a low degree of
routinization and mechanization
Numerous decentralized units
Structure will be low in formalization and have
decentralized control with lateral as well as vertical
communication
Prospectors can not maximize profitability of its inherent
inefficiency
Analyzers
Capitalize on the best of both the preceding types
They seek to minimize risk and maximize opportunity for
profit
Move into new products or markets only after viability has
been proved by prospectors
Analyzers live by imitation
They essentially follow their smaller and more innovative
competitors superior products, but only after their
competitors have demonstrated that the market is there
Seek both flexibility and stability.
They achieve these goals by developing structure made up
of dual components
Parts of these organizations have high levels of
standardization, routinization, mechanization for efficiency
Other parts are adaptive to flexibility
In this way they seek structure to accommodate both
stable and dynamic areas of operations
Reactors
Represents a residual strategy
Describe the inconsistent and unstable patterns that
-
arise when one of the three strategies is pursued
improperly
In general reactors respond inappropriately, perform
poorly, and as result are reluctant to commit
themselves aggressively to a specific strategy for the
future
Reasons
Top management may have failed to make the
organization strategy clear
Management may not have fully shaped the
organization’s structure to fit the chosen strategy
Management may have maintained its current
strategy –structure relationship despite overwhelming
changes in environmental conditions
Miles and Snow Strategic Typologies
Strategy
Goals
Environment Structural
Characteristics
Defender
Stability and
efficiency
stable
Tight control, extensive
division of labor, high
degree of formalization,
centralized
Analyzer
Stability and
flexibility
changing
Moderately centralized
control, tight control over
current activities, looser
control for new
undertakings
Prospector
Flexibility
Dynamic
Loose structure, low
division of labor, low
degree of formalization,
decentralized
Environment Strategy Continuum
Little change
and uncertainty
Defender
Rapid change and
uncertainty
Reactor
Analyzer
Prospector
Porter’s Competitive Strategies
Low cost leadership
Organization be the low cost leader and not merely
be the contender for that position
The product and service be offered must be
perceived as comparable to that offered by rivals or
atleast acceptable to buyers
Structural characteristics
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
1.
Differentiation
Firm seeks to be unique in the industry in ways that
are widely valued by the buyers
May emphasize high quality, extraordinary services,
innovative design, technological capability, positive
brand image
The key is that the attribute chosen must be different
from those offered by rivals and significant enough to
justify premium that exceeds the cost of differentiation
Structural Characteristics
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
Focus
Either a cost advantage (cost focus) or
differentiation ( differentiation focus) in a
narrow segment
Structural Characteristics
Combination of above policies directed at
specific strategic targets
Values and rewards flexibility and customer
intimacy
Measures cost of providing service and
maintaining customer loyalty
Pushes empowerment to employees with
customer contact
Miller’s integrative Framework
Developed the four strategy dimensions of
innovation, marketing, differentiation, breadth and
cost control
1.
Innovation:
To what degree does an organization introduce
major new products or services
Does not mean a strategy merely for simple or
cosmetic changes from previous offerings but
rather a meaningful and unique innovations
2. Market differentiation
Strives to create customer loyalty by uniquely
meeting a particular need
It does not necessarily mean the organization is
producing a higher quality or more up-to-date
product
The organization seeks to create favorable image
for its product through advertising, market
segmentation, and prestige pricing
Limitations to strategy imperative
1.
Critics question the Strategy-structure imperative
on the following points
Degree of discretionary latitude the managers
actually have
Impact of strategy would be greater in the early
development period of an organization
- once personnel are hired, equipment purchased,
policies and procedures are established it becomes
very tough to change
- In infancy vested interests have yet to be
solidified
Capital to labor ratio in an organization will affect
the impact of strategy on the structure
- in labor intensive firm the managers have much
more flexibility, and hence discretion, to exercise
change and influence structure
Limitations to strategy imperative
2. The lag factor:
When management implements a new strategy there is often no
change in structure
- Does this suggest that structures do not follow strategy ?
Proponents of strategy-structure imperative points out that
structures respond to changes in strategy but slowly
At the extreme this lag argument can be considered as a “ cop
out”
More realistically this lag is not a purely a random phenomena
- some organizations are slower to adapt their structures to
changes in strategy than others
The major factor affecting response is the degree of competitive
pressures
- the less competition an organization faces the less rapid its
structural response?
- without competition the concern for efficiency is reduced
Where the organization faces minimal competition, there is likely
to be significant lag between changes in strategy and
modifications in structure
Could Strategy Follow Structure
Structures can motivate or impede strategic activity
as well as simply constrain strategic choices
- strategic decisions made in centralized structure are
typically going to have less diversity of ideas and are
more likely to be consistent over time
- in decentralized organization, where input is likely to
be diverse, and the people providing that input
change, depending on situation
The notion that structure has some preliminary
support
- a study of 110 large manufacturing firms found that
strategy followed structure
- another study of 54 firms found that structure
influences and constraints strategy rather than other
way around
Industry Structure Relationship
Industry
Strategy
Structure
• Distinguishing characteristics of the industry affect the strategies the companies
would choose
•Strategy may be intermediate step between the unique characteristics of the industry in
which the organization operates and strategy it implements to achieve the alignment
•Industries differ in terms of growth possibilities, regulatory constraints, barriers to
entry and mobility, etc.
•Knowing the industry in which the organization operates allows one to know about,
product life cycles, required capital investments, long term prospects, type of
production technologies, etc
•Take two variables that tend to differ by industry category: (a) capital requirements for
entry and product innovation
Capital requirements
High Example
Example
Aerospace
Product
innovation
Example
Metals and
Mining
low
a
c
Computer
software
b
d Example
Bicycle
manufacturers
Low
High
Low
High capital requirement tend to result in large organization, and a limited number of competitors
Type A and C industries will be highly structured and standardized. Type A being more decentralized to
facilitate rapid response to innovations
Type B and D because of low capital investment requirements will make up large number of small firms,
Type D will likely to have more division of labor, and more formalization
Type B organization will tend to have low formalization and more decentralization
Other Factors affecting
Organizational Design
Strategy is one factor that affects organization
Design
Organizational Design is a result of numerous
contingencies
The emphasis placed on efficiency and control
versus flexibility and learning is determined by
contingencies of
Strategy
Environment
Technology
Size
Life cycle and culture
Contingency Factors
Affecting Organization Design
Organizational Structure and Design
The Right Mix of Design Characteristics Fits the Contingency Factors
2-32
Thomson Learning
© 2004
Assessing Organizational
Effectiveness
Overall effectiveness is difficult to measure in
organizations
Organizations are large, diverse, and fragmented
They perform many activities simultaneously,
pursue multiple goals, generate many outcomes
some intended and some unintended
Managers determine which indicators to measure
in order to gauge effectiveness
A number of approaches to measuring
effectiveness look at which measures
Contingency (Traditional)Approaches to
the Measurement of Organizational
Effectiveness
External Environment
Organization
Resource
Inputs
Resource-based
approach
2-34
Thomson Learning
© 2004
Internal
activities
and
processes
Internal
process
approach
Product and
Service
Outputs
Goal
approach
Resource Based Approach
Looks at the input side of transformation process
It assumes organizations must be structured in
obtaining and managing valued resources in order to
be effective
Organizational effectiveness is defined as the ability
of the organization, either in absolute or relative terms
to obtain scarce and valued resources and
successfully integrate and manage them
Indicators:
Bargaining Position: The ability of an organization to
obtain from its environment scarce and valued resources,
including financial resources, raw materials, human
resources, knowledge and technology
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 and intangible
resources in day-to-day organizational activities to achieve
superior performance
Resource Based Approach
Usefulness:
Useful when other indicators of performance is
difficult to obtain
In many not-for profit and social welfare
organization it is hard to measure output goals or
internal efficiency
Number of PhD's is one example
Shortcomings:
Only vaguely considers the organizational link to
the needs of the customers in external
environment
A superior ability to acquire and use resources is
important only if resources and capabilities are
used to achieve something that meets the need in
the environment
Critics have challenged that approach assumes
stability in the market place and fails to
adequately consider the changing value of
various resources as the competitive environment
and customer needs change
Internal Process Approach
Effectiveness is measured as internal
organizational health and efficiency
An effective organization has a smooth well oiled
internal processes
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
Internal Process Approach
1.
2.
3.
4.
5.
6.
7.
Indicators:
Strong corporate culture and positive work
environment
Team sprit, group loyalty, and team work
Confidence, trust, and communication between
workers and management
Decision making near the source of
information, regardless of where sources on
the organizational chart
Undistorted horizontal and vertical
communication, sharing of relevant facts and
feelings
Rewards to managers for performance, growth,
and development of subordinates, and for
creating an effective work group
Interaction between the organization and its
parts, with conflicts that incur over projects
resolved in the interest of the organization
Internal Process Approach
Usefulness
Most managers believe that happy, committed,
actively involved employees and a positive corporate
culture are important measure of effectiveness
Shortcomings
Total output and organization’s relationship with
external environment are not evaluated
Evaluation of internal health and functioning are
subjective, because many aspects of inputs and
internal processes are not quantifiable
Represents a limited view organizational
effectiveness
Goal Approach
Identifying output goals and assessing how well the
organization have attained these goals
This is a logical approach because organizations do try to
attain certain levels output profit or client satisfaction
The goal approach measures progress towards attainment
of these goals
Indicators:
The important goals to consider are operative goals
Efforts to measure effectiveness have been more more
productive using operating goals than using official goals
Official goals tend to be abstract and difficult to measure,
operative goals reflect activities the organization is actually
performing
Organizations have multiple (and conflicting ) operating
goals
Reported Goals
of U.S. Corporations
Goal
% Corporations
Profitability
Growth
Market Share
Social Responsibility
Employee welfare
Product quality and service
Research and development
Diversification
Efficiency
Financial stability
Resource conservation
Management development
Source: Adapted from Y. K. Shetty, “New Look at Corporate Goals,”
California Management Review 22, no. 2 (1979), pp. 71-19.
89
82
66
65
62
60
54
51
50
49
39
35
The Goal Approach
1.
2.
3.
4.
5.
Assumptions:
Assumes that organizations are deliberate, rational,
goal seeking entities. As such, successful goal
accomplishment becomes an appropriate measure of
effectiveness.
Use of goal approach implies other assumptions if it is
to be valid
Organizations must have ultimate goals
These goals must be identified and defined well
enough to be understood
These goals must be few enough to be manageable
There must be general consensus or agreement on
these goals
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 is Management by Objectives
Goals approach
Problems:
Whose goals? Top Management goals? Who is
included who is excluded?
Official goals does not always reflect organization’s
actual goals. Official goals tend to be influenced
strongly by standard of social desirability
An organization short-term goals are frequently
different from its long term goals. Which goals shortterm or long-term should be used
Organizations have multiple goals. They can compete
with each other and some times are even
incompatible ( high product quality and low unit cost
Goals Approach
1.
2.
3.
4.
5.
Value to managers:
Ensuring that input is received from all those
having a major influence on formulating even
though if they are not the part of senior
management
Including actual goals by observing behavior of
organization members
Recognizing that organization pursue both shortterm and long-term goals
Insisting on tangible, verifiable, and measurable
goals
Viewing goals as a dynamic entities that change
over time rather than as rigid or fixed statements of
purpose
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
This approach is similar to systems view, yet it
has a different emphasis.
Both consider interdependencies, but the
strategic constituencies view is not concerned
with all organization’s environment. It seeks to
appease only those in the environment who can
threaten the organization’s survival
The strategic constituencies approach
1.
2.
3.
Assumptions:
Organizations are assumed to be political arenas
where vested interest compete for control over
resources.
OE becomes an assessment of how successful the
organization has been in satisfying those critical
constituencies, upon whom the future survival of
organization depends
Organization has number of constituencies with
different degrees of power, each trying to satisfy its
demands. Each constituency has a unique set of
values, so it is unlikely that their preferences will be in
agreement
Assumes that managers pursue a number of goals and
the goals represent a response to those interest
groups that control the resources necessary for
organization to survive
Making strategic constituencies operative
1.
2.
3.
4.
5.
Dominant coalition to identify the constituencies
critical for organization’s survival
Evaluate the list to determine the relative power of
each
Identifying expectations that these constituencies
hold for the organization
Comparing the various expectations, determining
common expectations, and those that are
incompatible, assigning relative weights, and
formulating preference order of these various
goals for the organization as a whole
This preference order represents the relative
power of the various strategic constituents
Typical OE criteria of selected strategic constituents
Constituent
Typical of criteria
Owners
Employees
ROI, growth in earnings
Compensation, fringe benefits,
satisfaction with working conditions
Satisfaction with price, quality, service
Satisfaction with payments, future sales
potential,
Ability to pay indebt-ness
Customers
Suppliers
Creditors
Government
Compliance with laws, avoidance of
agencies
penalties and reprimands
Strategic constituencies Approach
Problems
The Task of separating the strategic constituents is
easy to say but difficult to do in practice
What separates strategic constituencies from
almost strategic constituencies/ where do you cut
the set? Won’t the interests of each member in the
dominant coalition strongly affect what he/she
perceives as strategic
Identifying the expectations that the strategic
constituencies hold for the organization present a
problem
An Integrated Approach ( Competing
values)
The three approaches – goal, resource, and internal process to
organizational effectiveness offers a limited view of O.E
The competing values model tries to balance a concern with various
parts of the organization rather than focusing on one part
This approach acknowledges that organizations do many things and
have many outcomes
It combines many indicators of effectiveness into a single framework
The model is based on the assumption that there are disagreements
and competing viewpoints about what constitutes effectiveness
Managers sometimes agree over which are the moist important goals to
pursue and measure
Stakeholders have competing claims on what they want from
organization
The competing values model takes into account these complexities
Using a comprehensive list of performance indicators a panel of experts
rated the indicators for similarity
Thr analysis produced underlyingof effectiveness criteria that
represented management values in organizations
Competing – values approach
1.
2.
The criteria you value and use in assessing
an organization effectiveness depend on
who you are and the interest you represent
Assumption:
There is no “ best” criterion for evaluating
an organization’s effectiveness
There are common elements underlying any
comprehensive list of OE criteria and that
these elements can be combined in such a
way as to create basic set of competing
values
Competing – values approach
1.
2.
Indicators:
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 represent an emphasis on well being of
the organization itself with respect to the environment
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
Open Systems Emphasis
A combination of external focus and flexible
structure
Management’s primary goals are growth and
resource acquisition
The organization accomplishes these goals
through sub goals of flexibility, readiness, and a
positive external evaluation
The dominant value is establishing a good
relationship with the environment to acquire
resources and grow
The emphasis is similar in some ways to the
resource based approach
Competing Values Model
The rational Goal Model
Represents management management values of
structural control and external focus
The primary goals are productivity, efficiency and
profit
The organization wants to achieve output goals in
controlled way
The sub goals that facilitate this outcome are
planning and goal setting
This emphasis is similar in some ways to the
goal approach
The Internal Process Emphasis
It reflects the values of internal focus and structural
control
The primary outcome is a stable organizational
setting that maintains itself in orderly manner
Organizations that are well established in
environment and simply wants to maintain their
current position reflect this emphasis
Sub goals include mechanism for efficient information
management and communication
Although this part of competing value model is similar
in some ways to internal process approach it is less
concerned with human resources than with other
internal processes that lead to efficiency
The Human Relations Emphasis
Incorporates the values of an internal focus and
flexible structure
Man agent concern is for the development of
human resources
Employees are given opportunities for autonomy,
and development
Management works toward the subgoals of
cohesion, morale, and training opportunities
Organizations adopting this emphasis are more
concerned with employees than with the
environment
Competing values and Organization life cycle
1.
2.
3.
Entrepreneurial stage:
Organization is typified by innovation, creativity, and
marshalling resources. Getting external support is
crucial. The open system model emphasizes these
criteria
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
Formalization stage 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.
5.
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
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 system model should dominate in guiding
effectiveness evaluation
Effectiveness Values
for Two Organizations
F
O
C
U
S
STRUCTURE
Human
Relations
Emphasis
INTERNAL
FLEXIBILITY
ORGANIZATION
A
Internal Process
Emphasis
Open Systems
Emphasis
EXTERNAL
ORGANIZATION
B
Rational Goal
Emphasis
CONTROL
Value to Managers
Competing values acknowledges that multiple
criteria and conflicting interests underlie any effort at
defining and assessing OE
By reducing large number of effectiveness criteria
into four conceptually clear organizational models
the C.V approach can guide managers in identifying
the appropriateness of different criteria to different
constituents and in different life cycle stages
Definition
“ The degree to which an organization attains its
short-term (ends) and long-term (means) goals,
the selection of which reflects strategic
constituencies, the self interest of the evaluator,
and life stage of the organization.”
