Strategic Management and Organizational Effectiveness

8/10/2019 Strategic Management and Organizational Effectiveness

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Strategic Management and

Organizational Effectiveness


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What is Strategy

Determination of the basic long-

term goals and objectives of an

enterprise and the adoption of

courses of action and allocation of

resources necessary for carrying

out these goals


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Types of Goals

Official Goals / mission

Reason for existence

Describes organizations vision, its shared value

and beliefs, and its reason for beingTypically defines business operations, focus on

values, markets, and customers that distinguish

the organization


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Types of Goals

Operative goals:

Designate ends sought through actual operatingprocedures of the organization and explain whatorganization is actually trying to do

Describe specific measurable outcomes and often areconcerned with short term

Specific goals for each primary task each organizationmust perform

a. Overall performance: profitability

b. Resources

c. Market

d. Employee Developmente. Innovation and change

f. productivity


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Importance of Goals

Type of Goals Purpose of Goals

Official Goals, mission: Legitimacy

Operative goals: Employee direction and motivation

Decision guidelines

Standard of performance


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Top Management Role in Organization

Direction, Design, and Effectiveness

CEO, Top

Management

Team

External Environment

Opportunities

Threats

Uncertainty

Resource Availability

Internal Situation

Strengths

Weaknesses

Distinctive Competence

Leadership Style

Past Performance

Strategic Direction

Organization

Design

Effectiveness

Outcomes

Define

mission,

official

goals

Select

operational

goals,

competitive

strategies

Resources

Efficiency

Goal attainment

Competing values

Structural Form

learning vs.efficiency

Information and

control systems

Production

technology

Human resource

policies,

incentives

Organizationalculture

Interorganizational

linkages


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The Strategy Imperative

Environment

Factors andOrganization

capabilities

Strategy Structure


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Chandlers Strategy Structure Thesis

Studied close to hundred of Americas largestcorporations tracing their development from 1909 -

1960

Conclusion : Unless strategy follows structureinefficiency would result

Stage 1:

Organizations typically begin with a single product orline ( do only one thing, manufacturing, sales, or warehousing)

The simplicity of this strategy is compatible withsimple structure

Decisions can be centralized in the hands of singlemanager

Concluded that single product strategy requires highcentralization, low complexity and low formalization


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Stage 2: Vertical integration

Organizations typically expand their activities

within the same industry Vertical integration strategy makes increased

interdependence among organizational units andcreates a need for more complex coordination

The desired complexity is achieved is achievedby redesigning the structure to form specializedunits based on functional grouping


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Stage 3: Diversification

Growth proceeds into product diversification

A product diversification strategy demand astructural form that allows for efficient allocationof resources, accountability for performance, andcoordination between units

This can be achieved through multiple set ofindependent divisions, each responsible for aspecified product line

Following Chandlers theory successfulorganizations that diversify should have a

different structure from that of a successful firmthat follow a single product strategy


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Chandlers Thesis

Time t t + 1 t + 2

Product

diversificationStrategy Low High

StructureSimple Functional Divisional

Th R h


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The Research

Additional studies that duplicated Chandlers work concludesthat the theory has validity but some distinct restrictions

Criticism

1. Chandlers 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 sizedorganizations, service firms or those in public sector could not beanswered 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 laChandler is more likely to lead to a growth than increasedprofitability


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Contemporary Strategy Structure

Theory

Contemporary important research on strategystructure relationship has been under taken by

1. Miles and Snow

2. Michael Porter

3. Danny Miller

Mil d S F St t i T


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Miles and Sow Four Strategic Types

Classify organization based on the rate at

which they change their products or markets Identified four strategic types

1. Defenders

2. Prospectors

3. Analyzers

4. Reactors


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Defenders

Seek stability by producing only a limited set ofproducts directed at narrow segment of total potential

market Strives aggressively to prevent competitors entering

their turf

This is achieved through competitive pricing orproduction of high quality products

Ignore developments and trends outside theirdomains

Grow through market penetration or limited productdevelopment

Little or no scanning of environment to find newopportunities

Intensive planning oriented toward cost and otherefficiency issues

Structure is high on horizontal differentiation,centralized control, and elaborate formal hierarchy forcommunication


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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 maintainingthe capacity to survey a wide range of environmentalconditions, trends, and events

Invest heavily in personnel who can scan a wide rangeof environment for potential opportunities

Since flexibility is critical the structure is also flexible

Rely on multiple technologies that have a low degree ofroutinization and mechanization

Numerous decentralized units Structure will be low in formalization and have

decentralized control with lateral as well as verticalcommunication

Prospectors can not maximize profitability of its inherent

inefficiency


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Analyzers

Capitalize on the best of both the preceding types

They seek to minimize risk and maximize opportunity forprofit

Move into new products or markets only after viability hasbeen proved by prospectors

Analyzers live by imitation

They essentially follow their smaller and more innovativecompetitors superior products, but only after theircompetitors 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

R t


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Reactors

Represents a residual strategy

Describe the inconsistent and unstable patterns thatarise when one of the three strategies is pursuedimproperly

In general reactors respond inappropriately, performpoorly, and as result are reluctant to commit

themselves aggressively to a specific strategy for thefuture

Reasons

- Top management may have failed to make theorganization strategy clear

- Management may not have fully shaped theorganizations structure to fit the chosen strategy

- Management may have maintained its currentstrategystructure relationship despite overwhelming

changes in environmental conditions


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Strategy Goals Environment Structural

CharacteristicsDefender 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

Miles and Snow Strategic Typologies


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Environment Strategy Continuum

Little change

and uncertaintyRapid change and

uncertainty

Defender Reactor Analyzer Prospector


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Porters Competitive Strategies

1. Low cost leadership

Organization be the low cost leader and not merelybe the contender for that position

The product and service be offered must beperceived as comparable to that offered by rivals oratleast acceptable to buyers

Structural characteristics Strong central authority; tight controls

Standard operating procedures

Easy to use manufacturing technologies

Highly efficient procurement and distributionsystem

Close supervision; limited employee empowerment

Frequent, detailed controlled reports


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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, positivebrand image

The key is that the attribute chosen must be differentfrom 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 strongcoordination

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


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Focus

Either a cost advantage (cost focus) or

differentiation ( differentiation focus) in anarrow segmentStructural CharacteristicsCombination of above policies directed at

specific strategic targetsValues and rewards flexibility and customer

intimacyMeasures cost of providing service and

maintaining customer loyalty

Pushes empowerment to employees withcustomer contact


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Millers integrative Framework

Developed the four strategy dimensions ofinnovation, marketing, differentiation, breadth andcost control

1. Innovation:

To what degree does an organization introducemajor new products or services

Does not mean a strategy merely for simple orcosmetic changes from previous offerings butrather 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-dateproduct

The organization seeks to create favorable image

for its product through advertising, marketsegmentation, and prestige pricing


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Li it ti t t t i ti


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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 thatstructures respond to changes in strategy but slowly

At the extreme this lag argument can be considered as a copout

More realistically this lag is not a purely a random phenomena

- some organizations are slower to adapt their structures tochanges in strategy than others

The major factor affecting response is the degree of competitivepressures

- the less competition an organization faces the less rapid itsstructural response?

- without competition the concern for efficiency is reduced

Where the organization faces minimal competition, there is likelyto be significant lag between changes in strategy andmodifications in structure


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Could Strategy Follow Structure

Structures can motivate or impede strategic activity

as well as simply constrain strategic choices- strategic decisions made in centralized structure aretypically going to have less diversity of ideas and aremore likely to be consistent over time

- in decentralized organization, where input is likely to

be diverse, and the people providing that inputchange, depending on situation

The notion that structure has some preliminarysupport

- a study of 110 large manufacturing firms found thatstrategy followed structure

- another study of 54 firms found that structureinfluences and constraints strategy rather than otherway around

I d t St t R l ti hi


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Industry Structure Relationship

Industry Strategy Structure

Distinguishing characteristics of the industry affect the strategies the companies

would chooseStrategy 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


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Capital requirements

Product

innovation

Low

High

High Low

low

a b

c d

Example

Aerospace

Example

Computersoftware

Example

Metals andMining

Example

Bicyclemanufacturers

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


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Other Factors affecting

Organizational Design

Strategy is one factor that affects organizationDesign

Organizational Design is a result of numerous

contingencies

The emphasis placed on efficiency and control

versus flexibility and learning is determined by

contingencies of

StrategyEnvironment

Technology

Size

Life cycle and culture


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Assessing Organizational

Effectiveness

Overall effectiveness is difficult to measure inorganizations

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 effectivenessA number of approaches to measuring

effectiveness look at which measures


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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 tobe effective

Organizational effectiveness is defined as the ability

of the organization, either in absolute or relative termsto obtain scarce and valued resources andsuccessfully 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, humanresources, knowledge and technology

The abilities of the organizations decision makers toperceive and correctly interpret the real properties of theexternal environment

The abilities of managers to use tangible and intangibleresources in day-to-day organizational activities to achievesu erior erformance


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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 orinternal efficiency

Number of PhD's is one example Shortcomings:Only vaguely considers the organizational link to

the needs of the customers in externalenvironment

A superior ability to acquire and use resources isimportant only if resources and capabilities areused to achieve something that meets the need inthe environment

Critics have challenged that approach assumesstability in the market place and fails toadequately consider the changing value of

various resources as the competitive environmentand customer needs chan e


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Internal Process Approach

Effectiveness is measured as internalorganizational 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


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Indicators:1. Strong corporate culture and positive workenvironment

2. Team sprit, group loyalty, and team work3. Confidence, trust, and communication between

workers and management

4. Decision making near the source ofinformation, regardless of where sources onthe organizational chart

5. Undistorted horizontal and verticalcommunication, sharing of relevant facts andfeelings

6. Rewards to managers for performance, growth,and development of subordinates, and forcreating an effective work group

7. Interaction between the organization and itsparts, with conflicts that incur over projectsresolved in the interest of the organization


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UsefulnessMost managers believe that happy, committed,

actively involved employees and a positive corporateculture are important measure of effectiveness

Shortcomings

Total output and organizations relationship withexternal environment are not evaluated

Evaluation of internal health and functioning aresubjective, because many aspects of inputs andinternal processes are not quantifiable

Represents a limited view organizationaleffectiveness


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Goal Approach

Identifying output goals and assessing how well theorganization have attained these goals

This is a logical approach because organizations do try toattain certain levels output profit or client satisfaction

The goal approach measures progress towards attainment

of these goalsIndicators:

The important goals to consider are operative goals

Efforts to measure effectiveness have been more moreproductive using operating goals than using official goals

Official goals tend to be abstract and difficult to measure,operative goals reflect activities the organization is actuallyperforming

Organizations have multiple (and conflicting ) operating

goals


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Reported Goals

of U.S. Corporations

Goal

Corporations

Profitability 89

Growth 82

Market Share 66Social Responsibility 65

Employee welfare 62

Product quality and service 60

Research and development 54

Diversification 51

Efficiency 50

Financial stability 49

Resource conservation 39

Management development 35

Source: Adapted from Y. K. Shetty, New Look at Corporate Goals,California Management Review 22, no. 2 (1979), pp. 71-19.

e oa pproac


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e oa pproac

Assumptions:

Assumes that organizations are deliberate, rational,

goal seeking entities. As such, successful goalaccomplishment becomes an appropriate measure ofeffectiveness.

Use of goal approach implies other assumptions if it isto be valid

1. Organizations must have ultimate goals

2. These goals must be identified and defined wellenough to be understood

3. These goals must be few enough to be manageable

4. There must be general consensus or agreement onthese goals

5. Progress towards these goals must be measurable


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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


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Goals approach

Problems: Whose goals? Top Management goals? Who is

included who is excluded?

Official goals does not always reflect organizationsactual goals. Official goals tend to be influencedstrongly by standard of social desirability

An organization short-term goals are frequentlydifferent from its long term goals. Which goals short-term or long-term should be used

Organizations have multiple goals. They can competewith each other and some times are evenincompatible ( high product quality and low unit cost


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Goals Approach

Value to managers:1. Ensuring that input is received from all those

having a major influence on formulating eventhough if they are not the part of seniormanagement

2. Including actual goals by observing behavior oforganization members

3. Recognizing that organization pursue both short-term and long-term goals

4. Insisting on tangible, verifiable, and measurablegoals

5. Viewing goals as a dynamic entities that changeover time rather than as rigid or fixed statements ofpurpose

The strategic constituencies approach


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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 organizations environment. It seeks to

appease only those in the environment who canthreaten the organizations survival



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Assumptions:

Organizations are assumed to be political arenaswhere vested interest compete for control over

resources.1. OE becomes an assessment of how successful the

organization has been in satisfying those criticalconstituencies, upon whom the future survival oforganization depends

2. Organization has number of constituencies withdifferent degrees of power, each trying to satisfy itsdemands. Each constituency has a unique set ofvalues, so it is unlikely that their preferences will be inagreement

3. Assumes that managers pursue a number of goals andthe goals represent a response to those interestgroups that control the resources necessary fororganization to survive

Making strategic constituencies operative


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g g p

1. Dominant coalition to identify the constituenciescritical for organizations survival

2. Evaluate the list to determine the relative power ofeach

3. Identifying expectations that these constituencieshold for the organization

4. Comparing the various expectations, determiningcommon expectations, and those that areincompatible, assigning relative weights, andformulating preference order of these variousgoals for the organization as a whole

5. This preference order represents the relativepower of the various strategic constituents


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Typical OE criteria of selected strategic constituents

Constituent Typical of criteria

Owners

Employees

Customers

Suppliers

CreditorsGovernment

agencies

ROI, growth in earnings

Compensation, fringe benefits,

satisfaction with working conditions

Satisfaction with price, quality, serviceSatisfaction with payments, future sales

potential,

Ability to pay indebt-ness

Compliance with laws, avoidance of

penalties and reprimands


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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 cutthe set? Wont the interests of each member in thedominant coalition strongly affect what he/sheperceives as strategic

Identifying the expectations that the strategicconstituencies hold for the organization present aproblem

An Integrated Approach ( Competing


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An Integrated Approach ( Competing

values)

The three approachesgoal, resource, and internal process toorganizational effectiveness offers a limited view of O.E

The competing values model tries to balance a concern with variousparts of the organization rather than focusing on one part

This approach acknowledges that organizations do many things andhave many outcomes

It combines many indicators of effectiveness into a single framework

The model is based on the assumption that there are disagreementsand competing viewpoints about what constitutes effectiveness

Managers sometimes agree over which are the moist important goals topursue and measure

Stakeholders have competing claims on what they want fromorganization

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 thatrepresented management values in organizations


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Competingvalues approach

The criteria you value and use in assessingan organization effectiveness depend onwho you are and the interest you represent

Assumption:

1. There is no best criterion for evaluatingan organizations effectiveness

2. There are common elements underlying anycomprehensive list of OE criteria and that

these elements can be combined in such away as to create basic set of competingvalues

Competing values approach


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Competing values approach

Indicators:

1. 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 environment2. Structure: Whether stability versus flexibility is the

dominant structural consideration

Stability: reflects a management value for top downcontrol

Flexibility: represents a value for adaptation andchange


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Open Systems Emphasis

A combination of external focus and flexiblestructure

Managements 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


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Competing Values Model

The rational Goal ModelRepresents 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 areplanning and goal setting

This emphasis is similar in some ways to the

goal approach


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The Internal Process Emphasis

It reflects the values of internal focus and structuralcontrol

The primary outcome is a stable organizational

setting that maintains itself in orderly manner

Organizations that are well established inenvironment 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


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The Human Relations Emphasis

Incorporates the values of an internal focus andflexible 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


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Competing values and Organization life cycle

1. Entrepreneurial stage:

Organization is typified by innovation, creativity, and

marshalling resources. Getting external support iscrucial. The open system model emphasizes thesecriteria

2. Collective stage:

Strategic constituents are likely to include union,

employees. Management needs to create a sense offamily within the organization and develop membercommitment. This is consistent with the criteriaarticulated in human relations model

3. Formalization stage and control stage:

Efficiency and orderliness are sought. The organizationis becoming mature and the strategic constituents atthis pointemployees, leaders, suppliers, andcustomers evaluate the organization in terms of itsstability and productivity. Such constituencies will lookto internal processes and rational goal model

C ti l d O i ti lif


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Competing values and Organization life

cycle

4. Elaboration of structure stage: Emphasis is onmonitoring the external environment. Strategicconstituents emphasize flexibility, ability to acquireresources and growth rate. These criteria are bestmet in the open systems model

5. Decline stage: strategic constituencies tend to besimilar to those found when organization is justbeginning. The concern is again with the ability ofthe organization to innovate and acquire resources.Open system model should dominate in guiding

effectiveness evaluation

Effectiveness Values


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ORGANIZATION

B

ORGANIZATIONA

Effectiveness Values

for Two Organizations

Human

Relations

Emphasis

Internal ProcessEmphasis

Rational GoalEmphasis

Open Systems

Emphasis

STRUCTURE

F

OC

U

S

FLEXIBILITY

CONTROL

INTERNAL EXTERNAL

Value to Managers


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Value to Managers

Competing values acknowledges that multiplecriteria and conflicting interests underlie any effort atdefining and assessing OE

By reducing large number of effectiveness criteria

into four conceptually clear organizational modelsthe C.V approach can guide managers in identifyingthe appropriateness of different criteria to differentconstituents and in different life cycle stages


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Definition

The degree to which an organization attains itsshort-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.

Documents

Strategic Management and Organizational Effectiveness