How Do Managers Measure Organizational Effectiveness?
An Agency Theory Perspective
Organizational effectiveness is the ability to use resources to create value; it includes
control, innovation, and efficiency. The external resource approach evaluates a
company’s ability to obtain scarce resources and valued skills. Indicators include stock
prices, return on investment, and market share. Researchers see primary management
tasks as control, innovation, and efficiency. Control means dominating the external
environment, attracting resources, and using political processes. Innovation entails
developing skills to discover new products and processes and designing adaptable
structures and cultures. Efficiency involves developing modern plants for rapid, low-cost
production, fast distribution, and high productivity.
The External Resource Approach: Control
Using the external resource approach, managers evaluate a firm’s ability to manage and
control the external environment. Indicators include stock price, profitability, return on
investment, and the quality of a company’s products. An important factor is
management’s ability to perceive and respond to environmental change. Stakeholders
value aggressiveness and an entrepreneurial spirit.
The Internal Systems Approach: Innovation
Using the internal systems approach, managers evaluate organizational effectiveness.
Structure and culture should foster flexibility and rapid response to market changes.
Flexibility fosters innovation.
Innovation is measured by the time needed for decision making, production, and
coordinating activities.
The Technical Approach: Efficiency
The technical approach is used to evaluate efficiency. Effectiveness is measured by
productivity and efficiency (ratio of outputs to inputs). Productivity gains include
increased production or cost reduction. Productivity is measured at all stages of
production. Service companies could measure sales per employee or the ratio of goods
sold to goods returned.
Employee motivation is an important factor in productivity and efficiency.
Organizational Stakeholders
Organizations create value for stakeholders—those with an interest, claim, or stake in
the organization. Stakeholders are motivated to participate in an organization if they
receive inducements or rewards that exceed their contributions. Organizational
stakeholders include inside and outside stakeholders.
Inside stakeholders are closest to an organization and have a direct claim on
organizational resources.
Shareholders are company owners who buy stock to earn dividends and stock
appreciation. They can withdraw support if inducements fall below contributions.
Managers coordinate resources to meet organizational goals and strive to invest
shareholder money profitably. Top managers are indirectly appointed by shareholders
through a board of directors. Managers contribute skills to receive compensation and
satisfaction. Managers often leave an organization if contributions exceed inducements.
The workforce includes non-managerial employees who contribute through the
performance of assigned duties. Motivation is related to the rewards and punishments
that influence performance. Employees decrease performance or leave if contributions
exceed inducements.
Outside stakeholders neither own nor work for the company but have an interest in it.
Customers are the largest outside stakeholder group. The money paid for a product is a
customer’s contribution to the organization. Unless they get value, customers withdraw
monetary support, and the company loses a stakeholder.
Suppliers provide raw materials and parts and directly affect company efficiency.
Suppliers indirectly attract customers because high-quality inputs lead to high-quality
products. U.S. automakers are imitating the Japanese, whose cars have high-quality
parts, by creating strong ties with suppliers to improve quality.
The government wants companies to compete fairly and comply with laws pertaining to
employee pay, safety, discrimination, and other issues. The government contributes to
organizations by standardizing rules.
Trade unions directly impact a company’s productivity and effectiveness, but union
demands can conflict with shareholder demands.
Local communities: The economics of a community, including real estate and
employment, depend on local businesses.
The general public: The wealth of a nation is tied to the success of its businesses. The
public wants corporations to behave in a socially responsible way. The public was upset
in 1992 when the president of United Way misused funds.
Organizational Effectiveness: Satisfying Stakeholder’s Goals and Interests
Organizations are coalitions of stakeholders who bargain to balance inducements with
contributions. An organization must minimally satisfy the interests of all stakeholders
who often have conflicting goals. To win stakeholder approval, the organization faces
the problems of competing goals, allocating resources, and balancing short- and long-
term goals.
Competing Goals
Shareholders own the company, thus managers should maximize shareholder wealth.
Yet ownership and control are separated because managers control the company and
can pursue personal interest. They may focus on short-term profits instead of long-term
growth or avoid risk taking because they control their own salaries.
Allocating Rewards
Reward allocation is important because it motivates stakeholders, yet it is difficult to
determine the distribution of excess rewards. Which criteria should measure
effectiveness, short-term profit, growth, or long-term wealth maximization? Should
employees receive short-term bonuses or lifetime employment? Should shareholders
receive dividends or have profits reinvested?
Managing Stakeholder Interests
Satisfying stakeholders such as customers, employees, and the government reaches the
ultimate goal of satisfying managers and shareholders.
Agency theory is useful for understanding the relationships between various levels of
management. A relationship exists when one party (the principle) delegates decision
making authority or control to another (the agent). The agency problem is that of
accountability, both because one party may have more information than the other, but
also the parties may have different goals.
Moral hazard occurs when the agent has more information than the principle and the
agent has an incentive to pursue his or her own self-interests.
To solve the agency problem, governance mechanisms must be put in place, which are
some forms of control which align the interests of the principles and agents.
Top Managers and Organizational Ethics
Ethics are the moral principles or beliefs about what is right or wrong. These principles
help guide managers when the best course of action is not clear, or when different
stakeholders have different needs. Because management decisions are often difficult, it
is useful to understand the frameworks that individuals use in making ethical decisions.
Sources of Organizational Ethics
Ethics come from three sources, society, group or professional, and individual.
Societal Ethics
These include such things as the legal system, customs in a society or culture, and in the
norms and values that people use to interact with each other.
Professional Ethics
These are the moral values and rules that a specific group relies on, such as doctors or
lawyers. A good example is athletics. In football or basketball, it is acceptable and not
considered cheating to try and sneak something by an official. Players don’t call
penalties on themselves. However, in golf, the ethical standards are such that players
are expected to call infractions on themselves.
Individual Ethics
These are the personal and moral standards that individuals use to structure their
interactions with people. Because individuals when left to their own devices tend to
pursue their own goals at the expense of the common good. The “Tragedy of the
Commons” example illustrates this well. Ethical rules and laws emerge to control this
type of behavior.
Self-Interest
Individuals face ethical issues when they weigh personal interests against the impact of
their actions on others. Research suggests that individuals with high stakes are more
likely to behave unethically. Companies with financial problems are more likely to
commit unethical and illegal acts (price fixing).
Outside Pressure
The probability of unethical behavior increases when outsiders pressure individuals to
perform.
Creating an Ethical Organization
Ethical people create an ethical organization. An employee decision is ethical if it falls
within acceptable standards in the organization’s environment, is communicated to all
affected parties and is approved by those with whom the decision maker has significant
personal relationships. An unethical decision hurts stakeholders in a manner that is
unacceptable in the organization’s environment.
Top managers influence a company’s ethical culture. As a figurehead, a manager models
the company position on ethics and promotes ethical behavior through employee
incentives. A manager informs customers and stakeholders about values and allocates
resources to social causes.
Designing an Ethical Structure and Control System
Structure and culture can be designed to encourage ethical behavior. Authority
relationships and rules can be designed to foster ethical behavior. The mission
statement can direct employees towards ethical decisions.
If employees feel helpless to prevent an unethical act or are afraid to discuss ethical
concerns, they may confide in an outside person or agency. These are whistle-blowers.
An organization can take the following actions to make whistle-blowing acceptable:
1. Allow subordinates to discuss ethical concerns with upper-level managers.
2. Create an ethics officer to investigate claims and inform employees about
ethics.
3. Create an ethics committee to make formal ethical judgments.
Creating an Ethical Culture
Ethics are part of an organization’s culture, and top management impacts ethics. Ethical
top managers foster an ethical culture, but unethical top managers make an ethical
culture difficult to establish.
Supporting the Interests of Stakeholder Groups
Although shareholders want high profits, they don’t want increased profits through
unethical behavior. Unethical behavior makes a company a riskier investment, hurts a
company’s reputation, and lowers its stock price. Outside stakeholders such as the
government can create rules to promote ethical behavior. Outside regulation can help
establish societal ethics.
What Is Organizational Change?
Organizational change occurs when an organization restructures resources to increase
the ability to create value and improve effectiveness. A declining company seeks ways
to regain customers; a growing organization designs new products. Change is prevalent.
Targets of Change
Organizational change includes changes in four areas:
Human resources are an organization’s most important asset. Changes include:
investment in training, socializing employees, changing norms to motivate a diverse
workforce, monitoring promotion and reward systems, and changing top management.
Functional resources can be transferred to maximize value creation as the environment
changes. Thus, key functions grow in importance. Organizations can change structure,
culture, and technology to improve the value created by functions. A product team
culture increases development time. Technology that uses self-managed work teams
increases productivity and quality.
Technological capabilities provide new products, change existing ones, and create a
core competence. Improving the reliability and quality of goods and services is an
important capability. Organizations may need to restructure to achieve the benefits of
new technology.
Organizational capabilities are imbedded in operations. Organizations use human and
functional resources to seize technological opportunities through structure and culture.
Forces for and Resistance to Organizational Change
Organizations face both the forces of change and resistances to change.
Forces of change require change or loss of competitive edge.
Competitive forces spur change, because an organization must equal or surpass rivals to
sustain a competitive advantage in efficiency, quality, innovation, or customer
responsiveness. Managing change is crucial when competing for customers.
Economic, political, and global forces, such as the North American Free Trade
Agreement (NAFTA) or other economic unions, are significant forces of change. The
European Union (EU) has increased to 20 countries. Production in an EU country
eliminates tariffs, so Japan produces cars in England to avoid foreign tariffs. The three
distinct economic spheres—North America, Europe, and Asia—expect to have more
trade within their arena than across spheres. Low-cost competitors, low-cost inputs, and
new technological developments are realities of global competition. Organizations may
need structural change to enter foreign markets and adapt to different cultures.
Demographic and social forces include an increasingly diverse workforce, changing,
hiring and promotion. Many workers want to balance work and leisure. Companies need
flexibility in scheduling to meet employee childcare needs.
Ethical forces place greater demands on firms for honest, corporate behavior, so some
firms have hired ethics officers to report offenses or give ethical advice. Organizations
protect whistleblowers and foreign employees.
Resistances to Change can occur at the organizational level, group level, or individual
level.
Organizational-Level
Power and conflict: If change benefits one function at the expense of another, conflict
impedes the change process. Powerful divisions, such as IBM’s mainframe division, can
sabotage change.
Differences in functional orientation: mean that divisions or functions view problems
from various perspectives and seek changes to benefit their own group. If sales fall, R&D
wants funding for product development while sales wants to hire more people. Subunit
orientations cause coordination problems and slow decision-making. A high level of task
interdependence makes change difficult. The greater the interdependence, the more
complicated change is. It is more complicated at top levels by affecting the entire
organization.
Mechanistic Structures: are resistant to change by design. People in a mechanistic
structure are expected to act a certain way, and are not given the freedom to change.
Group-level resistances to change
Group norms: When change results in different task and role relationships, informal
norms may become invalid, making a new set of norms necessary. People may resist
this. Group cohesiveness, attraction to the group, is helpful, but if it is too high, the
group may resist change. The group may work to maintain its position even at the
expense of other groups. Groupthink occurs when members ignore negative
information to achieve harmony.
Individual-level resistances to change
Uncertainty and insecurity: Resistance to the uncertainty and insecurity of change
results in inertia. Selective perception and retention suggests that people perceive
information consistent with their views. If change doesn’t benefit them, they do not
endorse it.
Habit: People prefer familiar tasks and tend to return to original behaviors, making
change.
What Is the Organizational Environment?
The resources surrounding an organization, such as raw materials and skilled workers,
comprise the organizational environment, and an organization conducts transactions to
obtain these resources for production. Resource procurement is impacted by
competition, changes in technology, and input prices. The organizational domain refers
to the goods and services offered and the customers and other stakeholders served; an
organization designs transactions to enlarge its domain. An organization operates in
both specific and general environments. One way to enlarge the domain is to expand
internationally.
The specific environment contains outside stakeholder groups who have a direct effect
on obtaining resources. Changes in the kinds of customers or in consumer tastes affect
an organization. Strategies to attract customers change to meet new customer needs.
Outside stakeholder groups include customers, distributors, suppliers, unions,
competitors, and the government. An organization deals with each group to attain
resources for survival, protection, and enlargement of its domain.
The general environment contains forces that affect all organizations and shape the
specific environment.
Technological forces, including new production methods, impact operations. Political
and environmental forces impact government policy toward business and stakeholders,
and affect production costs. Demographic, cultural, and social forces, including
birthrates, age, and lifestyle of a nation’s people influence demand. By managing these
environments effectively, a firm gains resources and the domain grows. Poor
environmental management shrinks a firm’s domain.
Managing Change: Action Research
Lewin’s Force Field Theory of Change shows the opposition between the forces for and
against change. When the forces are in balance, a company remains in inertia without
change. For change to occur, the forces for change must increase while resistance to
change decreases.
Action research is a strategy for generating and acquiring knowledge that managers can
use to define an organization’s desired future state. It consists of the following steps
Diagnoses of the Organization
Managers must first recognize the existence of a problem that needs to be solved. This
is done by identifying a gap between desired performance and actual performance.
Determining the Desired Future State
After identifying the present state, the next step is to identify where the organization
needs to be in the future.
Implementing Action
Implementation is a 4-step process. First, managers identify possible impediments to
change at all levels.
The second step is to decide who will be responsible for actually making the changes.
External change agents may be used, which are outside consultants who specialize in
managing change. Internal change agents are managers from within that are
knowledgeable about the situation. The third step is deciding which specific strategy to
use to unfreeze, change, and refreeze the organization per Lewin’s model.
Top-down change is implemented by managers at a high level in the organization,
knowing that the change will reverberate at all organizational levels. Bottom-up change
is implemented by employees at low levels and will gradually rise through the
organization.
Evaluating the Action is the final step in the process. Managers assess the degree to
which the changes have accomplished the desired objectives.
Institutionalizing Action Research
Like TQM, action research must be a habit or a norm for every organizational member in
order to be effective. To assist this, members at all levels of the organization must be
rewarded for being part of successful change efforts.
Organizational Development
Organizational Development is a series of techniques and methods that managers can
use in their action research program. The goal is to improve organizational effectiveness
and to help people reach their potential.
OD Techniques to Deal with Resistance to Change
The following are tactics that managers can use to deal with resistance to change.
Education and Communication- One impediment to change is that participants are
uncertain about what is going to happen. Providing them information reduces
resistance.
Participation and Empowerment- These are key elements of most TQM programs.
People that are involved in the change and decision-making process are more likely to
embrace rather than resist.
Facilitation- People need both training and time off to deal with the stressful effects of
major organizational change.
Bargaining and Negotiation- Change causes conflict, and bargaining and negotiation are
the major instrument used to resolve conflict.
Manipulation- Sometimes senior managers need to intervene, as politics shows that
powerful managers have considerable ability to resist change.
Coercion- When all else fails, some individuals need to be threatened with dire
consequences in order to get them to change.
OD Techniques to Promote Change
Counseling, Sensitivity Training, and Process Consultation- Recognizing that each
individual is different also requires them to be treated or managed different. Sometimes
counseling will help individuals understand that their own perceptions of a situation
may be incorrect. Sensitivity training is an intense type of training designed for those
who have problems working with other groups. They examine their perceptions of the
other group, can be a very intense experience in that innermost thoughts and feelings
are brought to light. In process consultation a trained consultant works with a manager
on the job to help improve his or her interactions with other organizational members.
Team Building and Intergroup Training- These techniques are designed to manage
change with or between groups. Team building is similar to process consultation except
that it involves the entire group worker together. Intergroup training goes a step further
and looks at how different functions or divisions work together.Organizational mirroring
is a technique designed to get both interdependent groups to see the perspective of the
other side. Appreciating others’ perspectives allows the groups to work together more
effectively.
Total Organizational Interventions- At the organizational level, organizational
confrontation meetings can be used. All managers get together and discuss whether the
organization is effectively achieving its goals
The Nature of Organizational Learning
Many decisions fail due to environmental uncertainty, yet the right decisions make
companies survive and prosper. Good decision-making requires learning new behaviors
and unlearning inefficient ones. Organizational learning assists mangers in making
better nonprogrammed decisions. It is a critical process because of the need to change
due to low-cost foreign competitors. Reengineering has been driven by learning efficient
operating methods.
Types of Organizational Learning
James March suggests two learning strategies, exploration and exploitation. Exploration
seeks new activities and procedures to enhance effectiveness, discovering new
management methods such as network organizations. Exploitation refines existing
activities and procedures to enhance effectiveness. TQM is an example of exploitation.
Exploration is more dramatic than exploitation, but both increase organizational
effectiveness. A learning organization is a company that intentionally designs its
structure, culture, and strategy to foster learning. A learning organization encourages all
employees to make suggestions for performing activities.
Levels of organizational learning include: individual, group, organizational, and
interorganizational. Peter Senge developed principles for learning.
Individual: Senge suggests that each organizational member has to develop personal
mastery, meaning employees should be empowered. Organizations should encourage
complex mental models that challenge employees to improve tasks. Individuals should
be involved and committed to their jobs in order to experiment and take risks. Allowing
employees to take more responsibility for decisions builds personal mastery. Cross-
training, reengineering, and the use of advanced information systems establish
responsibility.
Group: Self-managed and cross-functional teams allow individuals to share problem-
solving skills. Groups create synergies to increase performance. Group interactions
produce “group routines” or team learning, which is important as decisions are made in
subunits. Toyota used teams to revitalize GM’s plant.
Organization: Managers promote learning through structure and culture. Mechanistic
structures promote exploitative learning whereas organic structures promote
explorative learning. Organizations should take advantage of both types of learning.
Knowledge Management and Information Technology
New technologies are having a dramatic impact on how an organization operates.
Knowledge management is the sharing and integrating of expertise within the
organization through real-time information technologies.
It allowed consultants in the field to have more information available to them quicker.
This, combined with the flatter structure has allowed the consultants freedom to make
decisions, resulting in higher creativity and performance.
There are two kinds of knowledge management systems:
A codification approach is a collection of standardized organizational best practices, and
is suited for more mechanistic systems. For example, Dell Computer uses this type of
system to manage its global suppliers.
A personalization approach is a system designed for more organic organizations or
situations. Instead of a database of procedures, it is more focused on providing the user
who in the organization might be able to provide them a solution to a complex problem
Factors Affecting Organizational Learning
Nystrom and Starbuck developed a model of factors that reduces learning. To
understand poor decision-making, it is helpful to review factors that hurt decision-
making, known as cognitive biases. As organizations make decisions, they design rules
and SOPs to handle programmed decisions. Success achieved through rules can impede
learning from new experiences and result in inertia. If programmed decisions eliminate
non programmed decisions, a crisis may emerge. Managers frequently ignore signs of
problems and attribute problems to temporary interruptions in the environment.
Nystrom and Starbuck state that managers use “weathering the storm strategies,” such
as centralizing decision-making. An incrementalist approach to decision-making is less
risky than starting in new directions.
Organizational Learning and Cognitive Structures
Cognitive structures—systems of beliefs, expectations, and values—develop over time
and predetermine an individual’s interpretation of events. Opinions are formed based
on past experience, and may be distorted. Cognitive structures not only shape top-
management decision-making but also determine environmental threats and
opportunities. Managers view the same environment differently due to individual
cognitive structures.
Frequency and representativeness are ways of misinterpreting information. Frequency
is the belief that extreme events occur more often than they really do. If one batch of
supplies is defective, a firm assumes that all supplies are defective. This bias leads to
vertical integration to ensure quality. Representativeness is a judgment based on small
and unrepresentative samples. A company receives a few international orders and
launches global expansion. Frequency and representativeness inhibit organizational
learning.
projection and ego defensiveness. Projection allows managers to justify and reinforce
personal preferences and reinforce personal preferences and values by attributing them
to others. A manager who cannot solve a problem blames subordinates. This practice
erodes an organization’s culture. Ego defensiveness leads management to interpret
events favorably instead of admitting to mistakes. Projection and ego defensiveness
inhibit organization learning.
Escalation of commitment is a cognitive bias that leads managers to remain committed
to a losing
Course of action and refuse to admit a mistake. Managers may remain committed to an
incorrect action due to ego-defensiveness or the illusion of control. This bias is
reinforced by increment list decision-making, which is destructive and managers may be
faced with rapidly changing competition or technology.
Improving Decision-making and Learning
Managers can improve decision-making. They can adopt strategies for organizational
learning, increase the breadth and diversity of the top-management team, use devil’s
advocacy and dialectic inquiry, and develop a collateral organizational structure.
Strategies for organizational learning, unlearning old ideas and learning new ideas,
include:
Listening to dissenters: To improve decision-making, top managers can surround
themselves with people who express opposing points of view. They can collect
information from dissenters. However, managers often select people who agree with
them. This occurred at Nissan. Managers hesitate to encourage dissent because of
bounded rationality; dissent increases the amount of information to process.
Converting events into learning opportunities: The right organizational structure and
culture can lead to new responses to a situation. Research in California shows how
structure affected a hospital’s ability to respond to a doctors’ strike. An organic,
decentralized structure handled the strike better than a centralized, mechanistic
structure.
Experimenting is the process of generating new alternatives and testing the validity of
old ones. Experimenting leads to explorative learning. Managers can take an
incremental or garbage can approach to experiments. Incremental experiments vary
slightly from current procedures. A garbage can approach uses brainstorming to devise
new solutions.
Utilizing Game Theory: This approach views interactions between organizations as a
competitive game. It involves analyzing what competitors will do if a certain decision is
made, which involves looking forward into the future to try and predict what rivals will
do, and also reason backwards to determine what they should do given what the
competitor’s future moves will be. shows a game-theory scenario between FedEx and
UPS.
Nature of the Top-Management Team: The members of the team and the team
organization affect the level of organizational learning. Top management sets the tone
for the organization. Two team configurations are possible, the wheel or the circle. A
wheel has a CEO who receives data and makes decisions. Top-level managers have no
interaction, so this design works only for simple problems with minimum coordination.
Complex problems require a circle with a CEO and top managers who interact; they
function as a team, which promotes organizational learning.
Devil’s advocacy and dialectic inquiry reduce cognitive biases and the problems
associated with incrementalism. Managers become cognizant of alternatives and
analyze the pros and cons of each proposed course of action. Devil’s advocacy officially
appoints a person to disagree by evaluating decision-making and questioning
assumptions. Dialectic inquiry establishes teams to produce and evaluate alternatives
and recommend the best one. Parts of each team’s proposal are merged into a final
plan. (Fig. 12.6)
Collateral organizational structure improves decision-making by creating a collateral
organizational structure, an informal organization of managers that operates parallel to
the formal structure. Informal managers evaluate the decisions of formal managers.
Because formal managers know about the evaluations, they review decisions more
carefully. A collateral structure promotes change, whereas a formal structure maintains
stability.
Innovation and Technological Change
Innovation is the development of new products or production systems. There is a link
between innovation and technological change. Technology is the skills, tools, and
experience used to design and produce goods and services. Changes in technology are
prevalent and significantly affect an organization.
Two types of technological change are quantum and incremental change. Quantum
technological change is a basic transformation that reforms the way products are made.
Personal computers (PCs) and genetic engineering are examples. Products that use a
quantum technological advance, such as Intel’s first microprocessor, are called quantum
innovations. Such innovations force companies to change. Incremental technological
change is an improvement of base technology; products that use these refinements,
such as Intel’s newer microprocessors are called incremental innovations.
Innovation, Intrapreneurship, and Creativity
Intrapreneurs are entrepreneurs inside an organization who are responsible for the
success or failure of a project. These would include managers, scientists, or researchers
employed by a specific company. Many times, they get frustrated with the internal
workings of the organization, and start their own companies.
Creativity can simply be defined as going beyond the current boundaries. Examples
include generating new ideas, combining or synthesizing two or more previously
unrelated ideas, or modifying a product or process in order to make it better.
A knowledge creating organization is one where such innovation is going on at all levels
and in all areas of the organization.
Sources of Uncertainty in the Organizational Environment
Because all organizations face uncertainty, managers cannot predict resource supply.
Uncertainty stems from complexity, dynamism, and richness of the environment.
Environmental complexity is a function of the strength, number, and
interconnectedness of specific and general forces. The greater the number and
differences among them, the more complex, uncertain, and difficult to manage is the
environment. Managing 100 suppliers is easier than 1,000. Producing different products
for different customers increases complexity. The more interconnected the forces in
specific and general environment, the more uncertainty a firm faces.
Environmental dynamism is determined by how much and how fast specific and general
environmental forces change. Dynamism means that environmental forces change
quickly and unpredictably.
Environmental richness depends on the quantity of resources available for an
organization’s domain. Rich means abundant resources and low uncertainty.
What Is Organizational Conflict?
Stakeholders compete for the resources that an organization produces. Shareholders
want dividends, employees want raises. An organization must manage both cooperation
and competition among stakeholders to grow and survive. All stakeholders have a
common goal of organizational survival, but not all goals are identical. Organizational
conflict occurs when a stakeholder group pursues its interests at the expense of other
stakeholders. Given the different goals of stakeholders, organizational conflict is
inevitable. Conflict is associated with negative images, such as unions getting angry and
violent, but some conflict can improve effectiveness. When conflict passes a certain
point, it hurts an organization.
Managing Conflict: Conflict Resolution Strategies
Managing conflict is a priority, because conflict impairs organizational culture. Culture is
an important way to control behavior. Organizations must balance the need for conflict
to overcome inertia and promote learning with the prevention and escalation of
harmful conflict. Conflict management techniques depend on problem source. CS First
Boston needed a changed rewards system. Kodak needed a changed top-management
team. An organization reduces conflict by structural and attitudinal changes.
Acting at the Level of Structure
Managers can resolve conflict by changing task relationships:
An organization may change organizational structures. A functional structure causes
problems, such as communication and measurability problems.
A product structure assigns overhead costs more accurately. A functional structure does
not reflect the contributions of various functions to a product. A product team structure
speeds up product development.
Increasing integration can overcome conflicts over resources and subunit orientations.
Integrating mechanisms include task forces, teams, and integrating roles.
Flattening the hierarchy and decentralizing authority give employees decision-making
power and makes them accountable. Authority relationships must be defined. Conflict is
reduced because employees know their superiors. In a tall hierarchy, 10 people may
need to sign off on a proposal.
Acting at the Level of Attitudes and Individuals
Different divisions and functions have different ideas about accomplishing
organizational goals.
Managers can prevent the us-versus-them attitudes.
They can establish procedures to voice complaints. Procedures play a large role in
managing conflicts between managers and unions. Bargaining consists of attitudinal
structuring, a process to convince management and labor they have much in common. A
third-party negotiator, such as a senior manager in an integrating role or an outside
consultant, can mediate. Rotating employees, a tool used by the Japanese, manages
conflict by changing attitudes. Long held attitudes may necessitate a change in those
mired in conflict through transfer, promotion, or firing. Top-management may be
replaced to overcome inertia and change attitudes. The CEO influences attitudes by
setting the values and culture, influencing the attitudes of other managers, and having
the power to resolve subunit conflict. Strong CEOs listen to opinions and build
consensus. Weak CEOs fail to manage conflict, so strong coalitions fight for their goals at
the expense of the weaker subunits. As fighting escalates, conflict becomes harmful.
What Is Organizational Power?
Organizational power is the tool used to resolve the conflict. It is the ability to defeat
the opposition in accomplishing a goal. Marketing gets production to run an extra batch
of goods; production would not have run this batch, so an element of coercion is
involved. The power of different coalitions to influence decision-making determines
how conflict gets resolved and which subunits benefit. Conflict and power are
interrelated. Conflict arises because groups need to cooperate but compete for
resources. Groups use power to resolve conflict in their favor.
Sources of Organizational Power
Individuals, groups, and divisions seek power to influence others. There are seven
sources of power: authority; control over resources; control over information;
nonsubstitutability; centrality; control over uncertainty; controlling the premises of
decision-making, and unobtrusive power. (Fig. 14.4)
Authority is the most obvious source of power. Because it is legitimate power stemming
from an organization’s legal and cultural foundations, it is the ultimate source of power.
The legal charter permits the board of directors, the agent of shareholders, to grant a
CEO the power to use resources to create value. The CEO has the power to grant
authority to other managers, who give power to subordinates. Employees accept the
legal right of the organization to control their behavior. Many managers try to retain
control.
Control over resources gives subunits power. At a pharmaceutical company, R&D
scientists have power. Money is the ultimate resource, as it buys other resources. Top
managers have ultimate power because they allocate resources. The ability to generate
resources also increases power. Divisions that produce revenue have power.
Control over information, access to and control over the information flow, is a source of
power. By choosing the information others receive, an individual influences their
opinions. Those who select information are called “gatekeepers.” People in specialized
roles have power stemming from the control over information. Patients take the word
of doctors.
Nonsubstitutability means that no one else can perform an individual or subunit task,
giving power.
Centrality refers to those who make decisions and functions needed for resource flows.
Centrality is a source of power. An organization’s strategy determines which subunit is
central.
Unobtrusive Power
A dominant coalition has the power to control decision-making to resolve conflict in
their favor. This is known as unobtrusive power, because other subunits do not know
the coalition has influence. A coalition’s power stems from the ability to control the
assumptions, goals, and norms to evaluate alternatives. If marketing is the dominant
coalition, cost cutting will not get much attention. Unobtrusive power stems from the
ability to control the premises of decision-making. Subunits with similar interests build
coalitions to pursue common goals and use their power to influence decision-making.
Unobtrusive power is important because the coalition controls the assumptions, goals,
and norms used to evaluate alternatives. A coalition in favor of differentiation will not
consider cost-cutting. Unobtrusive power is important because others think they are are
being manipulated.
Challenges of organizational design
Differentiation
process by which an organization allocates people and resources to organizational tasks
and establishes the task and authority relationships that allow the organization to
achieve its goals. à process of establishing and controlling the division of labor/the
degree of specialization. necessary because of increased complexity with growth
Balancing Differentiation and Integration
subunit orientation = tendency to view one’s role in the organization strictly form the
perspective of the time frame, goals, and interpersonal orientations of one’s subunit à
horizontal differentiation has worked, but hinders cross-functional/divisional learning
and coordination – integration has to be promoted by promoting cooperation,
coordination and communication (increasingly electronically)
Integration and Integrating mechanisms
integration = process of coordinating various tasks, functions and divisions so that they
work together and not at cross-purposes à managers often fail to use the appropriate
mechanisms
hierarchy of authority (simplest) – ranking or employees integrates by specifying who
reports to whom
direct contact – managers meet face to face to coordinate activities (important as on
same level have no authority about each other – for disputes common superior is
important) liaison roles – specific manager is given responsibility for coordinating with
managers from other subunits on behalf of his or her subunit
Balancing Centralization and Decentralization
existance of a hierarchy of authority sometimes leads to a decline in responsibility and
risk taking which slows down decision making and results in inflexibility à
centralization/decentralization question (problem of how much authority to delegate to
each level)
Balancing Standardization and Mutual Adjustment
challenge is to find the right mix between standardization (rules and standard
communications) and mutual adjustment – then some actions are predictable and basic
goals are achieved while innovativeness and creativity is not limited in general at higher
levels more mutual adjustment is necessary
standardization = conformity to specific models or examples – defined by sets of rules
and norms – that are considered proper in a given situation (too much may stifle
innovation, creativity and lead to inflexibility) – make people actions predictable
mutual adjustment = compromise that emerges when decision making and
coordination are evolutionary processes and people use their judgment rather than
standardized rules to address a problem (only so can new and better ways of achieving
organizational goals be discovered
Control: Factors Affecting the Shape of the Hierarchy
when there are limits to direct personal supervision, organizations have to find other
ways – typically first the level of horizontal differentiation is increased all decisions on
the following 3 mehtods affect one another and thus must be made simultaneously
organization stucture evolves and has to be managed constantly
Sources of Uncertainty in the Organizational Environment
Because all organizations face uncertainty, managers cannot predict resource supply.
Uncertainty stems from complexity, dynamism, and richness of the environment.
Environmental complexity is a function of the strength, number, and
interconnectedness of specific and general forces. The greater the number and
differences among them, the more complex, uncertain, and difficult to manage is the
environment. Managing 100 suppliers is easier than 1,000. Producing different products
for different customers increases complexity. The more interconnected the forces in
specific and general environment, the more uncertainty a firm faces.
Environmental dynamism is determined by how much and how fast specific and general
environmental forces change. Dynamism means that environmental forces change
quickly and unpredictably.
Environmental richness depends on the quantity of resources available for an
organization’s domain. Rich means abundant resources and low uncertainty. A poor
environment is not only located in a poor country or region, but faces intense
competition and battles for resources.
Horizontal differentiation
horizontal differentiation leads to the emergence of specialized subunits (divisions or
functions) of which each has its own hierarchy; even within a function or department
can horizontal differentiation occur (e.g. in R&D into project teams) increasing
horizontal differentiation increases vertical differentiation, many problems of tall
hierarchies are avoided, but may cause additional coordination and motivation
problems which can be counted by wise choices concerning centralization,
standardization and influence of informal organization
Centralization
decentralization alone may not eliminate need for many hierarchical levels though but
reduces amount of direct supervision needed within a subunit and can allow even tall
structures to be flexible in its responses
Standardization
control can be gained through standardization (making activities predictable) and the
number of managers and extra levels of hierarchy is reduced rules and SOPs substitute
for direct supervision – span of control is increased, delegation made easier
What Is Organizational Culture
Organizational culture is the set of values that controls behavior, determines how
organizational members interpret the environment, and helps achieve a competitive
advantage. An organization has two types of values: terminal and instrumental.
Members learn values indirectly or through a formal socialization process.
The sources of culture include the characteristics of the people (particularly the
founder), organizational ethics, property rights, and structure. Organizational ethics is a
product of societal, professional, and individual ethics. Property rights outline the rights
and responsibilities of stakeholder groups. Shareholders enjoy the greatest property
rights. Rights given to managers include: a golden parachute, stock options, large
salaries, and control over organizational resources. Rights given to employees include
long-term employment, pension and benefits, and employee stock ownership. Structure
impacts culture; a mechanistic structure produces a predictable culture. An organic
structure encourages an innovative culture. Managers must examine the interaction of
all four sources.
How employees learn culture
stories = anchor the present in the past and provide explanations and legitimacy for
current practices
rituals = repetitive sequences of activities that express and reinforce the key values of
the organization, what goals are most important, which people are important and which
are expendable (e.g. college faculty members undergo a lengthy ritual in quest for
permanent employment: tenure)
material symbols = convey to employees who is important, degree of egalitarianism
desired by top management and kinds of behavior that are appropriate (e.g. décor,
employees’ attire, size of offices, elegance of furnishings, executive perks, employee
lounges, reserved dining facilities, reserved parking spaces, transportation means,
chauffeurs…)
language = new employees are frequently overwhelmed with acronyms and jargon
(unique terms to describe equipment, offices, key personnel…) but once learned this
terminology acts as a common denominator that unites members of a given culture or
subculture
Where Does Organizational Culture Come From?
Organizations have different cultures due to the interaction of four factors: people,
ethics, property rights given to employees, and structure.
Characteristics of People within the Organization
Companies attract, hire, and retain people with different values, personalities, and
ethics. People are drawn to companies with values similar to their own. As people and
values become more similar, organizational culture becomes more unique. The founder
impacts the culture by setting the initial values and hiring the first employees.
Organizational Ethics
The cultural values of the founder and the top managers are beyond an organization’s
control. Yet an organization can cultivate ethical values to control employees through
guidelines for appropriate behavior. Ethical values are an inseparable part of
organizational culture.
Personal ethics influence organizational ethics. Personal ethics stem from societal ethics
and an individual’s upbringing.
Property Rights
Cultural values arise from property rights, the rights given to stakeholders to receive and
use organizational resources. Shareholders have the greatest property rights, because
they own the resources and share in profits.
Top Management and Property Rights
Top managers determine their own property rights: terms of their employment, salaries,
benefits, pension, and termination agreements. Because top managers decide how
property rights are distributed to others, they influence culture.
Organizational Structure
Organizational structure, the formal system of rules and task and authority
relationships, is a source of culture. Different structures lead to different cultures.
Structure can promote cooperative norms and values that improve integration and
coordination. Teams in a product team or matrix structure have shared cultural values,
thus product development time is short.
Can Organizational Culture Be Managed?
Managers must examine the interaction of the sources of culture: the characteristics of
organizational members, organizational ethics, the property rights system, and
organizational structure. These factors interact, and only major modifications change
values, making cultural change difficult. An organization might need to change its
structure, its people, or its property rights system. A larger and more complex
organization with a successful culture can decrease effectiveness. To avoid negative
cultural change, managers must design a structure to handle control problems.
Four Levels of Strategy
Strategy formulation occurs at the functional, business, corporate, and global levels.
Creating value at one level impacts the others. Functional-level strategy is a plan to
create core competences to enhance functional and organizational resources, and
coordination abilities. Functional managers analyze the functional environment to be
aware of activities surrounding the company’s domain. (Fig. 8.2)
Merging functional core competences to achieve competitive advantage is business-
level strategy. The top-management formulates business-level strategy by positioning
the company to compete for resources. Functional- and business-level strategies protect
and enlarge the existing domain, but corporate-level strategies expand into new
domains. Corporate-level managers combine value creation skills to improve the
company and divisional competitive position. Strategies create more value collectively
than independently.
Functional-Level Strategy
Each function aims to create a core competence for a competitive advantage, achieved
by performing activities at a cost lower than competitors’ or providing unique products.
Strategies to Lower Costs or Differentiate Products
Functional-Level Strategy and Structure
Structure and culture are important to functional-level strategy because coordination
abilities, leading to core competence, result from structure. Lawrence and Lorsch found
that functional differentiation and integration impact performance. Each department
develops an orientation specific to its tasks and responds to its particular environment.
Contingency theory proposes that each function creates a structure to match its
resources.
Functional-Level Strategy and Culture
Culture, shared values that control behavior, is significant because it is hard to copy,
making it a competitive advantage. Structure can be duplicated, but culture becomes
ingrained in employee behavior.
Business-Level Strategy
Business-level strategists combine functional core competences to seek environmental
opportunities. They choose and manage the domain in which the company uses its core
competences for a competitive advantage, which in turn allows the firm to protect and
enlarge its domain. After selecting its domain, an organization positions itself to
compete, using low cost or differentiation. Low-cost value creation provides customers
with low-priced goods or services. Differentiation provides unique products for
customers who are willing to pay top prices.
Corporate level strategy
A plan to use and develop core competences so that the organization can not only
protect and enlarge its existing domain but also can expand into new domains.
Global expansion strategy
A plan involves choosing the best strategy to expand into overseas markets to obtain
scarce resources and develop core competences as discussed above.
What is technology?
technology = combination of skills, knowledge, abilities, techniques, materials,
machines, computers, tools and other equipment that people use to convert or change
raw materials into valuable goods and services (inputs, conversion, output) à exists at 3
levels:
individual level – skills and knowledge of individual
functional (or departmental) – procedures and techniques that groups work out to
perform work
organizational level – way inputs are converted into outputs
Technology and Organziational Effectiveness
technology is present in all organizational activities and an important source of
competitive advantage:
input stage: technology (skills, procedures, techniques) help handle relationships with
outside stakeholders
conversion stage: technology (combination of machines, techniques, work procedures)
transforms inputs to outputs
output stage: technology helps effectively dispose finished goods to external
stakeholders
Organizations use technology to become more efficient, innovative and able to meet
needs and desires of stakeholders à different technologies affect organization’s choice
of structure (to maximize effectiveness)
external resource approach: use technology to increase ability to manage and control
external stakeholders
internal systems approach: use technology to increase success of attempts to innovate
technical approach = uses technology to improve efficiency and lower costs while
enhancing quality and reliability
Technical Complexity: The Theory of Joan Woodward
programmed technology = technology in which the procedures for converting inputs
into outputs can be specified in advance so that tasks can be standardized and the work
process can be made predictable
Technical complexity = measure of the extent to which a production process can be
programmed so that it can be controlled and made predictable
Woodward says that technical complexity is the important dimension that differentiates
technologies
High technical complexity – conversion process can be programmed in advance and fully
automated o low technical complexity - conversion process depends primarily on people
and their skills/knowledge – maintaining high quality and consistency is difficult.
Identifies 10 levels of technical complexity associated with 3 types of production
technology (see next 3 headings)
Small-batch and unit technology
Results in one-of-a-kind, customized products or small quantities of precuts – allows
wide range, flexibility and customization but is relatively expensive and advance
programming is difficult as work process is unpredictable. Scores lowest on dimension of
technical complexity as production process is guided by reflections of people that use
the tools for what they want à ideally suited for new, complex products
Large-batch and mass production technology
Results in large volumes of standardized products – narrow product range, but
standardized, programmable work processes which lead to a high degree of control of
the production process and efficiency. Scores high on technical complexity as machines
control the work process – usually associated with automated equipment, but if labor
costs are low also performed by people
Continuous-process technology
highest technical complexity – conversion process is almost entirely automated and
mechanized, people generally only indirectly involved monitoring and ensuring efficient
operation. more technically efficient as it is more predictable and easier control when
operated at full capacity has lowest production costs, as labor costs are only a small
fraction. generally organizations tend to increase use of machines, but there are
exceptions where this is impossible or there is a market for products of small-batch
companies even though production costs are high
Technical complexity and organizational structure
Woodward found systematic differences in the technology- structure relationship à as
technical complexity increases, organizations become taller, span of control of the CEO
widens, span of control of first-line supervisors expands, then narrows
small-batch technology: impossibility of programming makes decentralized decision
making and flat structure (3 levels) necessary to enable flexible and quick responses;
needs mutual adjustment and face-to-face communications à organic structure. mass
production technology: possibility of programming and standardization allows for wider
span of control of first-line managers who control through rules and procedures;
decision making becomes centralized and the hierarchy taller (4 levels) as managers rely
on vertical communication to control the work process à mechanistic structure.
continuous process technology: though process are predictable, monitoring and
possibility of disaster requires tallest hierarchy with a diamond shape, the first-line
supervisors have very limited control; nevertheless is mutual-adjustment the primary
means of coordination in teams working out procedures for managing unexpected
situation – flexible responses are necessary à organic structure
The technological imperative
technological imperative = technology determines structure à concluded by
Woodward, but others found that size is more important than technology in
determining organization’s choice of structure general tendency that the more an
organization’s technology is mechanized and automated, the more likely is the
organization to have a highly centralized and standardized mechanistic structure –
strong for small organization, for larger ones other factors that cause an organization to
grow and differentiate may be more important