CHAPTER TWO

Strategy, Organization Design, and

Effectiveness
Contents of chapter

 The role of strategic direction on organization design.

 Organization purpose.

 A framework for selecting strategy and design/structure.

 Assessing organizational effectiveness.

 Contingency effectiveness approach, resource based

approach, and internal process approach.

 An integrated effectiveness model.

The role of strategic direction on organization design:

 Top managers give direction to organizations.

 They set goals and develop the plans for their
organization to attain them
 An organizational goal is a desired state of
affairs that the organization attempts to reach.
 A goal represents a result or end point toward
which organizational efforts are directed.
 Indeed, the primary responsibility of top management
is to determine an organization’s goals, strategy, and
design, therein adapting the organization to a changing
environment.
Organization design reflects the way goals
and strategies are implemented.

Organization direction is implemented

through decisions about structural form,
including whether the organization will be
designed for a learning or an efficiency orientation
Organization Purpose:
 All organizations exist for a purpose.

 This purpose may be referred to as the overall goal, or

mission.

 Different parts of the organization establish their own

goals and objectives to help meet the overall goal,
mission, or purpose of the organization.
 Strategic Intent:-
 Strategic intent means that all the organization’s
energies and resources are directed toward a focused,
unifying, and compelling overall goal.

 Strategic intent provides a focus for management

action.

 Three aspects related to strategic intent are the

mission, core competence, and competitive advantage
A. Mission:
 The overall goal for an organization is often
called the mission the organization’s reason
for existence
 The primary purposes of a mission statement is
to serve as a communication tool.
 It communicates to current and prospective
employees, customers, investors, suppliers,
and competitors what the organization stands
for and what it is trying to achieve
B. Competitive Advantage:-
 The overall aim of strategic intent is to
help the organization achieve a
sustainable competitive advantage.
 Competitive advantage refers to what
sets the organization apart from others
and provides it with a distinctive edge for
meeting customer or client needs in the
marketplace
C. Core Competence:
 A company’s core competence is something the
organization does especially well in comparison to its
competitors.

 A core competence may be in the area of superior research

and development, expert technological know-how,
process efficiency, or exceptional customer service
 Strategy and goal:-
 A strategy: is a plan for interacting with the
competitive environment to achieve
organizational goals.
 Some managers think of goals and strategies as
interchangeable.
 but goals define where the organization wants
to go and strategies define how it will get there.
 Formulating strategies is choosing whether the
organization will perform different activities
than its competitors
 Con`t------
 Two models for formulating strategies are the
Porter model of competitive strategies and Miles
and Snow’s strategy typology.

 Each provides a framework for competitive action.

Porter’s Competitive Forces and Strategies:
 Porter studied a number of business
organizations and proposed that managers
can formulate a strategy that makes the
organization more profitable and less
vulnerable if they understand five forces in the
industry environment.
 Con`t---
I). The Threat of New Entrants:-
• The threat of new entrants to an industry can
create pressure for established organizations,
which might need to hold down prices or
increase their level of investment.
II). The Power of Suppliers:
 Large, powerful suppliers can charge higher prices,
limit services or quality, and shift costs to their
customers, keeping more of the value for
themselves.
III). The Power of Buyers: Powerful customers, the flip side of
powerful suppliers, can force down prices, demand better quality
or service, and drive up costs for the supplying organization.

IV). The Threat of Substitutes: The power of alternatives and

substitutes for a company’s product or service may be affected by

changes in cost, new technologies, social trends that will deflect
buyer loyalty, and other environmental changes.

V). Rivalry among Existing Competitors: Rivalry among

competitors is influenced by the preceding four forces, as well
as by cost and product differentiation.
 Con`t-----
 In finding its competitive edge within these five forces,
Porter suggests that a company can adopt one of three
strategies: differentiation, low-cost leadership, or
focus.

 The focus strategy, in which the organization

concentrates on a specific market or buyer group, is
further divided into focused low cost and focused
differentiation
 Con`t----
• Low-cost leadership strategy involves techniques
for excelling at cost reduction and efficiency, with
broad competitive scope.
• Differentiation strategy strives to create and market
unique products by innovative product
characteristics and advertising.
• Focus strategies concentrate on a narrow market or
buyer group. The company tries to achieve either a
focused low-cost or a focused differentiation
advantage within a narrowly defined market.
Miles and Charles Snow Model:-
 The Miles and Snow typology is based on the idea that
managers seek to formulate strategies that will be
congruent with the external environment.

 Organizations strive for a fit among internal organization

characteristics, strategy, and the external environment.

 The four strategies that can be developed are the

prospector, the defender, the analyzer, and the reactor.
 Con`t.-----
Prospector:
The prospector strategy is to innovate, take risks, seek
out new opportunities, and grow.
Defender strategy:-
 Is concerned with stability or even retrenchment
 The defender is concerned primarily with
internal efficiency and control to produce
reliable, high-quality products for steady customers.
Analyzer:-
 It seems to lie midway between the prospector and
the defender.

 Some products will be targeted toward stable

environments in which an efficiency strategy
designed to keep current customers is used. Others
will be targeted toward new, more dynamic
environments, where growth is possible.
• Reactor:
• The reactor strategy is not really a strategy
at all. Rather, reactors respond to
environmental threats and opportunities in
an ad-hoc fashion.
 The reactor strategy can sometimes be successful,
but some times it lead to failed companies.

 Some large once highly successful companies are

struggling because managers failed to adopt a strategy
consistent with consumer trends.
 Assessing Organizational Effectiveness
• It is important to differentiate organizational
effectiveness from efficiency.
• Effectiveness is the degree to which an
organization realizes its multiple goals.
• Efficiency refers to the resources used to produce
outputs (ratio of inputs to outputs).
• Effectiveness is often difficult to measure in
organizations, especially those that are large,
diverse, fragmented and those that have multiple
goals and measures of effectiveness like not-for
profit organizations.
Traditional effectiveness approach, resource based
approach, and internal process approach

Traditional Effectiveness Approach:-

 Traditional approaches to measuring
effectiveness look at different parts of the
organization and measure indicators connected
with outputs, inputs, or internal activities
 Indicators tracked with the goal approach
include:
 Profitability:- the positive gain from business operations or
investments after expenses are subtracted
 Market share:- the proportion of the market the firm is
able to capture relative to competitors
 Growth:- The ability of the organization to increase its
sales, profits, or client base over time
 Social responsibility:- how well the organization serves the
interests of society as well as itself

 Product quality:- the ability of the organization to achieve

high quality in its products
• Resource-based Indicators:
 The resource-based approach looks at the input
side of the transformation process. It assumes
organizations must be successful in obtaining and
managing valued resources in order to be
effective.
 Internal Process Indicators: In the internal process
approach, effectiveness is measured as internal
organizational health and efficiency.
 Resource-Based Approach
• The resource-based approach evaluates the ability of
the organization to obtain valued resources from the
environment. Thus it looks at the input side of the
transformation process.
• This approach is useful when other indicators of
performance are difficult to obtain. Indicators of system
resource effectiveness include dimensions such as
bargaining position, ability to correctly interpret
properties of the environment, maintenance of internal
day-to-day activities, and ability to respond to
environmental changes.
• A shortcoming can be overemphasis on acquisition of
resources rather than on their utilization.
 Internal Process Approach:-
• The internal process approach evaluates
effectiveness by examining internal organizational
health and economic efficiency.
• An evaluation of human resources and their
effectiveness is important.
• Indicators of effectiveness include strong
corporate culture, team spirit, trustful
communication, decision making near sources of
information, undistorted communication,
managerial rewards for performance, and
interaction between the organization and its parts
 Goal Approach
• The goal approach measures effectiveness by
evaluating the extent to which operative goals
are achieved.
• It is more productive to measure effectiveness
using operative goals than using official goals
which are more abstract and difficult to
measure.
• The goal approach is used because output goals
can be readily measured, after issues of multiple
goals and subjective indicators of goal
attainment are resolved.
 Contingency Effectiveness Approaches
 An integrated effectiveness model:
 The Balanced Scorecard Approach to
Effectiveness Business organizations have
typically focused on financial measures such
as profit and return on investment to assess
performance.
The balanced scorecard combines
several indicators of effectiveness into a
single framework,
• balancing traditional financial measures with
operational measures relating to a company’s
critical success factors Within each area of
• Effectiveness financial performance, customer
service, internal business processes, and
• the organization’s capacity for learning and
growth managers identify key performance
indicators the organization will track.