Spread Knowledge

MGT504 - Organization Theory and Design - Lecture Handout 07

User Rating:  / 0


Understanding organizational goals and strategies, as well as the concept of fitting design to various contingencies, is a first step toward understanding organizational effectiveness. Organizational goals represent the reason for an organization’s existence and the outcomes it seeks to achieve. The next few sections of the lecture explore the topic of effectiveness and how effectiveness is measured in organizations.

Goals were defined earlier as the desired future state of the organization. Organizational effectiveness is the degree to which an organization realizes its goals. Effectiveness is a broad concept; it implicitly takes into consideration a range of variables at both the organizational and departmental levels. Effectiveness evaluates the extent to which multiple goals--- whether official or operative – are attained.

Efficiency is a more limited concept that pertains to the internal workings of the organization. Organizational efficiency is the amount of resources used to produce a unit of output. It can e measured as the ratio of inputs to outputs, if one organization can achieve a given production level with fewer resources than another organization it would be described as more efficient.

Sometimes efficiency leads to effectiveness. In other organizations, efficiency and effectiveness are not related. An organization may be highly efficient but fail to achieve its goals because it makes a product for which there is no demand. Likewise, an organization may achieve its profit goals but be inefficient.

Overall effectiveness is difficult to measure in organizations. Organizations are large, diverse, and diverse, and fragmented. They perform many activities simultaneously. They pursue multiple goals. And they generate many outcomes, some intended and some unintended. Managers determine what indicators to measure in order to gauge the effectiveness of their organization. One study found that many managers have a difficult time with the concept of evaluating effectiveness based on characteristics that are not subject to hard, quantitative measurement. However, top executives at some of today’s leading companies are finding new ways to measure effectiveness, using indicators such as “customer delight” and employee satisfaction. A number of approaches to measuring effectiveness look at which measurements managers choose to track. These contingency effectiveness approaches, discussed in the next section, are based on looking at which part of the organization managers consider most important to measure. Later, we will examine balanced effectiveness approaches, which integrate concern for various parts of the organization.


Contingency approaches to measuring effectiveness focus on different parts of the organization. Organizations bring resources in from the environment, and those resources are transformed into outputs delivered back into the environment. The goal approach to organizational effectiveness is concerned with the output side and whether the organization achieves its goals in terms of desired levels of output. The resources –based approach assesses effectiveness by observing the beginning of the process and evaluating whether the organization effectively obtains resources necessary for high performance. The internal process approach looks at internal activities and assesses effectiveness by indicators of internal health and efficiency.

This section first examines effectiveness as evaluated by the goal approach. Then it turns to the resources-based and internal process approaches to effectiveness. In the following section, we will examine approaches that attempt to balance and integrate these perspectives.


The goal approach to effectiveness consists of identifying an organization’s output goals and assessing how well the organization has attained hose goals. This is a logical approach because organizations do try to attain certain levels of output, profit, or client satisfaction. The goal approach measures progress toward attainment of those goals. For example, an important measure for the women’s National Basketball Association is number of tickets sold per game. During the league’s first season, President Val Ackerman set a goal of 4,000 to 5,000 tickets per game. The organization actually averaged nearly 9,700 tickets per game, indicating that the WNBA was highly effective in meeting its goal for attendance.

Indicators. The important goals to consider are operative goals. Efforts to measure effectiveness have been more productive using operative goals than using official goals. Official goals tend to be abstract and difficult to measure. Operative goals reflect activities the organization is actually performing.

One Example of multiple goals is from a survey of U.S. business corporations. Their reported goals are shown in Exhibit 2.8. Twelve goals were listed as being important to these companies. These twelve goals represent outcomes that cannot be achieved simultaneously. They illustrate the array of outcomes organizations attempt to achieve.

Usefulness. The goal approach is used in business organizations because output goals can be readily measured. Business firms typically evaluate performance in terms of profitability, growth, market share, and return on investment. However, identifying operative goal and measuring performance of an organization are not always easy. Two problems that must be resolved are the issues of multiple goals and subjective indicators of goal attainment.

Since organizations have multiple and conflicting goals, effectiveness often cannot be assessed by a single indicator, high achievement on one goal may mean low achievement on another. Moreover, there are department goals as well as overall performance goals. The full assessment of effectiveness should take into consideration several goals simultaneously. Many organizations, including Northern states tracks measurements in four goal areas; financial performance, customer service and satisfaction, internal process, and innovation and learning.

The other issue to resolve with the goal approach is how to identify operative goals for an organization and how to measure goal attainment. For business organizations, there are often objective indicators for certain goals, such as profit or growth. However, subjective assessment is needed for other goals, such as employee welfare or social responsibility. Someone has to go into the organization and learn what the actual goals are by taking with the top management teams. Once goals are identified, subjective perceptions of goals attainment have to be used when quantitative indicators are not available; Managers rely on information from customers, competitors, suppliers, and employees, as well as their own intuition, when considering these goals, Jerre Stead, Chairman and CEO of Ingram Micro Inc... The world’s largest distributor of computer-technology products and services communicates directly with hundreds of customers each week to measure the company’s goal of achieving “customer delight.” “These direct interactions don’t provide hard numbers,” he says,” “but I sure do learn a lot,” although the goal approach seems to be the most logical way to assess organizational effectiveness, managers and evaluators should keep in mind that the actual measure of effectiveness is complex process. The office of National Drug Control Policy’s attempt to set goals and measure results in the U.S. war against drugs illustrates how complex measuring effectiveness can be.


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. From a resource-based perspective, organizational effectiveness is defined as the ability of the organization, in either absolute or relative terms, to obtain scarce and valued resources and successfully integrate and manage them.

Indicators: Obtaining and successfully managing resources is the criterion by which organizational effectiveness is assessed. In a broad sense, indicators of effectiveness according to the resource-based approach encompass the following dimensions:

  • Bargaining position – the ability of the organization to obtain from its environment scarce and valued resources, including financial resources, raw materials, human resources, knowledge, and technology.
  • The abilities of the organization’s decision makers to perceive and correctly interpret the real properties of the external environment.
  • The abilities of managers to use tangible(e.g. suppliers, people) and intangible (e.g. knowledge, corporate culture) resources in day – to day organizational activities to achieve superior performance.
  • The ability of the organization to respond to changes in the environment.

Usefulness: The resource based approach is valuable when other indicators of performance are difficult to obtain. In many not-for-profit and social welfare organizations, for example, it is hard to measure output goals or internal efficiency. Some for – profit organizations also use a resource-based approach. For example, Mathsoft, Inc., which provides a road range of technical –calculation and analytical software for business and academia, evaluates its effectiveness partly by looking at how many top –rate Ph.D.s it can recruit. CEO Charles Digate believes Mathsoft has higher ratio of Ph.D.s to total employees than any other software company, which directly affects product quality and the company’s image.

Al though the resource –based approach is valuable when other measures of effectiveness are not available, it does have shortcomings. For one thing, the approach only vaguely considers the organization’s link to the needs of customers in the external environment. A superior ability to acquire and use resources is important only if resources and capabilities are used to achieve something that meets a need in the environment. The resource – based approach is most valuable when measures of goal attainment cannot be readily obtained.


In the internal process approach, effectiveness is measured as internal organizational health and efficiency. An effective organization has a smooth, well – oiled internal process. Employees are happy and satisfied. Departmental activities mesh with one another to ensure high productivity. This approach 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.

Indicators: One indicator of internal process effectiveness is the organization’s economic efficiency. However, the best – known proponents of a process model are from the human relations approach to organization. Such writers as Chris Argyris, Warren G. Bennis, Rensis Likert, and Richard Beckhard have all worked extensively with human resources in organizations and emphasize the connection between human resources and effectiveness. Writers on corporate culture and organizational excellence have stressed the importance of internal processes. Results from a recent study of nearly two hundred secondary school showed that both human resources an employee – oriented processes were important in explaining and promoting effectiveness in those organizations.

There are seven indicators of an effective organization as seen from an internal process approach:

  • Strong corporate culture and positive work climate
  • Team spirit, group loyalty , and team work
  • Confidence, trust, and communication between workers an management
    • Decision making near sources of information, regardless of where those sources are on the organizational chart.
  • Undistorted horizontal and vertical communication: sharing of relevant facts and feelings
  • Rewards to mangers for performance, growth, and development of subordinates and for creating an effective working group
  • Interaction between the organization and its parts, with conflict that occurs over projects resolved in the interest of the organization.

Usefulness: The internal process approach is important because the efficient use of resources and harmonious internal functioning are ways to measure effectiveness. Today most managers believe that happy, committed, actively involved employees and positive corporate culture are important measures of effectiveness. Gary White, CEO of the Gymboree Corp., for example, believes that keeping employees happy is the key to long – term success for his company, which runs parent –child play programs and operates more than 500 retail clothing stores. The internal process approach also has shortcomings. Total output and the organization’s relationship with the external environment are not evaluated. Also, evaluations of internal health and functioning are often subjective, because many aspects of inputs and internal processes are not quantifiable. Managers should be aware that this approach alone represents a limited view of organizational effectiveness.


The three approaches – goal, resources – based, internal process – to organizational effectiveness described earlier all have something to offer, but each one tells only part of the story. Some approaches try to balance a concern with various parts of the organization rather than focusing on one part. These integrative, balanced approaches to effectiveness acknowledge that organization do many things and have many outcomes. These approaches combine several indictors of effectiveness into a single framework. They include the stakeholder and competing values approaches.


One proposed approach integrates diverse organizational activities by focusing on organizational stakeholders. A stakeholder is any group within or outside an organization that has a stake in the organization’s performance, Creditors, suppliers, employees, and owner are all stakeholders. In the stakeholder approach (also called the constituency approach), the satisfaction of such groups can b assessed as an indicator of the organization’s performance. Each stakeholder will have a different criterion of effectiveness because it has a different interest in the organization. Each stakeholder group has to be surveyed to learn whether the organization performs well from its view point.

Indicators: the initial work on evaluating effectiveness on the basis of stakeholders included ninety –seven small businesses in Texas. Seven stakeholder groups relevant to those businesses were surveyed to determine the perception of effectiveness from each viewpoint. The following table shows each stakeholder and its criterion of effectiveness.

  Stakeholder Effectiveness Criteria
1. Owners Financial return
2. Employees Worker satisfaction, pay, supervision
3. Customers Quality of goods and services
4. Creditors Creditworthiness
5. Community Contribution to community affairs
6. Suppliers Satisfactory transactions
7. Government Obedience to laws, regulations

Related Content: MGT504 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of Organizational Theory and Design