MGT504 - Organization Theory and Design - Lecture Handout 04

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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 is the administration and execution of the strategic plan. This is the area where role of organization theory comes in.

Process of Strategic Management

  • Goals/objectives:
  • Must be SMART
  • Vision
  • Mission
  • External environmental assessment:
  • Opportunities and Threats
  • Resources availability
  • Internal environmental assessment:
  • Strengths and Weaknesses
  • Distinctive or core competencies
  • Leadership style
  • Past performance
  • Matching of the two assessments
  • Generation of strategies
    • Internal and External Environment
    • SWOT Analysis
    • Capability
    • Strength threat (ST), strength opportunity (SO) etc.
  • Selection of strategies
  • Implementation
  • Problems in implementation

Strategic Management

  • Difference between goals and strategies
  • e.g. 15% annual sales growth, through advertising
  • Motivated sales force
  • Two models of formulating strategies:
  • Porter’ model
  • Miles and Snow model

Porter’s Competitive Strategies

  • Differentiation
  • Low-cost leadership
  • Focus

How companies decide the strategy

  • Strategy and structure


Choice of strategy affects internal organization characteristics. Organization design characteristics need to support the firm’s competitive approach. For example, a company wanting to grow and invent new products looks and “feels” different from a company that is focused on maintaining market share for long-established products in a stable industry.

With a low – cost leadership strategy, managers take an efficiency approach to organization design, whereas a differentiation strategy calls for a learning approach. A low-cost leadership strategy (efficiency) is associated with strong, centralized authority and tight control, standard operating procedures, and emphasis on efficient procurement and distribution system. Employees generally perform routine tasks under close supervision and control and are not empowered to make decisions or take action on their own. A differentiation strategy, on the other hand, requires that employees be constantly experimenting and learning. Structure is fluid and flexible, with strong horizontal coordination. Empowered employees work directly with customers and are rewarded for creativity and risk – taking. The organization values research, creativity, and innovativeness over efficiency and standard procedures.

The prospector strategy requires characteristics similar to a differentiation strategy, and the defender strategy takes an efficiency approach similar to low-cost leadership. Because the analyzer strategy attempts to balance efficiency for stable product lines with flexibility and learning for new products, it is associated with a mix of characteristics. With a reactor strategy; managers have left the organization with no direction and no clear approach to design.


Strategy is one important factor that affects organization design, ultimately, how ever; organization design is a result of numerous contingencies. The emphasis given to efficiency and control versus learning and flexibility is determined by the contingencies of strategy, environment, size and life cycle, technology, and organizational culture. The organization is designed to “fit the contingency factors. For example, in a stable environment, the organization can have a traditional structure that emphasizes vertical control, efficiency, specialization, standard procedures, and centralized decision making.
However a rapidly changing environment may call for a more flexible structure, with strong horizontal coordination and collaboration through teams or other mechanisms. In terms of size and life cycle, young, small organizations are generally informal and have little division of labor, few rules and regulations, and ad hoc budgeting and performance systems. Large organizations such as IBM or Sears, on the other hand, have an extensive division of labor, numerous rules and regulations, and standard procedures and systems for budgeting, control, rewards, and innovation.

Design must also fit the workflow technology of the organization. For example, with mass production technology, such as a traditional automobile assembly line, the organization functions best by emphasizing efficiency, formalization, specialization, centralized decision making, and tight control. An e-business, on the other hand, may need to be very informal and flexible. A final contingency that affects organizational design is corporate culture. An organizational culture that values teamwork, collaboration, creativity, and open communication among all employees and managers, for example, would not function well with a tight, vertical structure and strict rules and regulations.

One responsibility of managers is to design organizations that fit the contingency factors of strategy, environment, size and life cycle, technology, and culture. Finding the right “fit” leads to organizational effectiveness, whereas a poor fit can lead to decline or even the demise of the organization.

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