Chapter 1 – Organizations and Organizational Effectiveness
What is an organization?
An organization is a tool people use to coordinate their actions to obtain something they desire or value. And
that is to achieve their goals. An organization is a response to and a means of satisfying some human need.
Who creates the organizations that arise to satisfy people’s needs? Sometimes an individual or a few people
believe they possess the necessary skills and knowledge and set up an organization to produce goods and
services. Entrepeneurship is the term used to describe the process by which people recognize opportunities to
satisfy needs and then gather and use resources to meet those needs.
The IT revolution is improving the way organizations operate and create value today.
How does an organization create value?
Value creation takes place at three stages: input, conversion, and output. Each stage is affected by the
environment in which the organization operates. The organizational environment is the set of forces and
conditions that operate beyond an organization’s boundaries but affect its ability to acquire and use resources
to create value. The way an organization chooses and obtains from its environment the inputs it needs
determines how much value the organization creates at the input stage. The way the organization uses human
resources and technology to transform inputs into outputs determines how much value is created at the
conversion stage. The result of the conversion process is an output of finished goods and services that the
organization releases into its environment. An organization that continues to satisfy people’s needs will be able
to obtain increasing amounts of resources over time and will be able to create more value.
Why do organizations exist?
Production of goods and services most often takes place in an organizational setting because people working
together usually can create more value.
To increase specialization and the division of labor
The collective nature of organizations allows individuals to focus on a narrow area of expertise, which allows
them to become more skilled or specialized at what they do.
To use large-scale technology
Economies of scale are cost savings that result when goods and services are produced in large volume on
automated production lines. Economies of scope are cost savings that result when an organization is able to
use underutilized resources more effectively because they can be shared across several different products or
tasks.
To manage the organizational environment
Pressures form the organizational environment also make organizations the favored mode for transforming
inputs into outputs. An organization’s environment is the source of valuable input resources and is the
marketplace into which it releases outputs. It is also the source of economic, social, and political pressures that
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,affect an organization’s ability to obtain these resources. An organization has the resources to develop
specialists to anticipate or attempt to influence the many pressures from the environment. This specialization
allows the organization to create more value.
To economize on transaction costs
The costs associated with negotiating, monitoring, and governing exchange between people to solve
transaction difficulties are called transaction costs.
To exert power and control
Organizations can exert pressure on individuals to conform to task and production requirements. Al these
requirements make production less costly and more efficient but put a burden on individuals.
Taken together these five factors help explain why often more can be created when people work together,
coordinating their actions in an organized setting. Over time its members can increase their skills and
capabilities.
Organizational theory, design and change
Organizational theory is the study of how organizations function and how they affect and are affected by the
environment in which they operate.
Organizational structure
Organizational structure is the formal system of task and authority relationships that control how people
coordinate their actions and use resources to achieve organizational goals.
The principal purpose of organizational structure is one of control: to control the way people coordinate their
actions to achieve organizational goals and to control the means used to motivate people to achieve these
goals.
Organizational structure is a response to contingencies involving environment, technology, and human
resources.
Organizational structure evolves as organization grows and differentiates.
Organizational structure can be managed and changed through the process of organizational design.
Organizational culture
Organizational culture is the set of shared values and norms that controls organizational members’
interactions with each other and with people outside the organization.
Organizational culture controls coordination and motivation; shapes behavior of people and the organization.
Organizational culture is shaped by people, ethics, and organizational structure.
Organizational culture evolves as organization grows and differentiates.
Organizational culture can be managed and changed through the process of organizational design.
Organizational design and change
Organizational design and change is the process by which managers select and manage various dimensions
and components of organizational structure and culture so that an organization can control the activities
necessary to achieve its goals.
Organizational design and change controls coordination and motivation; shapes behavior of people and the
organization.
Organizational design and change is shaped by people, ethics, and organizational structure.
Organizational design and change evolves as organization grows and differentiates.
Organizational design and change can be managed and changed through the process of organizational design.
Organizational change is the process by which organizations move from their present state to some desired
future state to increase their effectiveness. The goal of organizational change is to find new or improved ways
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, of using resources and capabilities to increase an organization’s ability to create value, and hence its
performance.
The importance of organizational design and change
Because of increased global competitive pressures and the increasing use of advanced IT, organizational design
has become one of the top priorities. Organizational design and change have important implications for a
company’s ability to deal with contingencies, achieve a competitive advantage, manage diversity effectively,
and increase its efficiency and ability to innovate.
Dealing with contingencies
A contingency is an event that might occur and must be planned for.
Gaining competitive advantage
Competitive advantage is the ability of one company to outperform another because its managers are able to
create more value from resources at their disposal. Competitive advantage springs from core competences,
meaning managers’ skills and abilities in value-creation activities.
Strategy is the specific pattern of decisions and actions that managers take to use core competences to achieve
a competitive advantage and outperform competitors.
Managing diversity
Differences in race, gender, and national origin of organizational members have important implications for the
values of an organization’s culture and for organizational effectiveness.
The consequences of poor organizational design
The consequence of poor organizational design or lack of attention to organizational design is the decline of the
organization. Talented employees leave, resources become harder to acquire, and the whole process of value
creation slows down.
How do managers measure organizational effectiveness
Control means having control over the external environment and having the ability to attract resources and
customers.
Innovation means developing an organization’s skills and capabilities so the organization can discover new
products and processes.
Efficiency means developing modern production facilities using new information technologies that can produce
and distribute a company’s products in a timely and cost-effective manner.
External resource approach: Evaluates the organization’s ability to secure, manage and control scarce and
valued skills and resources from outside the organization.
Internal systems approach: Evaluates the organization’s ability to be innovative and function quickly and
responsively.
Technical approach: Evaluates the organization’s ability to convert skills and resources efficiently into finished
goods and services.
Measuring effectiveness: organizational goals
Official goals are guiding principles that the organization formally states in its annual report and in other public
documents. Usually these goals lay out the mission of the organization: They explain why the organization
exists and what it should be doing.
Operative goals are specific long- and short-term goals that guide managers and employees as they perform
the work of the organization.
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