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CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL
EFFECTIVENESS
LEARNING OBJECTIVES
1. Explain why organizations exist and the purposes they serve.
2. Describe the relationship between organizational theory and organizational design and change,
and differentiate between organizational structure and culture.
3. Understand how managers can utilize the principles of organizational theory to design and
change their organizations to increase organizational effectiveness.
4. Identify the three principal ways in which managers assess and measure organizational
effectiveness.
5. Appreciate the way in which several contingency factors influence the design of organizations.
CHAPTER SUMMARY
This chapter discusses organizations, organizational theory, and the importance of organizational
design. An organization is a tool that people use to coordinate their actions to obtain something
they desire or value—to achieve their goals. 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 is the formal system of task and authority relationships that
control how people coordinate their actions and use resources to achieve an organization’s goals.
Organizational culture is the set of shared values and norms that control organizational members’
interactions with each other and with suppliers, customers, and other people outside the
organization.
Organizations are value-creation systems that take inputs from the environment and use skills
and knowledge to transform these inputs into finished goods and services. The use of an
organization allows people jointly to increase specialization and division of labor, use large-scale
technology, manage the organizational environment, economize on transaction costs, and exert
power and control—all of which increase the value the organization can create.
Organizational design is the process by which managers select and manage aspects of structure
and culture so an organization can control the activities necessary to achieve its goals.
Organizational design has important implications for a company’s competitive advantage, its
ability to deal with contingencies and manage diversity, its efficiency, its ability to generate new
goods and services, its control of the environment, its coordination and motivation of employees,
and its development and implementation of strategy. Organizational change is the process by
which organizations redesign and transform their structures and cultures to 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 of using resources and capabilities to
increase an organization’s ability to create value and hence performance.
Managers can use three approaches to evaluate organizational effectiveness: the external
resource approach, the internal systems approach, and the technical approach. Each approach is
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associated with a set of criteria that can be used to measure effectiveness and a set of
organizational goals.
CHAPTER OUTLINE
1.1 What is an Organization?
Organizations are extremely important in today’s world. Though organizations are intangible,
they have a role to play in all areas of our life. A grouping of people and other resources to
produce goods and services is the essence of organizing. An organization is a tool people use to
coordinate their actions to obtain something they desire or value—that is, to achieve their goals.
Today organizations are rapidly growing in number as they seek to respond to the changing
tastes and needs of consumers. Entrepreneurship 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.
How Does an Organization Create Value?
Value creation takes place at three stages: input, conversion, and output. The way a given
organization uses human resources and technology to transform inputs into outputs determines
how much value is created at the conversion stage. 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. (Refer to Figure 1.1)
Focus on New Information Technology: Amazon.com, Part 1
The success story of Amazon.com depicts how Jeff Bezos recognized the immense
entrepreneurial opportunity in the rapid growth of the Internet and used it optimally to become
extremely successful in the new electronic virtual marketplace.
Question: What was the realization that prompted Jeff Bezos’ entrepreneurial effort?
Answer: Bezos realized that compared to a real bricks-and-mortar bookstore, an online bookstore
would be able to offer a much larger and more diverse selection of books. Additionally, a virtual
bookstore would enable customers to browse, review, and access book recommendations. This
prompted him to set up Amazon.com.
The result of the conversion process is an output of finished goods and services that the
organization releases to its environment, where they are purchased and used by customers to
satisfy their needs. A value-creation model can be used to describe the activities of most kinds of
organizations.
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1.2 Why do Organizations Exist?
The production of goods and services most often takes place in an organizational setting because
people working together to produce goods and services usually can create more value than
people working separately.
There are five reasons for the existence of organizations. (Refer to Figure 1.3)
1. 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.
2. 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.
3. To Manage the Organizational Environment: Organizations are complex structures
involving many economic, social, and political pressures that affect their ability to function
optimally. Managing complex environments like these is a task beyond the abilities of most
individuals, but an organization has the resources to develop specialists to anticipate or attempt
to influence the many pressures from the environment.
4. To Economize on Transaction Costs: The costs associated with negotiating, monitoring, and
governing exchanges between people to solve the numerous transaction difficulties are called
transaction costs. Organizations’ ability to control the exchanges between people reduces the
transaction costs associated with these exchanges.
5. To Exert Power and Control: To get a job done efficiently, people must come to work in a
predictable fashion, behave in the interests of the organization, and accept the authority of the
organization and its managers. All these requirements make production less costly and more
efficient but put a burden on individuals who must conform to organizational goals.
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1.3 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. There is a close relationship between
organizational theory, structure, culture, design, and change. (Refer to Figure 1.4)
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
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coordinate their actions. For any organization, an appropriate structure is one that facilitates
effective responses to problems of coordination and motivation.
Organizational culture is the set of shared values and norms that controls organizational
members’ interactions with each other and with suppliers, customers, and other people outside
the organization. An organization’s culture is shaped by the people inside the organization, by
the ethics of the organization, by the employment rights given to employees, and by the type of
structure used by the organization. The cultures of organizations that provide essentially the
same goods and services can be very different.
Organizational design is the process by which managers select and manage aspects of structure
and culture so an organization can control the activities necessary to achieve its goals.
Organizational structure and culture are the means the organization uses to achieve its goals;
organizational design is about how and why various means are chosen. Organizational design
helps organizational members to view and respond to the outside environment in different ways
and puts pressure on work groups and individuals to behave in certain ways.
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 of using resources and capabilities to increase an organization’s
ability to create value, and hence its performance. Organizational change can be understood as
the process of organizational redesign and transformation.
Organizational Insight 1.1: How Steve Jobs Learned How to Organize and Control Apple
This case study shows that though people who start new organizations may initially lack the
kinds of skills or knowledge to manage an organization’s structure and culture effectively, they
can develop these skills over time. An understanding of the principles behind organizational
design and change helps in this learning process and deepens appreciation for the many subtle
technical and social processes that determine how organizations operate.
Question: What were the consequences of Jobs’ managerial style which he employed initially at
Apple?
Answer: Jobs’ arbitrary and overbearing style of management led to fierce competition,
misunderstanding, and growing distrust among workers. He often resorted to favoritism and his
strained relationship with Sculley (CEO of Apple) led to Jobs losing control of the company.
Question: What was the first step taken by Jobs when he returned to Apple in 1997?
Answer: Jobs’ first step was to create a clear vision and goals to energize and motivate Apple
employees. He did this by introducing new equipment, delegating work, setting challenging
goals, and ensuring that time schedules for different projects were met.
The Importance of Organizational Design and Change
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Today managers are searching for new and better ways to coordinate and motivate their
employees to increase the value their organizations can create. Managers have recognized the
implications that organizational design and change have in increasing employee effectiveness,
dealing with contingencies, gaining a competitive edge and managing diversity. Increased global
competitive pressures and the increasing use of advanced IT has provided impetus to this trend
too.
Dealing with Contingencies
A contingency is an event that might occur and must be planned for. An organization can design
its structure in many ways to increase control over its environment. One part of the
organizational environment that is becoming more important and more complex is the global
environment.
Gaining Competitive Advantage
Competitive advantage is the ability of one company to outperform another because its managers
are able to create more value from the resources at their disposal. Competitive advantage springs
from core competences or managers’ skills and abilities that allow a company to develop a
strategy to outperform competitors and produce better products, or produce the same products
but at a lower cost. Strategy is the specific pattern of decisions and actions that managers take to
use core competences to achieve a competitive advantage and outperform competitors. An
organization’s strategy is always changing in response to changes in the environment;
organizational design must be a continuously evolving managerial activity for a company to stay
ahead of the competition.
Organizational Insight 1.2: Groupon Forges Ahead
Groupon developed a strategy that aimed at leveraging its members’ collective buying power to
obtain deals from companies supplying goods and services that were hard to resist. This enabled
Groupon to capture customers and retain its competitive advantage.
Question: Why does Mason believe that investing in sales and marketing for Groupon is worthy?
Answer: Any new startup can easily imitate Groupon’s strategy, but being the first mover is a
major advantage. Mason believes that pouring money into sales and marketing to make Groupon
the global leader is worth the effort as it would enable them to reap the benefits of their
innovative strategies.
Question: What is the power that Groupon gives individuals?
Answer: Groupon gives individuals the bargaining power they need to deal with large
companies. It also looks at protecting its users by promising a refund if consumers are
dissatisfied.
Managing Diversity
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Today organizations have people from different races, genders, nationalities, minority groups,
and even immigrant populations working for them. Such a workforce requires care, attention,
and advance planning so the needs and concerns of all minorities are addressed. An organization
needs to design a structure and control system to make optimal use of the talents of a diverse
workforce and to develop an organizational culture that encourages employees to work together.
Promoting Efficiency, Speed, and Innovation
The capacity of organizations to create value increases enormously as organizations introduce
better ways of producing and distributing goods and services. This can be achieved through
specialization and the use of modern technology and newer and more efficient organizational
structures. Organizational design plays an important role in innovation, which is closely linked to
competitive advantage in organizations.
The Consequences of Poor Organizational Design
Organizational design affects company performance, yet employee roles are often neglected until
a crisis hits. One reason for decline is a loss of control over organizational structure and culture.
Talented employees leave, acquiring resources becomes difficult, and the value creation process
slows down. Managers are forced to change elements of structure and culture that derail strategy.
Organizational Insight 1.3: How Diverse Manufacturing Managers Can Help Increase
Product Quality
Hiring female employees in the automotive manufacturing industry that is a predominantly male
occupation is an unusual recruitment choice for Ford. However, it has strengthened the company
by changing the values and norms of its manufacturing culture, suggesting that diversity of
workforce has a role to play in organizational efficiency.
Question: How has hiring a growing number of women employees benefited Ford?
Answer: Hiring a growing number of women employees has changed the values and norms of
Ford’s manufacturing culture. Not only has it reduced the level of conflict between managers and
workers, it has promoted cooperation and helped promote Ford’s focus on increasing product
quality, which is one of its major competitive advantages in the automotive manufacturing
market today.
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1.4 How do Managers Measure Organizational Effectiveness?
Because managers are responsible for utilizing organizational resources in a way that maximizes
an organization’s ability to create value, it is important to understand how they evaluate
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organizational performance. Control, innovation, and efficiency are the three most important
processes managers use to evaluate how effectively the organization is creating value.
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 along with creating new organizational structures and cultures to adapt to
change.
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.
There are three approaches by which an organization’s efficiency can be measured. (Refer to
Table 1.1)
The External Resource Approach: Control
This is a method used by managers to evaluate how effectively an organization manages and
controls its external environment. Managers use indicators such as stock price, profitability, and
return on investment, which compare the performance of their organization with the performance
of other organizations. Top management’s ability to perceive and respond to changes in the
environment or to initiate change and be first to take advantage of a new opportunity is another
indicator of an organization’s ability to influence and control its environment.
The Internal Systems Approach: Innovation
This is a method that allows managers to evaluate how effectively an organization functions and
resources operate. To be effective, an organization needs a structure and a culture that fosters
adaptability and quick responses to changing conditions in the environment. Measures of an
organization’s capacity for innovation include the length of time needed to make a decision, the
amount of time needed to get new products to market, and the amount of time spent coordinating
the activities of different departments.
The Technical Approach: Efficiency
This is a method managers use to evaluate how efficiently an organization can convert some
fixed amount of organizational resources into finished goods and services. Technical
effectiveness is measured in terms of productivity and efficiency. Productivity measures are
objective indicators of the effectiveness of an organization’s production operations.
Measuring Effectiveness: Organizational Goals
Managers create goals that they use to assess how well the organization is performing. Two types
of goals used to evaluate organizational effectiveness are official goals and operative goals.
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Official goals are guiding principles that the organization formally states in its annual report and
in other public documents and usually they lay out the mission of the organization.
Operative goals are specific long- and short-term goals that guide managers and employees as
they perform the work of the organization.
Organizational Insight 1.4: First Global Xpress Delivers Packages Faster, Cheaper, and
Greener
This case study demonstrates how First Global Xpress, a small $10 million global package
shipping company, is competing with its much bigger competitors by improving its efficiency in
the global package shipping business. This is an example of the technical approach to measuring
organizational efficiency.
Question: What is the “hub-and-spoke” package distribution system?
Answer: Under the “hub-and-spoke” package distribution system, a package has to go through a
central hub first, where packages from all over the country are sorted for shipment to their final
destination. This means that a customer’s shipment has to take two different flights—one to get
to a hub and another to get to the destination.
Question: Why does FGX claim that it provides a “greener” way to transport shipments?
Answer: FGX ships its customers’ packages directly, eliminating the flight to the hub which is
common with other shipping companies. Thus, it uses less fuel oil with a 30% savings in CO2
emissions, providing customers with this service “in a more socially responsible, greener way.”
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1.5 The Plan of This Book
Figure 1.5 shows how the various chapters of this book fit together and provides a model of the
components involved in organizational design and change.
Organizational Environment: The main source of uncertainty is the environment and the first
part of this book is devoted to understanding this connection. An organization must design its
structure to handle relationships with stakeholders in the external environment. Chapter 3
presents models that reveal why the environment is a major source of uncertainty.
Organizational Design: Chapters 4 through 8 examine the principles on which organizations
operate and the choices available for designing and redesigning their structures and cultures to
match the environment. The same basic problems occur in all work settings, and the purpose of
design is to develop a structure that will respond effectively to these challenges.
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Organizational Change: The third part of the book deals with the many different issues
involved in changing and redesigning organizations. Included in this are different change
processes, such as restructuring, reengineering, and innovation management.
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DISCUSSION QUESTIONS AND ANSWERS
1. How do organizations create value? What is the role of entrepreneurship in this process?
Value is created through three stages: input, conversion, and output. At the input stage, value
depends on how an organization selects and obtains the inputs; certain inputs create more value
than others. At the conversion stage, value is a function of employees’ skills, including learning
from and responding to the environment. Output creates value if it satisfies a need.
Entrepreneurship is important to value creation by recognizing a need, gathering inputs, and
transforming them into a product or service. The value creation cycle will continue if customers
are satisfied; profits will generate inputs and improve the conversion process.
2. What is the relationship among organizational theory, organizational design, change,
structure, and culture?
Organizational theory is the study of how organizations function and how they affect and are
affected by the environment in which they operate. Organizational theory deals with the whole
organization. Organizational design entails decisions about structure and culture. Organizational
structure is the formal set of task and authority relationships. Organizational culture is a set of
shared values that influence behavior.
3. What is organizational effectiveness? Discuss three approaches to evaluating
effectiveness and the problems of each approach.
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.
These indices are compared to competitors’ indices. However, this approach fails to
consider organizational culture and structure.
 The internal approach reviews the organization’s ability to innovate and respond to the
environment quickly. Some measures include the length of time to get a product to
market, decision-making speed, and coordination time. This approach does not consider
costs or the external environment.
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
The technical approach reviews an organization’s ability to use skills and resources
efficiently. This approach considers neither the environment nor structure and culture. It
is important to evaluate an organization in all three areas—control, innovation, and
efficiency.
4. Draw up a list of effectiveness goals that you would use to measure the performance of
(a) a fast-food restaurant and (b) a school of business.
Students’ answers may vary. A fast-food restaurant’s goals will differ from a business school’s
goals because a school is a nonprofit organization.
(a) Some goals used to measure effectiveness at a fast-food restaurant are as follows:
• Lower the cost of meat, fries, and drinks.
• Lower the cost of labor.
• Improve the quality of the food and the skills of employees.
• Increase profits, stock price, and market share.
• Satisfy government requirements on sanitation and fair labor laws.
• Reduce employee conflict.
• Speed up the time it takes a customer to get served.
• Find more efficient ways to produce the food.
• Increase employee motivation by offering bonuses.
• Increase the quality of the food by ensuring that it is not too greasy and that it is hot
when customers receive it.
• Minimize the number of wrong orders.
(b) A business school’s goals can include the following:
• Attract top-quality faculty and students.
• Maximize revenue from tuition and fees.
• Offer scholarships.
• Attract revenue from organizations and alumni.
• Gain the support of the local community.
• Reduce conflict.
• Ensure that students are prepared for jobs.
• Respond to changes in the environment by constantly updating the curriculum.
• Encourage coordination among faculty from different departments.
ORGANIZATIONAL THEORY IN ACTION
Practicing Organizational Theory: Open Systems Dynamics
1. Identify the specific forces in the environment that have the greatest opportunity to help
or hurt this organization’s ability to obtain resources and dispose of its goods or services.
Students’ answers will vary. Shareholders, suppliers, distributors, customers, competitors, and
the government could be the environmental forces implicated most closely here.
2. Using the three views of effectiveness discussed in the chapter, discuss which specific
measures are most useful to managers in evaluating this organization’s effectiveness.
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Students’ answers will vary.
The Ethical Dimension #1
1. List examples of these ethical and unethical behaviors.
Students’ answers will vary. The quality of medical care, the role of insurance companies,
interactions with pharmaceutical representatives, medical research, and the legality and ethicality
of certain kinds of medical dilemmas such as mercy killing could be discussed.
2. How do these behaviors relate to the attempts of doctors and nurses to increase
organizational effectiveness in the ways discussed in the chapter? How does it relate to
their attempts to pursue their own self-interest?
Students’ answers will vary. Students need to understand that all organizations attempt to
increase their effectiveness (and not just for-profit corporations). Another interesting discussion
might be defining and discussing what “pursuing their own self-interest” really means from both
an ethical and a practical standpoint.
Making the Connection #1
Find an example of a company that is seeking to improve its effectiveness in some way.
What dimension of effectiveness (control, innovation, or efficiency) is it seeking to
improve? What changes is it making to address the issue?
Students’ answers will vary.
Analyzing the Organization: Design Module #1
Each student selects a company to study throughout the semester. Each module requires the
student to collect and analyze company information for a report to be submitted at the end of the
semester. Students can choose an organization like IBM or GM and find articles in magazines,
on the Internet, or contact a local company. The report answers the following questions: what is
the organization, what does it do, how does it create value, who are its stakeholders, what are its
major problems, and how does it measure effectiveness? Other issues such as technology or
competition may be included.
CASE FOR ANALYSIS
How Joe Coulombe Made Trader Joe’s a Success Story
Realizing that his chain of convenience stores could not compete successfully with the growing
7-11 chain, Joe Coulombe changed the name of his stores to Trader Joe’s and altered his strategy
to begin supplying upscale specialty products such as wine, drinks, and gourmet foods to
customers. This move worked well because he found a new niche in the supermarket industry
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and excelled in customer service by training employees to be proactive and kept them motivated
through generous rewards.
1. What was Joe Coulombe’s approach to organizational design?
Coulombe’s approach to organization design was guided by strong values. He took advantage of
a niche opportunity by developing a grounded organization. He created an informal
organizational structure marked by decentralization of authority, empowerment, and autonomy
of individual employees. As a result, employees felt responsible for the company as though it
was their own and this motivated them to work efficiently. Coulombe also provided excellent
rewards for good performance and treated all employees fairly.
2. What specific decisions did he make to create Trader Joe’s organizational structure and
culture?
Coulombe realized the need for excellent customer satisfaction and trained his employees to
deliver superior service. He provided his employees with good monetary rewards for working
efficiently. Additionally, he gave them a high degree of autonomy and many opportunities to
tailor their interactions with customers with whom they enjoyed a good rapport. The ambience,
services, products, and culture of Coulombe’s stores were designed to reflect the values upon
which he based his business.
3. Go online and see how Trader Joe’s is performing today. What new problems of
organizing has it been facing as it has grown?
Students’ answer will vary. While Trader Joe’s motto of providing organic food at competitive
prices still guides their business, they are facing numerous questions about the sources and
suppliers of their organic food products. Consumers are unhappy with the quality of service
which has deteriorated. Additionally, many consumers have criticized the company for using too
much packaging, which not only means that the product inside the package is less in quantity but
also that the company is not as eco-friendly as it claims to be.
TEACHING SUGGESTIONS
1. Ask students to try and find an industry that has not been impacted by technology in the last
decade. You might discuss how traditionally stable organizations, such as colleges or
universities, have been impacted by technology (online courses, interactive Web sites, etc.)
Discuss what they think the future will hold for such organizations.
2. Use discussion questions during the class by dividing students into small groups or pairs and
allowing 5–7 minutes to prepare answers, which are then shared with the class.
3. Use role plays to measure organizational effectiveness using the three approaches. One
student is a manufacturing manager who evaluates performance using the technical approach.
Another student is an R&D manager who uses the internal systems approach. The third is a
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corporate manager who uses the external resource approach. Stress that performance is
evaluated based on control, innovation, and efficiency.
4. Ask students to look at Amazon.com’s Web site (http://www.amazon.com) and discuss how
Amazon satisfies a need. Have them compare this to competitors that have surfaced, such as
Barnes & Noble (http://www.barnesandnoble.com).
5. To make sure students appreciate why organizations exist, have them give examples in class
of incidents when organizations have not served them well. Common examples include long
lines at the grocery store, poor service at a restaurant, etc. Try to help them re-frame their
examples in the context of the course material, such as specialization or the conversion
process. This is a good method for getting the students to understand the overall value of the
material throughout the semester.
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