Organization Development
Lecture 3
Diagnosing Organizations
Fig 23: Comprehensive Model for Diagnosing Organizational Systems
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Organization-Level
Diagnosis: Design
Components:
Figure 23(A) shows that a strategic orientation is composed of five major design components—
strategy, technology, structure, measurement systems, and human resources systems—and an
intermediate output— culture. Effective organizations align their design components to each
other and to the environment.
A strategy represents the way an organization uses its resources (human, economic, or technical)
to gain and sustain a competitive advantage. It can be described by the organization’s mission,
goals and objectives, strategic intent, and functional policies. A mission statement describes the
long-term purpose of the organization, the range of products or services offered the markets to be
served, and the social needs served by the organization’s existence. Examples are
"To make people happy." …Walt Disney
"To give ordinary folk the chance to buy the same thing as rich people." ….. Wal Mart
"To preserve and improve human life“ …Merck
"To give unlimited opportunity to women." ….Mary Kay Cosmetics
Goals and objectives are statements that provide explicit direction, set organization priorities,
provide guidelines for management decisions, and serve as the cornerstone for organizing
activities, designing jobs, and setting standards of achievement. Goals and objectives should set
a target of achievement (such as 50-percent gross margins, an average employee satisfaction
score of four on a five-point scale, or some level of productivity); provide a means or system for
measuring achievement; and provide a deadline or timeframe for accomplishment. A strategic
intent is a succinct label that describes how the organization intends to achieve its goals and
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objectives. For example, an organization can achieve goals through differentiation of its product
or service, by achieving the lowest costs in the industry, or by growth. Finally, functional
policies are the methods, procedures, rules, or administrative practices that guide decision
making and convert plans into actions. In the semiconductor business, for example, Intel has a
policy of allocating about 30 percent of revenues to research and development to maintain its
lead in microprocessors production.
Technology is concerned with the way an organization converts inputs into products and
services. It represents the core of the transformation function and includes production methods,
work flow, and equipment. Automobile companies have traditionally used an assembly-line
technology to build cars and trucks. Two features of the technological core have been shown to
influence other design components: interdependence and uncertainty. Technical interdependence
involves ways in which the different parts of a technological system are related. High
interdependence requires considerable coordination among tasks, such as might occur when
departments must work together to bring out a new product. Technical uncertainty refers to the
amount of information processing and decision making required during task performance.
Generally, when tasks require high amounts of information processing and decision making,
they are difficult to plan and routinize. The technology of car manufacturing is relatively certain
and moderately interdependent. As a result, automobile manufacturers can specify in advance
the behaviors workers should perform and how their work should be coordinated.
The structural system describes how attention and resources are focused on task
accomplishment. It represents the basic organizing mode chosen to (1) divide the overall work
of an organization, into subunits that can assign tasks to individuals or groups and (2) coordinate
these subunits for completion of the overall work. Structure, therefore, needs to be closely
aligned with the organization’s technology.
Two ways of determining how an organization divides work are to examine its formal structure
or to examine its level of differentiation and integration. Formal structures divide work by
function (accounting, sales, or production), by product or service (Chevrolet, Buick, or Pontiac),
or by some combination of both (a matrix composed of functional departments and product
groupings). The second way to describe how work is divided is to specify the amount of
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differentiation and integration there is in a structure. Applied to the total organization,
differentiation refers to the degree of similarity or difference in the design of two or more
subunits or departments. In a highly differentiated organization, there are major differences in
design among the departments. Some departments are highly formalized with many rules and
regulations, others have few rules and regulations, and still others are moderately formal or
flexible.
The way an organization coordinates the work across subunits is called integration. Integration
can be achieved in a variety of ways—for example, by using plans and schedules; using
budgets; assigning special roles, such as project managers, liaison positions, or integrators; or
creating cross-departmental task forces and teams. The amount of integration required in a
structure is a function of (1) the amount of uncertainty in the environment, (2) the level of
differentiation in the structure, and (3) the amount of interdependence among departments. As
uncertainty, differentiation, and interdependence increase, more sophisticated integration
devices are required.
Measurement systems are methods of gathering, assessing, and disseminating information on the
activities of groups and individuals in organizations. Such data tell how well the organization is
performing and are used to detect and control deviations from goals. Closely related to structural
integration, measurement systems monitor organizational operations and feed data about work
activities to managers and members so that they can better understand current performance and
coordinate work. Effective information and control systems clearly are linked to strategic by
organization members; and produce benefits in excess of their cost.
Human resources systems include mechanisms for selecting, developing, appraising, and
rewarding organization members. These influence the mix of skills, personalities, and behaviors
of organization members. The strategy and technology provide important information about the
skills and knowledge required if the organization is to be successful. Appraisal processes identify
whether those skills and knowledge are being applied to the work, and reward systems complete
the cycle by recognizing performance that contributes to goal achievement. Reward systems may
be tied to
measurement systems so that rewards are allocated on the basis of measured results.
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Organization culture is the final design component. It represents the basic assumptions, values,
and norms shared by organization members. Those cultural elements are generally taken for
granted and serve to guide members’ perceptions, thoughts, and actions. For example
McDonald’s culture emphasizes efficiency, speed, and consistency. It orients employees to
company goals and suggests the kinds of behaviors necessary for success. In Figure 23 (A),
culture is shown as an intermediate output from the five other design components because it
represents both an outcome and a constraint. It is an outcome of the organization’s history and
environment as well as of prior choices made about the strategy, technology, structure,
measurement systems, and human resources systems. It is also a constraint in that it is more
difficult to change than the other components. In that sense it can either hinder or facilitate
change. In diagnosis, the interest is in understanding the current culture well enough to determine
its alignment with the other design factors. Such information may partly explain current
outcomes, such as performance or effectiveness.
Outputs:
The outputs of a strategic orientation can be classified into three components. First, organization
performance refers to financial outputs such as profits, return on investment, and earnings per
share. For nonprofit and government agencies, performance often refers to the extent to which
costs were lowered or budgets met. Second, productivity concerns internal measurements of
efficiency such as sales per employee, waste, error, rates, quality, or units produced per hour.
Third, stakeholder satisfaction reflects how well the organization has met the expectations of
different groups. Customer satisfaction can be measured in terms of market share or focus-group
data; employee satisfaction can be measured in terms of an opinion survey; investor satisfaction
can be measured in terms of stock price.
Alignment:
The effectiveness of an organization’s current strategic orientation requires knowledge of the
above information to determine the alignment among the different elements.
1. Does the organization’s strategic orientation fit with the inputs?
2. Do the design components fit with each other?
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For example if the elements of the external environment (inputs) are fairly similar in their degree
of certainty, then an effective organization structure (design factor) should have a low degree of
differentiation. Its departments should be designed similarly because each faces similar
environmental demands. On the other hand, if the environment is complex and each element
presents different amounts of uncertainty, a more differentiated structure is warranted. Chevron
Oil Company’s regulatory, ecological, technological and social environments differ greatly in
their amount of uncertainty. The regulatory environment is relatively slow paced and detail
oriented. Accordingly, the regulatory affairs function within Chevron is formal and bound by
protocol. In the technological environment, on the other hand, new methods for discovering,
refining, and distributing oil and oil products are changing at a rapid pace. Those departments are
much more flexible and adaptive, very different from the regulatory affairs function.
Analysis:
Application 2 describes the Nike organization and provides an opportunity to perform the
following organization-level analysis. Organization-level dimensions and relationships may be
applied to diagnose this example. A useful starting point is to ask how well the organization is
currently functioning. Examination of the organization’s outputs yields measures of market
share, financial performance, and stakeholder satisfaction. Nike’s string of solid annual increases
over six years was followed by real or predicted declines. Discovering the underlying causes of
these problems begins with an assessment of the inputs and strategic orientation and then
proceeds to an evaluation of the alignments among the different parts. In diagnosing the inputs,
these two questions are important:
1. What is the company’s general environment? Nike’s environment is uncertain and
complex. Technologically, Nike is dependent on the latest breakthroughs in shoe design
and materials to keep its high-performance image. Socially and politically, Nike’s
international manufacturing and marketing operations require that it be aware of a variety
of stakeholder demands from several countries, cultures, and governments, including the
U.S. government, which might view Nike’s foreign manufacturing strategy with some
concern about U.S. jobs. Other stakeholders are pressuring Nike for changes to its human
resources practices.
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2. What is the company’s industry structure? Nike’s industry is highly competitive and
places considerable pressure on profits. First, the threat of entry is high. It is not difficult
or expensive to enter the athletic shoe market. Many shoe manufacturers could easily
offer an athletic shoe if they wanted. The threat of substitute products is also high. Nike’s
image and franchise depend on people wanting to be athletic. If fitness trends were to
change, then other footwear could easily fill the need. This possibility clearly exists
because Nike’s marketing has sensationalized professional athletes and sports, rather than
emphasizing fitness for the average person. The bargaining power of suppliers, such as
providers of labor, shoe materials, and manufacturing, is generally low because the
resources are readily available and there are many sources. The bargaining power of
buyers is moderate. At the high-performance end, buyers are willing to pay more for high
quality, whereas at the casual end, price is important and the purchasing power of large
accounts can bid down Nike’s price. Finally, rivalry among firms is severe. A number of
international and domestic competitors exist, such as Reebok, Adidas, New Balance,
Puma, Converse, and Tiger. Many of them have adopted marketing and promotion tactics
similar to Nike’s and are competing for the same customers. Thus, the likelihood of new
competition, the threat of new substitute products, and the rivalry among existing
competitors are the primary forces creating uncertainty in the environment and squeezing
profits in the athletic shoe industry.
The following questions are important in assessing Nike’s strategic orientation:
1. What is the company’s strategy? Nike’s strategy is clear on some points and
nebulous on others. First, although the company has no formal mission statement, it
has a clear sense about its initial purpose in producing high-quality, highperformance athletic footwear. That focus has blurred somewhat as Nike has ventured
into apparel, hiking boots, and casual shoes. Its goals also are nebulous because Phil
Knight does not set specific goals, only general direction. The tension between
growth and profits is a potential source of problems for the organization. On the other
hand, its strategic intent is fairly clear. It is attempting to achieve its growth and
profitability goals by offering a differentiated product—a high quality, highperformance shoe. Informal policies dominate the Nike organization.
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Application 2: Nike’s Strategic Orientation
In 1993, Nike was the leader in domestic-brand athletic footwear with more than 30 percent
market share. It also produced sports apparel, hiking boots, and upscale men’s shoes. But after
six years of solid growth, international sales were falling, sales of basketball shoes were down,
and the firm’s stock price had dropped 41 percent since November 1992. Analysts were
projecting declines in both total revenues and profits for the next fiscal year. In addition, Nike
had been the focus of attack from several stakeholder groups. Organized labor believed that Nike
exploited foreign labor; the African-American sector noted the lack of diversity in Nike’s
workforce; and the general public was growing tired of sensationalizing athletes.
Nike’s traditional strategy was built around high-performance, innovative athletic shoes,
aggressive marketing, and low-cost manufacturing. Using input from athletes, Nike developed a
strong competence in producing high-quality athletic shoes, first for running, then for basketball
another sports. By contracting with well-known and outspoken athletes to endorse its products, a
Nike image of renegade excellence and high performance emerged. Other consumers who
wanted to associate with the Nike image could do so by purchasing its shoes. Thus, a large
market of “weekend warriors,” people pursuing a more active lifestyle, serious runners, and
anyone wanting to project a more athletic image became potential customers. Nike contracted
with low-cost, foreign manufacturing plants to produce its shoes.
An athletic shoe retailer places orders with Nike representatives, who are not employees of Nike
but contract with Nike to sell its shoes, for delivery in six to eight months.
The Futures program, as it is called, offers the retailer 10 percent off the wholesale price for
making these advanced orders. The orders are then compiled and production scheduled with one
of Nike’s Asian manufacturing partners. Nike doesn’t actually make shoes; instead, it develops
contract relationships with Taiwanese, Korean, Japanese, and other low-cost sources. On-site
Nike employees guarantee that the shoes meet the Nike standards of quality.
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Nike’s culture is distinctive. The organization, built by athletes for athletes is very
entrepreneurial, and the “Just Do It” marketing campaign aptly describes the way things are done
at Nike. As one senior executive put it, “It’s fine to develop structures and plans and policies, if
they are viewed, and used, as tools. But it is so easy for them to become substitutes for good
thinking, alibis for not taking responsibility, reasons to not become involved, and then we’d no
longer be Nike.”
What emerged, by the mid-I 980s, was a way of working that involved setting direction, dividing
up the work, pulling things together, and providing rewards.
Although Phil Knight, founder and chairman of Nike, sets the general direction for Nike, he
rarely sets clear goals. For example, Knight views Nike as a growth company. The athletic drive
pushes employees to achieve bigger sales and put more shoes on more feet than anyone else.
Others are concerned that the decision to go public in the early I 980s has produced pressures for
profitability that sometimes work against growth. Implementation of the general direction
depends on people being tuned into the day-to-day operations. “You tune into what other people
are doing, and if you’re receptive, you start to see the need for something to be done,” Knight
says. Nike changed from a functional organization in 1985 to a product division structure in
1987. In addition, 1993 brought additional structural change. The new president, Tom Clark, was
busy implementing stronger communication and collaboration among manufacturing, marketing,
and sales. This description, however, belies the informality of the organization. In essence, the
aim of the Nike structure is to fit the pieces together in ways that best meet the needs of the
product, the customers, and the market.
In pulling things together, Nike relies on meetings as the primary method for coordination. The
word “meeting” connotes more formality than is intended. Meetings, which occur at all levels
and all parts of the organization, range from an informal gathering in the hallway, to a three-day
off-site event, to formal reviews of a product line. Membership in a meeting is equally fluid, with
the people who need to be involved invited and those who don’t, not invited,
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Although more formal systems have emerged over the years, their use is often localized to the
people or groups who invented them and is met with resistance by others. Thus, with the
exception of the Futures program, there is little in the way of formal information systems.
Finally, Knight favors an annual performance review system with annual pay increases tied to
performance. In fact, the system is fairly unstructured; some managers take time to do the
reviews well and others do not. Although no formal compensation policy exists, most employees
and managers believe that Nike is a “great place to work” For the majority of people there,
rewards come in the form of growth opportunities, autonomy, and responsibility.
2. What are the company’s technology, structure, measurement systems, and human
resources systems? First, the technology of Nike is moderately uncertain and interdependent.
For example, developing high-quality, state-of-the-art shoes is uncertain, but there is no evidence
that research and development is tightly linked to production. In addition, the Futures program
creates low interdependence between manufacturing and distribution, both of which are fairly
routine processes. Second, Nike’s product division structure appears moderately differentiated,
but the new president’s emphasis on communication and coordination suggests that it is not
highly integrated. Moreover, although Nike appears to have a divisional structure, its contract
relationships with manufacturing plants and sales representatives give it a fluid, network-like
structure. Third, human resources and measurement systems are underdeveloped. There is no
compensation policy, for example, and formal control systems are generally resisted. The one
exception to this is the Futures program that tracks orders (which are really advance revenues).
3. What is Nike’s culture? Finally, Nike’s culture is a dominant feature of the organization
design. The organization appears driven by typical athletic norms of winning, competition,
achievement, and performance.
Now that the organization inputs, design components, and outputs have been assessed, it is time
to ask the crucial question about how well they fit together. The first concern is the fit between
the inputs and the strategic orientation. The complex and uncertain environment fits well with
Nike’s focus on differentiation and a generally flexible organization design. That explains its
incredible success during the 1970s, 1980s, and into the 1990s. The alignment between its
strategic orientation and its environment appears sound.
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The second concern is the alignment of the design components. With respect to strategy, the
individual elements of Nike’s strategy are not aligned. It clearly intends to differentiate its
product by serving the high-end athlete with high-performance shoes.
However, this small group of athletes may have trouble communicating its needs to a large,
diversified organization. Growth goals and a diversified mission obviously do not align with
Nike’s differentiation intent. The market for higher priced and more specialized athletic shoes is
much smaller than the market for low-priced tennis shoes and limits the growth potential of
sales. That hypothesis is supported by the lack of clear goals in general and policies that support
neither growth nor profitability. However, there appears to be a good fit between strategy and the
other design components. The differentiated strategic intent requires technologies, structures, and
systems that focus on creating new ideas in products, marketing, and manufacturing. The flexible
structure, informal systems, and driving culture would seem well suited for that purpose.
The technology appears well supported and aligned with the structure. Product development,
market development, and manufacturing development are inherently unprogrammable tasks that
require flexibility and adaptability from the organization. Although a product structure overlays
most of Nike’s activities, the structure is not rigid, and there appears to be a willingness to create
structure as necessary to complete a task. In addition, the Futures program is important for two
reasons. First, it reduces uncertainty from the market by getting retailers to take the risk that a
shoe will not do well. For the retailer, this risk is mitigated by Nike’s tremendous reputation and
marketing clout. Second, knowing in advance what will be ordered provides Nike with the ability
to schedule production and distribution far in advance. This is a
Powerful device for integrating Nike’s activities. Finally, the lack of a formal human resource’s
system supports the fluid and flexible design, hut it creates problems in that there is no direction
for hiring and development, a point noted by the various stakeholders at the beginning of the
application.
Obviously, any discussion of Nike’s organization design has to recognize the powerful role its
culture plays. More than any design component, the culture promotes coordination of a variety of
tasks, serves as a method for socializing and developing people, and establishes methods for
moving information around the organization.
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Clearly, any change effort at Nike will have to acknowledge this role and design an intervention
accordingly. The strong culture will either sabotage or facilitate change depending on how the
change process aligns with the culture’s impact on individual behavior.
Based on this diagnosis of the Nike organization, at least two intervention possibilities are
suggested. First, in collaboration with the client, the OD practitioner could suggest increasing
Nike’s clarity about its strategy. In this intervention, the practitioner would want to avoid talking
about formalizing Nike’s strategy because the culture would resist such an attempt. However,
there are some clear advantages to be gained from a clearer sense of Nike’s future, its businesses,
and the relationships among them. Second, Nike could focus on increasing the integration and
coordination of its structure, measurement systems, and human resources systems. Although the
culture provides a considerable amount of social control, the lack of any human resources
systems and the relatively underdeveloped integration mechanisms suggest that finding ways to
coordinate activities without increasing formalization would be a value-added intervention.
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