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Lesson#17
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Diagnosing Organizations-1
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Diagnosing Organizations:
Comprehensive Model for Diagnosing Organizational
Systems
Organization-Level Diagnosis:
Design Components:
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 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 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 objectives;
provide accurate, understandable and timely
information; are accepted as legitimate 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.
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?
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.
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, high- performance 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.
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 lowcost
sources. On-site Nike employees guarantee that the shoes meet
the Nike standards of quality.
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, 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.
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 highend
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. 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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