Lecture – 05
Organizational Effectiveness – I
Welcome to this course Organization Theory/Structure and Design. Now, we will talk about
module 5. Now, as you can see from this slide that we are in part 1, that is Introduction to this
course on Organization Theory. In module 1 and 2, we have talked about the overview of this
course; in module 3 and 4 we have discussed the evolution of organization theory.
Now, module 5, 6 and 7 they are dedicated to understanding of Organizational Effectiveness.
So, let us start with module 5 and see what are the things that will be covered in this module.
(Refer Slide Time: 01:15)
So, we will talk about understanding what organizational effectiveness is; then we will
understand the importance of organizational effectiveness. After that we will define
organizational effectiveness and then describe the criteria for measuring organizational
effectiveness. And, it will be followed by Tom Peter’s and Robert Waterman’s definition and
characteristics of organizational effectiveness.
(Refer Slide Time: 01:34)
Now, to start with what is organizational effectiveness or OE, as it will be called OE? On the
average each Toyota employee produces 57.7 vehicles in a year. In contrast, Ford gets only
16.1 vehicles from each employee.
So, you can see the difference between the outputs of these two. Similarly, Toyota spends
only dollar 630 on labor for each vehicles whereas, Ford spends dollar 2379. So, that is about
4 times, yet Ford earns dollar 555 per vehicle to only dollar 466 for Toyota. So, which
company Ford or Toyota would you consider more effective and why?
(Refer Slide Time: 02:39)
So, during the year 1987, Monsanto, that is an agro chemical company sales rose 11 percent
over 1986. In contrast, during the same period Rohm and Haas that is again another chemical
manufacturing company, its sales rose only 7 percent, yet Rohm and Haas profit increased 41
percent compared to only 1 percent for Monsanto which is more effective.
(Refer Slide Time: 03:11)
Wamer-Lambert that is another pharmaceutical company, its profit declined in 1987, but its
return on investments return on invested capital that year was a huge 30.5 percent far more
impressive than Monsanto’s 11.2 percent or Rohm and Haas 17.8 percent.
(Refer Slide Time: 03:41)
Now, which of these three is more effective? How do you determine if a college is doing a
good job? If all its student get jobs upon graduation does that tell us the college is effective?
(Refer Slide Time: 04:01)
So, let us now look at what is organizational effectiveness. So, should we be looking at: 1, the
percentage increase or decrease in freshmen application; freshmen means new. A statistical
report of the number of books checked out from the library by students during the past
academic year, or should we survey asking seniors about what they thought of the college
experience, or should we look at the number of publications by the faculty members, awards
won by graduates and the average salary of former student 20 years after graduation.
So, what should we look at when we want to know whether a college or a university has been
effective or not?
(Refer Slide Time: 04:56)
Now, these examples are meant to introduce the problem inherent in defining and measuring
organizational effectiveness. As you will see, historically researchers have had considerable
difficulty in trying to agree on what the terms mean.
Yet almost all these same researchers are quick to acknowledge that this term, that is,
organizational effectiveness is the central theme in organization theory. In fact, it is difficult
to conceive of a theory of organizations that does not include the concept of effectiveness.
(Refer Slide Time: 05:35)
So, now what makes an organization effective? Organization theory presents the answer to
the question - proper organization structure. So, what is a proper organization structure? The
way we put people and jobs together and define their roles and relationships is an important
determinant in whether an organization is successful. Some structures work better under
certain conditions than do others because we have seen in earlier modules that structures,
they are dependent on external conditions.
So, importantly managers who understand their structural options and the conditions under
which each one is preferred will have a definite advantage over their less informed
counterparts. So, this is important that managers should understand their structural options
and in the conditions in which they are operating.
(Refer Slide Time: 06:38)
So, if they are able to match these two then obviously, they will have a better organizational
structure and a better organizational effectiveness. So, organization theory as a discipline
clarifies which organizational structure will lead to or improve organization effectiveness.
So, your organization structure that will improve or that will determine the organizational
effectiveness and you see that there are some broad factors that affect your organizational
structure and there are some geographic factors that affect your organizational structure.
So, this geography factor will also include culture among other things. So, we have talked
about in detail about the factors that affect organizational structure in one of the earlier
(Refer Slide Time: 07:30)
So, let us continue with this. We are trying to understand what makes an organization
effective. Every discipline in the administrative science contributes in some way to helping
managers make organization more effective.
Marketing, for instance, guides managers in expanding revenues and market share. Financial
concepts assist managers in making the optimal use of funds invested in the organization.
(Refer Slide Time: 07:59)
Production and operations management concepts offer guidance in designing efficient
production processes. And accounting principles they assist managers to provide information
that can enhance the quality of the decision made by their managers. So, all these
management disciplines they contribute to the effectiveness of an organization.
(Refer Slide Time: 08:25)
Now, let us define what organizational effectiveness is. The early approach to organizational
effectiveness which probably lasted through the 1950s was innocently simple. Effectiveness
used to be defined as the degree to which an organization realized its goals.
Hidden in this definition, however, were many ambiguities that severely curtailed both
researchers on the subject and practicing managers’ ability to grasp and use the concept. For
example, whose goal are we talking about? Whether we are talking about the short-term goal
or the long-term goals and the organization official goals or actual goals?
So, there can be a dichotomy between all this. So, which goals? Organization goals or
personal goals, short-term goals, long-term goals, declared goals or actual goals. So, that is
the problem with this definition because it is so simple, it is that you the degree to which an
organization realized its goals.
(Refer Slide Time: 09:34)
But, what goals are they talking about is not clear. So, let us take a goal, for example, that
most researchers and practitioners agree is a necessary condition for an organizational
success that is survival; survival through times and climes; climes means different changing
So, if there is anything that an organization seeks to do it is to survive. So, that is the first
basic principle, the first basic objective that the organizations they want to achieve is that
they want to survive. If there is anything that an organization seeks to do it is to survive, but
the use of survival as a criteria presumes the ability to identify the death of an organization.
So, with survival is another related concept that is that of death. So, what is the death of an
organization? How do we define or how do we identify whether the organization has died or
(Refer Slide Time: 10:59)
So, survival is an alive or dead evaluation. Whether it is alive, so it survived,;if it is dead,
then it is not surviving. Organizations do not die as neatly as human. When a human being
dies we get a certificate that states the precise time of passing and the presumed cause of
death. But, no such equivalent exists for organization that this organization has died on that
particular day that particular time and because of this and this reason. So, most organizations
do not die, they are remade.
So, organizations, they merge, reorganize, sell off major parts or move into totally new areas
of endeavor. So, there is no such thing as the death of an organization.
(Refer Slide Time: 12:04)
For example, American Motors, that is an automobile manufacturer in USA no longer exists,
but its manufacturing plants, employees and car designations like Jeep, Eagle they continue
on as part of Chrysler, one of the Big Three automobile manufacturer in the United States.
So, although American Motor the name that does not exist, but then the various products of
that organization they continue, the people they continue, their plants continue.
International Harvester, which built its reputation in farm equipment has changed its name to
Navistar International and sold its farm machinery business. So, this international harvester
changed its name to Navistar International and then they also sold the farm machinery
business. Navistar is now the truck-manufacturing business. So, now you see that how
organizations are remade.
(Refer Slide Time: 12:58)
In the real world, many organizations disappear from the scene or are reformed into another
entity making it difficult to make a survival judgment. So, whether they survive or not so,
that is a difficult question to answer.
So, it would be naive to assume that there are not organizations that survive that are still
ineffective or that are effective, but purposely not allowed to survive.
(Refer Slide Time: 13:25)
For some organizations and favorite targets include government agencies and large
corporations’ death practically never occurs. So, some large organizations, the government
organizations, large companies, they never die. They seem to have a life beyond any
evaluation as to whether they are doing a good job or not.
A week really goes by when some management team does not conclude that their firm is
most effective when it is liquidated, dissolved or absorbed by some other company, that is
effectiveness is improved by going out of the business. So, now you see this is another major
issue of organizational effectiveness; it improves by going out of business.
(Refer Slide Time: 14:24)
Hence, it is understandable now that even a goal that almost everyone agrees in is important,
that is survival – bogs down under some careful scrutiny. So, survival is also not the key
thing. It is also not the key of organizational effectiveness. Sometimes it is the other way that
the organizations they go out of business and they are still considered to be more effective.
(Refer Slide Time: 15:06)
So, 1960s and early 70s saw a proliferation of organizational effectiveness studies. A review
of these studies identified 30 different criteria all purporting to measure organizational
(Refer Slide Time: 15:14)
And, these are those areas. So, these are the criteria for measuring organizational
effectiveness. The 1st is overall effectiveness, the 2nd is productivity, the 3rd is efficiency,
the 4th is profit, 5th is quality, 6th is accidents.
(Refer Slide Time: 15:37)
The 7th is growth, 8th is absenteeism, 9th is turnover, 10th is job satisfaction, 11th is
motivation, 12th is morale.
(Refer Slide Time: 16:05)
13th is control, 14th is conflict or cohesion, the 15th is flexibility or adaptation, 16th is
planning and goal setting, 17th is goal consensus, the 18th is internalization of organization
(Refer Slide Time: 16:11)
The 19th criteria is role and norm congruence, the 2th criteria is managerial interpersonal
skills, 21st is managerial task skills, 22nd is information management and communication,
23rd is readiness, 24th is utilization of environment.
(Refer Slide Time: 16:34)
25th is evaluation by external entities, 26th is stability, 27th is value of human resources, 28
is participation and shared influence, 29th is training and development emphasis and 30th is
(Refer Slide Time: 16:53)
Now, few studies used multiple criteria and that the criteria themselves ranged from general
measures such as quality and morale to more specific factors such as accident rates and
absenteeism certainly leads to the conclusion that: organizational effectiveness means
different things to different people.
Now, keep in mind that different people may have a different meaning of organizational
effectiveness because you see that we have these 30 criteria for measuring organizational
effectiveness. So, one researcher can use 5 of these 30 and say the organization was not
effective; another one can choose another 5 measures and can say that the organization was
effective or the organization is effective.
(Refer Slide Time: 17:47)
So, some of the items are even contradictory in those 30 measures. Efficiency, for instance, is
achieved by using resources to their maximum. It is categorized by an absence of slack.
Flexibility or adaptation can be achieved only by having a surplus; that is, by the availability
So, now you see that efficiency is opposite of flexibility. Now, how to make these two ends
meet? So, if absence of slack is a measure of effectiveness, how can a surplus of slack also be
a measure of effectiveness? So, that is the big question.
(Refer Slide Time: 18:39)
No doubt part of the length of criteria for measuring organizational effectiveness is due to the
diversity of organizations being evaluated. So, there are so many different organizations that
are being evaluated. So, that becomes a difficult thing.
Additionally, it also reflects the different interests of the evaluators; because we are talking of
different organizations, different types of organizations and different interest of the evaluators
that is why this becomes a problem.
So, when we consider more specifically how values affect organization effectiveness, the
criteria chosen to define organizational effectiveness may tell more about the person doing
the evaluation, than about the organization being evaluated. So, now the problem is the
criteria will tell you about the person who is doing this study rather than the organization
(Refer Slide Time: 19:56)
But, all 30 criteria cannot be evaluated to every organization, and certainly some must be
more important than others. So, some out of those 30 may be more important for some type
of organization, some kind of organization and some may be more important for some other
type and other kind of organization.
The researcher who tabulated these 30 criteria concluded that since an organization can be
effective or ineffective on a number of different facets they may be relatively independent of
one another. So, organizational effectiveness has therefore, no operational definition. This
belief that OE defies definition has been widely accepted. From a researcher’s perspective, it
may be true.
(Refer Slide Time: 20:53)
On the other hand, a close look at the recent OE literature does see movement towards an
agreement; agreement on the definition. Even more important from a practical standpoint, all
of us have and use some operational definition of OE on a regular basis. So, there is a
consensus on this operational definition of OE.
This is so in spite of a supposed problem by researchers to define it still because the
researchers are not able to define it, but there is some kind of consensus some agreement on
the operational definition of OE.
(Refer Slide Time: 21:44)
Recent literature indicates that scholars may have been focusing for so long on differences
rather than the commonalities that they have overlooked. So, the key to defining
organizational effectiveness lies in commonalities and not on the differences.
There is almost a unanimous agreement today that OE requires multiple criteria that different
organization functions have been evaluated using different characteristics and the OE must
consider both means processes and the ends outcomes. So, now they have agreed that OE has
two dimensions; one is the processes carried out in the organization and the outcome.
(Refer Slide Time: 22:40)
If the search was to find a single and universal criterion of OE, then disappointment is
understandable. But because organizations do many things and their success depends on
adequate performance in a number of areas.
The definition of OE must reflect the complexity because organization is a complex entity
therefore, any definition of organizational effectiveness will have this kind of complexity. It
is occasionally lost on researchers that regardless of whether they can define and level of
phenomenon that phenomenon is still real and continues to function.
(Refer Slide Time: 23:33)
Gravitation existed for a long time before Newton discovered it. While researchers may
debate about whether or not OE can be defined, the fact is that all of us have a working
definition of this term OE.
We all make OE judgments on a regular basis whenever we buy stocks, choose a college to
study, select a bank in which to open your account, car-repair shop where you take your car
for repairs, decide which organization will get our donations and make others similar
decisions. Every time we are making some kind of judgment on organizational effectiveness.
Managers and administrators, of course, also make regular OE determinations while they
appraise and compare units or allocate budgets to these units. So, managers also keep on
evaluating organizational effectiveness because they have to allocate resources and budgets
to these units and obviously, which are more effective will get more resources and budgets
(Refer Slide Time: 24:50)
Evaluating the effectiveness of an organization is a widely spread and ongoing activity. It is
not that only once in a year the effectiveness will be measured; it is an ongoing activity and is
spread out in the organization. From a managerial perspective alone, judgments of OE are
going to be made with or without agreement on a formal definition of OE.
When managers seeks answers to whether things are going well, what needs to change,
attempt to compare their organizations with others, they are making OE judgments. So,
whenever they have to understand what is going well, what is not, what needs to change,
whether how my organization is doing as compared to others, every time they are making this
(Refer Slide Time: 25:47)
Now, let us look at Tom Peter’s and Robert Waterman’s definition, that is, a bestsellers
definition of organizational effectiveness. One of the most successful management books of
all times is Tom Peter’s and Robert Waterman’s “In Search of Excellence”, published in
1982. The book has sold 5 million copies.
After studying forty-two companies that peter and waterman described as well managed,
highly effective or excellent, these include firms like IBM, DuPont, 3M, McDonald’s, and
Procter and Gamble – they found eight characteristics that these companies had in common.
(Refer Slide Time: 26:36)
According to Tom Peters and Robert Waterman, these characteristics are: 1st, they had a bias
for action and getting things accomplished. 2nd is they stayed close to their customers in
order to fully understand their customers’ need. The 3rd is they allowed employees a high
degree of autonomy and fostered the entrepreneurial spirit and the 4th is they sought to
increase productivity through employee participation.
(Refer Slide Time: 27:15)
Fifth is employees know what the company stands for and their managers were actively
involved in problem at all levels. Sixth is organization stayed close to the businesses they
knew and understood. The seventh is they had organizational structures that were elegantly
simple with a minimal number of people in staff support activities.
They blended tight, centralized controls for protecting the company’s core values and loose
control in other areas to encourage risk-taking and innovation. So, values were tightly
controlled while risk-taking and innovation was loosely controlled. So, they had a tight grip
on their core values.
(Refer Slide Time: 28:06)
So, Peter and Waterman’s research methods and conclusion have received their share of
criticism. Nevertheless, for many practicing managers during the middle and late 1980s, “In
Search of Excellence” became their managerial bible. The eight characteristics became
similar to commandments, the achievement of which defined organizational effectiveness.
(Refer Slide Time: 28:33)
So, in order to conclude this module we started this module by discussion on what is
organizational effectiveness. After that we went on to understand the importance of
organizational effectiveness. Next we discussed the definition of organizational effectiveness.
Next we had listed down the criteria for measuring the organizational effectiveness. Those 30
criteria which are often contradictory to each other and finally, we summarize that discussion
by Tom Peter’s and Robert Waterman’s definition and characteristics of organizational
(Refer Slide Time: 29:12)
And, these are the four books from which the material for this module was taken.
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