Organizational Effectiveness

Approaches to Measuring Organizational Effectiveness

Understanding organizational goals and strategies is the first step towards understanding organizational effectiveness. Organizational goals represent the reason for an organization’s existence and the outcomes it seeks to achieve.

Organizational effectiveness is the degree to which an organization realizes its goals (desired future state of the organization).

Effectiveness is a broad concept. It takes into consideration a range of variables at both the organizational and departmental levels. Effectiveness evaluates the extent to which multiple goals are attained.

Efficiency is a more limited concept that pertains to the internal working of the organization. It can be measured as the ratio of inputs to outputs.

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.

It must be noted here that efficiency and effectiveness are not related. An organization may be highly efficient but fail to achieve its goals because it makes a product for which there is no demand. Likewise, an organization may achieve its profit goals but be inefficient. However, we must understand that efficiency sometime leads to effectiveness.

As 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 organizational performance.

To evaluate effectiveness, managers usually take one of the three approaches which are:

  1. External resource approach
  2. Internal systems approach
  3. Technical approach

The Table 1.1 explains the three approaches to measuring organizational effectiveness.

Table 1.1 Approaches to Measuring Organizational Effectiveness
Table 1.1 Approaches to Measuring Organizational Effectiveness Source: Gareth R. Jones, “Organizational Theory, Design and Change – Text and Cases,” (4th edition), Pearson Education (Singapore) Pvt. Ltd., Patparganj Delhi (2005).

External Resource Approach

The external resource (also called the system approach) allows managers to evaluate how effectively an organization manages and controls its external environment. It assumes organizations must be successful in obtaining resource inputs and in maintaining the organizational system to be effective.

Organizations Opens in new window must obtain scarce and valued resources from other organizations. From this view, organizational effectiveness is the ability of the organization (in absolute or relative terms) to exploit its environment in the acquisition of scarce and valued resources. For example, the organization’s ability to influence the stakeholder’s perceptions in its favor and to receive a positive evaluation is important for managers and the organization’s survival.

To measure effectiveness, 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.

In a broad sense, indicators of system resource effectiveness encompass the following dimensions:

  1. Bargaining position — the ability of the organization to exploit its environment in the acquisition of scarce and valued resources.
  2. Ability of the top management to perceive and correctly interpret the real properties of the external environment.
  3. Ability of the organization to respond to changes in the environment.

The system resource approach is valuable when other indicators of performance are difficult to obtain.

Managers know that the organization’s aggressiveness, entrepreneurial nature, and reputation are all criteria by which stakeholders (especially shareholders) judge how well a company’s management is controlling its environment.

Although the system resource approach is valuable when other measures of effectiveness are not available, it does have shortcomings. Often the ability to acquire resources seems less important than the utilization of those resources.

Internal Systems Approach

Under this approach, effectiveness is measured as internal organizational health and efficiency.

Thus, in the internal systems approach, effectiveness is what the organization does with its resources. The approach does not consider the external environment.

According to J Barton Cunningham, indicators of an effective organization as seen from an internal process approach are:

  1. Strong corporate culture and positive work climate.
  2. Team spirit, group loyalty, and teamwork.
  3. Confidence, trust and communication between workers and management.
  4. Decision-making near sources of information, regardless of where those sources are on the organization chart.
  5. Undistorted horizontal and vertical communication; sharing of relevant facts and feelings.
  6. Reward to managers for performance, growth, and development of subordinates and for creating an effective working group.
  7. Interaction between the organization and its parts, with conflict that occurs over projects resolved in the interest of the organization.

The internal process approach is important because the efficient use of resources and harmonious internal functioning are ways to measure effectiveness. However, the internal process approach does have shortcomings.

Total output and the organization’s relationship with the external environment are not evaluated. Like the other approaches to organizational effectiveness, the internal process approach has something to offer, but managers should be aware that efficiency alone represents a limited view of organizational effectiveness.

Technical Approach

Technical effectiveness is measured in terms of productivity and efficiency. Productivity measures are objective measures of the effectiveness of an organization’s production operations.

For most work activities, no matter how complex, there is a way to measure productivity or performance.

The technical approach allows managers to evaluate how efficiently an organization can convert some fixed amount of organizational skills and resources into finished goods and services.

For example, an increase in the units produced without any additional inputs results in increased productivity. In many organization settings, the inducements offered to both employees and managers are closely linked to productivity measures based on the technical approach.