Diagnosing Organizations:Outputs, Alignment, Analysis

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Organization Development MGMT 628

Lesson 17

Diagnosing Organizations

Fig 23: Comprehensive Model for Diagnosing Organizational Systems

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

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"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

Organization Development MGMT 628

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.

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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, 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, high-

performance 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 low-

cost 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

Organization Development MGMT 628

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 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

Organization Development MGMT 628

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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