The Role of Strategic Direction in Organization Design
The choice of goals and strategy influence how an organization should be designed.
An organization goal is a desired state of affairs that the organization attempts to reach. A goal represents a result or end point toward which organizational efforts are directed.
Top executives decide the end purpose the organization will strive for and determine the direction it will take to accomplish it. It is this purpose and direction that shapes how the organization is designed and managed.
Indeed, the primary responsibility of top management is to determine an organization’s goals, strategy, and design, thereby adapting the organization to a changing environment.Management insight
Middle managers do much the same thing for major departments within the guidelines provided by top management. Figure X-2.1 illustrates the relationships through which top managers provide direction and then design.
The direction-setting process, which is discussed in more detail in a designated post hereOpens in new window, typically begins with an assessment of the opportunities and threats in the external environment, including the amount of change, uncertainty, and resource availability.
Top managers also assess internal strengths and weaknesses to define the company’s distinctive competence compared with other firms in the industry.
SWOT analysis (in which “SWOT” stands for “strengths, weaknesses, opportunities, and threats”) includes a careful assessment of the strengths, weaknesses, opportunities, and threats that affect organizational performance.
This competitive analysis of the internal and external environment is one of the central concepts in strategic management.
Leaders obtain information about external opportunities and threats from a variety of sources, including customers, government reports, professional journals, suppliers, bankers, friends in other organizations, consultants, and association meetings.
Information about internal strengths and weaknesses comes from company budgets, financial ratios, profit and loss statements, and surveys of employee attitudes and satisfaction, among other reports.
Executives at The Kroger CompanyOpens in new window, like those at other grocery retailers, have been dealing with strong and swift changes in the industry in recent years.
A brief SWOT analysis can give leaders a guide for how to position the company as it adapts to these changes.
A second approach leaders use in setting direction is a forecasting technique known as scenario planning.
Scenario planning involves looking at current trends and discontinuities and visualizing future possibilities.
Rather than looking only at history and thinking about what has been, managers think about what could be. The events that cause the most damage to companies are those that no one even conceived of.
Managers can’t predict the future, but they strengthen their ability to cope with uncertainty by rehearsing a framework within which future events can be managed.
Organizations can be disrupted by any number of events. A survey by the Chartered Management InstituteOpens in new window and the Business Continuity InstituteOpens in new window found that some of the top events for which managers might need scenario plans include:
- extreme weather,
- loss of IT systems,
- loss of key employees,
- loss of access to offices or plants,
- failure of communications systems, and
Scenarios are like stories that offer alternative vivid pictures of what the future will be like and how managers will respond.
Typically, two or five scenarios are developed for each set of factors, ranging from the most optimistic to the most pessimistic view.
Royal Dutch ShellOpens in new window has long used scenario planning and has been preparing for a word in which oil prices continue to decrease. Scenario planning has helped steer Shell’s strategy of moving toward producing fuel for electricity, such as natural gas and renewable sources, and focusing on keeping its costs low.
After direction-setting, the next step, as shown in Figure X-2.1, is to define and articulate the organization’s strategic intent, which includes defining an overall mission and official goals based on the correct fit between external opportunities and internal strengths. Leaders then formulate specific operational goals and strategies that define how the organization is to accomplish its overall mission.
In Figure X2.1, organization designOpens in new window reflects the way goals and strategies are implemented so that the organization’s attention and resources are consistently focused toward achieving the mission and goals.
Organization designOpens in new window is the administration and execution of the strategic plan.
Managers make decisions about structural form, including whether the organization will be designed primarily for learning and innovation (an organic approach) or to achieve efficiency (a mechanistic approach), as discussed hereOpens in new window.
Other choices are made about information and control systems, the type of production technology, human resource policies, culure, and linkages to other organizations.
Note also the arrow in Figure X-2.1 running from organization design back to strategic intent. This means that strategies are often made within the current structure of the organization so that current design constrains, or puts limits on, goals and strategy.
More often than not, however, the new goals and strategy are selected based on environmental needs and then top managers attempt to redesign the organization to achieve those ends.
Finally, Figure X-2.1 illustrates how managers evaluate the effectiveness of organizational efforts—that is, the extent to which the organization realizes its goals. This chart reflects the most popular ways of measuring performance.
It is important to note here that performance measurements feed back into the internal environment so that past performance of the organization is assessed by top managers in setting new goals and strategic direction for the future.
Procter & Gamble (P& G)Opens in new window provides an example of how these ideas translate into organization practice. Former CEO A. G. Lafley wanted to provide a framework for organizing the discussion about goals and strategic direction so he used the OGSM (Objectives, Goals, Strategies, and Measures) tool illustrated in Figure X-2.2.
Note that a broad objective such as “Be the operating TSR (total shareholder return) leader in North American tissue/towel and value creator for P&G” is translated into more specific goals and strategies, such as “Grow Bounty and Charmin margin.”
In addition, the chart lists measures that managers will use to determine the success of their efforts. This is the essence of strategic management: setting goals, defining strategies for achieving the goals, and measuring the effectiveness of efforts.
The role of top management is important because managers can interpret the environment differently and develop different goals and strategies.
Several years ago, in the midst of a U.S. sales slump, top executives at WalmartOpens in new window tried a new direction.
- Instead of sticking with goals of strict operational efficiency and everyday low prices, they decided to court upscale customers with remodeled, less cluttered stores, organic foods, and trendy merchandise.
- Instead of offering everyday low prices, the retailer raised prices on many items and promoted price cuts on select merchandise.
WalmartOpens in new window succeeded in meeting its goal of attracting more upscale clientele, but many of its core customers decided they’d start shopping at other discount and dollar store chains. Walmart’s sales took a sharp downturn. “I think we tried to stretch the brand a little too far,” said William Simon, head of the U.S. division.
The choices top managers make about goals, strategies, and organization designOpens in new window have a tremendous impact on organizational effectivenessOpens in new window. Remember that goals and strategies are not fixed or taken for granted.
Top managers and middle managers must select goals for their respective units, and the ability to make good choices largely determines a firm’s success. Organization design is used to implement goals and strategy and also determines organization success.
- Research data for this work have been adapted from the manual:
- Managerial Accounting: Tools for Business Decision Making By Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso