Assessment of Organizational Effectiveness

Key people in charge of the organization, such as top executives or board members, have to make a conscious decision about how they will determine the organization’s effectiveness. Just as people determine goals, they also determine when the organization is successful.

Four Approaches to Measuring Organizational Effectiveness

Organizational effectiveness is a social construct, meaning that it is created and defined by an individual or group rather than existing independently in the external world.

Effectiveness is always multidimensional, and thus assessments of effectiveness are typically multidimensional as well.

Managers in business typically use profits and stock performance as indicators of effectiveness, but they also give credence to other measures, such as employee satisfaction, customer loyalty, corporate citizenship, innovativeness, or industry reputation.

As open systems, organizationsOpens in new window bring in resources from the environment, and those resources are transformed into outputs delivered back into the environment, as shown in Figure X-1.

Figure X-1 Four Approaches to Measuring Organizational Effectiveness | Credit — Slide Player Opens in new window

In addition, organizationsOpens in new window interact with a number of stakeholder groups inside and outside the organization.

Four key approaches to measuring effectiveness look at different parts of the organization and measure indicators connected with outputs, inputs, internal activities, or key stakeholders, also called strategic constituents. These four possible approaches to measuring effectives are:

1. The Goal Approach
2. The Resource-Based Approach
3. The Internal Process Approach
4. The Strategic Constituents Approach

Managers often use indicators from more than one of the four approaches (goal, resource, internal process, strategic constituents) when measuring effectiveness.

Figure X-2 Indicators of Organizational Effectiveness Reported by Multinational Organizations | Credit — Slide Player Opens in new window

Figure X-2 lists a sample of 15 indicators that managers of large, multinational organizations reportedly used to assess effectiveness. As you read the descriptions of the four approaches to measuring effectiveness in the following sections, try to decide which approach each of these 15 indicators falls under.

As the items in Figure X-2 reveal, indicators of effectiveness are both quantitative and qualitative, tangible and intangible. An indicator such as achieving sales targets or percentage of market share is easy to measure, but indicators such as employee engagement, quality, or customer satisfaction are less clear-cut and often must be measured qualitatively.

Relying solely on quantitative measurements can give managers a limited or distorted view of effectiveness. Albert Einstein is reported to have kept a sign in his office that read, “Not everything that counts can be counted, and not everything that can be counted counts.”

1.     The Goal Approach

This is a logical approach because organizations do try to attain certain levels of output, profit, or client satisfaction. For example, one major goal for UberOpens in new window was to regain its license to operate in London, one of the company’s most profitable markets outside the United States. Under the direction of a new CEO, Dara Khosrowshahi, Uber is toning down its “grow-at-any-cost” culture, and the company’s goals now include proving to government officials that Uber can comply with local rules and regulations.

UberOpens in new window won its appeal to have the London license renewed after managers agreed to stricter government oversight, including new systems for reporting problems to regulators. The goal approach measures progress toward the attainment of those goals.

Indicators

The important goals to consider are operating goals, because official goals (mission) tend to be abstract and difficult to measure.

Indicators tracked with the goal approach include:

• Profitability — the positive gain from business operations or investments after expenses are subtracted
• Market share — the proportion of the market the firm is able to capture relative to competitors
• Growth — the ability of the organization to increase its sales, profits, or client base over time
• Social responsibility — how well the organization serves the interests of society as well as itself
• Product quality — the ability of the organization to achieve high quality in its products or services

Usefulness

The goal approach is used in business organizations because output goals can be readily measured. Some nonprofit organizations that aim to solve social problems also find the goal approach useful.

For example, Every Child SucceedsOpens in new window is a public-private partnership funded primarily by United WayOpens in new window that aims to reduce infant mortality and improve maternal health in the area surrounding Cincinnati, Ohio.

In the seven Ohio and Kentucky counties around the city, 8.3 out of every 1,000 newborns die before they reach their first birthday, on par with countries such as Lithuania and Brunei. Yet among the mothers enrolled in Every Child Succeeds, that statistic is only 2.8 percent, lower than in virtually every industrialized country.

Using a rigorous model of performance measurement based on some of the management practices at P&G, social workers and nurses visit at-risk mothers in their homes and help them stop smoking, control their diabetes or high blood pressure, and improve their health in other ways. Unlike many social improvement programs, Every Child Succeeds sets and measures a few narrow and specific goals organized under seven focus areas.

In business as well as in nonprofit organizations such as Every Child Succeeds, identifying operating goals and measuring effectiveness are not always easy.

Two problems that must be resolved are the issues of multiple goals and subjective indicators of goal attainment. Since organizations have multiple and sometimes conflicting goals, effectiveness cannot be assessed by a single indicator.

High achievement on one goal might mean low achievement on another. Moreover, there are department goals as well as overall organizational goals. The full assessment of effectiveness should take into consideration several goals simultaneously.

The other issue to resolve with the goal approach is how to identify operating goals for an organization and how to measure goal attainment. For business organizations, there are often objective indicators for certain goals, such as profit or growth.

Every Child SucceedsOpens in new window can also use objective indicators for some goals, such as tracking how many infants are immunized or how many clients stop smoking during pregnancy. However, subjective assessment is needed for other goals, such as employee welfare, social responsibility, or client satisfaction.

Top managers and other key people on the management team have to clearly identify which goals the organization will measure. Subjective perceptions of goal attainment must be used when quantitative indicators are not available. Managers rely on information from customers, competitors, suppliers, and employees, as well as their own intuition, when considering these goals.

2.     The Resource-Based Approach

The resource-based approach looks at the input side of the transformation process shown in Figure X-1. It assumes organizations must be successful in obtaining and managing valued resources in order to be effective because strategically valuable resources give an organization a competitive edge.

From a resource-based perspective, organizational effectiveness is defined as the ability of the organization, in either absolute or relative terms, to obtain scarce and valued resources and successfully integrate and manage them.

Indicators

Obtaining and successfully managing resources is the criterion by which organizational effectiveness is assessed. In a broad sense, resource indicators of effectiveness encompass the following dimensions:

• Bargaining position—the ability of the organization to obtain from its environment scarce and valued resources, including tangible resources such as a prime location, financing, raw materials, and quality employees, and intangible assets such as strong brand or superior knowledge.
• The abilities of the organization’s decision makers to perceive and correctly interpret the real properties of the external environment and supply forces.

• The abilities of managers to use tangible (e.g., supplies, people) and intangible (e.g., knowledge, corporate culture) resources and capabilities in day-to-day organizational activities to achieve superior performance.
• The ability of the organization to respond to changes in resource sectors of the environment.

Usefulness

The resource-based approach is valuable when other indicators of performance are difficult to obtain. In many nonprofit and social welfare organizations, for example, it is hard to measure output goals or internal efficiency. The Shriners Hospitals for Children (SHC)Opens in new window system provides an example.

The 22 Shriners Hospitals provide free treatment to thousands of children with orthopedic conditions, burns, spinal cord injuries, and cleft lip and palette conditions. For most of its history, the SHC was highly successful in obtaining donations, the main source of funding for the hospitals’ operations.

Although the resource-based approach is valuable when other measures of effectiveness are not available, it does have shortcomings. For one thing, the approach only vaguely considers the organization’s link to the needs of customers.

A superior ability to acquire and use resources is important only if resources and capabilities are used to achieve something that meets a need in the environment. Critics have challenged that the approach assumes stability in the marketplace and fails to adequately consider the changing value of various resources as the competitive environment and customer needs change.

3.     The Internal Process Approach

In the internal process approach, effectiveness is measured as internal organizational health and efficiency.

This approach does not consider the external environment. The important element in effectiveness is what the organization does with the resources it has, as reflected in internal health and efficiency.

Indicators

One indicator of internal process effectiveness is economic efficiency. However, the best-known proponents of an internal process model are from the human relations approach to organizations.

Such writers as Chris Argyris, Waren G. Bennis, Rensis Likert, and Richard Beckhard have all worked extensively with human resources in organizations and emphasize the connection between human resources and effectiveness.

Results from a study of nearly 200 secondary schools showed that both human resources and employee-oriented processes were important in explaining and promoting effectiveness in those organizations.

Internal process indicators include:

• A strong, adaptive corporate culture and positive work climate
• Confidence and trust between employees and management
• Operational efficiency, such as using minimal resources to achieve outcomes
• Undistorted horizontal and vertical communication
• Growth and development of employees
• Coordination among the organization’s parts, with conflicts resolved in the interest of the larger organization

Usefulness

The internal process approach is important because the efficient use of resources and harmonious internal functioning are good ways to assess organizational effectiveness.

In the wake of the economic recession, companies such as DuPontOpens in new window, Campbell SoupOpens in new window, and UPSOpens in new window are looking for ways to be more efficient, such as using existing technology to accomplish more with less.

At Campbell’s Maxton, North Carolina-based factory, hundreds of small changes and improvements, any suggested by employees, have increased operating efficiency to 85 percent of what managers believe is the maximum possible.

UPS trucks carry devices that track how many left-turns against traffic its drivers have to make. By helping drivers optimize their routes with fewer left turns, the system will save UPS 1.4 million gallons of fuel per year.

Today, most managers believe that committed, actively involved employees and a positive corporate cultureOpens in new window are also important internal measures of effectiveness. The internal process approach also has shortcomings. Total output and the organization’s relationship with the external environment are not evaluated.

Another problem is that evaluations of internal health and functioning are often subjective because many aspects of inputs and internal processes are not quantifiable. Managers should be aware that this approach alone represents a limited view of organizational effectiveness.

Following the merger of Burlington Northern Railroad and the Atchison, Topeka, and Santa Fe Railway, managers at BNSF RailwayOpens in new window are committed to creating an environment that provided overall organizational effectiveness and they combine an internal process approach to measuring effectiveness with other approaches.

As this example illustrates, many organizations use more than one approach to measuring effectiveness because organizations pursue many different types of activities and serve many different interests.

4.     The Strategic Constituents Approach

The strategic constituents approach is related to the stakeholder approach described hereOpens in new window. Organizations have a variety of internal and external stakeholders that may have competing claims on what they want from the organization.

In reality, it is unreasonable to assume that all stakeholders can be equally satisfied.

The satisfaction of these strategic constituents can be assessed as an indicator of the organization’s performance.

Indicators

The initial work on evaluating effectiveness on the basis of strategic constituents looked at 97 small businesses and 7 groups relevant to those organizations. Members of each group were surveyed to determine the perception of effectiveness from each viewpoint. Each constituent group had a different criterion of effectiveness:

If an organization fails to meet the needs of several constituent groups, it is probably not meeting its effectiveness goals.

Although these seven groups reflect constituents that nearly every organization has to satisfy to some degree, each organization might have a different set of strategic constituents. For example, independent software developers are key to the success of companies such as Facebook even though they are not necessarily customers, suppliers, or owners. CEO Mark Zuckerberg works hard to win over developers.

At a developers’ conference, he unveiled a technology that lets websites install a Facebook “Like” button for free. Users can click on it to signal their interest in a piece of content. The user’s approval then shows up on his or her Facebook page with a link back to the site. The technology will drive traffic from Facebook to other websites, and in turn drive traffic back to Facebook.

Usefulness

Research has shown that the assessment of multiple constituents is an accurate reflection of organizational effectiveness, especially with respect to organizational adaptability. Moreover, both profit and nonprofit organizations are about their reputations and attempt to shape perceptions of their performance.

The strategic constituents approach takes a broad view of effectiveness and examines factors in the environment as well as within the organization. It looks at several criteria simultaneously—inputs, internal processes, and outputs—and acknowledges that there is no single measure of effectiveness.

The strategic constituents approach is popular because it is based on the understanding that effectiveness is a complex, multidimensional concept and has no single measure. In the next volume, we look at another popular approach that takes a multidimensional, integrated approach to measuring effectivenessOpens in new window.