Word Count is 1200 words or more. Everything must be in own words. Must have 2 or more References. Also will need to be cited correctly and in APA format. There will be 2 Attachments one is the Assignment and the other one is the Reading.

20181020003937unit_3_assignment_organizational_theory x20181020004254unit_3_reading_organizational_theory

 Word Count is 1200 words or more. Everything must be in own words. Must have 2 or more References. Also will need to be cited correctly and in APA format. There will be 2 Attachments one is the Assignment and the other one is the Reading. 

Select the link to read

Case C – I’m from the Government — and I’m Here to Help You

Case Summary

1.

In a narrative format, discuss the key facts and critical issues presented in the case.

2.

Explain the dilemma for organizations that have particularly serious regulatory issues. How should Jay resolve the differences in requirements from the Federal agency, OSHA, versus the state?

3.

Employing Porter’s Five Forces model, analyze the industry niche of care for the intellectually disabled. What specific conclusions can be drawn from your analysis?

Case Analysis

4.

Jay believes the required vaccinations would cost almost $30,000 a year, primarily due to his staff turnover rate, which is approximately 40%. Are there any suggestions you might have for Jay as to how he could reduce that turnover rate? Does the general environment model’s socio-cultural segment offer any clues?

Key Terms

3
Chapter Outline:
3-1
The Organization’s Industry

3-2
The Organization’s
Macroenvironment

3-3
Managing Environmental
Uncertainty

3-4
Environmental Scanning

3-5
Forecasting the
Environment

3-6
Crisis Management

Summary

Review Questions
Endnotes

Managing the
External Environment

boundary-spanning
buffering
crisis
crisis management
culture
Delphi technique
environmental scanning

gross domestic product (GDP)
imitation
industry life cycle
judgmental forecasting
macroenvironment
multiple scenarios
population ecology

self-reference criterion
time series analysis
uncertainty

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-2

macroenvironment
the general environment
that affects all business
firms in an industry, which
includes political-legal,
economic, social, and
technological forces

industry
a group of competitors
that produces similar
products or services

An organization cannot function effectively unless its managers understand the
forces outside of the organization that influence its performance and survival. There
are two components of the organization’s external environment: the industry—the
collection of competitors that offer similar products or services—and the complex
network of political-legal, economic, social, and technological forces known
as the organization’s macroenvironment. This chapter addresses each of these
components.

3-1 The Organization’s Industry
Each business unit operates among a group of companies that produce competing
products or services known as an industry. Although there are usually some
differences among competitors, each industry has “rules of combat” governing
such issues as product quality, pricing, and distribution. This is especially true in
industries that contain a large number of firms offering standardized products and
services. For example, most service stations in the United States generally offer
regular unleaded, mid-grade, and premium unleaded gasoline at prices that do not
differ substantially from those at nearby stations. If a rival attempts to sell different
grades, it may experience difficulty securing reliable sources of supply and may
also confuse consumers by deviating from the standard.

In a perfect world, each organization would operate in one clearly defined industry.
In the real world, however, many organizations compete in multiple industries, and
it may be difficult to clearly identify the industry boundaries. As such, the concept
of primary and secondary industries may be useful in defining an industry. A
primary industry may be conceptualized as a group of close competitors, whereas
a secondary industry includes less direct competition. The distinction between
primary and secondary industry may be based on objective criteria such as price,
similarity of products, or location, but is ultimately a subjective call.

3-1a Porter’s Five Forces Model

Industry factors have been found to play a major role in the performance of many
companies, with the exception of those that are its notable leaders or failures.1
As such, one needs to understand these factors at the outset before delving into
the characteristics of a specific firm. Michael Porter proposed a systematic means
of analyzing an industry’s potential profitability known as Porter’s “five forces”
model. As aforementioned, this model is based on IO economics and suggests that
industry structure is the primary determinant of firm performance. According to
Porter, an industry’s overall profitability depends on five basic competitive forces,
the relative weights of which vary by industry:

1. The intensity of rivalry among incumbent firms: Competition intensifies
when a firm identifies the opportunity to improve its position or senses
competitive pressure from other businesses in its industry, which can result

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-3

in price wars, advertising battles, new product introductions or modifications, and even
increased customer service or warranties.2

2. The threat of new competitors entering the industry: Unless the market is growing
rapidly, new entrants intensify the fight for market share, lowering prices and, ultimately,
industry profitability.

3. The threat of substitute products or services: Firms in one industry may be competing
with firms in other industries that produce substitute products, offerings produced by
firms in another industry that satisfy similar consumer needs but differ in specific
characteristics.

4. The bargaining power of buyers: The buyers of an industry’s outputs can lower that
industry’s profitability by bargaining for higher quality or more services and playing
one firm against another.

5. The bargaining power of suppliers: Suppliers can extract the profitability out of an
industry whose competitors may be unable to recover cost increases by raising prices.

Each of the five forces suggests that potential profits within an industry may be high, moderate,
or low. Analyzing the five forces for an organization’s industry can help managers understand
the potential for superior performance within that industry. It does not guarantee high or low
performance, as there are usually substantial performance differences among organizations
in the same industry. Porter’s five forces model, however, provides a useful framework for
thinking about the effects an industry has on an organization.

There are other valid perspectives on organizations and industries besides Porter’s view. As
Porter suggests, organizations functioning in a given industry generally possess a number of
similarities that are not typically shared by those in other industries. Fast-food restaurants, for
example, tend to be labor-intensive and cost-conscious, with established systems to provide
fast, efficient service to customers. However, new organizations may “buck the trend” from to
time by taking different approached designed to respond to changes in the environment more

Figure 3.1
Porter’s Five Forces Model

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-4

population ecology
a perspective on
organizations that
emphasizes the diversity
among organizations that
perform similar functions
and utilize common
resources

industry life cycle
the stages (introduction,
growth, shakeout,
maturity, and decline)
through which industries
are believed to pass

effectively. Whereas Porter’s five forces model emphasizes similarities among
organizations within an industry, the population ecology perspective emphasizes
organizational diversity and adaptation.3 According to this view, organizations
can be better understood by examining when and how they are formed, why new
organizations might vary from existing ones, and ultimately why some survive
when others fail. Some insight into this view can be obtained by considering the
life cycle through which an industry passes.

3-1b Industry Life Cycle

Like organizations, industries develop and evolve over time. Not only might the
group of competitors within an organization’s industry change constantly, but the
nature and structure of the industry can also change as it matures and its markets
become better defined. An industry’s developmental stage influences the nature
of competition and potential profitability among competitors.4 In theory, each
industry passes through five distinct phases of an industry life cycle.

A young industry that is beginning to form is considered to be in the introduction
stage. Demand for the industry’s outputs is low because product and/or service
awareness is still developing. Most purchasers are first-time buyers, and tend
to be affluent, risk tolerant, and innovative. Technology is a key concern in this
stage because businesses often seek ways to improve production and distribution
efficiencies as they learn more about their markets. Organizations emerging in
this stage often attempt to capitalize on first-mover advantages, similar to the
prospector strategy discussed in a previous chapter.

Normally, after key technological issues are addressed and customer demand begins
to rise, the industry enters the growth stage. Growth continues during this stage but
tends to slow as the market demand approaches saturation. Fewer first-time buyers
remain, and most purchases tend to be “upgrades” or replacements. Some of the
industry’s weaker competitors may not survive. Those that do establish distinctive
competencies that can help distinguish them from their competitors.

Shakeout occurs when industry growth is no longer rapid enough to support the
increasing number of competitors in the industry. As a result, an organization’s
growth is contingent on its resources and competitive positioning instead of a high
growth rate within the industry. Marginal competitors are forced out, and a small
number of industry leaders may emerge.

Maturity is reached when the market demand for the industry’s outputs is
completely saturated. Virtually all purchases are upgrades or replacements, and
industry growth may be low, nonexistent, or even negative. Industry standards for

Figure 3-2

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-5

quality and service have been established, and customer expectations tend to be more consistent than in previous
stages. The U.S. automobile industry is a classic example of a mature industry. Firms in mature industries often
seek new uses for their products or services or pursue new markets, often through global expansion. Because
the field has become crowded and customers have become more sophisticated, many successful organizations
begin to emphasize efficiencies in order to offer greater value.

The decline stage occurs when demand for an industry’s products and services decreases and often begins when
consumers begin to turn to more convenient, safer, or higher quality offerings from organizations in substitute
industries. Some firms may divest their business units in this stage, whereas others may seek to “reinvent
themselves” and pursue a new wave of growth associated with a similar product or service.

The life cycle model is a useful tool for evaluating an industry’s development and the types of organizations
that may be most likely to succeed. The key problem with the model, however, is that identifying an industry’s
precise position is often difficult, and not all industries follow these exact stages or at predictable intervals.5
For example, the U.S. railroad industry did not reach maturity for many decades and extended over a hundred
years before entering decline, whereas the personal computer industry began to show signs of maturity after
only seven years.

3-2 The Organization’s Macroenvironment
The second component within an organization’s external environment is the macroenvironment and consists
of political-legal, economic, social, and technological forces. Ultimately, the effects of these forces create
opportunities and threats for an organization. In general, forces in the macroenvironment affect all competitors
within a given industry, although the nature of the effects can differ among firms. For example, a sharp economic
decline may threaten the livelihood of a luxury automobile manufacturer, while at the same time creating an
opportunity for a carmaker with substantially lower costs.

Most organizations have little, if any influence over the macroenvironment. On occasion, a large, dominant
firm such as Wal-Mart may be able to exert some degree of influence over one or more aspects of the
macroenvironment. For example, the giant retailer’s political action committee contributed about $1 million
to candidates and parties in the United States in both 2003 and 2004, presumably in an effort to influence
regulation that might affect the organization.6 However, most organizations must seek to join with others in

trade and other associations in an attempt to exert
some degree of influence on a particular factor in the
macroenvironment.

Some factors may be placed neatly into one of these
interrelated categories, whereas others may straddle
two or more classes. For example, automobile safety
has political-legal (e.g., legislation requiring that
safety standards be met), social (e.g., consumer
demands for safe vehicles), and technological (e.g.,
innovations that may improve safety) dimensions.
For clarity concerns, however, each category of
macroenvironmental forces is discussed separately.

Figure 3-3

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-6

gross domestic
product
the value of a nation’s
annual total production of
goods and services

3-2a Political-Legal Forces

Political-legal forces include such factors as the outcomes of elections, legislation,
and judicial court decisions, as well as the decisions rendered by various commissions
and agencies at every level of government. Military conflicts are also included in
this arena and can also influence how a number of industries operate, especially
those with tight global ties. In 2003, for example, during the beginning of the war
in Iraq, many American firms modified their promotional strategies, fearing that
their television advertisements might be considered insensitive if aired alongside
breaking coverage of the war. At the same time, others began to plan for meeting
the anticipated future needs in Iraq for such products as cell phones, refrigerators,
and automobiles. In late 2003, American firms began to compete vigorously for
lucrative reconstruction contracts, while others prepared for increased business
activity there in the coming years.7

Industries are often affected by legislation and other political events specific to
their line of business. For example, the Highway Traffic Safety Administration in
the United States constantly tests cars and trucks sold in the U.S. and works with
carmakers to improve safety performance.8 Following the sharp declines in air
travel in the United States in 2001, airlines on the verge of bankruptcy campaigned
for and received $15 billion in government support in 2002 and an additional $2.9
billion in 2003.9 All societies have laws and regulations that restrict or control
business operations. Relatively speaking, free market oriented nations such as the
United States have fewer restrictions, but the level of regulation can be extensive
in some areas. Many socialist nations have rigid guidelines for hiring and firing
employees or establishing operations, and some require that a portion of what is
produced in that country be exported to earn foreign exchange. These regulations
are specific to each nation and create opportunities or pose threats to firms interested
in operating across national boundaries.

3-2b Economic Forces

Every organization is affected by changes in the local, national, and/or global
economies. The first economic consideration is that of the gross domestic product
(GDP), the value of a nation’s annual total production of goods and services. GDP
growth among nations is often interrelated, but all nations do not experience the
same rate of growth. For example, while GDP levels in the West were stagnant
during the late 1990s and early 2000s, China’s GDP grew at a staggering pace.10

Consistent GDP growth generally produces a healthy economy fueled by
increases in consumer spending, whereas a decline signals lower consumer
spending and decreased demand for goods and services. When GDP declines for
two consecutive quarters, a nation’s economy is generally considered to be in a
recession. A recession is not detrimental for all organizations. For example, college
and university enrollments often increase as undergraduate and graduate students

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-7

seek to gain an advantage in a tight job market.11 Unfortunately, it is difficult to forecast a recession in advance,
and many recessions are identified only after they have occurred.

High inflation negatively affects most, but not all businesses. High rates raise many of the costs of doing
business, and continued inflation can constrict the expansion plans of businesses and trigger governmental
action, such as is the case when the U.S. Federal Reserve Board raises its discount rate during inflationary
periods to slow economic growth. However, oil companies may benefit during inflationary times if the prices of
oil and gas rise faster than the costs of exploration, refinement, and transportation. Sharp increases in the price
of heating oil sparked a resurgence in the market for coal stoves in the winter of 2000–2001.12

Interest rates affect the demand
for many products and services,
especially “high ticket” items
whose costs are financed over
an extended period of time,
such as homes, automobiles,
and appliances. At the consumer
level, low short-term interest
rates benefit retailers such as
Wal-Mart and J.C. Penney
because they also tend to
lower rates on credit cards,
thereby encouraging consumer
spending. At the organizational
level, high interest rates can
hinder expansion efforts.

Organizations that transact a significant amount of business with entities outside of its borders are especially
vulnerable to changes in rates of exchange between the home and other currencies. When the value of the dollar
increases relative to other currencies, for example, American organizations are at a competitive disadvantage
internationally, as the prices of American-made goods rise in foreign markets. In addition, American
manufacturers tend to locate more of their plants abroad and make purchases from foreign sources. During this
time, American consumers are more likely to purchase products produced abroad, which are less expensive than
goods produced at home.

3-2c Social Forces

Social forces include such factors as societal values, trends, traditions, and religious practices and can
substantially influence organizational performance. Social forces can vary widely among nations, especially
as they are related to other factors. For example, smaller cars have been the vehicle of choice in European
countries since the 1990s. In Europe, roads are more narrow, gasoline is more heavily taxed, and fuel economy
is a greater concern. In the United States, roads are wider, gasoline is less expensive, and fuel consumption does
not play as strong a role in the purchase decision. As a result, American consumers tend to demand relatively
larger vehicles.13 Fashion in China also offers another example, where styles reflect a mix of Asian, American,
and European tastes.14

Recessions can be devastating for firms in many industries, but they are difficult to predict.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-8

Social forces often reflect societal practices that have lasted for decades or even centuries. For example, the
celebration of Christmas in the Western Hemisphere provides significant financial opportunities for card
companies, toy retailers, confectioners, tree growers, and gift shops. Some retailers are happy just to break even
during the year and generate their profits during the Christmas shopping season.

Societal trends also include demographic changes that can affect how organizations must function in order to
succeed. Consider the United States as an example. The baby boom, which lasted from 1945 through the mid-
1960s, initially created opportunities for baby apparel and diaper manufacturers, private schools, and even candy
and snack makers. Later, as this crop of baby boomers departed high school, universities grew at an astounding
rate and organizations had large applicant pools from which to select their employees. More recently, these baby
boomers have begun shopping at home more and are spending heavily on health-care needs, leisure activities,
and vacations.15

Today, the average American is older, busier, better educated, more technologically astute, and less likely to be
a member of the Caucasian race than in previous years. This trend has affected consumer demand in areas such
as personal computers and educational services, and has prompted many organizations emphasizing the broad
middle-age market to modify their strategic approaches to include either younger or older adults. For example,
cosmetics maker Avon, confronted with a shrinking clientele, began to expand its appeal to the trendier 16- to
24-year-old market in 2002.16 J.C. Penney, and Sears even opened stand-alone locations to provide easier access
to customers too busy to plan a day at the mall.17

In many respects, social forces—more than other forces
in the macroenvironment—have the greatest effect
on organizations that produce goods for or provide
services directly to consumers. Consider the American
automobile industry as an example. Sport utility
vehicles (SUVs) were born in the 1990s and by the
end of the decade had become the vehicle of choice for
many suburban families. Auto manufacturers realized,

however, that SUV patrons were willing to give up some of the rugged features associated with the SUV in
exchange for the additional space and softer ride associated with the previously most popular class of vehicles
known as the minivan. Ford responded by introducing a redesigned Explorer with three rows of seats, additional
safety gadgets, and a softer ride.18 By 2003, Ford, General Motors, and Nissan had begun to shift attention away
from large SUVs to the vehicles they often termed “crossovers” or “active lifestyle wagons.”19

Interestingly, however, the popularity of the SUV in the United States has been attacked on the grounds of
another social force, environmental responsibility. Environmentalists charge that SUVs are simply too large and
fuel-inefficient, increasing the nation’s dependence on external sources of oil, a reliance that may compromise
the nation’s ability to broker a lasting peace in the oil-rich Middle East. As a result, SUV manufacturers began
to develop and produce more fuel-efficient hybrid (i.e., gasoline and electric) versions in the mid-2000s.

One of the difficulties associated with social trends, however, is that they are often difficult to identify. In some
cases, two trends may even appear to be at odds with each other. For example, American consumers have
been sending a mixed message of “the celery stick and the double chocolate peanut swirl” for the past decade,
confusing restaurants and packaged food producers alike. Fast food restaurants responded by “supersizing”
their meal combinations with extra fries and larger drinks, while at the same time expanding alternatives for

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-9

items such as grilled chicken sandwiches and salads.20 In 2004, Coca-Cola and PepsiCo began to emphasize
smaller cans and bottles,21 while McDonald’s introduced low-carb menu items.22

During this same time, fast-food consumers began eating less at Burger King, Pizza Hut, and Taco Bell, in
favor of such outlets as Subway and Panera Bread, restaurants many consumers perceived to be more healthy.
Although the traditional competitors responded with more salads and
low-calorie, low-fat alternatives, their “heavy and fried” images have
been difficult to overcome.23 As these U.S. fast-food icons continue to
expand abroad, restaurant chains from other parts of the world, most
notably Latin America, are expanding into the United States.24

The health and fitness trend that emerged in the 1990s facilitated the
growth in a number of fitness equipment manufacturers and sports drink
producers, while hurting organizations in less health-friendly industries
such as tobacco and liquor. In 2002, Anheuser Busch launched Michelob
Ultra, a low-carbohydrate beer, in an attempt to tap the health-conscious
market,25 while PepsiCo announced it would attempt to increase its sales
of healthy snacks, including baked and low-fat offerings, to 50 percent
of its total snack food sales.26

In the early 2000s, concern about obesity in developed nations such as
the United States and the United Kingdom became more prominent.
Critics charge that sedentary lifestyles and unhealthy foods—such as
those produced by many fast-food restaurants—have led to increases
in diabetes, heart disease, and other medical problems associated with
obesity. Some claim that food processors and fast-food restaurants such as McDonald’s have contributed to this
phenomenon by encouraging individuals to consume larger quantities of unhealthy foods.27 Many consumers
began to pursue low-carbohydrate diets to lose weight and improve overall health. As a result, many food
producers and restaurants began catering to consumer interest in “low-carb” regiments as dieter concern shifted
from fat content in foods to carbohydrate content. Unilever, for example, began promoting “low-carb” Skippy
peanut butter, Wishbone dressing, and Ragu spaghetti sauce.28

Another prominent social trend in the early 2000s is related to technological advances associated with the
Internet. During this time, many traditional retailers began to experience sales declines as more consumers
shopped online. As a result, retailers began searching for new ways to attract prospective buyers to their stores,
discovering that many consumers were less likely to frequent a traditional retailer unless it also provided some
form of entertainment value. Bass Pro Shops, for example, increased its store traffic substantially by including
such amenities as a large fish tank, live bats, and even a rock-climbing wall. Mall developers began to include
“activity zones” in their facilities for such attractions as skating and fitness centers. This trend of mixing retailing
with entertainment is expected to continue in the coming years.29

The tragic events of September 11, 2001 (“9-11”) also resulted in social changes that affect many organizations.
Concerns over air travel safety have greatly influenced everything from flight routes to airline marketing
strategies. After 9-11, Americans as a whole became more willing to accept inconveniences associated with their
transactions if these inconveniences are associated with safety and security. Studies also suggest that investment
and personal life strategies have become more conservative and reflective as a result of the tragedy.30 Even

Fast food restaurants have found it
difficult to shed their “heavy and fried”
images as the health and fitness trend
enters its second decade.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-10

churches are taking notice, as the 25 percent increase in national
attendance immediately following the events of September 11 had
all but disappeared by the following year.31

General environmental concerns have also affected a number of
organizations. These include the emphasis on socially responsible
manufacturing and waste management practices, as well as concerns
for saving private wetlands from business development.32 Interest in
both consumer recycling and the production of recyclable products
heightened in the 1990s and has continued to remain a key concern
in the 2000s. Many analysts question consumer willingness to pay
the higher prices typically associated with environmentally friendly
products.33

3-2d Technological Forces

Technological forces include scientific improvements and innovations that affect organizations. The rate of
technological change can vary considerably among organizations and can affect operations in various ways.
Many organizations have capitalized on advances in technology such as computers, satellites, and fiber optics
to lower costs and serve their customers more effectively.

Technological change can also decimate existing organizations and even entire industries. Historical examples
of such change include the shifts from vacuum tubes to transistors, from steam locomotives to diesel and
electric engines, from fountain pens to ballpoints, and from typewriters to computers.34

On the consumer side, estimates of global Internet access in 2003 range from 600 to 800 million individuals,
the vast majority of whom reside in the United States, Canada, Europe, or Asia. Most Americans now shop
online, while frequent online shoppers tend to be male, married, and college educated, between 18 and 40 years
of age.35 Online retail spending for 2003 is estimated at $52 billion, with an average annual growth rate through
2007 estimated at 21 percent.36 Indeed, the widespread use of the Internet over the past decade is arguably the
most pervasive technological force affecting business organizations since the dissemination of the personal
computer.

The effects of the Internet are most profound in some industries, such as brokerage
houses, where online companies have demonstrated huge gains in the market,
or the travel industry, where the number of flights, hotels, and travel packages
booked over the past decade has skyrocketed. The Internet has also spawned the
advent of online banking, a much less costly means of managing transactions. As
such, by 2002, a number of major banks and creditors had begun encouraging
customers to pay bills online by offering free software, elimination of fees, and
even sweepstakes entries with each transaction.37 Indeed, the Internet has had a
major effect on virtually every industry in the developed world.

Consider the Internet’s affect on the airline industry as an example. As Internet
usage spread, many consumers began to purchase their airline tickets online instead

“Green” social concerns have created new business
opportunities in many areas; such as recycling,

automobile advances, and renewable energy sources.

It is difficult to overestimate
the effect of andances in tech-
nology on strategic planning

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-11

of utilizing the traditional intermediary, a travel agency. As airlines began investing in this much more
efficient means of ticketing in the 1990s, they started to trim commissions paid to travel agencies for
booking their flights. In 2003, the major U.S.-based large airlines eliminated commissions altogether
for most tickets sold in the United States. Although many travel agencies moved aggressively to
incorporate Internet technology and revamp their businesses, others did not survive. 38

Technology has also prompted changes in customer service. For example, many of the touch-tone
consumer hotlines of the 1990s were replaced in the early 2000s by “virtual agents” that answer calls
and use speech recognition technology to either resolve a question or transfer the customer to a “real
person” for additional assistance. Studies suggest that these systems improve response time by as
much as 40 percent. Whereas some consumers appreciate the increased speed and are enamored by
many agents’ use of accents and even flirtatious personalities, others feel awkward about “talking
to a computer pretending to be a person.” Interestingly, some American companies have addressed
this frustration by utilizing fewer technology-based systems and transferring incoming calls to their
consumer hotlines and technical support centers directly to representatives in countries such as India,
where labor costs are much lower.39

The influence of technology on organizations is discussed in greater detail later in the text.

Career Point
Gleaning Career Insight from the Macroenvironment

What can macroenvironmental forces tell you about career opportunities with a particular organization?
Sometimes a great deal. Consider the automobile and fast food industries as examples.

The automobile industry is heavily regulated by governments for safety and fuel economy. Most
consumers finance vehicle purchases, so sales of new cars typically decline when interest rates are
high and increase when rates are low. Consumer tastes are constantly evolving in areas such as fuel
economy, vehicle size preferences, and the like. Technological change to promote increased fuel
economy via hybrid gas/electric or even hydrogen power is on the horizon.

The fast food industry is not as heavily regulated as the automobile industry, although there are
concerns for cleanliness and safety. The industry is also less susceptible than the automobile industry
to economic conditions. The evolution of consumer tastes is also an issue, although the concerns
are associated with taste, health, and food preparation. Technology has improved the efficiency of
operations in a number of fast food restaurants but does not appear to be the driving force in firm
success or failure.

What do these environmental factors tell us about careers in the auto and fast food industries?
The greater role played by technology in the auto industry suggests that competitors will need a
significant number of highly trained and well-compensated engineers and R&D specialists to keep
pace, whereas fast food outlets will likely concentrate on hiring large numbers of less skilled workers.
The link between auto sales and interest rates suggests that the auto industry is more cyclical and
restructurings might be more common than in fast food restaurants. Of course, changing consumer
tastes suggest that decision-makers in both industries need to remain abreast of changes in consumer
preferences.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-12

uncertainty
a state whereby decision
makers lack current,
sufficient, reliable
information about their
organization and cannot
accurately forecast future
changes

3-3 Managing Environmental Uncertainty
Managers must develop systems to address confusion concerning the availability
of appropriate information about the organization’s environment. Ideally,
top managers are well aware of the variety of external forces that influence an
organization’s activities. Uncertainty occurs when decision-makers lack current,
sufficient, reliable information about their organization and cannot accurately
forecast future changes. In reality, however, decision-makers in any organization
must be able to make decisions when environmental conditions are uncertain.
Some organizations, such soft drink bottlers, are typically marked by lower levels
of uncertainty. Top managers in other organizations, such as biotech and aerospace
firms, tend to encounter higher levels of uncertainty.

Environmental uncertainty as perceived by decision-makers is influenced by
three key characteristics of the organization’s environment. First, the environment
may be classified along a simple-complex continuum. Simple environments have
relatively few external factors that influence the organization and the strength of
these factors tends to be low. Complex environments are marked by numerous
external factors, some of which can have a major influence on the organization. Of
course, many organizations may fall between these two extremes.

Second, the environment may be classified along a stable-unstable dimension.
Stable environments are marked by a slow pace of change in the nature of external
influences. Unstable environments are characterized by rapid change, such as
when competitors constantly modify strategies, consumer tastes change quickly,
or technological forces are developing constantly.

Finally, environmental uncertainty is a function of the quality or richness of
information available to decision-makers.40 This is a key concern in emerging
economies where reliable data on market demand, economic forces, and consumer
preferences may not be readily available. In developed nations, however,
information sources such as business publications, trade associations, and
governmental agencies tend to be more developed.

Considering these three environmental characteristics, uncertainty is lowest in
organizations whose environments are simple and stable, and where the quality
of available information available is high. In contrast, uncertainty is highest in
organizations whose environments are complex and unstable, and where the
quality of information is low.41 At the one extreme, many governmental entities
in developed countries may be the most simple and stable. Although governments
can restructure and budgets may change from year to year, the pace of change is
relatively slow and such entities are usually not influenced as greatly by external
forces as many for-profit organizations. In contrast, organizations whose core is tied
closely to technology tend to experience the greatest complexity and instability.
Following the terrorist attacks of September 11, 2001, airlines could be added to
this category because of increased regulatory pressure and fears of further attacks.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-13

buffering
a process for managing
uncertainty whereby an
organization establishes
departments to absorb
uncertainty from the
environment

imitation
an approach to managing
uncertainty whereby the
organization mimics the
strategy and structure of a
successful key competitor

Organizations in environments marked by low uncertainty are managed differently
than those marked by high uncertainty. When uncertainty is low, for example,
greater formality and established procedures can be implemented to improve
efficiency. When uncertainty is high, however, procedures are difficult to develop
because processes tend to change more frequently. In this situation, decision-
makers are often granted more freedom and flexibility so that the organization can
adapt to its environment as it changes or as better information on the environment
becomes available.

A number of techniques are available for managing uncertainty in the environment.
The first consideration, however, is whether the organization should concentrate
on adapting to its environment or attempting to influence it. The adaptation
perspective suggests than an organization is unable to substantially influence
factors in its external environment. As such, this approach is consistent with
industrial organization as discussed in chapter two.

Alternatively, the influence perspective assumes that an organization can either
influence its environment—a difficult task for all but large firms—or by strategic
choice reduce the level of uncertainty in the environment. Influencing the
environment can take many forms, such as operating only in a highly predictable
niche of the market, forming strategic alliances to expand a customer base, or
forming a joint venture to investigate new technologies without having to go
it alone. For example, a restaurant may select a more expensive location on a
well-traveled highway to reduce uncertainty associated with traffic flow at a less
expensive, more remote site.

Most organizations choose an approach between the two extremes, adapting in
areas where top managers are unable to influence the environment and operating
only in certain domains of the environment when this is possible. Southwest
Airlines, for example, reduces competitive uncertainty by concentrating on small
to medium size airports and reduces global political uncertainty by operating
flights only within the United States. At the same time, however, Southwest adapts
to consumer tastes and economic conditions by keeping tickets affordable and easy
to purchase online or by telephone.

There are other techniques to managing uncertainty that may be taken. One is
buffering, a common approach whereby organizations establish departments to
absorb uncertainty from the environment and thereby buffer its effects.42 Purchasing
departments, for example, perform a buffering role by stockpiling resources for the
organization in case they become scarce.

Another technique is imitation, an approach whereby the organization mimics the
strategy and structure of a successful key competitor. Organizations that imitate
their competitors reduce the risk of making poor strategic decisions. As such, this
can be an attractive approach, especially when an organization is struggling and it
can mimic a highly successful competitor. Imitation can restrict an organization’s

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-14

environmental
scanning
collecting and analyzing
information about relevant
trends in the external
environment

boundary-spanning
the interaction by
members of an
organization with
outsiders in order to obtain
information relevant to the
organization

ability to develop its own distinctive competence, however.

Aside from these techniques, enhancing the quality and quantity of information
available to an organization and the ability to disseminate it to decision-makers is
a key concern. Improving the organization’s ability to predict future environmental
changes and respond to unanticipated crisis events is also important. These issues
are discussed in greater detail in the following sections.

3-4 Environmental Scanning
Keeping abreast of changes in the external environment that affect the organization
presents a key challenge to managers. Environmental scanning refers to collecting
and analyzing information about relevant trends in the external environment.
A systematic environmental scanning process organizes the flow of current
information relevant to organizational decisions while providing decision-makers
with an early warning system for changes in the environment. Because members
of an organization often lack critical knowledge and information, they may scan
the environment by interacting with outsiders, a process known as boundary-
spanning.

Environmental scanning by nature is future-oriented. Unfortunately, however, the
results of environmental analysis are often too general or uncertain for specific
interpretation.43 Hence, the need for effective environmental scanning to produce
relevant information is critical.44

Environmental scanning can be viewed as
a continuous process.45 Top managers must
plan for and identify the type of information
the organization needs to support decision-
making. A system for obtaining this information
is then developed. Information is collected,
analyzed, and disseminated to the appropriate
decision-makers. Their feedback concerning
the usefulness and timeliness of the information
should influence the type of information required
by the organization. This process is summarized
in figure 3-4.

Large organizations may engage in environmental
scanning activities by employing one or more
individuals whose sole responsibility is to obtain,
process, and distribute important environmental
information to its decision-makers. These
individuals constantly review articles in trade journals and other periodicals, and
watch for changes in competitor activities. Alternatively, however, organizations

Figure 3-4
Environmental Scanning Process

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-15

may contract with a research organization that offers environmental scanning services and provides them with
real-time searches of published material associated with their organizations, key competitors, industries. In
contrast, decision-makers at many smaller organizations must rely on trade publications or periodicals such as
the Wall Street Journal to remain abreast of changes that may affect their organizations.

A potential lack of objectivity can be a concern when decision-makers evaluate environmental information
because they selectively perceive their environment through the lens of their own experiences and organization.
Managers with expertise in various functional areas tend to be more interested in and elevate information
pertaining to their functions. For example, marketing managers may see the need for immediate changes in the
marketing strategy to respond to changes in products offered by competitors, whereas operations managers may
argue for the immediate implementation of a new cost-reducing technology.46

Interestingly, environmental scanning often identifies relationships among key industry influences in two or
more forces. For example, heightened consumer concerns for automobile safety—a social force—could foster
legislative action—a political-legal force—to require that automobile manufacturers add side airbags to all
vehicles within a five-year period, an action that may be facilitated by improved manufacturing techniques—a
technological force. Environmental scanners should be less concerned about classifying external activities
as one force or another and more concerned about obtaining timely, accurate information for organizational
decision-makers.

Today, a key problem created by environmental scanning is often one of determining which information available
warrants attention. Consider that it is not uncommon for a major American organization to be referenced in over
a thousand news stories in a given week. Deciding which stories to read can be a daunting task.

For small organizations and for those competing in global markets, however, a greater problem might be the
lack of reliable information on environmental conditions and trends. In China, for example, research house
Euromonitor International reported that 23 billion liters of soft drinks were consumed in 2002, whereas a Coca-
Cola study concluded the level to be 39 billion liters. 47 Discrepancies such as this can create great difficulties
for decision-makers.

Lack of objectivity can be a concern when decision-
makers evaluate environmental information because
they selectively perceive their environment through
the lens of their own experiences and organization.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-16

time series analysis
an empirical forecasting
procedure in which certain
historical trends are used
to predict variables such
as a firm’s sales or market
share

Delphi technique
a forecasting procedure
whereby experts are
independently and
repeatedly questioned
about the probability of
some event’s occurrence
until consensus is reached
regarding the particular
forecasted event

judgmental forecasting
a forecasting procedure
whereby employees,
customers, suppliers, and/
or trade associations serve
as sources of qualitative
information regarding
future trends

multiple scenarios
a forecasting procedure
in which management
formulates several
plausible hypothetical
descriptions of sequences
of future events and trends

3-5 Forecasting the Environment
It is important for decision-makers in an organization not only to understand how
the environment affects an organization today, but also how it may influence the
organization in the future. As such, environmental scanning activities are most
useful when they not only reveal current conditions, but also aid in forecasting
future trends and changes. A number of forecasting techniques can be used, four of
which are discussed briefly here:

Time series analysis attempts to examine the effects of historical trends such as
population growth, technological innovations, or changes in disposable personal
income on key organizational variables such as firm costs, sales, profitability,
and market share. Time series analysis incorporates such factors as seasonal
fluctuations, weather conditions, and holidays to the firm’s performance, and can
often reveal the effect of economic cycles on organizational performance. Time
series analysis is most useful when trends can be quantified (e.g., temperature,
population) and are believed to be developing at a consistent pace.

The Delphi technique is often employed when specialized expertise is required to
forecast the future.48 If the trend to be forecasted lies within a particular field, then
experts in the area can be identified and independently surveyed about the likelihood
and nature of the trend, as well as its prospective effect on the organization. After
the initial results from experts are tabulated, they are redistributed to a panel of
experts for follow-up assessments until a consensus about the trend is reached.

When relationships between variables are complex, difficult to identify, or cannot
be adequately quantified, an organization may utilize judgmental forecasting, the
use of a variety of sources including customers, suppliers, or trade association
to provide qualitative information about future trends. For instance, sales
representatives may be asked to forecast sales growth based on their knowledge
of customers’ expansion plans. Surveys may also be mailed to suppliers or trade
associations to obtain their judgments on specific trends. Data is then compiled into
a composite forecast. Although judgmental forecasting effectively obtains input
from a variety of sources, it is often difficult to draw clear conclusions due to the
qualitative nature of the trend and the variety of sources that might be employed in
the data collection process.

In multiple scenarios, managers formulate several competing descriptions of
future events and trends.49 In doing so, strategic managers are required to identify
the key forces in the environment, determine how they are interrelated, estimate
their influence on future events, and ask “what if…” questions with each scenario.
Decision-makers then develop contingency plans that usually specify trigger points
such as changes in sales or competitor activity that initiate the implementation-
particular aspects of a plan.50

In practice, managers may utilize a combination of methods to predict environmental
changes that will affect their organizations. There is no consensus on the most
effective forecasting method, and most experts agree that each method can be
useful in the appropriate situation.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-17

crisis
any disruption that
physically affects an
organization, its basic
assumptions, or its core
activities

crisis management
the process of planning
for and implementing the
response to a wide range
of negative events that
could severely affect an
organization

3-6 Crisis Management
Forecasting methods are primarily used to project market conditions and
performance levels that are at least somewhat predictable. Unfortunately, however,
any organization can be faced with a crisis, a disruption that physically affects an
organization, its basic assumptions, or its core activities.51 How an organization
addresses a crisis may determine its ultimate survival. Although a crisis can be
initiated by factors internal or external to the organization, there are often multiple
factors involved. Crisis management refers to the process of planning for and
implementing the response to a wide range of negative events that could severely
affect an organization.

3-6a Types of Crises

The terrorist attacks of September 11, 2001, highlighted the need for organizations
to anticipate, prepare for, and respond to crisis events.52 For some organizations,
the attack resulted not only in the tragic loss of a substantial number of employees,
but also a loss of key facilities and data.53 Bioterrorism—the use of biological
agents for terrorist purposes—has become a major concern for top executives.
One recent survey reported that approximately two thirds of executives are not
confident that their organizations would be safe in the event of a biological or
chemical attack, even though 80 percent of the organizations in question have
crisis management plans in place.54

Of course, terrorism is but one crisis that can affect an organization. In addition, a
number of other potential organizational crises should be considered, such as fires
and other natural disasters, economic crises (e.g., extortion, boycotts, bribery),
information crises (e.g., computer system sabotage, copyright infringement,
counterfeiting), and political unrest such as urban riots.55 The effects of crises on
an organization can vary widely around the world and can be especially traumatic
in emerging nations where organizations may be less likely to have the resources
and infrastructure to deal with them.56

In addition to the events of September 2001, a number of large organizations have
faced major crises at some time during the past few decades. In 1984, for example,
gas leaked from a methyl isocyanate tank at a Union Carbide plant in Bhopal,
India, killing approximately 3,800 persons and totally or partially disabling
about 2,700 more. It was later learned that the leak occurred when a disgruntled
employee sought to spoil a batch of the chemical by adding water to the storage
tank. The incident was reported to officials at company headquarters in the United
States after a 12-hour delay, an event which sparked a widespread view that Union
Carbide was negligent and “covering up” details. India’s Supreme Court later
provided a $470 million settlement for victims and their families.57

In 1989, the Exxon Valdez tanker hit a reef in William Sound, Alaska, spilling
approximately 250,000 barrels of oil. Although there was no loss of human life,

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Best Practices

Organizational Theory 3-18

Crisis Management at McDonald’s

It is usually easier to locate examples of ineffective or nonexistent crisis management practices in
organizations than it is to identify examples of successful crisis planning. Fast food giant McDonald’s
has not always been noted for its success in this area, but demonstrated effective crisis management
in 2004.

In April of that year, McDonald’s chief executive Jim Cantalupo died suddenly from a heart attack.
Less than six hours later, McDonald’s board of directors named president and chief operating officer
Charlie Bell as his successor. The board had already intended for Bell to succeed Cantalupo at some
point, but its quick, decisive action quelled many fears about the future of the leading fast-food chain.
Hence, the board not only made a quick decision, but it had already thought about and planned for
succession.

McDonald’s response highlights the importance not only of planning for CEO succession, but also
of preparing for unexpected medical emergencies, especially with regard to top executives. Many
experts suggest that a firm’s board should always be prepared for an unexpected loss of the top two
executives in their firms and that they should not even fly on the same aircraft.

the loss of animal and bird life was extensive, and the negative press was damaging. The company’s
untested crisis management plan said such a spill could be contained in five hours, but it was not
implemented for two days. Exxon eventually spent about $2 billion to clean up the spill and another
$1 billion to settle legal claims associated with the disaster.58

In 2003, The New Delhi Center for Science and Environment published a report asserting that local
samples of Pepsi and Coke products contained pesticide residues at 30 times the acceptable limits in
Europe. India’s Parliament stopped serving the beverages and India nationalist activists in Allahabad
smashed bottles and vandalized the property of a Coke distributor. Daily sales dropped by about one-
third in less than two weeks, further curtailing efforts by the soft drink giants to spawn consumption
of a product in a country where the average resident consumes less than one soft drink per month. The
soft drink giants questioned the methodology and credentials of the group’s laboratory, a response
that did little to palliate the adverse effect of the crisis.59

3-6b The Crisis Management Process

The key to managing crises effectively is to plan in advance. As such, it is helpful to view crisis
management as a three-step process. Before the crisis, organizations should develop a crisis management
team to develop and plan for worst-case scenarios and define standard operating procedures that
should be implemented prior to any crisis event. For example, top managers anticipating labor unrest
at a company facility may hire additional security guards or contract with a private agency to provide
additional security.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-19

Proactive organizations that continually assess their vulnerabilities and threats and develop crisis management
plans tend to be adequately equipped when a crisis occurs. Proper preparation requires research of the literature,
of the industrial sector, and of the company itself. Information is needed to properly prepare for the crisis
events. When managers understand which crisis events are more likely to occur, they can plan for the event
more effectively and foster a business culture that is ready to meet the challenge if and when a crisis occurs.60

During the crisis, an organizational spokesperson should communicate effectively with the public to minimize
the effect of the crisis. For example, after being unprepared when Tylenol capsules laced with cyanide killed
seven people in 1982, Johnson & Johnson prepared more effectively and responded to a 1986 lacing incident
by acknowledging the crisis with the public and instructing all consumers to return products for a refund.61
Presentations to the public should be prompt, honest, professional, and streamlined through a single person or
office.

After the crisis, communication with the public should continue as needed, and the cause of the crisis should be
uncovered. Understanding the cause can help executives minimize the likelihood that the crisis will occur again
and improve preparation for the crisis if it does.62

Summary

Each organization is affected by factors in its external environment, including the collection of
competitors known as the industry. Porter’s five forces model offers a framework for evaluating
the industry’s structure and its influence on the organization.

In addition to the industry, each organization is affected by four sets of forces in its
macroenvironment. Political-legal forces include various forms of legislation and judicial
rulings, such as the decisions of various commissions and agencies at all levels of government.
Economic forces include the effects of factors such as inflation, interest rates, and exchange
rates. Social forces include traditions, values, societal trends, and a society’s expectations
of business. Technological forces include such factors as the Internet, as well as scientific
improvements and innovations that affect firm operations and/or products and services in a
given industry.

Environmental scanning is the process of researching and analyzing macroenvironmental
changes so that managers can take this information into account when making decision.
Understanding the present state of an organization’s environment is only part of the process,
however. It is also important to understand how changes might influence an organization in
the future. A number of forecasting techniques, including time series analysis, the Delphi
technique, judgmental forecasting, and multiple scenarios, can assist in assessing how future
trends may affect firms in a particular industry.

Unfortunately, some environmental events are difficult to predict and can have substantial
effects. Therefore, each organization should form a crisis management team and consider
various crisis scenarios as part of its effort to remain abreast of changes in the environment.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-20

Review Questions & Exercises

1. How might the concept of primary and secondary industries be applied to a fast-food restaurant
such as McDonald’s?

2. In what industry life cycle stage would you classify the airline industry? How might this stage
affect some of the strategic decisions made by a particular airline within the industry?

3. Using your college or university as an example, explain how political-legal, economic,
technological, and social forces have affected its operations over the past decade.

4. What steps should your college or university officials take to prepare the institution for potential
crises?

Glossary

• Boundary-spanning: The interaction by members of an organization with outsiders in order to
obtain information relevant to the organization.

• Buffering: A process for managing uncertainty whereby an organization established departments
to absorb uncertainty from the environment.

• Crisis: Any disruption that physically affects an organization, its basic assumptions, or its core
activities.

• Crisis Management: The process of planning for and implementing the response to a wide range
of negative events that could severely affect an organization.

• Delphi Technique: A forecasting procedure whereby experts are independently and repeatedly
questioned about the probability of some event’s occurrence until consensus is reached regarding
the particular forecasted event.

• Environmental Scanning: Collecting and analyzing information about relevant trends in the
external environment.

• Gross Domestic Product (GDP): The value of a nation’s annual total production of goods and
services.

• Imitation: An approach to managing uncertainty whereby the organization mimics the strategy and
structure of a successful key competitor.

• Industry Life Cycle: The stages (introduction, growth, shakeout, maturity, and decline) through
which industries are believed to pass.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-21

• Judgmental Forecasting: A forecasting procedure whereby employees, customers, suppliers, and/
or trade associations serve as sources of qualitative information regarding future trends.

• Macroenvironment: The general environment that affects all business firms in an industry, which
includes political-legal, economic, social, and technological forces.

• Multiple Scenarios: A forecasting procedure in which management formulates several plausible
hypothetical descriptions of sequences of future events and trends.

• Population Ecology: A perspective on organizations that emphasizes the diversity among
organizations that perform similar functions and utilize common resources.

• Time Series Analysis: An empirical forecasting procedure in which certain historical trends are
used to predict variables such as a firm’s sales or market share.

• Uncertainty: A state whereby decision-makers lack current, sufficient, reliable information about
their organization and cannot accurately forecast future changes.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-22

(Endnotes)
1. G. Hawawini, V. Subramanian, and P. Verdin, “Is Performance Driven by Industry- or Firm-Specific Factors? A New

Look at the Evidence,” Strategic Management Journal 24 (2003): 1–16.

2. J. R. Graham, “Bulletproof Your Business Against Competitor Attacks,” Marketing News, 14 March 1994, pp. 4–5; J.
Hayes, “Casual Dining Contenders Storm ‘Junior’ Markets,” Nations’ Restaurant News, 14 March 1994, pp. 47–52.

3. M. Hannon and J. Freeman, “The Population Ecology of Organizations,” American Journal of Sociology 82 (1977),
929-964.

4. C. W. Hofer, “Toward a Contingency Theory of Business Strategy ,” Academy of Management Journal 18 (1975):
784–810; G. Miles, C. C. Snow, and M. P. Sharfman, “Industry Variety and Performance,” Strategic Management
Journal 14 (1993): 163–177.

5. T. Levitt, “Exploit the Product Life Cycle,” Harvard Business Review 43, no. 6 (1965), 81–94.

6. J. Cummings, “Wal-Mart Opens for Business in a Tough Market,” Wall Street Journal, 24 March 2004, pp. A1,A15.

7. C. Cummins, “Business Mobilizes for Iraq,” Wall Street Journal, 24 March 2003, pp. B1, B3; J.A. Trachtenberg and B.
Steinberg, “Plan B for Marketers,” Wall Street Journal, 20 March 2003, pp. B1, B3; N. King, Jr., “The Race to Rebuild
Iraq,” Wall Street Journal, 11 April 2003, pp. B1,B3.

8. S. Power, “New Rollover Test Could Lead to Safer SUVs,” Wall Street Journal, 8 October 2003, pp. D1,D7.

9. D. Sevastopulo, “US Airlines ‘Are On Life Support’,” Financial Times, 2 October 2003, p. 15.

10. M. Wolf, “Why Europe Was the Past, the US is the Present and a China-Dominated Asia the Future of the Global
Economy,” Financial Times, 22 September 2003, p. 13.

11. 1J.E. Hilsenrath, “America’s Pricing Paradox,” Wall Street Journal, 16 May 2003, pp. B1,B4.

12. R. G. Matthews, “Coal Stoves Are Hot Again,” Wall Street Journal, 30 January 2001, p. B1.

13. J. B. White and D. Gautier-Villars, “Little Cars, Lots of Tricks,” Wall Street Journal, 2 October 2002, pp. B1, B3.

14. G. Kahn and A. Galloni, “Fashion’s China Syndrome,” Wall Street Journal, 16 June 2003, pp. B1,B5.

15. K. J. Marchetti, “Customer Information Should Drive Retail Direct Mail,” Marketing News, 28 February 1994, p. 7.

16. S. Beatty, “Avon Is Set to Call on Teens,” Wall Street Journal, 17 October 2002, pp.B1, B3.

17. K. Stringer, “Abandoning the Mall,” Wall Street Journal, 24 March 2004, pp. B1,B6.

18. J. B. White, G. L. White, and N. Shirouzu, “Drive for Lower Floors, Softer Rides Results in Domestic-Looking
SUVs,” Wall Street Journal Interactive Edition, 4 January 2001.

19. J. Ball, “Detroit Revs Up the Wagon,” Wall Street Journal, 7 January 2003, pp. B1, B3.

20. S. Ellison and B. Steinberg, “To Eat, Or Not to Eat,” Wall Street Journal, 20 June, 2003, pp. B1,B4.

21. B.McKay, “Downsize This!” Wall Street Journal, 27 January, 2004, pp. B1,B5.

22. S. Leung, “McDnoald’s Makeover,” Wall Street Journal, 28 January, 2004, pp. B1,B10.

23. S. Leung, “Fleeing from Fast Food,” Wall Street Journal, 11 November 2002, pp. B1, B3; S. Leung and R. Lieber,
“The New Menu Option at McDonald’s: Plastic,” Wall Street Journal, 26 November 2002, pp. D1, D2.

24. T. Bouza and G. Sama, “America Adds Salsa to Its Burgers and Fries,” Wall Street Journal, 2 January 2003, pp. A1,
A12.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-23

25. C. Lawton, “Anheuser Tries Low-Carb Beer to Tap Diet Buzz,” Wall Street Journal, 13 September 2002, pp. B1,B2.

26. B. McKay, “Pepsico Challenges Itself to Concoct Healthier Snacks,” Wall Street Journal, 23 September 2002, pp. A1,
A10.

27. N. Buckley, “Have Fat, Will Sue,” Financial Times, 13-14 December 2003, pp. W1-W2.

28. S. Ellison and D. Ball, “Now Low-Carb: Unilever’s Skippy, Wishbone, Ragu,” Wall Street Journal, 14 January 2004,
pp. B1-B2.

29. D. Starkman, “Retail Riddle: Is Shopping Entertainment?” Wall Street Journal, 22 January 2003, pp. B1, B6.

30. “How September 11 Changed America,” Wall Street Journal, 8 March 2002, p. B1.

31. K. McLaughlin, “The Religion Bubble: Churches Try to Recapture Their 9/11 Crowds,” Wall Street Journal, 11
September 2002, pp. D1, D6.

32. J. Carlton, “Saving Private Wetlands,” Wall Street Journal, 13 November 2002, pp. B1,B6.

33. G. A. Fowler, “‘Green” Sales Pitch Isn’t Helping to Move Products off the Shelf, “ Wall Street Jounal, 6 March 2002,
p. B1.

34. P. Wright, M. Kroll, and J. A. Parnell, Strategic Management: Concepts (Upper Saddle River, NJ: Prentice Hall, 1998).

35. Scarborough Research, “Almost Half of Internet Users Are Buying Products or Services Online,” 28 November 2000,
http://www.scarborough.com/scarb2000/press/pr_cyber_announce.htm.

36. CyberAtlas.com, “Young Americans Take Their Spending Online,” 19 September 2000, http:/cyberatlas.internet.com/
big_picture/demographics/article/0,,5901_463961,00.html; Nua Internet Surveys, “Online Retail Spending to Soar in
the U.S.” 15 January 2003, Web Metro News & Internet Statistics, www.webmetro.com.

37. M. Higgins, “Honest, the Check Is in the E-Mail,” Wall Street Journal, 4 September 2002, pp. D1, D4.

38. N. Harris and S. Carey, “Delta Ends Commissions for Most Travel Agents,” Wall Street Journal Interactive Edition, 15
March 2002; J. Costello, “Travel Agents Blast Decision to Cut Commissions in U.S.” Wall Street Journal Interactive
Edition, 25 March 2002.

39. J. Spencer, “Virtual Phone Reps Replace the Old Touch-Tone Menus; Making Claire Less Irritating,” Wall Street
Journal, 21 January 2002, pp. D1, D4.

40. W.H. Starbuck, “Organizations and Their Environments,” in M.D. Dunnette, ed., Handbook of Industrial Psychology
(Chicago; Rand McNally, 1976), pp. 1069-1123.

41. R.B. Duncan, “Characteristics of Perceived Environments and Perceived Environmental Uncertainty,” Administrative
Science Quarterly 17 (1972): 313-327.

42. J.D. Thompson, Organizations in Action (New York: McGraw-Hill).

43. K. Kumar, R. Subramanian, and K. Strandholm, “Competitive Strategy, Environmental Scanning, and Performance:
A Context Specific Analysis of Their Relationship.” International Journal of Commerce & Management 11 (2001):
1–33.

44. J. R. Groom and F. David, “Competitive Intelligence Activity Among Small Firms,” SAM Advanced Management
Journal, 66, no. 1 (2001): 12–29.

45. J. Herring, “The future of competitive intelligence: Driven by knowledge-based competition,” Competitive Intelligence
Magazine 6, no. 2 (2003): 5.

46. D. F. Jennings and J. R. Lumpkin, “Insights Between Environmental Scanning Activities and Porter’s Generic
Strategies: An Empirical Analysis,” Journal of Management 18 (1992): 791–803.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 3-24

47. G. Kahn, “Chinese puzzle: Spotty consumer data,” Wall Street Journal, 15 October 2003, pp. B1, B10.

48. G. Rowe and G. Wright, “The Delphi Technique as a Forecasting Tool: Issues and Analysis.” International Journal of
Forecasting. 15 (1999): 353–375; P. Ayton, W. R. Ferrell, and T. Stewart, “Commentaries on ‘The Delphi Technique
as a Forecasting Tool: Issues and Analysis’ by Rowe and Wright.” International Journal of Forecasting, 15 (1999):
377–381.

49. L. Fahey and V. K. Narayanan, Macroenvironmental Analysis for Strategic Management (St. Paul, MN: West, 1986),
p. 215.

50. C. D. Pringle, D. F. Jennings, and J. G. Longenecker, Managing Organizations: Functions and Behaviors (Columbus,
OH: Merrill, 1988), p. 114.

51. J. Burnett, Managing Business Crises: From Anticipation to Implementation (Westport, CT: Quorum, 2002).

52. D. N. Greenberg, J. A. Clair, and T. L. Maclean, “Teaching Through Traumatic Events: Uncovering the Choices of
Management Educators as They Respond to September 11th,” Academy of Management Learning & Education Journal 1, no. 1 (2002): 38–54.

53. J. W. Greenberg, “September 11, 2001: A CEO’s Story,” Harvard Business Review 80, no. 10 (2002): 58–64; P. ‘t Hart,
L. Heyse, and A. Boin, “New Trends in Crisis Management Practice and Crisis Management Research: Setting the
Agenda,” Journal of Contingencies & Crisis Management 9, no. 4 (2001): 181–188.

54. Business Wire, “BioTerrorism Response Plans Doubted; Organizations Feel Vulnerable Despite Contingency Planning,
According to Survey at International Biosecurity Summit,” 26 November 2002.

55. A. H. Miller, “The Los Angeles Riots: A Study in Crisis Paralysis,” Journal of Contingencies and Crisis Management
9, no. 4 (2001): 189–199; C. Pearson and I. Mitroff, “From Crisis Prone to Crisis Prepared: A Framework for Crisis
Management,” Academy of Management Executive, 7, no. 1 (1993): 48–59.

56. J. A. Parnell, W. R. Crandall, and M. L. Menefee, “Management Perceptions of Organizational Crises: A Cross-
Cultural Study of Egyptian Managers,” Journal of the Academy of Strategic and Organizational Leadership 1, no. 1
(1997): 8–19.

57. Bhopal.com Information Center (accessed 26 November 2002), www.bhopal.com

58. 58 A. Tanneson and L. Weisth, “FT Report: Mastering Leadership,” Financial Times, 22 November 2002.

59. J. Slater, “Coke, Pepsi Fight Product-Contamination Charges in India,” Wall Street Journal, 15 August 2003, pp.
B1,B4.

60. L. Barton, Crisis in Organizations II (Cincinnati: South-Western Publishing Co., 2001); R.R. Ulmer, “Effective Crisis
Management Through Established Stakeholder Relationships,” Management Communication Quarterly 14 (2001):
590–615.

61. P. Shrivastava, I. I. Mitroff, D. Miller, and A. Miglani, “Understanding Industrial Ccrises,” Journal of Management
Studies 25 (1988): 205–303.

62. Special thanks to John E. Spillan, Ph.D., The Pennsylvania State University, DuBois Campus, for his insight and
suggestions concerning the role of crisis management in the strategic management of organizations.

63. C. Hymowitz and J.S. Lublin, “McDonald’s CEP Tragedy Holds Lessons, Wall Street Journal, 20 April 2004, pp. B1,
B8; R. Gibson and S. Gray, “Death of Chief Leaves McDonald’s Facing Challenges,” Wall Street Journal, 20 April
2004, pp. A1, A16.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Key Terms

4
Chapter Outline:
4-1
The Organization’s Mission,
Goals, & Objectives

4-2
The Case for Goals
& Objectives

4-3
Goals & Stakeholders

4-4
The Agency Problem

4-5
Organizational
Effectiveness

4-6
Controlling Organizational
Effectiveness

Summary
Review Questions
Glossary
Endnotes

Goals & Organizational
Effectiveness

agency problem
balanced scorecard
best practices
CEO duality
comparative advantage
competitive benchmarking
concurrent control
corporate governance
diversification

employee stock ownership plan
(ESOP)
feedback control
feedforward control
formal organization
goals
informal organization
leveraged buyout (LBO)
mission

objectives
organizational capacity
organizational control
organizational effectiveness
stakeholders
takeover
top management team

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-2

mission
the reason for an
organization’s existence.
The mission statement
is a broadly defined but
enduring statement of
purpose that identifies the
scope of an organization’s
operations and its
offerings to the various
stakeholders

goals
desired general ends
toward which efforts are
directed

objectives
specific, verifiable, and
often quantified versions
of a goal

It has been said many times before that, “if you don’t know where you’re going,
any road will get you there.” This admonition is true for organizations. Its leaders
must understand and articulate the desired results from organizational activities if
they expect them to be successful. This chapter discusses three key considerations
to help leaders identify where an organization should be headed: (1) setting the
mission, goals, and objectives, (2) conceptualizing organizational effectiveness
and determining how to measure it, and (3) initiating organizational control when
the organization is not as effective as it should be.

4-1 The Organization’s Mission, Goals, and Objectives
Organizations are more likely to function effectively when their purpose and
resources are well understood by their members. Toward this end, a mission,
goals, and objectives should be developed for each organization. The mission is
the reason for the firm’s existence. The organization’s goals represent the desired
general ends toward which efforts in the organization are directed. Objectives,
sometimes called operative goals, are specific, and often quantified, versions of
goals. Unlike goals, objectives are verifiable and specific, and are developed so
that managers can measure performance.

An organization’s mission, goals, and objectives should be intertwined. For
example, the mission of a fast-food restaurant chain might be to “provide high-
quality food with consistent, and rapid service to consumers in the southeastern
United States at a profit.” Management may establish a goal “to expand the size
of the organization by adding new outlets.” From this goal, a number of specific
objectives may be derived, such as “to increase the number of stores by 20 percent
each year for the next five years.” The restaurant chain may have another goal, “to
be known as the innovative leader in the industry.” On the basis of this goal, one
of the specific objectives may be “to have 15 percent of sales each year come from
seasonal offerings or new products developed during the preceding two years.”

As is apparent, the mission is generally viewed as enduring and long-term in
nature. At the other end of the spectrum, objectives are seen as short-term with a
fixed duration. In this respect, goals fit neatly between the mission and objectives,
but the length of their duration can vary depending on context. Broadly speaking,
short-term goals look about a year into the future, intermediate-term goals look
about three to five years into the future, and long-term goals look six to ten years
down the road. It should be noted that the notion of short, intermediate, and long
with respect to the duration of goals is relative, however.

It is important to distinguish the concepts of mission, goals, and objectives from the
concept of strategy. Whereas the mission, goals, and objectives emphasize the de-
sired ends of organizational activity at various levels, the strategy connotes the orga-
nizational approach that will be taken to achieve the ends. The concepts are related
and may even use some of the same language, but they should be differentiated.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-3

It is also important to note the fine line between goals and objectives in contemporary business expression.
Some leaders may even use the terms interchangeably. Although it is necessary to understand the key principle
behind the distinction between terms—the need to incorporate measures into the equation—the use of different
terms is not necessarily problematic as long as everyone in the organization understands their meanings.

Objectives are typically set in a number of areas.
Most notably, organizations usually develop
performance objectives utilizing measures such
as profit, market share, and stock price. Managers
often develop objectives for improvements in
areas such as productivity, innovation and new
product development, product quality, resource
attainment, employee welfare, and social
responsibility.

Without verifiability and specificity, objectives
will not provide clear direction for the
organization. For example, if a manager states
a departmental objective as “increases average
order size to existing customers,” it will not
always be easy to tell whether or not the
department has been successful. Would the department be successful if the average order increased by only one
percent while inflation rose by five percent? Would the department be successful if the average order increased
by ten percent but fifteen percent of the customers switched to competitors? Without specifics, individuals are
left to debate success or failure based on their own perspectives of what happened and why.

Interestingly, specific and verifiable objectives can also lead to debates over the appropriateness of the measures
used. For example, if the previous objective was revised to “increase sales to existing customers by ten percent,”
some might argue that sales representatives will have an incentive to ignore new customers in an effort to meet
the stated objective. Hence, it is conceivable that pursuit of the objective could actually work against other
departmental goals. Simply stated, a sales rep could pursue one objective at the expense of another. For this
reason, it is essential that objectives not only be specific and verifiable, but that the most appropriate measures
are selected.

4-2 The Case for Goals and Objectives
It has been argued that setting goals and objectives can be an arduous, cumbersome, and time-consuming
process. However, goals and objectives are necessary for three main reasons.

First, they provide direction, guidance, and legitimacy for the organization. Without such guidance, employees
will determine for themselves what should be done, why it should be done, and how their activities fit into the
larger picture of organizational survival. For example, clerks at a department store’s customer service desk
often make decisions concerning whether customers without receipts or returning damaged goods should
receive refunds. Without goals and objectives that embody the activities of the department, different clerks will
inevitably make inconsistent judgments when faced with similar situations.

MISSION

GOAL

OBJECTIVE

OBJECTIVE
OBJECTIVE
OBJECTIVE
OBJECTIVE

GOAL
OBJECTIVE

OBJECTIVE
OBJECTIVE
OBJECTIVE
OBJECTIVE
GOAL
OBJECTIVE
OBJECTIVE
OBJECTIVE
OBJECTIVE
OBJECTIVE

The mission is the reason for the company’s existence. Goals are
general ends needed to obtain the mission. Objectives are specific
milestones needed to reach the goals.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-4

Organizational Goals & Career Goals

What are your career goals? Should you be concerned about your organization’s mission, goals, and
the like? It depends on the company.

Organizations often disseminate a mission, goals, values, and other written statements as a means
of guiding the firm’s strategic and daily activities. An organization whose mission is “to provide
customers with a level of value unsurpassed by any competitors” is setting guidelines for its deci-
sion-makers. If value to the customer is at the forefront, then managers must determine whether the
ultimate customer value associated with any activity will surpass the costs incurred. These activities
can include anything from production and equipment purchase decisions to how much is budgeted
for employee travel.

Unfortunately many organizations create elaborate goals and mission statements as a formality or
“gimmick.” In the former case, everything is filed away at company headquarters and decisions are
not affected. In the latter case, statements such as “the customer is king” or “our goal is zero defects”
are plastered throughout the organization, but employees soon learn that objectives have not been set
to measure whether or not the goals are being attained. In this situation, published goals can actually
have a negative effect, as they are not only widely ignored but may create the impression among
employees that the organization lacks any serious direction.

Ideally it is best to work for an organization whose goals are clearly defined, serve as real guidelines
for decisions, and are compatible with individual goals. When you consider employment with an
organization, you should ask not only for a short list of company goals, but how the organization is
pursuing them.

Career Point

Second, goals create unity across functional and geographical units of the organization. Without
organizational goals, units divided by function or geography are more likely to move in different
direction and compete for resources instead of working together toward a common purpose. The
existence of goals does not guarantee that a common purpose will be achieved, but it improves the
likelihood that it will be pursued.

Customers typically come into contact with members of different departments within an organization.
In many cases, these members may be located in different geographical locations. When each member
of the organization, regardless of department or location, understands its goals, a higher level of
consistency is likely to be achieved.

Third, goals and objectives motivate employees by encouraging workers to work toward their
attainment. They set benchmarks for employee performance and challenge them to put forth
maximum effort to reach them. When operational objectives are set for a one percent defect rate, for
example, production workers can monitor success or failure easily and may be motivated to produce
higher quality goods in an effort to meet the objective.

An organization’s leadership should be proactive in developing its goals and objectives. At first glance
it might appear that all organizations have goals and that most are well understood by their members.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-5

stakeholders
individuals or groups who
are affected by or can
influence an organization’s
operations

Unfortunately this is not the case. In some organizations, goals are inferred but
never specified because decision-makers do not take the time to identify them. It
should be noted that goals emerge anyway in these organizations—at least to some
extent—as individual members of the organization seek to identify ends toward
which activity should be directed.

The problem with allowing goals to emerge is twofold . First, the goals that
develop, either explicit or implicit, might not be appropriate for the organization.
Consider an electronics components manufacturer as an example. Without strong
leadership, the goals that evolve might emphasize the retention of two or three key
customers because they account for a large percentage of revenues and members
of the organization have become accustomed to working with them in the past.
It is possible, however, that the organization might be better suited to reduce its
dependence on these prime customers by cultivating additional accounts. Without
forethought and planning, goals aimed at expanding the reach of the organization
are not likely to develop.

Second, if goals are allowed to emerge, it is likely that competing sets of goals will
evolve for different factions within the organization. The goals “developed” by
production employees will probably concern production issues, those developed
by the sales department will probably emphasize revenue generation, and so on.
Hence, without central leadership in the development of goals, an organization can
easily end up with counterproductive or contradictory goals.

In sum, managers should understand the importance of goals and objectives, and
should seek to develop them in a proactive manner. Goals and objectives that are
clear and appropriate for an organization can play a great role in improving its
effectiveness. When goals or objectives are unclear, inconsistent, or simply do not
exist, however, organizational effectiveness is likely to suffer as a result.

4-3 Goals and Stakeholders
Establishing a mission, goals, and objectives may appear to be a non-controversial
task. However, various stakeholders—individuals or groups who are affected by
or can influence an organization’s operations—have different perspectives on the
purpose of an organization and can complicate the process. As a result, the task can
become quite complex.

Top managers are responsible for establishing and communicating a vision for the
organization that integrates the views of the various stakeholders. Hence, decision-
makers of profit-seeking organizations should be concerned not only with the
shareholders’ primary objective of profits, but also with attaining the goals of other
stakeholders as well.1 Ultimately, the mission, goals, and objectives that eventually
emerge should balance the pressures from the different stakeholder groups.

Various stakeholders often have different, even conflicting goals for an

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-6

organization.2 This occurs because each stakeholder group—including stockholders, members of the board of
directors, managers, employees, suppliers, creditors, and customers—views the organization from a different
perspective. Table 4-1 suggests what some of the goals might be for key stakeholders in a typical organization.

It is easy to see how stakeholder goals can conflict with one another. Following table 4-1, for example,
shareholders are generally interested in maximum profitability, whereas creditors are more concerned with
long-term survival so that their loans will be repaid. Customers wish to purchase high quality products at the
lowest possible prices, whereas the general public may seek to require a firm to incorporate costly measures
to cut pollution, a move that can ultimately raise prices. In addition, some individuals may be represented by
disparate stakeholder groups. For example, employees may own shares of stock in a firm and also purchase its
products. Top managers must reconcile these differences while pursuing its own set of goals, which typically
includes quality of work life and career advancement.

Organizations create value for various parties,
including employees through wages and salaries,
shareholders through profits, customers through
value derived via its goods and services, and
even governments through taxes. Organizations,
however, should not seek to maximize the value
delivered to any single stakeholder at the expense
of those goals of other groups.3 Those that do so
may enjoy desirable short-term results, but can
jeopardize their long-term survival and profitability.
For example, an organization that emphasizes the

Balancing the views of stakeholders
can be a challenging process.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-7

agency problem
a situation in which a
firm’s top managers (i.e.,
the “agents” of the firm’s
owners) do not act in
the best interests of the
shareholders

financial interests of shareholders over the monetary needs of employees can
alienate employees, motivating the top performers to seek employment elsewhere,
thereby threatening the continued performance of the organization. Likewise,
establishing long-term relationships with suppliers may restrict the organization’s
ability to remain flexible and change suppliers when necessary so that it can offer
innovative products to customers. Top management is charged not only with the
task of resolving opposing shareholder demands, but also with doing so in a manner
conducive to long-term success for the organization. 4

Balancing the various goals of an organization’s stakeholders can be difficult. In a
publicly traded organization, for example, top managers and the board of directors
are primarily accountable to the firm’s shareholders. As such, top managers are
responsible for generating financial returns, and board members are charged
with oversight of the firm’s management. Some have argued, however, that this
traditional shareholder-driven perspective is too narrow, and that financial returns
are actually maximized when a customer-driven perspective is adopted, a view that
is consistent with the marketing concept.5 In other words, an organization should
not focus on generating profits per se, but on satisfying customers, a process that
ultimately increases profits in the long term. Consumer advocate and frequent U.S.
Presidential candidate Ralph Nader has argued for more than 30 years that large
corporations must be more responsive to customers’ needs.6

4-4 The Agency Problem
Ideally, top management should attempt to maximize the return to shareholders on
their investment while simultaneously satisfying the interests of other stakeholders.
However, because absentee owners (i.e., the shareholders) in publicly-held firms
hire professionals to manage their organizations, some experts question the extent
to which these managers pursue profits for the organization rather than seeking to
satisfy their own personal goals.7 In many instances, managers’ goals of greater
salaries and stability may be in direct opposition to shareholders’ goals of high
organizational performance. For this reason, it is not uncommon to see successful
small organizations seeking to stay small so the owner can remain personally in
charge of the major business decisions.

The agency problem refers to a situation in which a firm’s managers—the “agents”
of the owners—do not always act in the best interests of the shareholders. The
extent to which the problem adversely affects most organizations is widely debated
and factors associated with the problem can vary from country to country.8 Indeed,
some argue that management primarily serves its own interests, whereas others
contend that managers share the same interests as the shareholders. These two
perspectives are briefly discussed in sections 4-4a and 4-4b.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-8

diversification
the process of acquiring
companies to increase a
firm’s size

4-4a Management Serves Its Own Interests

According to one perspective, top managers tend to make decisions that ultimately
increase their own salaries and other rewards. Hence, top managers are likely
to grow their firms even if growth is not the optimal strategy because executive
salaries tend to be higher in larger firms.9

Executives may also pursue diversification, increasing the size of their firms by
acquiring other companies. Diversification not only increases a firm’s size but may
also improve its survivability by spreading risk among business units operating in
different markets. However, diversification pursued only to spread risk is generally
not in the best interest of shareholders since they always have the option of reducing
their financial risks by purchasing shares in other corporations.10 This perspective
does not suggest that top managers are unconcerned with firm performance, but
rather that top managers may deemphasize it when personal considerations are
also involved in a decision.

The extent to which this perspective is accurate can create an advantage for
relatively small, entrepreneurial organizations whose owners actively manage the
firm. Because owners and managers are one and the same, no agency problem
exists. For this reason such organizations may be able to compete aggressively and
successfully with their larger rivals, especially if they concentrate their efforts on
limited domains within a given market.

4-4b Management and Stockholders Share the Same Interests

Because managers’ livelihoods are directly related to the success
of an organization, one can argue that managers generally share
the same interests as the stockholders. Because management
rewards rise with firm performance, managers by definition are
most concerned with organization performance, not individual
concerns. Many experts argue that managerial jobs are structured
in ways that force managers to attempt to enhance profits.11

4-4c Resolving the Agency Problem

Historically, the agency problem was not a concern in the early
years of the industrial revolution. During that time owners and
their family members served as active supervisors. Organizations
tended to be small and ownership was not typically dispersed.
When non-family members were secured as managers, they
were usually watched closely by an owner. Hence, the agency
problem became pervasive only when the corporate form of
ownership became more widely spread.

Today, the debate over whether top managers are primarily

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Best Practices

Organizational Theory 4-9

Employee Ownership in American Firms

The National Center for Employee Ownership (NCEO) publishes a list of the Employee Ownership
Top 100, including U.S.-based firms that are at least 50 percent employee-owned through an ESOP,
stock purchase plan, or other broad-based ownership plans.

Florida-based Publix Supermarkets is one of the largest firms on the list. The grocery chain operates
about 800 stores in Florida, Alabama, Georgia, South Carolina, and Tennessee. Publix ownership is
distributed to employees through ESOPs and stock purchase plans. Almost 100,000 employees are
shareholders, comprising almost two-thirds of the total number of shareholders for the firm.

Although a significant portion of the company is owned by non-employees, Publix circumvents
some of the concerns associated with the agency problem by distributing ownership widely among
its employees. Because they are both managers and owners, decision-makers have an incentive to act
in the best interest of the shareholders.

Interestingly, four of the top ten employee-owned companies as of 2004 are grocery chains. In
addition to Publix, Hy-Vee, Price Chopper, and Brookshire Brothers are also on the list.

employee stock
ownership plans
(ESOP)
a formal program that
transfers shares of stock to
a company’s employees.

concerned with their firms’ returns or their own interests continues.
Most managers, however, acknowledge truth in both perspectives. In
reality, differences in perspective are a matter of degree. It is also likely
that the degree to which the agency problem exists is related to factors
such as the industry in which an organization competes, the size of the
firm, and even its position in the organizational life cycle.

Ultimately, resolving the different perspectives on the agency problem
is a philosophical and experiential endeavor. Some managers may
argue for the existence of a serious agency problem while others in
the same organization may not perceive the problem to be significant.
Regardless of perspective, manager and shareholder goals may be easily
aligned when managers also own part of a firm. Hence, one of the most
common suggestions for aligning the goals of top management and
those of shareholders is to award shares of stock or stock options to top
management, transforming professional managers into shareholders.
Many companies have adopted employee stock ownership plans
(ESOPs) to distribute shares of the company’s stock to managers and
other employees over a period of time.

Stock option plans and high salaries may bring the interests of top
management and stockholders closer together.12 Top executives must
deliver high performance for the organization in order to protect

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-10

organizational
effectiveness
the extent to which an
organization utilizes its
resources effectively to
accomplish its goals and
objectives

organizational capacity
an organization’s ability
to remain effective and
sustain itself over the long
term

their salaries and option plans. Research supports this notion, suggesting that
as managerial stock ownership rises, the interests of managers and shareholders
begin to converge to some extent. 13 Many organizations pursue compensation
models designed to bring the two sides together, such as those that emphasize
stock options and profit sharing for managers instead of fixed pay levels.

4-5 Organizational Effectiveness
The concepts of goals and objectives—as well as the agency problem—assume that
the outcomes of an organization’s activities can be readily understood. The idea
of organizational performance is primarily associated with financial and market-
oriented measures. Organizational effectiveness is an elusive, broader term and can
mean different things to different people. We define organizational effectiveness
as the extent to which an organization utilizes its resources effectively to accomplish
its goals and objectives. Although traditional metrics such as profits, market share,
and stock price are useful in assessing organizational effectiveness, other factors
such as productivity, creativity, and human capital are also considered.

The notion of organizational effectiveness cannot be fully understood without also
recognizing its relationship to organizational resources. Organizational capacity
refers to an organization’s ability to remain effective and sustain itself over the
long term. It is possible for an organization to be highly effective with limited
capacity, although this is typically not the case. In practice, organizations seek to
acquire valuable resources to build capacity and ultimately improve effectiveness.

There are many ways top managers can foster organizational effectiveness. First, its
leaders can build trust and autonomy among its members. Trust leads to increased
autonomy and free sharing of information, and ultimately greater job satisfaction,
organizational commitment, and personal performance.14 Second, its leaders can
create a productive and supportive work environment, including factors such as
comfortable and sufficient office space, ergonomic
awareness, and an emphasis on training and
development. Of course, there are costs associated
with these activities, and they should be taken into
account. However, the costs can be offset in many
cases by improvements in effectiveness. Third, its
leaders can build capacity. Pressures to meet short-
term financial goals often relegate capacity building
to a back seat position. Many organizations invest
capital only in outcomes that can be immediately
measured or quantified. Instead, these organizations
should invest in activities and resources that can
serve as the foundation for long-term organizational
effectiveness.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-11

balanced scorecard
an approach to
measuring performance
or organizational
effectiveness based on an
array of quantitative and
qualitative factors, such
as return on assets, market
share, organizational
capacity, customer loyalty
and satisfaction, speed,
and innovation

4-5a Measuring Organizational Effectiveness

Although concepts such as organizational effectiveness and capacity are broad
enough to assist managers in communicating about their organizations, both are
notoriously difficult to measure. For this reason, some managers emphasize only
basic financial and accounting measures such as return on assets and sales growth.
One problem with this approach is that each measure tells only a piece of the
story. Astute managers examine multiple measures—some non-financial—when
evaluating an organization’s outcomes. In general, performance is associated with
profit measures whereas organizational effectiveness is considered with other
factors as well.

Because individual measures of performance and effectiveness can provide a
limited snapshot of the firm, a number of companies have begun using a balanced
scorecard approach, whereby measurement is not based on a single quantitative
factor, but on an array of quantitative and qualitative factors, such as return on
assets, market share, organizational capacity, customer loyalty and satisfaction,
speed, and innovation.15

Four primary perspectives are inherent within the balanced scorecard approach.
The financial perspective is concerned with traditional performance measures such
as profitability, return on investment, and improvement in stock price. The customer
perspective considers such factors as customer service, loyalty, and satisfaction.
The learning and growth perspective evaluates such areas as the degree to which
an organization is engaged in continuous improvement and is able to retain its most
valuable human resources. The internal business process perspective emphasizes
the value an organization delivers to its customers and shareholders.16

As can be seen, the balanced scorecard is concerned not only with the traditional
performance measures as captured in the financial perspective, but also with
broader, “softer” measures that can be easily overlooked when a firm is focused
solely on short-term financial performance. Interestingly, one can argue that high
marks along the other three perspectives can position the organization for superior
financial performance in the long term. The key to employing a balanced scorecard
is to select a combination of performance measures tailored specifically to the
organization. In other words, each organization’s members should develop a
reasonable number of simple measures that collectively reflect the organization’s
effectiveness.17

Another problem with measuring organizational performance is that one measure
can be pursued to the detriment of another. The common goals of growth and
profitability represent an example of this phenomenon. Many firms pursue growth
by investing in R&D or new product development, or by slashing prices to gain
customers. Either approach tends to reduce profits, at least in the short term. This
reality was reflected in Ford’s decision to cut North American production in the
early 2000s and sacrifice market share in order to enhance profits. Ford’s market

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-12

share declined from about 22 percent in 2001 to below 19 percent in 2004, but profits increased steadily during
this same period.18

One approach to measuring organizational effectiveness involves the examination of three key organizational
processes: (1) Controlling the external environment, (2) maintaining efficiency within operations, and (3)
fostering innovation.19 Specific goals can be developed to move the organization toward greater effectiveness
in each of these realms.

Controlling the external environment is difficult for any organization to do, especially smaller ones. The key
to effective control, however, is the ability of a firm to secure the resources to produce and market its products
or services. As such, traditional performance indicators such as stock price, market share, revenue growth, and
return on assets may be used to reflect the control dimension. Managers may set goals such as increasing profits
or market share as means of pursuing effectiveness in control.

Maintaining efficiency is concerned with more technical issues. Within this realm, managers are concerned
with an organization’s ability to produce a high quantity and quality of products or services relative to the
amount of input it consumes. As such, managers should evaluate changes in technology on a continuous basis
to reduce costs and increase quality. Efficiency is measured by such indicators as quality, production costs,
and customer service. Managers may set goals such as reducing product defects, cutting delivery time, and
improving customer satisfaction as means of pursuing efficiency.

Whereas efficiency is primarily concerned with improving existing products, services, and processes, innovation
is concerned with the identification of new and better ones. As such, managers can foster innovation by developing
the organization’s human, physical, and organizational resources. Innovative firms minimize conflict, support
worthy initiatives, and empower employees to make better decisions. As such, indicators such as rate of new
product development and employee coordination are often used to reflect an organization’s level of innovation.

Although it is not difficult to identify prospective indicators for each of the three processes, measuring them is far
from easy, especially for innovation. For example, developing new products is an activity generally presumed to
reflect innovation with a firm. However, it is difficult to determine precisely how many new products should be
developed within a given time period. In addition, the ultimate success or failure of new product introductions,
as well as the costs to develop and move them to market, should also be considered.

The interrelationships among these three broad
measures—control, efficiency, and innovation—
cannot be overstated. For example, an organization
that excels in control by securing the appropriate
resources may be in a better position to utilize
them to produce more efficiently or to create new
products or services. Hence, managers may wish
to emphasize excellence in one realm should
realize that they may be sacrificing excellent in
the other two.

Production efficiency cam be measured by
examining indicators such as units per time

period, cost per unit, and defective rates

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-13

organizational control
determining the extent
to which organizational
effectiveness is attained
and taking corrective
measures to improve
effectiveness if needed

top management team
the team of top-level
executives—including
members of the board of
directors, vice presidents,
and various line and staff
managers—all of whom
play instrumental roles in
managing the organization

competitive
benchmarking
the process of measuring a
firm’s performance against
that of the top performers,
usually in the same
industry

best practices
processes or activities that
have been successful in
other organizations

4-6 Controlling Organizational Effectiveness
Organizational control consists of determining the extent to which organizational
effectiveness is attained and taking corrective measures to improve effectiveness
if needed. Organizational control is similar to but broader than strategic control,
which emphasizes the extent to which strategies are effective. Whereas strategies
at various levels may emphasize a limited number of goals, organizational control
is concerned with issues and processes that may not be considered strategic.

Organizational control can be exerted through three primary means. Control can
be exerted through strategic control, from the board of directors through proper
oversight, and from outside of the organization via takeover. Control measures
taken by managers within the organization are usually more effective and efficient.
These measures are summarized in table 4-2 and discussed in greater detail below.

4-6a Exercising Control Within the Organization
Organizational control within the organization is generally concerned with
the strategy of the organization. Although control may be instituted at other
management levels, it is usually initiated by the chief executive and/or members
of the top management team. It should be noted that the chief executive is the
individual ultimately responsible for the organization’s management but rarely acts
alone. In most organizations, a team of top-level executives—including members
of the board of directors, vice presidents, and various line and staff managers are
also involved. Most top executives build a top management team to add different
perspectives and improve decision quality.20

Organizational control from within the organization can be initiated in a number
of ways. One is competitive benchmarking—the process of measuring a firm’s
performance against that of the top performers, usually in the same industry.
After determining the appropriate benchmarks, goals can be set to meet or exceed
them. Best practices—processes or activities that have been successful in other
organizations—may be adopted as a means of improving performance.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-14

Benchmarking tends to occur most frequently at the top of an organization, but can also occur at middle and
lower management levels. At the top level, factors such as profitability, market share, and revenue growth may
be applied. The most appropriate performance benchmarks are those associated with the strategy’s success, and
those over which the organization has control. The importance of specificity cannot be overstated, however. For
example, if market share is identified as a key indicator of the success or failure of a growth strategy, a specific
market share should be identified, based on past performance and/or industry norms. Without specificity, it
is difficult to assess the effectiveness of a strategy after it is implemented if clear targets are not identified in
advance.

The data required to set benchmarks is often readily available. For example, Fortune magazine annually
publishes the most- and least-admired American corporations with annual sales of at least $500 million in such
diverse industries as electronics, pharmaceuticals, retailing, transportation, banking, insurance, metals, food,
motor vehicles, and utilities. Corporate dimensions are evaluated along factors such as quality of products and
services, innovation, quality of management, market share, financial returns and stability, social responsibility,
and human resource management effectiveness. Publications such as Forbes, Industry Week, Business Week,
and the Industry Standard also provide performance scorecards based on similar criteria. Although such lists
generally include only large, publicly traded companies, they can offer high-quality strategic information at
minimal cost to the strategic managers of all organizations, regardless of size. Published information on areas
such as quality, innovation, and market share can be particularly useful measures.

Consumer Reports is also an excellent source of product quality data, evaluating hundreds of products from
cars to medicine each year. Because Consumer Reports accepts no advertising, its evaluations are relatively free
of bias, rendering it an excellent source of product quality information. Even if an organization’s products or
services are not evaluated, its managers can still gain insight on the quality of products and services produced
by competitors, suppliers, and buyers.

Specific published information may also exist for organizations in select industries. One of the best known is
the “Customer Satisfaction Index” released annually by J.D. Power for the automobile industry. A survey of
new-car owners each year examines such variables as satisfaction with various aspects of vehicle performance;
problems reported during the first 90 days of ownership; ratings of dealer service quality; and ratings of the
sales, delivery, and condition of new vehicles.21 Numerous Internet sites—such as Virtualratings.com—offer
quality ratings associated with a number of industries for everything from computers to university professors.

Excercising strategic control requires
that anticipated performance be
compared to actual performance

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-15

formal organization
the official structure
of relationships and
procedures used to
manage organizational
activity

feedforward control
a measure that anticipates
problems and is initiated
prior to an occurrence of
an activity

concurrent control
a measure that seeks to
correct a problem while it
is occurring

feedback control
a measure that seeks to
correct a problem after it
has occurred and prevent
it from happening again

informal organization
the norms, behaviors, and
expectations that evolve
when individuals and
groups come into contact
with one another

An organization’s top managers may seek to change how activities are performed,
both formally and informally. The formal organization—the official structure
of relationships and procedures used to manage organizational activity—can
facilitate or impede a firm’s success. When problems occur, it may be necessary to
implement changes within the existing formal organization or consider changing
it altogether.

For minor and less complex problems, managers can implement changes within
the formal organization before an activity begins, while it is occurring, and after an
activity has already occurred. Needless to say, it is generally desirable to institute a
control measure as early as possible. A feedforward control anticipates problems
and is initiated prior to an occurrence of an activity. For example, most major
airlines have instituted preventative maintenance programs designed to reduce
flight delays and crashes.

A concurrent control seeks to correct a problem while it is occurring. Supervision
is a common means of exercising concurrent control. Even when constant direct
supervision is not required, managers often “walk around” their departments from
time to time to learn about potential problems in their early stages.

Although it is best to anticipate a problem and correct it before it occurs—or at
least while it is occurring—this is not always possible. A feedback control seeks
to correct a problem after it has occurred and prevent it from happening again.
For example, a task force may be appointed to investigate reasons contributing to
a major breakdown in a production facility and reduce the chance that it occurs
again.

When problems are acute, however, changing the organization’s structure may be
desirable, as discussed in chapter five. Substantial structural changes cannot be easily
implemented and typically require a large amount of training and development. Top
managers at many of these firms underestimated the complications associated with
transforming their organizational structures into a more complex matrix structure.

In contrast to the formal organization, the informal organization refers to the norms,
behaviors, and expectations that evolve when individuals and groups come into
contact with one another.22 The informal organization is dynamic and flexible and
does not require managerial decree to change. When top executives use the formal
organization effectively, the informal organization tends to reinforce the formal
organization and promote the same values. However, when the organization’s value
system is unclear or even contradictory, the informal organization will ultimately
develop its own set of values and rewards. For example, every organization claims
to reward high job performance. However, when promotions and pay increases
go to individuals who have the greatest seniority (regardless of performance
level), employees will lose motivation and develop their own set of informal rules
concerning what will and will not be rewarded.

Managers at all levels must recognize that they can influence, but cannot control,

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-16

corporate governance
the board of directors,
institutional investors, and
block holders who monitor
firm strategies to ensure
managerial responsiveness

the informal organization. Interestingly, the most effective means of influencing
the informal organization is to develop and promote a formal organization that is
consistent with the core values of the firm. The informal organization becomes
dysfunctional when it develops means to address inconsistencies in the formal
organization.23

4-6b Corporate Governance and the Board of Directors

Corporate governance refers to the board of directors, institutional investors
(e.g., pension and retirement funds, mutual funds, banks, insurance companies,
among other money managers), and large shareholders known as blockholders
who monitor organizational strategies and performance to ensure effective
management. Boards of directors and institutional investors are generally the most
influential in a typical governance system. Because institutional investors own
more than half of all shares of publicly traded firms, they tend to wield substantial
influence. Blockholders tend to hold less than 20 percent of all firm shares, so their
influence is proportionally less than that of institutional investors.24 Nonetheless,
both institutional investors and blockholders are in a position to influence decision-
making to an extent that few individual shareholders can.

Boards often include both inside (i.e., firm executives) and outside directors.
Insiders bring company-specific knowledge to the board, whereas outsiders bring
independence and an external perspective. Over the past several decades, the
composition of the typical board has shifted from one controlled by insiders to one
controlled by outsiders, allowing board members to oversee managerial decisions
more effectively.25 Furthermore, when additional outsiders are added to insider-
dominated boards, CEO dismissal is more likely when corporate performance
declines26 and outsiders are more likely to pressure for corporate restructuring.27

Many experts argue that one organization’s board members should limit their
service on other boards. In the 1990s, the number of corporate board members with
memberships in other boards began to increase dramatically. With outside directors
of the largest 200 firms commanding an average of $152,000 in cash and equity
in 2001, a number of companies became concerned about both potential conflicts
of interest and the amount of time each individual can spend with the affairs of
each company. As a result, many companies have begun to limit the number of
board memberships their own board members may hold. By 2002, approximately
two-thirds of corporate board members at the largest 1500 U.S. companies did not
hold seats on other boards28 This change has been underscored by the Sarbanes-
Oxley Act of 2002, which requires that firms include more independent directors
on their boards and make new disclosures on internal controls, ethics codes and
the composition of their audit committees on annual reports. A number of analysts
have noted positive changes among boards as a result of this legislation in terms of
both independence and expertise.29

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-17

CEO duality
a situation in which the
CEO also serves as the
chair of the board

Boards of directors are composed of officials elected by the shareholders and are
responsible for monitoring activities in the organization, evaluating top managers,
and establishing the broad strategic direction for the firm. As such, boards are
responsible for selecting, compensating, and replacing the chief executive officer,
advising top management on strategic issues, and monitoring managerial and
company performance as representatives of the shareholders. A number of critics
charge, however, that board members do not always fulfill their legal roles.30 One
reason is that board members are nominated by the CEO, who expects them to
support his or her strategic initiatives. Another reason is the generous compensation
they often receive.31

When boards are controlled by insiders, a “rubber stamp” mentality can develop,
whereby directors do not aggressively challenge executive decisions as they
should. This is particularly true when the CEO also serves as chair of the board, a
practice known as CEO duality.32 Insider board members—especially those who
report to the CEO—may be less willing to exert control when the CEO also serves
as chair of the board. In the absence of CEO duality, however, insiders may be
more likely to contribute to board control.

Pressure on directors to acknowledge shareholder concerns has increased over
the past two decades. The major source of pressure in recent years has come
from institutional investors. By virtue of the size of their investments, they wield
considerable power and are more willing to use it than ever before.

It should be noted, however, that some board members have played effective
stewardship roles. Many directors promote strongly the best interests of the
firm’s shareholders, as well as those of various other stakeholder groups as well.
By conscientiously carrying out their duties, effective directors can ensure that
management remains focused on company performance.33

A number of recommendations have been made on how to promote effective
governance. It has been suggested that outside directors be the only ones to evaluate
the performance of top managers against established mission and goals, that all
outside board members should meet alone at least once annually, and that boards
of directors should establish appropriate qualifications for board membership and
communicate these qualifications to shareholders. For institutional shareholders, it
is recommended that institutions and other shareholders act as owners and not just
investors,34 that they not interfere with day-to-day managerial decisions, and that
they evaluate the performance of the board of directors regularly.35

4-6c Takeovers

When shareholders conclude that the top managers with ineffective board
members are mismanaging the firm, institutional investors, blockholders, and
other shareholders may sell large portions of their shares, substantially lowering
the market price of the company’s stock.36 Depressed prices often lead to a

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-18

takeover
the purchase of a
controlling quantity of
shares in a firm by an
individual, a group of
investors, or another
organization. Takeovers
may be friendly or
unfriendly

leveraged buyout
(LBO)
a takeover in which the
acquiring party borrows
funds to purchase a firm

takeover, a purchase of a controlling quantity of a firm’s shares by an individual,
a group of investors, or another organization. Takeovers may be attempted by
outsiders or insiders (i.e., managers), and may be friendly or unfriendly. A friendly
takeover is one in which the prospective buyer(s) work with the board to negotiate
a transaction. In contrast, an unfriendly takeover is one in which the target firm
resists the sale. In this instance, one or more individuals may purchase enough
shares in the target firm to either force a change in top management or to manage
the firm themselves. Interestingly, groups that seek to initiate unfriendly takeovers
often include current or former firm executives.

In many cases, sudden takeover attempts rely heavily on borrowed funds to finance
the acquisition, a process referred to as a leveraged buyout (LBO). LBOs strap
the company with heavy debt and often lead to a partial divestment of some of the
firm’s subsidiaries or product divisions to lighten the burden.37 Top managers often
become wary of LBOs if share prices drop precipitously, thereby enabling would-
be investors to acquire the firm at a lower cost.

Corporate takeovers provide a system of checks and balances often required to
initiate changes in ineffective management. Proponents argue that the threat of
LBOs can pressure managers to operate their firms more efficiently.38 However,
the debt created by a takeover can cause management to pursue activities that are
expedient in the short run but not best for the firm in the long run. In addition, the
extra debt required to finance an LBO tends to increase the likelihood of bankruptcy
for a troubled firm.39

Summary
An organization’s mission outlines the reason for its existence. A clear purpose
provides managers with a sense of direction and can guide all of the organization’s
activities. Goals represent the desired general ends toward which organizational
efforts are directed. However, managers, shareholders, and board members do
not always share the same goals. Top management must attempt to reconcile and
satisfy the interests of each group of stakeholders.

The concept of organizational effectiveness evaluates the extent to which an
organization accomplishes its goals and objectives. Measuring organizational
effectiveness is a complex process and should include a number of factors, not
only accounting and financial performance measures. One approach, the balanced
scorecard, evaluates other dimensions of performance beyond the financial realm.

When effectiveness is not attained, control measures are necessary. Organizational
control can be initiated from within the organization’s management ranks, through
its board of directors, or from outside of the organization through takeovers.
Generally speaking, control closest to the source of the problem is the most
desirable.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-19

Review Questions & Exercises

1. Do missions often change over time? Should missions remain constant? Why or why not?

2. What is organizational effectiveness and how is it measured?

3. Why do stakeholders in the same organization often have different goals? Would it not be best if
they shared the same goals? Explain.

4. Which control form—feedforward, concurrent, or feedback—is most desirable? Which is most
effective? Explain.

Glossary

• Agency Problem: A situation in which a firm’s top managers (i.e., the “agents” of the
firms’ owners) do not act in the best interests of the shareholders.

• Balanced Scorecard: An approach to measuring performance or organizational effectiveness
based on an array of quantitative and qualitative factors, such as return on assets, market share,
organizational capacity, customer loyalty and satisfaction, speed, and innovation.

• Best Practices: Processes or activities that have been successful in other organizations.

• CEO Duality: A situation in which the CEO also serves as the chair of the board.

• Competitive Benchmarking: The process of measuring a firm’s performance against that of the
top performers, usually in the same industry.

• Concurrent Control: A measure that seeks to correct a problem while it is occurring.

• Corporate Governance: The board of directors, institutional investors, and block holders who
monitor firm strategies to ensure managerial responsiveness.

• Diversification: The process of acquiring companies to increase a firm’s size.

• Employee stock ownership plan (ESOP): A formal program that transfers shares of stock to a
company’s employees.

• Feedback Control: A measure that seeks to correct a problem after it has occurred and prevent it
from happening again.

• Feedforward Control: A measure that anticipates problems and is initiated prior to an occurrence
of an activity.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-20

• Formal Organization: The official structure of relationships and procedures used to manage
organizational activity.

• Goals: Desired general ends toward which efforts are directed.

• Informal Organization: The norms, behaviors, and expectations that evolve when individuals and
groups come into contact with one another.

• Leveraged buyout (LBO): A takeover in which the acquiring party borrows funds to purchase a
firm.

• Mission: The reason for an organization’s existence. The mission statement is a broadly defined
but enduring statement of purpose that identifies the scope of an organization’s operations and its
offerings to the various stakeholders.

• Objectives: Specific, verifiable, and often quantified versions of a goal.

• Organizational Capacity: An organization’s ability to remain effective and sustain itself over the
long term.

• Organizational Control: Determining the extent to which organizational effectiveness is attained
and taking corrective measures to improve effectiveness if needed.

• Organizational Effectiveness: The extent to which an organization utilizes its resources effectively
to accomplish its goals and objectives.

• Stakeholders: Individuals or groups who are affected by or can influence an organization’s
operations.

• Takeover: The purchase of a controlling quantity of shares in a firm by an individual, a group of
investors, or another organization. Takeovers may be friendly or unfriendly.

• Top Management Team: The team of top-level executives—including members of the board of
directors, vice presidents, and various line and staff managers—all of whom play instrumental roles
in managing the organization.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-21

(Endnotes)
1. R. Jacob, “The Search for the Organization of Tomorrow,” Fortune, 18 May 1992, p. 93.

2. A. L. Friedman and S. Miles, “Developing Stakeholder Theory,” Journal of Management Studies, 39 (2002): 1–22.

3. H. A. Simon, “On the Concept of Organizational Goal,” Administrative Science Quarterly 9 (1964): 1–22; J. Pfeffer
and G. Salancik, The External Control of Organizations (New York: Harper & Row, 1978).

4. R. M. Cyert and J.G. March, A Behavioral Theory of the Firm (Englewood Cliffs, NJ: Prentice-Hall, 1963); J. G.
March and H. A. Simon, Organizations (New York: John Wiley & Sons, 1958).

5. S. I. Wu and C. Wu, “A New Market Segmentation Variable for Product Design-Functional Requirements,” Journal of
International Marketing and Marketing Research 25 (2000): 35–48.

6. For an example of his early work, see R. Nader, Unsafe at Any Speed: Design and Dangers of the American Automobile
(New York: Grossman, 1964).

7. B. M. Staw and L. D. Epstein, “What Bandwagons Bring: Effects of Popular Management Techniques on Corporate
Performance, Reputation, and CEO Pay,” Administrative Science Quarterly 45 (2000): 523–556.

8. K. Ramaswamy, R.Veliyath, and L. Gomes, “A Study of the Determinants of CEO Compensation in India,” Management
International Review 40 (2000): 167–191.

9. J. E. Richard, “Global Executive Compensation: A Look at the Future,” Compensation and Benefits Review 32, no.
3 (2000): 35–38.

10. 1D. J. Teece, “Towards an Economic Theory of the Multiproduct Firm,” Journal of Economic Behavior and
Organization 3 (1982): 39–63.

11. 1C. R. Weinberg, “CEO Compensation: How Much Is Enough?” Chief Executive 159 (2000): 48–63.

12. J. Child, The Business Enterprise in Modern Industrial Society (London: Collier-Macmillan, 1969).

13. S. L. Oswald and J. S. Jahera, “The Influence of Ownership on Performance: An Empirical Study,” Strategic
Management Journal 12 (1991): 321–326.

14. R.M. Kanter, Men and Women of the Corporation, New York: Perseus, 1993).

15. R. Kaplan and D. Norton, The Balanced Scorecard: Translating Strategy Into Action (Boston: Harvard Business
School Press, 1996); R. Kaplan and D. Norton, The Strategy Focused Organization (Boston: Harvard Business School
Press, 2001).

16. R. Kaplan and D. Norton, The Balanced Scorecard: Translating Strategy Into Action (Boston: Harvard Business
School Press, 1996); R. Kaplan and D. Norton, The Strategy Focused Organization (Boston: Harvard Business School
Press, 2001).

17. M. L. Frigo, “Strategy and the Balanced Scorecard,” Strategic Finance 84, no. 5 (2002): 6–8; E. M. Olson and S. F.
Slater, “The Balanced Scorecard, Competitive Strategy, and Performance,” Business Horizons 45, no. 3 (2002): 11–16.

18. J.B. White and N. Shirouzu, “At Ford Motor, High Volume Takes Backseat to Profits,” Wall Street Journal, 7 May
2004, pp. A1, A12.

19. R.R. Rojas, “ A Review of Models for Measuring Organizational Effectiveness Among For-Profit and Nonprofit
Organizations,” Nonprofit Management and Leadership, 11 (1) (2000): 97-104; L.Galambos, “What Have CEOs
Been Doing?” Journal of Economic History18 (1988): 243-258.

20. T. K. Das and B. Teng, “Cognitive Biases and Strategic Decision Processes: An Integrative Perspective,” Journal of
Management Studies 36 (1999): 757–778; M. A. Carpenter, “The Implications of Strategy and Social Context for the
Relationship Between Top Team Management Heterogeneity and Firm Performance,” Strategic Management Journal

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S

Organizational Theory 4-22

23 (2002): 275–284.

21. A. Taylor III, “More Power to J. D. Power,” Fortune, 18 May 1992, pp. 103–106.

22. D. Krackhardt and J. R. Hanson, “Informal Networks: The Company Behind the Chart,” Harvard Business Review 71,
no. 4 (July–August 1993): 104–111.

23. G. A. Miller, “Culture and Organizational Structure in the Middle East: A Comparative Analysis of Iran, Jordan
and the USA,” International Review of Sociology 11 (2001): 309–324; H. Kahalas, “How Competitiveness Affects
Individuals and Groups Within Organizations,” Journal of Organizational Behavior 22, no. 1 (2001): 83–85.

24. S. Chen and K. W. Ho, “Blockholder Ownership and Market Liquidity,” Journal of Financial & Quantitative Analysis
35 (2000): 621–633; J .J. McConnell and H. Servaes, “Additional Evidence on Equity Ownership and Corporate
Value,” Journal of Financial Economics 27 (1990): 595–612.

25. W. J. Salmon, “Crisis Prevention: How to Gear Up Your Board,” Harvard Business Review 71 (1993): 68–75.

26. See B. Hermalin and M. S. Weisbach, “The Determinants of Board Composition,” Rand Journal of Economics 19,
no. 4 (1988): 589–605; E. F. Fama and M. C. Jensen, “Separation of Ownership and Control,” Journal of Law and
Economics 26 (1983): 301–325; M. S. Weisbach, “Outside Directors and CEO Turnover,” Journal of Financial
Economics 20 (1988): 431–460.

27. P. A. Gibbs, “Determinants of Corporate Restructuring: The Relative Importance of Corporate Governance, Takeover
Threat, and Free Cash Flow,” Strategic Management Journal 14 (1993): 51–68.

28. P. Plitch, “Ready and Able?” Wall Street Journal, 24 February 2003, pp. R3, R5; J. S. Lublin, “More Work, More Pay,”
Wall Street Journal, 24 February 2003, pp. R4, R5.

29. N. Dunne, “Adding a Little Muscle In the Boardroom,” Financial Times, 10 October 2003, p. I.

30. J. H. Morgan, “The Board of Directors Is No Longer Just a ‘Rubber Stamp,’” TMA Journal 19, no. 5 (1999): 14–18.

31. B. R. Baliga and R. C. Moyer, “CEO Duality and Firm Performance,” Strategic Management Journal 17 (1996):
41–53; P. Stiles, “The Impact of Board on Strategy: An Empirical Examination,” Journal of Management Studies 38
(2001): 627–650.

32. S. Finkelstein and R. D’Aveni, “CEO Duality as a Double-Edged Sword,” Academy of Management Journal 37
(1994): 1079–1108.

33. M. S. Mizruchi, “Who Controls Whom? An Examination of the Relation Between Management and Board of Directors
in Large American Corporations,” Academy of Management Review 8 (1983): 426–435.

34. C. Wohlstetter, “Pension Fund Socialism: Can Bureaucrats Run the Blue Chips?” Harvard Business Review 71 (1993):
78.

35. J. A. Conger, D. Finegold, and E. E. Lawler III, “Appraising Boardroom Performance,” Harvard Business Review 76,
no. 1 (1998): 136–148.

36. P. Wright and S. Ferris, “Agency Conflict and Corporate Strategy: The Effect of Divestment on Corporate Value,”
Strategic Management Journal 18 (1997): 77–83.

37. S. Perumpral, N. Sen, and G. Noronha, “The Impact of LBO Financing on Bank Returns,” American Business Review
20, no. 1 (2002): 1–5.

38. M. C. Jensen, “The Eclipse of the Public Corporation,” Harvard Business Review 67 (September–October 1989):
61–74; P.H. Pan and C. W. L. Hill, “Organizational Restructuring and Economic Performance in Leveraged Buyouts,”
Academy of Management Journal 38 (1995): 704–739.

39. R. B. Reich, “Leveraged Buyouts: America Pays the Price,” New York Times Magazine (January 29, 1989): 32–40.

W
I
L
L
I
S
,

K
A
S
S
A
N
D
R
A

2
1
6
1
T
S