Organizational Effectiveness

There are a number of competing definitions of organizational effectiveness. Organizational effectiveness is concerned with the simultaneous achievement of high production and a highly people-centered enterprise. It also concerns the alignment of senior managers’ judgments about internal efficiency from an economic perspective and external political judgments focused on growth, survival, and control over the environment. Still other views of organizational effectiveness intersect with concerns about profitability, employee satisfaction, and societal value, or focus on the level of productivity in support of, and reliability in the utilization of, the organization’s business model. This entry discusses early thinking on organizational effectiveness, the evolution of ideas about organizational effectiveness, and insights on organizational effectiveness from multiple disciplines.

Early Thinking About Organizational Effectiveness

Prior to the 1950s and early 1960s, definitions of organizational effectiveness came from a goal-based, or selection, perspective. Subsequently, sociologists argued that organizational effectiveness centers on the contribution of individuals to organizational success, best understood within a systems model perspective. This involved the interplay between productivity, flexibility, and an absence of organizational strain. The focus on internal efficiency meant that issues such as corporate reputation did not feature in the discussion.

By the 1970s, organizational effectiveness was seen to depend on a series of important alignments between structure, process, and behavior, judged in terms of short-run productivity, efficiency, satisfaction, intermediate adaptability, and long-run survival. Also seen as important was the alignment between the internal task environment and the way the external institutional environment conditioned and set the context for industry profitability and senior management decisions over strategy.

More critical voices were also heard. A review of the different models of organizational effectiveness found little consistency, concluding that that the effectiveness construct is so complex that it defies simple attempts at model development. By the 1980s, two fundamental questions were raised: (1) Whose preferences should be weighted most heavily in reaching a judgment about organizational effectiveness? (2) How should organizations distribute these performance outcomes? It was from this point onward—once it was accepted that multiple stakeholders had a view on effectiveness—that corporate reputation was seen as one important outcome associated with it. Four strands of research, still influential today, began to dominate research:

• Deciding that it is all relative and asking the main stakeholders as consumers of the organization’s performance to evaluate performance against their own criteria (the forerunner to the use of the Balanced Scorecard performance management tool).

• Focusing on power and relative control over strategic resources and determining the dominant coalitions at any one time who negotiate what the performance outcomes should be.

• Taking a “social justice” perspective, arguing that social values determine organizational effectiveness and place limits around what a society can seek and the means by which it is attained; judging effectiveness against ensuring equal distribution of key resources such as liberty, opportunity, income, and wealth, in turn seen through the regret principle—that is, minimizing any level of regret that the constituents have over participating in the organization.

• Seeing effectiveness in evolutionary terms, as that which increases the adaptability of the organization and satisfies a continual process of divergent definitions of effective organizational performance over time. Effectiveness means resilience, defined as having sharpened skills of foresight and the capability to anticipate and prepare for the future, and self-correcting responses that maintain organizational fitness.

The Evolution of Ideas About Organizational Effectiveness

By the late 1980s and early 1990s, concern grew over the failure to manage effectiveness, attributed to the narrowness and financialization of organizational effectiveness measures, which created sealed boxes and closed-loop thinking in addressing effectiveness. It was argued that accounting perspectives on organizational effectiveness led to measures such as return on investment, assets, equity, and earnings per share. These were highly intercorrelated and subject to distortion, and did not take account of the risks to the reported finances. Similarly, although capital asset pricing or shareholder return models (i.e., looking at the securities market and adjusting the returns based on the risks and capturing long-run performance potential) were considered to be a more reliable and longer-term way of thinking about organizational effectiveness, they still suffered from the charge of reflecting effectiveness from the perspective of too narrow a stakeholder base.

Attention shifted once more toward thinking about organizational effectiveness from an organization design perspective and then from themes of information and organization design to questions about risk, management cognition, mental models, and the psychology of strategic management. Organizations were seen as being constrained by their environments. They have to set some criteria for effectiveness and do this typically via “performance norms,” which are, for better or worse, underpinned by sets of essential values. Researchers accepted that there may be competing or contradictory norms, but they also argued that the crucial task for management was to translate these norms into an “internal ideology” that provided the foundation for decision making and actions. An obvious next step for ideas about organizational effectiveness was to consider how decisions made about information and organization design might inadvertently, or indeed by design, lead into a form of management cognition and from this the mind-set and capital of top talent that could bring about too high levels of risk. Attention focused on the following:

• The importance of the mental models of senior managers
• Dealing with the problem that organization designs continually erode in their efficiency, therefore what did an organizational redesign capability involve?

New Cross-Disciplinary Insights

A range of factors are now also considered to have an important bearing on organization effectiveness, the most notable being

• the redesign of strategic organizational processes;
• changes in the organization form (the combination of strategy, structure, and internal control and coordination systems that provide an organization with its operating logic);
• the competing value of information inside the organization and how structures can help make sure managers attend to the most important information;
• integration mechanisms that bring together the varied knowledge of individuals in strategically important information markets to produce important solutions;
• the use of organizational culture to create the mental, emotional, and attitudinal states that precede effective employee performance; and,
• the systemic relationships among human resource management practices, broader human resource architectures, and human capital strategies to competitive advantage.

Psychologists began to get involved once more in the field of organizational effectiveness in the early 1990s. They turned their attention to changes in the employment relationship and the impact that these had on organizational effectiveness. While the initial psychological contributions to the field of organizational effectiveness were based on ideas of commitment, absenteeism, and turnover, changes in the structure of employment, job stability, employment outcomes, and the quality of the employment relationship, which were becoming evident by the late 1990s and early 2000s, began to change the frame of analysis for organizational psychology and its link to organizational effectiveness.

A number of fundamental principles began to emerge. First, attention was given to a number of fundamental building blocks of effectiveness at the individual level. The need to link employees more deeply to the organization’s products, services, processes, and performance began to be emphasized. Then, it became evident that the performance criteria applied to “effectiveness” had to become both more diverse and reciprocal. The language of implicit or psychological contracts began to enter the organizational effectiveness debate.

It was also recognized that basic managerial competency or proficiency, and the delivery of performance against efficient or cost-effective performance metrics, affects organizational competitiveness. This impact might be on the basis of speed or time, the creation of internal or external customer perceptions of added value, the challenge of the longer-term strategic risks or costs associated with error or inappropriate organizational decision making, or the “collateral damage” created by current actions in terms of the future constraints on actions they might create. The last of these brings corporate reputation center stage.

Third was the importance of organizational climate and culture as an enabler of high individual and organizational performance. And fourth was the importance of a series of individual-organizational linkages and bonds that create the mental, emotional, and attitudinal states that precede effective employee performance. In addition to the historical interest in commitment noted above, researchers began to explore the roles of identification, internalization, and psychological ownership. This research was to serve as a foundation for more recent interest in questions of corporate reputation, employee engagement, advocacy, and employer brands.

The management of work-life balance, well-being, productivity, and happiness, along with generational shifts in work values, has become mainstream. In addition, human resource management researchers have used an architectural metaphor to highlight the locus of value creation that was necessary for effectiveness. The human resource architecture reflected a combination of systems, practices, competencies, and skills needed to develop and manage an organization’s strategic human capital. Then, finally, there is a growing linkage between organizational effectiveness and sustainable management. Susan Albers Mohrman and Edward Lawler have identified three developments bringing together three previously separate domains of effectiveness: (1) profit, (2) ecological, and (3) social. Declining resources are affecting the security of the value chain. Increased transparency has opened up organizational performance to global scrutiny. There are increased expectations by customers and other stakeholders and a growing sentiment that corporations need to change the roles they play in the world to deal with complex, urgent issues.