A Practitioner’s Guide to Organizational Effectiveness
Organizational effectiveness measures how successful organizations are in reaching their goals. An effective organization runs smoothly and functions well. In this article, we will explain the building blocks needed to create an effective organization. Whether you are a leader or working in a more operational role, read on to learn how to make your organization function (even) better.
We will start by explaining what organizational effectiveness is, go over seven organizational effectiveness models, explain how organizational effectiveness can be measured, and conclude by specifying how HR can contribute to organizational effectiveness.
What is organizational effectiveness? A definition
Organizational effectiveness models
How to measure organizational effectiveness?
How HR can contribute to organizational effectiveness
What is Organizational Effectiveness? A Definition
According to Merriam-Webster, effectiveness is ‘the power to produce a desired result’. J.F. Kennedy was an effective president, Jack Welch an effective CEO, and Greta Thunberg is an effective climate activist.
In an organizational context, however, effectiveness is harder to define. Apple is considered a successful organization on many measures – but is it also effective? The effectiveness of an organization depends on its mission & goals, internal efficiency, strategic positioning, and many more factors.
The picture above shows three organizations. Which organization would you qualify as more effective? Each of them makes a tangible positive impact, either on their shareholders, their users, their workers, or the environment. This makes each of them effective – in different ways.
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This shows that organizational effectiveness has no one definition and depends on the organizational context. It can revolve around the degree to which an organization accomplishes its goals, satisfies its stakeholders, has the resources it needs to operate, or creates societal or environmental impact.
This brings us to our definition. We define organizational effectiveness as the degree to which an organization achieves the goals it set out to achieve. These goals can be a certain output (productivity or service quality), efficiency goals it set out for, but also the degree to which its internal processes are aligned, and the degree to which it has secured the resources required to create a competitive advantage.
7 Organizational Effectiveness Models
In the example earlier, you saw that three organizations that did widely different things, can be equally effective. That is because there are multiple angles to look at organizational effectiveness. The table below shows the seven most common perspectives on effectiveness (also known as effectiveness models) and what effectiveness means for each of these.
|Effectiveness models||Organizational effectiveness means…|
|Goal model||…accomplishing its goals|
|Internal process model||…high-quality internal processes|
|Resource-based model||…obtaining resources needed for high performance|
|Strategic constituency model||…satisfying strategic constituencies that hold sway over the organization|
|Stakeholder model||…satisfying stakeholders of the organization|
|Competing values model||…the presence of simultaneous opposites|
|Abundance model||…flourishing and virtuousness|
Let’s go over each of these and explain in a few sentences what they mean and how they can be applied to an organization.
- The goal approach gauges effectiveness by measuring to what degree the organization reaches the goals it set out to achieve. This is the most traditional way of measuring organizational effectiveness. Goals can include product or service quality and quantity, financial goals, shareholder value, societal impact, or all of these. The goal approach is less actionable as it measures output but does not provide information about the input or the process.
- The internal process model looks not at the outcome but at what happens inside of the organization. This approach assesses effectiveness through the smooth functioning of organizational operations. This is achieved through information management, documentation, and continuous consolidation.
The best-known example is the lean process approach, focused on continuous improvement and efficiency. The drawback is that the focus is often more on efficiency than on effectiveness and that the focus is more on inward processes than on outward opportunities.
- The resource-based model looks at the input as a measure of effectiveness. According to the Resource-Based View (RBV), firms achieve a competitive advantage by exploiting resources that are valuable, rare, and hard to imitate or copy.
Examples of such resources include proprietary software like Instagram or Microsoft’s Windows, advanced technology, like Apple’s iPhone, or a strong company brand or reputation like Apple, Coca Cola, or McKinsey. Bundling these resources helps the advantages become more profound. Take, for example, Apple’s technology in combination with the strong Apple brand. Organizations become effective by securing the supply of these resources.
- The strategic constituency model assesses effectiveness by measuring the degree to which it satisfies those in the environment who can threaten the organization’s survival – i.e., its strategic constituencies or interest groups. Each constituency has a degree of power and pursues different goals.
Constituencies can include owners, management, employees, customers, suppliers, government, and customer groups. Here, it is key to identify the relevant strategic constituencies, identify their expectations, and the way to meet these expectations.
- A similar approach is the stakeholder approach. This includes strategic constituencies but also those who are indirectly affected by the organization but may not have power over it (e.g., families of workers, activists, and communities).
- The competing values model is based on Cameron and Quinn’s competing values framework. This approach measures effectiveness by the ability of an organization to simultaneously promote competing values.
For example, an organization may want to satisfy customers and maximize profits while also taking care of employees, promote internal structure and coordination while also promoting innovation and novel initiatives, and have a clear direction while also providing autonomy to people to help the organization get there. The ability of an organization to reconcile these competing values is key to being effective.
- The abundance model proposes that effectiveness equates to unleashing the highest potential of human systems. This is about bringing forward positive values and virtuousness. To do this effectively, there has to be a balance between positive and negative values. For example, excellence and flourishing cannot exist without difficult challenges and struggle. Both positive and negative elements and emotions are required to push the potential of human systems.
Measuring organizational effectiveness is not a matter of either/or. Rather, it is about taking multiple perspectives and seeing if the organization is reaching the goals it set out to achieve, as well as its full potential.
How to measure organizational effectiveness? The OE scorecard
The organizational effectiveness models provide a perspective on assessing OE. If we want to measure it, we need to create a more detailed scorecard. This creates a systematic approach that can be used regularly to re-evaluate and track progress on how effective the organization really is and where we can make improvements.
Based on Cameron (2015), we have defined the following five questions that you can use to assess organizational effectiveness. As you will recognize, the activity domain and perspective form the effectiveness models we covered in the previous section.
- Activity domain. What is the domain of activities that OE assesses? Activity domains include goal realization, stakeholder satisfaction, financial return, employee loyalty, product leadership, customer intimacy, and so on.
- Perspective. From whose perspective is organizational effectiveness assessed? Examples include a shareholder perspective, employee perspective, customer perspective, or societal perspective.
- Level of analysis. What level of analysis applies? This can be on the individual, group, department, organizational, industry, or even on a global level.
- Time frame. What is the time frame used for the analysis? This can be over a period in the past, a snapshot of the current organization, or a long-term trends timeframe.
- Frame of reference. What is the frame of reference for the effectiveness assessment? The organization can be compared with the ideal organization, its competitors, a past version of the organization, or with its stated goals.
These questions allow you to take a specific perspective on organizational effectiveness and make it measurable. We added a simplified example below. This scorecard shows constituency satisfaction in the organization on an aggregated level, measured annually for 2020 and 2021.
The scorecard shows two key trends: Relations with labor unions and employees are low and deteriorating while shareholders and board satisfaction remains high. This may indicate a disconnect between senior management and the broader workforce, which is a danger to organizational effectiveness.
Of course, this is a simplified example. There are many more ways to measure satisfaction – e.g., turnover rates for employees, the degree to which labor unions have made frustrations public (in the news), and shareholder value. There are also many other KPIs to track, like the degree to which the organization reaches its goals, its position compared to their industry, and how effective it is in maintaining its competitive advantage. However, the example shows the power of measuring organizational effectiveness, and how you can use internal benchmarking to make the organization more effective.
How HR can contribute to organizational effectiveness?
This brings us to our last question: how can HR contribute to organizational effectiveness? Having a deeper understanding of organizational effectiveness will help specify how HR can add value to the organization.
First, organizational effectiveness is the main focus of the organizational development unit, which is often part of HR. The organizational development team runs organizational transformations and comes up with more specific interventions for workforce and organizational issues. For example, high turnover may result in interventions aimed to reduce turnover, ensure continuity of business, and drive efficiencies.
Second, HR can contribute to organizational effectiveness through people processes and building workforce capabilities. This is displayed in the figure below.
Let’s go through each of these steps.
- People practices. These are all the core HR practices, including recruitment & selection, learning and development, rewards & recognition, performance management, and workforce planning. All of these practices aim to create workforce capabilities.
- Workforce capabilities. These are the capabilities that HR is building in the workforce. Examples include employee engagement, employee experience, general competency levels, superior performance, leadership, and inclusion. Often, people practices directly aim at building these capabilities. We send employees to training to increase their capabilities, we reward people fairly, so they are motivated and perform well, and we have leadership development programs to increase our manager’s leadership capabilities.
- Key performance drivers. You will recognize the key performance drivers as part of organizational effectiveness. These include:
- Unique resources & capabilities. We mentioned the resource-based model earlier: HR should actively help to build resources and capabilities that are VRIO, short for valuable, rare, inimitable, and organized. These lead to the creation of a competitive advantage. HR can contribute by creating a high-performance culture, establishing best-of-industry people practices, but also contribute to existing VRIO capabilities through selective hiring, providing state-of-art skill-building training, and effective performance management processes.
- Efficient processes & organization. HR can contribute to efficient internal processes and smooth organizational operations by guaranteeing continuity of business through low absence and turnover, effective recruitment, and timely deployment of the workforce. This shows how people practices and workforce capabilities contribute to organizational effectiveness. Another key contribution is the creation of synergies through integrated HR practices around its culture and core competencies. These, in turn, reflect the strategic requirements of the business (Ulrich et al., 2017).
- Product and service outputs. The main contribution HR can make here is through their business acumen. HR should ensure that its policies benefit the organization’s end-customer, through culture-building, communicating values that align the organization with its customers, and through upskilling, rewarding, and evaluating those values. An organization in the service sector should, for example, have a clear, customer-oriented strategy and culture, and all HR activities should align with that.
Whether you are working in a leadership role or in a more operational capacity, understanding the drivers of organizational effectiveness will help you do a better job and help the organization advance in multiple ways. Effectiveness is, for example, about securing valuable resources and capabilities, optimizing processes, satisfying stakeholders, and ensuring that the organization reaches the goals it set out to achieve. Each of these perspectives can be used to measure and improve how effective the organization is – and create a well-oiled machine that positively impacts its employees, stakeholders, shareholders, and the broader community it operates in.
Organizational effectiveness is the degree to which an organization achieves the goals it set out to achieve. These goals can be a certain output (productivity or service quality), efficiency goals it set out for, but also the degree to which its internal processes are aligned, and the degree to which it has secured the resources required to create a competitive advantage.
There are 7 common organizational effectiveness models – goal model, internal process model, resource-based model, strategic constituency model, stakeholder model, competing values model, and abundance model.
Measuring organizational effectiveness is about taking multiple perspectives and seeing if the organization is reaching the goals it set out to achieve, as well as its full potential. Creating a detailed scorecard based on your goals and KPIs creates a systematic approach that can be used regularly to re-evaluate and track progress on how effective the organization really is and where we can make improvements.