Organizational alignment needs to satisfy two performance objectives. The first is to adapt the organization to the market and its ever-changing conditions. We refer to this objective as market adaptation. In addition, organizational alignment must also enable managers to coordinate their efforts across the organization to reduce complexity and administrative costs. We refer to this second objective as coordination. Adaptation and coordination act as forces in tension with each other. So, when measuring organizational performance, managers need to answer two fundamental questions: “How do we measure adaptation and coordination?” And “How is the organization performing?”
MARKET ADAPTATION AND ORGANIZATIONAL EFFECTIVENESS
An organization must be able to adapt to the market to be effective. Ideally, we would like a separate organization for each target market segment to be able to follow the customers as closely as possible and unlock profitable growth. But, such a high level of differentiation can become expensive very quickly. So, a company usually combines multiple market segments under a common unit, a division. The ruling question of organizational performance becomes one of effectiveness: i.e. how effective is the organizational unit in following the market?
Measures of effectiveness relate to the market performance of the organizational unit. They may include some of the following metrics: revenue growth, customer orders, customer satisfaction and experience, channel satisfaction and experience, customer retention, number of product lines and SKUs, market share, time to market, supply-chain performance, and much more.
COORDINATION AND ORGANIZATIONAL EFFICIENCY
The concern with organizational coordination is the efficient use of resources. Coordination uses resources to facilitate information sharing, knowledge transfer, and communication. Resources comprise teams, committees, or formal lateral units depending on the complexity of the organization. Coordination also uses administrative resources. These include the top management functions for executive control and direction over all personnel, departments, facilities, and activities such as human resources, accounting, finance, public relations, contract administration, and legal. Therefore, measures of organizational efficiency include the input cost of resources for coordinating and administrating the organizational unit and the relative amount of output.
HOW YOUR ORGANIZATION IS PERFORMING
The question invariably comes up as to what is more important: organizational effectiveness or efficiency? The answer is both, as the organization needs to be effective and efficient at the same time. Ultimately, the company needs to find the right balance: too much effectiveness increases organizational costs; too much efficiency keeps the company from following the market closely causing it to miss market opportunities.
So, the first order of business should be to start taking performance readings for the entire organization and each unit in particular. That will tell you a lot about your current situation. Then, the second order of business should be to compare these results against your strategic objectives: What do you see? How is the organization performing? Does the structure follow your strategy? This should tell you even more.
To learn more about strategy execution and the role of organizational alignment, view our publication: “Organizational Alignment: Deploying for Strategy.”