CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY

Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

Diagnosing Organization
Diagnosing organizations is the second major phase in the general model of planned change
described in previous Chapters. It follows the entering and contracting stage and precedes the planning
and implementation phase.
Diagnosis is the process of understanding a system’s current functioning. It involves collecting
pertinent information about current operations, analyzing those data, and drawing conclusions for
potential change and improvement. Effective diagnosis provides the systematic knowledge of the
organization needed to design appropriate interventions. Thus, OD interventions derive from diagnosis
and include specific actions intended to improve organizational functioning.
This chapter presents a general definition of diagnosis and discusses the need for diagnostic
models in guiding the process. Diagnostic models derive from conceptions about how organizations
function, and they tell OD practitioners what to look for in diagnosing organizations, departments,
groups, or jobs. They serve as a road map for discovering current functioning. A general, comprehensive
diagnostic model is presented based on open systems theory. This chapter concludes with a description
and application of an organization-level diagnostic model.
WHAT IS DIAGNOSIS?
Diagnosis is the process of understanding how the organization is currently functioning, and it
provides the information necessary to design change interventions. It generally follows from successful
entry and contracting, which set the stage for successful diagnosis. Those processes help OD practitioners
and client members jointly determine organizational issues to focus on, how to collect and analyze data to
understand them, and how to work together to develop action steps from the diagnosis. In another sense,
diagnosis is happening all the time. Managers, organization members, and OD practitioners are always
trying to understand the drivers of organization effectiveness, and how and why change is proceeding in a
particular way.

Unfortunately, the term diagnosis can be misleading when applied to organizations. It suggests a
model of organization change analogous to the medical model of diagnosis: An organization (patient)
experiencing problems seeks help from an OD practitioner (doctor); the practitioner examines the
organization, finds the causes of the problems, and prescribes a solution. Diagnosis in organization
development, however, is much more collaborative than such a medical perspective implies and does not
accept the implicit assumption that something is wrong with the organization.

The Process of Organization Development

First, the values and ethical beliefs that underlie OD suggest that both organization members and change
agents should be involved in discovering the determinants of current organization effectiveness.
Similarly, both should be involved actively in developing appropriate interventions and implementing
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

them. For example, a manager might seek an OD practitioner’s help to reduce absenteeism in his or her
department. The manager and an OD consultant jointly might decide to diagnose the cause of the problem
by examining company absenteeism records and by interviewing selected employees about possible
reasons for absenteeism. Alternatively, they might examine employee loyalty and discover the
organizational elements that encourage people to
stay. Analysis of those data could uncover determinants of absenteeism or loyalty in the department, thus
helping the manager and the OD practitioner jointly to develop an appropriate intervention to address the
issue.

Second, the medical model of diagnosis also implies that something is wrong with the patient and that one
needs to uncover the cause of the illness. In those cases where organizations do have specific problems,
diagnosis can be problem oriented, seeking reasons for the problems. On the other hand, as suggested by
the absenteeism example above, the OD practitioner and the client may choose one of the newer views of
organization change and frame the issue positively. Additionally, the client and the OD practitioner may
be looking for ways to enhance the organization’s existing functioning. Many managers involved with
OD are not experiencing specific organizational problems. Here, diagnosis is development oriented. It
assesses the current functioning of the organization to discover areas for future development. For
example, a manager
might be interested in using OD to improve a department that already seems to be functioning well.
Diagnosis might include an overall assessment of both the task performance capabilities of the
department and the impact of the department on its individual members. This process seeks to uncover
specific areas for future development of the department’s effectiveness.

In organization development, diagnosis is used more broadly than a medical definition would
suggest. It is a collaborative process between organization members and the OD consultant to collect
pertinent information, analyze it, and draw conclusions for action planning and intervention. Diagnosis
may be aimed at uncovering the causes of specific problems, focused on understanding effective
processes, or directed at assessing the overall functioning of the organization or department to discover
areas for future development. Diagnosis provides a systematic understanding of organizations so that
appropriate interventions may be developed for solving problems and enhancing effectiveness.

THE NEED FOR DIAGNOSTIC MODELS

Entry and contracting processes can result in a need to understand either a whole system or some part,
process, or feature of the organization. To diagnose an organization, OD practitioners and organization
members need to have an idea about what information to collect and analyze. Choices about what to look
for invariably depend on how organizations are perceived. Such perceptions can vary from intuitive
hunches to scientific explanations of how organizations function. Conceptual frameworks that people use
to understand organizations are referred to as “diagnostic models.” They describe the relationships among
different features of the organization, as well as its context and its effectiveness. As a result, diagnostic
models point out what areas to examine and what questions to ask in assessing how an organization is
functioning.
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

However, all models represent simplifications of reality and therefore choose certain features as
critical. The positive model of change supports the conclusion that focusing attention on those features,
often to the exclusion of others, can result in a biased diagnosis. For example, a diagnostic model that
relates team effectiveness to the handling of interpersonal conflict would lead an OD practitioner to ask
questions about relationships among members, decision-making processes, and conflict resolution
methods. Although relevant, those questions ignore other group issues such as the composition of skills
and knowledge, the complexity of the tasks performed by the group, and member interdependencies.
Thus, diagnostic models and processes must be chosen carefully to address the organization’s presenting
problems as well as to ensure comprehensiveness.
Potential diagnostic models are everywhere. Any collection of concepts and relationships that
attempts to represent a system or explain its effectiveness can potentially qualify as a diagnostic model.
Major sources of diagnostic models in OD are the thousands of articles and books that discuss, describe,
and analyze how organizations function. They provide information about how and why certain
organizational systems, processes, or functions are effective. The studies often concern a specific facet of
organizational behavior, such as employee stress, leadership, motivation, problem solving, group
dynamics, job design, and career development. They also can involve the larger organization and its
context, including the environment, strategy, structure, and culture. Diagnostic models can be derived
from that information by noting the dimensions or variables that are associated with an organization’s
effectiveness.

Another source of diagnostic models is OD practitioners’ experience in organizations. That field

knowledge is a wealth of practical information about how organizations operate. Unfortunately, only a
small part of that vast experience has been translated into diagnostic models that represent the
professional judgments of people with years of experience in organizational diagnosis. The models
generally link diagnosis with specific organizational processes, such as group problem solving, employee
motivation, or communication between managers and employees. The models list specific questions for
diagnosing such processes.

OPEN SYSTEMS MODEL

This section introduces systems theory, a set of concepts and relationships describing the
properties and behaviors of things called systems—organizations, groups, and people, for example.
Systems are viewed as unitary wholes composed of parts or subsystems; the system serves to integrate the
parts into a functioning unit. For example, organization systems are composed of departments, such as
sales, operations, and finance. The organization serves to coordinate behaviors of its departments so that
they function together in service of a goal or strategy. The general diagnostic model based on systems
theory that underlies most of the OD is called the “open systems model.”

Organizations as Open System, the open systems model recognizes that organizations exist in the
context of a larger environment that affects how the organization performs and in turn is affected by how
the organization interacts with it. The model suggests that organizations operate within an external
environment, takes specific inputs from the environment, and transforms those inputs using social and
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

technical processes. The outputs of the transformation process are returned to the environment and can be
used as
feedback to the organization’s functioning.

The open systems model also suggests that organizations and their subsystems departments,
groups, and individuals—share a number of common features that explain how they are organized and
function. For example, open systems display a hierarchical ordering. Each higher level of system is
composed of lower-level systems: Systems at the level of society are composed of organizations;
organizations comprise are composed of groups (departments); and groups comprise are composed of
individuals. Although systems at different levels vary in many ways—in size and complexity, for
example—they have a number of common characteristics by virtue of being open systems, and those
properties can be applied to systems at any level.

The following open systems properties are described below: environments; inputs,
transformations, and outputs; boundaries; feedback; equifinality; and alignment.

Environments Organizational environments are everything beyond the boundaries of the system that can
indirectly or directly affect performance and outcomes. Open systems, such as organizations and people,
exchange information and resources with their environments. They cannot completely control their own
behavior and are influenced in part by external forces. Organizations, for example, are affected by such
environ-mental conditions as the availability of labor and human capital, raw material, customer
demands, competition, and government regulations. Understanding how these external forces affect the
organization can help explain some of its internal behavior.

Inputs, Transformations, and Outputs Any organizational system is composed of three

related parts: inputs, transformations, and outputs. Inputs consist of human resources or other resources,
such as information, energy, and materials, coming into the system. Inputs are part of and acquired from
the organization’s external environment. For example, a manufacturing organization acquires raw
materials from an outside supplier. Similarly, a hospital nursing unit acquires information concerning a
patient’s condition from the attending physician. In each case, the system (organization or nursing unit)
obtains resources (raw materials or information) from its external environment.
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

Transformations are the processes of converting inputs into outputs. In organizations, a production or
operations function composed of both social and technological components generally carries out
transformations. The social component consists of people and their work relationships, whereas the
technological component involves tools, techniques, and methods of production or service delivery.
Organizations have developed elaborate mechanisms for transforming incoming resources into goods and
services. Banks, for example, transform deposits into mortgage loans and interest income. Schools
attempt to transform students into more educated people. Transformation processes also can take place at
the group and individual levels. For example, research and development departments can transform the
latest scientific advances into new product ideas, and bank tellers can transform customer requests into
valued services. Outputs are the results of what is transformed by the system and sent to the environment.
Thus, inputs that have been transformed represent outputs ready to leave the system. Group health
insurance companies receive premiums, healthy and unhealthy individuals, and medical bills; transform
them through physician visits and record keeping; and export treated patients and payments to hospitals
and physicians.
Boundaries The idea of boundaries helps to distinguish between systems and environments. Closed
systems have relatively rigid and impenetrable boundaries, whereas open systems have far more
permeable borders. Boundaries—the borders, or limits, of the system—are easily seen in many biological
and mechanical systems. Defining the boundaries of social systems is more difficult because there is a
continuous inflow and outflow through them. For example, where are the organizational boundaries in the
following case? An individual customer installing a wireless home network gets a message that the
software is conflicting with another piece of software from the Internet service provider (ISP). The
customer calls the network software provider who talks to the ISP technical support people and provides
technical support and suggestions that resolve the conflict. The customer feels completely supported by
the process and never knew that the network software technical support person he or she was talking to
was in India. The continued development of the Internet will continue to challenge the notion of
boundaries in open systems.
The definition of a boundary is somewhat arbitrary because a social system has multiple subsystems and
the boundary line for one subsystem may not be the same as that for a different subsystem. As with the
system itself, arbitrary boundaries may have to be assigned to any social organization, depending on the
variable to be stressed. The boundaries used for studying or analyzing leadership, for instance, may be
quite different from those used to study intergroup dynamics.

Feedback, feedback is information regarding the actual performance or the output results of the system.
Not all such information is feedback, however. Only information used to control the future functioning of
the system is considered feedback. Feedback can be used to maintain the system in a steady state (for
example, keeping an assembly line running at a certain speed) or to
help the organization adapt to changing circumstances. McDonald’s, for example, has strict feedback
processes to ensure that a meal in one outlet is as similar as possible to a meal in any other outlet. On the
other hand, a salesperson in the field may report that sales are not going well and may insist on some
organizational change to improve sales. A market research study may lead the marketing department to
recommend a change to the organization’s advertising campaign.
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

Equifinality In closed systems, a direct cause-and-effect relationship exists between the initial condition
and the final state of the system: When a computer’s “on” switch is pushed, the system powers up.
Biological and social systems, however, operate quite differently. The idea of equifinality suggests that
similar results or outputs may be achieved with different initial conditions and in many different ways.
This concept suggests that a manager can use varying degrees of inputs into the organization and can
transform them in a variety of ways to obtain satisfactory outputs.

Alignment A system’s overall effectiveness is partly determined by the extent to which the different
subsystems are aligned with each other. This alignment or fit concerns the relationships between the
organization and its environment, between inputs and transformations, between transformations and
outputs, and among the subsystems of the transformation process. Diagnosticians who view the
relationships among the various parts of a system as a whole are taking what is referred to as “a systemic
perspective.”
Alignment refers to a characteristic of the relationship between two or more parts.
It represents the extent to which the features, operations, and characteristics of one system support the
effectiveness of another system. Just as the teeth in two wheels of a watch must mesh perfectly for the
watch to keep time, so do the parts of an organization need to mesh for it to be effective. For example,
General Electric attempts to achieve its goals through a strategy of diversification and a divisional
structure that focuses attention and resources on specific businesses such as medical systems, lighting,
and consumer electronics. A functional structure would not be a good fit with the strategy because it is
more efficient for each division to focus on one product line than for one manufacturing department to try
to make CT scanners, light bulbs, and refrigerators. The systemic perspective suggests that diagnosis is
the search for misfits
among the various parts and subsystems of an organization

Diagnosing Organizational Systems

When viewed as open systems, organizations can be diagnosed at three levels. The
highest level is the overall organization and includes the design of the company’s strategy, structure, and
processes. Large organization units, such as divisions, subsidiaries, or strategic business units, also can be
diagnosed at that level. The next lowest level is the group or department, which includes group design and
devices for structuring interactions among members, such as norms and work schedules. The lowest level
is the individual position or job. This includes ways in which jobs are designed to elicit required task
behaviors.

Diagnosis can occur at all three organizational levels, or it may be limited to issues
occurring at a particular level. The key to effective diagnosis is knowing what to look
for at each level as well as how the levels affect each other.

For example, diagnosing a work group requires knowledge of the variables important for group
functioning and how the larger organization design affects the group. In fact, a basic understanding of
organization-level issues is important in almost any diagnosis because they serve as critical inputs to
understanding groups and individuals. Figure 5.2 presents a comprehensive model for diagnosing these
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

different organizational systems. For each level, it shows (1) the inputs that the system has to work with,
(2) the key design components of the transformation subsystem, and (3) the system’s outputs.

The relationships shown in Figure 5.2 illustrate how each organization level affects
the lower levels. The external environment is the key input to organization design decisions. Organization
design is an input to group design, which in turn serves as an input to job design. These cross-level
relationships emphasize that organizational levels must fit with each other if the organization is to operate
effectively
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

The following discussion on organization-level diagnosis and the discussion in Chapter 6 on group- and
job-level diagnosis provide general overviews of the dimensions (and their relationships) that need to be
understood at each level.

ORGANIZATION-LEVEL DIAGNOSIS

The organization level of analysis is the broadest systems perspective typically taken in
diagnostic activities. The model shown in Figure 5.2(A) is similar to other popular organization-level
diagnostic models. These include Weisbord’s six-box model, Nadler and Tushman’s congruency model,
Galbraith’s star model, and Kotter’s organization dynamics model. Figure 5.2(A) proposes that an
organization’s transformation processes, or design components, represent the way the organization
positions and organizes itself within an environment (inputs) to achieve specific outputs. The com-
bination of design component elements is called a “strategic orientation.” To understand how a total
organization functions, it is necessary to examine particular inputs, design components, and the alignment
of the two sets of dimensions. Figure 5.2(A) shows that two key inputs affect the way an organization
designs its strategic orientation: the general environment and the task environment or industry structure.

Organization Environments and Inputs

At the organization level of analysis, the external environment is the key input. We first describe different
types of environments that can affect organizations. Then we identify environmental dimensions that
influence organizational responses to external forces.

Environmental Types There are two classes of environments: the general environment and the task
environment. We will also describe the enacted environment, which reflects members’ perceptions of the
general and task environments.

The general environment consists of all external forces and elements that can influence an
organization and affect its effectiveness. The environment can be described in terms of the amount of
uncertainty present in social, technological, economic, ecological, and political/regulatory forces. Each of
these forces can affect the organization in both direct and indirect ways. For example, the outbreak of
SARS (severe acute respiratory syndrome) directly affected the demand uncertainty for tourism, airline,
and other industries in Singapore, Hong Kong, Beijing, and Toronto. Cathay Pacific and Singapore
Airlines had to ground much of their fleet as demand plummeted. The general environment also can affect
organizations indirectly by virtue of the linkages between external agents. Any business that was
dependent on tourism or travel, such as restaurants, hotels, and museums, was also affected by the SARS
outbreak. Similarly, an organization may have trouble obtaining raw materials from a supplier because a
national union is grieving a management policy, a government regulator is bringing a lawsuit, or a
consumer group is boycotting their products. Thus, components of the general environment can affect the
organization without having any direct connection to it.
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

An organization’s task environment or industry structure is another important input

into strategic orientation. Michael Porter defines an organization’s task environment by five forces:
supplier power, buyer power, threats of substitutes, threats of entry, and rivalry among competitors. First,
strategic orientations must be sensitive to powerful suppliers who can increase prices (and therefore lower
profits) or force the organization to pay more attention to the supplier’s needs than to the organization’s
needs. For example, unions represent powerful suppliers of labor that can affect the costs of any
organization within an industry. Second, strategic orientations must be sensitive to powerful buyers.
Powerful retailers, such as Wal-Mart and Costco, can force Procter & Gamble, Johnson & Johnson, or
other suppliers to lower prices or deliver their products in particular ways. Third, strategic orientations
must be sensitive to the threat of new firms entering into competition. Profits in the restaurant business
tend to be low because of the ease of starting a new restaurant. Fourth, strategic orientations must be
sensitive to the threat of new products or services that can replace existing offerings. Ice cream producers
must carefully monitor their costs and prices because it is easy for a consumer to purchase frozen yogurt
or other types of desserts instead. Finally, strategic orientations must be sensitive to rivalry among
existing competitors. If many organizations are competing for the same customers, for example, then the
strategic orientation must monitor product offerings, costs, and structures carefully if the organization is
to survive and prosper. Together, these forces play an important role in determining the success of an
organization, whether it is a manufacturing or service firm, a nonprofit organization, or a government
agency.

In addition to understanding what inputs are at work, the environment can be understood in terms
of its rate of change and complexity. The rate of change in an organization’s general environment or
industry structure can be characterized along a dynamic–static continuum. Dynamic environments change
rapidly and unpredictably and suggest that the organization adopt a flexible strategic orientation.
Dynamic environments are high in uncertainty compared to static environments that do not change
frequently or dramatically. The complexity of the environment refers to the number of important elements
in the general environment and industry structure. For example, software development organizations face
dynamic and complex environments. Not
only do technologies, regulations, customers, and suppliers change rapidly, but all of them are important
to the firm’s survival. On the other hand, manufacturers of glass jars face more stable and less complex
environments. While general environments and task environments describe the specific, objective
pressures an organization faces, the organization must first recognize those pressures. The enacted
environment consists of the organization members’ perception and representation of its general and task
environments. Weick suggested that environments must be perceived before they can influence decisions
about how to respond to them.

Organization members must actively observe, register, and make sense of the environment before it can
affect their decisions about what actions to take. Thus, only the enacted environment can affect which
organizational responses are chosen. The general and task environments, however, can influence whether
those responses are successful or ineffective. For example, members may perceive customers as relatively
satisfied with their products and may decide to make only token efforts at developing new products. If
those perceptions are wrong and customers are dissatisfied with the products, the meager product
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

development efforts can have disastrous organizational consequences. As a result, an organization’s

enacted environment should accurately reflect its general and task environments if members’ decisions
and actions are to be effective.

Environmental Dimensions Environments also can be characterized along dimensions that describe the
organization’s context and influence its responses. One perspective views environment as information
flows and suggests that organizations need to process information to discover how to relate to their
environments. The key dimension of the environment affecting information processing is information
uncertainty, or the degree to which environmental information is ambiguous. Organizations seek to
remove uncertainty from the environment so that they know best how to transact with it. For example,
organizations may try to discern customer needs through focus groups and surveys and attempt to
understand competitor strategies through press releases, sales force behaviors, and knowledge of key
personnel. The greater the uncertainty, the more information processing is required to learn about the
environment. This is particularly evident when environments are complex and rapidly changing. These
kinds of environments pose difficult information processing problems for organizations. For example,
global competition, technological change, and financial markets have created highly uncertain and
complex environments for many multinational firms and have severely strained their information
processing capacity.

Another perspective views environments as consisting of resources for which organizations compete. The
key environmental dimension is resource dependence, or the degree to which an organization relies on
other organizations for resources. Organizations seek to manage critical sources of resource dependence
while remaining as autonomous as possible. For example, firms may contract with several suppliers of the
same raw material so that they are not overly dependent on one vendor. Resource dependence is
extremely high for an organization when other organizations control critical resources that cannot be
obtained easily elsewhere. Resource criticality and availability determine the extent to which an
organization is dependent on the environment and must respond to its demands. An example is the tight
labor market for
information systems experts experienced by many firms in the late 1990s. These two environmental
dimensions—information uncertainty and resource dependence—can be combined to show the degree to
which organizations are constrained by their environments and consequently must be responsive to their
demands.

Design Components

Figure 5.2(A) shows that a strategic orientation is composed of five major design components—
strategy, technology, structure, measurement systems, and human resources systems—and an
intermediate output—culture. Effective organizations align their design components to each other and to
the environment. A strategy represents the way an organization uses its resources (human, economic, or
technical) to achieve its goals and gain a competitive advantage.
It can be described by the organization’s mission, goals and objectives, strategic intent, and functional
policies. A mission statement describes the long-term purpose of the organization, the
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

range of products or services offered, the markets to be served, and the social needs served by the
organization’s existence. Goals and objectives are statements that provide explicit direction, set
organization priorities, provide guidelines for management decisions, and serve as the cornerstone for
organizing activities, designing jobs, and setting standards of achievement. Goals and objectives should
set a target of achievement (such as 50% gross margins, an average employee satisfaction score of 4 on a
5-point scale, or some level of productivity); provide a means or system for measuring achievement; and
provide a deadline or time frame for accomplishment.

APPLICATION

Steinway’s Strategic Orientation

Steinway & Sons, which turned 150 years old in April 2003, is generally regarded as the finest
piano maker in the world. Founded in 1853 by the Steinway family, the firm was sold to CBS in
1972, taken private in 1985 by John and Robert Birmingham, and sold again in 1995 to Dana
Messina and Kyle Kirkland, who took it public in 1996. Steinway & Sons is the piano division
of the Steinway Musical Instruments Company that also owns Selmer Instruments and other
manufacturers of band instruments (http://www.steinwaymusical.com). Piano sales in 2002 were
$169 million, down 7.6% from the prior year and mirroring the general economic downturn.
Since going public, Steinway’s corporate revenues have grown a compounded 6–7% a year, while EPS
have advanced, on average, a compounded 11%. The financial performance for the overall company in
2002 was slightly below industry averages. The Steinway brand remains one of the company’s most
valuable assets. The company’s president notes that despite only 2% of all keyboard unit sales in the
United States, they have 25% of the sales dollars and 35% of the profits. Their market share in the high-
end grand piano segment is consistently over 80%. For example, 98% of the piano soloists at 30 of the
world’s major symphony orchestras chose a Steinway grand during the 2000/2001 concert season. Over
1,300 of the world’s top pianists, all of whom own Steinways and perform solely on Steinways, endorse
the brand without financial compensation. Workers at Steinway & Sons manufacturing plants in New
York and Germany have been with the company for an average of 15 years, often over 20 or 30 years.
Many of Steinway’s employees are descendants of parents and grandparents who worked for the
company.

The External Environment

The piano market is typically segmented into grand pianos and upright pianos, with the former being a
smaller but higher-priced segment. In 1995, about 550,000 upright pianos and 50,000 grand pianos were
sold. Piano customers can also be segmented into professional artists, amateur pianists, and institutions
such as concert halls, universities, and music schools. The private (home) market accounts for about 90%
of the upright piano sales and 80% of the grand piano sales, with the balance being sold to institutional
customers. New markets in Asia represent
important new growth opportunities. The piano industry has experienced several important and dramatic
changes for such a traditional product. Industry sales, for example, dropped
40% between 1980 and 1995. Whether the decline was the result of increased electronic keyboard sales, a
real decline in the total market, or some temporary decline was a matter of debate in the industry. Since
then, sales growth has tended to reflect the ups and downs of the global economy. Competition in the
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

piano industry has also changed. In the United States, several hundred piano makers at the turn of the
century had consolidated to eight by 1992. The Baldwin Piano and Organ Company is Steinway’s
primary U.S. competitor. It offers a full line of pianos under the Baldwin and Wurlitzer brand names
through a network of over 700 dealers. In addition to relatively inexpensive upright pianos produced in
high-volume plants, Baldwin also makes handcrafted grand pianos that are well respected and endorsed
by such artists as Dave Brubeck and Stephen Sondheim, and by the Boston, Chicago, and Philadelphia
orchestras. Annual sales are in the $100 million range; Baldwin was recently sold to the Gibson Guitar
Company. The European story is similar. Only Bösendorfer of Austria and Fazioli of Italy remain as
legitimate Steinway competitors. Several Asian companies have emerged as important competitors.
Yamaha, Kawai, Young Chang, and Samick collectively held about 35% of the vertical piano market and
80% of the grand piano market in terms of units and 75% of global sales in 1995. Yamaha is the world’s
largest piano manufacturer with sales of over $1 billion and a global market share of about 35%.
Yamaha’s strategy has been to produce consistent piano quality through continuous improvement. A
separate handcrafted concert grand piano operation has also tried to use continuous improvement methods
to create consistently high-quality instruments. More than any other high-quality piano manufacturer,
Yamaha has been able to emulate and compete with Steinway.

Steinway & Sons offers several different pianos, including two brands (Steinway and the less expensive
Boston brand) and both upright and grand piano models. The company handcrafts its
grand pianos in New York and Germany, and sells them through more than 200 independent dealers.
About half of the dealers are in North and South America and approximately 85% of all Steinway pianos
are sold through this network. The company also owns seven retail outlets in New York, New Jersey,
London, Munich, Hamburg, and Berlin.

The dealer network is an important part of Steinway’s strategy because of its role in the “concert bank”
program. Once artists achieve a certain status, they are invited to become part of this elite group. The
performer can go to any local dealer, try out different pianos, and pick the one they want to use at a
performance for only the cost of bringing the piano to the concert hall. The concert bank contains over
300 pianos in more than 160 cities. In return for the service, Steinway is given exclusive use of the
performer’s name for publicity purposes.

Creating a Steinway concert grand piano is an art, an intricate and timeless operation (although alternate
methods have been created and improved, the basic process hasn’t changed much). It requires more than
12,000 mostly handcrafted parts and more than a little magic. The tone, touch, and sound of each
instrument is unique, and 120 technical patents and innovations contribute to the Steinway sound. Two
years are required to make a Steinway grand as opposed to a mass-produced piano that takes only about
20 days. There are three major steps in the production process: wood drying (which takes about a year),
parts making, and piano making.
Wood-drying operations convert moisture-rich lumber into usable raw material through air-
drying and computer-controlled kilns. Time is a critical element in this process because slow and
natural drying is necessary to ensure the best sound-producing qualities of the wood. Even after all the
care of the drying process, the workers reject approximately 50% of the lumber.
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

After drying, the parts-making operations begin. The first of these operations involves bending of the
piano rim (the curved side giving a grand piano its familiar shape). These rims are formed of multiple
layers of specially selected maple that are manually forced into a unified shape, held in presses for several
hours, and then seasoned for 10 weeks before being joined to other wooden parts. During this time, the
sounding board (a specially tapered Alaska Sitka spruce panel placed inside the rim to amplify the sound)
and many other case parts are made. The final critical operation with parts making involves the
fabrication of the 88 individual piano action sets that exist inside a piano. Piano “actions” are the intricate
mechanical assemblies—made almost completely of wood and some felt, metal, and leather—that
transmit finger pressure on the piano keys into the force that propels the hammers that strike the strings.
The action is a particularly important part of a piano because this mechanical linkage gives Steinways
their distinctive feel. In the action department, each operator was responsible for inspecting his or her
own work, with all assembled actions further subject to 100% inspection. Piano-making operations
include “bellying,” finishing, and tone regulating. The bellying process involves the precise and careful
fitting of the soundboard, iron piano plate, and rim to each other. It requires workers to lean their
stomachs against the rim of the piano to complete this task. Because of individual variations in material
and the high degree of precision required, bellying takes considerable skill and requires several hours per
piano. After the bellying operations, pianos are strung and moved to the finishing department. During
finishing, actions and keyboards are individually fit to each instrument to accommodate differences in
materials and tolerances to produce a working instrument. The final piano-making step involves tone
regulating. Here, the pianos are “voiced” for Steinway sound. Unlike tuning, which involves the
loosening and tightening of strings, voicing requires careful adjustments to the felt surrounding the
hammers that strike the strings. This operation is extremely delicate and is performed by only a small
handful of tone regulators. The tone regulators at Steinway are widely considered to be among the most
skilled artisans in the factory. Their voicing of a concert grand can take as much as 20 to 30 hours. All
tone regulators at Steinway have worked for the company in various other positions before reaching their
present posts, and several have more than 20 years with the firm. Finally, after tone regulation, all pianos
are polished, cleaned, and inspected one last time before packing and shipment. Steinway produced more
than 3,500 pianos in 2002 at its New York and Hamburg, Germany, plants. Almost 430 people work in
the New York plant and all but about 100 of them work in production. They are represented by the United
Furniture Worker’s union. Seventy-five percent of the workers are paid on a straight-time basis; the
remainder, primarily artisans, are paid on piece rates. Keeping workers has proved increasingly difficult
as well-trained Steinway craftspeople are coveted by other manufacturers and many of the workers could
easily set up their own shop to repair or rebuild older Steinway pianos. Excess inventories due to weak
sales both pre- and post-September 11 forced Steinway to adjust its production schedule; workers in its
New York plant reported to work every other week rather than lay off the highly skilled workers needed
to build its pianos.
The following questions are important in assessing Steinway’s strategic orientation:
1. What is the company’s general environment?
2. What is the company’s task environment?
3. What is the company’s strategy?
 CHRIST THE KING COLLEGE OF SCIENCE AND TECHNOLOGY
Putatan, Muntinlupa City

ORGANIZATION DEVELOPMENT MODULE

CHAPTERS 5 AND 6

4. What are the company’s technology, structure, measurement systems, and human resources
systems?
5. What is Steinway’s culture?
***To be submitted on October 29, 2020***