Why Is Organizational Health So Important?

August 13, 2020

By Matthew R. Kerzner, Ph.D.

What is organizational health, and what does research say about it? Organizational health refers to the ability of a business to align, execute and renew itself faster than its competition. Organizational health not only targets a business’s financial sustainability, but it also increases its operational profits and develops its employees to meet the challenges of the competitive landscape.

An example of organizational health occurs when business owners learn from their mistakes and continuously improve their ability to compete in unique ways that competition cannot copy. Organizational health not only targets a business’s financial sustainability, but also increases its operational profits and develops its employees to meet the challenges of the competitive landscape. Researchers demonstrate that strong organizational health propels a business’s performance and helps its leaders create a path of continued improvement. For a family-owned business (“FOB”) to maintain organizational health, the business must have a good understanding of the external environment in which it operates, and it must have had a passion for understanding the capabilities of its workforce as it relates to organizational performance.

The concept of organizational health first appeared in literature more than 40 years ago. Warren Bennis (1962) was one of the first theorists to introduce organizational health as a way to determine organizational effectiveness and present the three dimensions of organizational health as adaptability, coherence of identity, and the ability to perceive the world. A business that sustains its organizational health yields more powerful assets and generates total returns to shareholders three times higher than unhealthy businesses.

There are four leader-driven practices that help sustain organizational health and, when implemented, businesses are five times more likely to be healthy and deliver strong performances over those businesses without strong practices in place. These practices include high-potential leaders who could determine how to deliver results and be held accountable to achieve them. These are businesses that have a strong market focus and a good handle on the external orientation toward not only customers, but all stakeholders, both internally and externally. These businesses have the execution edge, strive for continuous improvement, and raise quality and productivity—while eliminating waste and inefficiency. Additionally, these types of businesses search for talent and encourage building a competitive advantage by assembling and managing quality skills and a knowledge base.

Researchers demonstrate that strong organizational health can propel a business’s performance and help its business create a path of continued improvement. For an FOB to maintain organizational health, it must have a clear history of the business, a good handle on the external environment, and a passion for understanding the capabilities of its workforce as it relates to organizational performance.

Researchers state that the most difficult task for both FOBs and NFOBs is to achieve a competitive edge from developing its employees through improved organizational capability. This refers to the internal development of internal policies, procedures and processes that help support proper behaviors to maintain the business’s competitive advantage and the needs of all internal and external stakeholders. 

A successful business utilizes intangible resources, a set of capabilities, and core competencies to enhance its intellectual and system capabilities and ensure a more competitive advantage than just having physical assets. Intellectual and system capabilities address the business’s capacity to manage human intellect and convert it into useful products and services. When FOBs develop their human resource practices and procedures around organizational health, specifically in the area of talent development, this helps the owners have confidence in both their family and non-family employees when thinking about succession planning. According to researchers, there is a strong correlation between organizational health and both operational success and financial performance.

When owners in FOBs increase communication with their employees about the strategic direction of the company, trust is built. Trust is a key element of organizational health as it is critical for the long-term survival of a business. When owners share knowledge, both formally and informally, about the direction of their businesses, all stakeholders, employees, customers and suppliers have a sense of confidence and trust that the business is performing. This trust is called knowledge-based trust and is grounded in knowledge about another party and develops through repeated interactions.

Five Frames of Organizational Health

According to Keller and Price (2011), organizational health is viewed through five frames to help businesses reach their ultimate, competitive advantage over competitors. By using the five frames of organizational health in regard to succession planning, owners have a standard process to clearly communicate desired outcomes and lead the business to a successful transition. These five frames are aspire, assess, architect, act, and advance. They have associated health imperatives that businesses employ to maximize organizational health.

Five Frames of Performance and Health (Keller & Price, 2011)

Frame  Health Imperative
1. Aspire: Where did we want to go? 

Determine what “healthy” looks like for the business.

2. Assess: How ready were we to go there?  Uncover the root cause of mindset that supports or undermines organizational health. 
3. Architect: What must we have done to get there? Reshape the work environment to create healthy mindsets.
4. Act: How did we manage the journey? Ensure that energy for change is continually infused and unleashed.
5. Advance: How did we keep moving forward?  Equip leaders to lead from core of self-mastery.

As a business psychologist I educate and facilitate my clients through a strategic road map that can help them look at the past, think of the current state, and help develop a plan for the future. We look at how to grow the business, use operational efficiency, and how to develop the employees within the organization to help achieve the goals for short- and long-term sustainability of the business as well as maintain your strategic advantage.

About Matthew Kerzner

Matthew Kerzner is a Director in the Center for Individual and Organizational Performance and the Center for Family Business Excellence. Matt has more than 25 years of experience in organizational development with a specialization in assisting family businesses and closely held businesses.