ORGANIZATION THEORY CHAPTER 3 : Organizing in a Changing Global Environment Gareth R. Jones

1. ORGANIZATION THEORY CHAPTER 3 : Organizing in a Changing Global Environment Gareth R. Jones

2. Learning Objectives List the forces in an organization’s specific and general environment that give rise to opportunities and threats Identify why uncertainty exists in the environment Describe how and why an organization seeks to adapt to and control these forces to reduce uncertainty

3. Learning Objectives (cont.) Understand how resource dependence theory and transaction cost explain why organizations choose different kinds of interorganizational strategies to manage their environments to gain the resources needed to achieve their goals and create value for their stakeholders

4. What is the Organizational Environment? Environment: the set of forces surrounding an organization that have the potential to affect the way it operates and its access to scarce resources Organizational domain: the particular range of goods and services that the organization produces, and the customers and other stakeholders whom it serves

5. Figure 3.1: The Organizational Environment

6. The Specific Environment • The forces from outside stakeholder groups that directly affect an organization’s ability to secure resources • Outside stakeholders include customers, distributors, unions, competitors, suppliers, and the government • The organization must engage in transactions with all outside stakeholders to obtain resources to survive

7. The General Environment The forces that shape the specific environment and affect the ability of all organizations in a particular environment to obtain resources

8. The General Environment (cont.) • Economic forces: factors, such as interest rates, the state of the economy, and the unemployment rate, determine the level of demand for products and the price of inputs • Manufacturing plants in China, Mexico • Technological forces: the development of new production techniques and new information-processing equipment influence many aspects of organizations’ operations

9. The General Environment (cont.) • Political, ethical, and environmental forces: influence government policy toward organizations and their stakeholders • F.E: A tariff on imported cars • Hybrid vehicles • Demographic, cultural, and social forces: the age, education, lifestyle, norms, values, and customs of a nation’s people • Shape organization’s customers, managers, and employees • Demand for baby products • Bribery and corruption

10. Uncertainty in the Organizational Environment All environmental forces cause uncertainty for organizations Greater uncertainty makes it more difficult for managers to control the flow of resources to protect and enlarge their domains As forces cause the environment to become more complex, less stable and poorer, the level of uncertainty increases.

11. Figure 3.2: Three Factors Causing Uncertainty

12. Sources of Uncertainty in the Environment • Environmental complexity: the strength, number, and interconnectedness of the specific and general forces that an organization has to manage • F.E: Ford’s supply policy • Production of a wider variety of products for different groups of customers increases complexity • Interconnectedness: increases complexity • F.E: A major breakthrough in carmaking technology

13. Sources of Uncertainty in the Environment (cont.) • Environmental dynamism: the degree to which forces in the specific and general environments change over time • Stable environment: forces that affect the supply of resources are predictable • Unstable (dynamic) environment: when an organization cannot predict how the changes in the environment will affect them

14. Sources of Uncertainty in the Environment (cont.) • Environmental richness: the amount of resources available to support an organization’s domain • F.E: A large pool of high quality scientists in Boston • Environments may be poor because: • The organization is located in a poor country or in a poor region of a country • There is a high level of competition, and organizations are fighting over available resources

15. Resource Dependence Theory The goal of an organization is to minimize its dependence on other organizations for the supply of scare resources and to find ways of influencing them to make resources available

16. Resource Dependence Theory (cont.) • An organization has to manage two aspects of its resource dependence: • It has to exert influence over other organizations so that it can obtain resources • It must respond to the needs and demands of the other organizations in its environment

17. Resource Dependence Theory (cont.) • The strength of one organization’s dependence on another depends on: • How vital the resource is to the organization’s survival • inputs like component parts and raw materials (depend on) • Resources like customers and distribution outlets HP, SamsungBest Buy Acer Intel Circuit City Lenovo • The extent that other organization’s control these resources • Monopoly in some markets

18. Interorganizational Strategies for Managing Resource Dependencies • Two basic types of interdependencies cause uncertainty • Symbiotic interdependencies: interdependencies that exist between an organization and its suppliers and distributors • Intel and HP- Dell • Competitive interdependencies: interdependencies that exist among organizations that compete for scarce inputs and outputs (HP- Dell)

19. Linkage Mechanisms Linkage mechanisms, while controlling interdependency, require coordination Coordination reduces each organization’s freedom to act Organizations should choose the strategy that offers the most reduction in uncertainty for the least loss of control

20. Figure 3.3: Interorganizational Strategies for Managing Symbiotic Interdependencies

21. Strategies for Managing Symbiotic Resource Interdependencies • Developing a good reputation • Reputation: a state in which an organization is held in high regard and trusted by other parties because of its fair and honest business practices • Paying bills on time • Providing high quality goods and services • Reputation and trust are the most common linkage mechanisms for managing symbiotic interdependencies • Car repair shop

22. Strategies for Managing Symbiotic Resource Interdependencies (cont.) • Cooptation: a strategy that manages symbiotic interdependencies by giving them a stake in the organization • Make outside stakeholders inside stakeholders • Local schools strategy for parents (membership of school boards) • Interlocking directorate: a linkage that results when a director from one company sits on the board of another company

23. Strategies for Managing Symbiotic Resource Interdependencies (cont.) • Strategic alliances: an agreement that commits two or more companies to share their resources to develop joint new business opportunities • An increasingly common mechanism for managing symbiotic (and competitive) interdependencies • BMW-Intel alliance in 2005 • UPS and DHL in 2008 • The more formal the alliance, the stronger and more prescribed the linkage and tighter control of joint activities • Greater formality preferred with uncertainty

24. Types of Strategic Alliances • Long-term contracts: aim is to reduce costs • by sharing resources • by sharing the risk of R&D, marketing, construction • Kellogg-farmers contract for corn and rice • Networks: a cluster of different organizations whose actions are coordinated by contracts and agreements rather than through a formal hierarchy of authority • Minority ownership • Keiretsu:a group of organizations, each of which owns shares in the other organizations in the group, that work together to further the group’s interests

25. Figure 3.5: The Fuyo Keiretsu

26. Figure 3.4: Types of Strategic Alliances

27. Types of Strategic Alliances (cont.) Joint venture: a strategic alliance among two or more organizations that agree to jointly establish and share the ownership of a new business

28. Figure 3.6: Joint Venture Formation

29. Strategies for Managing Symbiotic Resource Interdependencies (cont.) • Merger and takeover: results in resource exchanges taking place within one organization rather than between organizations • To take over supplier or distributer ( Shell-oil fields; McDonald’s- vast ranches in Brazil) • New organization better able to resist powerful suppliers and customers • Normally involves great expense and problems managing the new business

30. Figure 3-7: Interorganizational Strategies for Managing Competitive Interdependencies

31. Strategies for Managing Competitive Resource Interdependencies • Collusion and cartels • Collusion: a secret agreement among competitors to share information for a deceitful or illegal purpose • May influence industry standards • Cartel: an association of firms that explicitly agrees to coordinate their activities • May influence price structure of market

32. Strategies for Managing Competitive Resource Interdependencies (cont.) • Third-party linkage mechanism: a regulatory body that allows organizations to share information and regulate the way they compete • trade association in the same industry • Strategic alliances: can be used to manage both symbiotic and competitive interdependencies (Ford-Mazda) • Merger and takeover: the ultimate method for managing problematicinterdependencies

33. Transaction Cost Theory Transaction costs: the costs of negotiating, monitoring, and governing exchanges between people Transaction cost theory: the goal of an organization is to minimize the costs of exchanging resources in the environment and the costs of managing exchanges inside the organization

34. Sources of Transaction Costs • Environmental uncertainty and bounded rationality • Bounded rationality: refers to the limited ability people have to process information • Opportunism and small numbers • When organizations are dependent on a small number for supplies, the potential for exploitation is great • Risk and specific assets • Specific assets: investments that create value in one particular exchange relationship but have no value in any other exchange relationship

35. Figure 3.8: Sources of Transaction Costs

36. Transaction Costs and Linkage Mechanisms • Transaction costs are low when: • Organizations are exchanging nonspecific goods and services • Uncertainty is low • There are many possible exchange partners

37. Transaction Costs and Linkage Mechanisms (cont.) • Transaction costs are high when: • Organizations begin to exchange more specific goods and services • Uncertainty increases • The number of possible exchange partners falls

38. Transaction Costs and Linkage Mechanisms (cont.) • Bureaucratic costs: internal transaction costs • Bringing transactions inside the organization minimizes but does not eliminate the costs of managing transactions

39. Using Transaction Cost Theory to Choose an Interorganizational Strategy Transaction cost theory can be used to choose an interorganizational strategy Managers can weigh the savings in transaction costs of particular linkage mechanisms against the bureaucratic costs

40. Using Transaction Cost Theory to Choose an Interorganizational Strategy (cont.) • Managers deciding which strategy to pursue must take the following steps: • Locate the sources of transaction costs that may affect an exchange relationship and decide how high the transaction costs are likely to be • Estimate the transaction cost savings from using different linkage mechanisms • Estimate the bureaucratic costs of operating the linkage mechanism • Choose the linkage mechanism that gives the most transaction cost savings at the lowest bureaucratic cost

41. Keiretsu • Japanese system for achieving the benefits of formal linkages without incurring its costs • Example: Toyota has a minority ownership in its suppliers • Affords substantial control over the exchange relationship • Avoids bureaucratic cost of ownership and opportunism

42. Franchising A franchise is a business that is authorized to sell a company’s products in a certain area The franchiser sells the right to use its resources (name or operating system) in return for a flat fee or share of profits

43. Outsourcing • Moving a value creation that was performed inside the organization to outside companies • Decision is prompted by the weighing the bureaucratic costs of doing the activity against the benefits • Increasingly, organizations are turning to specialized companies to manage their information processing needs