Organizational Theory, Design, and Change: Managing in A Changing Global Environment

Organizational Theory, Design, and Change
Fifth Edition Gareth R. Jones
Chapter 3 Managing in a Changing Global Environment

Copyright 2007 Prentice Hall
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Learning Objectives
1. List the forces in an organizations specific and general environment that give rise to opportunities and threats 2. Identify why uncertainty exists in the environment 3. Describe how and why an organization seeks to adapt to and control these forces to reduce uncertainty
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Learning Objectives (cont.)

4. 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 the stakeholders
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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
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Figure 3-1: The Organizational Environment
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The Specific Environment

The forces from outside stakeholder groups that directly affect an organizations 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
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The General Environment

The forces that shape the specific environment and affect the ability of all organizations in a particular environment to obtain resources
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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 Technological forces: the development of new production techniques and new informationprocessing equipment, influence many aspects of organizations operations
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The General Environment (cont.)

Political and environmental forces: influence government policy toward organizations and their stakeholders Demographic, cultural, and social forces: the age, education, lifestyle, norms, values, and customs of a nations people
Shape organizations customers, managers, and employees

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Sources of 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
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Sources of Uncertainty in the Environment (cont.)

Environmental complexity: the strength, number, and interconnectedness of the specific and general forces that an organization has to manage
Interconnectedness: increases complexity
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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: it is difficult to predict how forces will change that affect the supply of resources
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Environmental richness: the amount of resources available to support an organizations domain
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
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Figure 3-2: Three Factors Causing Uncertainty
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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
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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
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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 Competitive interdependencies: interdependencies that exist among organizations that compete for scarce inputs and outputs
Organizations aim to choose the interorganizational strategy that offers the most reduction in uncertainty with least loss of control
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Figure 3.3: Interorganizational Strategies for Managing Symbiotic Interdependencies
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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 Reputation and trust are the most common linkage mechanisms for managing symbiotic interdependencies
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Strategies for Managing Symbiotic Resource Interdependencies (cont.)

Co-optation: a strategy that manages symbiotic interdependencies by neutralizing problematic forces in the specific environment
Make outside stakeholders inside stakeholders Interlocking directorate: a linkage that results when a director from one company sits on the board of another company
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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 The more formal the alliance, the stronger and more prescribed the linkage and tighter control of joint activities
Greater formality preferred with uncertainty

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Types of Strategic Alliances

Long-term contracts 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 groups interests
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Figure 3-4: Types of Strategic Alliances
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Figure 3-5: The Fuyo Keiretsu
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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
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Figure 3.6: Joint Venture Formation
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Merger and takeover: results in resource exchanges taking place within one organization rather than between organizations
New organization better able to resist powerful suppliers and customers Normally involves great expense and problems managing the new business
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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
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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 Strategic alliances: can be used to manage both symbiotic and competitive interdependencies Merger and takeover: the ultimate method for managing problematic interdependencies
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Figure 3-7: Interorganizational Strategies for Managing Competitive Interdependencies
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Transaction Cost Theory

Transaction costs: the costs of negotiating, monitoring, and governing exchanges between people Transaction cost theory: a theory that states that 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
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Sources of Transaction Costs

Environmental uncertainty and bounded rationality
Bounded rationality: refers to the limited ability people have to process information Attempt to exploit forces or stakeholders Specific assets: investments that create value in one particular exchange relationship but have no value in any other exchange relationship 3- 32
Opportunism and small numbers
Risk and specific assets
Figure 3-8: Sources of Transaction Costs
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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
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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
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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
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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
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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
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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
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Franchising
A franchise is a business that is authorized to sell a companys 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
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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
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Organizational Theory, Design, and Change: Managing in A Changing Global Environment

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Organizational Theory, Design, and Change

Fifth Edition Gareth R. Jones

Chapter 3 Managing in a Changing Global Environment

Learning Objectives (cont.)

What is the Organizational Environment?

Figure 3-1: The Organizational Environment

Copyright 2007 Prentice Hall

The Specific Environment

The General Environment

Copyright 2007 Prentice Hall

The General Environment (cont.)

The General Environment (cont.)

Shape organizations customers, managers, and employees

Sources of Uncertainty in the Organizational Environment

Copyright 2007 Prentice Hall

Sources of Uncertainty in the Environment (cont.)

Interconnectedness: increases complexity

Copyright 2007 Prentice Hall

Sources of Uncertainty in the Environment (cont.)

Sources of Uncertainty in the Environment (cont.)

Environments may be poor because:

Copyright 2007 Prentice Hall

Figure 3-2: Three Factors Causing Uncertainty

Copyright 2007 Prentice Hall

Resource Dependence Theory

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Resource Dependence Theory (cont.)

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Interorganizational Strategies for Managing Resource Dependencies

Figure 3.3: Interorganizational Strategies for Managing Symbiotic Interdependencies

Copyright 2007 Prentice Hall

Strategies for Managing Symbiotic Resource Interdependencies

Copyright 2007 Prentice Hall

Strategies for Managing Symbiotic Resource Interdependencies (cont.)

Strategies for Managing Symbiotic Resource Interdependencies (cont.)

Greater formality preferred with uncertainty

Types of Strategic Alliances

Figure 3-4: Types of Strategic Alliances

Copyright 2007 Prentice Hall

Figure 3-5: The Fuyo Keiretsu

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Types of Strategic Alliances (cont.)

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Figure 3.6: Joint Venture Formation

Copyright 2007 Prentice Hall

Strategies for Managing Symbiotic Resource Interdependencies (cont.)

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Strategies for Managing Competitive Resource Interdependencies

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Strategies for Managing Competitive Resource Interdependencies (cont.)

Figure 3-7: Interorganizational Strategies for Managing Competitive Interdependencies

Copyright 2007 Prentice Hall

Transaction Cost Theory

Sources of Transaction Costs

Opportunism and small numbers

Risk and specific assets

Figure 3-8: Sources of Transaction Costs

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Transaction Costs and Linkage Mechanisms

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Transaction Costs and Linkage Mechanisms (cont.)

Copyright 2007 Prentice Hall