1. Changing Global Environment
Organizational Theory, Design, and Change Sixth Edition Gareth R. Jones
Chapter 3
Organizing in a
Changing Global Environment

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
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
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

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

11. 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
Interconnectedness: increases complexity

13. Sources of Uncertainty in the Environment (cont.)
2. 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.)
3. Environmental richness:
the amount of resources available to support an organization’s 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

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.)
The strength of one organization’s dependence on another depends on:
How vital the resource is to the organization’s survival
The extent that other organization’s control these resources

17. 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

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
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 the least loss of control

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
Reputation and trust are the most common linkage mechanisms for managing symbiotic interdependencies

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
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
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
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 3.4: Types of Strategic Alliances

26. Figure 3.5: The Fuyo Keiretsu

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
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
Strategic alliances: can be used to manage both symbiotic and competitive interdependencies
Merger and takeover: the ultimate method for managing problematic interdependencies

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