Copyright 2004 Prentice Hall Organizational Theory, Design, and Change Text and Cases Fourth Edition Gareth R. Jones Copyright 2004 Prentice Hall

Copyright 2004 Prentice Hall 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 Copyright 2004 Prentice Hall

Copyright 2004 Prentice Hall Learning Objectives Understand resource dependence theory and transaction cost and explain why organizations choose different kinds of interorganizational strategies to manage their environments Copyright 2004 Prentice Hall

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 Copyright 2004 Prentice Hall

Figure 3-1: The Organizational Environment Copyright 2004 Prentice Hall

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. Copyright 2004 Prentice Hall

The General Environment The forces that shape the specific environment and affect the ability of all organizations in a particular environment to obtain resources Copyright 2004 Prentice Hall

The General Environment 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 Copyright 2004 Prentice Hall

The General Environment 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 nation’s people Shape organization’s customers, managers, and employees Copyright 2004 Prentice Hall

Uncertainty in the Environment All of the forces discussed above cause uncertainty for organizations. It becomes more difficult for managers to control flow of resources to protect and enlarge their domains. Copyright 2004 Prentice Hall

Sources of Uncertainty in the Organizational Environment Three factors causing uncertainty Environmental complexity: the strength, number, and interconnectedness of the specific and general forces that an organization has to manage Environmental dynamism: the degree to which forces in the specific and general environments change quickly over time Copyright 2004 Prentice Hall

Sources of Uncertainty in the Organizational Environment Environmental richness: the amount of resources available to support an organization’s domain Two reasons why environments may be poor: 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. Copyright 2004 Prentice Hall

Figure 3-2: Three Factors Causing Uncertainty Copyright 2004 Prentice Hall

Resource Dependence Theory Organizations are dependent on their environment for their resources. Organizations attempt to manage their transactions with the environment to ensure access to resources. Organizations want access to their resources to be predictable. Copyright 2004 Prentice Hall

Resource Dependence Theory A theory that argues that the goal of an organization is to minimize its dependence on other organizations for the supply of scare resources in its environment and to find ways of influencing them to make resources available Copyright 2004 Prentice Hall

Resource Dependence Theory 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. Copyright 2004 Prentice Hall

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 scare inputs and outputs Copyright 2004 Prentice Hall

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 Copyright 2004 Prentice Hall

Strategies for Managing Symbiotic Resource Interdependencies Co-optation: a strategy that manages symbiotic interdependencies by neutralizing problematic forces in the specific environment Examples: make outside stakeholders (customers) inside stakeholders Interlocking directorate: a linkage that results when a director from one company sits on the board of another company Copyright 2004 Prentice Hall

Strategies for Managing Symbiotic Resource Interdependencies Strategic alliances: an agreement that commits two or more companies to share their resources to develop joint new business opportunities Copyright 2004 Prentice Hall

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 Copyright 2004 Prentice Hall

Figure 3-5: The Fuyo Keiretsu Copyright 2004 Prentice Hall

Types of Strategic Alliances Joint venture: a strategic alliance among two or more organizations that agree to jointly establish and share the ownership of a new business Merger and takeover: results in resource exchanges taking place within one organization rather than between organizations Copyright 2004 Prentice Hall

Figure 3-4: Types of Strategic Alliances Copyright 2004 Prentice Hall

Strategies for Managing Competitive Resource Interdependencies Collusion and cartels Collusion: a secret agreement among competitors to share information for a deceitful or illegal purpose Cartel: an association of firms that explicitly agrees to coordinate their activities Copyright 2004 Prentice Hall

Strategies for Managing Competitive Resource Interdependencies 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 Copyright 2004 Prentice Hall

Figure 3-7: Managing Competitive Interdependencies Copyright 2004 Prentice Hall

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 Copyright 2004 Prentice Hall

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 – attempt to exploit forces or stakeholders Risk and specific assets Specific assets: investments that create value in one particular exchange relationship but have no value in any other exchange relationship Copyright 2004 Prentice Hall

Figure 3-8: Sources of Transaction Costs Copyright 2004 Prentice Hall

Transaction Costs are Low When These Conditions Exist: Organizations are exchanging nonspecific goods and services. Uncertainty is low. There are many possible exchange partners. Copyright 2004 Prentice Hall

Transaction Costs Increase When These Conditions Exist: Organizations begin to exchange more specific goods and services. Uncertainty increases. The number of possible exchange partners falls. Copyright 2004 Prentice Hall

Transaction Costs and Linkage Mechanisms Bureaucratic costs According to transaction cost theory, organizations will adopt increasingly formal linkage mechanisms with their exchange partners as transaction costs increase. But these mechanism also carry bureaucratic costs within the organization. Copyright 2004 Prentice Hall

Transaction Costs and Linkage Mechanisms 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. Copyright 2004 Prentice Hall

Transaction Costs and Strategy 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 Copyright 2004 Prentice Hall

Copyright 2004 Prentice Hall Keiretsu Mechanism for achieving the benefits of formal linkages without incurring its costs Example: Toyota has a minority ownership in its suppliers. Substantial control over the exchange relationship Avoid bureaucratic cost of ownership and opportunism Copyright 2004 Prentice Hall

Copyright 2004 Prentice Hall 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. Copyright 2004 Prentice Hall

Copyright 2004 Prentice Hall 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. Copyright 2004 Prentice Hall