Managing Environmental Uncertainty and Interorganizational Relationships

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Copyright 2007 Prentice Hall 1
Organizational Theory, Design,
and Change
Fifth Edition
Gareth R. Jones
Chapter 3
Managing in a
Changing Global
Environment

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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
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

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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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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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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: it
is difficult to predict how forces will
change that affect the supply of
resources

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Environment (cont.)
■ 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

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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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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

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■ 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
■ A horizontal keiretsu is an alliance of
different companies, led by a bank that
provides them with finance.
■ A vertical keiretsu refers to
manufacturers, suppliers, and
distributors partnering up to cut costs
and become more efficient

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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
■ Eg:Price fixing in air travel – British
Airways and Virgin 2004-06
■ 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
■ 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
■ 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

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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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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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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 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

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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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