What is an Organization?

• Organizations are
– social entities that are goal directed;
– are designed as deliberately structured and
coordinating mechanisms, and
– are linked to the external environment

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Organizations exist to do the following
• Bring together resources to achieve desired goals
and outcomes
• Produce goods and services effectively
• Facilitate innovation
• Use modern manufacturing and information
technologies
• Adapt to and influence a changing environment

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Organizations exist to do the following
• Create value for customers, owners, employees
and other stakeholders
• Accommodate ongoing challenges of diversity,
ethics, and the motivation and coordination of
employees

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Measuring an Organization’s Effectiveness

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 Organization’s Stakeholders
• Stakeholders: people who have an interest, claim,
or stake in an organization

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 Inside Stakeholders
• Inside Stakeholders: People who are closest to an
organization and have the strongest and most direct
claim on organizational resources
– Shareholders: the owners of the organization
– Managers: the employees who are responsible for
coordinating organizational resources and ensuring
that an organization’s goals are successfully met
– The workforce: all non-managerial employees

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 Outside Stakeholders
• Outside Stakeholders: People who do not own the
organization, are not employed by it, but do have some
interest in it
– Customers: an organization’s largest outside stakeholder
group
– Suppliers: provide reliable raw materials and component
parts to organizations
– The government:
• Wants companies to obey the rules of fair
competition
• Wants companies to obey rules and laws concerning
the treatment of employees and other social and
economic issues 7
 Outside Stakeholders (contd…)
• Trade Unions: relationships with companies can be one
of conflict or cooperation
• Local communities: their general economic well-being
is strongly affected by the success or failure of local
businesses
• The general public
– Wants local businesses to do well against overseas
competition
– Wants corporations to act in socially responsible
way

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How Does an Organization Create Value?
• Value creation takes place at three stages: input,
conversion, and output
– Inputs: include human resources, information and
knowledge, raw materials, money and capital
– Conversion: the way the organization uses human
resources and technology to transform inputs into
outputs
– Output: finished products and services that the
organization releases to its environment

How IIM Calcutta creates value?

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 Inducements and Contributions:
Inside Stakeholders

Stakeholder Contribution to the Inducement to

Organization Contribute
Shareholders
Managers
Workforce

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 Inducements and Contributions:
Outside Stakeholders

Stakeholder Contribution to the Inducement to

Organization Contribute
Customers
Suppliers
General Public

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 An Organization’s Domain
• 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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 An Organization’s 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

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 Identifying IIMC’s Environment
• We will use buzz groups (4 to 6 members in each
group):
– Each group discusses the set of forces
surrounding IIMC that have the potential to affect
the way it operates and its access to scarce
resources

– One member of the group should be ready to

summarize the group’s discussion
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Uncertainty in An Organization’s 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 an
Organization’s Environment
• Environmental Complexity
• Environmental Dynamism
• Environmental Richness

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 Sources of Uncertainty
in an
Organization’s Environment
• 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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 Sources of Uncertainty
in an
Organization’s Environment
• 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

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 Sources of Uncertainty
in an
Organization’s Environment
• 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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 Resource Dependence Theory
• The goal of an organization is to minimize its
dependence on other organizations for the supply of
scarce resources and to find ways of influencing
them to make resources available

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 Resource Dependence Theory (contd..)
• 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 organizations control these
resources

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 Resource Dependence Theory (contd..)
• 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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 Inter-Organizational Strategies for
Managing Resource Dependencies
• Two basic types of interdependencies cause uncertainty:
– Symbiotic Interdependence: interdependencies that
exist between an organization and its suppliers and
distributors
– Competitive Interdependence: 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

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 Inter-Organizational Strategies for
Managing Resource Dependencies
• Two basic types of interdependencies cause uncertainty:
– Symbiotic Interdependence: interdependencies that
exist between an organization and its suppliers and
distributors
– Competitive Interdependence: interdependencies
that exist among organizations that compete for
scarce inputs and outputs

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 Inter-Organizational Strategies for
Managing Resource Dependencies
• WHAT STRATEGIES DOES IIMC (OR THE ORGANIZATION
WHERE YOU WORKED) USE(D) TO MANAGE SYMBIOTIC
INTERDEPENDENCE?

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Strategies for Managing Symbiotic Resource
Dependencies
• 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

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Strategies for Managing Symbiotic Resource
Dependencies
• Co-optation:
– 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

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Strategies for Managing Symbiotic Resource
Dependencies
• 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

• 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 (see example of
Fuyo Keiretsu on the next slide)

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 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

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Strategies for Managing Symbiotic Resource
Dependencies
• 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 Symbiotic Resource
Dependencies
• 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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 Inter-Organizational Strategies for
Managing Resource Dependencies
– Competitive Interdependence: interdependencies
that exist among organizations that compete for
scarce inputs and outputs

• WHAT STRATEGIES DOES YOUR ORGANIZATION USE TO

MANAGE COMPETITIVE INTERDEPENDENCE?

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 Inter-Organizational Strategies for
Managing Competitive 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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 Inter-Organizational Strategies for
Managing Competitive 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

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 Transaction Cost Theory

• Transaction Costs: the costs of negotiating,

monitoring, and governing exchanges between
people
• Transaction Cost: 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 Cost
• 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

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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
• 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
• 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 and
Interorganizational Strategy
• Transaction cost theory can be used to choose an
interorganizational strategy

• Managers can (and they do) weigh the savings in

transaction costs of particular linkage mechanisms
against the bureaucratic costs

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Using Transaction Cost Theory to Choose and
Interorganizational 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
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