Organizational Theory,

Design, and Change

Fifth Edition
Gareth R. Jones

Chapter 3

Managing in a
Changing Global
Environment
Copyright 2007 Prentice Hall 3- 1
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 2007 Prentice Hall 3- 2
Figure 3-1: The
Organizational Environment

Copyright 2007 Prentice Hall 3- 3

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 2007 Prentice Hall 3- 4
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 2007 Prentice Hall 3- 5

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
Copyright 2007 Prentice Hall 3- 6
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
nation’s people
 Shape organization’s customers,
managers, and employees

Copyright 2007 Prentice Hall 3- 7

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

Copyright 2007 Prentice Hall 3- 8

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

Copyright 2007 Prentice Hall 3- 9

Sources of Uncertainty in the
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
Copyright 2007 Prentice Hall 3- 10
Sources of Uncertainty in the
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

Copyright 2007 Prentice Hall 3- 11

Figure 3-2: Three Factors
Causing Uncertainty

Copyright 2007 Prentice Hall 3- 12

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

Copyright 2007 Prentice Hall 3- 13

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

Copyright 2007 Prentice Hall 3- 14

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 Copyright 2007 Prentice Hall 3- 15
Figure 3.3: Interorganizational Strategies
for Managing Symbiotic Interdependencies

Copyright 2007 Prentice Hall 3- 16

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

Copyright 2007 Prentice Hall 3- 17

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
Copyright 2007 Prentice Hall 3- 18
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

Copyright 2007 Prentice Hall 3- 19

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 2007 Prentice Hall 3- 20

Figure 3-4: Types of Strategic
Alliances

Copyright 2007 Prentice Hall 3- 21

Figure 3-5: The Fuyo Keiretsu

Copyright 2007 Prentice Hall 3- 22

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

Copyright 2007 Prentice Hall 3- 23

Figure 3.6: Joint Venture
Formation

Copyright 2007 Prentice Hall 3- 24

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

Copyright 2007 Prentice Hall 3- 25

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

Copyright 2007 Prentice Hall 3- 26

 Et fiyatları Rekabet Kurulu'na
şikayet edildi

Tüketiciler Birliği Başkan Vekili Mehmet Muta Şahin

''Et fiyatları üzerinden haksız kazanç elde etmeye
çalışan firmaları Rekabet Kuruluna şikayet ettik'' dedi.

Copyright 2007 Prentice Hall 3- 27

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
Copyright 2007 Prentice Hall 3- 28
Figure 3-7: Interorganizational Strategies
for Managing Competitive
Interdependencies

Copyright 2007 Prentice Hall 3- 29

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 2007 Prentice Hall 3- 30
2009 Nobel Prize in Economics:
Economic governance

Copyright 2007 Prentice Hall 3- 31

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 2007 Prentice Hall 3- 32
Figure 3-8: Sources of
Transaction Costs

Copyright 2007 Prentice Hall 3- 33

 Cooperation vs. opportunism:
The prisoner’s dilemma
Prisoner B Stays Silent Prisoner B Betrays

Prisoner A Stays Silent Each serves 6 months Prisoner A: 10 years

Prisoner B: goes free

Prisoner A Betrays Prisoner A: goes free Each serves 5 years

Prisoner B: 10 years

Copyright 2007 Prentice Hall 3- 34

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

Copyright 2007 Prentice Hall 3- 35

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

Copyright 2007 Prentice Hall 3- 36

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

Copyright 2007 Prentice Hall 3- 37

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

Copyright 2007 Prentice Hall 3- 38

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
Copyright 2007 Prentice Hall 3- 39
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

Copyright 2007 Prentice Hall 3- 40

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 2007 Prentice Hall 3- 41

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 2007 Prentice Hall 3- 42