3- Copyright 2010 Pearson Education, Inc.

Publishing as Prentice Hall 1

Organizational Theory,
Design, and Change

Sixth Edition
Gareth R. Jones

Chapter 3
Organizing in a
Changing Global
Environment
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Learning Objectives
1. List the forces in an organizations
specific and general environment that
give rise to opportunities and threats
2. Identify why uncertainty exists in the
environment
3. Describe how and why an
organization seeks to adapt to and
control these forces to reduce
uncertainty

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Learning Objectives (cont.)
4. 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
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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
organizations 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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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
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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
nations people
Shape organizations customers,
managers, and employees
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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
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Three Factors Causing Uncertainty
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Sources of Uncertainty in the
Environment
1. 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 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
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Sources of Uncertainty in the
Environment (cont.)
3. Environmental richness:
the amount of resources available to
support an organizations 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 scare
resources.
and to find ways of influencing them
to make resources available
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Resource Dependence Theory
(cont.)
The strength of one organizations
dependence on another depends on:
How vital the resource is to the
organizations survival
The extent that other organizations
control these resources
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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 the least
loss of control
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Linkage Mechanisms
Linkage mechanisms, while controlling
interdependency, require coordination
Coordination reduces each
organizations freedom to act
Organizations should choose the
strategy that offers the most reduction
in uncertainty for the least loss of
control
19
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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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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
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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
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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
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 groups interests
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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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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

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Figure 3-7: Interorganizational Strategies for
Managing Competitive Interdependencies
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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
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
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

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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
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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
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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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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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
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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
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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 companys
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