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 informationprocessing 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
All environmental forces cause
Environment

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
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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

Strategic alliances:(cont.)
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
Third-party linkage(cont.)
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

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