Organizational Environment

Organizational Analysis & Processes Organizational Environment By

Sreenath B.

Managing Resource Dependencies Resource Dependency Theory •

Resource dependence theory proposes that an organization’s goal is to minimize its reliance on other organizations for the supply of scarce resources.

• An organization must exert influence over other organizations to get resources and respond to the needs and demands of others in its environment.

What causes dependence on another organization for a specific resource? – how essential the input is to survival of organization. – the degree to which others control the resource. • An organization is more dependent if the resource is critical to survival and tightly controlled.

Magnitude of Resource exchange An organization that creates only one product or services is more dependent on its customers than an organization that has a variety of outs that are being disposed of in a variety of markets. Similarly, organizations which require one primary input for their operations will be more dependent on the sources of supply for that input than organizations that use multiple inputs, each in relatively small proportion.

Cont’d • When there are many sources of supply or potential customers, the power of any single one is correspondingly reduced

How does Microsoft manage resource dependence? • Microsoft is not dependent on others for resources. It controls the development of computer operating systems, so companies depend on Microsoft. • The control of this resource has increased Microsoft’s market share.

Interorganizational Strategies for Managing Resource Dependencies • An organization manages interdependencies through interorganizational strategies. • Linkage mechanisms connect companies and require coordinated actions, with a loss of freedom for independent action. • A contract requires compliance even if a firm can negotiate a better offer. • The best interorganizational strategy reduces uncertainty and provides the least loss of control.

Cont’d • Two types of interdependencies are – Symbiotic Interdependencies – Competitive Interdependencies

Symbiotic Interdependencies • Symbiotic interdependencies occur when the outputs of one organization serve as the inputs for another, an organization and its suppliers. Eg: Intel supplies chips for computer manufacturers such as Compaq. Auto manufacturers distribute cars through dealers.

Competitive Interdependencies • Competitive interdependencies exist among organizations that compete for scarce resources. • Eg: Dell and HP for customers and inputs from Intel.

Strategies for Managing Symbiotic Resource Interdependencies • Cooperation is greater if strategy is formal. Four strategies for managing symbiotic resource interdependencies include: developing a good reputation, co-optation, strategic alliance, and merger and takeover. Reputation

Co-optation

Strategic Alliance

Merger & Takeover

Cont’d 1. Developing a Good Reputation – An organization can build a good reputation in the eyes of customers and suppliers through fairness and honesty, high-quality goods and services, and prompt payment of bills. – A dishonest company will be unsuccessful in the long term. – Developing a good reputation is the most frequently used linkage mechanism for managing symbiotic interdependencies.

Cont’d 2. Co-optation –

it is used to counter problematic forces in the specific environment.

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An organization brings adversaries inside the organization and make them inside stakeholders. Eg : Some use an interlocking directorate, a linkage whereby a director from one company sits on the board of another.

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3. Strategic alliances – –

sharing of resources by several companies, are popular for managing interdependencies. Alliances include: long-term contracts, networks, minority ownership, and joint venture.

Cont’d – The more formal agreements provide stronger linkages and tighter control over joint activities. – As environmental uncertainty increases, companies rely on formal alliances.

Long-Term Contracts

Networks

Minority Ownership

Joint Ventures

Cont’d • Long-term contracts reduce costs by sharing resources or spreading the risk associated with activities such as marketing and R&D. – Contracts, both written or verbal, are the most informal kind of alliance, because the only connection is the agreement.

• A network is a group that coordinates activities via contract. A network is more formal than a contract because more ties connect members who share competencies such as R&D skills with partners. – Partners use those skills to increase efficiency and reduce the core organization’s costs and size. – A company can perform design work and have partners produce the product.

Cont’d • Minority Ownership occurs when organizations buy a stake in each other, forming a more formal alliance. – The Japanese keiretsu is a group of organizations, each of which owns shares in the other organizations and works to further group interests. – Japan has two types of keiretsu: Capital keiretsu to manage input and output linkages & financial keiretsu for linkages among different companies, usually with a bank at the center. – Toyota is a capital keiretsu with a minority stake in suppliers. – A financial keiretsu is an interlocking directorate with members serving on the bank’s board.

Cont’d – At the Fuyo keiretsu. Fuji Bank is the center with members such as Nissan, Hitachi, and Canon. Members have other companies with minority ownership in suppliers.

• Joint ventures are formal strategic alliances among two or more companies to establish and share ownership in a new business; a formal legal agreement defines rights & responsibilities. – Each organization sends managers to the new company. – Participants can pool distinctive competences, design a new structure, keep parent companies small, & reduce the difficulty of managing parent company interdependencies.

Cont’d 4. Mergers and takeovers are the most formal strategies for managing interdependencies. – A merger or takeover results in resource exchanges within organizations and prevents control by a powerful supplier or customer. – However, mergers and takeovers are costly, and problems arise in managing a new business. – This strategy is used if a company must control a critical resource or manage a significant interdependency.

Strategies for Managing Competitive Resource Interdependencies • Competition increases uncertainty, but organizations can use strategies to manage competitive resource interdependencies: collusion and cartels; third-party linkage mechanisms; strategic alliances; and mergers and takeovers. • A more formal strategy is an explicit attempt to coordinate a competitor’s activities.

Cont’d

Collusion & Cartels

Third party linkage Mechanism

Strategic Alliances

Mergers & Takeovers

Cont’d 1. Collusion and Cartels – Collusion, a secret pact among competitors to share data for an illegal purpose, reduces competitive uncertainty. – A cartel, a group that coordinates activities, increases the stability and richness of an organization’s environment and reduces uncertainty. Eg: OPEC

1. Third-Party Linkage Mechanisms – An indirect way to coordinate activities is through a third-party linkage mechanism, a regulatory body such as a trade association that shares information and governs competitive practices.

Cont’d • Advantages: – Interaction decreases the concern about deceptive organizational practices. – The association can lobby the government for favorable industry policies. – Third-party linkages assist in managing resource interdependencies and reducing uncertainties. – An increased information flow allows an easier response. These linkage mechanisms let companies co-opt themselves and benefit from coordination.

Cont’d 3. Strategic alliances 4. Mergers and takeovers

Managerial Implications of Resource Dependence Theory • Managers should study each resource transaction and decide how to manage it. • Managers should aim for an informal linkage mechanism yet identify the purpose and problems of a strategic alliance to choose between a formal or informal linkage mechanism. • Transaction cost theory is useful for identifying the costs and benefits of each linkage mechanism.

Transaction Cost Theory • Transaction costs are associated with negotiating, monitoring, and governing exchanges between people. • Transaction cost theory proposes that organizations should aim to minimize transaction costs for inside dealings and outside transactions. • Transaction cost theory addresses why and when organizations choose and change strategies. • Transaction costs reduce productivity; time spent monitoring and negotiating exchanges could have created value.

Sources of Transaction Costs 1. Environmental uncertainty and bounded rationality: – People have a limited ability, known as bounded rationality, to process data and understand their environment. – Bounded rationality makes it costly to manage transactions in uncertain environments. – To reduce transaction costs, organizations use formal linkage mechanisms like minority ownership.

1. Opportunism and small numbers: – The potential for opportunism is high when relying on one supplier or a few trading partners. So, organizations increase transaction costs by using resources to enforce agreements for protection.

Cont’d 3. Risk and specific assets: – Investing in specific assets, one exchange relationship, is risky. – After the company invests, a customer may buy products at a lower price.

Transaction Costs and Linkage Mechanisms • Interorganizational linkage mechanisms depend on transaction costs. • Transaction costs are low when: – – –

nonspecific goods and services are exchanged uncertainty is low many exchange partners exist.

• Transaction costs increase when: – – –

more specific goods and services are exchanged uncertainty increases potential exchange partners decrease.

Cont’d • Informal linkage mechanisms – Reputation – Unwritten contracts.

• Companies do not trust each other, so they use formal linkages, such as contracts. • Joint venture partners favor activities that create value for both parties. • Merger partners seek mutual success, because one firm owns the other. • Transaction cost theory attributes the move from less to more formal linkage to reducing transaction costs.

Bureaucratic Costs • Internal transaction costs are called Bureaucratic costs. • Integration and communication are costly, and time spent in a meeting could have created value. • As the organization becomes bureaucratic cost increases.

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Using Transaction Cost Theory to Choose an Interorganizational Strategy • Transaction cost theory considers the costs of linkage mechanisms and forecasts when and why a strategy should be selected. • When choosing a strategy, managers must: – Identify the sources of and level of transaction costs – estimate the savings from using different linkage mechanisms – estimate the bureaucratic costs, and select the linkage that achieves cost savings at the lowest level of bureaucratic costs.

• Transaction cost theory suggests that formal linkage mechanisms are appropriate when transaction costs are high. Otherwise, informal mechanisms with lower bureaucratic costs should be selected. • Three mechanisms minimize transaction costs while avoiding bureaucratic costs: 1. Keiretsu offers the benefits of ownership without the costs. – Eg :Toyota has a minority interest in its suppliers for control and reduced uncertainty, but without ownership and the management costs.

Cont’d 2. Franchising – The franchiser gives a franchisee the rights to use resources in exchange for a flat fee or a percentage of the profits. – The franchiser provides the inputs to the franchisee, who makes exchanges with the customer. – The relationship is symbiotic. – Franchisers give rights to franchisees because the bureaucratic costs of managing their businesses are too high. 3. Outsourcing – buying a specialized service, is another strategy for managing interdependencies. – The decision to make or outsource products depends on whether value exceeds bureaucratic costs.

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