Ch. 3.pdf

§3 Organizing in a changing global environment 3.1 What is the organiza onal environment? The environment is the set of pressures and forces surrounding an organizaon that have the potenal to a*ect the way it operates and its ability to acquire scarce resources. 10 An organizaon a9empts to mana...

§3 Organizing in a changing global environment 3.1 What is the organiza onal environment? The environment is the set of pressures and forces surrounding an organizaon that have the potenal to a*ect the way it operates and its ability to acquire scarce resources. 10 An organizaon a9empts to manage the forces in its environment to obtain the resources necessary to produce goods and services. The term organiza onal domain refers to the parcular range of goods/services that the organizaon produces and the customers and other stakeholders it serves. An organizaon establishes its domain by deciding how to manage the forces in its environment to maximise its ability to secure resources. One way in which an organizaon can enlarge and protect its domain is to expand internaonally. The speci=c environment consists of forces from outside stakeholder groups that directly a*ect an organizaon’s ability to secure resources (customers, distributors, unions, the government, suppliers, etc.) Global supply chain management is the process of planning and controlling supply/distribuon acvies such as acquiring and storing raw materials and seminished products, controlling work-inprocess inventory, and moving nished goods from point of manufacture to point of sale as e;ciently as possible. The challenges associated with distribung and markeng products increase in the global environment. Because the tastes of customers vary from country to country, also, global distribuon is di;cult when an organizaon’s products are complex and customers need a lot of informaon to operate or use them successfully, di*erent laws and regulaons, di*erent management styles, etc. The general environment consists of forces that shape the specic environment and a*ect the ability of all organizaons in a parcular environment to obtain resources (see gure 3.1). - - Economic forces, such as interest rates, the state of the economy, and unemployment rate, determine the level of demand for products and price of inputs. Internaonally di*erent interest rates, wage levels, etc. have a dramac e*ect on the way organizaons operate internaonally; Technological forces in:uence many aspects of organizaons’ operaons (e.g. development of new producon techniques and new informaon-processing equipment); Polical, ethical and environmental forces in:uence government policy toward organizaons and their stakeholders; Demographic, cultural and social forces shape organizaons’ customers, managers and employees (e.g. age, educaon, lifestyle, norms and values). Sources of uncertainty in the organiza onal environment 11 As the environment becomes more complex, less stable and poorer, the level of uncertainty increases. There are three factors that cause uncertainty. 1. Environmental complexity is a funcon of the strength, number, and interconnectedness of the specic and general forces that an organizaon has to manage. Complexity also increases if the company produces a wider variety of products for di*erent group of customers. 2. Environmental dynamism is the degree to which forces in the specic and general environments change quickly over me and thus contribute to the uncertainty an organizaon faces. An environment is stable if forces a*ect the supply of resources in a predictable way. 3. Environmental richness is a funcon of the amount of resources available to support an organizaon’s domain. In rich environments, uncertainty is low because resources are plenful so organizaons don’t need to compete over it. Environments may be poor for two reasons: (1) an organizaon is located in a poor country or poor region of a country; and (2) there is a high level of compeon and organizaons are ghng over available resources. 3.2 The resource dependence theory According to the resource dependence theory, the goal of an organizaon is to minimize its dependence on other organizaons for the supply of scarce resources in its environment and to nd ways to in:uence them to secure needed resources. Thus, an organizaon must simultaneously manage two aspects of its resource dependence: 1. It has to exert in:uence over other organizaons so it can obtain resources, and 2. It must respond to the needs and demands of the other organizaons in its environment. The strength of one organizaon’s dependence on another for a parcular resource is a funcon of two factors: (1) how vital the resource is to the organizaon’s survival, and (2) the extent to which other organizaons control the resource. To manage their resource dependence and control their access to scarce resources, organizaons develop various strategies. 3.3 Interorganiza onal strategies for managing resource dependencies 12 To reduce uncertainty, an organizaon needs to devise interorganizaonal strategies to manage the resource interdependencies in its specic and general environment. Managing these interdependencies allows organizaons to protect and enlarge their domain. In the specic environment, organizaons need to manage their relaonships with forces such as suppliers, unions, and consumer interest groups. If they restrict access to resources, they can increase uncertainty. In the specic environment, two basic types of interdependencies cause uncertainty: symbioc and compeve. Interdependencies are symbioc when the outputs of one organizaon are inputs for another; thus symbio c interdependencies generally exist between an organizaon and its suppliers and distributors. Compe ve interdependencies exist among organizaons that compete for scarce inputs and outputs. In general, an organizaon aims to choose the interorganizaonal strategy that o*ers the most reducon in uncertainty for the least loss of control. A linkage is formal when two or more organizaons agree to coordinate their interdependencies directly to reduce uncertainty. The more formal the linkage, the greater are both the direct coordinaon and the likelihood that coordinaon is based on an explicit wri9en agreement or some common ownership between organizaons. The more informal the linkage, the more indirect or loose the method of coordinaon (so coordinaon be based on an implicit or unspoken agreement). 3.4 Strategies for managing symbio c resource interdependencies To manage symbioc interdependencies, organizaons have a range of strategies from which to choose. Figure 3.3 indicates the relave degree of formality of four strategies. The more formal a strategy, the greater the cooperaon between organizaons. The least formal, least direct way to manage symbioc interdependencies with suppliers and customers is to develop a reputa on, a state in which an organizaon is held in high regard and trusted by other pares because of its fair and honest business pracces. Coopta on is a strategy that manages symbioc interdependencies by neutralizing problemac forces in the specic environment. A common way to coopt problemac forces such as customers, suppliers, or other important outside stakeholders is to bring them within the organizaon and, in e*ect, make them inside stakeholders. E.g. local schools a9empt to coopt parents by invenng them to become members of school boards (the organizaon gives up some control but gains more than it loses). They can also be brought inside through the use of an interlocking directorate, which is a linkage that results when a director from one company sits in the board of another company. A strategic alliance is an agreement that commits two or more companies to share their resources to develop join new business opportunies. There 13 are several types of strategic alliances. In general, as uncertainty increases, organizaons choose a more formal alliance to protect their access to resources. - - Long-term contracts: the purpose of these contracts is usually to reduce costs by sharing resources or by sharing the risk of research and development, markeng, construcon, etc.; Network or network structure: is a cluster of di*erent organizaons whose acons are coordinated by contracts and agreements; Minority ownership: when organizaons buy a minority ownership stake in each other. A keiretsu is a group of organizaons, each of which owns shares in the other organizaons in the group, that work together to further the group’s interests. Japanese companies employ two basic forms of keiretsu. Capital keiretsu are used to manage input and output linkages, nancial keiretsu are used to manage linkages among diverse companies and usually have at their centre a large bank. joint venture is a strategic alliance among two or more organizaons that agree to jointly establish and share the ownership of a new business (most formal and bound by legal agreement). In sum, the degree of formality increases as environmental uncertainty increases to provide organizaons with more control over ongoing conngencies. Merger and takeover a distributor or supplier is the most formal way for managing symbioc resource interdependencies, because now resource exchanges occur within one organizaon rather than between organizaons. 3.5 Strategies for managing compe ve resource interdependencies Compeon threatens the supply of scarce resources and increases the uncertainty of the specic environment. Ulmately, the organizaonal environment is controlled by the handful of the strongest companies that now compete head to head for resources. Organizaons use a variety of techniques to directly manipulate the environment to reduce the uncertainty of their compeve interdependent acvies. The more formal the strategy selected, the more explicit the a9empt to coordinate competors’ acvies. - A collusion is a secret agreement among competors to share informaon for a deceiOul or illegal purpose, such as keeping prices high. Organizaons collude to reduce the compeve uncertainty. A cartel is an associaon of rms that explicitly agree to coordinate their acvies (both are illegal). 14 - - - A third-party linkage mechanism is a regulatory body that allows organizaons to share informaon and regulate the way they compete (e.g. a trade associaon). This interacon reduces the fear that one organizaon may deceive or outwit another. Strategic alliances can also be used to manage compeve interdependencies. Competors can cooperate and form a joint venture to develop common technology that will save them a lot of money (though they may be in compeon when their nal product this the market.) Merger and takeover is the ulmate weapon for managing compeve interdependencies, merger and takeover can improve a company’s compeve posion. 3.6 Transac on cost theory In chapter 1, we dened transac on costs as the costs of negoang, monitoring, and governing exchanges between people. Transacon costs also arise when organizaons exchange resources or informaon. According to transac on cost theory, the goal of the organizaon is to minimize the costs of exchanging resources in the environment and the costs of managing exchanges inside the organizaon. Sources of transac on costs Transacon costs result from a combinaon of human and environmental factors (see gure 3.8). These are: - - - Environmental uncertainty and bounded ra onality: because of the limited ability to process informaon and to understand the environment surrounding organizaons (bounded raonality), the higher the level of uncertainty in an environment, the greater the di;culty of managing transacons between organizaons; Opportunism and small numbers: when the prospect of opportunism is high because of the small number of suppliers to which an organizaon can go for resources, the organizaon has to expend resources to negoate, monitor and enforce agreements with its suppliers to protect itself; risk and speci=c assets: specic assets are investments, in skills, machinery and knowledge, that create value in one parcular exchange relaonship but have no value in any other exchange relaonship. E.g. an investment into a 10 million dollar cosng machine that only makes microchips is a very specic asset. Once the investment is made, the organizaon is locked into it. Transac on costs and linkage mechanisms Organizaons base their choice of interorganizaonal linkage mechanisms on the level of transacon costs involved in an exchange relaonship. Transacon costs are low when these condions exist: 1. Organizaons are exchanging nonspecic goods and services. 2. Uncertainty is low 3. There are many possible partners. 15 Transacon costs increase when these condions exist: 1. Organizaons begin to exchange more specic goods and service. 2. Uncertainty increases. 3. The number of possible exchange partners falls. When an organizaon will begin to feel it cannot a*ord to trust other organizaons, and it will start to use more formal linkages, such as long-term contracts, to govern its exchanges. In a high-transacon-cost situaon, an organizaon should choose a more formal linkage mechanism to manage exchange as transacon costs increase. The more formal the mechanism, the more control organizaons have. Bureaucra c costs Bureaucra c costs are internal transacon costs. Integraon and communicaon are not only di;cult to achieve, but cost money because managers have to spend their me in meengs rather than creang value (this is an argument why not to create a joint venture or mergers). Using transac on cost theory to choose an interorganiza onal strategy Transacon cost theory can help managers choose an interorganizaonal strategy by enabling them to weigh the saving in transacon costs achieved from using a parcular linkage mechanism against the bureaucrac costs of operang the linkage mechanisms. Managers deciding which strategy to pursue must take the following steps: 1. Locate the sources of transacon costs and decide how high the transacon costs are likely to be. 2. Esmate the transacon cost saving from using di*erent linkage mechanisms. 3. Esmate the bureaucrac costs of operang the linkage mechanism. 4. Choose the linkage mechanism that gives the most transacon cost saving at the lowest bureaucrac cost. Three linkage mechanisms that help organizaons to avoid bureaucrac costs while sll minimizing transacon costs are keiretsu, franchising and outsourcing. 1. Keiretsu: can be seen as a mechanism for achieve the benets of a formal linkage mechanism without incurring its costs. 2. Franchising: a business authorized to sell a company’s products in a certain area. The franchiser sells the right to use its resources to a person or group in return for a :at fee or a share of the prots. 3. Outsourcing: the process of moving a value creaon acvity that was performed inside an organizaon to outside where it is done by another company. . . , , , . . 16 . , . .