Organizational Environment

Organisational Environment The environment is the set of forces

surrounding an organization that have that have the potential to affect the way it operates and its access to scarce resources.

Scarce resources-raw materials Skilled workers The information it needs to improve technology The outside stakeholders such as customers The banks and financial institutions that supply

the capital etc.

Specific environment

The specific environment consist of forces from outside stakeholder groups that directly affect an organization's ability to secure resources.

Customers, distributors, unions, competitors, suppliers and the Government are all important outside stakeholders who can influence and pressure organisations to act in certain ways.

The European divisions of General Motors and Ford compete not only with European car companies such as Fiat and BMW but also with Japanese companies Toyota and Honda.

THE GENERAL ENVIRONMENT

The general environment consists of forces that shape the specific environment and affect the ability of all organisations in a particular environment to obtain resources.

General Environment

Economic forces Technological forces Political forces Demographic, cultural and social

forces.

Economic forces

Interest rates, the state of the economy ,unemployment rate, Level of demand for products, GDP, per Capita Income, The economic policies etc.

Technological Forces

Development of new production techniques, new information processing equipment, the use of computerized manufacturing technology, investment in advanced research and development activities, International transfer of technology etc.

Political and Legal Forces

Government policy. New laws implemented by the

Government. Labour Laws. Pollution Control board Regulations. Tax Relaxations.

Demographic, Cultural and Social Factors.

Age, Education, life style, norms, values and customs of a nation`s people shape organisation`s customers, managers and employees.

Sources of uncertainty in the organizational Environment

Environmental complexity. Environmental Dynamism. Environmental richness.

Environmental complexity

Environmental complexity is a function of strength, number, and interconnectedness of the specific and general forces that an organisation has to manage.

The greater the number,and the greater the differences between them , the more complex and uncertain is the environment and the more difficult to predict and to control

The more interconnected the forces in the organization's specific and general environments are , the more uncertainty the organisation faces.

Environmental Dynamism

The degree to which the forces in the specific and general environments change quickly over time and thus contribute to the uncertainty an organisation faces.

An environment is stable if forces affect the supply of resources in a predictable way.

An environment is unstable and dynamic if an organisation cannot predict the way in which the forces will change over time.

Environmental richness

Environmental richness is a function of resources available to support an organization's domain.

In rich environments, resources are plentiful and uncertainty is low.

Environments may be poor for two reasons.

1. The organisation is located in a poor region of country.

2. There is a high level of competition and organisations are fighting over available resources.

Theories Of Change

Some theories emphasise internally driven change.

Others emphasise externally driven change.

To provide an integrated approach to the theories of change,Van De Ven and Poole reviewed the literature extensively.

Identified 20 different theories of development and change across 200000 titles and 200 articles.

They clustered them into four prototypical theories.

1. Life cycle theory. 2. Teleological theory. 3. Dialectical Theory. 4. Evolutionary Theory.

The Life-Cycle Theory

The basic assumption in theories based on life cycle is that any organisation is like a living organism. As an organisation undergoes change, it passes through stages/phases in both its structure/form and functions somehow maintaining its identity throughout the process.

Greiner`s model of organisational development follows life cycle theory, which includes five stages in an organizations life

1.Creativity(Starting up phase) 2.Direction(the phase where more focus is

required.) 3.Delegation(the phase where the

organization grows larger) 4.Coordination(this is the phase of

differentiation of functions, need for integration within the organisation)

5. Collaboration(the phase where the organisation becomes a total entity by working together effectively in collaboration)

Telelogical theory

This school of thought views organisational development as a result of change in its goals and purposes and considers this process as ongoing with an organisation never attaining a permanent equillibrium or being static.

Examples of the applications of telelogical theory include establishing organisation mission statement , listing a set of goals planning different strategies and so on.

Proponents of this theory view development as a repetitive sequence of goal formulation,implementation,evaluation,and modification of goals based on what was learned or intended by the entity.

Dialectical theory

Van Den and Poole state the basic assumption with this school of thought as organisations exist in a pluralistic world of colliding events, forces or contradictory values that compete with each other for domination and control.

The reason behind the organisational change is collision between two different view points .

Evolutionary theory

Organisational change is an ongoing and evolving process and organisation change proceeds according to a continuing cycle of variation,selection and retention among organisations competing for resources in a specific environment.

Such a change parallels biological evolution and therefore it is known as evolutionary theory.

Van De Ven and Poole explain it further as competition for scarce environmental resources

between entities(organisations).

Theories of change at the individual level

Lewin`s model of change process has provided the required framework for other researchers to build on subsequent models or theories of change.Lewin identified three ways that lead to

organisational change. Change the individual

workers,implying change at the individual level.

Change the various organisational structures and systems.

Change the organisational climate.

According to Beer and Nohria, about 70% of all change initiatives fail.

The reason behind such failures is that managers, lose focus and get immersed in the pile of text available in print and online that is to aid them to carry on the change.

Theory E

Theory E views organisational change from the context of changing the economic value of the organisation.

It gives prime importance to the shareholder value and considering it to be the only legitimate measure of corporate success.

Such change includes high usage of economic incentives,drastic layoffs,downsizing and restructuring.

Theory O

This approach to change is adopted by corporate houses operating in the Asian and European economies.

Change is based on organisational capacity. They will not focus solely on their stock prices. The goal is often to develop organisational

culture and human capability through individual and organisational learning.

These include the process of changing, obtaining feedback,reflecting and making further changes.

Resource dependency theory

Resource Dependency Theory

Organisations are dependent on their environment for the resources they need to survive and grow.

The supply of resources is dependent on the richness, dynamism and complexity of the environment.

The goal of an organization is to minimize its dependence on other organizations for the supply of scarce resources in its environment and to find ways to influence them to make the resources available.

An organization must manage two aspects of resource dependence.

1. It has to exert influence over other organizations so that it can obtain resources.

It must respond to the needs and demands of other organizations in its environment.

The strength of one organizations dependence on other organization depends upon two factors.

1. How vital is the resource for the organization's survival.

2.The extent to which the resource is controlled by other organizations.

To manage their resource dependence and control their access to scarce resources, organisations develop various strategies.

Inter organisational Strategies to Manage Resource Dependencies.

The flow of resources over organizations is uncertain and problematic.

To reduce uncertainty,organisation needs to devise interorganisational strategies to manage the resource interdependencies in its specific and general environment

Managing these interdependencies allows an organisation to protect and enlarge its domain.

In the specific environment, two basic types of interdependencies cause uncertainty.

1. Symbiotic. 2. Competitive. Interdependencies are symbiotic when the

output of one organization becomes the input of other.

Competitive interdependencies exist between organizations when they compete for scarce resources.

Strategies for managing symbiotic resource interdependencies.

1. Developing a good reputation-A state in which the organization is held in high regard and trusted by other parties because of its fair and honest practices.

2.Co-Optation-It is a strategy to neutralise the problematic forces in the environment.

-An organisation that wants to bring opponents to its side gives them a stake in or claim on what it does and tries to satisfy their interests.

Ex. Pharmaceutical companies. Parent teacher associations. Interlocking Directorate.

3. Strategic Alliance-An agreement that commits two or more companies to share their reources to develop joint new business opportunities.

Ex. Dell and Microsoft formed a strategic alliance to bring high performance InfiniBand technology to the next generation business servers.

Networks Minority Ownership

Strategies for managing competitive resource Interdependencies

Organisations do not like competition.

Competition threatens the supply of scarce resources and increases the uncertainty of the specific environment.

Organisations use variety of techniques to manipulate the environment to reduce the uncertainty of their competitive interdependent activities.

Collusion and Cartels

Collusion-A secret agreement among competitors to share information for a deceitful or illegal purpose.

Organisations collude in order to reduce competitive uncertainty they experience.

Competitors in an industry can collude by establishing industry standards.

Industry standards functions like rules of conduct and may tell competitors what prices they should charge, what their product specifications should be etc.

The dominant organisation is likely to be the price leader.

A Cartel is an association of firms that explicitly agree to co ordinate their activities.

Third party linkage mechanisms.

A regulatory body that allows organizations to share information and regulate the way they operate.

Ex. Trade association-An organization that represents companies in the same industry and enables competitors to meet. Share information, and informally make agreements that allow them to monitor one another`s activities.

Ex. Micro electronics and Computer Corporation, an applied R&D Co-operative funded by Intel and Motorola.

Strategic Alliances. Mergers and Take over.

Transaction Cost theory

Transaction Costs

The costs of negotiating, monitoring and governing exchanges between people.

Transaction costs also arise when organisations exchange resources or information. Organisations interact with other organisations to get the resources they require, and they have to control those symbiotic and competitive interdependencies.

According to transaction cost theory, the goal of the organisation is to minimise the costs of exchanging resources in the environment and the costs of managing exchanges inside the organisation.

Sources of transaction costs

Environmental uncertainty and bounded rationaliy- The higher the level of uncertainty in the environment, the greater is the difficulty of managing transactions between organisations.

Opportunism and Small numbers-When an organisation is dependent on one supplier or on a small number of trading partners, the potential for opportunism is high.

Risk and Specific Assets-Specific assets are investments in skills,machinery,knowledge and information that create value in particular exchange relationship but have no value in any other exchange relationship.

An organisation that sees any prospect of being trapped or blackmailed will judge the investment in specific assets to be too risky.

Bureaucratic Costs

Internal transaction costs are called bureaucratic costs to distinguish them from the transaction costs of exchanges between organizations in the environment.

Communication and integration between functions and divisions are complex and difficult.

It costs money, because managers have to spend time in meetings rather than creating value.

So managing an organization's structure is a complex and expensive problem that becomes much more expensive and complex as the organization grows.

Transaction Cost theory to choose an interorganisational Strategy

Transaction Cost theory can help managers to choose an interorganisational strategy by enabling them to weigh the savings in transaction costs achieved from using a particular linkage mechanism against the bureaucratic costs of operating the linkage mechanism.

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.

The implication of Transaction Cost view is that a formal linkage mechanism should be used only when transaction costs are high enough to demand it.

The organization should take over or merge with its suppliers or distributors, only if the saving in transaction costs outweighs the costs of managing the new acquisition.

Other wise, the organisation has to rely on less formal mechanisms such as strategic alliances and long term contracts to handle exchange relationships.

Informal linkage mechanisms avoid the need for an organization to incur bureaucratic costs.

The three linkage mechanisms that enable organizations to avoid bureaucratic costs while minimizing transaction costs are kairetsu,franchising and outsourcing.

Transaction Costs are low, when Organisations are exchanging non specific

goods and services. Uncertainty is low. There are many possible exchange

partners. In these kind of environments, it is easy for

organisations to negotiate and monitor interorganisational behaviour.

So, organisations can use relatively informal linkage mechanisms.-unwritten, word-of-mouth contracts.

Transaction Costs are High, when Organisations begin to exchange more

specific goods and services. Uncertainty increases. The number of possible exchange

partners fails. Organisations will begin to feel that it

cannot afford to trust other organisations.

Organisation will choose more formal linkage mechanisms.

Change in samsung

On June 7, 1993, Samsung Chairman Kun hee Lee Announced his new management policy.

To completely overhaul Samsung corporation.

Change it into a truly innovative company.

He achieved his goal in less than 10 years.

Combined cell phone,ultrathin laptops

Lack of Concern for quality. Concern was for quantity. Defective Products-a necessary evil. Hierarchical and deferential culture

discouraged employees from questioning the authority or thinking outside the box.

Line stop system Six Sigma program Advanced quality control methods.

Change everything except your spouse and children.

Empowered employees. Senior managers were required to

visit the fields. No unnecessary regulations. Jobs were restructured-engineers and

designers from across the company were forced to work together.

No life time employment. Senior managers were fired.

Now, the success is due to Lee`s new management and ongoing commitment to change.