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Change
Chapter 1
Organizations and
Organizational
Effectiveness
1-1
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objectives
1. Explain why organizations exist and
the purposes they serve
2. Describe the relationship between
organizational theory and
organizational design and change,
and differentiate between
organizational structure and culture
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Learning Objectives (cont.)
3. Understand how managers can utilize
organizational theory to design and
change their organizations to increase
organizational effectiveness
4. Identify how managers assess and
measure organizational effectiveness
5. Appreciate the way contingency factors
influence the design of organizations
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What is an Organization?
Organizations provide goods and
services
Organizations employ people and
resources
Organizations bring together people
and resources to produce products and
services
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What is an Organization? (cont.)
Organization is a tool used by
people to coordinate their activities to
obtain something they desire or goals
It is an Entrepreneurship: it
identify opportunities to satisfy needs,
and then gather and use resources to
meet those needs
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How Does an Organization
Create Value?
Value creation takes place at three
stages: input, conversion, and output
Inputs: include human resources,
information and knowledge, raw
materials, money and capital
Conversion: the way the organization
uses human resources and technology to
transform inputs into outputs
Output: finished products and services
that the organization releases to its
environment
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Figure 1.1: How an Organization
Creates Value
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Why Do Organizations Exist?
To increase specialization and the
division of labor
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Why Do Organizations Exist?
(cont.)
To use large-scale technology
Economies of scale: cost savings that
result when goods and services are
produced in large volume
Economies of scope: cost savings that
result when an organization is able to use
underutilized resources more effectively
because they can be shared across
several different products or tasks
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Why Do Organizations Exist?
(cont.)
To manage the external environment
External environment consists of the
political, social, economic, and
technological factors that affect
organizations
Organizations regularly exchange
products and services for needed
resources
Organizations need to manage their
external environment
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Why Do Organizations Exist?
(cont.)
To exert power and control
Organizations structure their members to
efficiently produce products and services
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Figure 1.3: Why
Organizations Exist
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Organizational Theory, Design, and
Change: Some Definitions
Organizational theory: the study of
how organizations function and how
they affect and are affected by the
environment in which they operate
Organizational structure: the formal
system of task and authority
relationships that control how people to
coordinate their actions and use
resources to achieve organizational goals
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Some Definitions (cont.)
Organizational culture: is the set of
key values, beliefs, and attitudes shared
by organizational members and helps
shape the behavior within the
organization
Organizational design: the process
by which managers select and manage
aspects of structure and culture so that
an organization can control the activities
necessary to achieve its goals
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Some Definitions (cont.)
Organizational change:
the process by which organizations
transformation
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Figure 1.4: The Relationship Among
Organizational Theory, Structure, Culture,
Design, and Change
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Importance of Organizational
Design and Change
Dealing with contingencies
Contingencies are events that might occur
and must be planned for
Organizations must be designed to be
able to respond to changes in the
complex and increasingly difficult
environment many organizations face
Globalization and changing IT
technologies are just two challenges
organizations must be ready to face
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Importance of Organizational
Design and Change (cont.)
Gaining competitive advantage
The ability to outperform other companies
because of the capacity to create more
value from resources
Core competences: skills and abilities in
value creation embedded in the
organization’s people or structures
Strategy: pattern of decisions and
actions involving core competences that
produces a competitive advantage to
outperform competitors
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Importance of Organizational
Design and Change (cont.)
Managing diversity
Differences in the race, gender, and
national origin of organizational members
have important implications for
organizational culture and effectiveness
Learning how to effectively utilize a
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Importance of Organizational
Design and Change (cont.)
Promoting efficiency, speed, and
innovation
The better organizations function, the
more value they create
The correct organizational design can lead
to faster innovation and quickly get new
products to market
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Consequences of Poor
Organizational Design
Decline of the organization’s sales and
profits
Layoffs occur and talented employees
leave to take positions in growing
organizations
Resources become harder to acquire
Resulting crisis may result in
organizational failure
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How Do Managers Measure
Organizational Effectiveness?
Control: external resource approach
Monitors how effectively an organization
manages and controls its external environment
Innovation: internal system approach
Develops an organization’s skills and capabilities
to change, adapt, and improve the way it
functions
Efficiency: technical approach
Measures how efficiently an organization
converts a fixed amount of resources into
finished goods and services
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Table 1.1: Approaches to
Measuring Effectiveness
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Measuring Effectiveness:
Organizational Goals
Official goals: guiding principles that
the organization formally states in its
annual report and in other public
documents
Mission: a mission statement explains
why the organization exists and what it
should be doing
Operative goals: specific long- and
short-term goals that guide managers
and employees as they perform the
work of the organization
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Part 1-unit ii
Stakeholders,
Managers, and Ethics
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Organizational Stakeholders
Stakeholders: people who have an
interest, claim, or stake in an
organization
Inducements: rewards such as
money, power, and organizational
status
Contributions: the skills,
knowledge, and expertise that
organizations require of their
members during task performance
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Table 2-1: Inducements and
Contributions of Stakeholders
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Inside Stakeholders
People who are closest to an
organization and have the strongest and
most direct claim on organizational
resources
Shareholders: the owners of the
organization
Managers: the employees who are
responsible for coordinating organizational
resources and ensuring that an
organization’s goals are successfully met
The workforce: all non-managerial
employees
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Outside Stakeholders
People who do not own the organization,
are not employed by it, but do have
some interest in it
Customers: an organization’s largest
outside stakeholder group
Suppliers: provide reliable raw materials
and component parts to organizations
The government
Wants companies to obey the rules of fair
competition
Wants companies to obey rules and laws
concerning the treatment of employees and
other social and economic issues
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Outside Stakeholders (cont.)
Trade unions: relationships with
companies can be one of conflict or
cooperation
Local communities: their general
economic well-being is strongly affected
by the success or failure of local
businesses
The general public
Wants local businesses to do well against
overseas competition
Wants corporations to act in socially
responsible way
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Organizational Effectiveness: Satisfying
Stakeholders’ Goals and Interests
An organization is used simultaneously
by various stakeholders to achieve their
goals
Shareholders: return on their investment
Customers: product reliability and product value
Employees: compensation, working conditions,
career prospects
For an organization to be viable, the
dominant coalition of stakeholders has
to control sufficient inducements to
obtain the contributions required of
other stakeholder groups
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Competing Goals
Organizations exist to satisfy stakeholders’
goals
But which stakeholder group’s goal is most
important?
In the most of the countries, the
shareholders have first claim in the value
created by the organization
However, managers control organizations
and may further their own interests instead
of those of shareholders
Goals of managers and shareholders may be
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Allocating Rewards
Managers must decide how to allocate
inducements to provide at least
minimal satisfaction of the various
stakeholder groups
Managers must also determine how to
distribute “extra” rewards
Inducements offered to shareholders
affect their motivation to contribute to
the organization
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Top Managers and
Organizational Authority
Authority: the power to hold people
accountable for their actions and to make
decisions concerning the use of
organizational resources
The board of directors: monitors
corporate managers’ activities and rewards
corporate managers who pursue activities
that satisfy stakeholder goals
Inside directors: hold offices in a company’s
formal hierarchy
Outside directors: not full-time employees
May hold positions on the board of many companies
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Top Managers and
Organizational Authority (cont.)
Corporate-level management: the
inside stakeholder group that has
ultimate responsibility for setting
company goals and allocating
organizational resources
Chain of command: the system of
hierarchical reporting relationships in an
organization
Hierarchy: a vertical ordering or
organizational roles according to their
relative authority
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The Chief Executive Officer’s (CEO)
Role in Influencing Effectiveness
Responsible for setting organizational
goals and designing its structure
Selects key executives to occupy the
topmost levels of the managerial
hierarchy
Determines top management’s rewards
and incentives
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The CEO’s role in influencing
organizational effectiveness (cont.)
Controls the allocation of scarce
resources such as money and decision-
making power among the
organization’s functional areas or
business divisions
The CEO’s actions and reputation have
a major impact on inside and outside
stakeholders’ views of the organization
and affect the organization’s ability to
attract resources from its environment
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The Top-Management Team
Line-role: managers who have direct
responsibility for the production of
goods and services
Staff-role: managers who are in
charge of a specific organizational
function such as sales or research and
development (R&D)
Are advisory only
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The Top-Management Team
(cont.)
Top-management team: a group of
managers who report to the CEO and
COO and help the CEO set the
company’s strategy and its long-term
goals and objectives
Corporate managers: the members
of top-management team whose
responsibility is to set strategy for the
corporation as a whole
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Other Managers
Divisional managers: managers who
set policy only for the division they
head
Functional managers: managers
who are responsible for developing the
functional skills and capabilities that
collectively provide the core
competences that give the
organization its competitive advantage
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Figure 2-1: The Top-
Management Hierarchy
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An Agency Theory
Perspective
Agency problem: a problem in
determining managerial accountability
which arises when delegating
authority to managers
Shareholders are at information
disadvantage compared to top
managers
Top managers and shareholders may
have different goals
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The Moral Hazard Problem
Two conditions create the moral
hazard problem
Very difficult to evaluate how well the
agent has performed because the agent
possesses an information advantage
The agent has an incentive to pursue
goals and objectives that are different
from the principal’s
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Solving the Agency Problem
Use governance mechanisms:
The forms of control which align the
interests of principal and agent so that both
parties have the incentive to work together
to maximize organizational effectiveness
Use appropriate incentives to align the
interests of managers and shareholders
Stock-based compensation schemes that
are linked to the company’s performance
Promotion tournaments and career paths
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Top Managers and
Organizational Ethics
Ethical dilemma: decisions that
involve conflicting interests of parties
Ethics: moral principles and beliefs
about what is right or wrong
There are no indisputable rules or
principles that determine whether an
action is ethical
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Ethics and the Law
Laws specify what people and
organizations can and cannot do
Laws specify sanctions when laws are
broken
Ethics and laws are relative
No absolute or unvarying standards exist
to determine how people should behave
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Sources of Organizational
Ethics
Societal ethics: codified in a society’s
legal system, in its customs and practices,
and in the unwritten norms and values
that people use to interact with each other
Professional ethics: the moral rules and
values that a group of people uses to
control the way they perform a task or use
resources
Individual ethics: the personal and
moral standards used by individuals to
structure their interactions with other
people
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Why Do Ethical Rules
Develop?
Ethical rules and laws emerge to control
self-interested behavior by individuals
and organizations that threaten the
society’s collective interests
Ethical rules reduce transaction costs,
that is the costs of monitoring,
negotiating, and enforcing agreements
between people
Reputation effect: Transaction costs:
Are higher for organizations with a reputation for
illegality
Are lower for organizations with a reputation for
honest dealings
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Why Does Unethical Behavior
Occur?
Personal ethics: ethics developed as
part of the upbringing and education
Self-interest: weighing our own
personal interests against the effects
of our actions on others
Outside pressure: pressures from
the reward systems, industry and
other forces
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Creating an Ethical
Organization
An organization is ethical if its
members behave ethically
Put in place incentives to encourage
ethical behavior and punishments to
discourage unethical behaviors
Managers can lead by setting ethical
examples
Managers should communicate the
ethical values to all inside and outside
stakeholders
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Designing an Ethical Structure
and Control System
Design an organizational structure that
reduces incentives to act unethically
Take steps to encourage whistle-
blowing – encourage employees to
inform about an organization’s
unethical actions
Establish position of ethics officer and
create ethics committee
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Creating an Ethical Culture
Values, rules, and norms that define
an organization’s ethical position are
part of its culture
Behaviors of top managers are a
strong influence on the corporate
culture
Creation of an ethical corporate culture
requires commitment from all levels
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Supporting the Interests of
Stakeholder Groups
Find ways to satisfy the needs of
various stakeholder groups
Pressure from outside stakeholders
can also promote ethical behavior
The government and its agencies,
industry councils, regulatory bodies,
and consumer watchdogs all play
critical roles in establishing ethical
rules
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Part I-Unit 3
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Organizational
Environments
External environment
– everything
outside an organization’s boundaries
that might affect it.
General environment
Task environment
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Figure 3.1
Organization
and Its
Environment
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The External Environment
General environment is the set of
broad dimensions and forces in an
organization’s surroundings that
create its overall context.
International dimension
Technological dimension
Political-legal dimension
Socio-cultural dimension
Economic dimension
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The External Environment. .
.
(continued)
Task environment
consists of
specific organizations or groups
that influence an organization.
Competitors
Customers
Suppliers
Strategic partners
Regulators
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The General Environment
Economic Dimension
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The General Environment. .
.
(continued)
Technological Dimension
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The General Environment. .
.
(continued)
Socio-cultural Dimension
Customs, values and demographic
characteristics of the society in which the
organization functions.
Socio-cultural processes determine the products,
services and standards of conduct that society is
likely to value.
Consumer tastes change over time – preferences
for color, style, taste, etc change from season to
season. [McDonald’s response to healthier food selections]
Socio-cultural factors influence how workers feel
about their jobs and organizations.
Appropriate business conduct varies from
culture to culture.
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The General Environment. .
.
(continued)
Political-Legal Dimension
Refers to government regulation of
business and the relationship between
business and government.
The legal system partially defines what an
organization can and cannot do.
In western countries, periods of ‘pro-
business’ and ‘anti-business’ climates can
affect how businesses operate. [mergers and
acquisitions may not be possible due to worry about
organizations becoming too large and running small businesses
out of business.]
Political stability with other countries can
affect businesses willingness to trade with
those countries.
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The General Environment. .
.
(continued)
International Dimension
The extent to which an organizations is
involved in or affected by business in other
countries.
Multinational firms are clearly affected by
businesses in other countries. [car and
aircraft manufacturers, restaurants,
electronics firms, etc]
Advances in transportation and information
technology have linked all parts of the
world, no matter how remote.
Virtually every organization is affected by
the international dimension of its general
environment.
See Figure 3.2, page 77.
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Figure 3.2
McDonald’s
General
Environment
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The Task Environment
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The Organizational
Environment
Public pressure
Suppliers Customers
groups
The
Organization
Government Labor unions
Competitors
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The Task Environment
(continued)
...
Competitors
Other organizations that compete with
our organization for resources.
Most obvious resource is customer
dollars.
Organizations compete for bank loans,
property, quality labor, technological
breakthroughs, patents, scarce raw
materials.
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The Task Environment
(continued)
...
Customers
Whoever pays money to acquire an
organization’s products or services.
Customers of major organizations may
include: schools, hospitals, government
agencies, wholesalers, retailers and
manufacturers.
Customers have more discriminating
tastes and new products’ and services’
expectations.
Companies who expand internationally
face critical differences [no beef served in India,
alcohol served in Germany and France as a part of the menu].
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The Task Environment
(continued)
...
Suppliers
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The Task Environment. . .
(continued)
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The Task Environment
(continued)
...
Regulators
A unit that has the potential to control,
legislate or otherwise influence the
organization's policies and practices.
Regulatory agencies – created by the government
to protect the public from certain business
practices or to protect organizations from one
another. [EPA, SEC, FDA, EEOC]
Interest groups – organized by their members to
attempt to influence organizations. No official
power, but use the media to call attention to their
positions. [NOW, MADD, NRA, the Sierra Club, Ralph Nader’s Center
for the Study of Responsive Law, Consumers Union, Better Business
Bureau, etc].
See Figure 3.3, page 79.
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Figure 3.3
McDonald’s
Task
Environment
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The Internal Environment
Internal Environment consists of:
Owners
Board of Directors
Employees
Physical Work Environment
Organizational Culture
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The Internal Environment. ..
(continued)
Owners
People who can claim property rights to
an organization.
Single individual who establishes and runs a
small business.
Partners who jointly own a business.
Shareholders who own shares of stock in a
corporation or other organization.
Companies who own other companies which
are run as wholly owned subsidiaries by the
parent companies. [McDonald’s owns bakeries that
supply it with buns and have partial ownership in other chains.]
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The Internal Environment ...
(continued)
Board of Directors
Governing body elected by a
corporation's stockholders and charged
with overseeing the general
management of the firm to ensure that
it is being run in a way that best serves
the stockholders’ interests.
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The Internal Environment ..
.(continued)
Employees
The nature of the workforce is changing in terms
of gender, ethnicity, age, etc.
Workers are also demanding more job
ownership – partial ownership in the company
or more say in how they perform their jobs.
Companies are relying on ‘temps’ more – less
salary and benefits cost – but no company
loyalty.
Labor unions are presenting management with
another layer with which to deal – some
companies deal with more than one union.
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The Internal Environment ..
.(continued)
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The Internal Environment ..
.(continued)
Culture
A set of values, beliefs, behaviors,
customs and attitudes that helps the
members of the organization to
understand what it stands for, how it
does things and what it considers
important.
Plays an important part in shaping
management behavior.
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Organization-Environment
Relationships
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1. Environmental Change and
Complexity
Uncertainty – unpredictability
created by environmental change
and complexity.
Least environmental uncertainty is faced
by organizations with ‘stable’ and
‘simple’ environments. [Subway and Taco Bell focus on
certain segments of the consumer market, produce a limited product line, have
a constant source of suppliers and face relatively consistent competition]
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Environmental Change and Complexity. . .
(continued)
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2. Competitive Forces
Michael E Porter proposes that
managers should view the
organizational environments in
terms of five competitive forces:
The threat of new entrants
Competitive rivalry
The threat of substitute products
The power of buyers
The power of suppliers
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Competitive Forces. . . (continued)
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Competitive Forces. . . (continued)
Competitive rivalry
The nature of the competitive
relationship between firms in the
industry.
Large firms, dominant in the field,
engage in price wars, comparative
advertising and new-product
introductions.
Examples include: Coke and Pepsi; American
Express and Visa; Kodak and Fuji; US and
foreign auto makers.
Small establishments, in contrast, do
not generally engage in such practices.
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Competitive Forces. . . (continued)
Information Technology
Strategic Response
Mergers, Acquisitions and Alliances
Organization Design and Flexibility
Direct Influence
Social Responsibility
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Adapting – Information
Technology
Important when forming an initial
understanding of the environment
and watching for signs of change.
Boundary Scanner is an employee
[sales rep or purchasing agent]
who spends much time in contact
with others outside the
organization. Can keep up with
what is going on in other
organizations.
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Adapting – Information
Technology
Environmental Scanning –
managers monitor the
environments through
observation and reading.
Management Information
Systems [MIS] within the
organization must gather and
organize information valuable to
all managers or specialists.
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Adapting – Strategic
Response
Strategic Options may include:
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Adapting – Mergers, Acquisitions and
Alliances
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Adapting – Organization Design and
Flexibility
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Adapting – Social Responsibility
Social Responsibility
is the set of
obligations an organization has to protect
and enhance the societal context in which
it functions.
Organizational stakeholders include:
Person or organization directly affected by the
practices of an organization and has a stake in its
performance – suppliers, employees, customers, creditors,
interest groups, trade associations, local community.
Natural environment – air, water, noise pollution, recycling,
waste control, etc.
General social welfare – charities, supporting events,
boycotting products from certain countries.
See Figure, 3.5, page 93.
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100
How Organizations Adapt to
Their Environments:
General
environment
Information
Task management
environment
Mergers,
takeovers
Social acquisitions,
responsibility alliances
The
Organization
Strategic Direct
responses influence
Organization
design and
flexibility
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101
Organizational Theory,
Design, and Change
Part 1 unit 4
Managing in a
Changing Global
Environment
102
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objectives
1. List the forces in an organization’s
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
103
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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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106 1-
The Specific Environment
The forces from outside stakeholder
groups that directly affect an
organization’s 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
nation’s people
Shape organization’s 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 organization’s 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 organization’s
dependence on another depends on:
How vital the resource is to the
organization’s survival
The extent that other organization’s
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
organization’s 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 (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 group’s 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
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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
here are many possible exchange
Tpartners
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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
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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 company’s
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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