Organizations and Organizational Effectiveness

Organizational Design, and
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
vashusumam@yahoo.com 1- 2
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
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
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
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
Figure 1.1: How an Organization
Creates Value
Why Do Organizations Exist?
To increase specialization and the
division of labor
 Division of labor allows specialization
 Specialization allows individuals to

become experts at their job
(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
(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
vashusumam@yahoo.com 1-10
10
(cont.)
To exert power and control
 Organizations structure their members to
efficiently produce products and services
To economize on transaction costs

 Transaction costs: the costs associated
with negotiating, monitoring, and
governing exchanges between people
who must cooperate
11
Figure 1.3: Why
Organizations Exist
12
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
13
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
14
Some Definitions (cont.)
Organizational change:
 the process by which organizations
move from their present state to

some desired future state to
increase their effectiveness
 Organizational redesign and
transformation
15
Figure 1.4: The Relationship Among
Organizational Theory, Structure, Culture,
Design, and Change
16
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
17
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
18
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
diverse workforce can result in better

decision making and more effective
workforce
19
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
20
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
21
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
22
Table 1.1: Approaches to
Measuring Effectiveness
23
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
24
Part 1-unit ii
Stakeholders,
Managers, and Ethics
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 25

Learning Objectives
1. Identify the various stakeholder
groups and their interests on an
organization
2. Understand the choices and problems
inherent in distributing the value an
organization creates
3. Appreciate who has authority and
responsibility at the top of an
organization, and distinguish
between different levels of
management
4. Describe the agency problem that
exists in all authority relationships
and the mechanisms available to
control illegal and unethical behaviors
5. Discuss the vital role played by ethics
in constraining managers and
employees to pursue goals that lead
to long-run organizational
effectiveness
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
Table 2-1: Inducements and
Contributions of Stakeholders
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
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
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
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
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
incompatible vashusumam@yahoo.com 1-34
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
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
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
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
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
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
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
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
Figure 2-1: The Top-
Management Hierarchy
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
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
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
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
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
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
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
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
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
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
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
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
Part I-Unit 3
External Environments & organizational

relationships
Organizational
Environments
External environment
– everything
outside an organization’s boundaries
that might affect it.
General environment
Task environment
Internal environment – the conditions

and forces within an organization.
Not all parts of the environment are
equally important to all organizations.
[small organizations do not have BoDs, but corporations are required to;
private schools worry less about economic conditions as do schools supported
by the government, etc]
See Figure 3.1, page 75.
Figure 3.1
Organization
and Its
Environment
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
The External Environment. .
.
(continued)
Task environment
consists of
specific organizations or groups
that influence an organization.
Competitors
Customers
Suppliers
Strategic partners
Regulators
The General Environment
Economic Dimension
Overall health and vitality of the

economic system in which the
organization operates.
Usually influenced by economic growth,
inflation interest rates and
unemployment.
The General Environment. .
.
(continued)
Technological Dimension
Methods available for converting

resources into products or services.
Examples include:
CAD (computer-assisted design) techniques
Assembly-line techniques for car
manufacturing and hamburger assembly at
McDonald’s
Use of internet in all areas of business
Integrated business software systems
.
(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.
.
(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.
.
(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.
Figure 3.2
McDonald’s
General
Environment
The Task Environment
Provides useful information more

readily than does the General
Environment because the
manager can identify
environmental factors of specific
interest to the organization.
The Organizational
Environment
Public pressure
Suppliers Customers
groups
The
Organization
Government Labor unions
Competitors
(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.
(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].
(continued)
...
Suppliers
Organizations that provide resources for

other organizations.
McDonald’s depends on Heinz for its
ketchup packets and Coca-Cola for its soft
drinks.
The Task Environment. . .
(continued)
Strategic Partners (Allies)

Two or more companies that work together in
joint ventures or similar arrangement.
McDonald’s with Wal-Mart and Disney.
Strategic partnerships allow companies to
share expertise they lack, spread risk and
open new market opportunities.
Usually occurs with international firms. [Ford
shares a distribution and service center in South America with Volkswagen and
builds minivans in the US with Nissan]
(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].
Figure 3.3
McDonald’s
Task
Environment
The Internal Environment
Internal Environment consists of:
Owners
Board of Directors
Employees
Physical Work Environment
Organizational Culture
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.]
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.
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.
.(continued)
Physical Work Environment

An important consideration for many businesses.
Construction supervisors may rely on wireless
communication equipment to keep in touch with
various work crews.
Facilities may be spread out among various
buildings in the city, in rural or suburban areas,
or in campus-like facilities.
Some facilities have traditional offices on each
side of a hall, some modular cubicles with partial
walls, or an even more open arrangement.
.(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.
Organization-Environment
Relationships
Three basic perspectives can be

used to describe how
environments affect
organizations:
1. Environmental change and complexity

2. Competitive forces
3. Environmental turbulence
1. Environmental Change and
Complexity
James D Thompson theorized that

organizational environment can be described
along two dimensions:
Degree of change – the extent to which the
environment is relatively stable or relatively
dynamic.
Degree of homogeneity – the extent to which
the environment is relatively simple (few
elements, little segmentation) or relatively
complex (many elements, much
segmentation).
These two dimensions interact to determine
the level of uncertainty faced by the
organization.
Environmental Change and Complexity. . .
(continued)
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]
Organizations with ‘dynamic’ but

‘simple’ environments generally face a
moderate degree of uncertainty [clothing
manufacturers and certain CD producers who target a certain kind of clothing
or CD buyer but are alert to changing tastes]
Environmental Change and Complexity. . .
(continued)
Moderate amount of uncertainty results in

organizations with stability and
complexity. [automobile manufacturers must interact
with many suppliers, regulators, consumer groups and
competitors, yet change occurs quite slowly in this industry
despite changes in the styles of cars]
Very dynamic and complex environmental

conditions create a high degree of
uncertainty. occurs in the technology area due to rapid
rate of innovation and change in consumer markets which affect
the industry, their suppliers and their competitors. Intel, Sony,
Compaq, IBM, Apple and internet-based firms like eBay and
Amazon.com face high levels of uncertainty]

Figure 3.4: Environmental Change,
Complexity, and Uncertainty
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
Competitive Forces. . . (continued)
The threat of new entrants

The extent to which new competitors can easily
enter a market or market segment.
Entrance is easier for market requiring a small
amount of capital to open. [dry cleaner, pizza, hamburger or
sandwich shop, etc.]
More difficult when it takes a tremendous

investment in plant, equipment and distribution
systems [automobile market, etc.]
The internet has reduced the costs and other
barriers of entry into many market segments so
the threat has increased for many firms.
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.
The threat of substitute products

The extent to which alternative products
or services may take the place of or
diminish the need for existing products
and/or services.
Personal computers (PCs) have virtually
eliminated the need for calculators,
typewriters and large mainframe
computers.
Sugar and salt substitutes are used
more often.
DVD players will render VCRs obsolete in
The power of buyers

The extent to which buyers of the
products or services in an industry have
the ability to influence the suppliers.
Relatively few potential buyers for
aircraft. Therefore, buyers have
considerable influence over the price
they are willing to pay, the delivery date
of the order, etc.
Buyers have virtually no power with
products that have very many willing
buyers.
The power of suppliers

The extent to which suppliers have the
ability to influence potential buyers.
The power of the supplier depends on
the product being offered. The more
restricted the service or product, the
more power to the supplier. [electricity
providers, telephone/internet access]
Small wholesaler of vegetables has little

power, since if people do not like the
product, they can easily find an
alternative supplier.
3. Environmental
Turbulence
Environmental change or turbulence
which occurs with no warning at all.
Most common is an organizational crisis of
some sort.
9/11 affected travel, international and
domestic businesses.
Workplace violence – unhappy or dismissed
workers assault other workers.
Spread of computer viruses that can shut
down businesses around the world. [Love Bug
virus in 2000]
Far too few organizations have developed

crisis plans and special teams to deal with
such events.
How Organizations Adapt to
Their Environment
Basic Techniques for Adapting
 Information Technology
 Strategic Response
 Mergers, Acquisitions and Alliances
 Organization Design and Flexibility
 Direct Influence
 Social Responsibility
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.
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.
Adapting – Strategic
Response
Strategic Options may include:
 Maintaining the present course

 Expanding the business [going
international]
 Shrinking the business or shutting down
certain areas
Adapting – Mergers, Acquisitions and
Alliances
Merger – two or more firms come

together under one name. [Banoco and
Bapco]
Acquisition – one firm buys

another firm out. [Starbucks and Seattle Coffee
Company]
Hostile Takeover – a firm takes another

firm over by force.
Alliance – two or more firms
undertake a venture together, but
each keeps its own identity. [British
Airways and American Airlines; McDonald’s with Disney and Wal-Mart]
Adapting – Organization Design and
Flexibility
Mechanistic Organization Design:

Firms operating in low levels of uncertainty
who operate under rigid rules, regulations
and standard operating procedures [SOPs].
Managers have little flexibility with
decision making.
Organic Organization Design:
Firms operating in high levels of
uncertainly who operate with relatively
few SOPs.
Managers have great flexibility with
decision making and can react quickly to
environmental changes.
Adapting – Direct Influence
Suppliers may be influenced to sign long-term
contracts with fixed prices.
Companies may become their own suppliers.
[McDonald’s owns bakeries; Campbell’s makes its own soup cans, etc.]
Certain activity may affect an organization’s

competitors. [car manufacturer discounts and upgrades in warranties,
electronic products warranty and price changes, etc]
Advertising to show people new uses for products,

finding new customers, taking customers from
competitors, etc.
Lobbying and bargaining with government and
other regulating agencies to influence decisions
that might affect the organization/industry.
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.
vashusumam@yahoo.com 1-
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
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
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
vashusumam@yahoo.com
104 1-
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
105 1-
Figure 3.1: The
Organizational Environment
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
107 1-
The forces that shape the specific
environment and affect the ability of
all organizations in a particular
environment to obtain resources
108 1-
(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
109 1-
(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
110 1-
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
111 1-
Three Factors Causing Uncertainty
112 1-
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
113 1-
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
114 1-
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
115 1-
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
116 1-
(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
117 1-
(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
118 1-
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
119 1-
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
120 1-
Figure 3.3: Interorganizational Strategies
for Managing Symbiotic Interdependencies
121 1-
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
122 1-
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
123 1-
 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
124 1-
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
125 1-
Figure 3.4: Types of Strategic
Alliances
126 1-
Figure 3.5: The Fuyo Keiretsu
127 1-
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
128 1-
Figure 3.6: Joint Venture
Formation
129 1-
 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
130 1-
Figure 3-7: Interorganizational Strategies for
Managing Competitive Interdependencies
131 1-
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
132 1-
Strategies for Managing Competitive
 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
133 1-
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
134 1-
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
135 1-
Figure 3.8: Sources of
Transaction Costs
136 1-
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
137 1-
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
138 1-
Linkage Mechanisms (cont.)
Bureaucratic costs: internal
transaction costs
 Bringing transactions inside the
organization minimizes but does not
eliminate the costs of managing
transactions
139 1-
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
140 1-
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
141 1-
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
142 1-
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
143 1-
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
144 1-

Organizations and Organizational Effectiveness

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Organizations and Organizational Effectiveness

Uploaded by

Copyright:

Available Formats

Organizational Design, and

 Division of labor allows specialization

 Specialization allows individuals to

To economize on transaction costs

move from their present state to

diverse workforce can result in better

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 25

External Environments & organizational

Internal environment – the conditions

See Figure 3.1, page 75.

Overall health and vitality of the

Methods available for converting

Provides useful information more

Organizations that provide resources for

Strategic Partners (Allies)

Physical Work Environment

Three basic perspectives can be

1. Environmental change and complexity

James D Thompson theorized that

Organizations with ‘dynamic’ but

Moderate amount of uncertainty results in

Very dynamic and complex environmental

See Figure 3.4, page 90.

The threat of new entrants

More difficult when it takes a tremendous

The threat of substitute products

The power of buyers

The power of suppliers

Small wholesaler of vegetables has little

Far too few organizations have developed

 Maintaining the present course

Merger – two or more firms come

Acquisition – one firm buys

Hostile Takeover – a firm takes another

Mechanistic Organization Design:

Certain activity may affect an organization’s

Advertising to show people new uses for products,

 Cartel: an association of firms that

 Transaction cost theory can be used

You might also like