Gloryson Chalil

Organizational Structure,
Design and Change
Session 3:
Managing Organization and its Environment
Organizational Structure, Design and Change

Organization & its Environment

Revisiting the definition for Organization

Environment: the set of forces surrounding an

organization that have the potential to affect the
way it operates and its access to scarce resources
Meaning of resources

Organizational domain: the particular range of

goods and services that the organization
produces, and the customers and other
stakeholders whom it serves

Organizational Structure, Design and Change

Environment & Organizational Strategy

Organizational Environment
Specific Environment (task environment)
Customers

Suppliers

Distributors

The
Organization

Government

Unions

Competitors

Forces from outside stakeholder groups that directly

affect an organizations capability to secure resources
Organizational Structure, Design and Change

Environment & Organizational Strategy

Organizational Environment
Demographic &
Cultural Forces

International
Forces

Customers
Suppliers

Environmental
Forces

Distributors

The
Organization

Government

Political
Forces

Unions

Competitors
Economic
Forces

Technological
Forces

-Forces shape the specific environment &

-Affect the ability of all organizations
Organizational Structure, Design and Change

Environment & Organizational Strategy

Uncertainty in Environment
Dynamism:
Complexity:
Degree at which
Strength, number &
forces in specific and
Interconnectedness of
generic environments
specific and
change quickly
generic forces
over time
Richness:
Amount of resources
available to support
an organizations
domain

Organizational Structure, Design and Change

Organization & its Environment

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

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

Dependence on resource is determined by

Criticality of the resource

Scarcity of the resource

E.g.: CRY, Nuclear Agreement
Organizational Structure, Design and Change

Organization & its Environment

Managing Resource Dependence

Two basic types of interdependencies to address
uncertainty

Symbiotic interdependencies: interdependencies that

exist between an organization and its suppliers and
distributors (Vertical integration strategies)
Competitive interdependencies: interdependencies that
exist among organizations that compete for scarce inputs
and outputs (Horizontal integration strategies)

Organizations aim to choose the interorganizational

strategy that offers the most reduction in uncertainty
with least loss of control
Organizational Structure, Design and Change

Environment & Organizational Strategy

Uncertainty in Environment
Symbiotic interdependence:
Informal
Reputation
Long-term
contracts

Formal

Co-optation

Strategic
Alliance

Merger &
Takeover

Networks

Minority
Ownership

Joint
Ventures

Competitive Interdependencies:
Collusion
and Cartels

3rd Party
Linkage

Strategic
Alliance

Organizational Structure, Design and Change

Merger &
Takeover
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Organization & its Environment

Symbiotic Interdependencies
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
e.g.: Concept of branding, employer branding

Organizational Structure, Design and Change

Organization & its Environment

Symbiotic Interdependencies
Cooptation
A strategy that manages symbiotic interdependencies
by neutralizing problematic forces in the specific
environment

Make outside stakeholders inside stakeholders

Interlocking directorate:
a linkage that results when a director from one company
sits on the board of another company
E.g.: Sponsorship by pharmaceutical companies,
Academic committee

Converting outside stakeholders to inside stakeholders

How?
Organizational Structure, Design and Change

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Organization & its Environment

Symbiotic Interdependencies
Strategic alliances:
An agreement that commits two or more companies to
share their resources to tap new business opportunities
Long term contract:

10 year agreement between Google and Samsung,

Microsoft and Yahoo

Networks: Nike, Reebok & Airline Alliances

Minority ownership: Keiretsu
Joint venture: BARC

Broadcast Audience Research Council Vs TAM Media Research

Merger and takeover:

Ford and Hertz RentaCar
Organizational Structure, Design and Change

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Organization & its Environment

Competitive 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

Section 3 of the Competition Act, 2002, agreements that

have an adverse effect on competition within India

Following forms or combination thereof

Price fixing
Market division agreements
Concerted refusal to deal
Bidrigging

Organizational Structure, Design and Change

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Organization & its Environment

Competitive Interdependencies
Thirdparty 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

Organizational Structure, Design and Change

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Organization & its Environment

Transaction Cost Theory

Transaction costs:

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

Transaction cost theory:

A theory that states that

the goal of an organization is to minimize the costs of
a) exchanging resources in the environment and
b) managing exchanges inside the organization

Organizational Structure, Design and Change

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Sources of Transaction Costs

Conditions wherein transaction cost is low/high..

Human & environmental factors
Organizational Structure, Design and Change

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Organization & its Environment

Transaction Cost Theory

Bureaucratic costs: internal transaction costs

Bringing transactions inside the organization minimizes

but does not eliminate the costs of managing transaction

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 extent of transaction costs
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

Organizational Structure, Design and Change

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Organization & its Environment

Transaction Cost Theory

Suzuki Motor Gujarat Pvt. Ltd. (SMGPL), a 100% owned company by

Suzuki will manufacture cars for Maruti
Suzuki Japan, Maruti Suzuki and Suzuki Gujarat will form one group
and the benefits will be shared between the three partners,
SMGPL will remain as an unlisted company with starting capital of 100
crores, target capacity (750000 units/year)
Initial plan was for setting up the unit in Gujarat by Maruti itself
Suzuki wanted to start the Mansar plant with 70% ownership, but had to
drop plans due to resistance from government.

Questions:
Environment of SMGPL & Maruti Suzuki
Relationship between these three organizations
Transaction cost for SMGPL and Maruti Suzuki
Organizational Structure, Design and Change

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Organization & its Environment

Transaction Cost Theory

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
TCS Pearl, 848 m deal

Example from your mailbox

Organizational Structure, Design and Change

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Organization & its Environment

Transaction Cost Theory

Franchising
A franchise is a business that is authorized to sell a
companys 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
Outsourcing
Moving a value creation that was performed inside the
organization to outside companies
Compare the bureaucratic costs of doing the activity Vs
benefits

Relation with networks in RDT

Organizational Structure, Design and Change

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Organization & its Environment

Group Activity & Individual Project Questions

Identify the applications of transaction cost theory in one of

the business. Choose one example each with high and low
transaction cost and give reasons for variation in transaction
cost

Individual Project Questions

Rank Generic and specific environment factors in your
organization (from HR perspective) with reasons.
Go through illustrations of resource dependence theory related
to HR department and check their appropriateness (minimum
two).

Organizational Structure, Design and Change

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