ENVIRONMENT AND ORGANIZATION

DESIGN
&
RELATIONSHIP BETWEEN
ORGANIZATIONS

SESSION : 6
 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.

4. Understand how Resource Dependence Theory and Transaction Cost explain

why organizations choose different kinds of inter-organizational strategies to
manage their environments.
ORGANIZATIONAL DOMAIN &
ENVIRONMENT
Domain: It refers to the range of goods & services the organization produces
and the customers and stakeholders whom it serves.

Environment: Set of forces that surround the organization and have the
potential to affect the way it operates and its access to scarce resources.

This includes competition from Rival companies, Rapid technological changes

and Increase in cost of important inputs.
THE ORGANIZATIONAL ENVIRONMENT
Cultural forces Demographic forces Social forces

Customers Distributors

Government The Organization Unions

Suppliers Competitors

Technological
Economic forces
forces

General environment
Specific environment
ENVIRONMENTAL Richness
UNCERTAINTY Rich - poor

Complexity Dynamism
Simple -- complex Stable --unstable

Environmental uncertainty, as defined by Pfeffer and Salancik (1978), refers to "the degree to
which future states of the world cannot be anticipated and accurately predicted." Environmental
uncertainty is problematic to an organization only when it involves an element critical to the
organization.
FACTORS THAT CAUSE
UNCERTAINTY
1. Complexity is a function of the strength, number and interconnectedness of the specific and
general forces that an organization has to manage.
The greater the number & differences between them, the more complex & uncertain will the
environment be to predict & control.
2. Dynamism: is measured by the speed with which the specific and general environment changes
over time and contribute to uncertainty.
Stable - if forces are predictable; unstable & dynamic – if change cannot be predicted.
3. Richness denotes the amount of resources available to support an organizations domain.
Environments may be poor on account of two reasons:
1. Location in a poor country
2. High level of competition.
1. CONTINGENCY THEORY
Low Environmental Uncertainty High

Stable environments: Mechanistic structures (specialization, formality, hierarchy).

Changing environments: Organic structures (less specialization, informality,

lateral relations)

Fit with environment determines success. Ideal relationship between

environmental uncertainty and organizational structure.
 2. RESOURCE DEPENDENCY
THEORY
Argues that the goal of an organization is to:
Minimize its dependence on other organizations for the supply of scarce resources
AND
To find ways of influencing these organizations to make resources available.
The strength of one organization's dependence on another for a particular resource
is a function of:
1. How vital the resource is for survival
2. The extent to which the resource is controlled by other organizations
Organizations develop various strategies to manage their resource dependencies
and control their access to scarce resources.
TWO TYPES OF
INTERDEPENDENCIES.
Symbiotic interdependencies exist between an organization and its suppliers and
distributors.

(e.g. Ford and its 1750 suppliers (One Ford); World Excellence Awards)

Competitive interdependencies exist among organizations that compete for scarce

inputs and outputs.

Ford shares a distribution and service center in South America with Volkswagen and builds minivans
in the US with Nissan
 CHANGING CHARACTERISTICS
INTERORGANIZATIONAL RELATIONSHIPS
Traditional Orientation: Adversarial
 Suspicion, competition, arm’s length
 Price, efficiency, own profits
 Limited information and feedback
 Legal resolution of conflict
 Minimal involvement and up-front
investment, separate resources
 Short-term contracts
New Orientation: Partnership
Trust, addition of value to both sides, high
commitment
Equity, fair dealing, both profit
Electronic linkages to share key information,
problem feedback and discussion
Mechanisms for close coordination, people on-
site
Involvement in partner’s product design and
production, shared resources
Long-term contracts
Business assistance beyond the contract 10
STRATEGIES FOR SYMBIOTIC
INTERDEPENDENCIES
1. Developing a good reputation-held in high regard and trusted by other firms (e.g.
Triple bottom line for companies, CSR activities)
2. Co- optation-a strategy that neutralizes problematic forces in the specific environment.
( pharmaceutical companies and doctors- sponsoring medical conferences)
3. Strategic Alliances- Long-term contracts, Networks, Minority ownership (keiretsu) and
Joint ventures. (Toyota’s Keiretsu; ICICI Bank & Vodafone m-pesa, 2011)
4. Mergers & takeovers- results in resource exchanges taking place within one
organization rather than between organizations.
(IDFC Bank - Grama Vidiyal Micro Finance Ltd; Aditya Birla Fashion and Retail
(ABFRL) -Forever 21, 2016)

Informal 1 2 3 4 Formal
STRATEGIES FOR COMPETITIVE
INTERDEPENDENCIES
1. Collusion and Cartels: Collusion is a secret agreement to share information.
Cartel is an association of firms that explicitly agree to coordinate
activities.(Cement companies in India ? )
2. Third-party linkage mechanisms: a regulatory body that allows organizations to
share information and regulate the way they compete. ( Confederation of Real
Estate Developers’ Associations of India -CREDAI )
3. Strategic alliances : can be used to manage both symbiotic and competitive
interdependencies. ( Gujarat Ambuja Cement Limited and Associated Cement
Limited, 2006, DHL & UPS in U.S)
4. Merger and takeover: the ultimate method for managing problematic
interdependencies.($4-billion Sun Pharma-Ranbaxy deal - fifth largest specialty
generics company in the world, Holcim merges with Lafarge - LafargeHolcim,
2015; Reliance Communications and Maxis Communications Berhad (MCB),
Aircel,-fourth-largest telecom operator in the country, 2016)
Informal 1 2 3 4 Formal
3. TRANSACTION COST THEORY
Transaction cost theory states that 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.
Transaction costs are defined as the costs of negotiating, monitoring, and
governing exchanges between organizations.
Reasons: Transaction costs are low when:
 Environmental uncertainty  Exchanging nonspecific goods and services
 Uncertainty is low,
 Bounded rationality  There are many possible exchange
 Opportunism and small numbers partners
 Risk and specific assets
 Keiretsu ( interfirm networks): long-term and continuous business relationship
between an assembly maker Toyota and its domestic parts suppliers. SAIL and
IR.
 Franchising : PepsiCo – national level divestment - Franchisee Varun
Beverages; Baskin Robbins, Subway, McDonald's, Pizza Hut, Dominos Pizza.
 Outsourcing: Airtel: IT (IBM), network operations (Ericsson, Siemens &
Alcatel Lucent ) transmission towers (Bharti Infratel Ltd); Apple -
Foxconn or Pegatron.
 Low Uncertainty Low-Moderate Uncertainty
1. Mechanistic structure; formal,
1. Mechanistic structure; formal,
centralized
centralized
2. Few departments
STABLE 2. Many departments, some boundary
spanning
3. No integrating roles
3. Few integrating roles
4. Some planning; moderate speed
4. Current operations orientation;
response
low speed response
ENVIRONMENTAL
CHANGE High-Moderate Uncertainty High Uncertainty
1. Organic structure, teamwork;
1. Organic structure, teamwork;
participative, decentralized
participative, decentralized
2. Many departments differentiated,
2. Few departments, much boundary
UNSTABLE extensive boundary spanning
spanning
3. Many integrating roles
3. Few integrating roles
4. Planning orientation; fast
4. Extensive planning, forecasting;
response
high speed response

SIMPLE COMPLEX
ENVIRONMENTAL COMPLEXITY
 Environment Organization
High Many departments and boundary roles
complexity Greater differentiation and more
High integrators for internal coordination
uncertainty
Organic structure and systems with low
High rate formalization, decentralization, and low
of change standardization to enable a high-speed response
Environmental
domain Establishment of favorable linkages:
ownership, strategic alliances, cooptations,
interlocking directorates, executive recruitment,
advertising, and public relations
Scarcity of Resource
dependence Control of the environmental domain:
valued change of domain, political activity, regulation,
resources trade associations, and illegitimate activities

16