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Managing in a Changing Global Environment. Chapter 3. Environment. Forces surrounding an organization that have potential to affect its operation & its ability to access resources

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  • Forces surrounding an organization that have potential to affect its operation & its ability toaccess resources
  • Organizations attempt to manage environmental forces to get resourcesneeded to produce G/S, serve customers & protect domain
  • Organizational domain

What is it?

How is it established?

the environment think about how each of these affects ability to acquire resources







Consumer interest groups

=Outside SH





Environmentalist pressures


Cultural/ social

The EnvironmentThink about how each of these affects ability to acquire resources
sources of uncertainty in the environment
Sources of Uncertainty in the Environment
  • Uncertainty When environmental forces make it difficult for an organization to control the flow of resources
        • Complexity
        • Dynamism
        • Richness
environmental complexity
Environmental Complexity
  • The number, strength & interconnectedness of environmental forces an organization has to manage. What would raise complexity?
  • More E. forces more complexity more uncertainty more unpredictable harder to control the flow of resources


environmental dynamism
Environmental Dynamism
  • How much & how quickly environmental forces change over time
      • New laws, new competition, changing customer demands, new technology, expansion overseas
  • An environment’s forces can be stable & predictable or unstable, dynamic & unpredictable
  • More dynamic  more uncertainty
environmental richness
Environmental Richness

The amount of resources available to an organization

  • Rich environment: resources plentiful, competition low & uncertainty low
  • Poor environment: resources hard to obtain, competition high & uncertainty high

What makes an E. poor?

1. Located in poor location/region

2. Excessive competition


uncertainty is greatest when
Uncertainty is greatest when?

Environment is:

  • Rich –or- Poor?
  • Dynamic –or- stable?
  • Complex –or- simple?
U.S. Airlines face uncertain E. Why?
  • Increased competition (low fares, global)
  • Airlines interconnected (when 1 lowers prices, all must)
  • High cost of fuel
  • Fluctuating economy
  • Fluctuating passenger demand (starting to weaken now)

WSJ 1-10-08

  • Oregonian 1-10-08 Some big airlines are planning to reduce domestic capacity in 2008 in hopes of driving fares higher to offset rising fuel costs. (Manage the E)
resource dependence theory
Resource Dependence Theory
  • Organizations try to:
    • Reduce dependence on other organizations for supply of resources
    • Influence other organizations to make those resources more available (reduce uncertainty)
    • Any guesses how?
  • How dependent an organization is depends on:

1. How vital is the resource(for survival)?

-Can manufacturers need aluminum

2. How much control do other organizations have over the resource?

-PC makers need memory chips

-Dependence on suppliers & distributors

interorganizational relationships
Interorganizational Relationships

---Organizations formulate strategies to manage interorganizational resource dependencies in an attempt to reduce uncertainty without giving up control

Symbiotic: the outputs of one organization are the inputs of another. Examples?

Competitive: organizations compete for inputs &/or outputs. Examples?

strategies for managing symbiotic relationships
Strategies for Managing Symbiotic Relationships
  • Formal linkage: written agreement
  • Informal linkage: unspoken agreement

1. Reputation (most informal)

2. Co-optation

          • Neutralize opponents by giving them a stake
          • Interlocking directorate

3. Strategic alliance

          • Agreement to share resources for joint business opportunity

4. Merger & takeover (most formal)

strategic alliances
Strategic Alliances
  • Long-term contracts
      • Informal agreement to share something. Why?
  • Networks
      • Coordination of multiple organizations by contracts/agreements (no formal hierarchy)
      • Benefits?
  • Minority ownership
      • Ownership of minority stake (<49%)
      • Benefit?
  • Joint venture
      • Joint establishment & sharing of ownership of a new business
      • Benefit?
general rule
General Rule
  • As environmental uncertainty increases, the formality of interorganizational linkages ______ .

A. Increases

B. Decreases

    • Why?
    • What is the problem with using a more formal linkage than is necessary?
strategies for managing competitive relationships attempts to reduce uncertainty
Strategies for Managing Competitive Relationships (Attempts to reduce uncertainty)

1. Collusion & cartels

  • Collusion: secret agreement between competitors to share information for illegal purpose; their cooperation is an attempt to reduce competition (ex: scrap)
  • Cartel: group of companies that agree to coordinate actions to set industry standards (price fixing); also illegal! (ex: caskets)

2. Third-party linkage mechanism

  • Organizations form regulatory bodies in order to share information & regulate & monitor their competition
  • Trade associations
strategies for managing competitive relationships
Strategies for Managing Competitive Relationships

3. Strategic alliances

  • ex: Sony and Samsung formed a strategic alliance to improve LCD panel TVs

4. Merger & takeover

  • Disadvantages?
    • Become monopoly or overly bureaucratic (cost!)

---These 2 strategies are used to manage both symbiotic & competitive relationships---

transaction cost theory
Transaction Cost Theory
  • What are transaction costs?
      • Cost of organization interacting with other organizations. Cost to monitor, negotiate, & govern exchanges.
  • Transaction costs rise as a company attempts to control symbiotic & competitive interdependencies

--TC are 42% of health care costs!

  • An organization’s goal is to minimize costs of negotiating & monitoring exchanges both in & out of the organization (SO CAN USE $ TO CREATE VALUE!!)
what things increase tc
What Things Increase TC?
  • Bounded rationality (uncertainty)
      • More uncertain environment  more expensive to manage
      • How can an org. predict future behavior of another? It costs $ to enforce agreements.
      • Sometimes the costs of enforcing an informal agreement outweigh the benefits & a more formal linkage is required.
  • Opportunism
      • Tendency to cheat/ exploit other SH
      • Examples: dependent on 1 supplier; substitution of inferior materials; higher costs
  • Specific assets
      • Investments that only create value in one exchange relationship (high level of risk)
      • Ex: memory card fits only 1 camera; investment in machinery that makes 1 product
transaction cost assessment
Transaction Cost Assessment

Transaction costs are lower when:

1. Environmental uncertainty is high or low?

2. Organizations are exchanging specific or nonspecific G/S?

3. The number of possible exchange partners is high or low?

When TC low, the organization can choose more formal or informal linkage?

bureaucratic costs
Bureaucratic Costs
  • Are internal transaction costs
    • Costs to monitor, negotiate, & govern exchanges between people inside the organization
  • Managers must choose the linkage that results in the most transaction cost savings & the lowest bureaucratic costs.
      • Formal linkages increase BC but decrease TC
      • Informal linkages decrease BC but increase TC
      • RULE: only use formal linkage when TC are very high, because savings in TC must outweigh BC!
strategies used to avoid bc minimize tc
Strategies used to avoid BC & minimize TC
  • Keiretsu
    • Minority stakes in suppliers to gain control and reduce opportunism (Toyota)
  • Franchising
    • Business authorizes another business to sell its products & use its resources in exchange for share of profits; still maintains control over quality & service
  • Outsourcing
    • Outside company performs 1 or more value creation activities to reduce bureaucratic costs
homework assignment
Homework Assignment

Alcoa example 4th quarter results

  • Causes of uncertainty
    • Aluminum prices are dropping (trading @ $2500/ton- down from $2630/ton)
    • Aluminum consumption in N. America fell 10% in 2007 (due to slowed production of cars/trucks)
      • N. America – poor E.
      • China, India, S. America –richer E. (alum price expected to increase)
    • Higher costs of material inputs (commodities)
    • Higher transportation costs
    • Higher energy expenses
    • Fluctuating housing industry- vinyl siding & decks (dynamism)
    • Fluctuating currency exchange rates (weak dollar)
    • Aerospace business- down as customers used more products in inventory.