Organizational Analysis

&
Processes

Organizational Environment

By

Sreenath B.
 Managing Resource Dependencies
Resource Dependency Theory

• Resource dependence theory proposes that an

organization’s goal is to minimize its reliance on other
organizations for the supply of scarce resources.

• An organization must exert influence over other

organizations to get resources and respond to the needs
and demands of others in its environment.
 What causes dependence on another
organization for a specific resource?

– how essential the input is to survival of

organization.
– the degree to which others control the
resource.

• An organization is more dependent if the

resource is critical to survival and tightly
controlled.
Magnitude of Resource exchange

An organization that creates only

one product or services is more
dependent on its customers than
an organization that has a variety
of outs that are being disposed of in a variety of
markets.

Similarly, organizations which require one primary

input for their operations will be more dependent on
the sources of supply for that input than organizations
that use multiple inputs, each in relatively small
proportion.
 Cont’d

• When there are many sources of supply or

potential customers, the power of any single
one is correspondingly reduced
How does Microsoft manage resource
dependence?
• Microsoft is not dependent on others for
resources. It controls the development of
computer operating systems, so companies
depend on Microsoft.
• The control of this resource has increased
Microsoft’s market share.
 Interorganizational Strategies for
Managing Resource Dependencies
• An organization manages interdependencies
through interorganizational strategies.
• Linkage mechanisms connect companies and
require coordinated actions, with a loss of
freedom for independent action.
• A contract requires compliance even if a firm
can negotiate a better offer.
• The best interorganizational strategy reduces
uncertainty and provides the least loss of
control.
 Cont’d

• Two types of interdependencies are

– Symbiotic Interdependencies

– Competitive Interdependencies
 Symbiotic Interdependencies

• Symbiotic interdependencies occur when the

outputs of one organization serve as the inputs
for another, an organization and its suppliers.

Eg: Intel supplies chips for computer manufacturers

such as Compaq.
Auto manufacturers distribute cars through dealers.
 Competitive Interdependencies

• Competitive interdependencies exist among

organizations that compete for scarce resources.

• Eg: Dell and HP for customers and inputs from

Intel.
 Strategies for Managing Symbiotic
Resource Interdependencies
• Cooperation is greater if strategy is formal.

Four strategies for managing symbiotic resource

interdependencies include: developing a good
reputation, co-optation, strategic alliance, and
merger and takeover.

Reputation Co-optation Strategic Merger &

Alliance Takeover
 Cont’d
1. Developing a Good Reputation

– An organization can build a good reputation in the

eyes of customers and suppliers through fairness
and honesty, high-quality goods and services, and
prompt payment of bills.
– A dishonest company will be unsuccessful in the
long term.
– Developing a good reputation is the most frequently
used linkage mechanism for managing symbiotic
interdependencies.
 Cont’d
2. Co-optation
– it is used to counter problematic forces in the
specific environment.
– An organization brings adversaries inside the
organization and make them inside stakeholders.
– Eg : Some use an interlocking directorate, a
linkage whereby a director from one company sits
on the board of another.
3. Strategic alliances
– sharing of resources by several companies, are
popular for managing interdependencies.
– Alliances include: long-term contracts, networks,
minority ownership, and joint venture.
 Cont’d
– The more formal agreements provide stronger
linkages and tighter control over joint activities.
– As environmental uncertainty increases, companies
rely on formal alliances.

Long-Term Networks Minority Joint

Contracts Ownership Ventures
 Cont’d
• Long-term contracts reduce costs by sharing
resources or spreading the risk associated with
activities such as marketing and R&D.
– Contracts, both written or verbal, are the most informal
kind of alliance, because the only connection is the
agreement.
• A network is a group that coordinates activities via
contract. A network is more formal than a contract
because more ties connect members who share
competencies such as R&D skills with partners.
– Partners use those skills to increase efficiency and
reduce the core organization’s costs and size.
– A company can perform design work and have partners
produce the product.
 Cont’d
• Minority Ownership occurs when organizations buy
a stake in each other, forming a more formal alliance.
– The Japanese keiretsu is a group of organizations, each of
which owns shares in the other organizations and works to
further group interests.
– Japan has two types of keiretsu: Capital keiretsu to manage
input and output linkages & financial keiretsu for linkages
among different companies, usually with a bank at the
center.
– Toyota is a capital keiretsu with a minority stake in
suppliers.
– A financial keiretsu is an interlocking directorate with
members serving on the bank’s board.
 Cont’d
– At the Fuyo keiretsu. Fuji Bank is the center with
members such as Nissan, Hitachi, and Canon. Members
have other companies with minority ownership in
suppliers.

• Joint ventures are formal strategic alliances

among two or more companies to establish and
share ownership in a new business; a formal legal
agreement defines rights & responsibilities.
– Each organization sends managers to the new company.
– Participants can pool distinctive competences, design a
new structure, keep parent companies small, & reduce the
difficulty of managing parent company
interdependencies.
 Cont’d

4. Mergers and takeovers are the most formal

strategies for managing interdependencies.

– A merger or takeover results in resource exchanges

within organizations and prevents control by a
powerful supplier or customer.

– However, mergers and takeovers are costly, and

problems arise in managing a new business.

– This strategy is used if a company must control a

critical resource or manage a significant
interdependency.
 Strategies for Managing Competitive
Resource Interdependencies

• Competition increases uncertainty, but

organizations can use strategies to manage
competitive resource interdependencies:
collusion and cartels; third-party linkage
mechanisms; strategic alliances; and mergers
and takeovers.

• A more formal strategy is an explicit attempt to

coordinate a competitor’s activities.
 Cont’d

Collusion Third party Strategic Mergers

& linkage Alliances &
Cartels Mechanism Takeovers
 Cont’d
1. Collusion and Cartels
– Collusion, a secret pact among competitors to share
data for an illegal purpose, reduces competitive
uncertainty.
– A cartel, a group that coordinates activities,
increases the stability and richness of an
organization’s environment and reduces
uncertainty. Eg: OPEC

1. Third-Party Linkage Mechanisms

– An indirect way to coordinate activities is through a
third-party linkage mechanism, a regulatory body
such as a trade association that shares information
and governs competitive practices.
 Cont’d
• Advantages:
– Interaction decreases the concern about deceptive
organizational practices.

– The association can lobby the government for

favorable industry policies.

– Third-party linkages assist in managing resource

interdependencies and reducing uncertainties.

– An increased information flow allows an easier

response. These linkage mechanisms let companies
co-opt themselves and benefit from coordination.
 Cont’d

3. Strategic alliances

4. Mergers and takeovers

 Managerial Implications of
Resource Dependence Theory
• Managers should study each resource transaction
and decide how to manage it.

• Managers should aim for an informal linkage

mechanism yet identify the purpose and problems
of a strategic alliance to choose between a formal
or informal linkage mechanism.

• Transaction cost theory is useful for identifying

the costs and benefits of each linkage mechanism.
 Transaction Cost Theory
• Transaction costs are associated with negotiating,
monitoring, and governing exchanges between
people.
• Transaction cost theory proposes that
organizations should aim to minimize transaction
costs for inside dealings and outside transactions.
• Transaction cost theory addresses why and when
organizations choose and change strategies.
• Transaction costs reduce productivity; time spent
monitoring and negotiating exchanges could have
created value.
 Sources of Transaction Costs
1. Environmental uncertainty and bounded
rationality:
– People have a limited ability, known as bounded
rationality, to process data and understand their
environment.
– Bounded rationality makes it costly to manage
transactions in uncertain environments.
– To reduce transaction costs, organizations use formal
linkage mechanisms like minority ownership.
1. Opportunism and small numbers:
– The potential for opportunism is high when relying on
one supplier or a few trading partners. So,
organizations increase transaction costs by using
resources to enforce agreements for protection.
 Cont’d

3. Risk and specific assets:

– Investing in specific assets, one exchange
relationship, is risky.
– After the company invests, a customer may buy
products at a lower price.
 Transaction Costs and Linkage
Mechanisms
• Interorganizational linkage mechanisms depend on transaction costs.
• Transaction costs are low when:
– nonspecific goods and services are exchanged
– uncertainty is low
– many exchange partners exist.
• Transaction costs increase when:
– more specific goods and services are exchanged
– uncertainty increases
– potential exchange partners decrease.
 Cont’d

• Informal linkage mechanisms

– Reputation
– Unwritten contracts.
• Companies do not trust each other, so they use
formal linkages, such as contracts.
• Joint venture partners favor activities that create
value for both parties.
• Merger partners seek mutual success, because
one firm owns the other.
• Transaction cost theory attributes the move
from less to more formal linkage to reducing
transaction costs.
 Bureaucratic Costs

• Internal transaction costs are called Bureaucratic

costs.

• Integration and communication are costly, and

time spent in a meeting could have created value.

• As the organization becomes large the

bureaucratic cost increases.
 Using Transaction Cost Theory to
Choose an Interorganizational Strategy
• Transaction cost theory considers the costs of
linkage mechanisms and forecasts when and why
a strategy should be selected.
• When choosing a strategy, managers must:
– Identify the sources of and level of transaction costs
– estimate the savings from using different linkage
mechanisms
– estimate the bureaucratic costs, and select the linkage
that achieves cost savings at the lowest level of
bureaucratic costs.
• Transaction cost theory suggests that formal
linkage mechanisms are appropriate when
transaction costs are high. Otherwise, informal
mechanisms with lower bureaucratic costs
should be selected.
• Three mechanisms minimize transaction costs
while avoiding bureaucratic costs:

1. Keiretsu offers the benefits of ownership without

the costs.
– Eg :Toyota has a minority interest in its suppliers
for control and reduced uncertainty, but without
ownership and the management costs.
 Cont’d
2. Franchising
– The franchiser gives a franchisee the rights to use
resources in exchange for a flat fee or a percentage of
the profits.
– The franchiser provides the inputs to the franchisee,
who makes exchanges with the customer.
– The relationship is symbiotic.
– Franchisers give rights to franchisees because the
bureaucratic costs of managing their businesses are
too high.
3. Outsourcing
– buying a specialized service, is another strategy for
managing interdependencies.
– The decision to make or outsource products depends
on whether value exceeds bureaucratic costs.
THANK YOU