Organizational Theory, Design,

and Change
Text and Cases
Fourth Edition
Gareth R. Jones

Copyright 2004 Prentice Hall 1

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

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Learning Objectives
4. Understand resource dependence
theory and transaction cost and
explain why organizations choose
different kinds of interorganizational
strategies to manage their
environments

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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
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Figure 3-1: The
Organizational Environment

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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.
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The General Environment
 The forces that shape the specific
environment and affect the ability of
all organizations in a particular
environment to obtain resources

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The General Environment
 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
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The General Environment
 Political 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

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Uncertainty in the Environment
 All of the forces discussed above cause
uncertainty for organizations.
 It becomes more difficult for managers
to control flow of resources to protect
and enlarge their domains.

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 Sources of Uncertainty in the
Organizational Environment
 Three factors causing uncertainty
1. Environmental complexity: the
strength, number, and interconnectedness
of the specific and general forces that an
organization has to manage
2. Environmental dynamism: the degree
to which forces in the specific and general
environments change quickly over time

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 Sources of Uncertainty in the
Organizational Environment
3. Environmental richness: the
amount of resources available to
support an organization’s domain
 Two reasons why environments may be
poor:
1) The organization is located in a poor country
or in a poor region of a country.
2) There is a high level of competition, and
organizations are fighting over available
resources.

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Figure 3-2: Three Factors
Causing Uncertainty

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Resource Dependence Theory
 Organizations are dependent on their
environment for their resources.
 Organizations attempt to manage their
transactions with the environment to
ensure access to resources.
 Organizations want access to their
resources to be predictable.

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Resource Dependence Theory
 A theory that argues that the goal of
an organization is to minimize its
dependence on other organizations for
the supply of scare resources in its
environment and to find ways of
influencing them to make resources
available

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Resource Dependence Theory
 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.

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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 scare
inputs and outputs

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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

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Strategies for Managing Symbiotic
Resource Interdependencies
 Co-optation: a strategy that
manages symbiotic interdependencies
by neutralizing problematic forces in
the specific environment
 Examples: make outside stakeholders
(customers) inside stakeholders
 Interlocking directorate: a linkage that
results when a director from one
company sits on the board of another
company
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Strategies for Managing Symbiotic
Resource Interdependencies
 Strategic alliances: an agreement
that commits two or more companies
to share their resources to develop
joint new business opportunities

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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

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The Fuyo Keiretsu

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Types of Strategic Alliances
 Joint venture: a strategic alliance among
two or more organizations that agree to
jointly establish and share the ownership of
a new business
 Merger and takeover: results in resource
exchanges taking place within one
organization rather than between
organizations

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Figure 3-4: Types of Strategic
Alliances

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Strategies for Managing Competitive
Resource Interdependencies
 Collusion and cartels
 Collusion: a secret agreement

among competitors to share

information for a deceitful or illegal
purpose
 Cartel: an association of firms that

explicitly agrees to coordinate their

activities

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Strategies for Managing Competitive
Resource Interdependencies
 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
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Figure 3-7: Managing
Competitive Interdependencies

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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
exchanging resources in the
environment and the costs of
managing exchanges inside the
organization
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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 – attempt
to exploit forces or stakeholders
 Risk and specific assets
 Specific assets: investments that create value in
one particular exchange relationship but have no
value in any other exchange relationship

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Figure 3-8: Sources of
Transaction Costs

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Transaction Costs are Low
When These Conditions Exist:
1. Organizations are exchanging
nonspecific goods and services.
2. Uncertainty is low.
3. There are many possible
exchange partners.

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 Transaction Costs Increase
When These Conditions Exist:
1. Organizations begin to exchange
more specific goods and services.
2. Uncertainty increases.
3. The number of possible
exchange partners falls.

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Transaction Costs and Linkage
Mechanisms
 Bureaucratic costs
 According to transaction cost theory,

organizations will adopt increasingly

formal linkage mechanisms with
their exchange partners as
transaction costs increase.
 But these mechanism also carry

bureaucratic costs within the

organization.

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Transaction Costs and Linkage
Mechanisms
 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.

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Transaction Costs and
Strategy
 Managers deciding which strategy to
pursue must take the following steps:
1. Locate the sources of transaction costs that
may affect an exchange relationship and decide
how high the transaction costs are likely to be
2. Estimate the transaction cost savings from
using different linkage mechanisms
3. Estimate the bureaucratic costs of operating the
linkage mechanism
4. Choose the linkage mechanism that gives the
most transaction cost savings at the lowest
bureaucratic cost

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Keiretsu
 Mechanism for achieving the benefits
of formal linkages without incurring its
costs
 Example: Toyota has a minority
ownership in its suppliers.
 Substantial control over the exchange
relationship
 Avoid bureaucratic cost of ownership and
opportunism

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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.

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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.

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