MGT504 - Organization Theory and Design - Lecture Handout 13

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ORGANIZATIONAL ECOSYSTEMS

ORGANIZATION – ENVIRONMENT INTEGRATIVE FRAME WORK

One theme is that the amount of complexity and change in an organization’s domain influences the need for information and hence the uncertainty felt within an organization. Greater information uncertainty is resolved through greater structural flexibility, and the assignment of additional departments and boundary roles. When uncertainty is low, management structures can be more mechanistic, and the number of departments and boundary roles can be fewer. The second theme pertains to the scarcity of material and financial resources. The more dependent an organization is on other organizations for those resources, the more important it is to either establish favorable linkages with those organizations or control entry into the domain. If dependence on external resources is low, the organization can maintain autonomy and does not need to establish linkages or control the external domain.

POPULATION ECOLOGY

This section introduces a different perspective on relationships among organizations. The population ecology perspective differs from the other perspectives because if focuses on organizational diversity and adaptation within a population or organizations. A population is a set of organization engaged in similar activities with similar patterns of resource utilization and outcomes. Organizations within a population compete for similar resources or similar customers, such as financial institutions in the Seattle area.

Within a population, the question asked by ecology researchers is about the large number and variation of organizations in society. Why are new organizational forms constantly appearing that create such diversity? Their answer is that individual organizational adaptation is severally limited compared to the changes demanded by the environment. Innovation and change in a population of organizations take place through the birth of new forms and kinds of organizations more so than by the reform and change of existing organizations. Indeed, organizational forms are considered relatively stable, and the good of a whole society is served by the development of new forms of organization through entrepreneurial initiatives. New organizations meet the new needs of society more so than established organizations that are slow to change.

What does this theory mean in practical terms? It means that large established organizations often become dinosaurs. Established companies such as Toys “R” Us and Barnes & Nobel, for example, have had tremendous difficulty adapting to a rapidly changing environment. Hence, new organizational forms that fit the current environment will emerge, such as e Toys and Amazon.com that fill a new niche and overtime take away business from established companies. Large, established companies are finding it nearly impossible to make the shift to an internet-based business model.

Why do established organizations have such a hard time adapting to a rapidly changing environment? Michael Hannan and Johan Freeman, Originators of the population ecology model of organization, argue that there are many limitations on the ability of organizations to change. The limitations come from heavy investment in plant, equipment, and specialized personnel, limited information, established viewpoints of decision makers, the organization’s own successful history that justifies current procedures, and the difficulty of changing corporate culture. True transformation is a rare and unlikely event in the face of all these barriers.

At this very moment, new organizational forms are emerging. Consider the changing gas station. Two decades ago, gas stations sold gas and maybe offered auto repair. Today, most gas pumps are located in front or convenience stores where customers can pick up a six –pack or buy a loaf of bread and gallon of mil. Some stores are quite large, often including a deli or doughnut shop. Now, a new organizational form is emerging that that includes multiple stores on one site—for example, a gas station, a fast – food restaurant, and a dry cleaner, in today’s fast – paced world, customers want convenience on a level not even considered in the 1970s. In the travel industry, which was once dominated by a few large carriers, low –fare airlines such as Southwest Airlines in the United States, West Jet in Canada, Go Fly Ltd. in Britain, and Ryanair in Ireland are taking business away from the faints. Another recent change is the development of corporate universities within large companies like Motorola and Fedex. There are more than one thousand corporate universities, compared to just two hundred a few years ago. One Reason they’ve developed so fast is that companies can’t get desired services from established universities, which are too stuck in traditional ways of thinking and teaching.

According to the population ecology view, when looking at an organizational population as a whole, the changing environment determines which organizations survive or fail. The assumption is that individual organizations suffer from structural inertia and find it difficult to adapt to environmental changes. Thus, when rapid change occurs, old organization are likely to decline or fail, and new organizations emerge that are better suited to the needs of the environment.

Currently, huge AT&T is working hard to renew itself in the rapidly changing telecommunications world. A part of this strategy was the appointment of a new chief executive, Michael Armstrong, to replace long-time CEO Robert Allen. Based on the history of telephone companies, population ecology researchers would say that successful change is unlikely for example, in the early 1900s.

When the telephone industry was new, over four hundred telephone companies existed Pennsylvania alone. Most used magneto technology, which means each telephone, carried its own battery. A major innovation was a common battery --- a power source located within the central office used for voice transmission among all telephones connected there. This was a powerful innovation, but most phone companies failed to adapt. Thus as the common battery became more popular, the magneto-based companies went out of business. Over the years consolidation occurred until only a few phone companies are left, and now AT&T, the dominant long –distance carrier, may be in the twilight of its dominance

The population’s ecology model is developed from theories of natural selection in biology, and the terms evaluation and selection are used to refer to the underlying behavioral processes. Theories of biological evolution try to explain why certain life forms appear and survive are typically best fitted to the immediate environment.

In 1987, Forbes magazine reported a study of American businesses over seventy years, from 1917 to 1987. Do you recall Baldwin Locomotive, Studebakers, or Lehigh Coal & Navigation? These companies were among 78 percent of the top one hundred in 1917 that did not see 1987. Of the twenty – two that remained in the top one hundred, only eleven did so under their original names. The environment of the 1940s and 1950s was suitable to Woolworth, but new organizational forms like Wal-Mart and Kmart became dominant in the 1980s. In 1917, most of the top one hundred companies where huge steel and mining industrial organizations, which were replaced by high – technology companies such as IBM and Merck. Two companies that seemed to prosper over a long period were Ford and General Motors, but they are now being threatened by world changes in the automobile industry. No company is immune to the processes of social change. From just 1979 to 1989, 187 of the companies on the fortune 500 list ceased to exist as independent companies. Some were acquired, some merged, and some were liquidated. Meanwhile, technology was changing the environment again. Cellular phone technology made Qualcomm a major player in the 1990s. And the internet explosion made millionaires out of many who bought America Online stock at $ 0.36 a share when it went public in 1992. In just a few years, AOL went from being just a good idea to being a Fortune 500 power house.

ORGANIZATIONAL FORM AND NICHE

The population ecology model is concerned with organizational forms, organizational form is an organization’s specific technology, structure, products, goals, and personnel, which can be selected or rejected by the environment. Each new organization tries to find a niche (a domain of unique environmental resources and needs) sufficient to support it. The niche is usually small in the early stages of an organization but may increase in size over time if the organization is successful. If a niche is not available, the organization will decline and may perish.

From the viewpoint of a single firm, luck, chance, and randomness play important t parts in survival. New products and ideas are continually being proposed by both entrepreneurs and large organizations. Whether these ideas and organizational forms survive or fail is often a matter of chance – whether external circumstances happen to support them. A woman who started a small electrical contracting business in a rapidly growing Florida community would have an excellent chance of success. If the same woman were to start the same business in a declining community else where in the United States, the chance of success would be far less. Success or failure of a single firm thus is predicted by the characteristics of the environment as much as by the skills or strategies used by the origination.

PROCESS OF ECOLOGICAL CHANGE

The population ecology model assumes that new organizations are always appearing in the population. Thus, organization populations are continually undergoing change. The process of change in the population is defined by three principles that occur in stages; variation, selection, and retention. These stages are summarized below:

  • Variation, New Organizational forms continually appear in a population of organizations. They are initiated by entrepreneurs, established with venture capital by large corporations, or set up by a government seeking to rovide
    new services. Some forms may be conceived to cope with a perceived need in the external environment. In your own neighborhood, for example, a new restaurant may be started to meet a perceived need. In recent years, a large number of new firms have been initiated to develop computer software, to provide consulting and other services to large corporations, and to develop products and technologies for internet commerce. Other new organization produce a traditional product such as steel, but do it using minimal technology and new management techniques that make the new steel companies such as Nucor far more able to survive. Organizational variation is analogous to mutations in biology, and they add to the scope and complexity of organizational forms in the environment.
  • Selection. Some variations will suit the external environment better than others. Some prove beneficial and thus are able to find a niche and acquire the resources from the environment necessary to survive. Other variation fails to meet the needs of the environment and perish. When there is insufficient demand for a firm’s product and when insufficient resources are available to the organizations, that organization will be “selected out.” Only a few variations are “selected in” by the environment and survive over the long term.
  • Retention. Retention is the preservation and institutionalization of selected organizational forms. Certain technologies, product, and services are highly valued by the environment. The retained organizational form may become a dominant part of the environment. Many forms of organization have been institutionalized, such as government, schools, churches, and automobile manufacturers. McDonald’s, which owns a huge share of the fast
    food market and provides the first job for many teenagers, has become institutionalized in American life.
  • Institutionalized organization likes McDonald’s Seem to be relatively permanent features in the population of organizations, but they are not permanent in the long run. The environment is always changing, and, if the dominant organizational forms do not adapt to external change, they will gradually diminish and be replaced by other organizations. Taco Bell captured some of McDonald’s customers because the Mexican fast – food chain kept lowering prices while McDonald’s consistently raised them. Unless it adapts, McDonalds might no longer be price
    competitive in the fast – food market.

From the population ecology perspective, the environment is the important determinant of organizational success or failure. The organizational must meet an environmental leads to the establishment of new organizational forms in a population of organization.

STRATEGIES FOR SURVIVAL

Another principle that underlies the population ecology model is the struggle for existence, or competition. Organizations and populations of organizations are engaged in a competitive struggle over resources, and each organizational form is fighting to survive. The struggle is most intense among new organizations, and both the birth and survival frequencies of new organizations are related to factors in the larger environment. Factors such as size of urban area, percentage of immigrants, political turbulence, industry growth rate, and environmental variability have influence enced the launching and survival of newspapers, telecommunications firms, rail-roads, government agencies, labor unions, and even voluntary organizations.

In the population ecology perspective, generalist and specialist strategies distinguish organizational forms in the struggle for survival. Organizations with a wide niche or domain, that is, those that offer a broad range of products or services or that serve a broad market, are generalist, organizations that provide a narrower range of goods or services or that serve a narrower market are specialists.

In the natural environment, a specialist form of flora and fauna would evolve in protective isolation in a place like Hawaii, where the nearest body of land is two thousand miles away. The flora and fauna are heavily protected. In contrast, a place like Costa Rica, which experienced wave after wave of external influences, developed a generalist set of flora and fauna that has better resilience and flexibility for adapting to a broad range of circumstances. In the business world, Amazon.com started with a specialist strategy, selling books over the internet, but evolved to a generalist strategy with the addition of music, video, greeting cards, and other products, plus links to sites selling drugstore goods, pet supplies, and flowers. A company such as Olmec Corporation, which sells African American and Hispanic dolls, would be considered a specialist, whereas Mattel is generalist, marketing a broad range of toys for boys and girls of all ages.

Specialists are generally more competitive than generalists in the narrow area in which their domains overlap. However, the breadth of the generalist’s domain serves to protect it somewhat from environmental changes. Though demand may decrease for some of the generalist’s products or services, it usually increases for others at the same time. In addition, because of the diversity of products, services, and customers, generalists are able to reallocate resources internally to adapt to a changing environment, whereas specialists are not. However, because specialists are often smaller companies, they can sometimes move faster and be more flexible in adapting to a changing environment.

Managerial impact on company success often comes from selecting a strategy that steers a company into an open niche in the environment. Charles Schwab Corp. was established and became successful by creating a new niche for discount brokerage houses. More recently, Schwab managers spotted an open niche based on on-line securities trading, helping the company grab the lion’s share in a new market.

INSTITUTIONALISM.

The institutional perspective provides yet another view of inter organizational relationship. Organizations are highly interconnected. Just as companies need efficient production to survive, the institutional view argues that organizations need legitimacy from their stakeholders. Companies perform well when they are perceived by the larger environment to have a legitimate right to exist. Thus, the institutional perspective describes how organizations survive and succeed through congruence between an organization and the expectations from its environment. The institutional environment is composed of norms and values from stakeholders (customers, investors, associations, broads, government, collaborating organizations) thus the institutional view believes that organizations adopt structures and processes to please outsiders, and these activities come to take on rule like status in organizations. The institutional environment reflects what the greater society views as correct ways of organizing and behaving.

Legitimacy is defined as the general perspective that organizations actions are desirable, proper, and appropriate within the environment’s system of norms, values and beliefs. Institutional theory thus is concerned with the set of intangible norms and values that shape behavior, as opposed to the tangible elements of technology and structure. Organizations must fit within the cognitive and emotional expectations of their audience. For example, people will not deposit money in a bank unless it sends signals of safety and compliance with norms of wise financial management.

Another example is the widespread interest among business firms in the annual Fortune magazine survey that ranks corporations based on their reputation. Consider also your local government and whether it could raise property taxes for increased school funding if community residents did not approve of the school district’s policies and activities. The Soviet Union collapsed and communism quickly disappeared because communism held little legitimacy in the minds of citizens in Russia and Eastern Europe. Just as important, when Westerners tired to construct to market – based economy in Russia, those efforts failed because citizens did not have a mental framework that saw competitive organizations as legitimate. Gradually institutions will grow and flourish in Russia consistent with the value held in the larger culture.

The institutional view also sees organizations as having two essential dimensions – technical and institutional. The technical dimension is the day–to-day work technology and operating requirements. The institutional structure is that part of the organization most visible to the outside public. Moreover, the institutional dimension is governed by expectations from the external environment. As a result of pressure to do things in a proper and correct way, the formal structures of many organizations reflect the expectations and values of the environment rather than the demand of work activities. This means that an organization may incorporate positions or activities (equal employment officer, e-commerce division) perceived as important by the larger society and thus increase its legitimacy and survival prospects, even though these elements may decrease efficiency. Compaq Computer Corp’s board ousted CEO Eckhard Pfeiffer because he was unwilling to cut out the company’s distributors and sell computers directs online, having a dot – com division is perceived as essential by the larger society today. The formal structure and design of an organization may not be rational with respect to work flow and products or services, but it will assure survival in the larger environment.

Organizations adapt to the environment by signaling their congruence with the demands and expectations stemming from norms, standards set by professional bodies, funding agencies, and customer, structure is something of a façade disconnected from technical work though which the organizations obtains approval, legitimacy, and continuing support. The adoption of structures thus may not linked to actual production needs, and may occur regardless of whether specific internal problems are solved. Formal structure is separated from technical action in this view.

INSTITUTIONAL SIMILARITY

Organizations have a strong need to appear legitimate. In so doing, many aspects of structure and behavior may be targeted toward environmental acceptance rather than toward internal technical efficiency. Inter organizational relationships thus are characterized by forces that cause organizations in a similar population to look like one another. Institutional similarity, called institutional isomorphism in the academic literature, is the emergence of a common structure and approach among organizations in the same field. Isomorphism is the process that causes one unit in a population to resemble other units that face the same set of environmental conditions. Exactly how does increasing similarity occur? How are these forces realized? A summary of three mechanisms for institutional adaptation are summarized below. There are three core mechanisms; mimetic forces, which result from response to uncertainty, normative forces, which result from common training and professionalism, and coercive forces, which stem from political influence

Mimetic Forces: Most organizations especially business organizations, face great uncertainty. It is not clear to senior executives exactly what products, services, or technologies will achieve desired goals, and sometimes the goals themselves are not clear. In the face of this uncertainty mimetic forces occur, which is the pressure to copy or model other organizations

Executives see an innovation in a firm generally regarded as successful, so the management practice is quickly copied. This modeling is done without any clear proof that performance will be improved. Mimetic Processes explain why fads and fashions occur in the business world. Once a new idea starts, many organizations grab onto it, only to learn that the application is difficult and may cause more problems that is solves. This was the case with the recent frenzy around reengineering and the merger wave that swept many industries. Of course there were successes reported in both instances but also a large number of failures. Techniques such as job enrichment, total quality management, and the balanced scorecard have all been adopted without clear evidence for efficiency or effectiveness. The one certain benefit is that management’s feelings of uncertainty will be reduced, and the company’s image will be enhanced because the firm is seen as using the latest management techniques.

Three Mechanisms for institutional Adaptation

  Mimetic Coercive Normative
Reason to become similar Uncertainty Dependence Duty obligation
Events Innovation, Visibility Political law, Rules, Sanctions Professionalism,
Certification, Accreditation
Social basis Culturally Supported Legal Moral
Example Reengineering,
Benchmarking
Pollution Controls, School
regulations
Accounting standards
Training

Perhaps the clearest example, of official copying is the technique of bench-marking that occurs as part of the total quality movement. Benchmarking means identifying ‘who is best’ at something in an industry and then duplicating the technique for creating excellence, perhaps even improving it in the process. Rank Xerox, the subsidiary of Xerox that sells copiers in Europe, uses benchmarking to find out what competitors are doing and then copies the best techniques.

The Mimetic Process works because organization face continuous high uncertainty, they are aware of innovations occurring in the environment, and the innovations are culturally supported, thereby giving legitimacy to adopters. This is a strong mechanism by which a group of banks, or high schools, or manufacturing firms begin to look and acts like one another.

Coercive Forces: All organizations are subject to pressure, both formal and informal, from government, regulatory agencies, and other important organizations in the environment, especially those on which a company is dependent. Coercive forces are the external pressures exerted on organizations to adopt structures, techniques, or behaviors similar to other organizations. Some pressures may have the force of law, such as government mandates to adopt new pollution control equipment. Health and safety regulations may demand that a safety officer be appointed. Due to increasing political pressure at the local, state, and national levels, more than twenty gun manufacturers recently adopted a policy of installing child safety locks on handguns. As with other changes, those brought about because of coercive forces may not make the organization more effective, but it will “look” more effective and will be accepted as legitimate in the environment.

Coercive pressures often occur between organizations where there is a power difference. It is not unusual for a large retailer like Wal-Mart or a manufacture like General Motors to insist on certain policies, Procedures, and techniques used by it suppliers. When Honda picked Donnelly Corporation to make all the mirrors for its U.S. manufactured cars, Honda insisted that Donnelly empower its workers. Because Donnelly had already taken major steps in this direction, it won the contract, unless an organization know how to foster collaborative relationship internally, Honda believes the company won’t be good at making a partnership work between the two companies.

Organizational changes that result from coercive forces occur when an organization is dependent on another, when there are political factors such as rules, laws, and sanctions involved, or when some other contractual or legal basis defines the relationship. Organizations operating under those constrains will adopt changes and relate to one another in a way that increases homogeneity and limits diversity.

Normative Forces: The third reason organizations change according to the institutional view is normative. Normative forces mean that organizations are expected to change to achieve standards of professionalism, and to adopt techniques that are considered by the professional community to be up to date and effective. Changes may be in any area, such as information technology, accounting requirements, or marketing techniques. Professionals share a body of formal education based on university degrees and professionals share a body of formal education based on university degrees and professional networks through which ideas are exchanged by consultants and professional leaders. Universities, consulting requirements firms, and professional training institutions develop norms among professional mangers. People are exposed to similar training and standards, and adopt shared values, which are implemented in organizations with which they work. Business schools teach finance, marketing, and human resource major that certain techniques are better than others, so using those techniques becomes a standard in the fields. In one study, for example, a radio station changed from a functional to a multidivisional structure because a consultant recommended it as a “Higher standard” of dong business. There was no proof that his structure was better, but the radio station wanted legitimacy and to be perceived as fully professional and up to date in its management techniques. As another example, studies show great homogeneity among superintendents in the U.S Public school system and among board members of Fortune 500 Companies. Through education and experience, people are subjected to considerable pressure to gain legitimacy by acting exactly the same way as people already in those positions.

Companies accept normative pressure to become like one another through a sense of obligation or duty to high standards of performance based on professional norms shared by managers and specialist in their respective organizations. These norms are conveyed through professional education and certification and have almost a moral or ethical requirement based on the highest standards accepted by the profession at that time

A company may use any or all of the mechanisms of mimetic, coercive, or normative forces to change itself for greater legitimacy in he institutional environment. Firms tend to use these mechanisms when they are acting under conditions of dependence, uncertainty, ambiguous goals, and reliance on professional credentials. The outcome of these processes is that organizations become far more homogeneous that would be expect from the natural diversity among managers and environment.

Inter organizational relationships are the relatively enduring resource transactions, flows, and linkages that occur among two or more organizations. Traditionally, these transactions and relationships have been seen as a necessary evil to obtain what an organization needs. The presumption has been that the world is composed of distinct businesses that thrive on autonomy and compete for supremacy. A company may be forced into inter organizational relationships depending on its needs and the stability of the environment.

A new view described by James Moore argues that organizations are now evolving into business ecosystems. An organizational ecosystem is a system formed by the interaction of a community of organization and their environment. An ecosystem cuts across traditional industry, lines. A company can create its own ecosystem. Microsoft travels in four major industries: consumer electronics, information, communications, and personal computers. Its ecosystem also includes hundreds of suppliers, including Hewlett-Packard and Intel, and millions of customers across many markets. Traditional boundaries are dissolving. Circuit City uses its expertise gained from selling televisions and stereos to sell used cars. Shell Oil is the largest seller of packaged sausages in the Scandinavian countries.

Wal-Mart rated an ecosystem based on well-known brands and low prices in rural and small markets. Today, Wal- Mart cannot be categorized simply as retailer. It is also a wholesaler, a logistics company, and an information services company. Wal-Mart, like other business ecosystems, develops relationships with hundreds of organizations cutting across traditional business boundaries.

IS COMPETITION DEAD?

No company can go it alone under a constant onslaught of international competitors, changing technology, and new regulations. Thus competition, which assumes a distinct company competing for survival and supremacy with other stand-alone businesses, no longer, exists. In that sense competition is dead. However, most managers recognize that the competitive stakes are higher than ever in a world where market share can crumble overnight and no industry is immune from almost instant obsolescence. In today’s world, a new form of competition is in fact intensifying.

For one thing, company’s new needs to co evolve with others in the ecosystem so that everyone gets stronger. Consider the wolf and the caribou. Wolves cull weaker caribou, which strengthens the herd. A strong herd means that wolves must become stronger themselves. With co evolution, the whole system becomes stronger. In the same way, companies co evolve through discussion with each other, shared visions, alliances, and managing complex relationships, as we saw with Cisco Systems and its partners in the opening case. The words of British biologist Brain Goodwin apply to today’s businesses as well to nature. “Companies has no special status… what is important is the pattern of relationships and interactions that exist and how they contribute to the system as an integrated whole.
Conflict and cooperation often exist at the same time. In New York City, Time Warner refused to carry Fox’s twenty – four news channel on its New York City cable systems. The two companies engaged in all- out conflict, however, masked a simple fact: the two companies can’t live without each other. Fox and Time Warner are wedded to one another in separate business deals around the world. They will never let the local competition in New York upset their larger inter dependence on a global scale. Mutual dependencies and partnerships have become a fact of life in business ecosystems. Companies no longer operate autonomously or with a single voice. A senior executive at Dream Works sued Disney. But that hasn’t stopped Disney’s ABC network from acquiring television shows from Dream Works. Companies today may use their strength to win conflicts and negotiations, but ultimately cooperation carries the day.

THE CHANGING ROLE OF MANAGEMENT

Within business ecosystems managers learn to move beyond traditional responsibilities of corporate strategy and designing hierarchical structures and control system. If a top manager looks down to enforce order and uniformity, the company is missing opportunities for new and evolving external relationship. In this new world, managers think about horizontal processes rather than vertical structures. Important initiatives are not just top down; they cut across the boundaries separating organizational units. Moreover horizontal relationships now include linkages with suppliers and customers, who become part of the team. Business leaders can learn to lead economic co evolution. Managers learn to see and appreciate the rich environment of opportunities that grow from cooperative relationships with other contributors to the ecosystem. Rather than trying to force suppliers into low prices or customers into high prices, mangers strive to strengthen the larger system evolving around them, finding ways to understand this big picture and how to contribute.

This is a broader leadership role than ever before. For example, Harry Brown, president of EBC industries(formerly Erie Bolt Corp.) formed a network with about fifty of his company’s competitors to jointly market their skills and capabilities and acquire business that none of the companies could possibly get alone. They share information about quality systems, consult one another before investing in machinery, use one another’s sales reps, and even pass on customers to one another. Although members of the network still compete in some areas, cooperation often increases revenues, reduces costs, and improves quality. For example, Brown works with a machine shop in Buffalo to produce metal studs because the combined expertise of the two companies results in larger profit margins for both companies and a higher – quality product for the customer. However, the two companies bid competitively on other jobs for which each has the ability to produce a quality product efficiently.

INTER ORGANIZATIONAL FRAMEWORK

Understanding this larger organizational ecosystem is one of the most exiting areas of organization theory. The models and perspectives for understanding inter organizational relationships ultimately help managers change their role from top-down management to horizontal management across organizations. Relationships among organizations can be characterized by whether the organizations are dissimilar or similar, and whether relationships are competitive or cooperative. By understanding these perspectives, managers can assess their environment and adopt strategies to suit their needs. The first perspective is called resource dependence theory, which was briefly described in earlier. It describes rational ways organizations deal with each other to reduce dependence on the environment. The second perspective is about collaborative networks, wherein organizations allow themselves to become dependent on other organizations to increase value and productivity for both. The third perspective is population ecology, which examines how new organizations fill niches left open by established organizations, and how a rich variety of new organizational forms benefit society. The final approach is called institutionalism and explains why and how organizations legitimate themselves in the larger environment and design structures by borrowing ideas from each other.

RESOURCE DEPENDENCE

Resource dependence represents the traditional view of relationships among organizations. Resource dependence theory argues that organizations try to minimize their dependence on other organizations for the supply of important resources and try to influence the environment to make resources available. Organizations succeed by striving for independence and autonomy. When threatened by grater dependence, organizations will assert control over external resources to minimize that dependence. Resources dependence theory argues that organizations do not want to become vulnerable to other organizations because of negative effects on performance.

The amount of dependence on a resource is based on two factors. First is the importance of the resource to the firm, and second is how much discretion or monopoly power those who control a resource have over its allocation and use. For example, a Wisconsin manufacturer made scientific instruments with internal electronics. It acquired parts from a supplier that provided adequate quality at the lowest price. The supplier was not involved in the manufacturer’s product design but was able to provide industry-standard capacitors at fifty cents each. As industry standards changed, other suppliers of the capacitor increased to $2 each. The Wisconsin firm had no choice but to pay the higher price. Within eighteen months, the price of the capacitor increased to $ 10 each, and then the supplier discontinued production altogether. Without capacitors, production came to a halt for six months. The scientific instruments manufacturer allowed itself to become dependent on a single supplier and made no plans for redesign to use substitute capacitors or to develop new suppliers. A single supplier had sufficient power to increase price beyond reason and to almost put the Wisconsin firm out of business.

Organizations aware of resource dependence tend to develop strategies to reduce their dependence on the environment and learn how to use their power differences.

RESOURCE STRATEGIES

When organizations feel resource or supply constraints, the resources dependence perspective says they maneuver to maintain their autonomy through a variety of strategies. One strategy is to adapt to or alter the interdependent relationships. This could mean purchasing ownership in suppliers, developing along – term contracts or joint ventures to lock in necessary resources, or building relationships in other ways. For example, interlocking directorships occur when boards of directors include members of the boards of supplier companies. Organizations may join trade associations to coordinate their needs, sign trade agreements, or merge with another firm to guarantee resource and material supplies. Some organizations may take political actions, such as lobbying for new regulations or deregulation, favorable taxation, tariffs, or subsidies, or push for new standards that make resource acquisition easier. Organizations operating under the resource dependence philosophy will do whatever is needed to avoid excessive dependence on the environment to maintain control of resources and hence reduce uncertainty.

POWER STRATEGIES

In resource dependence theory, large, independent companies have power over small suppliers. For example, power in consumer products has shifted from vendors such as Rubbermaid and Procter & Gamble to the big discount retail chains such as Wal-Mart and Kmart. In manufacturing, behemoths like General Electric and Ford can account for 10 to 50 percent of many suppliers revenue, giving the large company enormous power. For example, General Electric called in three hundred suppliers to its appliance divisions and told them they must slash costs by 10 percent. Similarly, health maintenance organizations have growing power to dictate terms to pharmaceutical companies because they may account for 40 percent or more of a drug maker’s U.S. sales. Group Health Cooperative of Puget Sound ordered its doctors to stop prescribing all but an essential handful of drugs from Merck and Pfizer because the two drug makers refused to discount their prices. The Seattle-Based HMO instead began using equivalent drugs from rival suppliers who were willing to cut prices 10 to 20 percent. The loss in revenues promoted Merck’s president to personally visit Group Health and begin offering discounts. When one company has power over another, it can ask suppliers to absorb more costs, ship more defiantly, and provide more services than ever before, often without a price increase. Huge automakers like General Motors expect their suppliers to provide a broad range of services in one-stop shopping fashion while also meeting specific quality standards, such as ISO 9000 specifications. Often the suppliers have no choice but to go along, and those who fail to do so may go out of business.

COLLABORATIVE NETWORKS

North American companies typically have worked alone, competing with each other and believing in the traditional of individualism and self-reliance. Today, however, thanks to an uncertain international environment, realignment in corporate relationships is taking place. The collaborative network perspective is an emerging alternative to resource dependence theory. Companies join together to become more competitive and to share scarce resources. As a new wave of technology based on digital communications builds, for example computer manufacturers, local phone companies, cable television operators, cellular phone companies, and even water and gas utilities have teaming up. Biotechnology companies collaborate to share resources and knowledge and spur innovation. Consulting firms, investment companies, and accounting firms may join in an alliance to meet customer demands for expanded services. As companies move into their own uncharted territory, they are also racing into alliances as a way to share risks and cash in on rewards. In many cases companies are learning to work closely together. Consider the following example

  • AT&T is reaching out everywhere these days, dropping its traditional do-it from –scratch approach to team up with such major, established companies as Comcast Communications and Cisco Systems, as well as small pioneering companies, ensconcing itself in almost every corner of the rapidly changing communications industry.
  • Large computer and software companies such as IBM, Sun Microsystems, and Microsoft are joining forces with small e-commerce companies. The large firms get access to innovative new technology and markets, while the emerging companies gain the benefit of the large firm’s financing and marketing capabilities.
  • With corporate research budgets under pressure and technologies increasingly complex, the hottest R&D trend is collaboration. Companies are figuring out how to fruitfully connect with outside experts in other companies, consortiums, universities, and government labs. G.E Aircraft Engines teamed up with archrival Pratt & Whitney to share the $ 1 billion cost of designing a new jet engine. Texas Instruments and Hitachi joined their semiconductor businesses to share the best design and engineering abilities of both companies.
  • Small companies are banding together to compete against much larger firms. A group of seven wirelesstelephone companies in the United States and Canada are jointly marketing digital wireless phone service to challenge such telecommunications giants as AT&T and Sprint Communications. Forty local microbreweries formed the Oregon Brewers Guild to gain the resources needed to compete against craft brews from Miller and Anheuser-Busch.

INTERNATIONAL ORIGINS

Why all this interest in inter organizational collaboration. Major reasons are sharing risks when entering new markets, mounting expensive new programs and reducing costs, and enhancing organizational profile in selected industries or technologies. Cooperation is a prerequisite for greater innovation, problem solving, and performance. In addition, partnerships are a major avenue for entering global markets, with both large and small firms developing partnerships overseas and in North America

North Americans have learned from their international experience just how effective inter organizational relationships can be. Both Japan and Korea have long traditions of corporate clans or industrial groups that collaborate and assist each other. In Japan this grouping is called keiretsu. A keiretsu is a collection of companies that share holdings in one another, have interlocking boards of directors, and undertake joint ventures in long term business relationships. A keiretsu has long-term historical linkages through educational backgrounds of executives that literally create a family of companies. North Americans typically have considered interdependence a bad thing. Believing it would reduce competition. In a keiretsu, no single company dominates, and competition is fierce. It’s as if the brothers and sisters of a single family went into separate businesses and want to outdo one another, but they still love one another and will help each other when needed. Companies in a keiretsu enjoy a safety net that encourages long-term investment and risk-taking for entering new markets and trying new technologies. The following story from Toyota illustrates how powerful and beneficial the keiretsu can be to Japanese companies.
Although North American companies may never cooperate to the extent that members of Toyota’s Keiretsu do, inter organizational linkages can help firms achieve higher levels of innovation and performance, especially as they learn to shift from an adversarial to a partnership mind-set.

FROM ADVERSARIES TO PARTNERS

Fresh flowers are blooming on the battle – scarred landscape where once-bitter rivalries among suppliers, customers, and competitors took place. In North America, collaboration among organizations initially occurred in not – for – profit social service and mental health organizations where public interest was involved. Community organizations collaborated to achieve greater effectiveness for each patty and better utilize scare resources. With the push from international competitors and international examples, hard – nosed American managers are shifting to a new partnership paradigm on which to base their relationships.

Consider the example of Eastman Kodak Co. and Sun Chemical Corp. the two companies have competed vigorously for years, selling film and offset – printing supplies to the same set of customers. However, they forged a partnership to develop and market graphic arts products in order to compete worldwide against Agfa-Gevart Group, the world’s largest supplier of graphic – arts materials. As a Kodak spokesman put it, “We at Eastman Kodak came to the conclusion that it is better to join forces with another competitor than to continue competing with Agfa starting us in the face.

More companies are changing from a traditional adversarial mindset to a partnership orientation. More and more evidence from studies of General Electric, Corning, Amoco, and Whirlpool indicate that partnering allows reduced cost and increased value for both parties in a predatory world economy. The new model is based on trust and the ability of partners to develop equitable solutions to conflicts that inevitably arise. In the new orientation, people try to add value to both sides and believe in high commitment rather than suspicion and competition. Companies work toward equitable profits for both sides rather than just for their own benefit. The new model is characterized by lots of shared information, including electronic linkages for automatic ordering and face – to – face discussions to provide corrective feedback and solve problems. Sometimes people from other companies are on site to enable very close coordination. Partners are involved in each other’s product design and production and invest for the long term. It’s not unusual for business partners to help each other outside whatever is specified in the contract. For example, AMP, a manufacturer of electronic and electrical connectors, was contacted by a customer about a broken connector that posed serious problems. It wasn’t even AMP’s connector, but the vice president and his sales manager went to a warehouse on a weekend and found replacement parts to get the customer back on line. They provided the service with no charge as a way to enhance the relationship. Indeed, this kind of teamwork treats partner companies almost like departments of one’s own company.

Changing Characteristics of Inter organizational Relationships

Traditional Orientation New Orientation
Adversarial Partnership
Suspicion, Competition, arm’s length Trust, addition of value to both sides, high
commitment
Price. Efficiency, own profits Equity. Fair dealing. All profit
Limited information and feedback Electronic linkages to share key information problem
feedback, and decision
Legal resolution of conflict Mechanisms for close coordination, people on site.
Minimal involvement and up-front investment Involvement in partner’s product design and
production
Short-term contracts Long-term contracts
Contract limiting the relationship Business Assistance beyond the contract

Companies like Whirlpool Corporation use suppliers to design new products. The design work for the gas burner system for a new Whirlpool gas range was done by supplier Eaton Corporation. In this new view of partnerships, dependence on another company is seen to reduce rather than increase risks. Greater value can be achieved by both parties. By being imbedded in a system inter – organizational relationship, similar to a Japanese keiretsu, everyone does better by helping each other. This is a far cry from the belie that organizations do best by being autonomous and independent. Sales represent actives may have desk on the customer’s factory floor, and they have access to information systems and the research lab. Coordination is so intimate that its hare to tell one organization from another. An example of how partnership can boost both parties is Empire Equipment.

By becoming intimately involved in the supplier’s production with the attitude of fair dealing and adding value to both sides, Empire Equipment achieved savings for itself and additional value for its supplier. In the next generation of collaborative networks, suppliers may build products from components that arrive at one point to be assembled into a final product. Germany’s Volkswagen is attempting to achieve this new form of organization in the automobile industry, as described in the Taking the Lead box.

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