Chapter Five

1. Chapter Five Interorganizational Relationships 1

2. CHAPTER OVERVIEW This chapter explores a trend in organizing, which is the increasingly dense web of relationships among organizations. Companies have always been dependent on other organizations for supplies, materials, and information. At one time it was a matter of a large, powerful company tightening the screws on small suppliers. Today a company can choose to develop positive, trusting relationships. Interorganizational research has yielded perspectives such as resource dependence, collaborative networks, population ecology, and institutionalism. Today, managers handle a whole set of challenging and complex, interorganizational relationships. 2

3. Managing by Design Organizations should strive to be as independent and self-sufficient as possible so that their managers aren�t put in the position of �dancing to someone else�s tune.� The success or failure of a start-up is largely determined by the smarts and management ability of the entrepreneur. Managers should quickly copy or borrow techniques being used by other successful companies to make their own organization more effective and to keep pace with changing time 3

4. Organizational Ecosystems Interorganizational relationships the relatively enduring resource transactions, flows, and linkages that occur among two or more organizations. Organizational ecosystems (James Moore) A system formed by the interaction of a community of organizations and their environment. An ecosystem cuts across traditional industry lines. Microsoft works in four industries: consumer electronics, information, communications, and personal computers. Its ecosystem includes hundreds of suppliers, millions of customers across many markets. 4

5. Organizational Ecosystems Is competition dead? In the sense that a single company competing for supremacy with other stand-alone businesses no longer exists, competition is dead. No company can go it alone under a constant onslaught of international competition, changing technology, and new regulations. A new type of competition is intensifying. Companies need to coevolve with others in the ecosystem so that everyone gets stronger. Companies coevolve through discussion with each other, shared visions, alliances, and managing complex relationships. The changing role of management Managers must think about horizontal processes rather than vertical structures. Managers learn to see and appreciate the rich environment of opportunities that grow from cooperative relationships with other contributors to the ecosystem. 5

6. Organizational Ecosystem

7. Sony Corporation and Samsung Electronics Company What reason could Samsung have for letting Sony use some of its key technologies for flat-panel televisions before Samsung�s own products used them? By working closely with Sony, Samsung engineers and managers knew they were getting a crash course in how to make better televisions. As competition has intensified, Sony and Samsung realize that they depend on each other in technology and product development. The two firms continue to try to out-do one another, but they continue to share information too, because managers at both companies know it�s the best route to growing stronger. 7

8. The Changing Role of Management Managers think about horizontal processes rather than vertical structures. The old way of managing relied almost exclusively on operations roles, defending the organization�s boundaries and maintaining direct control over resources. Today, collaborative roles are becoming more important for success. 8

9.  Interorganizational framework The models and perspectives for understanding interorganizational relationships help managers change their role from top-down management to horizontal management. Relationships among organizations can be characterized by whether the organizations are similar or dissimilar, and whether the relationships are competitive or cooperative. �By understanding these perspectives, managers can assess their environment and adopt strategies to suit their needs 9

10. A Framework of Interorganizational Relationships* 10

11. A Framework of Interorganizational Relationships Resource Dependence Rational ways organizations deal with each other to reduce dependence on the environment. Collaborative Networks Organizations allow themselves to become dependent on other organizations to increase value and productivity for all. Population Ecology Exams how new organizations fill niches left open by established organizations and how a rich variety of new organizational forms benefits society. Institutionalism Explains how organizations legitimate themselves in the larger environment and design structures by borrowing ideas from each other. 11

12. Resource Dependence Resource-dependency theory Represents the traditional view of relationships among organizations. 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. Dependence depends on: Importance of the resource to the firm(criticality) How much monopoly power those who control a resource have over its allocation and use(Scarcity) Organizations aware of resource-dependence tend to develop strategies to reduce their dependence on the environment and learn how to use their power differences. 12

13.  Supply Chain Relationships Many organizations develop close relationships with key suppliers to gain control over necessary resources. Supply chain management refers to managing the sequence of suppliers and purchasers, covering all stages of processing from obtaining raw materials to distributing finished goods to consumers. Formalizing collaborative supply chain relationships can help organizations obtain and use resources more efficiently and improve performance. 13

14. Supply Chain for a Retail Organization

15. Resource Dependence Power Implications Large, independent companies often have such power over small suppliers that they must be lean and nimble and not count on price competition alone. Suppliers are asked to absorb more costs, ship more efficiently, and provide more services than ever before, sometimes without a price increase. The suppliers may have no choice but to acquiesce to the demands. Walmart/Levi Power is shifting in many industries Collaborative agreement 15

16. Amazon.com, Inc. If you�ve purchased books from Amazon, you might have used the �Buy Now with 1 Click� button, which allows registered users to buy a book from Amazon instantly and get free shipping. But if you�re a publisher and you cross the giant online retailer, you�re likely to have the �Buy Now� button disabled for your titles. Customers can still buy the books, but they have to navigate to an open marketplace linking them to third-party sellers. 16

17. Strategies for Managing Resource Interdependencies Developing a good reputation Co-optation Strategic alliance Long-Term Contracts Networks Minority Ownership Joint Ventures Mergers and Acquisitions Trade Mechanisms Collusion and Cartels Executive Recruiting 17

18. Power Strategies Large independent companies have power over small suppliers Walmart/Levi When one company has power over another, it can ask suppliers to absorb more costs, ship more efficiently, and provide more services than ever before, often without a price increase. Power is shifting in many industries Microsoft/Su Collaborative agreement 18

19. Collaborative Networks Collaborative-network theory Companies join together to become more competitive Why collaboration? Major reasons are sharing risks when entering new markets, mounting expensive new programs and reducing costs, enhancing organizational profile in selected industries or technologies. Cooperation is a prerequisite for greater innovation, problem solving, and performance. Partnerships are a major avenue for entering foreign markets. Provide a safety net that encourages long-term investment and risk taking. 19

20. From Adversaries to Partners With the push from international competitors, managers are shifting to a new partnership paradigm on which to base relationships from the traditional adversarial mindset. Trust is the basis of the new model, for partners to develop equitable solutions to conflicts that inevitably arise. Partners are involved in each other�s product design and production, and invest for the long term. �By breaking down boundaries and becoming involved in partnerships with an attitude of fair dealing and adding value to both sides, today�s companies are changing the concept of what makes an organization. 20

21. Changing Characteristics of Interorganizational Relationships 21

22. Population Ecology This perspective focuses on organizational diversity and adaptation within a population of organizations. A population is a set of organizations engaged in similar activities with similar patterns of resource utilization and outcomes(fast food restaurants in Lubbock). According to the population-ecology view, the changing environment determines which organizations survive or fail. Organizational form must reflect the needs of a changing external environment. When rapid change occurs, old organizations are likely to decline or fail, and new organizations emerge that are better suited to the needs of the environment. The model is developed from theories of natural selection in biology, and the terms evolution and selection are used to refer to the underlying behavioral processes. 22

23. Population Ecology View The changing environment determines which organizations survive or fail. Assumes that individual organizations suffer from structural inertia and find it difficult to adapt to environmental changes. When rapid change occurs, old organizations are likely to decline or fail, and new organizations emerge that are better suited to the needs of the environment. 78% of the top companies in 1917 did not exist in 1987. 23

24. Form and Niche Population-Ecology model is concerned with: Organizational form Organization�s specific technology, structure, products, goals, and personnel. Niche Domain of unique environmental resources and needs sufficient to support an organization. Organizational form must reflect the needs of a changing external environment. If the form is inappropriate or if the organization is in the wrong niche, the organization will fail. Success or failure of a single firm is predicted by the characteristics of the environment as much as by the skills or strategies used by the organization. 24

25. Process of Ecological Change Variation occurs when new organizational forms appear in the population of organizations. Also, any single organization may try new variations for its own form. Axiom Global Inc. Selection Refers to whether a new organizational form is suited to the environment and can survive. Only a few variations will suit the environment and survive over the long term. Retention The preservation and institutionalization of selected organizational forms. Certain technologies, products, and services are highly valued by the environment. 25

26. Axiom Global Inc. Axiom provides legal services to corporations on an as-needed basis, typically charging fees that are far less than traditional law firms. Axiom can charge less because it doesn�t have to compensate highly-paid partners, and the company�s lawyers often work from home or at a client�s offices, helping to keep overhead to a minimum. 26

27. Elements in the Population-Ecology Model of Organizations

28. Strategies for Survival Another principle underlying the population ecology model is the struggle for existence, which means that each organizational form is engaged in a competitive struggle to obtain sufficient resources for survival. This competition is especially intense among new organizations, many of which fail to survive, but even institutionalized organizations are not necessarily permanent in the long run. In population ecology, strategies distinguish organizational forms in the struggle for survival Generalists A company that offers a broad range of products or services or that serves a broad market. Specialist A company that provides a narrow range of goods or services or that serves a narrower market. Specialists are more competitive than generalists. However, the breadth of the generalist�s domain serves to protect it somewhat from environmental changes. 28

29. Institutionalism Institutional perspective Describes how organizations survive and succeed through congruence between an organization and the expectations from its environment. Concerned with the set of intangible norms and values that shape behavior. Institutional environment Composed of norms and values from stakeholders (customers, investors, boards, government, collaborating organizations) and results in a belief that organizations adopt structures and processes to please outsiders. Organizations need legitimacy from their stakeholders. Legitimacy The perspective that an organization�s actions are desirable, proper, and appropriate within the environment�s system or norm, values, and beliefs. Institutional theory is concerned with the set of intangible norms and values that shape behavior. 29

30. The Institutional View Sees organizations as having two essential dimensions- technical and institutional. Technical-the day-to-day work, technology and operating requirements. Governed by norms of rationality and efficiency. Institutional-that part of the organization most visible to the outside public. 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 has the effect of increasing its legitimacy and survival, even those these elements may decrease efficiency. 30

31. Institutional Similarity Institutional Similarity The emergence of a common structure and approach among organizations in the same field that cause them be look like one another. Following are the reasons organizations change, or three forces behind the change toward institutional similarity, according to the institutional perspective. With unclear goals, technology, and products or services, caused by great uncertainty, mimetic forces occur, which is the copying or modeling of other organizations. Benchmarking is a clear example of official copying, although when best practice techniques are duplicated, they may be improved. Coercive forces are external pressure on organizations to adopt structures, techniques, or behaviors similar to other organizations. It occurs when organizations are dependent on each other, when there are political factors such as rules, laws, and sanctions involved, or when a contractual or legal basis defines the relationship. Organizations will appear to be more effective because of the appearance of legitimacy in the environment. Normative forces mean that organizations are expected to change for standards of professionalism and to adopt techniques considered by the professional community to be up-to-date and effective. 31

32. Three Mechanisms for Institutional Adaptation 32