Managing in a Changing Global Environment

1. Managing in a Changing Global Environment Chapter 3

2. Environment • 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?

3. Specific Customers Competitors Suppliers Distributors Government Unions Consumer interest groups =Outside SH General Economy Politics Technology Environmentalist pressures Demographic Cultural/ social The EnvironmentThink about how each of these affects ability to acquire resources

4. 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

5. 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 Ford

6. 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

7. 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 Examples?

8. Uncertainty is greatest when? Environment is: • Rich –or- Poor? • Dynamic –or- stable? • Complex –or- simple?

9. 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)

10. 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

11. 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?

12. 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)

13. 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?

14. 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?

15. 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

16. 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---

18. 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!!)

19. 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

20. 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?

21. 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!

22. 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

23. 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.