CHAPTER 5 Learning Objectives Organizational Ecosystems After reading this chapter you should be able to: 1. Resource Dependence 2. 3. 4. 5. Collaborative Networks Population Ecology 6. 7. Institutionalism Design Essentials 178 Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships Before reading this chapter, please check whether you agree or disagree with each of the following statements: 1 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.” I AGREE 2 The success or failure of a start-up is largely determined by the smarts and management ability of the entrepreneur. I AGREE 3 I DISAGREE I DISAGREE 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 times. I AGREE I DISAGREE Several garment factory fires in Bangladesh in 2012 and the collapse of another apparel plant in 2013 that killed more than 1,100 workers put the spotlight on poor working conditions in that country. The incidents set off public outrage, requiring the retailers such as Walmart, Target, and H&M that use Bangladesh contractors to respond. It’s a serious problem, and even though Walmart publicly blacklisted about 250 Bangladesh suppliers found to have safety problems and other retailers took similar steps, it wasn’t enough to salve the public’s anger. Now, major U.S. retailers including Gap, Walmart, Target, Macy’s, Costco, and VF Corporation have banded together in a group called the Alliance for Bangladesh Worker Safety. The group’s primary goals are to improve working conditions and prevent such disasters. It has come up with common fire and building safety standards and formed a board that includes four company representatives, former U.S. ambassador to Bangladesh Jim Moriarty, and fire safety consultant Randy Tucker. The group will provide $100 million in low-cost loans. The alliance falls short of the commitment made by an alliance of mostly European companies, including H&M, that has agreed to directly pay for the costs of repair and renovation of some 5,000 Bangladesh garment factories. Yet it is definitely a step in the right direction. Former U.S. Representative Ellen O’Kane Tauscher, who will serve as chairman of the board, says her job is to ensure accountability. “We expect scrutiny, but it is also important to give us time to put the plans into action.”1 When dealing with a massive, complex problem, like the organizational catastrophes in Bangladesh, even the most sophisticated and capable organization will soon reach the limit of its effectiveness. Today’s organizations face numerous complex problems because of the complexity and uncertainty of the environment, as discussed in the previous chapter. Thus, a widespread organizational trend is to reduce boundaries and increase collaboration between companies, sometimes even between competitors. For example, Poste Italiane S.p.A., which serves as Italy’s postal service as well as a bank, credit card firm, and mobile phone company, created one of Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 179 180 Part 3: Open System Design Elements the most sophisticated cyber security operations in the world. CEO Massimo Sarmi realized that to achieve true security for customers against cybercrime, he needed to collaborate with other organizations. He began reaching out around the globe. Poste Italiane has signed a memorandum of understanding with the U.S. Secret Service, for example, and joined the electronic crime task force in New York City. The company has partnered with companies such as software firm Microsoft, energy company Enel, and Visa/MasterCard, and academic organizations such as George Mason University and the University of London, to open a global Cyber Security Program of Excellence. The center is promoting international cooperation regarding cyber security and studying ways to make the Internet more dynamically secure through active defense. “[T]he problem is global,” Sarmi says. “It’s not national or local.”2 In many industries, the business environment is so complicated that no single company can develop all the expertise and resources needed to stay competitive. Why? Globalization and rapid advances in technology, communications, and transportation have created amazing new opportunities, but they have also raised the cost of doing business and made it increasingly difficult for any company to take advantage of those opportunities on its own. In this new economy, webs of organizations are emerging. Collaboration and partnership is the new way of doing business. Organizations think of themselves as teams that create value jointly rather than as autonomous companies that are in competition with all others. Purpose of This Chapter This chapter explores the most recent 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. The question involves the way these relationships are managed. 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. The notion of horizontal relationships described in Chapter 3 and the understanding of environmental uncertainty in Chapter 4 are leading to the next stage of organizational evolution, which is a web of horizontal relationships across organizations. Organizations can choose to build relationships in many ways, such as appointing preferred suppliers, establishing agreements, business partnering, joint ventures, or even mergers and acquisitions. Interorganizational research has yielded perspectives such as resource dependence, collaborative networks, population ecology, and institutionalism. The sum total of these ideas can be daunting because it means managers no longer can rest in the safety of managing a single organization. They have to figure out how to manage a whole set of interorganizational relationships, which is a great deal more challenging and complex. Organizational Ecosystems Interorganizational relationships are the relatively enduring resource transactions, flows, and linkages that occur among two or more organizations. 3 Traditionally, these transactions and relationships have been seen as a necessary evil to obtain Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships 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 interorganizational relationships depending on its needs and the instability and complexity 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 organizations and their environment. An ecosystem cuts across traditional industry lines.4 A similar concept is the megacommunity approach, in which businesses, governments, and nonprofit organizations join together across sectors and industries to tackle huge, compelling problems of mutual interest, such as energy development, world hunger, or cybercrime.5 181 BRIEFCASE As an organization manager, keep these guidelines in mind: Look for and develop relationships with other organizations. Don’t limit your thinking to a single industry or business type. Build an ecosystem of which your organization is a part. Is Competition Dead? No company can go it alone under a constant onslaught of international competitors, changing technology, and new regulations. Organizations around the world are embedded in complex networks of confusing relationships— collaborating in some markets, competing fiercely in others. The number of corporate alliances has been increasing at a rate of 25 percent annually, and many of those have been between competitors. 6 Hyundai, Chrysler, and Mitsubishi jointly run the Global Engine Manufacturing Alliance to build four-cylinder engines. Volvo is now owned by Zhejiang Geely Holding Group of China, but it maintains an alliance with previous owner Ford Motor Company to supply engines and certain other components.7 Traditional competition, which assumes a distinct company competing for survival and supremacy with other standalone businesses, no longer exists because each organization both supports and depends on the others for success, and perhaps for survival. 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.8 In today’s world, a new form of competition is in fact intensifying.9 For one thing, companies now need 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. Exhibit 5.1 illustrates the complexity of an ecosystem by showing the myriad overlapping relationships among high-tech companies. Since the time this chart was created, many of these companies have merged, been acquired, or gone out of business. Ecosystems constantly change and evolve, with some relationships growing stronger while others weaken or are terminated. The changing pattern of relationships and interactions in an ecosystem contributes to the health and vitality of the system as an integrated whole.10 In an organizational ecosystem, conflict and cooperation exist at the same time. For example, consider what is happening with Apple and Samsung. Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. QUOKKA SPORTS INKTOMI TEXAS INSTRUMENTS BROADCOM DELL COMPUTER © Cengage Learning® SAS INSTITUTE CHARLES SCHWAB TREND MICRO BABYCENTER INTEL INFOSPACE.COM ATI TECHNOLOGIES JUNIPER NETWORKS LEVEL 3 COMMUNICATIONS ARM HOLDINGS TIME WARNER YA H O O EPIPHANY EBAY MICROTUNE TRINTECH GROUP ISS GROUP LEXRA IBM VITRIA TECHNOLOGY NEW ERA OF NETWORKS NEXABIT NETWORKS LAWSON SOFTWARE DATACHANNEL BUY.COM RED HAT SOFTWARE USA/LYCOS INTERACTIVE NETWORKS ACCENTURE ARIBA TECHNOLOGIES XEROX SIEBEL SYSTEMS SCIENCE APPLICATIONS INTERNATIONAL BREEZECOM PANGEA CADENCE DESIGN SYSTEMS TAIWAN SEMICONDUCTOR MANUFACTURING TIVO SUN MICROSYSTEMS BERTELSMANN AMERICA ONLINE SOFTWARE TECHNOLOGIES ROYAL PHILIPS ELECTRONICS SONY INTERWOVEN VIGNETTE WIND RIVER SYSTEMS BLOOMBERG WEBMETHODS GEMPLUS MICROSOFT PIVOTAL SOFTWARE The largest companies (those with more than 10,000 employees) are, not surprisingly, the hubs of the digital universe: they tend to have the most strategic partnerships (black lines) and investments (red lines).* *Smaller companies that have no relationships with the hubs are not featured. CHECKFREE KANA COMMUNICATIONS COMPAQ COMPUTER AMAZON.COM LUCENT TECHNOLOGIES ITXC COMCAST PARADYNE APPLIED MATERIALS NUANCE COMMUNICATIONS MCI WORLDCOM WHISTLE COMMUNICATIONS IRIDIUM WORLD COMMUNICATIONS SYMBIAN CISCO SYSTEMS AT&T UNWIRED PLANET NOKIA PIXAR ANIMATION STUDIOS WALT DISNEY COMPUTER ASSOCIATES QWEST COMMUNICATIONS EXODUS COMMUNICATIONS SOFTWARE SEMICONDUCTORS BIOTECH DATA NETWORKING E-COMMERCE AND MEDIA SYSTEMS INTEGRATION AND WEB SERVICES COMM. SERVICES AND EQUIP. (INCL. WIRELESS) SYSTEMS MANUFACTURING AND CONSUMER COMPUTING EXHIBIT 5.1 182 Part 3: Open System Design Elements Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships 183 IN PRACTICE Apple and Samsung 11 Some companies believe cooperation is essential to success. Google, for example, has a whole team dedicated to giving away technology to the competition. Microsoft also tends to support and cooperate with a wide range of companies that help sell software and services. It has invested $2 billion to a leveraged buy-out of Dell Computer. Microsoft, executives say, “is committed to the long-term success of the entire PC ecosystem.”12 Other companies, such as Apple, are less willing to cooperate, although they do so when it clearly benefits them. “Open systems don’t always win,” warned the recently deceased Steve Jobs, Apple’s co-founder and former CEO, who always kept tight control and close watch over his company’s products.13 In general, cooperation has become the rule in many industries and especially in high-tech firms. The business press is full of articles that talk about frenemies, reflecting the trend toward companies being both friends and enemies, collaborators and competitors. Many companies that long prided themselves on independence have shifted to an ecosystem approach. Mutual dependencies and partnerships have become a fact of life. Is competition dead? Companies today may use their strength to achieve victory over competitors, 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 systems. Managers have to look beyond the boundaries of their own company and build relationships with a network of partners. If a top manager looks down to enforce order and uniformity, the company is missing opportunities for new and evolving external relationships.14 In this new world, managers think about horizontal processes rather than vertical structures. Important initiatives are not just Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 184 Part 3: Open System Design Elements 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, managers strive to strengthen the larger system evolving around them, finding ways to understand this big picture and how to contribute. For example, managers at luxury retailer Neiman Marcus are cooperating with managers at cheap-chic retailer Target and with fashion designers in an experiment that pushes the boundaries of retail and potentially expands the customer base for all. For the holiday shopping season, a limited edition collection of 50 designer items from fashion houses including Diane Von Furstenberg, Tory Burch, Derek Lam, Rodarte, and 20 other designers will be offered at an average price of $60 at both retail chains. Neiman had contacts with the designers, while Target had an extensive supply chain to produce items in bulk. Executives from the two retailers met in person to brainstorm how the experiment might work, then began negotiating with designers.15 This is a broader leadership role than ever before. Managers in charge of coordinating with other companies must learn new executive skills. For example, Federal investigations have found that the inability of managers to collaborate and communicate effectively across organizational boundaries played a significant role in the BP-Transocean Deepwater Horizon oil spill, as we described in Chapter 1. One question raised by investigators concerned an argument between a BP manager and a Transocean manager that occurred on the rig the day of the explosion. BP and Federal agency managers also had trouble collaborating effectively in clean-up efforts.16 A study of executive roles by the Hay Group distinguished between operations roles and collaborative roles. Most traditional managers are skilled in handling operations roles, which have traditional vertical authority and are accountable for business results primarily through direct control over people and resources. Collaborative roles, on the other hand, don’t have direct authority over horizontal colleagues or partners, but are nonetheless accountable for specific business results. Managers in collaborative roles have to be highly flexible and proactive. They achieve results through personal communication and assertively seeking out needed information and resources.17 The old way of managing relied almost exclusively on operations roles, defending the organization’s boundaries and maintaining direct control over resources. Today, though, collaborative roles are becoming more important for success. When partnerships fail, it is usually because of an inability of the partners to develop trusting, collaborative relationships rather than due to the lack of a solid business plan or strategy. In successful alliances, people work together almost as if they were members of the same organization.18 Consider the U.S. war against terrorism. As we discussed in the opening section of this chapter, interorganizational collaboration is essential for tackling large, complex problems. To fight terrorism, the U.S. government not only collaborates with governments of other countries but also with numerous private security companies. At the Pentagon’s National Military Command Center, employees of private contracting firms work side-by-side with military personnel monitoring potential crises worldwide and providing information to top leaders. “We could not perform our mission without them,” said Ronald Sanders, former chief of human capital at the Office of the Director of National Intelligence. “They serve as our reserves, providing flexibility and expertise we can’t acquire. Once they are on board, we treat them as if they’re part of the total force.”19 Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships 185 EXHIBIT 5.2 Dissimilar Similar Competitive Resource Dependence Population Ecology Cooperative Collaborative Network Institutionalism *Thanks to Anand Narasimhan for suggesting this framework. © Cengage Learning® ORGANIZATION RELATIONSHIP ORGANIZATION TYPE Interorganizational Framework Appreciating the larger organizational ecosystem is one of the most exciting areas of organization theory. The models and perspectives for understanding interorganizational relationships ultimately help managers change their role from top-down management to horizontal coordination across organizations. Exhibit 5.2 shows a framework for analyzing the different views of interorganizational relationships. 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 described briefly in Chapter 4. It describes rational ways organizations deal with each other to reduce their 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 all. 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 benefits society. The final approach is called institutionalism, which explains why and how organizations legitimate themselves in the larger environment and design structures by borrowing ideas from each other. These four approaches to the study of interorganizational relationships are described in the remainder of this chapter. Resource Dependence Resource dependence represents the traditional view of relationships among organizations. As described in Chapter 4, 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 Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 186 Part 3: Open System Design Elements available.20 Organizations succeed by striving for independence and autonomy. When threatened by greater dependence, organizations will assert control over external resources to minimize that dependence. When organizations feel resource or supply constraints, the resource-dependence perspective says they maneuver to maintain their autonomy through a variety of strategies, several of which were described in Chapter 4. One strategy is to adapt to or alter the interdependent relationships. This could mean purchasing ownership in suppliers, developing long-term contracts or joint ventures to lock in necessary resources, or building relationships in other ways. Types of Resource-Dependence Relationships Organizations operating under the resource-dependence philosophy will do whatever is needed to avoid excessive dependence on other organizations and maintain control of resources and outcomes, thereby reducing their uncertainty. Exhibit 5.3 shows a hierarchy of resource-dependence relationships. The strategies at the top of the hierarchy offer managers more direct control over joint outcomes so that the organization can maintain its autonomy, whereas those at the bottom offer less direct control. Acquisition/Merger. This type of relationship offers the greatest amount of control over joint outcomes because the acquiring firm absorbs all of the resources, assets, and liabilities of the target organization. For example, Mattel recently acquired Canada’s Mega Brands Inc. to expand its line of toys and compete with LEGO in the market for plastic construction blocks. Mattel will own the company and control what happens with it.21 EXHIBIT 5.3 More Control Over Joint Outcomes Less Control Over Joint Outcomes Ownership Acquisition/Merger Joint Venture Formal Agreement Strategic Alliance Supply Sourcing Trade Association Informal Agreement Board Interlock © 2016 Cengage Learning® Joint Venture. A joint venture offers less control than full ownership. As Peter Drucker once said, “Businesses once grew by one of two ways: grass roots up, or by acquisition. . . . Today they grow through alliances—all kinds of dangerous alliances. Joint ventures and partnering which, by the way, very few people understand.”22 A joint venture is a new and distinct organizational entity set up by two or more organizations to jointly develop an innovative product or shared technology. The successful video streaming site HULU, for example, is a joint venture that was set up by News Corporation (which owns Fox), Disney (which owns ABC), and Comcast Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships 187 (which owns NBC). Although the three compete with one another on the television airwaves, they knew they could be more competitive together than separately with video streaming.23 Whirlpool has a joint venture with Hisense-Kelon Holdings Co. to make refrigerators and washers in China.24 Strategic Alliance. A strategic alliance is less formal and binding than a joint venture. It is a collaborative agreement between two or more organizations that contribute resources to a common endeavor while maintaining their individuality. One example is a strategic partnership between NBCUniversal News Group and NowThis News, a start-up that creates short news segments tailored for social media sites such as Instagram and Snapchat and stored on mobile apps for viewers to watch throughout the day. NowThis News creates 10-, 15-, and 30-second news segments focusing on the top serious stories of the day. The partnership with NBC is expected to facilitate the evolution to linking to longer videos for those who want more information.25 Supply Sourcing. Many organizations establish contracts with key suppliers to acquire resources to supplement in-house resources and capabilities. Rather than going it alone, companies such as Apple, Walmart, Dell, and Tesco develop deep, mutually beneficial relationships to make sure they have the supplies and resources they need. As one example, SCA (Svenska Cellulosa Aktiebolaget) uses fiber from recycled paper to make napkins, toilet paper, and paper towels for restaurants, offices, schools, and other institutions. When the supply of recycled paper went down in recent years due to reduced paper waste along with competition for the fiber from Chinese paper companies, SCA developed partnerships with numerous recycling centers, providing them with financial backing to upgrade equipment in exchange for the centers selling recovered fiber exclusively to SCA.26 At the same time, companies don’t want to become too dependent on one supplier. Apple, which for years has used a single company, Foxconn, to assemble iPhones and iPads, recently began using a second company, Pegatron Corp., as the primary assembler for the iPad Mini tablets and a low-cost iPhone. The goal is to reduce risk and overdependence on one company in the supply chain.27 Trade Association. A trade association is a federation that allows organizations, often in the same industry, to meet, share information, and monitor one another’s activities. A trade association can also use collective resources to lobby for government policies to protect the industry. Membership in the Smoke Free Alternatives Trade Association (SFATA) is growing as opposition to the electronic cigarette industry grows and “vaping” increases in popularity.28 SFATA has lobbied to keep the federal government from regulating electronic cigarettes the same way tobacco is regulated, believing that “self-regulation is pivotal to the success of the industry.”29 Board Interlock. A board interlock occurs when a director serves on the boards of multiple companies, creating connections among the companies. The candy company Hershey, for example, has for decades had a board with at least a dozen interlocks with other companies at any one time. 30 This practice also occurs frequently in Silicon Valley, where venture capitalist Marc Andreessen is a director of several firms, including eBay, Hewlett-Packard, and Facebook.31 BRIEFCASE As an organization manager, keep these guidelines in mind: Reach out and influence external people and organizations that threaten needed resources. Adopt strategies to control resources, especially when your organization is dependent and has little power. Assert your company’s influence when you have power and control over resources. Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 188 Part 3: Open System Design Elements Power Implications In resource-dependence relationships, large independent companies have power over smaller suppliers or partners. When a large company such as Amazon has power over small publishing companies, for instance, it can ask the companies for shipping deals or lower prices and the publishing companies have no choice but to go along. One former Amazon executive in charge of vendor relations in Europe admits that after Amazon grew large and powerful he took “an almost sadistic delight” in pressuring book publishers to give the online company better financial terms.32 As Facebook has grown more powerful, it is using its muscle to put restrictions and limits on independent developers that create applications for the social networking site. IN PRACTICE Facebook 33 Resource dependence can work in the opposite direction too. Auto companies such as Toyota and General Motors are working to develop a new type of electric motor that doesn’t require the use of neodymium, a rare earth mineral that is almost entirely mined and refined in China. Chinese suppliers have power over the auto companies as they strive to create more hybrid and electric vehicles, and the price of the mineral has soared.34 Power relationships in various industries are always shifting. Collaborative Networks The collaborative-network perspective is an emerging alternative to resource-dependence theory. Companies join together to become more competitive and to share scarce resources. Large aerospace firms partner with one another and with smaller companies and suppliers to design next-generation jets. Large pharmaceutical companies join with small biotechnology firms 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.35 Five leading medical groups spanning several states and millions of patients joined in a consortium to share electronic data, including patient health records. Geisinger Health System, Kaiser Permanente, Mayo Clinic, Intermountain Healthcare, and Group Health Cooperative believe using and sharing digitized patient records can help healthcare providers make smarter decisions and provide better care, such as referring a patient to a specialist in another system.36 Corporate alliances require managers who are good at building personal networks across boundaries. How effective are you at networking? Complete the questionnaire in the “How Do You Fit the Design?” box to find out. Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships 189 HOW DO YOU FIT THE DESIGN? PERSONAL NETWORKING 8. ___ ___ ___ ___ ___ ___ 9. Mostly True Mostly False ___ ___ ___ ___ 10. 1. Scoring: 2. Interpretation: 3. 4. 5. 6. 7. ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ Why Collaboration? Why all this interest in interorganizational collaboration? Some companies have moved away from the idea of remaining independent to allow themselves to develop mutually dependent relationships with other organizations and accomplish things none of the organizations could do alone. There has been a tremendous surge in the formation of strategic alliances, for example, over the past three decades, with both large established firms and small entrepreneurial firms taking advantage of the benefits of collaboration.37 Some key reasons for collaboration include sharing risks when entering new markets, mounting expensive new programs and reducing costs, and enhancing the organization’s profile in selected industries or technologies. Cooperation and collaboration is a prerequisite for greater innovation, adaptation, problem solving, and performance.38 Partnerships are also a major avenue for entering global markets, with both large and small firms developing partnerships overseas and in North America. Joint ventures with organizations in other countries, for example, make up a substantial portion of U.S. firms’ foreign investment and entry strategies.39 Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 190 Part 3: Open System Design Elements North American companies traditionally have worked alone, competing with each other and believing in the tradition of individualism and self-reliance, but they have learned from their international experience just how effective interorganizational relationships can be. Both Japan and Korea have long traditions of corporate clans or industrial groups that collaborate and assist each other. North Americans typically have considered interdependence a bad thing, believing it would reduce competition. However, the experience of collaboration in other countries has shown that competition among companies can be fierce in some areas even as they collaborate in others. It is as if the brothers and sisters of a single family went into separate businesses and want to outdo one another, but they will help each other out when push comes to shove. ASSESS YOUR ANSWER 1 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.” ANSWER: Disagree. Interorganizational linkages provide a kind of safety net that encourages long-term investment, information sharing, and risk taking. Organizations can achieve higher levels of innovation and performance as they learn to shift from an adversarial to a partnership mindset.40 Consider the following examples: General Motors and Ford Motor Company compete fiercely to sell cars and trucks, but they have joined together to develop new transmissions with 9 speeds for front-wheel-drive vehicles and 10 speeds for rear-drive cars and trucks. The new transmissions are part of the companies’ efforts to meet upcoming standards for fuel efficiency and carbon dioxide emissions in the United States and Europe. By cooperating on design, engineering, and testing, the companies will save hundreds of millions of dollars. The two automakers have already collaborated on a 6-speed automatic transmission. “We’ve already proven that Ford and GM transmission engineers work extremely well together,” said Ford’s vice president of powertrain engineering.41 Microsoft and Oracle recently struck a deal to allow pieces of Oracle’s business software to work with Microsoft’s software and online services. The deal between the often feuding technology giants comes as both companies are fighting competition from web-based alternatives to some of their key products. Moreover, the companies have common customers that want help getting products to work together. Steven Ballmer, former CEO of Microsoft, said the two firms have long had a “behind the scenes collaboration,” but that was no longer enough during a time when customers want all their cloud services to work together easily. Oracle CEO Larry Ellison hinted that his company will be partnering with other firms as well.42 Roche Holding AG and AstraZeneca PLC developed a partnership to share data on early-stage drug design to increase the odds of developing safe and effective drugs. The data will also be shared with a third company, MedChemica Ltd., Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships 191 which specializes in scrutinizing chemical compounds to pinpoint chemical structures that might create safety problems. The companies say they hope other pharmaceutical companies will join the data-sharing partnership, leading to the creation of safer, more effective drugs.43 Pharmaceutical companies have until recently been protective of their research data, but there is a noted trend toward collaboration, such as the recently formed Accelerating Medicines Partnership. IN PRACTICE Accelerating Medicines Partnership 44 From Adversaries to Partners Fresh flowers are blooming on the battle-scarred landscape where once-bitter rivalries once took place. In North America, collaboration among organizations initially occurred in nonprofit social service and mental health organizations, where public interest was involved. Community organizations collaborated to achieve greater effectiveness and better use of scarce resources.45 With the push from international competitors and international examples, hard-nosed American business managers soon began shifting to a new partnership paradigm on which to base their relationships. Exhibit 5.4 provides a summary of this change in mindset. Rather than organizations maintaining independence, the new model is based on interdependence and trust. Performance measures for the partnership are loosely defined, and problems are resolved through discussion and dialogue. Managing strategic relationships with other firms has become a critical management skill, as discussed in this chapter’s BookMark. 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 and face-to-face discussions to provide feedback and solve problems. Sometimes people from other companies are on site to enable very close coordination. Partners develop equitable solutions to conflicts rather than relying on legal contracts and lawsuits. Contracts may be loosely specified, and it is not unusual for business partners to help each other outside whatever is specified in the contract.46 BRIEFCASE As an organization manager, keep these guidelines in mind: Seek collaborative partnerships that enable mutual dependence and enhance value and gain for both sides. Get deeply involved in your partner’s business, and vice versa, to benefit both. Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 192 Part 3: Open System Design Elements EXHIBIT 5.4 Traditional Orientation: Adversarial New Orientation: Partnership Low dependence High dependence Journal of Management Studies Harvard Business Review Fortune Management Review BOOKMARK 5.0 HAVE YOU READ THIS BOOK? Managing Strategic Relationships: The Key to Business Success Top managers must be champions for the alliance. Managing Strategic Relationships: The Key to Business Success, A PARTNERSHIP PARADIGM MANAGING RELATIONSHIPS IN A NEW ERA Recognize that detailed legal contracts can undermine trust and goodwill. Treat partners like members of your own organization. Managing Strategic Relationships: The Key to Business Success, Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships 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 entwined in a system of interorganizational relationships, everyone does better because they help one another. This is a far cry from the belief that organizations do best by being autonomous. The partnership mindset can be seen in a number of industries. For example, aircraft manufacturers EADS, Embraer, and Boeing have teamed up to develop aviation biofuel.47 Top medical centers, such as the Mayo Clinic, the MD Anderson Cancer Center, and Community Health Systems, have formed partnerships with networks of clinics or smaller nonprofit hospitals to expand their services and leverage their brands.48 Auto companies have formed numerous partnerships to share development costs for new electric and hybrid vehicles. Canada’s Bombardier and its suppliers were linked together almost like one organization to build the Continental business jet.49 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. Population Ecology This section introduces a different perspective on relationships among organizations. The population-ecology perspective differs from the other perspectives because it focuses on organizational diversity and adaptation within a population of organizations.50 A population is a set of organizations 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 or car dealerships in Houston, Texas. 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 that create such diversity constantly appearing? The answer is that individual organizational adaptation is severely limited compared to the changes demanded by the environment. Innovation and change in a population of organizations take place through the birth of new types 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 than established organizations that are slow to change.51 What does this theory mean in practical terms? It means that large, established organizations often become dinosaurs. Consider that among the companies that appeared on the first Fortune 500 list in 1955, only 71 stayed on the list for 50 years. Some were bought out or merged with other companies. Others simply declined and disappeared. Large, established firms often have tremendous difficulty adapting to a rapidly changing environment. Hence, new organizational forms that fit the current environment emerge, fill a new niche, and over time take away business from established companies.52 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 organizations are likely to decline or fail, and new organizations emerge that are better suited to the needs of the environment. Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 193 194 Part 3: Open System Design Elements What Hinders Adaptation? Why do established organizations have such a hard time adapting? Michael Hannan and John 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 plants, equipment, and specialized personnel; limited information; the 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.53 Consider the story of Barnes & Noble. IN PRACTICE Barnes & Noble Versus Amazon 54 55 BRIEFCASE As an organization manager, keep these guidelines in mind: Adapt your organization to new variations being selected and retained in the external environment. If you are starting a new organization, find a niche that contains a strong environmental need for your product or service, and be prepared for a competitive struggle over scarce resources. Back in 1997, few people thought Amazon was a threat to Barnes & Noble. The story of how this new company defeated a giant illustrates that it is extremely difficult for large established companies to shift to a new way of doing things. Another example comes from Kodak, which actually invented some of the earliest digital photographic technology but couldn’t accept that customers would give up on the company’s traditional film. Kodak had been successful for so long and was so large and entrenched in its way of doing business that it couldn’t change substantively even when managers wanted to.56 The population-ecology 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. Theories of biological evolution try to explain why certain life forms appear and survive whereas others perish. Some theories suggest the forms that survive are typically best fitted to the immediate environment. The environment of the 1940s and 1950s was suitable to Woolworth, but new organizational forms like Walmart and other superstores became dominant in the 1980s. Now, the environment is shifting again, indicating that the “big box” era is coming to a close. With more people shopping online, smaller stores once again have an advantage in bricks-and-mortar retail. Walmart is planning to open dozens of smallscale Walmart Express stores in urban areas. Best Buy is also opting for smaller storefronts called Best Buy Mobile and searching for ways to fill unused floor space in its large outlets.57 No company is immune to the processes of social change. In recent years, technology has brought tremendous environmental change, leading to the decline of many outdated organizations and a proliferation of new companies such as Pinterest, Facebook, and Twitter. Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships 195 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 (i.e., 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 the organization doesn’t find an appropriate niche, it will decline and may perish. From the viewpoint of a single firm, luck, chance, and randomness play important 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 starting a small electrical contracting business in a rapidly growing area such as Austin, Texas, or Raleigh, North Carolina (the two fastest growing cities in 2014), would have an excellent chance of success. If the same woman were to start the same business in a declining community elsewhere in the United States, her 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 organization’s managers. 2 The success or failure of a start-up is largely determined by the smarts and management ability of the entrepreneur. ANSWER: Disagree. ASSESS YOUR ANSWER Process of Ecological Change The population-ecology model assumes that new organizations are always appearing in the population. Thus, organizational populations are continually undergoing change. The process of change in the population occurs in three stages: variation, selection, and retention, as summarized in Exhibit 5.5. Variation. Variation means the appearance of new, diverse forms in a population of organizations. These new organizational forms are initiated by entrepreneurs, established with venture capital by large corporations, or set up by governments seeking to provide new services. Some forms may be conceived to cope with a perceived need in the external environment. In recent years, a large number of new firms have been initiated to develop applications for smartphones and social networking sites, to develop computer software, to provide consulting and other services to large corporations, and to develop products and technologies for Internet commerce. Other new organizations produce a traditional product or service, but do it using new technology, new business models, or new management techniques that make the new companies far more able to survive. Organizational variations are analogous to mutations in biology, and they add to the scope and complexity of organizational forms in the environment. Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 196 Part 3: Open System Design Elements Variation Selection Retention • Large number of variations appear in the population of organizations • Some organizations find a successful niche and survive • A few organizations grow large and become institutionalized in the environment © Cengage Learning® EXHIBIT 5.5 Selection. Selection refers to whether a new organizational form is suited to the environment and can survive. Only a few variations are “selected in” by the environment and survive over the long term. 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 variations fail to meet the needs of the environment and perish. When there is insufficient demand for a firm’s product or service and when insufficient resources are available to the organization, that organization will be “selected out.” Retention. Retention is the preservation and institutionalization of selected organizational forms. Certain technologies, products, 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 43 percent of the fast-food market and provides the first job for many teenagers, has become institutionalized in American life. Institutionalized organizations like 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 shifting, and if the dominant organizational forms don’t adapt to external change, they will gradually diminish and be replaced by other organizations. From the population-ecology perspective, the environment is the important determinant of organizational success or failure. The organization must meet an environmental need or else it will be selected out. The principles of variation, selection, and retention lead to the establishment of new organizational forms in a population of organizations. 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. Historically, for example, factors such as size of urban Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships area, percentage of immigrants, political turbulence, industry growth rate, and environmental variability have influenced the launching and survival of newspapers, telecommunication firms, railroads, government agencies, labor unions, and even voluntary organizations.58 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 generalists. 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 2,000 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 environments. 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, DVDs, electronics, and a wide range of other goods; creation of the Kindle digital reader; and more recently the addition of a streaming video service offering thousands of movies and TV shows. A company such as Olmec Corporation, which sells African-American and Hispanic dolls, would be considered a specialist, whereas Mattel is a generalist, marketing a broad range of toys for boys and girls of all ages.59 Apple uses a specialist strategy with its iPhone, offering only one smartphone model, whereas Samsung uses a generalist strategy creating multiple versions of myriad phone products.60 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 changes.61 Managerial impact on company success often comes from selecting a strategy that steers a company into an open niche. Institutionalism The institutional perspective provides yet another view of interorganizational relationships.62 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 (e.g., customers, investors, associations, boards, other organizations, government, and the community). 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.63 Legitimacy is defined as the general perception that an organization’s actions are desirable, proper, and appropriate within the environment’s system of norms, values, and beliefs.64 Institutional theory thus is concerned with the set of intangible Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 197 198 Part 3: Open System Design Elements norms and values that shape behavior, as opposed to the tangible elements of technology and structure. Organizations and industries 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 compliance with norms of wise financial management. 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. Most organizations are concerned with legitimacy, as reflected in the annual Fortune magazine survey that ranks corporations based on their reputations and the annual Global RepTrak 100 conducted by the Reputation Institute. Success and a good reputation go hand in hand. The fact that there is a payoff for having a good reputation is verified by a study of organizations in the airline industry. Having a good reputation was significantly related to higher levels of performance based on measures such as return on assets and net profit margin.65 Many corporations actively shape and manage their reputations to increase their competitive advantage. In the wake of the mortgage meltdown and the failure of giants Bear Stearns and Lehman Brothers, for example, many companies in the finance industry began searching for new ways to bolster legitimacy. Citigroup, Merrill Lynch, and Wachovia all ousted their chief executives over mortgage-related issues, partly as a way to signal a commitment to better business practices. The board of oil giant BP asked Tony Hayward to resign as CEO due to his mishandling of the Deepwater Horizon oil spill crisis and brought in a new CEO they believed could take the steps needed to restore the company’s reputation.66 The notion of legitimacy answers an important question for institutional theorists: Why is there so much homogeneity in the forms and practices of established organizations? For example, visit banks, high schools, hospitals, government departments, or business firms in a similar industry, in any part of the country, and they will look strikingly similar. When an organizational field is just getting started, such as in Internet-related businesses, diversity is the norm. New organizations fill emerging niches. Once an industry becomes established, however, there is an invisible push toward similarity. Isomorphism is the term used to describe this move toward similarity. The Institutional View and Organization Design 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 technical dimension is governed by norms of rationality and efficiency, but the institutional dimension is governed by expectations from people and organizations in the external environment. As a result of pressure to conduct business 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 (e.g., e-commerce division, chief compliance officer, social media director) perceived as important by the larger society to increase its legitimacy and survival prospects, even though these elements may decrease efficiency. For example, many small companies set up websites, even Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships 199 though the benefits gained from the site are sometimes outweighed by the costs of maintaining it. Having a website is perceived as essential by the larger society today. The formal structure and design of an organization may not be rational with respect to workflow and products or services, but it will ensure survival in the larger environment. Organizations adapt to the environment by signaling their congruence with the demands and expectations stemming from cultural norms, standards set by professional bodies, funding agencies, and customers. Structure is something of a facade disconnected from technical work through which the organization obtains approval, legitimacy, and continuing support. The adoption of structures thus might not be linked to actual production needs and might occur regardless of whether specific internal problems are solved. Formal structure is separated from technical action in this view.67 Institutional Similarity BRIEFCASE As an organization manager, keep these guidelines in mind: Pursue legitimacy with your organization’s major stakeholders in the external environment. Adopt strategies, structures, and management techniques that meet the expectations of significant parties, thereby ensuring their cooperation and access to resources. Many aspects of structure and behavior may be targeted toward environmental acceptance rather than toward internal technical efficiency. Interorganizational 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.68 Exactly how does increasing similarity occur? How are these forces realized? Exhibit 5.6 provides a summary of three mechanisms for institutional adaptation. These three core mechanisms are mimetic forces, which result from responses to uncertainty; coercive forces, which stem from political influence; and normative forces, which result from common training and professionalism.69 Mimetic Forces. Most organizations, especially business organizations, face great uncertainty. It is not clear to senior executives exactly what products, services, technologies, or management practices will achieve desired goals, and sometimes the goals themselves are not clear. In the face of this uncertainty, mimetic forces, the pressures to copy or model other organizations, occur. Executives observe an innovation in a firm generally regarded as successful, so the practice is quickly EXHIBIT 5.6 Mimetic Coercive Normative Institutions and Organizations Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 200 Part 3: Open System Design Elements copied. McDonald’s revived stagnant sales by adding healthier menu items and new types of beverages, so other fast-food chains began doing the same. “You need to learn from your competition,” said David Novak, CEO of Yum Brands, the parent company of KFC, Taco Bell, and Pizza Hut. SanDisk, Microsoft, Samsung, and other companies came out with their own digital music players to try to capture some of the success Apple enjoyed with its iPod.70 Many large companies enter specific foreign markets when managers see their firm’s biggest rivals doing so, even if entering the market is highly risky. Managers don’t want to take a chance on losing out.71 Many times, this modeling of other organizations 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 than it solves. This was the case with the recent merger wave that swept many industries. The past few decades have seen the largest merger and acquisition wave in history, but evidence shows that many of these mergers did not produce the expected financial gains and other benefits. The sheer momentum of the trend was so powerful that many companies chose to merge not because of potential increases in efficiency or profitability but simply because it seemed like the right thing to do.72 Techniques such as outsourcing, teams, Six Sigma quality programs, brainstorming, and the balanced scorecard have all been adopted without clear evidence that they will improve 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. A study of 100 organizations confirmed that those companies associated with using popular management techniques were more admired and rated higher in quality of management, even though these organizations often did not reflect higher economic performance.73 Perhaps the clearest example of official copying is the technique of benchmarking 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. Many organizations, however, simply copy what a competitor is doing without understanding why it is successful or how it might mesh—or clash—with their own organization’s way of doing business.74 The mimetic process occurs because managers face 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 act like one another. ASSESS YOUR ANSWER 3 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 times. ANSWER: Agree. Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships 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 an organization to adopt structures, techniques, or behaviors similar to other organizations. For example, large corporations have recently been putting pressure on service providers, such as accounting or law firms, to step up their diversity efforts. Managers in these corporations have felt pressure to increase diversity within their own organizations and they want the firms with which they do business to reflect a commitment to hiring and promoting more women and minorities as well.75 Some pressures may have the force of law, such as government mandates to adopt new pollution control equipment or new safety standards. New regulations and government oversight boards have been set up for the mortgage and finance industries following the Wall Street meltdown. As one example, the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act requires credit card companies to add specific warnings regarding late payments and the total amount of interest customers will pay if they make only the minimum payment. Coercive pressures may also occur between organizations where there is a power difference, as described in the resource-dependence section earlier in this chapter. Large retailers and manufacturers often insist that certain policies, procedures, and techniques be used by their suppliers. As part of its new sustainability push, for instance, Walmart is requiring its 100,000 or so suppliers to calculate the “full environmental costs” of making their products (such as water use, carbon dioxide emissions, and waste) and provide this information for the company to distill into a rating system that shoppers will see alongside the price of the item.76 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. 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 constraints will adopt changes and relate to one another in a way that increases homogeneity and limits diversity. 201 BRIEFCASE As an organization manager, keep this guideline in mind: Enhance legitimacy by borrowing good ideas from other firms, complying with laws and regulations, and following procedures considered best for your company. Normative Forces. The third reason organizations change according to the institutional view is normative forces. Normative forces are pressures 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, marketing techniques, or collaborative relationships with other organizations. 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 firms, trade associations, and professional training institutions develop norms among professional managers. 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 majors that certain techniques are better than others, so using those techniques becomes a standard in the field. 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 doing Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 202 Part 3: Open System Design Elements business. There was no proof that this structure was better, but the radio station wanted legitimacy and to be perceived as fully professional and up to date in its management techniques. Companies accept normative pressures 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 specialists 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. In some cases, though, normative forces that maintain legitimacy break down, as they did recently in the mortgage and finance industries, and coercive forces are needed to shift organizations back toward acceptable standards. An organization may use any or all of the mechanisms of mimetic, coercive, or normative forces to change itself for greater legitimacy in the 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 than would be expected from the natural diversity among managers and environments. Design Essentials ■ This chapter has been about the important evolution in interorganizational relationships. At one time organizations considered themselves autonomous and separate, trying to outdo other companies. Today more organizations see themselves as part of an ecosystem. The organization may span several industries and will be anchored in a dense web of relationships with other companies. In this ecosystem, collaboration is as important as competition. Indeed, organizations may compete and collaborate at the same time, depending on the location and issue. In business ecosystems, the role of management is changing to include the development of horizontal relationships with other organizations. ■ Four perspectives have been developed to explain relationships among organizations. The resource-dependence perspective is the most traditional, arguing that organizations try to avoid excessive dependence on other organizations. In this view, organizations devote considerable effort to controlling the environment to ensure ample resources while maintaining independence. Types of resourcedependence relationships include acquisitions or mergers, joint ventures, strategic alliances, supply sourcing, trade associations, and board interlocks. ■ The collaborative-network perspective is an emerging alternative to resource dependence. Organizations welcome collaboration and interdependence with other organizations to enhance value for both. Many executives are changing mindsets away from autonomy toward collaboration, often with former corporate enemies. The new partnership mindset emphasizes trust, fair dealing, and achieving profits for all parties in a relationship. ■ The population-ecology perspective explains why organizational diversity continuously increases with the appearance of new organizations filling niches left open by established companies. This perspective asserts that large companies usually cannot adapt to meet a changing environment; hence, new companies Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships 203 emerge with the appropriate form and skills to serve new needs. Through the process of variation, selection, and retention, some organizations will survive and grow while others perish. Companies may adopt a generalist or specialist strategy to survive in the population of organizations. ■ The institutional perspective argues that interorganizational relationships are shaped as much by a company’s need for legitimacy as by the need to provide products and services. The need for legitimacy means that the organization will adopt structures and activities that are perceived as valid, proper, and up to date by external stakeholders. In this way, established organizations copy techniques from one another and begin to look very similar. The emergence of common structures and approaches in the same field is called institutional similarity or institutional isomorphism. Three core mechanisms explain increasing organizational homogeneity: mimetic forces, which result from responses to uncertainty; coercive forces, which stem from power differences and political influences; and normative forces, which result from common training and professionalism. ■ Each of the four perspectives is valid. They represent different lenses through which the world of interorganizational relationships can be viewed: organizations experience a competitive struggle for autonomy; they can thrive through collaborative relationships with others; the slowness to adapt provides openings for new organizations to flourish; and organizations seek legitimacy as well as profits from the external environment. The important thing is for managers to be aware of interorganizational relationships and to consciously manage them. KEY CONCEPTS coercive forces collaborative-network perspective generalist institutional environment institutional perspective institutional similarity interorganizational relationships joint venture legitimacy mimetic forces niche normative forces organizational ecosystem organizational form population population-ecology perspective resource-dependence theory retention selection specialist strategic alliance struggle for existence trade association variation DISCUSSION QUESTIONS 1. The concept of business ecosystems implies that organizations are more interdependent than ever before. From personal experience, do you agree? Explain. 2. How do you feel about the prospect of becoming a manager and having to manage a set of relationships with other companies rather than just managing your own company? Discuss. 3. Assume you are the manager of a small firm that is dependent on a large manufacturing customer that uses the resource-dependence perspective. Put yourself in the position of the small firm, and describe what actions you would take to survive and succeed. What actions would you take from the perspective of the large firm? 4. Many managers today were trained under assumptions of adversarial relationships with other companies. Do you think operating as adversaries is easier or more difficult than operating as partners with other companies? Discuss. 5. Discuss how the adversarial versus partnership orientations work among students in class. Is there a sense of competition for grades? Is it possible to develop true partnerships in which your work depends on others? Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 204 Part 3: Open System Design Elements 6. The population-ecology perspective argues that it is healthy for society to have new organizations emerging and old organizations dying as the environment changes. Do you agree? Why would European countries pass laws to sustain traditional organizations and inhibit the emergence of new ones? 7. Discuss how the process of variation, selection, and retention might explain innovations that take place within an organization. 8. Do you believe that legitimacy really motivates a large, powerful organization such as Walmart? Is acceptance by other people a motivation for individuals as well? Explain. 9. How does the desire for legitimacy result in organizations becoming more similar over time? 10. How do mimetic forces differ from normative forces? Give an example of each. CHAPTER 5 WORKSHOP The Shamatosi77 Instructions 1. Divide into groups of three. Half the groups, on one side of the room, are “1s” and the other half are “2s.” 2. The 1s are Pharmacology; the 2s are Radiology. Read only your own role, not the other one. 3. Any students not in a negotiating group can be assigned to observe a specific negotiation meeting. 4. Both groups want to purchase Shamatosi plants owned by DBR. 5. Each group has 10 minutes to prepare a negotiation strategy for meeting with the other side. 6. One Pharmacology group meets with one Radiology group so that all groups meet with one counterpart. 7. You have 15 minutes to try and negotiate a possible agreement to purchase Shamatosi plants from DBR. 8. You should decide whether you can form an agreement to move ahead jointly or whether you will go into competition with each other. An agreement would consider the price offered for the plants, how the cost is shared, to where plants will be delivered (which company), and how plants are best utilized. 9. Groups report to the whole class on results of negotiation. Observers can comment on their observations, such as level of trust and/or disclosure and ease/difficulties of reaching an agreement between companies. 10. Instructor leads a discussion on interorganizational agreements, decision-making, and joint ventures. Role of Team from Pharmacology, Inc.: D r. B e r n i c e H o b b s , a b i o l o g i c a l r e s e a r c h e r f o r Pharmacology, Inc., a major pharmaceutical company, has monitored with mounting concern the reports from Brazil’s Amazon rainforest. Everything from world weather patterns to providing an estimated one in four ingredients in medicine is tied to securing the world’s rainforests. But over the past decade, scientists and pharmaceutical companies, along with environmental groups and others, have observed with alarm the destruction of the rainforests, and with it the destruction of entire species of plant, animal, and insect life. As Hobbs monitors the situation, she is particularly concerned about conditions with regard to a particular plant found in limited quantities near the Rio Negro. Rainforest trees have shallow roots because the major nutrients for growth are located near the surface level. Biologists discovered a rare tiny plant growth called Shamatosi embedded among the trees near the Rio Negro. For a number of years, researchers have explored potential medical uses for these tiny plants. Dr. Hobbs has been working with the leaves of the tiny Shamatosi plant and has discovered the plant’s potential as a cancer-suppressing drug after breast cancer surgery. For a number of years the leading drug in this category has been Tamoxifen, a synthetic drug described as “remarkable” and credited with saving more lives than any other oncological drug by the lead investigator for a major breast cancer research group. However, research has also shown that Tamoxifen raises the risk of cancer in the lining of the uterus and can lead to blood clots in the lungs. There is also a growing level of concern as Tamoxifen resistance has developed. The medicine developed by Hobbs may avoid these problems and bring a new treatment into the list of options for doctors and their patients. But more research is needed. Hobbs needs to have access to as many leaves as possible from the Shamatosi plant. DBR, the Brazilian timber company, has possession of several thousand Shamatosi plants from this year’s season that have been replanted in portable crates. Your company, Pharmacology, Inc., has authorized $1.5 million for your team to bid to obtain the plants. You cannot go over this budget. Your team will meet with a team from Radiology, Inc., which also wants to purchase the Shamatosi plants from DBR, about a possible agreement for purchasing and using the plants for research. Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5: Interorganizational Relationships Role of Team from Radiology, Inc.: Dr. Alberto Dominguez, a biochemist for Radiology, Inc. who has expertise in treating radiation exposure, monitors with mounting concern the reports from Brazil’s Amazon rainforest. Everything from world weather patterns to providing an estimated one in four ingredients in medicine is tied to securing the world’s rainforests. But over the past decade, scientists and pharmaceutical companies, along with environmental groups and others, have observed with alarm the destruction of the rainforests, and with it the destruction of entire species of plant, animal, and insect life. As Dominguez monitors the situation, he is particularly concerned about conditions concerning a particular plant found in limited quantities near the Rio Negro. Rainforest trees have shallow roots because the major nutrients for growth are located near the surface level. Biologists discovered a rare tiny plant growth called Shamatosi embedded among the trees near the Rio Negro. For a number of years, researchers have explored potential medical uses for these tiny plants. Dr. Dominquez has been working with the roots of the Shamatosi plant in response to incidents involving radiation exposure. The worldwide expansion of nuclear facilities, the lessons from the 1986 Chernobyl disaster, and the resulting cases of thyroid cancer among thousands CASE FOR ANALYSIS | 205 of children and adolescents, led to intensive research by Dominguez and his colleagues to provide the swiftest response with the most powerful medicine. For years, Potassium iodide (KI) was issued in kits provided by organizations such as the Centers for Disease Control. However, KI was found deficient in protecting many body parts, such as the liver and intestines. Dominguez discovered the tiny Shamatosi plant, and his research indicated the potential for medicines from the root of this plant to provide additional protection, even for incidents of large-scale or prolonged exposure. The March 2011 Tohoku earthquake and tsunami, and the resultant radiation exposure caused by the meltdown at the Fukushima Daiichi nuclear power plant, intensified concerns among scientists to find and develop a new medicine. Dominguez needs as many plants as possible. DBR, the Brazilian timber company, has possession of several thousand Shamatosi plants from this year’s season that have been replanted in portable crates. Your company, Radiology, Inc., has authorized your team to bid $1.5 million to obtain the plants. You cannot go over this budget. Your team will meet with a team from Pharmacology, Inc., which also wants to purchase the Shamatosi plants from DBR, about a possible agreement for purchasing and using the plants for research. Why is Cooperation So Hard? Armando Bronaldo immigrated to the United States six years ago after working as design leader for an Italian company specializing in home sound systems. Armed with a vision and 15 years of experience, he founded his own company, Technologia, as the supplier of sound translation components including the base radiator, dome tweeter (for high frequency), composite cone (for midrange sound), the binding post (for sound translator delivery), and ohms impedance (for conducting sound through the speakers). As it builds its reputation for quality and supply chain service and delivery, Technologia relies heavily on continuing a solid relationship with AUD, a manufacturer of home sound systems, under the management of CEO Audie Richards. AUD was the company’s first contractual partner, currently accounting for 50 percent of the small supplier’s business. The initial agreement with AUD has grown and the current business relationship brings a steady stream of orders that has enabled Bronaldo, even in a tough economy, to add workers over the last three years. Bronaldo loves the reliability of selling to AUD, but he sometimes questions whether the business relationship is overbalanced in favor of the powerful manufacturer. “I think in the beginning Audie played his hand well, knowing that we were a start-up and trying to secure a solid customer base. In my eagerness to get the contract and in trying to please the head of a big company, I found myself saying ‘Yes’ and carrying out his wishes and demands,” Bronaldo admits. “Because we were a young company and because he is, by far, our biggest customer, I think he got into the habit of assuming the focus would remain on his needs and his profits throughout the business relationship. But now, with our feet under us as a company, I think it is time to look again at the relationship between the two companies.” Richards is satisfied with the present arrangement he has with Technologia and sees himself as both partner and mentor, as he recently explained to a colleague. “Bronaldo came to this country and started his company and I was willing to give him a chance, set up our logistics, and make it possible for him to grow his company. I think it’s worked out very well for AUD. And now he talks about wanting to change the way we do things. I’m suspicious about what he has in mind. But he needs us more than we need him. Look, I’ve got a good supplier; he gets lots of business from us; I see no reason to change it.” Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 206 Part 3: Open System Design Elements Although the relationship and dialogue at the top management level is strained, mid-level managers at both companies do talk and are eager to explore and implement a new vendor managed inventory (VMI) system that builds a partnership of strong interdependence and equity. Instead of sending purchase orders, VMI involves sharing daily electronic information about AUD’s sales, so inventory is replaced automatically by Technologia. Mid-level managers Larry Stansell (AUD) and Victoria Santos (Technologia) regularly correspond and meet to find potential areas for close cooperation, information sharing, and problem feedback. “I know that Richards is suspicious, but it really is time for these two guys to take a new look at this business relationship and how they can address issues that could be beneficial to both,” Santos says. “The playing field has changed. Technologia is stronger.” “But the relationship has not changed and I don’t think it will until Bronaldo finds a way to reduce his dependence on AUD. In the meantime, flexibility, information sharing, and reconsidering a range of cost-efficient options is important,” Stansell admits, “But we have to start with the discussion of whether AUD calls all the shots between our two organizations.” “Yes, and that discussion must include logistical issues,” Santos says. “Delivery, the disagreements about the pallets . . .” “Richards set up all of that initially—what would work best for delivery to AUD,” Santos says. “But Bronaldo insists that PM rather than AM pick-ups would be better and that a change in pallet companies, from Bradley Packaging to Eastmont Packaging, would cut costs per trip by reducing mileage. Plus Eastmont has a new custom-made pallet that provides greater load stabilization necessary for high-tech components. The savings for Technologia would be shared with AUD.” CASE FOR ANALYSIS | “But Bradley has a long-time business relationship of its own with AUD,” Stansell points out. “So, what we’re saying here is that it is not just a discussion about these two organizations, but a consideration of the whole supply chain. The cost of lost flexibility, the lack of shared information. It’s costing both of them. And the sudden spikes in production requests by AUD, in response to its retail customers, create unnecessary problems in production planning at Technologia and unnecessary stress for the management and workers at both companies.” “VMI could be a powerful tool that empowers and brings value to both sides,” Stansell says. “Through this system, Technologia will be able to create orders for us based on direct access to our orders and demand information— both short and long-range needs. . . .” “And then, we can work together, determining the...
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