Organization Theory and Design

130 Part 2: Organizational Purpose and Structural Design

EXHIBIT 3.22 Board of Directors
Aquarius Advertising President
Agency Organization Chart

Legal Counsel Executive Policy Committee
Vice President

Financial Manager Human Resources
Manager

Accounts Operations Marketing
Vice President Vice President Vice President

Accounts TV/Radio/Internet Newspapers/ Research Media
Manager Production Magazine Department Department
Department Production
Account Department
Executive
Copy Merchandising
Account Department Department
Executive
Art
Account Department
Executive

Account
Executive

Chapter 3: Fundamentals of Organization Structure 131

Clients
Account Manager
Account Executives
TV/Radio Specialists
Newspaper/Magazine
Specialists
Copy Specialists
Art Specialists
Merchandising Specialists
Media Specialists
Research Specialists

Clients X F F NN OOO O O

Account Manager XF NNN NN NN
Account Executives X FFF FF FF

TV/Radio Specialists X NO ONNO
XO ONOO
Newspaper/Magazine X NO OO
Specialists

Copy Specialists

Art Specialists X O OO

Merchandising Specialists XFF

Media Specialists XF

Research Specialists X

EXHIBIT 3.23
Sociometric Index of Aquarius Personnel and Clients
F ϭ Frequent—daily
O ϭ Occasional—once or twice per project
N ϭ None

a despot, I would make all of them check with me first to An agency reorganization was one solution proposed
get approval. Things would sure change around here. by top management to increase flexibility in this unpre-
dictable environment. The reorganization would be aimed
The need for reorganization was made more acute by at reducing the agency’s response time to environmental
changes in the environment. Within a short period of time, changes and at increasing cooperation and communication
there was a rapid turnover in the major accounts handled among specialists from different departments. The top
by the agency. It was typical for advertising agencies to managers are not sure what type of reorganization is ap-
gain or lose clients quickly, often with no advance warning propriate. They would like your help analyzing their con-
as consumer behavior and lifestyle changes emerged and text and current structure and welcome your advice on
product innovations occurred. proposing a new structure.

132 Part 2: Organizational Purpose and Structural Design

Notes

1. Chuck Salter, “Ford’s Escape Route,” Fast Company (Octo- “Task Forces: An Effective Management Tool,” Manage-
ber 2004), 106–110; “Ford Escape Hybrid Named Best ment Review (February 1987), 52–57.
Truck in Detroit,” The Jakarta Post (January 27, 2005), 18; 19. Neal E. Boudette, “Marriage Counseling; At Daimler-
and Bernard Simon, “Ford Aims to Build on Escape Hy- Chrysler, A New Push to Make Its Units Work Together,”
brid’s Success,” National Post (January 26, 2005), FP–10. The Wall Street Journal (March 12, 2003), A1, A15.
20. Keith Naughton and Kathleen Kerwin, “At GM, Two
2. “The Stalling of Motor City,” BusinessWeek (November 1, Heads May Be Worse Than One,” Business Week (August
2004), 128. 14, 1995), 46.
21. Paul R. Lawrence and Jay W. Lorsch, “New Managerial
3. Daniel J. Wakin, “With Shifting Needs and Ebbing Re- Job: The Integrator,” Harvard Business Review (November–
sources, Church is Reorganizing,” The New York Times December 1967), 142–151.
(January 4, 2004). 22. Charles Fishman, “Total Teamwork: Imagination Ltd.,”
Fast Company (April 2000), 156–168; Thomas L. Legare,
4. John Child, Organization (New York: Harper & Row, “How Hewlett-Packard Used Virtual Cross-Functional
1984). Teams to Deliver Healthcare Industry Solutions,” Journal of
Organizational Excellence (Autumn 2001), 29–37.
5. Stuart Ranson, Bob Hinings, and Royston Greenwood, “The 23. Anthony M. Townsend, Samuel M. DeMarie, and Anthony
Structuring of Organizational Structures,” Administrative Sci- R. Hendrickson, “Virtual Teams: Technology and the Work-
ence Quarterly 25 (1980), 1–17; and Hugh Willmott, “The place of the Future,” Academy of Management Executive
Structuring of Organizational Structure: A Note,” Adminis- 12, no. 3 (August 1998), 17–29.
trative Science Quarterly 26 (1981), 470–474. 24. Henry Mintzberg, The Structuring of Organizations (Engle-
wood Cliffs, N.J.: Prentice-Hall, 1979).
6. This section is based on Frank Ostroff, The Horizontal Or- 25. Frank Ostroff, “Stovepipe Stomper,” Government Executive
ganization: What the Organization of the Future Looks (April 1999), 70.
Like and How It Delivers Value to Customers (New York: 26. Based on Robert Duncan, “What Is the Right Organization
Oxford University Press, 1999). Structure?” Organizational Dynamics (Winter 1979),
59–80; and W. Alan Randolph and Gregory G. Dess, “The
7. Stephen Salsbury, The State, the Investor, and the Railroad: Congruence Perspective of Organization Design: A Concep-
The Boston & Albany, 1825–1867 (Cambridge: Harvard tual Model and Multivariate Research Approach,” Acad-
University Press, 1967), 186–187. emy of Management Review 9 (1984), 114–127.
27. Lynn Cook, “How Sweet It Is,” Forbes (March 1, 2004),
8. David Nadler and Michael Tushman, Strategic Organiza- 90ff; David Kaplan, “Cool Commander; Brenham’s Little
tion Design (Glenview, Ill.: Scott Foresman, 1988). Creamery Gets New Leader in Low-Key Switch,” Houston
Chronicle (May 1, 2004), 1; Kristin Hays, “First Family Fa-
9. William C. Ouchi, “The Implementation of a Decentralized vorite,” Cincinnati Post (June 26, 2004), B.8.0; Toni Mack,
Organization Design in Three Large Public School Districts: “The Ice Cream Man Cometh,” Forbes (January 22, 1990),
Edmonton, Seattle, and Houston” (unpublished manuscript, 52–56; David Abdalla, J. Doehring, and Ann Windhager,
Anderson School of Management, University of California– “Blue Bell Creameries, Inc.: Case and Analysis” (unpublished
Los Angeles, 2004). manuscript, Texas A&M University, 1981); Jorjanna Price,
“Creamery Churns Its Ice Cream into Cool Millions,” Pa-
10. “Country Managers: From Baron to Hotelier,” The Econo- rade (February 21, 1982), 18–22; and Art Chapman, “Lone
mist (May 11, 2002), 55–56. Star Scoop—Blue Bell Ice Cream Is a Part of State’s Culture,”
http://www.bluebell.com/press/FtWorthStar-july2002.htm.
11. Based on Jay R. Galbraith, Designing Complex Organiza- 28. Rahul Jacob, “The Struggle to Create an Organization for
tions (Reading, Mass.: Addison-Wesley, 1973), and Organi- the 21st Century,” Fortune (April 3, 1995), 90–99.
zation Design (Reading, Mass.: Addison-Wesley, 1977), 29. Amy Barrett, “Staying On Top”; Joseph Weber, “A Big
81–127. Company That Works,” BusinessWeek (May 4, 1992),
124–132; and Elyse Tanouye, “Johnson & Johnson Stays
12. G. Christian Hill, “Dog Eats Dog Food. And Damn If It Ain’t Fit by Shuffling Its Mix of Businesses,” The Wall Street
Tasty,” Ecompany Now (November 2000), 169–178; “Coun- Journal (December 22, 1992), A1, A4.
try Managers: From Baron to Hotelier”; Rochelle Garner and 30. Eliza Newlin Carney, “Calm in the Storm,” Government Ex-
Barbara Darrow, “Oracle Plots Course,” CRN (January 24, ecutive (October 2003), 57–63; and Brian Friel, “Hierarchies
2005), 3; and Anthony Hilton, “Dangers behind Oracle’s and Networks,” Government Executive (April 2002), 31–39.
Dream,” Evening Standard (February 11, 2005), 45. 31. Robert A. Guth, “Midlife Correction; Inside Microsoft, Fi-
nancial Managers Winning New Clout,” The Wall Street
13. Lee Iacocca with William Novak, Iacocca: An Autobiogra- Journal (July 23, 2003), A1, A6; and Michael Moeller, with
phy (New York: Phantom Books, 1984), 152–153.

14. Based on Galbraith, Designing Complex Organizations.
15. “Mandate 2003: Be Agile and Efficient,” Microsoft Execu-

tive Circle (Spring 2003), 46–48.
16. Jay Galbraith, Diane Downey, and Amy Kates, “How Net-

works Undergird the Lateral Capability of an Organization—
Where the Work Gets Done,” Journal of Organizational Ex-
cellence (Spring 2002), 67–78.
17. Amy Barrett, “Staying on Top,” BusinessWeek (May 5,
2003), 60–68
18. Walter Kiechel III, “The Art of the Corporate Task Force,”
Fortune (January 28, 1991), 104–105; and William J. Altier,

Chapter 3: Fundamentals of Organization Structure 133

Steve Hamm and Timothy J. Mullaney, “Remaking 50. Melissa A. Schilling and H. Kevin Steensma, “The Use of
Microsoft,” BusinessWeek (May 17, 1999), 106–114. Modular Organizational Forms: An Industry-Level Analy-
32. Based on Duncan, “What Is the Right Organization sis,” Academy of Management Journal 44, no. 6 (2001),
Structure?” 1149–1168; Jane C. Linder, “Transformational Outsourc-
33. Weber, “A Big Company That Works.” ing,” MIT Sloan Management Review (Winter 2004),
34. Phred Dvorak and Merissa Marr, “Stung by iPod, Sony Ad- 52–58; and Denis Chamberland, “Is It Core or Strategic?
dresses a Digital Lag,” The Wall Street Journal (December Outsourcing as a Strategic Management Tool,” Ivey Busi-
30, 2004), B1. ness Journal (July–August 2003), 1–5.
35. Maisie O’Flanagan and Lynn K. Taliento, “Nonprofits: En-
suring That Bigger Is Better,” McKinsey Quarterly, Issue 2 51. Denis Chamberland, “Is It Core or Strategic?”; Philip Siek-
(2004), 112ff. man, “The Snap-Together Business Jet,” Fortune (January
36. John Markoff, “John Sculley’s Biggest Test,” The New York 21, 2002), 104[A]–104[H]; Keith H. Hammonds, “Smart,
Times (February 26, 1989), sec. 3, 1, 26; and Shelly Branch, Determined, Ambitious, Cheap: The New Face of Global
“What’s Eating McDonald’s?” Fortune (October 13, 1997), Competition,” Fast Company (February 2003), 91–97;
122–125. Kathleen Kerwin, “GM: Modular Plants Won’t Be a Snap,”
37. Stanley M. Davis and Paul R. Lawrence, Matrix (Reading, BusinessWeek (November 9, 1998), 168–172; and Giuseppe
Mass.: Addison-Wesley, 1977), 11–24. Bonazzi and Cristiano Antonelli, “To Make or To Sell? The
38. Erik W. Larson and David H. Gobeli, “Matrix Manage- Case of In-House Outsourcing at Fiat Auto,” Organization
ment: Contradictions and Insight,” California Management Studies 24, no. 4 (2003), 575–594.
Review 29 (Summer 1987), 126–138.
39. Davis and Lawrence, Matrix, 155–180. 52. Schilling and Steensma, “The Use of Modular Organiza-
40. Edward Prewitt, “GM’s Matrix Reloads,” CIO (September tional Forms”; Raymond E. Miles and Charles C. Snow,
1, 2003), 90–96. “The New Network Firm: A Spherical Structure Built on a
41. Robert C. Ford and W. Alan Randolph, “Cross-Functional Human Investment Philosophy,” Organizational Dynamics
Structures: A Review and Integration of Matrix Organiza- (Spring 1995), 5–18; and R. E. Miles, C. C. Snow, J. A.
tions and Project Management,” Journal of Management 18 Matthews, G. Miles, and H. J. Coleman Jr., “Organizing in
(June 1992), 267–294; and Duncan, “What Is the Right Or- the Knowledge Age: Anticipating the Cellular Form,” Acad-
ganization Structure?” emy of Management Executive 11, no. 4 (1997), 7–24.
42. Lawton R. Burns, “Matrix Management in Hospitals: Test-
ing Theories of Matrix Structure and Development,” Ad- 53. Paul Engle, “You Can Outsource Strategic Processes,” In-
ministrative Science Quarterly 34 (1989), 349–368. dustrial Management (January–February 2002), 13–18.
43. Carol Hymowitz, “Managers Suddenly Have to Answer to
a Crowd of Bosses” (In the Lead column), The Wall Street 54. Don Tapscott, “Rethinking Strategy in a Networked World,”
Journal (August 12, 2003), B1; and Michael Goold and An- Strategy & Business 24 (Third Quarter, 2001), 34–41.
drew Campbell, “Making Matrix Structures Work: Creating
Clarity on Unit Roles and Responsibilities,” European 55. The story of TiVo is described in Jane C. Linder, “Transfor-
Management Journal 21, no. 3 (June 2003), 351–363. mational Outsourcing,” MIT Sloan Management Review
44. Christopher A. Bartlett and Sumantra Ghoshal, “Matrix (Winter 2004), 52–58; Alison Neumer, “I Want My TiVo;
Management: Not a Structure, a Frame of Mind,” Harvard Subscriptions Hike as Nation Gets Hooked,” Chicago Tri-
Business Review (July–August 1990), 138–145. bune (February 22, 2005), 8; and David Lieberman, “Deal
45. This case was inspired by John E. Fogerty, “Integrative Will Put TiVo System on Comcast DVRs,” USA Today
Management at Standard Steel” (unpublished manuscript, (March 14, 2005), http://www.usatoday.com/money/indus-
Latrobe, Pennsylvania, 1980); Stanley Reed with Adam As- tries/technology/2005-03-14-tivo-usat_x.htm?POE’click-refer.
ton, “Steel: The Mergers Aren’t Over Yet,” BusinessWeek
(February 21, 2005), 6; Michael Amdt, “Melting Away 56. Miles and Snow, “The New Network Firm”; Gregory G.
Steel’s Costs,” BusinessWeek (November 8, 2004), 48; and Dess, Abdul M. A. Rasheed, Kevin J. McLaughlin, and
“Steeling for a Fight,” The Economist (June 4, 1994), 63. Richard L. Priem, “The New Corporate Architecture,”
46. Michael Hammer, “Process Management and the Future of Academy of Management Executive 9, no. 2 (1995), 7–20;
Six Sigma,” Sloan Management Review (Winter 2002), and Engle, “You Can Outsource Strategic Processes.”
26–32; and Michael Hammer and Steve Stanton, “How
Process Enterprises Really Work,” Harvard Business Review 57. The discussion of weaknesses is based on Engle, “You Can
77 (November–December 1999), 108–118. Outsource Strategic Processes”; Henry W. Chesbrough and
47. Hammer, “Process Management and the Future of Six David J. Teece, “Organizing for Innovation: When Is Virtual
Sigma.” Virtuous?” Harvard Business Review (August 2002), 127–134;
48. Based on Ostroff, The Horizontal Organization, and Dess et al., “The New Corporate Architecture”; and N. Anand,
Richard L. Daft, Organization Theory and Design, 6th ed. “Modular, Virtual, and Hollow Forms of Organization De-
(Cincinnati, Ohio: South-Western, 1998), 250–253. sign,” working paper, London Business School, 2000.
49. Frank Ostroff, The Horizontal Organization, 102–114.
58. Linda S. Ackerman, “Transition Management: An In-depth
Look at Managing Complex Change,” Organizational Dy-
namics (Summer 1982), 46–66.

59. Based on Ostroff, The Horizontal Organization, 29–44.
60. Based on Child, Organization, Ch. 1; and Jonathan D. Day,

Emily Lawson, and Keith Leslie, “When Reorganization
Works,” The McKinsey Quarterly, 2003 Special Edition:
The Value in Organization, 21–29.

This page intentionally left blank

PART 3

Open System
Design Elements

4. The External Environment

5. Interorganizational Relationships

6. Designing Organizations for the
International Environment

4 The External Environment

The Environmental Domain
Task Environment • General Environment • International Context

Environmental Uncertainty
Simple–Complex Dimension • Stable–Unstable Dimension • Framework

Adapting to Environmental Uncertainty
Positions and Departments • Buffering and Boundary Spanning • Differentiation and
Integration • Organic versus Mechanistic Management Processes • Planning, Forecasting,
and Responsiveness

Framework for Organizational Responses to Uncertainty
Resource Dependence
Controlling Environmental Resources

Establishing Interorganizational Linkages • Controlling the Environmental
Domain • Organization–Environment Integrative Framework
Summary and Interpretation

A Look Inside

Nokia

Nokia became the world’s leading maker of cell phone handsets in
1998, and the giant Finnish company looked poised to run rivals out
of the handset business for good. But by 2004, products that didn’t
match consumer needs and strained relationships with major cus-
tomers had cost Nokia nearly a fifth of its 35 percent global market
share. Revenue growth shifted into reverse and the stock took a nosedive.

What went wrong? For one thing, Nokia missed the hottest growth
sector in cell phones, the market for midrange models with cameras and high-
resolution color screens. Nokia’s leaders chose instead to pump hundreds of mil-
lions of dollars into the development of “smart phones” that allow consumers to get on
the Internet, play video games, listen to music, and watch movies or television shows.
The problem was, the new phones proved too bulky and expensive for many consumers, who
began turning instead to cheaper, stylish models from Motorola, Samsung, and Siemens. The
clamshell design, in particular, which allowed users to fold the phone in half when it wasn’t in
use, fueled a new cell phone boom in Europe and the United States. Nokia had stuck to the
“candy bar” handset and was caught without a competitor in the battle. Nokia also neglected
some of its biggest customers. Mobile operators such as Orange SA, France Telecom SA’s wire-
less unit, pushed for customized phones with special features that their customers wanted, but
Nokia was slow to respond. “Their attitude was that, given their size, they didn’t need to lis-
ten to us,” an executive at one European mobile operator said.

These missteps allowed rivals to gobble up market share. To get Nokia back on track, lead-
ers have cranked up the introduction of new midrange phones, slashed costs on low-end mod-
els for developing countries, and promised mobile operators to tailor phones to their specifi-
cations. Nokia also continues to invest heavily in gadgets that feature advanced software and
run programs just like a computer. The key question is: Are the gadgets Nokia is developing
products that customers will want?1

Many companies, like Nokia, face tremendous uncertainty in dealing with the
external environment. The only way a high-tech company like Nokia can
continue to grow is through innovation, yet unless the company makes
products that people want to buy, the huge investments in research and development
will not pay off. At the time this text is being written, Nokia is getting its strongest
sales in China due to a growing demand for less expensive phones in rural areas. It
remains to be seen if the company’s new, technologically advanced products will
catch on in the marketplace. Nokia still holds the largest share of the mobile phone
market, but its sales and profits are stagnant while those of rival Samsung Elec-
tronics of Korea are zooming.2

Some companies get surprised by shifts in the environment and are unable to
quickly adapt to new competition, changing consumer interests, or innovative
technologies. Tower Records and Wherehouse both filed for bankruptcy, and some
smaller retail music chains have simply disappeared, in the wake of Apple’s iPod
and other new channels that allow music lovers to download just what they want.
Traditional music retailers are surviving only by diversifying into new areas or form-
ing partnerships to create their own downloading services. In the airline industry,

138 Part 3: Open System Design Elements

Briefcase major carriers that use a traditional hub-and-spoke system, such as United Air
Lines, Swissair, and US Airways, have been pummeled by smaller, nimbler competi-
As an organization tors like JetBlue, Ryanair, and Southwest, which can prosper in today’s difficult en-
manager, keep these vironment by keeping operations costs ultra-low.3
guidelines in mind:
Organize elements in the Numerous factors in the external environment cause turbulence and uncertainty
external environment into for organizations. The external environment, including international competition
ten sectors for analysis: in- and events, is the source of major threats confronting today’s organizations. The en-
dustry, raw materials, hu- vironment often imposes significant constraints on the choices that managers make
man resources, financial for an organization.
resources, market, tech-
nology, economic condi- Purpose of This Chapter
tions, government, socio-
cultural, and international. The purpose of this chapter is to develop a framework for assessing environments
Focus on sectors that may and how organizations can respond to them. First, we will identify the organiza-
experience significant tional domain and the sectors that influence the organization. Then, we will ex-
change at any time. plore two major environmental forces on the organization—the need for informa-
tion and the need for resources. Organizations respond to these forces through
structural design, planning systems, and attempts to change and control elements
in the environment.

The Environmental Domain

In a broad sense the environment is infinite and includes everything outside the orga-
nization. However, the analysis presented here considers only those aspects of the en-
vironment to which the organization is sensitive and must respond to survive. Thus,
organizational environment is defined as all elements that exist outside the boundary
of the organization and have the potential to affect all or part of the organization.

The environment of an organization can be understood by analyzing its domain
within external sectors. An organization’s domain is the chosen environmental field of
action. It is the territory an organization stakes out for itself with respect to products,
services, and markets served. Domain defines the organization’s niche and defines
those external sectors with which the organization will interact to accomplish its goals.

The environment comprises several sectors or subdivisions of the external envi-
ronment that contain similar elements. Ten sectors can be analyzed for each orga-
nization: industry, raw materials, human resources, financial resources, market,
technology, economic conditions, government, sociocultural, and international. The
sectors and a hypothetical organizational domain are illustrated in Exhibit 4.1. For
most companies, the sectors in Exhibit 4.1 can be further subdivided into the task
environment and general environment.

Task Environment

The task environment includes sectors with which the organization interacts directly
and that have a direct impact on the organization’s ability to achieve its goals. The
task environment typically includes the industry, raw materials, and market sectors,
and perhaps the human resources and international sectors.

The following examples illustrate how each of these sectors can affect organi-
zations:
• In the industry sector, Wal-Mart has become the nation’s largest food retailer,

and nontraditional outlets such as club stores and discounters now account for

Chapter 4: The External Environment 139

International Context EXHIBIT 4.1
An Organization’s
Environment

(j) (a) (b)
International Industry Raw
Sector Materials
Sector Sector
DOMAIN
(c)
(i) Human
Sociocultural Resources
Sector
Sector

(h) ORGANIZATION (d)
Government Financial
Resources
Sector
Sector
(g)
Economic (e)
Conditions Market
Sector
Sector
(f)
Technology

Sector

(a) Competitors, industry size and (g) Recession, unemployment rate, inflation
competitiveness, related industries rate, rate of investment, economics,
growth
(b) Suppliers, manufacturers, real estate,
services (h) City, state, federal laws and regulations,
taxes, services, court system, political
(c) Labor market, employment agencies, processes
universities, training schools, employees
in other companies, unionization (i) Age, values, beliefs, education, religion,
work ethic, consumer and green
(d) Stock markets, banks, savings and loans, movements
private investors
(j) Competition from and acquisition by
(e) Customers, clients, potential users of foreign firms, entry into overseas
products and services markets, foreign customs, regulations,
exchange rate
(f) Techniques of production, science,
computers, information technology,
e-commerce

more than 30 percent of the grocery market. This shift is forcing traditional
supermarkets to find new ways to compete. Recall the discussion of Wegmans in
the Chapter 2 Leading by Design box. Wegmans has stayed competitive by
building larger stores, stocking gourmet foods and ready-made meals, and
adding services such as dry cleaning, child play centers, and wine shops.4
• An interesting example in the raw materials sector concerns the beverage can
industry. Steelmakers owned the beverage can market until the mid-1960s,
when Reynolds Aluminum Company launched a huge aluminum recycling

140 Part 3: Open System Design Elements

program to gain a cheaper source of raw materials and make aluminum cans
price-competitive with steel.5
• In the market sector, keeping up with consumers’ rapidly changing tastes is a
real headache for big food companies such as Kraft and Nestlé SA. A few years
ago, Kraft was at the top of the food chain, with a portfolio of brands includ-
ing Oscar Mayer, Jell-O, Oreo, and Ritz. But growing consumer concerns over
obesity and food-related health issues have taken a huge toll on Kraft’s earnings.
The company is now looking for growth primarily by expanding its organic and
gourmet product offerings rather than pushing macaroni and cheese or cookies
and crackers.6
• The human resources sector is of significant concern to every business. Re-
search groups say U.S. businesses will soon face a shortage of skilled workers.
Princeton, New Jersey–based Educational Testing Service, for example, found
that the literacy of American adults ranks tenth out of seventeen industrialized
countries. Moreover, younger adults underperform Americans over forty, lead-
ing researchers to warn that without improved adult training and education,
U.S. companies will fall further behind in the global economy.7
• For most companies today, the international sector is also a part of the task
environment because of globalization and intense competition. Outsourcing
has become a hot-button issue, with companies in industries from toy manu-
facturing to information technology sending work to lower-wage countries to
become more competitive. Biotechnology and life sciences firms once seemed
immune to the trend, but that too is changing. Big U.S. drug manufacturers are
facing pressures as smaller firms gain cost advantages by outsourcing to com-
panies such as WuXi Pharmatech in Shanghai or Biocon in India.8

General Environment

The general environment includes those sectors that might not have a direct im-
pact on the daily operations of a firm but will indirectly influence it. The general
environment often includes the government, sociocultural, economic conditions,
technology, and financial resources sectors. These sectors affect all organizations
eventually. Consider the following examples:
• In the government sector, new European Union (EU) environmental and con-

sumer protection legislation could cause headaches for many U.S. firms. For
example, one new rule requires chemical makers who do business in EU coun-
tries to run safety and environmental impact tests on more than 30,000 chem-
icals, a process that could cost these companies more than $7 billion. Other
new regulations require companies to pick up the tab for recycling the prod-
ucts they sell in the EU.9
• Shifting demographics is a significant element in the sociocultural sector.
In the United States, Hispanics have passed African Americans as the nation’s
largest minority group, and their numbers are growing so fast that Hispanics
(or Latinos, as many prefer to be called) are becoming a driving force in
U.S. politics, economics, and culture. Kroger has already converted one of
its Houston stores to an all-Hispanic supermercado to compete with
Hispanic merchants, and the growing Hispanic population is forcing gradual
changes in organizations from the U.S. Labor Department to the local auto
parts store.10
• General economic conditions often affect the way a company does business.
Germany’s two most celebrated daily newspapers, the Frankfurter Allgemeine

Chapter 4: The External Environment 141

Zeitung and the Süddeutsche Zeitung, expanded pell-mell during the economic
boom of the late 1990s. When the economy crashed, both papers found them-
selves in dire financial circumstances and have had to cut jobs, close regional
offices, scrap special sections, and cut out customized inserts.11
• The technology sector is an area in which massive changes have occurred in re-
cent years, from digital music and video recorders to advances in cloning tech-
nology and stem-cell research. One technology having a tremendous impact on
organizations is online software that allows people to easily create and maintain
Web logs, or blogs. One estimate is that, in early 2005, 23,000 new Web logs
were being created each day, with everyday people widely publishing informa-
tion on everything from bad customer service to poor product performance.12
• All businesses have to be concerned with financial resources, but this sector is
often first and foremost in the minds of entrepreneurs starting a new business.
Ken Vaughan started a gas-mask business to take advantage of a boom in the
asbestos-removal business. When the boom ended, it looked like Neoterik
Health Technologies Inc. would end too. But after the terrorist attacks of Sep-
tember 11, 2001, Vaughan attracted the attention of venture capitalists, who
were eager to invest financial resources in a company that could profit from
concerns over homeland security.13

International Context

The international sector can directly affect many organizations, and it has be-
come extremely important in the last few years. In addition, all domestic sectors
can be affected by international events. Despite the significance of international
events for today’s organizations, many students fail to appreciate the importance
of international events and still think domestically. Think again. Even if you stay
in your hometown, your company may be purchased tomorrow by the English,
Canadians, Japanese, or Germans. For example, General Shale Brick, with head-
quarters in a small town in East Tennessee, was bought by Wienerberger
Baustoffindustrie AG, a Vienna, Austria, company that is the world’s largest
brickmaker. The Japanese alone own thousands of U.S. companies, including
steel mills, rubber and tire factories, automobile assembly plants, and auto parts
suppliers.14

The distinctions between foreign and domestic operations have become in-
creasingly irrelevant. For example, in the auto industry, Ford owns Sweden’s
Volvo, while Chrysler, still considered one of America’s Big Three automakers, is
owned by Germany’s DaimlerChrysler and builds its PT Cruiser in Mexico.
Toyota, which recently overtook Ford as the world’s second largest automaker,
is a Japanese company, but it has built more than 10 million vehicles in North
American factories. In addition, U.S.-based companies are involved in thousands
of partnerships and alliances with firms all around the world. These in-
creasing global interconnections have both positive and negative implications for
organizations. Because of the significance of the international sector and its
tremendous impact on organization design, this topic will be covered in detail in
Chapter 6.

The growing importance of the international sector means that the environ-
ment for all organizations is becoming extremely complex and extremely com-
petitive. However, every organization faces uncertainty domestically as well as
globally. Consider how changing elements in the various environmental sectors
have created uncertainty for advertising agencies such as Ogilvy & Mather.

142 Part 3: Open System Design Elements

In Practice It was a sad day in the advertising industry when Ogilvy & Mather, one of the most
respected advertising agencies on Madison Avenue, was reduced to competing for
Ogilvy & Mather business in a live online auction. The agency won the account, but that eased the
pain only slightly.

The world has changed dramatically since Ogilvy & Mather’s founders made deals
with corporate CEOs over golf games and could reach 90 percent of the American
public with a prime-time commercial on network television. Today, agency executives fre-
quently have to dicker with people from their client’s procurement department, who are
used to beating down suppliers on the price of cardboard boxes or paper bags. They want to get
the best deal, and they want to see a whole lot more than a couple of television spots.
The economic decline that followed the crash of the dot-coms and the 2001 terrorist attacks in
the United States led to the worst advertising recession in more than half a century. Marketing bud-
gets were often the first to be cut, and worldwide ad spending declined 7 percent in 2001. The
agencies laid off 40,000 employees, nearly 20 percent of their workforce. The weak economic cli-
mate also led to a major change in how corporations pay for advertising. Up until that time, most
clients paid their agencies a 15 percent commission on media purchases rather than paying them
directly for their work. Today, though, many companies have cut out commissions altogether. Cor-
porate procurement departments are demanding that the agencies clearly spell out their labor costs
and how they are billing the client. The agencies are having a hard time making the shift.
And that’s not even the biggest problem the ad agencies are having. Traditionally, agencies have
relied on television and print media, but that’s just not working anymore. The number of prime-time
television viewers in the United States, particularly for the networks, continues to decline. And those
who are watching often do so via new devices like TiVo that let them skip commercials entirely. New
forms of media such as the Internet, video on demand, cellular phones, and video games are tak-
ing up a larger and larger percentage of people’s time. Corporations are clamoring for more inno-
vative low-key approaches, such as product placements in video games or products integrated into
television shows and music events, as well as lower-cost options such as direct mail and Internet ad-
vertising. Yet the agencies have been slow to adapt, still clinging to the notion that making good
half-a-million dollar 30-second television commercials will pay off.
The combination of weak economic conditions, media fragmentation, new technologies, and
changing habits has the advertising industry reeling. Although many of these developments have
been predicted for some time, the big agencies got caught flat-footed when they actually came to
pass. As Ogilvy & Mather’s CEO, Shelly Lazurus, says of the recent past, “These have not been the
best years.”15

Advertising agencies aren’t the only organizations that have had a hard time
adapting to massive shifts in the environment. In the following sections, we will dis-
cuss in greater detail how companies can cope with and respond to environmental
uncertainty and instability.

Environmental Uncertainty

How does the environment influence an organization? The patterns and events oc-
curring in the environment can be described along several dimensions, such as
whether the environment is stable or unstable, homogeneous or heterogeneous,
simple or complex; the munificence, or amount of resources available to support the
organization’s growth; whether those resources are concentrated or dispersed; and

Chapter 4: The External Environment 143

the degree of consensus in the environment regarding the organization’s intended
domain.16 These dimensions boil down to two essential ways the environment in-
fluences organizations: (1) the need for information about the environment and
(2) the need for resources from the environment. The environmental conditions of
complexity and change create a greater need to gather information and to respond
based on that information. The organization also is concerned with scarce material
and financial resources and with the need to ensure availability of resources.

Environmental uncertainty pertains primarily to those sectors that an organiza-
tion deals with on a regular, day-to-day basis. Recall the earlier discussion of the
general environment and the task environment. Although sectors of the general en-
vironment—such as economic conditions, social trends, or technological changes—
can create uncertainty for organizations, determining an organization’s environ-
mental uncertainty generally means focusing on sectors of the task environment,
such as how many elements the organization deals with regularly, how rapidly these
elements change, and so forth. To assess uncertainty, each sector of the organiza-
tion’s task environment can be analyzed along dimensions such as stability or
instability and degree of complexity.17 The total amount of uncertainty felt by an
organization is the uncertainty accumulated across environmental sectors.

Organizations must cope with and manage uncertainty to be effective. Uncer-
tainty means that decision makers do not have sufficient information about environ-
mental factors, and they have a difficult time predicting external changes. Uncer-
tainty increases the risk of failure for organizational responses and makes it difficult
to compute costs and probabilities associated with decision alternatives.18 The re-
mainder of this section will focus on the information perspective, which is concerned
with uncertainty created by the extent to which the environment is simple or com-
plex and the extent to which events are stable or unstable. Later in the chapter, we
discuss how organizations control the environment to acquire needed resources.

Simple–Complex Dimension

The simple–complex dimension concerns environmental complexity, which refers to
heterogeneity, or the number and dissimilarity of external elements relevant to an
organization’s operations. The more external factors that regularly influence the or-
ganization and the greater number of other companies in an organization’s domain,
the greater the complexity. A complex environment is one in which the organization
interacts with and is influenced by numerous diverse external elements. In a simple
environment, the organization interacts with and is influenced by only a few similar
external elements.

Aerospace firms such as Boeing Co. and Europe’s Airbus operate in a complex
environment, as do universities. Universities span a large number of technologies and
are continually buffeted by social, cultural, and value changes. Universities also must
cope with numerous ever-changing government regulations, competition for quality
students and highly educated employees, and scarce financial resources for many
programs. They deal with granting agencies, professional and scientific associations,
alumni, parents, foundations, legislators, community residents, international agen-
cies, donors, corporations, and athletic teams. This large number of external ele-
ments make up the organization’s domain, creating a complex environment. On
the other hand, a family-owned hardware store in a suburban community is in a
simple environment. The store does not have to deal with complex technologies or
extensive government regulations, and cultural and social changes have little impact.
Human resources is not a problem because the store is run by family members and

144 Part 3: Open System Design Elements

part-time help. The only external elements of real importance are a few competitors,
suppliers, and customers.

Stable–Unstable Dimension

The stable–unstable dimension refers to whether elements in the environment are
dynamic. An environmental domain is stable if it remains the same over a period of
months or years. Under unstable conditions, environmental elements shift abruptly.
Environmental domains seem to be increasingly unstable for most organizations.
This chapter’s Book Mark examines the volatile nature of today’s business world
and gives some tips for managing in a fast-shifting environment.

Book Mark 4.0 (HAVE YOU READ THIS BOOK?)

Confronting Reality: Doing What Matters to Get Things Right
By Lawrence A. Bossidy and Ram Charan

The business world has changed in re- course of action, and unrealistic expectations. For exam-
cent years and will continue to change at ple, when sales and profits fell off a cliff at data-storage
an increasingly rapid pace. That’s the reality that spurred Larry giant EMC in early 2001, managers displayed a bias to-
Bossidy, retired chairman and CEO of Honeywell Interna- ward hearing good news and believed the company was
tional, and Ram Charan, a noted author, speaker, and busi- only experiencing a blip in the growth curve. When Joe
ness consultant, to write Confronting Reality: Doing What Tucci was named CEO, however, he was determined to
Matters to Get Things Right. Too many managers, they be- find out if the slump was temporary. By talking directly
lieve, are tempted to hide their heads in the sand of financial with top leaders at his customers’ organization, Tucci was
issues rather than face the confusion and complexity of the able to face the reality that EMC’s existing business model
organization’s environment. based on high-cost technology was dead. Tucci imple-
mented a new business model to fit that reality.
LESSONS FOR FACING REALITY • Ruthlessly assess your organization. Understanding the in-
For many companies, today’s environment is characterized by ternal environment is just as important. Managers need to
global hyper-competition, declining prices, and the growing evaluate whether their company has the talent, commit-
power of consumers. Bossidy and Charan offer some lessons ment, and attitude needed to drive the important
to leaders for navigating a fast-changing world. changes. At EMC, Tucci realized his sales force needed an
• Understand the environment as it is now and is likely to attitude shift to sell software, services, and business solu-
tions rather than just expensive hardware. The arrogant,
be in the future, rather than as it was in the past. Relying hard-driving sales tactics of the past had to be replaced
on the past and conventional wisdom can lead to disas- with a softer, more customer-oriented approach.
ter. Kmart, for example, stuck to its old formula as Wal-
Mart gobbled its customers and carved out a new busi- STAYING ALIVE
ness model. Few could have predicted in 1990, for Staying alive in today’s business environment requires that
example, that Wal-Mart would now be America’s biggest managers stay alert. Managers should always be looking at
seller of groceries. their competitors, broad industry trends, technological
• Seek out and welcome diverse and unorthodox ideas. changes, shifting government policies, changing market
Managers need to be proactive and open-minded toward forces, and economic developments. At the same time, they
conversing with employees, suppliers, customers, col- work hard to stay in touch with what their customers really
leagues, and anyone else they come in contact with. What think and really want. By doing so, leaders can confront real-
are people thinking about? What changes and opportuni- ity and be poised for change.
ties do they see? What worries them about the future?
• Avoid the common causes of manager failure to confront Confronting Reality: Doing What Matters to Get Things Right, by Lawrence
reality: filtered information, selective hearing, wishful A. Bossidy and Ram Charan, is published by Crown Business Publishing.
thinking, fear, emotional overinvestment in a failing

Chapter 4: The External Environment 145

Instability may occur when competitors react with aggressive moves and coun-
termoves regarding advertising and new products, as happened with Nokia, de-
scribed in the chapter opening. Sometimes specific, unpredictable events—such as
Janet Jackson’s “wardrobe malfunction” at the 2004 Super Bowl halftime show,
accounts of anthrax-laced letters being sent through the U.S. Postal Service, or the
discovery of heart problems related to pain drugs such as Vioxx and Celebrex—
create unstable conditions. Today, “hate sites” on the World Wide Web, such as
Ihatemcdonalds.com and Walmartsucks.com, are an important source of instability
for scores of companies. In addition, freewheeling bloggers can destroy a company’s
reputation virtually overnight. Kryptonite’s reputation in bicycle locks plummeted
after a Web log was posted that the locks could be opened with a Bic pen. After
10 days of blogging, Kryptonite announced a free product exchange that would cost
it about $10 million.19

Although environments are more unstable for most organizations today, an ex-
ample of a traditionally stable environment is a public utility.20 In the rural Midwest,
demand and supply factors for a public utility are stable. A gradual increase in de-
mand may occur, which is easily predicted over time. Toy companies, by contrast,
have an unstable environment. Hot new toys are difficult to predict, a problem com-
pounded by the fact that children are losing interest in toys at a younger age, their
interest captured by video games, cable TV, and the Internet. Adding to the insta-
bility for toymakers such as Mattel and Hasbro is the shrinking retail market, with
big toy retailers going out of business trying to compete with discounters such as
Wal-Mart. Toy manufacturers often find their biggest products languishing on
shelves as shoppers turn to less-expensive knock-offs produced for Wal-Mart by
low-cost manufacturers in China.21

Framework

The simple–complex and stable–unstable dimensions are combined into a frame-
work for assessing environmental uncertainty in Exhibit 4.2. In the simple, stable
environment, uncertainty is low. There are only a few external elements to contend
with, and they tend to remain stable. The complex, stable environment represents
somewhat greater uncertainty. A large number of elements have to be scanned, an-
alyzed, and acted upon for the organization to perform well. External elements do
not change rapidly or unexpectedly in this environment.

Even greater uncertainty is felt in the simple, unstable environment.22 Rapid
change creates uncertainty for managers. Even though the organization has few ex-
ternal elements, those elements are hard to predict, and they react unexpectedly to
organizational initiatives. The greatest uncertainty for an organization occurs in the
complex, unstable environment. A large number of elements impinge upon the or-
ganization, and they shift frequently or react strongly to organizational initiatives.
When several sectors change simultaneously, the environment becomes turbulent.23

A beer distributor functions in a simple, stable environment. Demand for beer
changes only gradually. The distributor has an established delivery route, and sup-
plies of beer arrive on schedule. State universities, appliance manufacturers, and in-
surance companies are in somewhat stable, complex environments. A large number
of external elements are present, but although they change, changes are gradual and
predictable.

Toy manufacturers are in simple, unstable environments. Organizations that de-
sign, make, and sell toys, as well as those that are involved in the clothing or music

146 Part 3: Open System Design Elements

Simple + Stable = Complex + Stable =
Low Uncertainty Low-Moderate Uncertainty

1. Small number of external elements, 1. Large number of external
and elements are similar elements, and elements are
dissimilar
Stable 2. Elements remain the same or
change slowly 2. Elements remain the same or
ENVIRONMENTAL change slowly
CHANGE Examples: Soft drink bottlers,
beer distributors, Examples: Universities,
container manufacturers, appliance manufacturers,
food processors chemical companies,
insurance companies
Uncertainty
Complex + Unstable =
Simple + Unstable = High Uncertainty
High-Moderate Uncertainty

Unstable 1. Small number of external 1. Large number of external
elements, and elements are elements, and elements
similar are dissimilar

2. Elements change frequently and 2. Elements change frequently
unpredictably and unpredictably

Examples: E-commerce, Examples: Computer firms,
fashion clothing, aerospace firms,
music industry, telecommunications
toy manufacturers firms, airlines

Simple Complex

ENVIRONMENTAL COMPLEXITY

EXHIBIT 4.2
Framework for Assessing Environmental Uncertainty
Source: Adapted and reprinted from “Characteristics of Perceived Environments and Perceived Environmental Uncertainty,” by Robert B. Duncan, published
in Administrative Science Quarterly 17 (1972), 313–327, by permission of The Administrative Science Quarterly. Copyright © 1972 by Cornell University.

industry, face shifting supply and demand. Most e-commerce companies focus on a
specific competitive niche and, hence, operate in simple but unstable environments
as well. Although there may be few elements to contend with—e.g., technology,
competitors—they are difficult to predict and change abruptly and unexpectedly.

The telecommunications industry and the airline industry face complex, unsta-
ble environments. Many external sectors are changing simultaneously. In the case of
airlines, in just a few years they were confronted with an air-traffic controller short-
age, price cuts from low-cost carriers such as Southwest Airlines, soaring fuel prices,
the entry of new competitors such as JetBlue and AirTran, a series of major air-
traffic disasters, and a drastic decline in customer demand following the 2001 ter-
rorist attacks.

Chapter 4: The External Environment 147

Adapting to Environmental Uncertainty

Once you see how environments differ with respect to change and complexity, the
next question is, “How do organizations adapt to each level of environmental un-
certainty?” Environmental uncertainty represents an important contingency for or-
ganization structure and internal behaviors. Recall from Chapter 3 that organiza-
tions facing uncertainty generally have a more horizontal structure that encourages
cross-functional communication and collaboration to help the company adapt to
changes in the environment. In this section we discuss in more detail how the envi-
ronment affects organizations. An organization in a certain environment will be
managed and controlled differently from an organization in an uncertain environ-
ment with respect to positions and departments, organizational differentiation and
integration, control processes, and future planning and forecasting. Organizations
need to have the right fit between internal structure and the external environment.

Positions and Departments

As the complexity and uncertainty in the external environment increases, so does the
number of positions and departments within the organization, which in turn in-
creases internal complexity. This relationship is part of being an open system. Each
sector in the external environment requires an employee or department to deal with
it. The human resource department deals with unemployed people who want to
work for the company. The marketing department finds customers. Procurement
employees obtain raw materials from hundreds of suppliers. The finance group deals
with bankers. The legal department works with the courts and government agencies.
Many companies have added e-business departments to handle electronic commerce
and information technology departments to deal with the increasing complexity of
computerized information and knowledge management systems.

The U.S. government has also responded to environmental uncertainty by creat-
ing new positions and departments. Soon after the 2001 terrorist attacks in the
United States, Congress created a Department of Homeland Security to merge all or
parts of various agencies and create a coordinated national strategy for domestic
protection, preparedness, and response.24

Buffering and Boundary Spanning

The traditional approach to coping with environmental uncertainty was to establish
buffer departments. The purpose of buffering roles is to absorb uncertainty from the
environment.25 The technical core performs the primary production activity of an
organization. Buffer departments surround the technical core and exchange materi-
als, resources, and money between the environment and the organization. They help
the technical core function efficiently. The purchasing department buffers the tech-
nical core by stockpiling supplies and raw materials. The human resource depart-
ment buffers the technical core by handling the uncertainty associated with finding,
hiring, and training production employees.

A newer approach some organizations are trying is to drop the buffers and ex-
pose the technical core to the uncertain environment. These organizations no longer
create buffers because they believe being well connected to customers and suppliers
is more important than internal efficiency. For example, John Deere has assembly-

148 Part 3: Open System Design Elements

Briefcase line workers visiting local farms to determine and respond to customer concerns.
Whirlpool pays hundreds of customers to test computer-simulated products and fea-
As an organization tures.26 Opening up the organization to the environment makes it more fluid and
manager, keep these adaptable.
guidelines in mind:
Boundary-spanning roles link and coordinate an organization with key elements
Scan the external environ- in the external environment. Boundary spanning is primarily concerned with the ex-
ment for threats, changes, change of information to (1) detect and bring into the organization information
and opportunities. Use about changes in the environment and (2) send information into the environment
boundary-spanning roles, that presents the organization in a favorable light.27
such as market research
and competitive- Organizations have to keep in touch with what is going on in the environment so
intelligence departments, that managers can respond to market changes and other developments. A study of
to bring into the organiza- high-tech firms found that 97 percent of competitive failures resulted from lack of at-
tion information about tention to market changes or the failure to act on vital information.28 To detect and
changes in the environ- bring important information into the organization, boundary personnel scan the en-
ment. Enhance boundary- vironment. For example, a market-research department scans and monitors trends in
spanning capabilities consumer tastes. Boundary spanners in engineering and research and development
when the environment is (R&D) departments scan new technological developments, innovations, and raw
uncertain. materials. Boundary spanners prevent the organization from stagnating by keeping
top managers informed about environmental changes. Often, the greater the uncer-
tainty in the environment, the greater the importance of boundary spanners.29

One new approach to boundary spanning is business intelligence, which refers
to the high-tech analysis of large amounts of internal and external data to spot pat-
terns and relationships that might be significant. For example, Verizon uses
business-intelligence to actively monitor customer interactions so that it can catch
problems and fix them almost immediately.30 Tools to automate the process have
been the hottest area of software in recent years, with companies spending over $4
billion on business-intelligence software in one recent year and the amount expected
to double by 2006.31

Business intelligence is related to another important area of boundary spanning,
known as competitive intelligence (CI). Membership in the Society of Competitive In-
telligence Professionals has more than doubled since 1997, and colleges are setting up
master’s degree programs in CI to respond to the growing demand for these profes-
sionals in organizations.32 Competitive intelligence gives top executives a systematic
way to collect and analyze public information about rivals and use it to make better
decisions.33 Using techniques that range from Internet surfing to digging through
trash cans, intelligence professionals dig up information on competitors’ new prod-
ucts, manufacturing costs, or training methods and share it with top leaders.

In today’s turbulent environment, many successful companies involve everyone
in boundary-spanning activities. People at the grass-roots level are often able to see
and interpret changes or problems sooner than managers, who are typically more
removed from the day-to-day work.34 At Cognos, which sells planning and budget-
ing programs to large corporations, any of the company’s 3,000 employees can sub-
mit scoops about competitors through an internal Web site called Street Fighter.
Each day, R&D and sales managers pore over the dozens of entries. Good tips are
rewarded with prizes.35

The boundary task of sending information into the environment to represent the
organization is used to influence other people’s perception of the organization. In
the marketing department, advertising and sales people represent the organization
to customers. Purchasers may call on suppliers and describe purchasing needs. The
legal department informs lobbyists and elected officials about the organization’s

Chapter 4: The External Environment 149

needs or views on political matters. Many companies set up their own Web pages to
present the organization in a favorable light. For example, to counteract hate sites
that criticize their labor practices in Third World countries, Nike and Unocal both
created Web sites specifically to tell their side of the story.36

All organizations have to keep in touch with the environment. Here’s how
Genesco, a growing Nashville-based retailer that markets shoes and apparel to
trend-savvy teenagers, spans the boundary in the shifting environment of the fash-
ion industry.

James Estepa, the head of Genesco Retail group, lives by the motto, “You’re never In Practice
moving fast enough to satisfy the fickle teen consumer.” With teenagers’ fashion pref-
erences changing on a weekly basis, how do companies like Genesco stay on top of Genesco
things? Estepa says his company does it by stepping inside the teenage mind.

For years, Genesco was best known for its Johnston & Murphy brand, the staid
brown shoes worn by middle-aged businessmen and U.S. presidents. But recently, the
company has transformed itself into a fashion powerhouse with its Journeys teen-focused
shoe stores and Underground Station, the nation’s second-largest chain of urban-inspired ap-
parel stores. One way Genesco stays on top of trends is by hiring people who are close to the age
of its target customers. Sales associates in Journeys and Underground Station stores wear the same
kinds of clothes, listen to the same kinds of music, and watch the same movies as their customers.
The company’s buyers and merchandisers are young too. They spend hours watching music videos,
surfing the Internet, and playing the hottest new video games. Staying on top of moment-to-
moment shifts in popular culture is the top priority for Genesco’s buyers. It is they, rather than man-
agers, who make initial shoe and clothing orders, and they have minimal buying constraints. “If an
item shows up on the music videos, the kids are in the stores the next day trying to buy it,” Estepa
explains. Flexible internal procedures and strong partnerships with vendors enable Genesco to get
products into stores fast.

Another key to staying on top of what’s hot is continually analyzing sales data. Managers and
buyers monitor store and individual shoe sales daily. In many cases, this enables managers to tell
how strong a product is going to be from the first day it hits the stores, helping Genesco follow,
rather than try to lead, its customers.

“There’s a huge amount of fashion risk in this business,” says Chris Svezia, an analyst who fol-
lows the performance of Genesco. “The important thing is just to stay on top of it. Right now
they’re on the upswing of getting it right.”37

Differentiation and Integration

Another response to environmental uncertainty is the amount of differentiation and
integration among departments. Organizational differentiation is “the differences in
cognitive and emotional orientations among managers in different functional de-
partments, and the difference in formal structure among these departments.”38
When the external environment is complex and rapidly changing, organizational de-
partments become highly specialized to handle the uncertainty in their external sec-
tor. Success in each sector requires special expertise and behavior. Employees in an
R&D department thus have unique attitudes, values, goals, and education that dis-
tinguish them from employees in manufacturing or sales departments.

150 Part 3: Open System Design Elements

EXHIBIT 4.3 President
Organizational
Departments Differentiate
to Meet Needs of
Subenvironments

R&D Manufacturing Sales
Division Division Division

Scientific Manufacturing Market
Subenvironment Subenvironment Subenvironment

Scientific Research Raw Labor Suppliers Customers Advertising
journals centers materials agencies
Distribution
Professional Production system Competitors
associations equipment

A study by Paul Lawrence and Jay Lorsch examined three organizational
departments—manufacturing, research, and sales—in ten corporations.39 This study
found that each department evolved toward a different orientation and structure to
deal with specialized parts of the external environment. The market, scientific, and
manufacturing subenvironments identified by Lawrence and Lorsch are illustrated
in Exhibit 4.3. Each department interacted with different external groups. The dif-
ferences that evolved among departments within the organizations are shown in Ex-
hibit 4.4. To work effectively with the scientific subenvironment, R&D had a goal
of quality work, a long time horizon (up to 5 years), an informal structure, and task-
oriented employees. Sales was at the opposite extreme. It had a goal of customer sat-
isfaction, was oriented toward the short term (2 weeks or so), had a very formal
structure, and was socially oriented.

One outcome of high differentiation is that coordination among departments
becomes difficult. More time and resources must be devoted to achieving coordina-
tion when attitudes, goals, and work orientation differ so widely. Integration is the
quality of collaboration among departments.40 Formal integrators are often required
to coordinate departments. When the environment is highly uncertain, frequent

EXHIBIT 4.4
Differences in Goals and Orientations among Organizational Departments

Characteristic R&D Manufacturing Sales
Department Department Department

Goals New developments, quality Efficient production Customer satisfaction
Time horizon Long Short Short
Interpersonal orientation Mostly task Task Social
Formality of structure Low High High

Source: Based on Paul R. Lawrence and Jay W. Lorsch, Organization and Environment (Homewood, Ill.: Irwin, 1969), 23–29.

Chapter 4: The External Environment 151

EXHIBIT 4.5 Plastics Foods Container
Environmental Uncertainty and Organizational Integrators
High Moderate Low
Industry High Moderate Low
22% 17% 0%
Environmental uncertainty
Departmental differentiation
Percent management in integrating roles

Source: Based on Jay W. Lorsch and Paul R. Lawrence, “Environmental Factors and Organizational Integration,” Organizational Planning: Cases and Concepts
(Homewood, Ill.: Irwin and Dorsey, 1972), 45.

changes require more information processing to achieve horizontal coordination, so Briefcase
integrators become a necessary addition to the organization structure. Sometimes
integrators are called liaison personnel, project managers, brand managers, or co- As an organization
ordinators. As illustrated in Exhibit 4.5, organizations with highly uncertain envi- manager, keep these
ronments and a highly differentiated structure assign about 22 percent of manage- guidelines in mind:
ment personnel to integration activities, such as serving on committees, on task
forces, or in liaison roles.41 In organizations characterized by very simple, stable Match internal organiza-
environments, almost no managers are assigned to integration roles. Exhibit 4.5 tion structure to the exter-
shows that, as environmental uncertainty increases, so does differentiation among nal environment. If the ex-
departments; hence, the organization must assign a larger percentage of managers ternal environment is
to coordinating roles. complex, make the organi-
zation structure complex.
Lawrence and Lorsch’s research concluded that organizations perform better Associate a stable envi-
when the levels of differentiation and integration match the level of uncertainty in ronment with a mechanis-
the environment. Organizations that performed well in uncertain environments had tic structure and an unsta-
high levels of both differentiation and integration, while those performing well in ble environment with an
less uncertain environments had lower levels of differentiation and integration. organic structure. If the
external environment is
Organic versus Mechanistic Management Processes both complex and chang-
ing, make the organiza-
Another response to environmental uncertainty is the amount of formal structure and tion highly differentiated
control imposed on employees. Tom Burns and G. M. Stalker observed twenty indus- and organic, and use
trial firms in England and discovered that external environment was related to inter- mechanisms to achieve
nal management structure.42 When the external environment was stable, the internal coordination across de-
organization was characterized by rules, procedures, and a clear hierarchy of author- partments.
ity. Organizations were formalized. They were also centralized, with most decisions
made at the top. Burns and Stalker called this a mechanistic organization system.

In rapidly changing environments, the internal organization was much looser,
free-flowing, and adaptive. Rules and regulations often were not written down or, if
written down, were ignored. People had to find their own way through the system
to figure out what to do. The hierarchy of authority was not clear. Decision-making
authority was decentralized. Burns and Stalker used the term organic to character-
ize this type of management structure.

Exhibit 4.6 summarizes the differences in organic and mechanistic systems. As
environmental uncertainty increases, organizations tend to become more organic,
which means decentralizing authority and responsibility to lower levels, encourag-
ing employees to take care of problems by working directly with one another, en-
couraging teamwork, and taking an informal approach to assigning tasks and re-
sponsibility. Thus, the organization is more fluid and is able to adapt continually to
changes in the external environment.43

152 Part 3: Open System Design Elements

EXHIBIT 4.6 Mechanistic Organic
Mechanistic and Organic
Forms 1. Tasks are broken down into special- 1. Employees contribute to the common
ized, separate parts. tasks of the department.

2. Tasks are rigidly defined. 2. Tasks are adjusted and redefined
through employee teamwork.
3. There is a strict hierarchy of authority
and control, and there are many rules. 3. There is less hierarchy of authority and
control, and there are few rules.
4. Knowledge and control of tasks
are centralized at the top of the 4. Knowledge and control of tasks are lo-
organization. cated anywhere in the organization.

5. Communication is vertical. 5. Communication is horizontal.

Source: Adapted from Gerald Zaltman, Robert Duncan, and Jonny Holbek, Innovations and Organizations (New York:
Wiley, 1973), 131.

The learning organization, described in Chapter 1, and the horizontal and vir-
tual network structures, described in Chapter 3, are organic organizational forms
that are used by companies to compete in rapidly changing environments. Guiltless
Gourmet, which sells low-fat tortilla chips and other high-quality snack foods,
shifted to a flexible network structure to remain competitive when large companies
like Frito Lay entered the low-fat snack-food market. The company redesigned it-
self to become basically a full-time marketing organization, while production and
other activities were outsourced. An 18,000-square-foot plant in Austin was closed
and the workforce cut from 125 to about 10 core people who handle marketing and
sales promotions. The flexible structure allows Guiltless Gourmet to adapt quickly
to changing market conditions.44 Another excellent example of a company that
shifted to a more organic system to cope with change and uncertainty is Rowe Fur-
niture Company, described in the Leading by Design box.

Planning, Forecasting, and Responsiveness

The whole point of increasing internal integration and shifting to more organic
processes is to enhance the organization’s ability to quickly respond to sudden
changes in an uncertain environment. It might seem that in an environment where
everything is changing all the time, planning is useless. However, in uncertain envi-
ronments, planning and environmental forecasting actually become more important
as a way to keep the organization geared for a coordinated, speedy response. Japan-
ese electronic giants such as Toshiba and Fujitsu, for example, were caught off guard
by a combination of nimble new competitors, rapid technological change, deregula-
tion, the declining stability of Japan’s banking system, and the sudden end of the
1990s technology boom. Lulled into complacency by years of success, Japan’s in-
dustrial electronics companies were unprepared to respond to these dramatic
changes and lost billions.45

When the environment is stable, the organization can concentrate on current op-
erational problems and day-to-day efficiency. Long-range planning and forecasting
are not needed because environmental demands in the future will be the same as
they are today.

Chapter 4: The External Environment 153

Leading by Design

Rowe Furniture Company

Nestled in the foothills of the Ap- employee teams worked closely with engineers to design
palachian Mountains, the Rowe the new production system. Most supervisory positions were
Furniture Company has been eliminated, and people were cross-trained to perform the
cranking out sofas, loveseats, and different tasks required to build a piece of furniture. Team
easy chairs for nearly 60 years. For members signed a pledge of unity agreeing to pitch in and
most of that time, Rowe’s workers help colleagues, making team goals a priority. Each group
punched their time cards, turned off selected its own members from the various functional areas
their brains, and did exactly what the boss told them to do. and then created the processes, schedules, and routines for
Rowe’s factory used to be a traditional assembly line, with a particular product line. Although there was some resis-
people performing the same boring tasks over and over— tance among employees in the beginning, when the pieces
one person cutting, another sewing, another gluing, and so fell into place productivity and quality shot through the
forth. Rowe had been successful with this approach so far, roof. Rowe is closing in on its goal of the 10-day sofa. Just
but the marketplace was changing and top executives knew as important, employees are enjoying the new sense of in-
Rowe needed to change to keep pace. volvement and the challenge and responsibility that comes
Inexpensive imports had snagged about 16 percent of from continuously improving the process. “[The managers]
the upholstered furniture market by early 2005, and Rowe is make you feel you’re important to this company,” said
determined to keep that number from growing much larger. Rhonda Melton, a lead sewer and dispatcher. “They want
The only way to do that is to offer more styles and fabrics, your opinions.”
better quality, and a fast turnaround on custom-made
pieces. Furniture shoppers used to be content to buy what Open information is an important part of the new cul-
was on the showroom floor or else wait several months for ture at Rowe. Everything gets posted, and every team mem-
a custom-made product. Today’s customer wants cus- ber has instant access to current information about order
tomized pieces “now.” Bruce Birnback, president and chief flows, output, productivity, and quality. Data that were once
operating officer of Rowe, believes the custom-order market closely guarded by management are now the common prop-
is the Achilles’ heel of low-cost Chinese competitors. He’s erty of the shop floor. The sense of personal control and re-
aiming for an audacious goal of getting custom sofas to re- sponsibility has led to some dramatic changes in workers,
tailers in only 10 days. who often hold impromptu meetings to discuss problems,
To meet that difficult challenge, Birnback knew Rowe check each other’s progress, or talk about new ideas and
needed a hyper-efficient assembly process. Managers re- better ways of doing things. One group, for example, came
searched lean manufacturing and realized the operational together as a “down-pillow task force” to invent a better
and cultural factors that made Toyota so successful in auto- stuffing process.
mobile manufacturing could be applied in a furniture factory
as well. The assembly line was scrapped in favor of a cellu- The shift to an organic system at Rowe did not happen
lar design that has small teams of workers making a piece of overnight, but managers believe the results were worth the
furniture from start to finish. A sophisticated computer sys- effort, creating an environment in which workers are con-
tem was installed so that furniture retailers could send or- stantly learning, solving problems, and creating new and
ders to the factory electronically the minute they were better operational procedures.
placed. The system can immediately start the production
process by ordering fabric and assigning the order to a Sources: Chuck Salter, “When Couches Fly,” Fast Company (July 2004),
specific team. 80–81; Thomas Petzinger, Jr., The New Pioneers: The Men and Women
The key to success, though, was employee involvement Who Are Transforming the Workplace and Marketplace (New York:
and team commitment. Managers set the basic outline, but Simon & Schuster, 1999), 27–32; and Cheryl Lu-Lien Tan, “U.S. Response:
Speedier Delivery,” The Wall Street Journal (November 18, 2004), D1.

154 Part 3: Open System Design Elements

With increasing environmental uncertainty, planning and forecasting become
necessary.46 Planning can soften the adverse impact of external shifts. Organizations
that have unstable environments often establish a separate planning department. In
an unpredictable environment, planners scan environmental elements and analyze
potential moves and countermoves by other organizations. Planning can be exten-
sive and may forecast various scenarios for environmental contingencies. With sce-
nario building, managers mentally rehearse different scenarios based on anticipat-
ing various changes that could affect the organization. Scenarios are like stories that
offer alternative, vivid pictures of what the future will look like and how managers
will respond. Royal Dutch/Shell Oil has long used scenario building and has been a
leader in speedy response to massive changes that other organizations failed to per-
ceive until it was too late.47

Planning, however, cannot substitute for other actions, such as effective bound-
ary spanning and adequate internal integration and coordination. The organizations
that are most successful in uncertain environments are those that keep everyone in
close touch with the environment so they can spot threats and opportunities, en-
abling the organization to respond immediately.

Framework for Organizational
Responses to Uncertainty

The ways environmental uncertainty influences organizational characteristics are
summarized in Exhibit 4.7. The change and complexity dimensions are combined
and illustrate four levels of uncertainty. The low uncertainty environment is simple
and stable. Organizations in this environment have few departments and a mecha-
nistic structure. In a low-moderate uncertainty environment, more departments are
needed, along with more integrating roles to coordinate the departments. Some
planning may occur. Environments that are high-moderate uncertainty are unstable
but simple. Organization structure is organic and decentralized. Planning is empha-
sized and managers are quick to make internal changes as needed. The high uncer-
tainty environment is both complex and unstable and is the most difficult environ-
ment from a management perspective. Organizations are large and have many
departments, but they are also organic. A large number of management personnel
are assigned to coordination and integration, and the organization uses boundary
spanning, planning, and forecasting to enable a high-speed response to environ-
mental changes.

Resource Dependence

Thus far, this chapter has described several ways in which organizations adapt to
the lack of information and to the uncertainty caused by environmental change and
complexity. We turn now to the third characteristic of the organization-environment
relationship that affects organizations, which is the need for material and financial
resources. The environment is the source of scarce and valued resources essential to
organizational survival. Research in this area is called the resource-dependence per-
spective. Resource dependence means that organizations depend on the environ-
ment but strive to acquire control over resources to minimize their dependence.48
Organizations are vulnerable if vital resources are controlled by other organizations,
so they try to be as independent as possible. Organizations do not want to become
too vulnerable to other organizations because of negative effects on performance.

Chapter 4: The External Environment 155

Low Uncertainty Low-Moderate Uncertainty

1. Mechanistic structure: 1. Mechanistic structure:
formal, centralized formal, centralized

Stable 2. Few departments Uncertainty 2. Many departments, some
3. No integrating roles boundary spanning
ENVIRONMENTAL 4. Current operations orientation;
CHANGE 3. Few integrating roles
low-speed response 4. Some planning; moderate-speed

High-Moderate Uncertainty response

High Uncertainty

Unstable 1. Organic structure, teamwork: 1. Organic structure, teamwork:
participative, decentralized participative, decentralized

2. Few departments, much 2. Many departments differentiated,
boundary spanning extensive boundary spanning

3. Few integrating roles 3. Many integrating roles

4. Planning orientation; fast 4. Extensive planning, forecasting;
response high-speed response

Simple Complex

ENVIRONMENTAL COMPLEXITY

EXHIBIT 4.7
Contingency Framework for Environmental Uncertainty and Organizational Responses

Although companies like to minimize their dependence, when costs and risks are
high they also team up to share scarce resources and be more competitive on a
global basis. Formal relationships with other organizations present a dilemma to
managers. Organizations seek to reduce vulnerability with respect to resources by
developing links with other organizations, but they also like to maximize their own
autonomy and independence. Organizational linkages require coordination,49 and
they reduce the freedom of each organization to make decisions without concern for
the needs and goals of other organizations. Interorganizational relationships thus
represent a tradeoff between resources and autonomy. To maintain autonomy, or-
ganizations that already have abundant resources will tend not to establish new
linkages. Organizations that need resources will give up independence to acquire
those resources.

Dependence on shared resources gives power to other organizations. Once an
organization relies on others for valued resources, those other organizations can in-

156 Part 3: Open System Design Elements

Briefcase fluence managerial decision making. When a large company like IBM, Motorola, or
Ford Motor Co. forges a partnership with a supplier for parts, both sides benefit,
As an organization but each loses a small amount of autonomy. For example, some of these large com-
manager, keep these panies are now putting strong pressure on vendors to lower costs, and the vendors
guidelines in mind: have few alternatives but to go along.50 In much the same way, dependence on
Reach out and control ex- shared resources gives advertisers power over print and electronic media companies.
ternal sectors that For example, as newspapers face increasingly tough financial times, they are less
threaten needed resources. likely to run stories that are critical of advertisers. Though newspapers insist adver-
Influence the domain by tisers don’t get special treatment, some editors admit there is growing talk around
engaging in political activ- the country of the need for “advertiser-friendly” newspapers.51
ity, joining trade associa-
tions, and establishing fa- Controlling Environmental Resources
vorable linkages. Establish
linkages through owner- In response to the need for resources, organizations try to maintain a balance be-
ship, strategic alliances, tween linkages with other organizations and their own independence. Organizations
cooptation, interlocking di- maintain this balance through attempts to modify, manipulate, or control other or-
rectorates, and executive ganizations.52 To survive, the focal organization often tries to reach out and change
recruitment. Reduce the or control elements in the environment. Two strategies can be adopted to manage
amount of change or resources in the external environment: (1) establish favorable linkages with key ele-
threat from the external ments in the environment and (2) shape the environmental domain.53 Techniques to
environment so the orga- accomplish each of these strategies are summarized in Exhibit 4.8. As a general rule,
nization will not have to when organizations sense that valued resources are scarce, they will use the strate-
change internally. gies in Exhibit 4.8 rather than go it alone. Notice how dissimilar these strategies are
from the responses to environmental change and complexity described in Exhibit
4.7. The dissimilarity reflects the difference between responding to the need for re-
sources and responding to the need for information.

Establishing Interorganizational Linkages

Ownership. Companies use ownership to establish linkages when they buy a part
of or a controlling interest in another company. This gives the company access to
technology, products, or other resources it doesn’t currently have.

A greater degree of ownership and control is obtained through acquisition or
merger. An acquisition involves the purchase of one organization by another so that
the buyer assumes control. A merger is the unification of two or more organizations
into a single unit.54 In the banking industry, Wells Fargo merged with Norwest and
Chase merged with Banc One. Acquisition occurred when IBM bought software de-
veloper Lotus Development Corp. and when Wal-Mart purchased Britain’s ASDA
Group. These forms of ownership reduce uncertainty in an area important to the

EXHIBIT 4.8 Establishing Interorganizational Linkages Controlling the Environmental Domain
Organizing Strategies for
Controlling the External 1. Ownership 1. Change of domain
Environment 2. Contracts, joint ventures 2. Political activity, regulation
3. Cooptation, interlocking directorates 3. Trade associations
4. Executive recruitment 4. Illegitimate activities
5. Advertising, public relations

Chapter 4: The External Environment 157

acquiring company. In the past few years, there has been a huge wave of acquisition
and merger activity in the telecommunications industry, reflecting the tremendous
uncertainty these organizations face.

Cingular and AT&T Wireless. Sprint and Nextel. SBC Communications and AT&T. Ver- In Practice
izon and MCI. Western Wireless and Alltel. Between February 2004 and February
2005, it seemed that every month brought news of another acquisition or merger in Verizon and SBC
the telecommunications industry. After $100 billion in deals over the year, two giants Communications
are poised to rule the industry if they get regulatory approval of the recent mergers. Inc.
Verizon and SBC Communications Inc. were both created out of the breakup of AT&T
in the mid-1980s. They’ve spent the past couple of decades acquiring the size and re-
sources they need to remain competitive in the complex and rapidly changing telecommu-
nications industry.

The mergers have given the two “Papa Bells,” as they’re being called by one Federal Com-
munications Commission official, nationwide reach and a hand in every aspect of modern
communications—local, long distance, wireless, Internet, and now even television. With more and
more people giving up land lines in favor of wireless, and new competition such as Internet phone
service from cable operators, telephone companies have had a tough time. For example, MCI was
a long-distance powerhouse in the late 1980s, but long-distance is a losing battle these days.
However, the nationwide clout MCI had built, especially with corporate customers, was just what
Verizon needed to give it a springboard to compete in the changing arena. Verizon’s major com-
petitor, SBC, had similar reasons for buying AT&T Corp. The erosion of SBC’s core business (it lost
4 million land lines since 2002) means the company had to gain the size and resources to expand
into new areas. Both SBC and Verizon are moving fast to provide a bundle of services that include
phone, wireless, Internet, cable television, and on-demand TV.

The cable companies aren’t going to just lie down, and the fight is just beginning. However, the
recent mergers have put Verizon and SBC in a better position to ride out the waves of change and
uncertainty.55

Formal Strategic Alliances. When there is a high level of complementarity between
the business lines, geographical positions, or skills of two companies, the firms of-
ten go the route of a strategic alliance rather than ownership through merger or ac-
quisition.56 Such alliances are formed through contracts and joint ventures.

Contracts and joint ventures reduce uncertainty through a legal and binding re-
lationship with another firm. Contracts come in the form of license agreements that
involve the purchase of the right to use an asset (such as a new technology) for a spe-
cific time and supplier arrangements that contract for the sale of one firm’s output to
another. Contracts can provide long-term security by tying customers and suppliers
to specific amounts and prices. For example, the Italian fashion house Versace has
forged a deal to license its primary asset—its name—for a line of designer eyeglasses.
McDonald’s contracts for an entire crop of russet potatoes to be certain of its supply
of french fries. McDonald’s also gains influence over suppliers through these con-
tracts and has changed the way farmers grow potatoes and the profit margins they
earn, which is consistent with the resource dependence perspective.57 Large retailers
such as Wal-Mart, Target, and Home Depot are gaining so much clout that they can
almost dictate contracts, telling manufacturers what to make, how to make it, and
how much to charge for it. Many music companies edit songs and visual covers of
their CDs to cut out “offensive material” in order to get their products on the shelves
of Wal-Mart, which sells more than 50 million CDs annually.58

158 Part 3: Open System Design Elements

Joint ventures result in the creation of a new organization that is formally inde-
pendent of the parents, although the parents will have some control.59 In a joint ven-
ture, organizations share the risk and cost associated with large projects or innova-
tions. AOL created a joint venture with Venezuela’s Cisneros Group to smooth its
entry into the Latin American online market. IBM formed a joint venture with USA
Technologies Inc. to test Web-enabled washers and dryers at colleges and universi-
ties. Traditional coin-operated technology will be replaced with an IBM micropay-
ment system that allows students to pay by swiping an ID card or pushing a code
on a cell phone. They can log onto a Web site to see if a machine is available and
have an e-mail sent when a load is done.60

Cooptation, Interlocking Directorates. Cooptation occurs when leaders from
important sectors in the environment are made part of an organization. It takes
place, for example, when influential customers or suppliers are appointed to the
board of directors, such as when the senior executive of a bank sits on the board
of a manufacturing company. As a board member, the banker may become psy-
chologically coopted into the interests of the manufacturing firm. Community
leaders also can be appointed to a company’s board of directors or to other orga-
nizational committees or task forces. These influential people are thus introduced
to the needs of the company and are more likely to include the company’s interests
in their decision making.

An interlocking directorate is a formal linkage that occurs when a member of
the board of directors of one company sits on the board of directors of another com-
pany. The individual is a communications link between companies and can influence
policies and decisions. When one individual is the link between two companies, this
is typically referred to as a direct interlock. An indirect interlock occurs when a di-
rector of company A and a director of company B are both directors of company C.
They have access to one another but do not have direct influence over their respec-
tive companies.61 Recent research shows that, as a firm’s financial fortunes decline,
direct interlocks with financial institutions increase. Financial uncertainty facing an
industry also has been associated with greater indirect interlocks between compet-
ing companies.62

Executive Recruitment. Transferring or exchanging executives also offers a
method of establishing favorable linkages with external organizations. For example,
each year the aerospace industry hires retired generals and executives from the De-
partment of Defense. These generals have personal friends in the department, so the
aerospace companies obtain better information about technical specifications,
prices, and dates for new weapons systems. They can learn the needs of the defense
department and are able to present their case for defense contracts in a more effec-
tive way. Companies without personal contacts find it nearly impossible to get a de-
fense contract. Having channels of influence and communication between organiza-
tions serves to reduce financial uncertainty and dependence for an organization.

Advertising and Public Relations. A traditional way of establishing favorable re-
lationships is through advertising. Organizations spend large amounts of money to
influence the taste of consumers. Advertising is especially important in highly com-
petitive consumer industries and in industries that experience variable demand. Ad-
vertising is a major part of Chevrolet’s strategy to regain a leading position in the

Chapter 4: The External Environment 159

car and truck market. In connection with the introduction of several new models,
the company launched a new advertising campaign taglined “An American Revolu-
tion,” which uses edgy imagery and rock music to provoke a feeling of freedom and
“swagger” that Chevy brands were once known for.63

Public relations is similar to advertising, except that stories often are free and
aimed at public opinion. Public relations people cast an organization in a favorable
light in speeches, in press reports, and on television. Public relations attempts to
shape the company’s image in the minds of customers, suppliers, and government
officials. For example, in an effort to survive in this antismoking era, tobacco com-
panies have launched an aggressive public relations campaign touting smokers’
rights and freedom of choice.

Controlling the Environmental Domain

In addition to establishing favorable linkages to obtain resources, organizations of-
ten try to change the environment. There are four techniques for influencing or
changing a firm’s environmental domain.

Change of Domain. The ten sectors described earlier in this chapter are not fixed.
The organization decides which business it is in, the market to enter, and the sup-
pliers, banks, employees, and location to use, and this domain can be changed.64 An
organization can seek new environmental relationships and drop old ones. An or-
ganization may try to find a domain where there is little competition, no govern-
ment regulation, abundant suppliers, affluent customers, and barriers to keep com-
petitors out.

Acquisition and divestment are two techniques for altering the domain.
Canada’s Bombardier, maker of Ski-Doo snowmobiles, began a series of acquisi-
tions to alter its domain when the snowmobile industry declined. CEO Laurent
Beaudoin gradually moved the company into the aerospace industry by negotiating
deals to purchase Canadair, Boeing’s deHaviland unit, business-jet pioneer Learjet,
and Short Brothers of Northern Ireland.65 An example of divestment is when JC
Penney sold off its chain of Eckerd drug stores to focus on the department store.

Political Activity, Regulation. Political activity includes techniques to influence
government legislation and regulation. Political strategy can be used to erect regu-
latory barriers against new competitors or to squash unfavorable legislation. Cor-
porations also try to influence the appointment to agencies of people who are sym-
pathetic to their needs.

Microsoft has become one of the biggest and most sophisticated lobbying orga-
nizations in the country, spending $11.1 million on federal-level lobbyists in 2003
alone. One key issue Microsoft has lobbied against is any legislation that might cre-
ate an environment favorable to open-source software. Microsoft’s widespread lob-
bying efforts and strong political power make it difficult for the federal government
to pass any type of technology-related legislation that the company opposes. Large
pharmaceutical companies such as Schering-Plough and Wyeth frequently engage in
political activity to influence FDA decisions regarding generic drugs or other
changes that might weaken their organization’s power and control.66 Wal-Mart long
steered clear of politics but has recently been adding lobbyists to the payroll and be-
coming heavily involved in political activity.

160 Part 3: Open System Design Elements

In Practice In the late 1990s, Wal-Mart discovered a problem that could hamper its ambitious in-
ternational expansion plans—U.S. negotiators for China’s entry into the World Trade
Wal-Mart Organization had agreed to a thirty-store limit on foreign retailers doing business
there. Worse still, executives for the giant retailer realized they didn’t know the right
people in Washington to talk to about the situation.

Until 1998, Wal-Mart didn’t even have a lobbyist on the payroll and spent virtu-
ally nothing on political activity. The issue of China’s entry into the WTO was a wake-up
call, and Wal-Mart began transforming itself from a company that shunned politics to one
that works hard to bend public policy to suit its business needs. Hiring in-house lobbyists and work-
ing with lobbying organizations favorable to its goals has enabled Wal-Mart to gain significant wins
on global trade issues.
In addition to concerns over global trade, Wal-Mart has found other reasons it needs govern-
ment support. In recent years, the company has been fighting off legal challenges from labor unions,
employees’ lawyers, and federal investigators. For example, the United Food and Commercial
Workers International Union helped Wal-Mart employees file a series of complaints about the com-
pany’s overtime, health care, and other policies with the National Labor Relations Board, leading to
dozens of class-action lawsuits. Wal-Mart in turn poured millions of dollars into a campaign that
presses for limits on awards in class-action suits and began lobbying for legislation that bars unions
from soliciting outside of retail stores. Although that legislation failed, top executives are pleased
with their lobbyists’ progress. Yet they admit they still have a lot to learn about the best way to in-
fluence government legislation and regulation in Wal-Mart’s favor.67

In addition to hiring lobbyists and working with other organzations, many
CEOs believe they should do their own lobbying. CEOs have easier access than lob-
byists and can be especially effective when they do the politicking. Political activity
is so important that “informal lobbyist” is an unwritten part of almost any CEO’s
job description.68

Trade Associations. Much of the work to influence the external environment is
accomplished jointly with other organizations that have similar interests. For ex-
ample, most large pharmaceutical companies belong to Pharmaceutical Research
and Manufacturers of America. Manufacturing companies are part of the Na-
tional Association of Manufacturers, and retailers are part of the Retail Industry
Leaders Association. Microsoft and other software companies join the Initiative
for Software Choice (ISC). By pooling resources, these organizations can pay peo-
ple to carry out activities such as lobbying legislators, influencing new regulations,
developing public relations campaigns, and making campaign contributions. The
National Tooling and Machining Association (NTMA) devotes a quarter of a mil-
lion dollars each year to lobbying, mainly on issues that affect small business, such
as taxes, health insurance, or government mandates. NTMA also gives its mem-
bers statistics and information that help them become more competitive in the
global marketplace.69

Illegitimate Activities. Illegitimate activities represent the final technique compa-
nies sometimes use to control their environmental domain. Certain conditions, such
as low profits, pressure from senior managers, or scarce environmental resources,

Chapter 4: The External Environment 161

may lead managers to adopt behaviors not considered legitimate.70 Many well-
known companies have been found guilty of unlawful or unethical activities. Ex-
amples include payoffs to foreign governments, illegal political contributions, pro-
motional gifts, and wiretapping. At formerly high-flying companies such as Enron
and WorldCom, pressure for financial performance encouraged managers to dis-
guise financial problems through complex partnerships or questionable accounting
practices. In the defense industry, the intense competition for government contracts
for major weapons systems has led some companies to do almost anything to get an
edge, including schemes to peddle inside information and to pay off officials. Two
former Boeing officials were recently charged with stealing thousands of pages of
Lockheed Martin documents to win a rocket-launching contract. In another inci-
dent, while Boeing was negotiating a $17 billion deal to replace aerial tankers with
767s, e-mails between Boeing CFO Michael Sears and Air Force procurement offi-
cer Darleen Druyan came to light indicating that the Boeing executive had offered
Druyan a job.71

One study found that companies in industries with low demand, shortages,
and strikes were more likely to be convicted for illegal activities, implying that il-
legal acts are an attempt to cope with resource scarcity. Some nonprofit organiza-
tions have been found to use illegitimate or illegal actions to bolster their visibil-
ity and reputation as they compete with other organizations for scarce grants and
donations.72

Organization–Environment Integrative Framework

The relationships illustrated in Exhibit 4.9 summarize the two major themes
about organization–environment relationships discussed in this chapter. One
theme is that the amount of complexity and change in an organization’s domain
influences the need for information and hence the uncertainty felt within an orga-
nization. Greater information uncertainty is resolved through greater structural
flexibility and the assignment of additional departments and boundary roles.
When uncertainty is low, management structures can be more mechanistic, and the
number of departments and boundary roles can be fewer. The second theme per-
tains to the scarcity of material and financial resources. The more dependent an
organization is on other organizations for those resources, the more important it
is to either establish favorable linkages with those organizations or control entry
into the domain. If dependence on external resources is low, the organization can
maintain autonomy and does not need to establish linkages or control the exter-
nal domain.

Summary and Interpretation

The external environment has an overwhelming impact on management uncertainty
and organization functioning. Organizations are open social systems. Most are in-
volved with hundreds of external elements. The change and complexity in environ-
mental domains have major implications for organization design and action. Most
organizational decisions, activities, and outcomes can be traced to stimuli in the ex-
ternal environment.

Organizational environments differ in terms of uncertainty and resource depen-
dence. Organizational uncertainty is the result of the stable–unstable and

162 Part 3: Open System Design Elements

Environment Organization

High High Many departments and boundary
complexity uncertainty roles
Greater differentiation and more
High rate integrators for internal coordination
of change
Organic structure and systems with
low formalization, decentralization,
and low standardization to enable a
high-speed response

Environmental domain
(ten sectors)

Scarcity Resource Establishment of favorable
of valued dependence linkages: ownership, strategic
resources alliances, cooptations, interlocking
directorates, executive
recruitment, advertising, and
public relations

Control of the environmental domain:
change of domain, political activity,
regulation, trade associations, and
illegitimate activities

EXHIBIT 4.9
Relationship between Environmental Characteristics and Organizational Actions

simple–complex dimensions of the environment. Resource dependence is the result
of scarcity of the material and financial resources needed by the organization.

Organization design takes on a logical perspective when the environment is con-
sidered. Organizations try to survive and achieve efficiencies in a world character-
ized by uncertainty and scarcity. Specific departments and functions are created to
deal with uncertainties. The organization can be conceptualized as a technical core
and departments that buffer environmental uncertainty. Boundary-spanning roles
provide information about the environment.

The concepts in this chapter provide specific frameworks for understanding how
the environment influences the structure and functioning of an organization. Envi-
ronmental complexity and change, for example, have specific impact on internal
complexity and adaptability. Under great uncertainty, more resources are allocated
to departments that will plan, deal with specific environmental elements, and inte-

Chapter 4: The External Environment 163

grate diverse internal activities. Moreover, when risk is great or resources are scarce,
the organization can establish linkages through the acquisition of ownership and
through strategic alliances, interlocking directorates, executive recruitment, or ad-
vertising and public relations that will minimize risk and maintain a supply of scarce
resources. Other techniques for controlling the environment include a change of the
domain in which the organization operates, political activity, participation in trade
associations, and perhaps illegitimate activities.

Two important themes in this chapter are that organizations can learn and adapt
to the environment and that organizations can change and control the environment.
These strategies are especially true for large organizations that command many re-
sources. Such organizations can adapt when necessary but can also neutralize or
change problematic areas in the environment.

Key Concepts interlocking directorate
mechanistic
boundary-spanning roles organic
buffering roles organizational environment
business intelligence resource dependence
cooptation sectors
differentiation simple–complex dimension
direct interlock stable–unstable dimension
domain task environment
general environment uncertainty
indirect interlock
integration

Discussion Questions

1. Define organizational environment. Would the task environment of a new Internet-
based company be the same as that of a government welfare agency? Discuss.

2. What are some forces that influence environmental uncertainty? Which typically has
the greatest impact on uncertainty—environmental complexity or environmental
change? Why?

3. Why does environmental complexity lead to organizational complexity? Explain.
4. Discuss the importance of the international sector for today’s organizations, compared

to domestic sectors. What are some ways in which the international sector affects or-
ganizations in your city or community?
5. Describe differentiation and integration. In what type of environmental uncertainty
will differentiation and integration be greatest? Least?
6. Under what environmental conditions is organizational planning emphasized? Is plan-
ning an appropriate response to a turbulent environment?
7. What is an organic organization? A mechanistic organization? How does the environ-
ment influence organic and mechanistic structures?
8. Why do organizations become involved in interorganizational relationships? Do these
relationships affect an organization’s dependency? Performance?
9. Assume you have been asked to calculate the ratio of staff employees to production
employees in two organizations—one in a simple, stable environment and one in a
complex, shifting environment. How would you expect these ratios to differ? Why?
10. Is changing the organization’s domain a feasible strategy for coping with a threatening
environment? Explain.

164 Part 3: Open System Design Elements

Chapter 4 Workbook: Organizations You Rely On*

Below, list eight organizations you somehow rely on in other organization you could use in case the ones in col-
your daily life. Examples might be a restaurant, a clothing umn 1 were not available. In column 3, evaluate your level
or CD store, a university, your family, the post office, the of dependence on the organizations listed in column 1 as
telephone company, an airline, a pizzeria that delivers, Strong, Medium, or Weak. Finally, in column 4, rate the
your place of work, and so on. In the first column, list certainty of that organization being able to meet your
those eight organizations. Then, in column 2, choose an- needs as High (certainty), Medium, or Low.

Organization Backup Organization Level of dependence Level of certainty
1.

2.

3.

4.

5.

6.

7.

8.

*Adapted by Dorothy Marcic from “Organizational Dependencies,” in Ricky W. Griffin and Thomas C. Head, Practicing Management,
2nd ed. (Dallas: Houghton Mifflin), 2–3.

Chapter 4: The External Environment 165

Questions came high-dependence and low-certainty? How would
1. Do you have adequate backup organizations for those your behavior relate to the concept of resource depen-
dence?
of high dependence? How might you create even more 3. Have you ever used any behaviors similar to those in
backups? Exhibit 4.8 to manage your relationships with the or-
2. What would you do if an organization you rated high ganizations listed in column 1?
for dependence and high for certainty suddenly be-

Case for Analysis: The Paradoxical Twins: Acme and Omega Electronics*

Part I narrowly defined jobs, which would lead to efficient per-
In 1986, Technological Products of Erie, Pennsylvania, was formance and high company profits. People were generally
bought out by a Cleveland manufacturer. The Cleveland satisfied with their work at Acme; however, some of the
firm had no interest in the electronics division of Techno- managers voiced the desire to have a little more latitude in
logical Products and subsequently sold to different in- their jobs.
vestors two plants that manufactured computer chips and
printed circuit boards. Integrated circuits, or chips, were Inside Omega
the first step into microminiaturization in the electronics in- Omega’s president, Jim Rawls, did not believe in organiza-
dustry, and both plants had developed some expertise in tion charts. He felt his organization had departments simi-
the technology, along with their superior capabilities in lar to Acme’s, but he thought Omega’s plant was small
manufacturing printed circuit boards. One of the plants, lo- enough that things such as organization charts just put arti-
cated in nearby Waterford, was renamed Acme Electronics; ficial barriers between specialists who should be working to-
the other plant, within the city limits of Erie, was renamed gether. Written memos were not allowed since, as Rawls ex-
Omega Electronics, Inc. pressed it, “the plant is small enough that if people want to
communicate, they can just drop by and talk things over.”
Acme retained its original management and upgraded
its general manager to president. Omega hired a new pres- The head of the mechanical engineering department
ident who had been a director of a large electronic research said, “Jim spends too much of his time and mine making
laboratory and upgraded several of the existing personnel sure everyone understands what we’re doing and listening
within the plant. Acme and Omega often competed for the to suggestions.” Rawls was concerned with employee satis-
same contracts. As subcontractors, both firms benefited faction and wanted everyone to feel part of the organiza-
from the electronics boom and both looked forward to fu- tion. The top management team reflected Rawls’s attitudes.
ture growth and expansion. The world was going digital, They also believed that employees should be familiar with
and both companies began producing digital microproces- activities throughout the organization so that cooperation
sors along with the production of circuit boards. Acme had between departments would be increased. A newer member
annual sales of $100 million and employed 550 people. of the industrial engineering department said, “When I first
Omega had annual sales of $80 million and employed 480 got here, I wasn’t sure what I was supposed to do. One day
people. Acme regularly achieved greater net profits, much I worked with some mechanical engineers and the next day
to the chagrin of Omega’s management. I helped the shipping department design some packing car-
tons. The first months on the job were hectic, but at least I
Inside Acme got a real feel for what makes Omega tick.”
The president of Acme, John Tyler, was confident that, had
the demand not been so great, Acme’s competitor would Part II
not have survived. “In fact,” he said, “we have been able In the 1990s, mixed analog and digital devices began threat-
to beat Omega regularly for the most profitable contracts, ening the demand for the complex circuit boards manufac-
thereby increasing our profit.” Tyler credited his firm’s tured by Acme and Omega. This “system-on-a-chip” tech-
greater effectiveness to his managers’ abilities to run a nology combined analog functions, such as sound, graphics,
“tight ship.” He explained that he had retained the basic
structure developed by Technological Products because it *Adapted from John F. Veiga, “The Paradoxical Twins: Acme and
was most efficient for high-volume manufacturing. Acme Omega Electronics,” in John F. Veiga and John N. Yanouzas, The
had detailed organization charts and job descriptions. Tyler Dynamics of Organizational Theory (St. Paul: West, 1984),
believed everyone should have clear responsibilities and 132–138.

166 Part 3: Open System Design Elements

and power management, together with digital circuitry, roof.” To make matters worse, purchasing had not ob-
such as logic and memory, making it highly useful for new tained all the parts, so the industrial engineers decided to
products such as cellular phones and wireless computers. assemble the product without one part, which would be in-
Both Acme and Omega realized the threat to their futures serted at the last minute. On Thursday, July 23, the final
and began aggressively to seek new customers. units were being assembled, although the process was de-
layed several times. On Friday, July 24, the last units were
In July 1992, a major photocopier manufacturer was finished while Tyler paced around the plant. Late that af-
looking for a subcontractor to assemble the digital memory ternoon, Tyler received a phone call from the head designer
units of its new experimental copier. The projected contract of the photocopier manufacturer, who told Tyler that he
for the job was estimated to be $7 million to $9 million in had received a call on Wednesday from Jim Rawls of
annual sales. Omega. He explained that Rawls’s workers had found an
error in the design of the connector cable and taken cor-
Both Acme and Omega were geographically close to rective action on their prototypes. He told Tyler that he
this manufacturer, and both submitted highly competitive had checked out the design error and that Omega was
bids for the production of 100 prototypes. Acme’s bid right. Tyler, a bit overwhelmed by this information, told
was slightly lower than Omega’s; however, both firms were the designer that he had all the memory units ready for
asked to produce 100 units. The photocopier manufacturer shipment and that, as soon as they received the missing
told both firms that speed was critical because its president component on Monday or Tuesday, they would be able to
had boasted to other manufacturers that the firm would deliver the final units. The designer explained that the de-
have a finished copier available by Christmas. This boast, sign error would be rectified in a new blueprint he was
much to the designer’s dismay, required pressure on all sub- sending over by messenger and that he would hold Acme
contractors to begin prototype production before the final to the Tuesday delivery date.
design of the copier was complete. This meant Acme and
Omega would have at most 2 weeks to produce the proto- When the blueprint arrived, Tyler called in the produc-
types or would delay the final copier production. tion supervisor to assess the damage. The alterations in the
design would call for total disassembly and the unsoldering
Part III of several connections. Tyler told the supervisor to put ex-
tra people on the alterations first thing Monday morning
Inside Acme and to try to finish the job by Tuesday. Late Tuesday after-
As soon as John Tyler was given the blueprints (Monday, noon, the alterations were finished and the missing compo-
July 13, 1992), he sent a memo to the purchasing depart- nents were delivered. Wednesday morning, the production
ment asking to move forward on the purchase of all neces- supervisor discovered that the units would have to be torn
sary materials. At the same time, he sent the blueprints to apart again to install the missing component. When John
the drafting department and asked that it prepare manu- Tyler was told this, he again “hit the roof.” He called in-
facturing prints. The industrial engineering department dustrial engineering and asked if it could help out. The pro-
was told to begin methods design work for use by the pro- duction supervisor and the methods engineer couldn’t
duction department supervisors. Tyler also sent a memo to agree on how to install the component. John Tyler settled
all department heads and executives indicating the critical the argument by ordering that all units be taken apart
time constraints of this job and how he expected that all again and the missing component installed. He told ship-
employees would perform as efficiently as they had in the ping to prepare cartons for delivery on Friday afternoon.
past.
On Friday, July 31, fifty prototypes were shipped from
The departments had little contact with one another Acme without final inspection. John Tyler was concerned
for several days, and each seemed to work at its own speed. about his firm’s reputation, so he waived the final inspec-
Each department also encountered problems. Purchasing tion after he personally tested one unit and found it opera-
could not acquire all the parts on time. Industrial engi- tional. On Tuesday, August 4, Acme shipped the last fifty
neering had difficulty arranging an efficient assembly se- units.
quence. Mechanical engineering did not take the deadline
seriously and parceled its work to vendors so the engineers Inside Omega
could work on other jobs scheduled previously. Tyler made On Friday, July 10, Jim Rawls called a meeting that in-
it a point to stay in touch with the photocopier manufac- cluded department heads to tell them about the potential
turer to let it know things were progressing and to learn of contract they were to receive. He told them that as soon as
any new developments. He traditionally worked to keep he received the blueprints, work could begin. On Monday,
important clients happy. Tyler telephoned someone at the July 13, the prints arrived and again the department heads
photocopier company at least twice a week and got to met to discuss the project. At the end of the meeting, draft-
know the head designer quite well. ing had agreed to prepare manufacturing prints, while

On July 17, Tyler learned that mechanical engineering
was far behind in its development work, and he “hit the

Chapter 4: The External Environment 167

industrial engineering and production would begin meth- cal engineering spent Monday night redesigning the cable,
ods design. and on Tuesday morning, the drafting department finalized
the changes in the manufacturing prints. On Tuesday
Two problems arose within Omega that were similar morning, Rawls was a bit apprehensive about the design
to those at Acme. Certain ordered parts could not be de- changes and decided to get formal approval. Rawls re-
livered on time, and the assembly sequence was difficult to ceived word on Wednesday from the head designer at the
engineer. The departments proposed ideas to help one an- photocopier firm that they could proceed with the design
other, however, and department heads and key employees changes as discussed on the phone. On Friday, July 24, the
had daily meetings to discuss progress. The head of electri- final units were inspected by quality control and were then
cal engineering knew of a Japanese source for the compo- shipped.
nents that could not be purchased from normal suppliers.
Most problems were solved by Saturday, July 18. Part IV
Ten of Acme’s final memory units were defective, whereas
On Monday, July 20, a methods engineer and the pro- all of Omega’s units passed the photocopier firm’s tests.
duction supervisor formulated the assembly plans, and The photocopier firm was disappointed with Acme’s deliv-
production was set to begin on Tuesday morning. On ery delay and incurred further delays in repairing the de-
Monday afternoon, people from mechanical engineering, fective Acme units. However, rather than give the entire
electrical engineering, production, and industrial engineer- contract to one firm, the final contract was split between
ing got together to produce a prototype just to ensure that Acme and Omega with two directives added: (1) maintain
there would be no snags in production. While they were zero defects and (2) reduce final cost. In 1993, through ex-
building the unit, they discovered an error in the connector tensive cost-cutting efforts, Acme reduced its unit cost by
cable design. All the engineers agreed, after checking and 20 percent and was ultimately awarded the total contract.
rechecking the blueprints, that the cable was erroneously
designed. People from mechanical engineering and electri-

Notes

1. David Pringle, “Wrong Number; How Nokia Chased Top 11. Mark Landler, “Woes at Two Pillars of German Journal-
End of Market, Got Hit in Middle,” The Wall Street Jour- ism,” The New York Times (January 19, 2004), C8.
nal (June 1, 2004), A1; and Andy Reinhardt with Moon
Ihlwan, “Will Rewiring Nokia Spark Growth?” Business- 12. David Kirkpatrick and Daniel Roth, “Why There’s
Week (February 14, 2005), 46ff. No Escaping the Blog,” Fortune (January 10, 2005),
44–50.
2. Andrew Yeh, “China Set To Be Nokia’s Top Market,” Fi-
nancial Times (February 24, 2005), 24; and Reinhardt and 13. Robert Frank, “Silver Lining; How Terror Fears Brought
Ihlwan, “Will Rewiring Nokia Spark Growth?” Tiny Firm to Brink of Success,” The Wall Street Journal
(May 8, 2003), A1, A14.
3. Paul Keegan, “Is the Music Store Over?” Business 2.0
(March 2004), 115–118; Tom Hansson, Jürgen Ringbeck, 14. Andrew Kupfer, “How American Industry Stacks Up,” For-
and Markus Franke, “Fight for Survival: A New Business tune (March 9, 1992), 36–46.
Model for the Airline Industry,” Strategy ϩ Business, Issue
31 (Summer 2003), 78–85. 15. Devin Leonard, “Nightmare on Madison Avenue,” Fortune
(June 28, 2004), 93–108; and Brian Steinberg, “Agency
4. Matthew Boyle, “The Wegmans Way,” Fortune (January Cost-Accounting Is under Trial,” The Wall Street Journal
24, 2005), 62–68. (January 28, 2005), B2.

5. Dana Milbank, “Aluminum Producers, Aggressive and Ag- 16. Randall D. Harris, “Organizational Task Environments: An
ile, Outfight Steelmakers,” The Wall Street Journal (July 1, Evaluation of Convergent and Discriminant Validity,” Jour-
1992), A1. nal of Management Studies 41, no. 5 (July 2004), 857–882;
Allen C. Bluedorn, “Pilgrim’s Progress: Trends and Conver-
6 Sarah Ellison, “Eating Up; As Shoppers Grow Finicky, Big gence in Research on Organizational Size and Environ-
Food Has Big Problems,” The Wall Street Journal (May 21, ment,” Journal of Management 19 (1993), 163–191;
2004), A1. Howard E. Aldrich, Organizations and Environments (En-
glewood Cliffs, N.J.: Prentice-Hall, 1979); and Fred E.
7. Aaron Bernstein, “The Time Bomb in the Workforce: Illiter- Emery and Eric L. Trist, “The Casual Texture of Organiza-
acy,” BusinessWeek (February 25, 2002), 122. tional Environments,” Human Relations 18 (1965), 21–32.

8. Andrew Pollack, “Yet Another Sector Embraces Outsourcing 17. Gregory G. Dess and Donald W. Beard, “Dimensions of Or-
to Asia: Life Sciences,” International Herald Tribune (Febru- ganizational Task Environments,” Administrative Science
ary 25, 2005), 17. Quarterly 29 (1984), 52–73; Ray Jurkovich, “A Core Ty-
pology of Organizational Environments,” Administrative
9. Samuel Loewenberg, “Europe Gets Tougher on U.S. Compa- Science Quarterly 19 (1974), 380–394; Robert B. Duncan,
nies,” The New York Times (April 20, 2003), Section 3, 6. “Characteristics of Organizational Environment and

10. Brian Grow, “Hispanic Nation,” BusinessWeek (March 15,
2004), 58–70.

168 Part 3: Open System Design Elements

Perceived Environmental Uncertainty,” Administrative Sci- 35. “Snooping on a Shoestring,” Business 2.0 (May 2003),
ence Quarterly 17 (1972), 313–327. 64–66.
18. Christine S. Koberg and Gerardo R. Ungson, “The Effects
of Environmental Uncertainty and Dependence on Organi- 36. Mike France with Joann Muller, “A Site for Soreheads,”
zational Structure and Performance: A Comparative Study,” BusinessWeek (April 12, 1999), 86–90.
Journal of Management 13 (1987), 725–737; and Frances J.
Milliken, “Three Types of Perceived Uncertainty about the 37. Naomi Snyder, “Close on the Heels of the Followers,” The
Environment: State, Effect, and Response Uncertainty,” Tennessean (February 6, 2005), 1E, 4E; “Stepping into the
Academy of Management Review 12 (1987), 133–143. Teenage Mind” (an Interview with Genesco’s Jim Estepa),
19. Mike France with Joann Muller, “A Site for Soreheads,” Footwear News (July 28, 2003), 22; Katie Abel, “Smart
BusinessWeek (April 12, 1999), 86–90; Kirkpatrick and Journeys,” Footwear News (November 3, 2003), 14; and
Roth, “Why There’s No Escaping the Blog.” “The WWD List: Street Smarts; The Top 10 Streetwear
20. J. A. Litterer, The Analysis of Organizations, 2d ed. (New Chains,” WWD (November 18, 2004), 14.
York: Wiley, 1973), 335.
21. Constance L. Hays, “More Gloom on the Island of Lost 38. Jay W. Lorsch, “Introduction to the Structural Design of
Toy Makers,” The New York Times (February 23, 2005), Organizations,” in Gene W. Dalton, Paul R. Lawrence, and
http://www.nytimes.com. Jay W. Lorsch, eds., Organizational Structure and Design
22. Rosalie L. Tung, “Dimensions of Organizational Environ- (Homewood, Ill.: Irwin and Dorsey, 1970), 5.
ments: An Exploratory Study of Their Impact on Organiza-
tional Structure,” Academy of Management Journal 22 39. Paul R. Lawrence and Jay W. Lorsch, Organization and En-
(1979), 672–693. vironment (Homewood, Ill.: Irwin, 1969).
23. Joseph E. McCann and John Selsky, “Hyper-turbulence and
the Emergence of Type 5 Environments,” Academy of Man- 40. Lorsch, “Introduction to the Structural Design of Organiza-
agement Review 9 (1984), 460–470. tions,” 7.
24. Seth M. M. Stodder, “Fixing Homeland Security; New
Leadership and Consolidation Key,” The Washington 41. Jay W. Lorsch and Paul R. Lawrence, “Environmental Fac-
Times (February 28, 2005), A21. tors and Organizational Integration,” in J. W. Lorsch and
25. James D. Thompson, Organizations in Action (New York: Paul R. Lawrence, eds., Organizational Planning: Cases and
McGraw-Hill, 1967), 20–21. Concepts (Homewood, Ill.: Irwin and Dorsey, 1972), 45.
26. Sally Solo, “Whirlpool: How to Listen to Consumers,” For-
tune (January 11, 1993), 77–79. 42. Tom Burns and G. M. Stalker, The Management of Innova-
27. David B. Jemison, “The Importance of Boundary Spanning tion (London: Tavistock, 1961).
Roles in Strategic Decision-Making,” Journal of Management
Studies 21 (1984), 131–152; and Mohamed Ibrahim Ahmad 43. John A. Courtright, Gail T. Fairhurst, and L. Edna Rogers,
At-Twaijri and John R. Montanari, “The Impact of Context “Interaction Patterns in Organic and Mechanistic Systems,”
and Choice on the Boundary-Spanning Process: An Empirical Academy of Management Journal 32 (1989), 773–802.
Extension,” Human Relations 40 (1987), 783–798.
28. Michelle Cook, “The Intelligentsia,” Business 2.0 (July 44. Dennis K. Berman, “Crunch Time,” BusinessWeek Frontier
1999), 135–136. (April 24, 2000), F28–F38.
29. Robert C. Schwab, Gerardo R. Ungson, and Warren B.
Brown, “Redefining the Boundary-Spanning Environment 45. Robert A. Guth, “Eroding Empires: Electronics Giants of
Relationship,” Journal of Management 11 (1985), 75–86. Japan Undergo Wrenching Change,” The Wall Street Jour-
30. Tom Duffy, “Spying the Holy Grail,” Microsoft Executive nal (June 20, 2002), A1, A9.
Circle (Winter 2004), 38–39.
31. Julie Schlosser, “Looking for Intelligence in Ice Cream,” 46. Thomas C. Powell, “Organizational Alignment as Compet-
Fortune (March 17, 2003), 114–120. itive Advantage,” Strategic Management Journal 13 (1992),
32. Pia Nordlinger, “Know Your Enemy,” Working Woman 119–134; Mansour Javidan, “The Impact of Environmental
(May 2001), 16. Uncertainty on Long-Range Planning Practices of the U.S.
33. Ken Western, “Ethical Spying,” Business Ethics (Septem- Savings and Loan Industry,” Strategic Management Journal
ber/October 1995), 22–23; Stan Crock, Geoffrey Smith, 5 (1984), 381–392; Tung, “Dimensions of Organizational
Joseph Weber, Richard A. Melcher, and Linda Himelstein, Environments,” 672–693; and Thompson, Organizations
“They Snoop to Conquer,” BusinessWeek (October 28, in Action.
1996), 172–176; and Kenneth A. Sawka, “Demystifying
Business Intelligence,” Management Review (October 47. Ian Wylie, “There Is No Alternative To . . .,” Fast Company
1996), 47–51. (July 2002), 106–110.
34. Edwin M. Epstein, “How to Learn from the Environment
about the Environment—A Prerequisite for Organizational 48. David Ulrich and Jay B. Barney, “Perspectives in Organiza-
Well-Being,” Journal of General Management 29, no. 1 tions: Resource Dependence, Efficiency, and Population,”
(Autumn 2003), 68–80. Academy of Management Review 9 (1984), 471–481; and
Jeffrey Pfeffer and Gerald Salancik, The External Control of
Organizations: A Resource Dependent Perspective (New
York: Harper & Row, 1978).

49. Andrew H. Van de Ven and Gordon Walker, “The Dynam-
ics of Interorganizational Coordination,” Administrative
Science Quarterly (1984), 598–621; and Huseyin Leblebici
and Gerald R. Salancik, “Stability in Interorganizational
Exchanges: Rulemaking Processes of the Chicago Board of
Trade,” Administrative Science Quarterly 27 (1982),
227–242.

50. Kevin Kelly and Zachary Schiller with James B. Treece,
“Cut Costs or Else: Companies Lay Down the Law to Sup-
pliers,” BusinessWeek (March 22, 1993), 28–29.

Chapter 4: The External Environment 169

51. G. Pascal Zachary, “Many Journalists See a Growing Reluc- Ronald S. Burt, Toward a Structural Theory of Action
tance to Criticize Advertisers,” The Wall Street Journal (New York: Academic Press, 1982).
(February 6, 1992), A1, A9. 62. James R. Lang and Daniel E. Lockhart, “Increased Environ-
mental Uncertainty and Changes in Board Linkage Pat-
52. Judith A. Babcock, Organizational Responses to Resource terns,” Academy of Management Journal 33 (1990),
Scarcity and Munificence: Adaptation and Modification in 106–128; and Mark S. Mizruchi and Linda Brewster
Colleges within a University (Ph.D. diss., Pennsylvania State Stearns, “A Longitudinal Study of the Formation of Inter-
University, 1981). locking Directorates,” Administrative Science Quarterly 33
(1988), 194–210.
53. Peter Smith Ring and Andrew H. Van de Ven, “Develop- 63. Lee Hawkins Jr. “GM Seeks Chevrolet Revival,” The Wall
mental Processes of Corporative Interorganizational Rela- Street Journal (December 19, 2003), B4.
tionships,” Academy of Management Review 19 (1994), 64. Kotter, “Managing External Dependence.”
90–118; Jeffrey Pfeffer, “Beyond Management and the 65. William C. Symonds, with Farah Nayeri, Geri Smith, and
Worker: The Institutional Function of Management,” Acad- Ted Plafker, “Bombardier’s Blitz,” BusinessWeek (February
emy of Management Review 1 (April 1976), 36–46; and 6, 1995), 62–66; and Joseph Weber, with Wendy Zellner
John P. Kotter, “Managing External Dependence,” Academy and Geri Smith, “Loud Noises at Bombardier,” Business-
of Management Review 4 (1979), 87–92. Week (January 26, 1998), 94–95.
66. Ben Worthen, “Mr. Gates Goes to Washington,” CIO (Sep-
54. Bryan Borys and David B. Jemison, “Hybrid Arrangements tember 2004), 63–72; Gardiner Harris and Chris Adams,
as Strategic Alliances: Theoretical Issues in Organizational “Delayed Reaction: Drug Manufacturers Step Up Legal At-
Combinations,” Academy of Management Review 14 tacks That Slow Generics,” The Wall Street Journal (July
(1989), 234–249. 12, 2001), A1, A10; Leila Abboud, “Raging Hormones:
How Drug Giant Keeps a Monopoly on 60–Year-Old Pill,”
55. Almar Latour, “Closing Bell; After a Year of Frenzied The Wall Street Journal (September 9, 2004), A1.
Deals,Two Telecom Giants Emerge,” The Wall Street Jour- 67. Jeanne Cummings, “Joining the PAC; Wal-Mart Opens for
nal (February 15, 2005), A1, A11; Almar Latour, “New Kid Business in a Tough Market: Washington,” The Wall Street
on the Box; To Meet the Threat from Cable, SBC Rushes to Journal (March 24, 2004), A1.
Offer TV Service,” The Wall Street Journal (February 16, 68. David B. Yoffie, “How an Industry Builds Political Advan-
2005), A1, A10; and Murray Sabrin, “No Reason to Fear tage,” Harvard Business Review (May–June 1988), 82–89;
Telecom Mergers,” The Record (August 17, 2005), L-09. and Jeffrey H. Birnbaum, “Chief Executives Head to Wash-
ington to Ply the Lobbyist’s Trade,” The Wall Street Journal
56. Julie Cohen Mason, “Strategic Alliances: Partnering for Suc- (March 19, 1990), A1, A16.
cess,” Management Review (May 1993), 10–15. 69. David Whitford, “Built by Association,” Inc. (July 1994),
71–75.
57. Teri Agins and Alessandra Galloni, “After Gianni; Facing a 70. Anthony J. Daboub, Abdul M. A. Rasheed, Richard L.
Squeeze, Versace Struggles to Trim the Fat,” The Wall Street Priem, and David A. Gray, “Top Management Team Char-
Journal (September 30, 2003), A1, A10; John F. Love, Mc- acteristics and Corporate Illegal Activity,” Academy of
Donald’s: Behind the Arches (New York: Bantam Books, Management Review 20, no. 1 (1995), 138–170.
1986). 71. Stewart Toy, “The Defense Scandal,” BusinessWeek (July 4,
1988), 28–30; and Julie Creswell, “Boeing Plays Defense,”
58. Zachary Schiller and Wendy Zellner with Ron Stodghill II Fortune (April 19, 2004), 90–98.
and Mark Maremont, “Clout! More and More, Retail Gi- 72. Barry M. Staw and Eugene Szwajkowski, “The Scarcity-
ants Rule the Marketplace,” BusinessWeek (December 21, Munificence Component of Organizational Environments
1992), 66–73. and the Commission of Illegal Acts,” Administrative Science
Quarterly 20 (1975), 345–354; and Kimberly D. Elsbach
59. Borys and Jemison, “Hybrid Arrangements as Strategic Al- and Robert I. Sutton, “Acquiring Organizational Legitimacy
liances.” through Illegitimate Actions: A Marriage of Institutional
and Impression Management Theories,” Academy of Man-
60. Ian Katz and Elisabeth Malkin, “Battle for the Latin Ameri- agement Journal 35 (1992), 699–738.
can Net,” BusinessWeek (November 1, 1999), 194–200;
“IBM Joint Venture to Put Laundry on Web,” The Wall
Street Journal (August 30, 2002), B4.

61. Donald Palmer, “Broken Ties: Interlocking Directorates and
Intercorporate Coordination,” Administrative Science
Quarterly 28 (1983), 40–55; F. David Shoorman, Max H.
Bazerman, and Robert S. Atkin, “Interlocking Directorates:
A Strategy for Reducing Environmental Uncertainty,” Acad-
emy of Management Review 6 (1981), 243–251; and

5 Interorganizational Relationships

Organizational Ecosystems
Is Competition Dead? • The Changing Role of Management • Interorganizational
Framework

Resource Dependence
Resource Strategies • Power Strategies

Collaborative Networks
Why Collaboration? • From Adversaries to Partners

Population Ecology
Organizational Form and Niche • Process of Ecological Change • Strategies for Survival

Institutionalism
The Institutional View and Organization Design • Institutional Similarity

Summary and Interpretation

A Look Inside

International Truck and Engine Corporation

The factory floor of International Truck and Engine Corporation is a
beehive of activity. As the nation’s largest combined commercial
truck, school bus, and mid-range diesel engine producer, the place
has to keep humming. But some of the people scurrying around the
plant floor don’t even work for International; they’re on the payroll
of Rockwell Automation, one of the company’s key suppliers.

Over the past few years, International has negotiated long-term con-
tracts with suppliers to handle more and more of the company’s non-core activi-
ties. Equipment parts and service management is handled by Rockwell, which can
manage inventory, repair parts, upgrade components, and track warranties at a lower
cost than International could do in-house. Inventory costs for International have gone
way down because the supplier is the one responsible for keeping the most current spare parts
available and avoiding obsolete inventory. In addition, on-site parts experts enable the manu-
facturer to improve machine efficiency. Rockwell benefits from the collaborative arrangement
too. By having people on site, Rockwell gets closer to the customer and has greater opportu-
nity for upgrades or sales of other products. Just as important, on-site experience with how
parts are used enables the supplier to improve its products and innovate on parts before cus-
tomers even ask.

International’s interest in collaboration isn’t limited to parts management. The company
has a joint venture with Ford Motor Company to build mid-sized commercial trucks and sell
truck and diesel engine parts. A new strategic alliance with MAN Nutzfahrzeuge AG of
Munich, Germany, takes collaboration even further. International and MAN will collaborate
on the design, development, sourcing, and manufacturing of new components and systems
for commercial trucks and engines. Both companies expect to benefit from each other’s tech-
nologies and achieve greater economies of scale, enabling them to be more competitive on
a global basis.1

Organizations of all sizes in all industries are rethinking how they do business
in response to today’s chaotic environment. One of the most widespread
trends is to reduce boundaries and increase collaboration between compa-
nies, sometimes even between competitors. Today’s aerospace companies, for ex-
ample, depend on strategic partnerships with other organizations. Europe’s Airbus
Industrie and Boeing, the largest U.S. aerospace company, are both involved in mul-
tiple relationships with suppliers, competitors, and other organizations. Global
semiconductor makers have been collaborating while competing for years because
of the high costs and risks associated with creating and marketing a new generation
of semiconductors.

Global competition and rapid advances in technology, communications, and
transportation have created amazing new opportunities for organizations, 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. A large company like General Electric develops
a special relationship with a supplier that eliminates middlemen by sharing complete
information and reducing the costs of salespersons and distributors. Several small

172 Part 3: Open System Design Elements

companies may join together to produce and market noncompeting products. You
can see the results of interorganizational collaboration when movies such as War of
the Worlds, The Dukes of Hazzard, or Star Wars: Episode III—Revenge of the Sith
are launched. Before seeing the movie, you might read a cover story in People or En-
tertainment Weekly, see a preview clip or chat live with the stars at an online site
such as E online, find action toys being given away at a fast-food franchise, and no-
tice retail stores loaded with movie-related merchandise. For some blockbuster
movies, coordinated action among companies can yield millions in addition to box-
office and DVD profits. In the new economy, 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 increas-
ingly dense web of relationships among organizations. Companies have always
been dependent on other organizations for supplies, materials, and information.
The question is how these relationships are managed. At one time it was a matter
of a large, powerful company like General Electric or Johnson & Johnson tight-
ening the screws on small suppliers. Today a company can choose to develop pos-
itive, trusting relationships. Or a large company like General Motors might find it
difficult to adapt to the environment and hence create a new organizational form,
such as Saturn, to operate with a different structure and culture. The notion of
horizontal relationships described in Chapter 3 and the understanding of envi-
ronmental uncertainty in Chapter 4 are leading to the next stage of organizational
evolution, which is horizontal relationships across organizations. Organizations
can choose to build relationships in many ways, such as appointing preferred sup-
pliers, establishing agreements, business partnering, joint ventures, or even merg-
ers 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.2 Traditionally,
these transactions and relationships have been seen as a necessary evil to obtain
what an organization needs. The presumption has been that the world is composed
of distinct businesses that thrive on autonomy and compete for supremacy. A com-
pany 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 evolv-
ing 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. A company can create its own ecosystem.
Microsoft travels in four major industries: consumer electronics, information, com-

Chapter 5: Interorganizational Relationships 173

munications, and personal computers. Its ecosystem also includes hundreds of sup- Briefcase
pliers, including Hewlett-Packard and Intel, and millions of customers across many
markets. Cable companies like Comcast are offering new forms of phone service, As an organization
and telephone companies like SBC Communications are getting into the television manager, keep these
business. Apple Computer is arguably having greater success as an entertainment guidelines in mind:
company with its iPod and iTunes Music Store than it ever had as a computer man-
ufacturer. Apple’s success grows out of close partnerships with other organizations, Look for and develop rela-
including music companies, consumer electronics firms, cell phone makers, other tionships with other orga-
computer companies, and even car manufacturers.3 Apple and Microsoft, like other nizations. Don’t limit your
business ecosystems, develop relationships with hundreds of organizations cutting thinking to a single indus-
across traditional business boundaries. try or business type. Build
an ecosystem of which
Is Competition Dead? your organization is a
part.
No company can go it alone under a constant onslaught of international competi-
tors, 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. Indeed, research indicates that a large per-
centage of new alliances in recent years have been between competitors. These al-
liances influence organizations’ competitive behavior in varied ways.4

Traditional competition, which assumes a distinct company competing for sur-
vival and supremacy with other stand-alone 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 in-
dustry is immune from almost instant obsolescence.5 In today’s world, a new form
of competition is in fact intensifying.6

For one thing, companies now need to coevolve 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 coevolution, the whole system becomes stronger. In the
same way, companies coevolve through discussion with each other, shared visions,
alliances, and managing complex relationships. Amazon.com Inc. and its retail part-
ners illustrate this approach.

Amazon.com was one of the earliest players in the world of online retailing, opening In Practice
its virtual bookstore in 1995, before many people had ever heard of the Internet. Since
then, Amazon has continued to evolve, from an online bookseller to an online retailer Amazon.com Inc.
with its own vast warehouses of books, DVDs, kitchen appliances and electronics, and
now to a technology provider for other merchants. Today, Amazon sells everything
from baby furniture to golf clubs, but its partners own and store most of the inventory.
Amazon’s Web site serves as a kind of online shopping mall where retailers set up shop to
sell their wares to a vast global market. Amazon has partnerships with hundreds of small and
large retailers, including Target, Lands End, and Goldsmith International.

Amazon processes the orders and gets a cut of the sale, but retailers fill the orders from their
own warehouses. The arrangement gives Amazon a way to expand into new businesses without
making huge investments in inventory and developing the expertise to forecast hot products
in multiple categories. As for the retailers, they get access to Amazon’s global customer traffic,

174 Part 3: Open System Design Elements

$1 billion investment in technology, and Internet savvy, enabling them to focus on their bricks-and-
mortar businesses.

The partnership approach is not without its challenges. Toys “R” Us, one of Amazon’s earliest
partners, recently filed suit against the online firm, charging that Amazon violated its contract when
it began allowing other retailers to sell products that compete with Toys “R” Us. Some big compa-
nies, including Nike and Callaway Golf, are fighting the sale of their goods on Amazon, fearing it
might tarnish their premium brands. Amazon, however, insists that in the long run, the web of part-
nerships will benefit everyone. One manufacturer that eventually agreed is Sony. Sony executives
originally refused to authorize Amazon to sell Sony products, but realized they were fighting a los-
ing battle to try and maintain control and exclusivity in the new world of Internet retailing. Today,
Sony products are big sellers on the site.7

Amazon and its partners represent an ecosystem, in which each company de-
pends to some extent on the others and each has the opportunity to grow stronger.
For example, Amazon is finding that every new retail partner has its own demands
for how its products should be presented and sold. Amazon managers welcome the
feedback because it enables them to keep improving the site. The retail partners
grow stronger too, because Amazon keeps a close watch on factors such as how well
the retailers are managing delivery, communication, and customer service.

Exhibit 5.1 illustrates the complexity of an ecosystem by showing the myriad
overlapping relationships in which high-tech companies were involved in 1999.
Since then, many of these companies have merged, been acquired, or gone out of
business during the dot-com crash of 2000 and 2001. 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.8

In an organizational ecosystem, conflict and cooperation frequently exist at the
same time. Procter & Gamble (P&G) and Clorox are fierce rivals in cleaning prod-
ucts and water purification, but both companies profited when they collaborated on
a new plastic wrap. P&G invented a wrap that seals tightly only where it is pressed
and won’t stick elsewhere. Managers recognized the value of such a product, but
P&G didn’t have a plastic-wrap category. They thought a joint venture with Clorox
to market the new plastic wrap under the well-established Glad brand name would
be more profitable than investing the time and money to establish P&G in a new
product category. P&G shared the technology with archrival Clorox for a 10 per-
cent stake in the Glad business. Glad’s share of the wrap market shot up 23 percent
virtually overnight with the introduction of Glad Press ’n Seal. Since then, the two
companies have continued the collaboration with the introduction of Glad Force
Flex trash bags, which make use of a stretchable plastic invented in P&G labs.9 Mu-
tual dependencies and partnerships have become a fact of life in business ecosys-
tems. Is competition dead? Companies today may use their strength to win conflicts
and negotiations, but ultimately cooperation carries the day.

The Changing Role of Management

Within business ecosystems managers learn to move beyond traditional responsi-
bilities of corporate strategy and designing hierarchical structures and control sys-
tems. If a top manager looks down to enforce order and uniformity, the company
is missing opportunities for new and evolving external relationships.10 In this new
world, managers think about horizontal processes rather than vertical structures.

SYSTEMS MANUFACTURING AND CONSUMER COMPUTING The largest companies (those with more than 10,000 employees) are, not surprisingly, Chapter 5: Interorganizational Relationships
COMM. SERVICES AND EQUIP. (INCL. WIRELESS) the hubs of the digital universe: they tend to have the most strategic partnerships
SYSTEMS INTEGRATION AND WEB SERVICES (black lines) and investments (red lines).*

E-COMMERCE AND MEDIA

DATA NETWORKING KANA ISS GROUP PIVOTAL GEMPLUS SONY TIVO
BIOTECH COMMUNICATIONS SOFTWARE BLOOMBERG
TAIWAN
EBAY INFOSPACE.COM SEMICONDUCTOR
EPIPHANY MANUFACTURING
AMAZON.COM
YAHOO
SEMICONDUCTORS

SOFTWARE COMPAQ MICROSOFT INTERWOVEN
COMPUTER
NEW ERA OF ROYAL PHILIPS
COMPUTER NETWORKS ELECTRONICS CADENCE
ASSOCIATES VIGNETTE DESIGN
VITRIA SYSTEMS
QWEST TECHNOLOGY WIND RIVER
COMMUNICATIONS SYSTEMS PANGEA

EXODUS WEBMETHODS BREEZECOM
COMMUNICATIONS
TIME
WALT WARNER SOFTWARE
TECHNOLOGIES
DISNEY ARM
CISCO HOLDINGS

SYSTEMS LEVEL 3 SCIENCE
COMMUNICATIONS APPLICATIONS
PIXAR UNWIRED ATI TECHNOLOGIES INTERNATIONAL
ANIMATION PLANET DELL
STUDIOS COMPUTER SAS SUN
INSTITUTE MICROSYSTEMS
NOKIA
SIEBEL
SYSTEMS

COMCAST TRINTECH
GROUP

SYMBIAN AT&T BROADCOM AMERICA XEROX
ONLINE

ITXC JUNIPER BUY.COM BERTELSMANN ARIBA
NETWORKS DATACHANNEL TECHNOLOGIES
IRIDIUM WORLD PARADYNE
COMMUNICATIONS TREND MICRO
NUANCE
WHISTLE COMMUNICATIONS
COMMUNICATIONS
LAWSON USA/LYCOS
SOFTWARE INTERACTIVE ACCENTURE
NETWORKS
IBM
MCI INTEL
WORLDCOM LUCENT TEXAS
TECHNOLOGIES INSTRUMENTS
CHECKFREE
APPLIED RED HAT
MATERIALS SOFTWARE

QUOKKA INKTOMI BABYCENTER MICROTUNE NEXABIT
SPORTS NETWORKS
LEXRA
CHARLES
*Smaller companies that have no relationships with the hubs are not featured. SCHWAB

EXHIBIT 5.1 175
An Organizational Ecosystem (based on 1999 data)

176 Part 3: Open System Design Elements

EXHIBIT 5.2 ORGANIZATION TYPE
A Framework of
Interorganizational Dissimilar Similar
Relationships*

ORGANIZATION RELATIONSHIP Competitive Resource Population
Dependence Ecology

Cooperative Collaborative Institutionalism
Network

*Thanks to Anand Narasimhan for suggesting this framework.

Important initiatives are not just top down; they cut across the boundaries sepa-
rating organizational units. Moreover, horizontal relationships, as described in
Chapter 3, now include linkages with suppliers and customers, who become part
of the team. Business leaders can learn to lead economic coevolution. 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 un-
derstand this big picture and how to contribute.

This is a broader leadership role than ever before. For example, Donovan Neale-
May, president of Neale-May & Partners, formed an international alliance of forty
independent high-tech public relations agencies, called GlobalFluency, to share in-
formation and market their services to acquire business that small, owner-run agen-
cies have trouble winning on their own. “We have companies—our own neighbors
here in Colorado—that won’t hire us because we don’t have offices in sixty-five
countries,” says John Metzger, CEO of a Boulder firm. Now, with the power of
GlobalFluency behind them, small firms such as Metzger’s are winning accounts
that once went only to large competitors. Alliance members still maintain their in-
dependence for small jobs but can join together to pitch for regional projects or in-
ternational campaigns.11

Interorganizational Framework

Understanding this larger organizational ecosystem is one of the most exciting areas
of organization theory. The models and perspectives for understanding interorgani-
zational relationships ultimately help managers change their role from top-down
management to horizontal management across organizations. A framework for
analyzing the different views of interorganizational relationships is in Exhibit 5.2.
Relationships among organizations can be characterized by whether the organiza-
tions are dissimilar or similar and whether relationships are competitive or cooper-
ative. By understanding these perspectives, managers can assess their environment
and adopt strategies to suit their needs. The first perspective is called resource-

Chapter 5: Interorganizational Relationships 177

dependence theory, which was briefly described in Chapter 4. It describes rational
ways organizations deal with each other to reduce dependence on the environment.
The second perspective is about collaborative networks, wherein organizations al-
low themselves to become dependent on other organizations to increase value and
productivity for both. The third perspective is population ecology, which examines
how new organizations fill niches left open by established organizations, and how a
rich variety of new organizational forms benefits society. The final approach is
called institutionalism and explains why and how organizations legitimate them-
selves 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 Briefcase

Resource dependence represents the traditional view of relationships among orga- As an organization
nizations. As described in Chapter 4, resource-dependence theory argues that orga- manager, keep these
nizations try to minimize their dependence on other organizations for the supply of guidelines in mind:
important resources and try to influence the environment to make resources avail-
able.12 Organizations succeed by striving for independence and autonomy. When Reach out and control ex-
threatened by greater dependence, organizations will assert control over external re- ternal sectors that
sources to minimize that dependence. Resource-dependence theory argues that or- threaten needed re-
ganizations do not want to become vulnerable to other organizations because of sources. Adopt strategies
negative effects on performance. to control resources, espe-
cially when your organiza-
The amount of dependence on a resource is based on two factors. First is the im- tion is dependent and has
portance of the resource to the firm, and second is how much discretion or monop- little power. Assert your
oly power those who control a resource have over its allocation and use.13 For ex- company’s influence when
ample, a Wisconsin manufacturer made scientific instruments with internal you have power and con-
electronics. It acquired parts from a supplier that provided adequate quality at the trol over resources.
lowest price. The supplier was not involved in the manufacturer’s product design
but was able to provide industry-standard capacitors at 50 cents each. As industry
standards changed, other suppliers of the capacitor switched to other products, and
in 1 year the cost of the capacitors increased to $2 each. The Wisconsin firm had no
choice but to pay the higher price. Within 18 months, the price of the capacitors in-
creased to $10 each, and then the supplier discontinued production altogether.
Without capacitors, production came to a halt for 6 months. The scientific instru-
ments manufacturer allowed itself to become dependent on a single supplier and
made no plans for redesign to use substitute capacitors or to develop new suppliers.
A single supplier had sufficient power to increase prices beyond reason and to al-
most put the Wisconsin firm out of business.14

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

Resource Strategies

When organizations feel resource or supply constraints, the 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

178 Part 3: Open System Design Elements

resources, or building relationships in other ways. Another technique is to use in-
terlocking directorships, which means boards of directors include members of the
boards of supplier companies. Organizations may also join trade associations to co-
ordinate their needs, sign trade agreements, or merge with another firm to guaran-
tee resources and material supplies. Some organizations may take political action,
such as lobbying for new regulations or deregulation, favorable taxation, tariffs, or
subsidies, or push for new standards that make resource acquisition easier. Organi-
zations operating under the resource-dependence philosophy will do whatever is
needed to avoid excessive dependence on the environment to maintain control of re-
sources and hence reduce uncertainty.

Power Strategies

In resource-dependence theory, large, independent companies have power over
small suppliers.15 For example, power in consumer products has shifted from ven-
dors such as Rubbermaid and Procter & Gamble to the big discount retail chains,
which can demand—and receive—special pricing deals. Wal-Mart has grown so
large and powerful that it can dictate the terms with virtually any supplier. Consider
Levi Strauss, which for much of its 150-year history was a powerful supplier with a
jeans brand that millions of people wanted and retailers were eager to stock. “When
I first started in this business, retailers were a waystation to the consumer,” says
Levi’s CEO Philip Marineau. “Manufacturers had a tendency to tell retailers how to
do business.” But the balance of power has shifted dramatically. In order to sell to
Wal-Mart, Levi Strauss had to overhaul its entire operation, from design and pro-
duction to pricing and distribution. For example, Levi jeans used to go from facto-
ries to a company-owned distribution center where they were labeled, packed, and
sent on to retailers. Now, to meet Wal-Mart’s need to get products fast, jeans are
shipped already tagged from contract factories direct to Wal-Mart distribution cen-
ters, where Wal-Mart trucks pick them up and deliver them to individual stores.16
When one company has power over another, it can ask suppliers to absorb more
costs, ship more efficiently, and provide more services than ever before, often with-
out a price increase. Often the suppliers have no choice but to go along, and those
who fail to do so may go out of business.

Power is also shifting in other industries. For decades, technology vendors have
been putting out incompatible products and expecting their corporate customers to
assume the burden and expense of making everything work together. Those days
may be coming to an end. When the economy began declining, big corporations cut
back their spending on technology, which led to stiffer competition among vendors
and gave their corporate customers greater power to make demands. Microsoft and
Sun Microsystems, which have been waging war for 15 years, recently buried the
hatchet and negotiated a collaboration agreement that will smooth the way for pro-
viding compatible software products.17

Collaborative Networks

Traditionally, the relationship between organizations and their suppliers has been an
adversarial one. Indeed, North American companies typically have worked alone,
competing with each other and believing in the tradition of individualism and self-
reliance. Today, however, thanks to an uncertain global environment, a realignment
in corporate relationships is taking place. The collaborative-network perspective is

Chapter 5: Interorganizational Relationships 179

an emerging alternative to resource-dependence theory. Companies join together to
become more competitive and to share scarce resources. Technology companies join
together to produce next-generation products. 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 com-
panies, and accounting firms may join in an alliance to meet customer demands for
expanded services.18 As companies move into their own uncharted territory, they are
also racing into alliances.

Why Collaboration?

Why all this interest in interorganizational collaboration? Major reasons are shar-
ing risks when entering new markets, mounting expensive new programs and re-
ducing costs, and enhancing organizational profile in selected industries or tech-
nologies. Cooperation is a prerequisite for greater innovation, problem solving, and
performance.19 In addition, partnerships are a major avenue for entering global mar-
kets, with both large and small firms developing partnerships overseas and in North
America.

North Americans have learned from their international experience just how ef-
fective 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, be-
lieving 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 sin-
gle family went into separate businesses and want to outdo one another, but they
still love one another and will help each other when needed.

Interorganizational linkages provide a kind of safety net that encourages long-
term investment and risk taking. Companies can achieve higher levels of innovation
and performance as they learn to shift from an adversarial to a partnership mind-
set.20 In many cases companies are learning to work closely together. Consider the
following examples:
• Chrysler’s new Crossfire sports car was designed in collaboration with partners

Mercedes and Mitsubishi and assembled almost entirely by outside suppliers us-
ing their own factories and employees. The automaker is building a new plant
in Canada where suppliers’ employees will outnumber Chrysler workers. Sup-
pliers will do everything from bending steel to painting finished bodies, with
Chrysler employees handling only the final assembly.21
• The pharmaceuticals giant Pfizer collaborates with more than 400 companies on
research and development projects and co-marketing campaigns. For example,
Pfizer has earned billions from co-promotion of Warner-Lambert’s Lipitor, a
drug for treating elevated cholesterol.22
• The Chicago Mercantile Exchange and the Chicago Board of Trade are
crosstown rivals, but they collaborated to build a joint Web-enabled clearing
system that enables financial institutions conducting trades to put up money
only once to guarantee trades on both exchanges.23
• Small companies are banding together to compete against much larger firms.
Forty local microbreweries formed the Oregon Brewers Guild to gain the re-
sources needed to compete against craft brews from Miller and Anheuser-
Busch.24