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Lesson#42
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Organization and Environment Relationships
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Organization and Environment Relationships
Organizations are open systems and must relate to their
environments. They must acquire the resources
and information needed to function; they must deliver products
or services that are valued by customers.
An organization's strategy—how it acquires resources and
delivers outputs—is shaped by particular aspects,
and features of the environment.
Thus, organizations can devise a number of responses for
managing environmental interfaces, from
internal administrative responses, such as creating special
units to scan the environment, to external
collective responses, such as forming strategic alliances with
other organizations.
Organization and Environment Framework
This section provides a framework for understanding how
environments affect organizations and, in turn,
how organizations can affect environments. The framework is
based on the concept that organizations and
their subunits are open systems existing in environmental
contexts. Environments can be described in two
ways. First, there are different types of environments that
consist of specific components or forces. To
survive and grow, organizations must understand these different
environments, select appropriate parts to
respond to, and develop effective relationships with them. A
manufacturing firm, for example, must
understand raw materials markets, labor markets, customer
segments, and production technology
alternatives. It then must select from a range of raw material
suppliers, applicants for employment,
customer demographics, and production technologies to achieve
desired outcomes effectively.
Organizations are thus dependent on their environments. They
need to manage external constraints and
contingencies and take advantage of external opportunities. They
also need to influence the environment in
favorable directions through such methods as political lobbying,
advertising, and public relations.
Second, several useful dimensions capture the nature of
organizational environments. Some environments
are rapidly changing and complex, and so require different
organizational responses than do environments
that are stable and simple. For example, chewing gum
manufacturers face a stable market and use well-understood
production technologies. Their strategy and organization design
issues are radically different from
those of software developers who face product life cycles
measured in months instead of years, where labor
skills are rare and hard to find, and where demand can change
drastically overnight.
In this section, first we describe different types of
environments that can affect organizations. Then we
identify environmental dimensions that influence organizational
responses to external forces. Finally, we
review the different ways that organizations can respond to
their environments. This material provides an
introductory context for describing interventions that concern
organization and environment relationships:
integrated strategic change, trans-organizational development,
and mergers and acquisitions.
Environmental Types
Organizational environments are everything beyond the boundaries
of organizations that can directly or
indirectly affect performance and outcomes. That includes
external agents that directly affect the
organization, such as suppliers, customers, regulators, and
competitors, as well as indirect influences in the
wider cultural, political, and economic context. These two
classes of environments are called the task
environment and the general environment, respectively. We will
also describe the enacted environment,
which reflects members' perceptions of the general and task
environments.
The general environment consists of all external forces that can
influence an organization. It can be
categorized into technological, legal and regulatory, political,
economic, social, and ecological components.
Each of these forces can affect the organization in both direct
and indirect ways. For example, economic
recessions can directly impact demand for a company's product.
The general environment also can affect
organizations indirectly by virtue of the linkages between
external agents. For example, an organization may
have trouble obtaining raw materials from a supplier because the
supplier is embroiled in a labor dispute
with a national union, a lawsuit with a government regulator, or
a boycott by a consumer group. Thus,
components of the general environment can affect the
organization without having any direct connection
to it.
The task environment consists of the specific individuals and
organizations that interact directly with the
organization and can affect goal achievement: customers,
suppliers, competitors, producers of substitute
products or services, labor unions, financial institutions, and
so on. These direct relationships are the
medium through which organizations and environments mutually
influence one another. Customers, for
example, can demand changes in the organization's products, and
the organization can try to influence
customers' tastes and desires through advertising.
The enacted environment consists of the organization's
perception and representation of its general and
task environments. Environments must be perceived before they
can influence decisions about how to
respond to them. Organization members must actively observe,
register, and make sense of the environment
before it can affect their decisions about what actions to take.
Thus, only the enacted environment
can affect which organizational responses are chosen. The
general and task environments, however, can
influence whether those responses are successful or ineffective.
For example, members may perceive customers
as relatively satisfied with their products and may decide to
make only token efforts at developing
new products. If those perceptions are wrong and customers are
dissatisfied with the products, the meager
product development efforts can have disastrous organizational
consequences. As a result, an organization's
enacted environment should accurately reflect its general and
task environments if members' decisions and
actions are to be effective.
Environmental Dimensions
Environments can also be characterized along dimensions that
describe the organization's context and
influence its responses. One perspective views environments as
information flows and suggests that
organizations need to process information to discover how to
relate to their environments. The key
dimension of the environment affecting information processing is
information uncertainty, or the degree to
which environmental information is ambiguous. Organizations seek
to remove uncertainty from the
environment so that they know best how to transact with it. For
example, organizations may try to discern
customer needs through focus groups and surveys and attempt to
understand competitor strategies through
press releases, sales force behaviors, and knowledge of key
personnel. The greater the uncertainty, the more
information processing is required to learn about the
environment. This is particularly evident when
environments are complex and rapidly changing. These kinds of
environments pose difficult information
processing problems for organizations. For example, global
competition, technological change, and
financial markets have created highly uncertain and complex
environments for many multinational firms
and have severely strained their information processing
capacity.
Another perspective views environments as consisting of
resources for which organizations compete. The
key environmental dimension is resource dependence, or the
degree to which an organization relies on
other organizations for resources.
Organizations seek to manage
critical sources of resource dependence
while remaining as autonomous as possible. For example, firms
may contract with several suppliers of the
same raw material so that they are not overly dependent on one
vendor. Resource dependence is extremely
high for an organization when other organizations control
critical resources that cannot be obtained easily
elsewhere. Resource criticality and availability determine the
extent to which an organization is dependent
on the environment and must respond to its demands. An example
is the tight labor market for
information systems experts experienced by many firms in the
late 1990s.
These two environmental dimensions—information uncertainty and
resource dependence—can be
combined to show the degree to which organizations are
constrained by their environments and
consequently must be responsive to their demands. As shown in
Figure 58, organizations have the most
freedom from external forces when information uncertainty and
resource dependence are both low. In
such situations, organizations do not need to respond to their
environments and can behave relatively
independently of them. U.S. automotive manufacturers faced these
conditions in the 1950s and operated
with relatively little external constraint or threat.
Organizations are more constrained and must be more
responsive to external demands as information uncertainty and
resource dependence increase. They must
perceive the environment accurately and respond to it
appropriately. Organizations such as financial
institutions, high-technology firms, and health-care facilities
are facing unprecedented amounts of
environmental uncertainty and resource dependence. Their
existence depends on recognizing external
challenges and responding quickly and appropriately to them.
Organizational Responses
Organizations must have the capacity to monitor and make sense
of their environments if they are to
respond appropriately. They must identify and attend to those
environmental factors and features that are
highly related to goal achievement and performance. Moreover,
they must have the internal
capacity to develop effective responses. Organizations employ a
number of methods to influence and
respond to their environments, to buffer their technology from
external disruptions, and to link themselves
to sources of information and resources. These responses are
generally designed by senior executives
responsible for setting corporate strategy and managing external
relationships. Three classes of responses
are described below: administrative, competitive, and
collective.
Administrative Responses
The most common organizational responses to the environment are
administrative, including the formation
or clarification of the organization's mission; the development
of objectives, policies, and
budgets; or the creation of scanning units. These responses can
be either proactive or reactive and are
aimed at defining the organization's purpose and key tasks in
relationship to particular environments. As
discussed earlier, an organization's mission describes its
long-term purpose, including the products or
services to be offered and the markets to be served. An
effective mission clearly differentiates the
organization from others in its competitive environment. For
example, 3M's core purpose is to solve
unsolved problems innovatively. 3M is distinguished from its
competitors by its attention to unsolved
problems and its core competence of innovation. Similarly, an
organization's objectives, policies, and
budgets signal which parts of the environment are important.
They allocate and direct resources to
particular environmental relationships. Intel's new product
development objectives and allocation of more
than 20 percent of revenues to research and development signal
the importance of its linkage to the technological
environment. Finally, organizations may create scanning units,
such as market research and
regulatory relations departments, to respond administratively to
the environment. These units scan
particular parts or aspects of the environment, interpret
relevant information, and communicate it to
decision makers who develop appropriate responses. Scanning
units generally include specialists with
expertise in a particular segment of the environment. For
example, market researchers provide information
to marketing executives about customer tastes and preferences.
Such information guides choices about
product development, pricing, and advertising.
Figure 58
Environmental Dimension and organizational Transaction
RESOURCE DEPENDENCE
Low High
Low
High
Minimal environmental
Constraint and need to
Be responsiveness to
Environment
I
NF
OR
MATI
ON
UNCE
RT
AI
NI
T
Y
Moderate Constraint
and responsiveness to
Environment
Moderate
Constraint and
responsiveness to
Environment
Maximal
environmental
Constraint and
need to Be
responsiveness to
Environment
Competitive Responses
Competitive responses to the environment typically are
associated with for-profit firms but can also apply
to nonprofit and governmental organizations. Such actions seek
to enhance the organization's performance
by establishing a competitive advantage over its rivals. To
sustain competitive advantage, organizations
must achieve an external position vis-à-vis their competitors or
perform internally in ways that are unique,
valuable, and difficult to imitate.
Uniqueness
. An
organization first must identify the bundle of resources and processes that make
it
distinct from other firms. These can include financial
resources, such as access to low-cost capital;
reputational resources, such as brand image or a history of
product quality; technological resources, such as
patents or a strong research and development department; and
human resources, such as excellent labormanagement
relationships or scarce and valuable skill sets. Based on this
list, the organization then
determines how the resources apply to key organizational
processes—regular patterns of organizational
activity that involve a sequence of tasks performed by
individuals. For example, a software development
process combines computer resources, software programs, typing
skills, knowledge of computer languages,
and customer requirements. Other organizational processes
include new product development, strategic
planning, appraising member performance, making sales calls,
fulfilling customer orders, and the like.
Processes and capabilities that are unique to the organization
are called distinctive competencies and
represent the cornerstone of competitive advantage.
Value
. Organizations
achieve competitive advantage when their resources and processes deliver outputs
that either warrant a higher-than-average price or are
exceptionally low in cost. Both advantages are
valuable according to a performance/ price criterion. Products
and services with highly desirable features
or capabilities, although expensive, are valuable because of
their ability to satisfy customer demands for
high quality or some other performance dimension. Mercedes
automobiles are valuable because the
perceived benefits of ownership, including engineering
performance, reliability, and prestige, exceed the
price paid. On the other hand, outputs that cost little to
produce are valuable because of their ability to
satisfy customer demands at a low price. Chevrolet automobiles
are valuable because they provide basic
transportation at a low price. Mercedes and Chevrolet are both
profitable, but achieve that outcome
through different value propositions.
Imitability
. Finally,
sustainable competitive advantage is achieved when unique and valuable resources
and
processes are difficult to mimic or duplicate by other
organizations. For example, organizations can protect
their competitive advantage by making it difficult for other
firms to identify their distinctive competence.
Disclosing unimportant information at trade shows or forgoing
superior profits can make it difficult for
competitors to identify an organization's strengths.
Organizations can aggressively pursue a range of
opportunities, thus raising the cost for competitors who try to
replicate their success. Organizations can
seek to retain key human resources through attractive
compensation and reward practices, thereby making
it more difficult and costly for competitors to attract such
talent.
Collective Responses
Organizations can cope with problems of environmental dependence
and uncertainty through increased
coordination with other organizations. Collective responses help
control interdependencies among
organizations and include such methods as bargaining;
contracting; coopting; and creating joint ventures,
federations, strategic alliances, and consortia. Contemporary
organizations increasingly are turning to joint
ventures and partnerships with other organizations to manage
environmental uncertainty and perform tasks
that are too costly and complicated for single organizations to
perform. These multiorganization
arrangements are being used as a means of sharing resources for
large-scale research and development, for
spreading the risks of innovation, for applying diverse
expertise to complex problems and tasks, and for
overcoming barriers to entry into foreign markets. For example,
pharmaceutical firms are forming strategic
alliances to distribute noncompeting medications and avoid the
high costs of establishing sales
organizations; firms from different countries are forming joint
ventures to overcome restrictive trade
barriers; and high-technology firms are forming research
consortia to undertake significant and costly
research and development for their industries.
Major barriers to collective responses in the United States are
organizations' drive to act autonomously and
government policies discouraging coordination among
organizations, especially in the same industry. On
the other hand, Japanese industrial and economic policies
promote cooperation among organizations, thus
giving them a competitive advantage in responding to complex and
dynamic global environments. For
example, the Japanese government traditionally has provided
financial assistance and support to
cooperative research efforts among Japanese consumer product
manufacturers. The resulting technological
developments enabled such firms as Matsushita, Canon, and Sony
to reduce American competitors' market
shares dramatically.
The three interventions discussed here derive from this
organization and environment framework. They
help organizations assess their environments and make
appropriate responses to them. The first
intervention, integrated strategic change, focuses on how to
coordinate administrative and competitive
responses for a single organization or strategic business unit.
The next two interventions, transorganization
development and mergers and acquisitions, broaden the scope from
single to multiple organizations. These
interventions endeavor to coordinate administrative,
competitive, and collective responses.
Integrated Strategic Change
Integrated Strategic Change (ISC) is a recent intervention that
brings an OD perspective to traditional
strategic planning. It was developed in response to managers'
complaints that good business strategies often
are not implemented. The research suggested that too little
attention was being given to the change process
and human resources issues necessary to execute the strategy.
For example, the predominant paradigm in
strategic planning and implementation artificially separates
strategic thinking from operational arid tactical
actions; it ignores the contributions that planned change
processes can make to implementation. In the
traditional process, senior managers and strategic planning
staff prepare economic forecasts, competitor
analyses, and market studies. They discuss these studies and
rationally align the firm's strengths and
weaknesses with the environmental opportunities and threats to
form the organization's strategy.
Implementation occurs as middle managers, supervisors, and
employees hear about the new strategy
through memos, restructuring announcements, changes in job
responsibilities, or new departmental objectives.
Consequently, because participation has been limited to top
management, there is little understanding
of the need for change and little ownership of the new
behaviors, initiatives, and tactics required to achieve
the announced objectives.
Key Features
ISC, in contrast, was designed to be a highly participative
process. It has three key features:
1. The relevant unit of analysis is the organization's strategic
orientation comprising its strategy and
organization design. Strategy and the design that supports it
must be considered as an integrated whole.
2. Creating the strategic plan, gaining commitment and support
for it, planning its implementation, and
executing it are treated as one integrated process. The ability
to repeat such a process quickly and effectively
when conditions warrant represents a sustainable competitive
advantage.
3. Individuals and groups throughout the organization are
integrated into the analysis, planning, and
implementation process to create a more achievable plan, to
maintain the firm's strategic focus, to direct
attention and resources on the organization's key competencies,
to improve coordination and integration
within the organization, and to create higher levels of shared
ownership and commitment.
Application Stages
The ISC process is applied in four phases: performing a
strategic analysis, exercising strategic choice,
designing a strategic change plan, and implementing the plan.
The four steps are discussed sequentially here
but actually unfold in overlapping and integrated ways. Figure
59 displays the steps in the ISC process and
its change components. An organization's existing strategic
orientation, identified as its current strategy (SI)
and organization design (OI), are linked to its future strategic
orientation (S2/O2) by the strategic change
plan.
Figure 59
1. Performing the strategic analysis
.
The ISC process begins with a diagnosis of the organization's
readiness for change and its current strategy and organization
(S1/O1). The most important indicator of
readiness is senior management's willingness and ability to
carry out strategic change. Organizations whose
leaders are not willing to lead and whose senior managers are
not willing and able to support the new
strategic direction when necessary should consider team-building
processes to ensure their commitment.
The second stage in strategic analysis is understanding the
current strategy and organization design. The
process begins with an examination of the organization's
industry as well as its current financial
performance and effectiveness. This information provides the
necessary context to assess the current
strategic orientation's viability. Next, the current strategic
orientation is described to explain current levels
of performance and human outcomes. Several models for guiding
this diagnosis exist. For example, the
strategy is represented by the organization's mission, goals and
objectives, intent, and business policies. The
organization design is described by the structure, work,
information, and human resource systems. Other
models for understanding the organization's strategic
orientation include the competitive positioning model
and other typologies. These frameworks assist in assessing
customer satisfaction; product and service
offerings; financial health; technological capabilities; and
organizational culture, structure, and systems.
Strategic analysis actively involves organization members in the
process. Search conferences; employee
focus groups; interviews with salespeople, customers, purchasing
agents; and other methods allow a variety
of employees and managers to participate in the diagnosis and
increase the amount and relevance of the
data collected. This builds commitment to and ownership of the
analysis; should a strategic change effort
result, members are more likely to understand why and be
supportive of it.
2. Exercising strategic choice.
Once the existing strategic orientation is
understood, a new one must be
designed. For example, the strategic analysis may reveal misfits
among the organization's environment,
strategic orientation, and performance. These misfits can be
used as inputs to workshops where the future
strategy and organization design are crafted. Based on this
analysis, senior management formulates visions
for the future and broadly defines two or three alternative sets
of objectives and strategies for achieving
those visions. Market forecasts, employees' readiness and
willingness to change, competitor analyses, and
other projections can be used to develop the alternative future
scenarios. The different sets of objectives
and strategies also include projections about the organizational
design changes that will be necessary to
support each alternative. Although participation from other
organizational stakeholders is important in the
alternative generation phase, choosing the appropriate strategic
orientation ultimately rests with top
management and cannot easily be delegated. Senior executives are
in the unique position of viewing
strategy from a general management position. When major
strategic decisions are given to lower-level
managers, the risk of focusing too narrowly on a product,
market, or technology increases.
This step determines the content or "what" of strategic change.
The desired strategy (S2) defines the
products or services to offer, the markets to be served, and the
way these outputs will be produced and
positioned. The desired organization design (O2) specifies the
organizational structures and processes
necessary to support the new strategy. Aligning an
organization's design with a particular strategy can be a
major source of superior performance and competitive advantage.
3. Designing the strategic change plan.
The strategic change plan is a comprehensive
agenda for
moving the organization from its current strategy and
organization design to the desired future strategic
orientation. It represents the process or "how" of strategic
change. The change plan describes the types,
magnitude, and schedule of change activities, as well as the
costs associated with them. It also specifies how
the changes will be implemented, given power and political
issues, the nature of the organizational culture,
and the current ability of the organization to implement change.
4. Implementing the strategic change plan
.
The final step in the ISC process is the actual
implementation of the strategic change plan. This draws heavily
on knowledge of motivation, group
dynamics, and change processes. It deals continuously with such
issues as alignment, adaptability,
teamwork, and organizational and personal learning.
Implementation requires senior managers to champion
the different elements of the change plan. They can, for
example, initiate action and allocate resources to
particular activities, set high but achievable goals, and
provide feedback on accomplishments. In addition,
leaders must hold people accountable to the change objectives,
institutionalize each change that occurs, and
be prepared to solve problems as they arise. This final point
recognizes that no strategic change plan can
account for all of the contingencies that emerge. There must be
a willingness to adjust the plan as
implementation unfolds to address unforeseen and unpredictable
events and to take advantage of new
opportunities.
Transorganizational Development
Transorganizational development (TD) is a form of planned change
aimed at helping organizations develop
collective and collaborative strategies with other
organizations. Many of the tasks, problems, and issues
facing organizations today are too complex and multifaceted to
be addressed by a single organization.
Multiorganization strategies and arrangements are increasing
rapidly in today's highly competitive, global
environment. In the private sector, research and development
consortia allow companies to share resources
and risks associated with large-scale research efforts. For
example, Sematech involved many large
organizations, such as Intel, AT&T, IBM, Xerox, and Motorola,
that joined together to improve the
competitiveness of the U.S. semiconductor industry. Joint
ventures, such as Fuji-Xerox, between domestic
and foreign firms can help overcome trade barriers and
facilitate technology transfer across nations. The
New United Motor Manufacturing, Inc., in Fremont, California,
for example, is a joint venture between
General Motors and Toyota to produce automobiles using Japanese
teamwork methods.
Transorganizational Systems and their Problems
Transorganizational systems (TSs) are groups of organizations
that have joined together for a common
purpose. TSs include a range of collective responses, including
licensing agreements, strategic alliances,
joint ventures, and public-private partnerships. They are
functional social systems existing intermediately
between single organizations and societal systems. TSs make
decisions and perform tasks on behalf of their
member organizations, although members maintain their separate
organizational identities and goals. This
separation distinguishes them from mergers and acquisitions. In
contrast to most organizations, TSs tend
to be under organized: relationships among member organizations
are loosely coupled; leadership and
power are dispersed among autonomous organizations, rather than
hierarchically centralized; and commitment
and membership are tenuous as member organizations act to
maintain their autonomy while
jointly performing.
These characteristics make creating and managing TSs difficult.
Potential member organizations may not
perceive the need to join with other organizations. They may be
concerned with maintaining their
autonomy or have trouble identifying potential partners. U.S.
firms, for example, are traditionally "rugged
individualists'' preferring to work alone rather than to join
with other organizations. Even if organizations
decide to join together, they may have problems managing their
relationships and controlling joint
performances. Because members typically are accustomed to
hierarchical forms of control, they may have
difficulty managing lateral relations among independent
organizations. They also may have difficulty
managing different levels of commitment and motivation among
members and sustaining membership over
time.
Application Stages
Given these problems, trans-organizational development has
evolved as a unique form of planned change
aimed at creating TSs and improving their effectiveness. The
four stages are shown in Figure 60, along with
key issues that need to be addressed at each stage.
Figure 60
The stages and issues are described below.
1. Identification stage
.
This initial stage of TD involves identifying potential member organizations of
the
TS. For example, in the case of a strategic alliance or joint
venture, this stage involves identifying the
potential partners best suited to achieving the organization's
objectives. Identifying potential members can
be difficult because organizations may not perceive the need to
join together or may not know enough
about each other to make membership choices. These problems are
typical when trying to create a new TS.
Relationships among potential members may be loosely coupled or
nonexistent; thus, even if organizations
see the need to form a TS, they may be unsure about who should
be included.
The identification stage is generally carried out by one or a
few organizations interested in exploring the
possibility of creating a TS. Change agents work with these
initiating organizations to clarify their own
goals, such as product or technology exchange, learning, or
market access; to explore alternatives to
collaboration, including internal development, purchasing skills
or resources, or making an acquisition; and
understanding the tradeoff between the loss of autonomy and the
value of collaboration. OD practitioners
also help specify criteria for membership in the TS and identify
organizations meeting those standards. Because
TSs are intended to perform specific tasks, a practical
criterion for membership is how much
organizations can contribute to task performance. Potential
members can be identified and judged in terms
of the skills, knowledge, and resources that they bring to bear
on the TS task. TD practitioners warn,
however, that identifying potential members also should take
into account the political realities of the
situation. Consequently, key stakeholders who can affect the
creation and subsequent performance of the
TS are identified as possible members.
During the early stages of creating a TS, there may be
insufficient leadership and cohesion among
participants to choose potential members. In these situations,
participants may contract with an outside
change agent who can help them achieve sufficient agreement on
TS membership. In several cases of TD,
change agents helped members to create a special leadership
group that could make decisions on behalf of
the participants. This leadership group comprised a small cadre
of committed members and was able to
develop enough cohesion among members to carry out the
identification stage.
2. Convention stage
.
Once potential members of the TS are identified, the convention stage is
concerned
with bringing them together to assess whether creating a TS is
desirable and feasible. This face-to-face
meeting enables potential members to explore mutually their
motivations for joining and their perceptions
of the joint task. They work to establish sufficient levels of
motivation and of task consensus to form the
TS.
Like the identification stage, this phase of TD generally
requires considerable direction and facilitation by
change agents. Existing stakeholders may not have the legitimacy
or skills to perform the convening
function, and change agents can serve as conveners if they are
perceived as legitimate and credible by the
attending organizations. In many TD cases, conveners came from
research centers or universities with
reputations for neutrality and expertise in TD. Because
participating organizations tend to have diverse
motives and views and limited means for resolving differences,
change agents may need to structure and
manage interactions to facilitate airing of differences and
arriving at consensus about forming the TS. They
may need to help organizations work through differences and
reconcile self-interests with those of the
larger TS.
3. Organization stage
.
When the convention stage results in a decision to create a TS, members then
begin to organize themselves for task performance. This involves
establishing structures and mechanisms
that promote communication and interaction among members and
that direct joint efforts to the task at
hand. For example, members may create a coordinating council to
manage the TS, and they might assign a
powerful leader to head that group. They might choose to
formalize exchanges among members by
developing rules, policies, and formal operating procedures.
When members are required to invest large
amounts of resources in the TS, such as might occur in an
industry-based research consortium, the
organizing stage typically includes voluminous contracting and
negotiating about members' contributions
and returns. Here, corporate lawyers and financial analysts play
key roles in structuring the TS. They determine
how costs and benefits will be allocated among member
organizations as well as the legal obligations,
decision-making responsibilities, and contractual rights of
members.
In the case of strategic alliances and joint ventures, explicit
strategies must be created for how the TS will
perform its work. Change agents can help members define
competitive advantage for the TS as well as the
structural requirements necessary to support achievement of its
goals.
4. Evaluation stage
.
This final stage of TD involves assessing how the TS is performing. Members need
feedback so that they can identify problems and begin to resolve
them. Feedback data generally include
performance outcomes and member satisfactions, as well as
indicators of how well members are interacting
jointly. Change agents, for example, can periodically interview
or survey member organizations about
various outcomes and features of the TS and feed that data back
to TS leaders. Such information will
enable leaders to make necessary operational modifications and
adjustments. It may signal the need to
return to previous stages of TD to make necessary corrections,
as shown by the feedback arrows in Figure
60.
Roles and Skills of the Change Agent
Trans-organizational development is a relatively new application
of planned change, and practitioners are
still exploring appropriate roles and skills. They are
discovering the complexities of working with under
organized systems comprising multiple organizations. This
contrasts sharply with OD, which has
traditionally been applied in single organizations that are
heavily organized. Consequently, the roles and
skills relevant to OD need to be modified and supplemented when
applied to TD.
The major role demands of TD derive from the two prominent
features of TSs: their under organization
and their multi-organization composition. Because TSs are under
organized, change agents need to play
activist roles in creating and developing them. They need to
bring structure to a group of autonomous
organizations that may not see the need to join together or may
not know how to form an alliance. The
activist role requires a good deal of leadership and direction,
particularly during the initial stages of TD. For
example, change agents may need to educate potential TS members
about the benefits of joining together.
They may need to structure face-to-face encounters aimed at
sharing information and exploring interaction
possibilities.
Because TSs are composed of multiple organizations, change
agents need to maintain a neutral role,
treating all members alike. They need to be seen by members as
working on behalf of the total system,
rather than as being aligned with particular members or views.
When change agents are perceived as
neutral, TS members are more likely to share information with
them and to listen to their inputs. Such
neutrality can enhance change agents' ability to mediate
conflicts among members. It can help them
uncover diverse views and interests and forge agreements among
stakeholders. Change agents, for example,
can act as mediators, ensuring that members' views receive a
fair hearing and that disputes are equitably
resolved. They can help to bridge the different views and
interests and achieve integrative solutions.
Given these role demands, the skills needed to practice TD
include political and networking abilities.
Political competence is needed to understand and resolve the
conflicts of interest and value dilemmas
inherent in systems made up of multiple organizations, each
seeking to maintain autonomy while jointly
interacting.
Political savvy can help change agents manage their own roles
and values in respect to those power
dynamics. It can help them to avoid being coopted by certain TS
members and thus losing their neutrality.
Networking skills are also indispensable to TD practitioners.
These include the ability to manage lateral
relations among autonomous organizations in the relative absence
of hierarchical control. Change agents
must be able to span the boundaries of diverse organizations,
link them together, and facilitate exchanges
among them. They must be able to form linkages where none
existed and to transform networks into
operational systems capable of joint task performance.
Defining the roles and skills of TD practitioners is still in a
formative stage. Our knowledge in this area will
continue to develop as more experience is gained with TSs.
Change agents are discovering, for example,
that the complexity of TSs requires a team consulting approach,
involving practitioners with different skills
and approaches working together to promote TS effectiveness.
Initial reports of TD practice suggest that
such change projects are large scale and long term, typically
involving multiple, simultaneous interventions
aimed at both the total TS and its constituent members. The
stages of TD application are protracted,
requiring considerable time and effort to identify relevant
organizations, to convene them, and to organize
them for task performance.
Mergers and Acquisitions
Mergers and acquisitions (M&As) involve the combination of two
organizations. The term merger refers to
the integration of two previously independent organizations into
a completely new organization; acquisition
involves the purchase of one organization by another for
integration into the acquiring organization. M&As
are distinct from TSs, such as alliances and joint ventures,
because at least one of the organizations ceases
to exist.
M&A Rationale
Organizations have a number of reasons for wanting to acquire or
merge with other firms, including
diversification or vertical integration; gaining access to
global markets, technology, or other resources; and
achieving operational efficiencies, improved innovation, or
resource sharing. As a result, M&As have
become a preferred method for rapid growth and strategic change.
M&A interventions typically are preceded by an examination of
corporate and business strategy. Corporate
strategy describes the range of businesses within which the firm
will participate, and business strategy
specifies how the organization will compete in any particular
business. Organizations must decide whether
their corporate and strategic goals should be achieved through
administrative or competitive responses,
such as ISC, or through collective responses, such as TD or
M&As. Mergers and acquisitions are preferred
when internal development is too slow, or when alliances or
joint ventures do not offer sufficient control
over key resources to meet the firm's objectives.
M&As are complex strategic changes that involve various legal
and financial requirements beyond the
scope of this text.
Application Stages
Mergers and acquisitions involve three major phases as shown in
Table 23: pre-combination, legal
combination, and operational combination. OD practitioners can
make substantive contributions to the
pre-combination and operational combination phases as described
below.
Pre-combination Phase
This first phase consists of planning activities designed to
ensure the success of the combined
organizations. The organization that initiates the strategic
change must identify a candidate organization;
work with it to gather information about each other, and plan
the implementation and integration activities.
The evidence is growing that pre-combination phase activities
are critical to M&A success.
1. Search for and select candidate.
This involves developing screening criteria to
assess and narrow the
field of candidate organizations, agreeing on a first-choice
candidate, assessing regulatory compliance,
establishing initial contacts, and formulating a letter of
intent. Criteria for choosing an M&A partner can include
leadership and management characteristics, market access
resources, technical or financial capabilities,
physical facilities, and so on. OD practitioners can add value
at this stage of the process by encouraging
screening criteria that include managerial, organizational, and
cultural components as well as technical and
financial aspects. In practice, financial issues tend to receive
greater attention at this stage, with the goal of
maximizing shareholder value. Failure to attend to cultural and
organizational issues, however, can result in
diminished shareholder value during the operational combination
phase.
Identifying potential candidates, narrowing the field, agreeing
on a first choice, and checking regulatory
compliance are relatively straightforward activities. They
generally involve investment brokers and other
outside parties who have access to databases of organizational,
financial, and technical information. The
final two activities, making initial contacts and creating a
letter of intent, are aimed at determining the
candidate's interest in the proposed merger or acquisition.
Table 23
Major Phases and Activates in Merger and Acquisitions
Major M &A
phases
Key Steps
OD And Change
Management Issues
Precombination
•
Search for and select
candidate.
• Create M & A team.
• Establish business case.
• Perform due diligence
assessment.
• Develop merger
integration plan.
• Ensure that candidates
are screened for
cultural as well as
functional technical,
physical asset criteria.
• Define clear leadership
structure.
• Establish a clear
strategic vision
competitive strategy
and system integration
potential.
• Specify the desirable
organization design
features.
• Specify an integration
action plan.
Legal combination
•
Complete financial
negotiations.
• Close deal.
• Announce the
combination.
Operational combination
•
Day I activities.
• Organizational and
technical integration
activities.
• Cultural integration
activities.
• Implement change
quickly.
• Communications.
• Solve problem together
and focus on customer.
• Conduct an evaluation
to learn and identify
further areas of
integration planning.
.
2. Create an M&A team.
Once there is initial agreement between the two
organizations to pursue a
merger or acquisition, senior leaders from the respective
organizations appoint an M&A team to establish
the business case, to oversee the due diligence process, and to
develop a merger integration plan. This team
typically comprises senior executives and experts in such areas
as business valuation, technology,
organization, and marketing. OD practitioners can facilitate
formation of this team through human process
interventions, such as team building and process consultation,
and help the team establish clear goals and
action strategies. They also can help members define a clear
leadership structure, apply relevant skills and
knowledge, and ensure that both organizations are represented
appropriately. The group's leadership
structure, or who will be accountable for the team's
accomplishments, is especially critical. In an
acquisition, an executive from the acquiring firm is typically
the team's leader. In a merger of equals, the
choice of a single individual to lead the team is more
difficult, but must be made. The outcome of this
decision and the process used to make it form the first outward
symbol of how this strategic change will be
conducted.
3. Establish the business case
.
The purpose of this activity is to develop a prima facie case that
combining the two organizations will result in a competitive
advantage that exceeds their separate
advantages. It includes specifying the strategic vision,
competitive strategy, and systems integration
potential for the M&A. OD practitioners can facilitate this
discussion to ensure that each issue is fully
explored. If the business case cannot be justified on strategic,
financial, and operational grounds, the M&A
should be revisited, terminated, or another candidate should be
sought.
Strategic vision represents the organizations' combined
capabilities. It synthesizes the strengths of the two
organizations into a viable new organization.
Competitive strategy describes the business model for how the
combined organization will add value in a
particular product market or segment of the value chain, how
that value proposition is best performed by
the combined organization (compared with competitors), and how
that proposition will be difficult to
imitate. The purpose of this activity is to force the two
organizations to go beyond the rhetoric of "these
two organizations should merge because it's a good fit.
Systems integration specifies how the two organizations will be
combined. It addresses how and if they can
work together. It includes such key questions as Will one firm
be acquired and operated as a wholly owned
subsidiary? Does the transaction imply a merger of equals? Are
layoffs implied, and if so, where? On what
basis can promised synergies or cost savings be achieved?
4. Perform a due diligence assessment
.
This involves evaluating whether the two organizations actually
have the managerial, technical, and financial resources that
each assumes the other possesses. It includes a
comprehensive review of each organization's articles of
incorporation, stock option plans, organization
charts, and so on. Financial, human resources, operational,
technical, and logistical inventories are evaluated
along with other legally binding issues. The discovery of
previously unknown or unfavorable information
can stop the M&A process from going forward.
Although due diligence assessment traditionally emphasizes the
financial aspects of M&As, this focus is
increasingly being challenged by evidence that culture clashes
between two organizations can ruin expected
financial gains. Thus, attention to the cultural features of
M&As is becoming more prevalent in due
diligence assessment.
The scope and detail of due diligence assessment depend on
knowledge of the candidate's business, the
complexity of its industry, the relative size and risk of the
transaction, and the available resources. Due
diligence activities must reflect symbolically the vision and
values of the combined organizations. An overly
zealous assessment, for example, can contradict promises of
openness and trust made earlier in the
transaction. Missteps at this stage can lower or destroy
opportunities for synergy, cost savings, and
improved shareholder value.
5. Develop merger integration plans
.
This stage specifies how the two organizations will be combined. It
defines integration objectives; the scope and timing of
integration activities; organization design criteria;
Day 1 requirements; and who does what, where, and when. The
scope of these plans depends on how
integrated the organizations will be. If the candidate
organization will operate as an independent subsidiary
with an "arm's-length" relationship to the parent, merger
integration planning need only specify those
systems that will be common to both organizations. A full
integration of the two organizations requires a
more extensive plan.
Merger integration planning starts with the business ease
conducted earlier and involves more detailed
analyses of the strategic vision, competitive strategy, and
systems integration for the M&A. For example,
assessment of the organizations' markets and suppliers can
reveal opportunities to serve customers better
and to capture purchasing economies of scale, examination of
business processes can identify best
operating practices; which physical facilities should be
combined, left alone, or shutdown; and which
systems and procedures are redundant. Capital budget analysis
can show which investments should be
continued or dropped. Typically, the M&A team appoints subgroups
composed of members from both
organizations to perform these analyses. OI) practitioners can
conduct team building and process
consultation interventions to improve how those groups function.
Next, plans for designing the combined organization are
developed. They include the organization's
structure, reporting relationships, human resource's policies,
information and control systems, operating
logistics, work designs, and customer-focused activities.
The final task of integration planning involves developing an
action plan for implementing the M&A. This
specifies tasks to be performed, decision-making authority and
responsibility, and timelines for
achievement. It also includes a process for addressing conflicts
and problems that will invariably arise
during the implementation process.
Legal Combination Phase
This phase of the M&A process involves the legal and financial
aspects of the transaction. The two
organizations settle on the terms of the deal, register the
transaction with and gain approval from
appropriate regulatory agencies, communicate with and gain
approval from shareholders, and file
appropriate legal documents. In some cases, an OD practitioner
can provide advice on negotiating a fair
agreement, but this phase generally requires knowledge and
expertise beyond that typically found in OD
practice.
Operational Combination Phase
This final phase involves implementing the merger integration
plan. In practice, it begins during due
diligence assessment and may continue for months or years
following the legal combination phase. M&A
implementation includes the three kinds of activities described
below.
1. Day 1 activities
.
These include communications and actions that officially start the
implementation
process. For example, announcements may be made about key
executives of the combined organization,
the location of corporate headquarters, the structure of tasks,
and areas and functions where layoffs will
occur. M&A practitioners pay special attention to sending
important symbolic messages to organization
members, investors, and regulators about the soundness of the
merger plans and those changes that are
critical to accomplishing strategic and operational objectives.
2. Operational and technical integration activities
.
These involve the physical moves, structural
changes, work designs, and procedures that will be implemented
to accomplish the strategic objectives and
expected cost savings of the M&A. The merger integration plan
lists these activities, which can be large in
number and range in scope from seemingly trivial to quite
critical. For example, American Airlines'
acquisition of Reno Air involved changing Reno's employee
uniforms, the signage at all airports, marketing
and public relations campaigns, repainting airplanes, and
integrating the route structures, among others.
When these integration activities are not executed properly, the
M&A process can be set back. American's
poor job of clarifying the wage and benefit programs caused an
unauthorized pilot "sickout" that cancelled
many flights and left thousands of travelers stranded. Finally,
integrating the reservation, scheduling, and
pricing systems was a critical activity. Failure to execute this
task quickly could have caused tremendous
logistical problems, increased safety risks, and further
alienated customers.
3. Cultural integration activities.
These tasks are aimed at building new values and
norms in the
organization. Successful implementation melds both the technical
and cultural aspects of the combined
organization. For example, members from both organizations can
be encouraged to solve business
problems together, thus addressing operational and cultural
integration issues simultaneously.
The M&A literature contains several practical suggestions for
managing the operational combination phase.
First, the merger integration plan should be implemented sooner
rather than later, and quickly rather than
slowly. Integration of two organizations generally involves
aggressive financial targets, short timelines, and
intense public scrutiny. Moreover, the change process is often
plagued by culture clashes and political
fighting. Consequently, organizations need to make as many
changes as possible in the first one hundred
days following the legal combination phase. Quick movement in
key areas has several advantages: it
preempts unanticipated organization changes that might thwart
momentum in the desired direction, it
reduces organization members' uncertainty about when things will
happen, and it reduces the anxiety of the
activity's impact on the individual's situation. All three of
these conditions can prevent desired collaboration
and other benefits from occurring.
Second, integration activities must be communicated clearly and
in a timely fashion to a variety of
stakeholders, including shareholders, regulators, customers, and
organization members. M&As can increase
uncertainty and anxiety about the future, especially for members
of the involved organizations who often
inquire, "Will I have a job? Will my job change? Will I have a
new boss?" These kinds of questions can
dominate conversations, reduce productive work, and spoil
opportunities for collaboration. To reduce
ambiguity, organizations can provide concrete answers through a
variety of channels including company
newsletters, email and intranet postings, press releases, video
and in-person presentations, one-on-one
interaction with managers, and so on.
Third, members from both organizations need to work together to
solve implementation problems and to
address customer needs. Such coordinated tasks can clarify work
roles and relationships; they can
contribute to member commitment and motivation. Moreover, when
coordinated activity is directed at
customer service, it can assure customers that their interests
will be considered and satisfied during the
merger.
Fourth, organizations need to assess the implementation process
continually to identify integration
problems and needs. The following questions can guide the
assessment process:
• Have savings estimated during pre-combination planning been
confirmed or exceeded?
• Has the new entity identified and implemented shared
strategies or opportunities?
• Has the new organization been implemented without loss of key
personnel?
• Was the merger and integration process seen as fair and
objective?
• Is the combined company operating efficiently?
• Have major problems with stakeholders been avoided?
• Did the process proceed according to schedule?
• Were substantive integration issues resolved?
• Are people highly motivated (more so than before)?
Mergers and acquisitions are among the most complex and
challenging interventions facing organizations
and OD practitioners. Application 12 describes the M&A process
at Daimler-Benz and Chrysler. It clearly
demonstrates the importance of cultural issues in mergers and
the role that organization development can
play in the process.
Application 12: M&A process at Daimler-Benz and Chrysler
On November 17, 1998, Daimler-Benz, Germany’s most revered brand
name, and Chrysler, America’s
number-three car company, merged to become the world’s
fifth-largest car maker. The $40.5 billion merger
in the history of the automobile manufacturing business.
The process began in the early 1990s when Daimler executives
began asking the question. Their
question led to the conclusion that Mercedes automobiles were
reaching the limits of their market.
Daimler’s marquis name brand made it difficult to enter emerging
and other high-volume markets.
Moreover, if Mercedes remained in a specialized niche, they
might not be able to benefit quickly from new
techonoligies.innvators would have little incentive to license
their advanced technology to a small market
player. As a result, Daimler began looking for a partner who
could increase its scope of operations.
The process heated up during the mid-1990s because of
overcapacity in the global automotive
industry. Chrysler was the top candidate because of its
complementary product line and geographical
distribution. The two companies began the first of three rounds
of talks in 1995.their first attempt at
working together was an ill-fated Latin American joint venture.
Wall Street gave the merger an instant blessing. The business
case looked very good along product,
geography, and financial lines, but there were concerns about
the differences in culture. First, there was
very little product overlap.
Second, each company had a strong geographical presence where
the other was weak. The
combination allowed both firms to make a strong entry into the
Latin American market. Third both
organizations had healthy balance sheets.
However, strong reservations emerged concerning the cultural
fit, organizationally, Chrysler was a
lean, centralized, low-cost, producer; Mercedes was a
high-quality, bureaucratic, and staid organization.
Cultural artifacts were easy to identify.
Still, the two organizations saw great opportunities in cost
savings, especially in logistics, purchasing,
and finance. Subsequent announcements promised savings of $1.4
billion in the year of operations.
executive vice president of global procurement and supply, the
new organization would be able to optimize
worldwide capacity, enjoy increased purchasing power with
suppliers, and capitalize on cost savings derived
from shared techonoligy.he suggested that it would take between
three and five tears to consolidate
purchasing for the two companies an aggressive target. Combining
manufacturing would take much longer.
Prior to the formal close of the transaction, the integration
team announced the structure and
principles for the post merger consolidation process. First,
Thomas Stallkamp, Chrysler’s president, was
announced as head of the integration effort. Second, issue
resolution teams were established to help
address key concerns. The first five teams were banded under the
category of global automotive
integration, which included product development, volume
production, global sales and marketing, raw
materials and part sourcing, and global automotive
srategizing.others were grouped under companywide
functions such as finance, human resources etc.third,the
integration process was to be shaped by eight basic
principles.
Shortly after the merger was finalized in November, Schrempp and
Eaton named the senior
executives for the new organization as well as the key
structural features. The organization was to have dual
headquarters. In addition, initial consolidation and integration
would occur in the finance, purchasing, and
other staff organizations.
Daimler Chrysler has withstood a number of challenges, almost
all of which can be seen as originating
in the different cultures.
Perhaps the most symbolic of the problems Daimler Chrysler faced
in its execution of the post
merger integration was the September 1999 announcement that
Stallkamp, the head of the integration
team, was leaving the organization.
Then in October 1999, Shrempp announced a restructuring of the
organization into three groups:
Chrysler, Mercedes, and commercial products. this structure gave
considerable autonomy to the north
American organization, in effect putting further integration
efforts on hold and raising concerns over
whether the new organization would be able to deliver on its
promised $1.4 billion in cost saving.
In fact, integration effort had run into several
snags.stallkamp’s integration team had identified about
five hundred potential changes with the top ninety-eight changes
expected to produce the promised
savings.
A related problem the organization had to face was the different
human resources practices, most
importantly compensation. In addition, there were big
differences between European and American union
contracts, including benefits and vacation time that were driven
by different cultural assumptions.
With respect to the compensation problem, the new board had to
approve drastic changes in pay
packages to put German executives on an equal footing with their
American counterparts. This made
realizing the promised cost savings more difficult.
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