Organization and Environment Relationships:Environmental Dimensions, Administrative Responses

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Lesson # 42

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-un-

derstood 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.

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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 envi-

ronment 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 cus-

tomers 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

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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 tech-

nological 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

Moderate Constraint

Minimal environmental

and responsiveness to

Constraint and need to

Low

Environment

Be responsiveness to

Environment

Maximal

High

Moderate

environmental

Constraint and

responsiveness to

need to Be

Environment

responsiveness to

Environment

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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 labor-

management 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

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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 objec-

tives. 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.

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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

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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 com-

mitment 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.

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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. Be-

cause 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

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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 deter-

mine 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.

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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 in-

clude 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.

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Table 23

Major Phases and Activates in Merger and Acquisitions

Major M &A

And

Change

phases

Key Steps

Management Issues

· Search for and select

· Ensure that candidates

Precombination

candidate.

are

screened

for

· Create M & A team.

cultural as well as

functional

technical,

· Establish business case.

physical asset criteria.

· Perform due diligence

· Define clear leadership

assessment.

structure.

· Develop

merger

· Establish

clear

integration plan.

strategic

vision

competitive

strategy

and system integration

potential.

· Specify the desirable

organization

design

features.

· Specify an integration

action plan.

· Complete

Legal combination

financial

negotiations.

· Close deal.

· Announce

the

combination.

· Day I activities.

· Implement

Operational combination

change

· Organizational

quickly.

and

· Communications.

technical

integration

· Solve problem together

activities.

· Cultural

integration

and focus on customer.

· Conduct an evaluation

activities.

to learn and identify

further

areas

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

Organization Development MGMT 628

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.

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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?

Organization Development MGMT 628

· 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.

Organization Development MGMT 628

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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