Designing Externally Controlled Organizations

This is not a treatise on organizational design. However, some implications of the resource dependence perspective for design are worthy of consideration, if only because the adequacy and value of the perspective can be assessed. We will consider four implications: (1) the design of scanning systems; (2) designs for loosening dependencies; (3) designs for managing conflicting demands and constraints; and (4) designs of chief executive positions.

1. Scanning the Environment

Whether management plays a responsive role or attempts to alter the organization’s environment, good information about the context will be required. Most organizations follow the easy course. Available data is collected and processed; information more difficult to gather is ignored. The information most frequently generated for other purposes—usually for accounting for the organization’s internal operations—is all too frequently the only information available in the organization. Few organizations systematically seek out information about their context.

Academic literature on environmental scanning is notably sparse (e.g.,Aguilar, 1967). Any recommendation, therefore, must be tentative; there is an insufficient empirical base on which to develop strong conclusions. Most writers will assert that since organizational environments are important, it is critical to scan them. Yet, the fact is that organizations typically do not do much environmental scanning. One must either question the advice or question the common practices of organizations. That there is so little literature in this area reinforces our conclusion that the allusion to the environment is frequently pro forma and seldom follows up the open systems perspective with anything remotely useful from a managerial or theoretical perspective. It may also be that scanning the environment is, in fact, not that necessary. One can imagine some advantage to ignoring environmental change.: Knowing about the change puts the organization in the position of; having to respond to it. It may be better to ignore changes rather than risk overresponding to every small, insignificant environmental fluctuation.

Scanning systems face two problems: (1) how to register needed information, and (2) how to act upon the information. Both problems affect the organization’s ability to either adapt to or change the environment. Part of the problem of scanning environmental elements was implied in our earlier discussion about enactment. Subunits established to scan a particular part of the environment typically hire persons with expertise limited to one narrow segment. A market research department employs MBA or Ph.D. business graduates trained in marketing, survey research, and statistics. The firm will survey consumers, often a dominant focus in marketing training, and test-market various products. The firm will probably have excellent information about alternative communication channels, their costs and effectiveness, as well as all kinds of attitudinal data about potential consumers for the product. Communications data are prevalent in part because other organizations ( advertising agencies, the media ) collect them and make them available. What the firm is not likely to have are data on whether the product is stocked anywhere, whether the sales force is doing an adequate job promoting the product, or what kind of shelf space or display it is getting. After all, the performance of the sales force is a topic for industrial psychologists interested in motivation, while issues of distribution ate the responsibility of those specializing in marketing channels.

A scanning unit frequently attends to only one portion of the environment. Yet, the environment has multiple facets. The obvious solution is to establish multiple scanning units or scanning units that have within them a variety of interests, backgrounds, and types of expertise. Although this solution is useful to overcome the problem of missing important aspects of the environment, the establishment of multiple scanning units does nothing to overcome, and may actually worsen, the second problem of acting on the information.

The greater problem in coping with organizational environments is that the needed information is not in the hands of those making the decisions or is not used by these persons. The causes of these difficulties are many and varied. One problem is that information is typically collected by staff departments (marketing research, long-range planning, etc. ) and must be used by line personnel. Conflicts are common between line and staff. Information collected by specialized experts, with unique vocabularies and sophisticated methodological approaches, produces reports couched in terminology unfamiliar to the fine managers who must use the information. Communication is difficult. Differences in perspective, vocabulary, and expertise all bar the use of information collected about organizational environments.

An additional problem is that those who provide information collect what they believe to be important. There is no assurance that similar judgments of importance hold for operating managers. Staff members may fail to ask managers what information is needed, and the information collected may be important only to those who collected it. This problem is not easily solved. A decision maker may be unable to predict what information he needs or would use. A likely response to the question of what information is needed is the information he has used in the past, obviously constrained by availability. Moreover, it is not clear that the manager is the best judge of what is needed, since he operates on the basis of what he has done before. Persons develop styles of operating and decision making; changing these styles may be difficult. Persons accustomed to making decisions using certain information are not likely to suddenly use new information, especially information they did not request.

A third problem facing operating managers and staff is that both implicitly may perceive information collection and acquisition as affecting their relative power and status. It is the case that if one controls the information-used in decision making, one can control decision outcomes. To the extent that managers rely on staff, they lose discretion and admit the importance of the staff and the need for them. One way for managers to retain power is to ignore the staff information. For then part, the staff attempt to have their reports heeded to illustrate their importance and power within the organization. The contest for control over decision making is what is involved, and this contest is frequently exacerbated by the differences in backgrounds and ages of the parties involved.

The environmental perspective argues for the need for information about environments. Specialized scanning units, however, may be ineffective in meeting that need. Specialized units collect specialized information, so that to develop a comprehensive view of the environment, a variety of units may be required. At the same time, operating managers may use the collected information only under duress, and the problems of obtaining the attention of the managers are increased as the number of scanning units writing reports increases. Many reports are filed and forgotten, and few become incorporated in organizational decision making. Scanning highlights and narrows the organization’s attention, so that the assignment of specific individuals to scan specific environmental segments may leave the organization more isolated and less informed than before. The scanners focus on routinized, quantitative data collection, prepare reports filled with jargon and complexity, and then struggle with operating personnel to have their efforts considered.

In writing of environmental enactment, we noted the difficulty of planning. Planning scanning systems is no less difficult, since such an activity presumes the organization already knows what it needs to know. We argue that the problem is not one of not having the necessary information. The expertise required to manage the organization’s interdependence is often present in the organization. It is already possessed by the various operating managers themselves. Constantly confronted with problems from their own interactions with the environment, it is unlikely they are unaware of that environment. More probably, they are unable to consider the situation and its implications taking an overall, longer range view. Unfortunately, operating man- agers are most often involved in immediate, short-run problem solving (Mintzberg, 1973), and therefore, they seldom have the time or the inclination to engage in any kind of planning.

While the organization as a whole may possess the requisite information, the information may be widely dispersed throughout the organization in a variety of different functional areas and positions. One effective strategy for keeping up on major changes would be to bring together the various sources of expertise within the organization in a focused format to use this expertise in planning and decision making. Such techniques as the Delphi (Linstone and Turoff, 1975) and Nominal Group Technique (Delbecq, Van de Ven, and Gustafson, 1975), in which participants, chosen for their expertise, are systematically queried about judgrnents, potential actions, and forecasts, provide some advantages over the use of specialized staff departments. Commitment to the decisions and forecasts may be increased because operating personnel are themselves involved. The planning and decision making, moreover, can be done in language, and using data, familiar to the persons involved.

2. Loosening Dependencies

The external control of organizational behavior comes about, in part, from the organization’s dependence on specific others. Discretion permits the organization to adapt to contingencies and to alter activities as conditions change. It is likely that the maintenance of discretion should be a crucial organizational activity. Some latitude in the organization s behavior will be useful and organizations will seek to minimize external control.

The loosening of external control can be accomplished, we have suggested, through the loosening of dependencies. Organizations are controlled by an external source to the extent they depend on that source for a large proportion of input or output. Dependence diminishes through diversification. Organizations with many small suppliers are potentially less controlled than ones with a few major suppliers. From the above considerations, it might appear that organizational designs that reduce organizational dependencies would be highly differentiated structures, organizations performing a variety of activities in a variety of contexts. If diversification loosens dependence and provides the focal organization with more discretion, and if discretion is both sought and useful for survival and adaptation, then it should be the case that over time more diversified structures should emerge, particularly for those organizations dealing with concentrated input or output markets. This result might occur either because less diversified organizations were more likely to fail or because organizations systematically adapted and became more diversified.

It does appear that there have been trends toward increasing diversification. Consider Berman’s (1973) history of merger waves. The first wave was described as an attempt to consolidate and control markets. In this first wave, many of the giant enterprises which today control sectors of the economy were created. Various steel producers combined to form U.S. Steel, and tobacco manufacturers combined to form the major tobacco firms. In the second wave of merger, vertical integration was accomplished with the organizations extending to take over sources of supply and distributors. The third major wave involved conglomerate mergers, or mergers made for purposes of diversification, involving firms such as Tenneco, Gulf and Western Industries, and LTV. Such a pattern of merger activity would suggest that organizations first secure their competitive position, then attempt to manage interdependence with supply and distribution channels, and finally, turn their attention to diversification to diminish the external control of others over their activities. The situation is more complex, however. These different merger movements took place under different legal conditions. Vertical integration followed the passage and more vigorous enforcement of the Sherman Act, and the conglomerate mergers followed the passage of more stringent antimerger regulations. The regulations themselves were in response to the perceived threat of economic concentration posed by earlier mergers. While legal constraints may provide some explanation for the pattern of activities undertaken by industrial firms, other types of organizations not subject to antitrust laws have also diversified. Downs (1967), for instance, has noted that public agencies expand their domains and take on additional activities to ensure their survival. Such expansion provides the agencies with more independence.

3. Coping with Conflicting Demands

The pursuit of diversification or organizational growth, both designed to lessen dependence on elements of the organization’s environment, will probably lead to an increase in the number of groups and organs zations interested in the focal organization. This can increase the diversity and number of demands on the organization. Size, however, is not the critical variable affecting the complexity of demands. Even small, less diversified organizations are confronted by a variety of interests with different preferences for organizational action. Rather, the critical variable is the extent to which the organization represents a resource or potential tool to be used by others. The more useful the resources of an organization are to others, the more demands the organization will face. According to the theoretical perspective we have developed, organizational designs which disperse dependence through the environment also link the organization to more elements which might seek to use it in their service, creating more competing and conflicting interests.

Fortunately, the very differentiation that reduces the organization’s dependence on external groups also helps the organization manage the conflicting demands thus created. First, diversification, while not reducing demands, does reduce the organization’s need to respond to any given demand. By dispersing dependency among numerous others, the impact of the organization’s not responding to given demands is reduced. A second advantage, obtained through the creation of a differentiated, loosely coupled organizational structure is that various groups may be satisfied simultaneously. The critical factor is that the diverse interests be loosely coupled and not interdependent within the organization. When interests are not tightly interconnected and there is no need for actions to be consistent with all interests simultaneously, then it is possible to satisfy conflicting demands by establishing subunits to cope with each interest. Consumers may de- mand better quality products and more control over product policies. In response, the organization may establish a consumer affairs department. Demands are registered and consumers or their organizations are provided with access and a feeling of participation. At the same time, workers wanting more control can appeal to the personnel or industrial relations department, while minorities can articulate their interests through affirmative action offices. This differentiation process can go on indefinitely, subject only to the constraint imposed by limited resources. Thompson (1967) has argued that organizations do exactly what we have described—establish subunits to deal with homogeneous subsegments of the environment.

Structural differentiation, from this perspective, derives not directly as a consequence of organizational size but as a function of the number and importance of different interests that must be coopted. This number may, in turn, be related to organizational size. And size, in turn, may be a function of growing differentiation and diversification. Differentiating an organization to simultaneously satisfy multiple constituencies is a practice evident in many organizations. Universities, for example, establish research institutes to obtain money from various sources, academic departments to serve disciplinary interests, and various student and community service units to meet the demands of those groups.

It is important to note that differentiation provides a satisfactory solution to the problem of competing demands only when the differentiated subunits are themselves relatively independent. Each subunit must be in a position to take actions unconstrained by the actions taken by other subunits. Loose-coupling assists organizations in coping with their environments by permitting new subunits to absorb protest without a requirement to rationalize the relationship among all the various subunits. Of course, it is also true that if subunits are loosely coupled then most organizational practices will be buffered from changes created by any single subunit in response to interest group demands. The organization can thus make small accommodations to interest groups without redirecting the activities of the entire organization. A consumer affairs department can deal with complaints about the product with a letter and a free sample, but the production and development departments remain unaffected.

A second benefit achieved by establishing a special department to handle particular subsegments of the environment is that each sub- segment becomes partially coopted. The interest group or organization develops an interest in the subunit with which it deals. Since the established subunit is the primary access to the organization, its survival becomes defined as critical for the interest group’s purposes. As a consequence, the external interest may make less extreme demands on the subunit and become interested in preserving its limited access and representation within the organization. The differentiation of organizational structures to cope with homogeneous environmental elements can both buffer the organization and lessen the force of the external influences.

Another strategy for coping with interdependence with external groups making conflicting demands is through the use of slack resources (Galbraith, 1973). Organizations can more readily cope with conflicting demands when they have sufficient resources, so that many demands can be at least partially satisfied simultaneously. Organizational slack, frequently apparent in the form of extra profits or resources, is useful not only to make the owners and managers happy but to facilitate managing the environment of competing demands. Conflict is reduced when interdependence is reduced, and interdependence is reduced when resources are plentiful. As we already noted, the elaboration of structure to include differentiated, loosely coupled subunits to cope with the various environmental elements also requires resources to support the various subunits thereby created. Again, then, the importance of slack resources for managing conflicting demands is evident.

The structural solution to conflicting demands is a differentiated organization of loosely coupled subunits, each of which deals with special environmental interests, and each of which is only slightly interdependent with other subunits within the organization. This solution depends on the availability of slack resources, for without slack, subunits could not be loosely connected and could not respond to their immediate environments without affecting the entire system.

Neither the differentiation of the organization into subunits nor the diversification of activities reduces the organization’s dependence on tire environment. What such actions accomplish is to alter the nature of the interdependence and structure organizational dependence so that it is more readily managed. By having numerous interests make demands on the organization, the organization reduces its need to respond to any specific interest because each represents only a small part of the total organization and its activities. While there are still resource acquisition consequences of not complying, the effects are diminished.

Moreover, diversification shifts interdependence from the organization’s relationship with the, environment to greater interdependence among elements in the environment. By making previously unrelated activities or markets now related under a single management or control structure, diversification makes previously unrelated environmental subsegments more interdependent. Linked through the organization, environmental subsegments now compete with each other as well as facing competition within the subsegment. If there are insufficient slack resources across the entire economy, such interlocking of organizations can actually cause problems. Organizations dealing with a large set of diverse environmental elements without sufficient slack resources face difficulties in managing and resolving the competing groups therefore confronted.

4. The Chief Executive Position

In Chapter Nine we argued that environments affect organizational change through alteration of the distribution of influence and consequent changes in administrators. As a symbol of the organization and its policies, administrators can be removed when participants demand it as a condition for continuing to support the organization. If it is indeed true that adaptation to environmental interest comes about in part through changes in administration, then the institutionalization of power and control can be seen as detrimental to the organization’s ability to cope with the environment. Structures which inhibit the institutionalization of power should survive change more readily. Structures which permit power to be maintained beyond the point of being useful to the organization are less likely to be adaptable.

While the trend in organizational forms has been to more diversified structures and activities, the trend in organizational power structures appears to be in the direction of increasing centralization. In industry, stock companies are increasingly owned by diffuse ownership interests or by trust departments and pension funds that are unwilling and unable to exercise strong influence on management. As a result, managers have acquired more control over the organization. The diffusion of control over a number of small investors enhances the manager s ability to institutionalize his power. Earlier, we noted that there was some tendency for turnover in administrators to be reduced when the corporation was management-controlled compared to the situation where managers faced a few, nonmanaging dominant ownership interests. It is likely to be true in general that the diffusion of the organization’s activities will permit more centralized administrator control. This is because any single other group or organization now has less interest in the total organization and its activities and, therefore, should be less willing to spend the resources and effort necessary to control the organization. Such reasoning may be another explanation for the emergence of differentiated, diffused organizational structures.

If differentiation in organizational structures is useful for dealing with competing demands, it would be logically possible to extend that argument and suggest the usefulness of differentiation even in the chief executive position. Instead of having a single chief executive or chief administrator, the organization might have several, each with his or her own expertise and the ability to cope with some segment of the environment. Multiple chief executives have seldom been tried, and when tried, have often not succeeded. In part, this is because the idea of multiple chief executive officers, while useful for dealing with the various environments confronted by the organization, is inconsistent with the concept of the administrator as the symbol of organizational action. After all, when we want to fire the administrator for some problem in the organization, we would prefer to fire one, clearly visible, target rather than several persons who share responsibility and through this sharing avoid responsibility.

One way of achieving both accountability and adaptability may be to have a single figurehead but have the actual organizational control lodged in a multiparty executive position. This would require giving each executive an independent and sufficient power base to survive the struggle for dominance which would undoubtedly ensue. Of course, such an organizational design is completely at variance with the traditional prescriptions for unity of command. Indeed, the type of political decision making likely to be produced by the structure we have described may be viewed as irrational or inefficient. Of course, the trade-off must be made between some loss of order and efficiency to achieve the capability of organizational adaptability.

In the absence of the ability or desire to establish multiple centers of control and authority, the next best solution requires ensuring that executives can be replaced easily when environmental conditions require new skills or a new symbol. Such replacement is obviously facilitated when power is decentralized in the organization, or when the chief executive cannot control the appointment of all subordinates so as to people the organization with dedicated loyalists. Overlapping political districts common to some United States cities represents an example of this form of shared power. The mayor controls the hiring of some personnel, but other boards and commissions control other hiring.

Power is also more likely to be institutionalized when the executive controls the definition of reality through a control over the information system in the organization. It is interesting that authors have not more frequently noted the connection between decentralization of authority and the decentralization of information systems. The connection is direct. If the chief executive is allowed to control the social distribution of information through secrecy and selective presentation of information, then he can control the definition of the situation. By defining organizational contingencies, his power can be institutionalized beyond both the formal authority structure and the contingencies of the environment.

The institutionalization of control is a process that has not been empirically examined and is only imperfectly understood. Yet, it is clear that organizational responsiveness will increase when power and control are not institutionalized and new skills, competencies, and interests can emerge with changing environmental contingencies.

At the same time, stability and predictability in the organization is desirable. After all, continual change would be as destructive as no change at all. Thus, some institutionalization of power and control is necessary to achieve stability. It prevents the organization from changing to meet minor environmental contingencies of short duration. However, it is likely that most organizations err on the side of stability. Those in control, certainly, would favor such a position.

5. Organizational and Political Structures

Many of the structural attributes described as desirable for organizational adaptability and for coping with an environment of conflicting demands and interests are represented in political organizations in the United States. Institutionalization of control is inhibited by the requirement for confronting elections, and multiple control structures are designed into the system by providing at the federal level the three branches of government and the host of commissions and boards, and at other governmental levels through overlapping, autonomous political districts and organizations. Structural elaboration into various departments and committees permits  various interests to be heeded, while  the existence of organizational slack and a loosely coupled system facilitates the absorption of protest and the incorporation of change without profoundly disturbing the entire system.

We are not the first to note structural parallels between political organizations and other types of organization or the similarities in their governance and adaptation. To carry the analogy to its logical conclusion, however, suggests that one should design organizations with features of representative political structures, particularly when adaptation rather than stability or efficiency is of primary concern. Even current writing about decentralization and delegation typically speaks of such passing of power as a gift, conferred upon lower level participants. Despite awareness of surface similarities, there remain fundamental differences in the control structure of representative democracies and those of formal organizations. The belief in the requirement for absolute authority and unity of command prevents the development of designs which incorporate representative forms of control. We suspect it is mainly when the problems confronted by formal organizations become increasingly the management of conflicting demands and adaptation to changing social contexts that structural similarities to political organizations emerge.

Source: Pfeffer Jeffrey, Salancik Gerald (2003), The External Control of Organizations: A Resource Dependence Perspective, Stanford Business Books; 1st edition

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