I recommend reading chapters 1 and 3, and only reading my summary of chapters 6 and 7.

1: An External Perspective on Organizations
The basic premise: Organizations must constantly struggle to survive.  The key to survival is acquiring resources from the environment, which is composed of other organizations.  The problem is that the environment is unstable and undependable.

Past organizational research has mostly focused on the problems of using resources – in other words, on processes within a single organization.  But resources must be acquired before they can be used, and this involves exchange with the environment.

• Internal processes are more visible, hence easier to study.
• A persisting research bias attributes causality to the actions of individuals, rather than to context.  In particular, organizations are assumed to reflect the preferences of their leaders.   A good deal of research, however, contradicts this view.

The organizational environment could be defined as every event that affects the org., but this would not be a useful definition.

• Because organizations are loosely coupled with their environments, they do not even notice some events.  Other events are noticed but do not require a response because the organization is buffered.
• The process through which organizations gather knowledge filters out some information, while making other information highly accessible and likely to be utilized.

In a situation of environmental constraint, what is the role of management?  It is partly symbolic: managers personify the organization and enhance members’ feelings of predictability and control.  This is an important social role.
Managers must also guide the organization’s adjustment to environmental reality.  This means filling two functions:

• Processing: recognizing outside constraints and adjusting the organization accordingly
• Advocating: trying to manipulate the environment and loosen existing constraints

Conclusions about interdependence:

• It varies with the relation between the availability of, and demand for, resources.
• It connects actors through a flow of transactions.
• It creates problems of uncertainty for organizations.  Organizations typically attempt to reduce the uncertainty associated with outcome interdependence by increasing behavior interdependence – by structuring predictable relationships.

Out of the list on p. 44, three main factors determine the dependence of one organization upon another.
1) The importance of the resource to the focal organization.  This involves two aspects:

• The relative magnitude of the resource (the percent of the organization’s total resources that it represents)
• The “criticality” of the resource (“the ability of the organization to continue functioning in the absence of the resource.”)

3) The concentration of resource control.  An organization is more dependent to the extent that the resources it needs come from one, or a few, suppliers.  Interesting point: any regulation increases concentration of resource control, because those who want greater access to the resource can then attempt to influence the regulators instead of the suppliers.

In these terms, dependence = “the product of the importance of a given input or output to the organization and the extent to which it is controlled by a relatively few (outside) organizations” (51).  It is a measure of influence.

However, concentrated power is not a source of influence alone.  There must be no effective countervailing power.  In other words, there must be asymmetry in the exchange relationship.  Asymmetry is the true source of power.  (Here, P&F are following Blau, Exchange and Power in Social Life.)

6: Altering Organizational Independence
One way for an organization to manage its interdependence is through merger.

Vertical mergers reduce symbiotic interdependence, or the dependence of an organization upon suppliers and customers.
P&F’s data support this assertion; an organization’s transactions with a given industry predict its likelihood of effecting a merger with an organization in that industry.  (However, P&F’s data are aggregated at the industry level, making the results somewhat difficult to interpret.)  There is little support for the alternative hypotheses that vertical mergers are random, that they are based on the profitability of the target company, or that they are more likely in highly concentrated industries.
Another alternative hypothesis involves familiarity: mergers occur between organizations that have good information about one another.  However, P&F find that:
1. Merger activity is highly correlated with purchase transactions in highly concentrated environments.  In such environments, where there are few suppliers, inputs are a major source of uncertainty, so organizations will try to merge backward.
2. Merger activity is highly correlated with sales transactions in moderately concentrated environments.  In such environments, firms do not have overwhelming market power over their customers, but they are not passive price takers either.  Hence, they will try to merge forward.
This confirms the basis of the resource dependence hypothesis but not the familiarity hypothesis.

Horizontal mergers primarily reduce competitive interdependence.  (Some horizontal mergers reduce symbiotic interdependence.)
Competitive uncertainty is highest in moderately concentrated industries, where firms are too big to be price takers, but there are too many firms for them all to coordinate their activities informally.
P&F’s findings: horizontal merger activity peaks when the top 4 firms in an industry control 40% of the market – an intermediate level of concentration.

Diversification is a way of reducing dependence on a single, critical exchange by involving the firm in new and unrelated types of exchange relationships.
P&F find that diversification is significantly correlated with dependence on a single transaction, and especially on doing business with the federal government.  (The same result is found using Israeli data.)

Mergers are really just a special case of growth.  Growth always helps deal with dependence.

Alternative theories about growth:

Successful organizations always face pressure for growth.  This theory ignores the fact that organizational growth is based on a decision.

Individual motives of leaders

Profitability

Economies of scale

P&F believe that organizations grow in order to enhance stability and reduce uncertainty.  Reasons:

• Large organizations have more “slack”, hence more time to adjust to new situations.
• Large organizations tend to become interdependent with more and larger outside groups, which come to have an interest in the organization’s survival.

• Useful when coordination is not needed all the time.
• Useful when merger is not feasible.
• However, control is less secure than in the case of a merger.

• Information about one’s partners
• Channels of communication
• Help obtain commitments of support from the environment
• Help to legitimate the focal organization

• Cutthroat competition
• Some types of interorganizational influence

Joint ventures are a mechanism for explicit interorganizational cooperation.
Empirically, P&F find support for the idea that joint ventures reduce uncertainty.  They are likely to occur under conditions of intermediate industry concentration, which is where uncertainty is highest.  They are also likely when concentration is high, since firms in concentrated industries control more of the market when they cooperate.  (This is written rather vaguely.  The distinction between the effects of high and intermediate concentration is not clear.  It is also not clear how things are different if the partners are in two different industries.)
The patterns of joint ventures between companies in two different industries mirror those for vertical mergers.
The patterns of joint ventures within a single industry mirror those for horizontal mergers.

Another method of organizational linkage is the use of interlocking boards of directors.  This is a form of cooptation.  Participation in a board gives an outside interest a stake in the organization.  However, the board members may gain real influence in the organization and divert it from its original purposes.  (Refer to Selznick.)
P&F find that the appointment of interlocking directors parallels the use of joint ventures: they are likely to be found when concentration is high or intermediate.
The use of outside directors is correlated with firm size, with the debt/equity ratio (a measure of the firm’s financial health), and the firm’s regulatory environment.  In fact, a board composition that deviates from the “optimal” composition (in terms of form size, financial health and regulation) is negatively related to performance.
A study of hospital boards shows that hospitals which need more resources from the environment are more likely to appoint board members based on the support they can provide, rather than based on their administrative skills.

When industry concentration is low, joint ventures and interlocking directorates do not reduce much uncertainty.  Organized trade associations and cartels do a better job because they bring large numbers of organizations together at the same time.