Chapter 22 Transorganizational Change PDF

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Trans-organizational Change...

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22 Transorganizational Change This chapter describes interventions that move beyond the single organization to include merging, allying, or networking with other organizations. These multiorganization change programs are becoming more prevalent in OD as organizations extend their boundaries to keep pace with highly complex and rapidly changing environments. Under these conditions, organizations may merge with or acquire other firms to gain essential capabilities and resources, to operate at a larger scale, and to enter new markets. They may form strategic alliances with other organizations to share costs and expertise and to manage their exchanges more efficiently. They may join with other firms to tackle complex problems and projects that single organizations cannot accomplish. Transorganizational change helps organizations create and sustain such multiorganization linkages. It helps organizations transcend the perspective of a single organization and address the needs and concerns of all involved organizations. This represents a fundamental shift in strategic orientation because the strategies, goals, structures, and processes of two or more organizations become interdependent and must be coordinated and aligned. This raises the scope and complexity of change processes; it increases the chances that conflicts and misunderstandings will occur. Transorganizational change calls for OD practitioners to move to a higher level of diagnosis and intervention that straddles the boundaries of different organizations, attends to their unique and often conflicting needs, and brings structure to what is frequently an underorganized and highly uncertain process. Practitioners are having to develop new concepts, skills, and expertise for implementing these change interventions.

Because transorganizational change is relatively new to OD, this chapter starts with an explanation of the rationale underlying multiorganization arrangements. Then, three kinds of interventions are described: mergers and acquisitions, strategic alliances, and networks. Mergers and acquisitions leverage the strengths (or shore up the weaknesses) of one organization by combining with another organization. This transorganizational change involves integrating many of the interventions previously discussed in this text, including human process, technostructural, and human resources management interventions. Research and practice in mergers and acquisitions strongly suggest that OD practices can contribute to implementation success. Alliance interventions, including joint ventures, franchising, and long-term contracts, help to develop the relationship between organizations that believe the benefits of cooperation outweigh the costs of lowered autonomy and control. These increasingly common arrangements require each organization to understand its goals and strategy in the relationship, build and leverage trust, and ensure that it is receiving the expected benefits. Finally—and building on the knowledge of alliances—network interventions are concerned with helping a group or system of organizations engage in relationships to perform tasks or to solve problems that are too complex and multifaceted for a single organization to resolve. These multiorganization systems abound in today’s environment and include research and development consortia, public–private partnerships, and constellations of profit-seeking organizations. They tend to be loosely coupled and nonhierarchical, and consequently they

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require methods different from most traditional tions recognize the need for transorganizaOD interventions that are geared to single tional partnerships and develop coordinating organizations. These methods help organiza- structures for carrying them out.

TRANSORGANIZATIONAL RATIONALE More and more, organizations are linking with other organizations to achieve their objectives. These transorganizational strategies can provide additional resources for large-scale research and development; spread the risks of innovation; apply diverse expertise to complex problems and tasks; make information or technology available to learn and develop new capabilities; position the organization to achieve economies of scale or scope; and gain access to new, especially international, marketplaces.1 For example, pharmaceutical firms form strategic alliances to distribute noncompeting medications and to avoid the high costs of establishing sales organizations; firms from different countries form joint ventures to overcome restrictive trade barriers; and hightechnology firms form research consortia to undertake significant and costly research and development for their industries. More generally, however, transorganizational strategies allow organizations to perform tasks that are too costly and complicated for single organizations to perform.2 These tasks include the full range of organizational activities, including purchasing raw materials, hiring and compensating organization members, manufacturing and service delivery, obtaining investment capital, marketing and distribution, and strategic planning. The key to understanding transorganizational strategies is recognizing that these individual tasks must be coordinated with each other. Whenever a good or service from one of these tasks is exchanged between two units (individuals, departments, or organizations), a transaction occurs. Transactions can be designed and managed internally within the organization’s structure, or externally between organizations. For example, organizations can acquire a raw materials provider and operate these tasks as part of internal operations or they can collaborate with a raw material supplier through longterm contracts in an alliance. Economists and organization theorists have spent considerable effort investigating when transorganizational strategies work best. They have developed frameworks, primarily transaction cost theory and agency theory, that are useful for understanding these interventions.3 As a rule, transorganizational strategies work well when transactions occur frequently and are well understood. Many organizations, for example, outsource their payroll tasks because the inputs, such as hours worked, pay rates, and employment status; the throughputs, such as tax rates and withholdings; and the outputs occur regularly and are governed by well-known laws and regulations. Moreover, if transactions involve people, equipment, or other assets that are unique to the task, then transorganizational linkage is the preferred approach. For example, Microsoft works with a variety of value-added resellers, independent software vendors, and small and large consulting businesses to bring their products to customers ranging in size from individual consumers to the largest business enterprises in the world. An internal sales and service department to handle the unique demands of each customer segment would be much more expensive to implement and would not deliver the same level of quality as the partner organizations. In general, relationships between and among organizations become more formalized as the frequency of interaction increases, the type of information and other resources that are exchanged become more proprietary, and the number of different types of exchanges increases.4 Cummings has referred to groups of organizations that have joined together for a common purpose as transorganizational systems (TSs).5 TSs are functional social systems existing intermediately between single organizations on the one hand and societal systems on the

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other. These multiorganization systems can make decisions and perform tasks on behalf of their member organizations, although members maintain their separate organizational identities and goals. This separation distinguishes TSs from mergers and acquisitions. In contrast to most organizational systems, TSs tend to be underorganized. Relationships among member organizations are loosely coupled; leadership and power are dispersed among autonomous organizations, rather than hierarchically centralized; and commitment and membership are tenuous as member organizations act to maintain their autonomy while jointly performing. These characteristics make creating and managing TSs difficult.6 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. The network interventions described in this chapter can help TSs understand and address these problems.

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 the interventions described later in this chapter because at least one of the organizations ceases to exist. The stressful dynamics associated with M&As led one researcher to call them the “ultimate change management challenge.”7 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.8 As a result, M&As have become a preferred method for rapid growth and strategic change. In 2007, for example, the worth of M&A deals reached an all-time high of over $4.4 trillion globally, with 40% of that total involving cross-border M&As.9 Recent large transactions include Cerberus and Chrysler, AT&T and Bell South, Google and YouTube, News Corporation and Dow Jones, Royal Bank of Scotland and ABN Amro, Nestle and Gerber Products, Walt Disney Company and Pixar, P&G and Gillette, and Wachovia and Golden West Financial. Despite M&As’ popularity, they have a questionable record of success.10 Among the reasons commonly cited for merger failure are inadequate due diligence processes, lack of a compelling strategic rationale, unrealistic expectations of synergy, paying too much for the transaction, conflicting corporate cultures, and failure to move quickly. M&A interventions typically are preceded by an examination of the organization’s strategy. Executives must decide whether their strategic goals should be achieved by either an internal change or a multiorganization arrangement, such as an M&A, strategic alliance, or network. Mergers and acquisitions are preferred when internal development is considered too slow or when strategic alliances or networks do not offer sufficient control over key resources to meet the firm’s objectives. In addition to the OD issues described here, M&As are complex changes that involve legal and financial knowledge beyond the scope of this text. OD practitioners are encouraged to seek out and work with specialists in these other relevant disciplines. The focus here is on how OD can contribute to M&A success.

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Application Stages Mergers and acquisitions involve three major phases as shown in Table 22.1: precombination, legal combination, and operational combination.11 OD practitioners can make substantive contributions to the precombination and operational combination phases as described below. Precombination Phase This first phase consists of planning activities designed to ensure the success of the combined organization. The organization that initiates the M&A must identify a candidate organization, work with it to gather information about each other, and plan the implementation and integration activities. Research shows that precombination activities are critical to M&A success.12 These include: 1. Search for and Select Candidate. This involves developing screening criteria to assess and narrow the field of candidate organizations, agreeing on a first-choice candidate, assessing regulatory compliance, establishing initial contacts, and formulating a letter of intent. Criteria for choosing an M&A partner can include leadership and management characteristics, market access resources, technical or financial capabilities, physical facilities, and so on. OD practitioners can add value at this stage of the process by encouraging screening criteria that include managerial, organizational, and cultural components as well as technical and financial aspects. In practice, financial issues tend to receive greater attention at this stage,

[Table 22.1] Major Phases and Activities in Merger and Acquisitions MAJOR M&A PHASES

KEY STEPS

OD AND CHANGE MANAGEMENT ISSUES

Precombination

• Search for and select

• Ensure that candidates are

Legal combination

• Complete financial

candidate • Create M&A team • Establish business case • Perform due diligence assessment • Develop merger integration plans

screened for cultural as well as financial, technical, and physical asset criteria • Define a clear leadership structure • Establish a clear strategic vision, competitive strategy, and systems integration potential • Specify the desirable organization design features • Specify an integration action plan

negotiations

• Close the deal • Announce the

combination

Operational combination

• Day 1 activities • Organizational and

technical integration activities • Cultural integration activities

• Implement changes quickly • Communicate • Solve problems together and

focus on the customer • Conduct an evaluation to learn

and identify further areas of integration planning

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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.13 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. 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.14 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 can also help members define a 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 essential. The outcome of this decision and the process used to make it are the first outward symbols of how this transorganizational 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.15 It includes specifying the strategic vision, competitive strategy, and systems integration potential for the M&A. OD practitioners can facilitate this discussion to ensure that each issue is fully explored. If the business case cannot be justified on strategic, financial, or operational grounds, the M&A should be revisited, terminated, or another candidate should be considered. Strategic vision represents the organizations’ combined capabilities. It synthesizes the strengths of the two organizations into a viable new organization. For example, AT&T had a clear picture of its intentions in acquiring NCR: to “link people, organizations, and their information in a seamless global computer network.” 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 it 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.” The AT&T and NCR acquisition struggled, in part, because NCR management was told simply to “look for synergies.”16 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, operational, technical, logistical, and human resources inventories

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are evaluated along with other legally binding issues. The discovery of previously unknown or unfavorable information can halt the M&A process. 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.17 Thus, attention to the cultural features of M&As is becoming more prevalent in due diligence assessment. For example, Abitibi-Price applied a cultural screen as part of its due diligence activities along with financial and operational criteria. The process sought to identify the fit between Abitibi’s values and those of possible merger candidates. Stone Consolidated emerged as both a good strategic and cultural fit with Abitibi. This cultural assessment contributed heavily to the success of the subsequent merger. OD expertise can contribute significantly to M&A cultural assessment; it can help organizations carry out cultural due diligence sytematically and objectively. 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 t...