session 15 and 16 interorganizational relationships

7/27/2019 Session 15 and 16 Interorganizational Relationships

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MANAGING ORGANIZATIONS

Session 15 & 16:Interor anizational Relationshi s &

PGP 2010-12 Section B

Term 1:June-September 2010

Sourav MukherjiAssociate Professor of Organization & Strategy

Indian Institute of Management Bangalore, India

Organizational Forms for the Future


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3A NEW WAVE IS SWEEPING ACROSS THE BUSINESS WORLD

Bharti Televentures has outsourced itsnetwork management to Ericsson & ITmanagement to IBM

S Mukherji

Kingfisher Airlines has outsourced itsground handling facilities to Indian Airlines

Hindustan Levers have outsourced itshuman resource managementto Accenture


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4WHY IS EVERYBODY THINKING ABOUT OUTSOURCING ?

Outsourcing leverages the benefits of specialization

Not about core versus non-core Not only about cost reduction

S Mukherji

Outsourcing today is about value maximization

Enabled by widespread availability of information

and information technology Possible to separate the physical flow of resources

from flow of information


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5FOUR STRATEGIC REASONS FOR OUTSOURCING

Cost Minimization

Accessing superiorcompetencies andprivileged assets

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2

S Mukherji

Superior resourceleverage

Risk diversification

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While these are collectively exhaustive, they are not mutually exclusive


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6COST EFFICIENCY CAN ARISE FROM VARIOUS SOURCES

Cost Minimization


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Moving beyond arbitrage

Manufacturers derive scale economies bydemand aggregation

Services derive better utilization bydemand aggregation

Specialization and greater scale enablinginnovation and automation, which finally

S Mukherji



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leads to greater efficiency

Superior value at competitive prices

Challenges of managing scale, varietyand developing superior processes


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7ACCESS RESOURCES THAT ARE DIFFICULT OR

UNECONOMICAL TO BUILD

Cost Minimization


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Complementary assets take time to build.Such time cannot be afforded when timeto market is critical

- pharmaceutical distribution network

Privileged assets are difficult to create- airport ground handling facilities

Certain competencies are required only

S Mukherji



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.

in loss of flexibility- strategy consulting

Many of these command a price premiumrather than being available at low cost


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8LEVERAGE RESOURCES TO MAXIMIZE VALUE ADDITION

Cost Minimization


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Review of activities within each functionto determine which among them are

- transaction intensive, non specificto organization, have scale economies

- specific to organization

A specialized player might be in a betterposition to do certain activities within thefunction. Therefore ideal for outsourcin .

S Mukherji



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Organization resources are better leveragedto focus on activities which are specific tothe organization

Not a matter of core versus non-core butdetermining where is it that the organizationcan add value


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9PORTFOLIO OF CLIENTS TO MINIMIZE DEMAND VOLATILITY

Cost Minimization


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Outsourcer maintains a portfolio of clientswhose demand profiles are uncorrelatedwith one another

Transfer resources from one client project

to another depending on demand

Possible only if skills are fungible

A lication in eo le intensive service

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business- critical driver of scale

Minimizes risks arising out of demand

volatility that the client would not havebeen able to do on their own


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10OUTSOURCING HAS ITS COSTS AND RISKS

Application of transaction cost theory to build a decision framework

Transaction specific investmentscreate potential for opportunistic

behaviour leading to an increasein negotiated prices

Costs of searching, drawing,negotiating end enforcing contracts

Other relatedorganizationalcosts

Transaction

Strategic

risks

S Mukherji

Costs get escalated when thereis business uncertainty

Risks of knowledge spillover anddivulgement of sensitive information,

often tacit and complex in nature

Disruptive effect of supply shockson business, where contractualcompensation might not be asufficient safeguard

Productioncostwithinorganization

Production

cost ofmarket


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What are some of the deterrents of opportunistic behaviour ?

Do markets always fail when there are small numbers and needfor transaction specific investments ?

S Mukherji

Can there be an economic rational for trust ?


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The Prisoners Dilemma: An illustration

0,10 5,5

2,2 10,0

X

Does not

confess

ConfessX confession: 0 or 5 years

X not confession: 2 or 10 years

Individual strategy implies confession

If Y thinks similarly, he will also confess

TO CONFESS OR NOT TO CONFESS

S Mukherji

YDoes not

confessConfess

Alliance strategy: 2 years each

Based on trust , risky

Cost of betrayal high (10 years)

Most suitable for long run

Opportunism in an economic transaction may be curbed

keeping long term interests in mind


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OUTSOURCING LIFES TOUGH AND MUNDANE TASKS14

Offers a pool of assistants in India whompeople could call or email to ask for help

Outsource tasks that can be accomplished overphone or email is relatively short period of time~ 20 minutes

Doctors appointment, restaurant reservation,

Illustrative examples of Personal Process Outsourcing

S Mukherji

A lady outsourced breaking off a relationship

Users wishing to outsource onerous or unpalatabletasks post them on the web and invite bids

50,000 users after 1.5 years of existence

A man sought bidders to clean his ears and foundsomeone highly qualified

Source: News item from AFP, appearing in Hindu, 29 th June 2008

session 15 and 16 interorganizational relationships

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