PART II: LITERATURE REVIEW
CHAPTER TWO
Organizational Environment
2.1.
Introduction
Organizational environment consists of physical and social factors that have the potential
to influence the organization in various ways. Researchers have attempted to define the
environment by elaborating, classifying and analyzing its structure and role in
organizational performance. Whereas, contemporary organizational environment with its
numerous affecting factors is changing so dramatically that prediction about its behavior
is practically impossible. In the developing countries especially, the complexities of
organizational environment are greater in their number and strength due to greater
uncertainties. Therefore, an understanding of organizational environment and its various
complexities is essential to manage the organization’s activities effectively. This chapter
specifically focuses on the notion of organizational environment and its various
dimensions discussed by organizational researchers in different research eras. A review
of this literature will provide a basis for understanding the complexity of environment of
the developing countries.
In the study of organization, I presume that the major problem a researcher would
face is from where to start the research work? There are a range of dimensions, from
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operational to strategic management and institutional planning, which could be the points
of entry into initiating the research inquiry. But if we thoroughly analyze the
contributions in the field of organizational theory, the starting point in most of the studies
appears to be the analysis of organizational environment, which determines the nature
and form of activities in the organization. The basic questions that are usually raised are:
what is organizational environment? What are different types of organizational
environments? And why is the study of organizational environment important? In this
chapter, I have attempted to discuss these questions through the available literature on
this subject.
2.2.
What is Environment?
There is no consensus amongst the contributors of organizational theory on the basic
definition of environment. Over the past fifty years, researchers have used different
approaches to define this concept. Some of the pioneering researchers in this field include
Dill (1958), Emery and Trist (1965), Thomson (1967), and Duncan (1972). Dill (1958)
introduces the notion of task environment, and focuses on the external environmental
factors. According to him these factors have an impact upon organizational goal settings.
He states that: task is cognitive formulation, consisting of goals and usually also of
constraints on behaviors appropriate for reaching the goals (P. 411).
Emery and Trist (1965) categorize organizational environment into four types.
Their work adds considerable importance to understanding the structure of organizational
environment. The research of Emery and Trist (1965) was followed by the work of
Thomson (1967) on the subject of organizational domain, which identifies the area of
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potential dependency for the organization. According to him, potential dependencies
include range of products, population served and services rendered etc. Based on the
works of previous researchers, Duncan (1972) also attempts to define the concept of
organizational environment. He states that:
Environment is thought of as the totality of physical and social factors that are
taken directly into consideration in the decision making behavior of individual in
the organization (p. 314).
Duncan discusses the physical and social factors that define both internal and
external environments, adding to the work of Rice (1963), which focuses only on the
internal environment of the organization. Osborn and Hunt (1974) describe
organizational environment with respect to relevance of factors. They consider all the
relevant factors like other organizations, association of individuals, and macro forces as
the environment. They also attempted to identify and define the ‘macro’, ‘aggregation’
and ‘task’ environments in the light of work done by earlier scholars e.g. Clarke and
McCabe (1970), and Dill (1958). These concepts are discussed in detail later in this
chapter.
Other researchers who have discussed various aspects of organizational
environment include Lindsay and Rue (1980), Astley and Fomburn (1983), Dess and
Beard (1984), Walter (2003), and Boyne and Meier (2009). Lindsay and Rue (1980)
attempted to investigate the effects of organizational environment on long range
planning. They are of the view that organization tends to adopt the long-range planning
as the complexity and instability of the business environment increases. Astley and
Fomburn (1983) explain the relationship between environment and organizational
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autonomy. They hold the view that organization is not an autonomous actor of its
strategic choice. There are many external factors that compel the organization to revise its
strategic planning and implementation.
Dess and Beard (1984) further refine Dill’s notion of task environment, and
suggest its three components: munificence, dynamism, and complexity. They explain
munificence as the extent to which the environment can support long-term organizational
growth. They further describe that, organization looks for an environment that allows for
organizational growth and stability. Such growth and stability may assist the organization
to generate extra resources that could be used for innovation, organizational coalitions
and conflict resolutions. According to Dess and Beard, dynamism includes unpredictable
changes in organizational environment. These unpredictable changes create uncertainties
and complexities for the organization. They viewed these complexities to be
characterized with heterogeneity and the range of organizational activities within the
organizational environment. Dess and Beard also contend that highly complex
environment generates greater uncertainty for the managers than lesser complex
environment. While explaining the environmental complexity, Dess and Beard present it
as a dimension of task environment but most of the other researchers like Child (1972)
and Duncan (1972) consider complexity as a characteristic of organizational
environment.
Walters (2003) explains that new business models like Virtual Organization and
Holonic Organization, are emerging as a result of environmental turbulence. These are
basically the inter-organizational networks, in which organizations with different
capabilities join together to exploit emerging market opportunities. These structures are
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characterized as non-hierarchical, self-regulating, and with dynamic equilibrium among
parties.
Boyne and Meier (2009) discuss the relationship between environmental
turbulence and organizational stability, and consider environmental turbulence to have a
damaging effect on organizational stability, growth and performance. Therefore the best
response to environmental turbulence could be internal environmental change.
2.3.
Foundations of Organizational Environment: Theories, Types,
and Dimensions
After analyzing the available literature on organizational environment, it appears that
there have been three stages of development in the understanding of environmentorganization relationship. The first stage occurred from the late 1950s to mid 1960s. In
this stage the concept of organizational environment was introduced to organizational
theory. Most of the researchers in this stage e.g. Dill (1958), Burn and Stalker (1961),
Rice (1963), and Emery and Trist (1965) concentrated on various structures and types of
organizational environment. This stage is considered as an introductory stage in the
theory of organizational environment in which most of the research effort was focused on
identifying the importance of organizational environment in the context of organizational
theory. The remarkable work of this stage is the development of contingency theory. I
have explained the contingency theory and other developments during this stage in the
subsequent subsections of this chapter.
The second stage of development mainly took place during the late 1960s to late
1970s. In this period researchers like Thomson (1967), Duncan (1968, 1972), and Osborn
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and Hunt (1974) etc. attempted to classify the organizational environment into various
types and categories. This stage is considered as concept development stage.
The third stage of development began in the late 1970s and continues to date. This
period is dedicated to analysis of organizational environment as a significant element
affecting organizational operations. At this stage, the researchers are attempting to find
out the ways in which environment affects the organizational dynamics. The most
significant contributions of researchers during this stage include the addition of three
important theories to the field of organization analysis i.e. resource dependence theory,
population ecology theory, and institutional theory (Hatch, 1997). The detailed
explanation of all the three stages is given as following:
2.3.1.
Stage I: Introduction to the Concept of Environment
This stage, extending from late 1950s to mid 1960s, is the introductory period for the
concept of organizational environment. During this period, most of the researchers have
attempted to introduce the concept of organizational environment and its various types.
The major contributions during this period are suggested below:
2.3.1.1.
Introduction of Task Environment
Dill (1958) conducted an exploratory study on two Norwegian firms with 250-300
employees. In this study, he focused on one important component of the environment i.e.
task environment, which he considered to have a strong effect on goal setting. Dill
attempted further to operationalize the concept of environment using relevant variables,
like, manufacturing and sale, fashion, marketing, and services etc.
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2.3.1.2.
Mechanistic and Organic Environment, and Development of the
Contingency Theory
Some of the pioneering researchers on organizational environment hold the view that
organizational structure depends upon the types of environment. In static environment,
there is homogeneity of activities and stability of structures in the organization, and in
changing environment organization tends to adopt the flexible structures with
heterogeneity of activities. This phenomenon is the basic theme of contingency theory
that ‘different environmental conditions called for different styles of organizing’ (Burns
& Stalker, 1961). It means that the effective way to organize is contingent upon the
conditions of the environment. The major contribution in contingency theory is made by
Burns and Stalker, by identifying and examining two different structures of environment:
mechanistic and organic. The mechanistic environment has specialization of parts with
more stability and fewer changes in environmental dimensions, while organic
environment has less specialization of its parts, less stability, and more changes in
environmental dimensions.
2.3.1.3.
Internal and External Environment
Rice (1963) explains the notion of organizational environment by classifying its structure
into two broad categories: internal environment and external environment. He defines
internal environment as a relationship and interaction amongst the members of the
organization, and considers other organizations and individuals as external environment
of the organization.
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2.3.1.4.
Emery and Trist: Four Types of Organizational Environment
Following on the work of Rice (1963), the research by Emery and Trist (1965)
categorizes the structure of organizational environment with respect to uncertainty,
complexity and predictability. They identify four types of organizational environment:
1.
‘Placid Randomized environment’ in which goals of the organization remain the
same.
2.
‘Placid clustered environment’ which is comparatively dynamic than the first one.
It is like an imperfect competition, in which there are few buyers and sellers and
survival of every organization depends upon their information of its environment.
3.
‘Disturbed reactive environment’ which consists of a clustered environment in
which there is more than one organization of the same kind i.e. the objectives of
one organization are same as or relevant to other similar organizations. The
existence of the various similar organizations is a major characteristic of this
environment. In clustered environment, some clusters are profitable and others are
not, and every organization desires to move into the profitable cluster of the
environment.
4.
‘Turbulent field’ in which the dynamism of the environment arises not only from
the interactions of constituent organizations but also from the field itself.
2.3.2
Stage II: Development in the Field of Organizational Environment
This stage in the context of organizational environment is considered as concept
development stage. In this period, from late 1960s to late 1970s, most of the researchers
attempted to classify and categorize the concept of organizational environment. Some of
the major contributions during this period include:
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2.3.2.1.
Heterogeneity/Homogeneity and Stability/Dynamism
Thomson (1967) classifies organizational environment on the basis of two dimensions:
heterogeneity/homogeneity and stability/dynamism. The first dimension describes the
elements of the environment in terms of their similarity or difference from each other.
The second dimension describes the status of change in these elements, that is, whether
these elements are changing or not.
2.3.2.2.
Dimensions of Internal and External Environments
Duncan (1968) further expanded the work of Rice (1963) by defining internal and
external environments in details. He holds the view that internal environment comprises
of all the forces operating within the organization, while external environment comprises
all the forces operating outside the organization. Duncan identifies three components of
internal environment and five components of external environment. The internal
environment consists of personnel, functional & staff unit, and organizational-level
components. The five components of external environment are: customers, suppliers,
competitors, socio-political forces and technology.
Duncan (1972) further elaborated these dimensions to identify the relationship of
internal and external environments with uncertainty and decision making (I will discuss
this study in details in Chapter Four).
2.3.2.3.
Macro, Aggregation, and Task Environments
Following on Duncan’s work, Osborn and Hunt (1974) suggests that environment is
composed of unlimited elements outside the boundaries of the organization. These
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unlimited elements can be grouped into three broad categories: macro, aggregation, and
task.
1.
‘Macro environment’ consists of the forces that have a reasonable effect on
organizational characteristics and output.
2.
‘Aggregation environment’ consists of special interest groups and constituencies
operating within macro environment. It is difficult to define the aggregation
environment, because some of its dimensions overlap the task environment and
play a considerable role in altering it.
3.
‘Task environment’ affects only specific organization, whereby every
organization has its own task environment, as identified earlier by Dill (1958).
2.3.3.
Stage III: Applications of the Concept of Organizational Environment
This stage is dedicated to analysis of the effects of environment on organizational
dynamics. In this period, from late 1970s to date, applications and importance of the
environment in organizational dynamics remain the major issue in most of the research
studies. The most significant work during this period is the development of three
important theories. In the following subsections, I have discussed these theories in detail.
2.3.3.1.
Resource Dependence Theory
This theory is developed by Pfeffer and Salancik (1978). It argues that the organization is
managed and controlled by its environment. This theory concentrates on interorganizational relations, identifying various types of players in the environment e.g.
suppliers, buyers and mediators, etc. and the dependence of one organization over the
other to obtain its desired resources. Therefore an organization develops the power to
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influence the other organization in various ways. By using this power, the players in the
external environment make demands on other organizations in different ways like
competitive prices and desirable goods and services.
The resource dependence analysis consists of two important steps: identification
of organizational required resources, and tracing the sources to fulfill the need. In interorganizational relationships most of the organizations concentrate on capturing the
scarcest resources to obtain maximum power. For obtaining the maximum power,
resource dependence theory concentrates on two important points: comprehensively
understanding the network regarding its players and scarce resources, and looking for the
ways to avoid dependency on other organization.
Practically resource dependence analysis is a highly complex and challenging
task, because it is very difficult for the organization to identify all the sources of its
desired resources. Therefore to solve this problem it is essential to sort sources and
resources out according to their criticality and scarcity.
2.3.3.2.
Population Ecology Theory
In population ecology theory, organizational environment is assumed to have the power
to select the organizations from a pool of competitors which best serve its requirements
(Hannan & Freeman, 1977; Aldrich & Mindlin, 1978). This theory is the extension of the
resource dependence theory, in which organizations have the power to select the other
organizations to obtain and to share the scarce pool of resources (Aldrich & Pfeffer,
1976). The adopted patterns of interdependence of different environmental players affect
the survival and success of individual members. Therefore, the basic argument of this
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theory is based on the concept of ‘survival of the fittest’ that is, organizations compete for
their survival (Hatch, 1997).
To understand the environment, this theory concentrates on the pool of
organizations, or population of the organizations, rather than individual organization.
This theory attempts to predict various issues like organizational birth, death,
coordination, competition, organization success and organizational failure.
There are various drawbacks in this theory. Firstly, it is impossible to predict the
survival on the basis of resource dependence. Secondly, it also not possible to decide and
study the organizational population especially in difficult types of market structures like
perfect competition and oligopoly.
2.3.3.3.
Institutional Theory
Institutional theory focuses on the social structures. Scott (2004) defines the institutional
theory by stating that
Institutional theory attends to the deeper and more resilient aspects of social
structure. It considers the processes by which structures, including schemas, rules,
norms, and routines, become established as authoritative guidelines for social
behavior. It inquires into how these elements are created, diffused, adopted, and
adapted over space and time; and how they fall into decline and disuse (p. 408).
In connection with the organizational environment, institutional theory explains
two issues: demands that environment puts on organization, and rewards that
organization receives for effectively and efficiently meeting the environmental demands
(Hatch, 1997). Various researchers like Deephouse (1996), and Suchman (1995) assert
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that environment can put two different types of demands on organization. First, it can
make technical and economic demands, for example production of specific goods or
exchange of services. Secondly, it can make social and cultural demand that requires
organization to fulfill the social and cultural responsibilities. When organization fulfills
the environmental demands, then it will reward the organization in different ways like
conforming to the values, and beliefs of society etc.
In neo-institutional theory some researchers like DiMaggio and Powell (1991)
attempted to move beyond the thoughts of social structures by explaining the process in
which practices and organizations become institutions. Scott (1995) defines
institutionalism as the process in which actions are repeated again and again and given
same meanings by self and others. Therefore, not only social structures and
organizations, but actions can be conceptualized as institution.
2.3.3.4
Modern and Postmodern Perspectives on Organizational Environment
From classical management to the postmodernism, there are various view points on the
notion of environment. Classical management theory is based upon the close system
approach, where internal operations are the major concern of management. Whereas,
modern and postmodern theories are based on the open system approach, and argue that
organization is open to its environment. The modern perspective of organizational
environment concentrates on capitalistic concerns, like industry, market regulation, and
competition etc (Boje & Dennehy, 1993). Whereas, the postmodern analysts reconstruct
the notion of organizational environment by paying special attention to nature; and
consider the modern view as denatured (Shrivastava, 1995). Most of the postmodern
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theorist are in the favor of deconstructing the concept, and redefine it on the basis of
reality, social order, affiliations and roles etc. for example the use of word ‘Developing
Countries’, ‘Developed Countries’, ‘ First World’, ‘Third World’, ‘Africans’, ‘Asians’
etc (Boje & Robert, 1993). All these words indicate different structures of environment.
The most important aspect of the postmodern view of environment is its classification.
They are against the arguments that there are different types of environment. They hold
the view that there is just one highly complex environment and we are dealing with
different aspects of the same environment (Hatch, 1997).
After reviewing the available literature on organizational environment, I presume
that it is relatively difficult to present a coherent and comprehensive concept to
understand the organizational environment because there is no single set of concepts or
models on organizational environment that are widely accepted, as described by
Sharfman and Dean (1991a) in a discussion about environments:
Neither a single set of constructs nor a single set of measures of the organizational
environment is widely accepted, making it difficult to build a comprehensive
literature on the impact of the environment on the firm...because neither a single
approach to conceptualizing the environment nor to measuring it has received
widespread acceptance, we have been unable to build a comprehensive, coherent
literature about the environment and its impact on the firm. (p. 681)
In the previous discussion on environment, it have been attempted to explain the
viewpoints, arguments, and understandings of various earlier schools of thought
regarding organizational environment. There are several approaches to identify the
environmental elements, but three of the most common are: internal environment,
external environment, and international/global environment (Hatch, 1997). External
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environment consists of three sub-dimensions: task environment, general environment
and inter-organizational networks. Therefore, to examine the organizational environment
for this study, the three elements mentioned above are considered to be the basic
elements in the case of Pakistan.
2.4.
Environmental Complexity
In organizational theory complexity is an important variable that characterizes both
organizations and its environment (Anderson, 1999). Environmental complexity remains
the major concern for organizational theorist since the seminal work of Emery and Trist
(1965), who have discussed this concept in the context of environmental turbulence and
change. After their work, different researchers defined this concept in variety of ways.
Thomson (1967) describes complexity as heterogeneity and diversity.
After these two significant contributions, Duncan (1972) operationalized the
concept of environmental complexity by describing two characteristics of complex
environment: complexity in terms of the number of factors, and heterogeneity among
these factors in environment. Moreover, Duncan also introduced the notion of internal
and external complexities. In internal complexity, organizational structure, culture,
technology and personnel are the important components while, customers, suppliers,
competitors and socio-cultural components of the environment are considered as the
integral part of external complexity.
After Duncan’s work, some other significant studies have been carried out in this
field (like Dess & Beard 1984; Singh, 1997; Tung, 1979) but the concentration of these
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researchers in their subsequent studies remains on the same two basic categories
previously described by Duncan (1972). Hence, environmental complexity could be “the
number of different items or elements that must be dealt with simultaneously by the
organization” (Scott 1992, p. 230).
In more comprehensive terms, environmental complexity is the number and
interactions between the elements of the environment where future behavior of the
environment is unpredictable and frequency of changes in variables is unknown. The
intensity of the interactions between elements is another important component of
environmental complexity (Tsoukas & Hatch, 2001).
On the other hand, organizational complexity can be measured as the number of
activities and subsystems in the organization (Daft, 1992). According to Daft, there are
three dimensions of organizational complexity:
1.
‘Vertical complexity’ which is the number of levels in organizational hierarchy. If
there are more levels in hierarchy, it is said to be a complex organization.
2.
‘Horizontal complexity’ is the number of different jobs to be performed in
organizational structure, and
3.
‘Spatial complexity’ is the number of geographical locations.
2.5.
Why the Study of Environment is Important?
Organizational environment is a continuously dynamic phenomenon that creates
problems for management (Milliken, 1987). Different researchers like Harrington and
Kendall (2006) suggest that environmental dynamism consists of unpredictable changes
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taking place in the organizational environments. Due to unpredictable changes in
organizational environment, organizational dynamism and uncertainty has remained the
major concerns for organizational theorists for over three decades (Gerloff, Muir &
Bodensteiner, 1991). The major problem for managers is their lack of understanding of
the behavior and of change patterns in organizational environment which creates
difficulties in various organizational processes like strategic planning, and project
evaluation etc. (Lawrence & Lorsch, 1967). In this regard, most of the researchers
suggest a detailed environmental analysis before preparing an organizational plan
(George, Moone & Vincet, 2007; Miller, 2009).
2.6
Conclusion
In this chapter, some important aspects of organizational environment and the notion of
environmental complexity are discussed. After this review, it has been concluded that
business organization experiences continuous changes due to dynamism in organizational
environment. Most researchers view these changes as systematic rather than random
(Buzzell, 1980). To align with the environmental change, transformational change may
be more relevant than other types of changes like development and transitional changes.
A detailed discussion on these issues is carried out in Chapter Three.
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CHAPTER THREE
Organizational Transformation
3.1.
Introduction
Environmental conditions and managerial decisions appear to establish the basic pattern
of activities in organization (Boeker, 1989). With the continuance of these activities,
shared understanding of that basic pattern is established (Meyer & Rowan, 1977). This
type of shared understanding in organization creates routineness and homogeneity of the
activities. According to Hannan and Freeman (1984) routineness and homogeneity are the
major causes of organizational inertia. To break this inertia in organizational settings,
new patterns of activities are established as a result of organizational change (Romanelli
& Tushman, 1994).
The concept of change has been studied and documented in the classical
literature1, while business organizational change is fairly contemporary, and has been the
focal point of several organizational studies (Chapman, 2002; Hughes, 2007). Change in
postmodern organizational structures is the result of several factors like volatile and
dynamic environment (Fergusson & Langford, 2006; Hunsaker & Hunsaker, 2008);
deregulation, globalization, and technological innovation (Domberger, 1998) and
1
Morgan (1986) quotes from Heraclitus 500 B.C. who presented the idea of flux and change in the
universe. He states that “You cannot step twice into the same river, for other waters are continually flowing
on.”
Chapter-3
organizational complexities (Douglas & Sabourian, 2005; Mason, 2007). Others like
Hughes (2007), and Morales, Reche & Torres (2008) also present top management’s
inclination and desire towards change and innovation as a factor affecting organizational
change.
Discussion on organizational environment and complexity especially in the
context of the developing countries introduces new paradigms for successful
transformation. In these emerging paradigms, the major point that has to be discussed is
the component and scope of transformation process and its compatibility with
environmental dimensions. In this chapter, basics of organizational change e.g. definition,
types, and processes etc. and different methodologies and dimensions e.g. learning,
inertia, and leadership etc. of organizational transformation have been discussed.
3.2.
What is Organizational Change?
Change is considered to be a multifaceted phenomenon in contemporary organizational
theory (Kanter, Stein & Jich, 1992). The major problem in studying this concept is the
lack of adequate definition of organizational change. However, different researchers have
attempted to define organizational change from their individual perspectives. Clarke
(1994), and Meyer (1982) for example, focus on the need of organizational change.
Clarke (1994) concentrates on organizational change to compete with environmental
pressures and to achieve the targets of continuous survival and growth. Meyer, on the
other hand, focuses on the change to cope with unexpected changes in organizational
environment. According to him, unexpected changes may include workers’ strikes, and
management crises, etc.
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Behavior of the change process and its procedures were studied by Child and
Smith, (1987), with a focus on transformational change in the case of the Cadbury Ltd.
The major variables of their analysis were: objectives of the firm, context of the firm,
collaboration amongst the organizations, and organizational inertia. In addition to this,
other significant contributions have been made by Fomburn & Ginsberg (1990);
Greenwood and Hinning (1996) and Van and Huber (1990).
Fomburn and Ginsberg analyze the organizational strategy that mediates the
relationship between industry structure and organizational performance. In this study,
they concentrate on integration of business and corporate level strategies to remove the
inertia and to increase the shareholders value. The study of Greenwood and Hinning
(1996) focuses on the development of a framework to understand the change in the
context of neo-institutional theory. In this study they analyze the effect of political,
regulatory and technological complexities on organization that compels it for radical
organizational change. The research of Van and Huber (1990) analyzes the process of
organizational change. They discussed various change processes like emerging of change,
growing of change, development of change and termination of change process.
As far as the basic definition of organizational change is concerned, Kanter
(1992) defines organizational change as “the Shift in behavior of the whole organization,
to one degree or another” (p.11). Van and Poole (1995) have similar opinion on the
fundamental definition of change. They describe organizational change as “Change, one
type of event, is an empirical observation of difference in form, quality, or state over time
in an organizational entity (p. 512).”
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In addition to defining the concept of organizational change, different researchers
have attempted to identify and analyze different dimensions of organizational change, for
example, Anderson and Tushman (1990) emphasizes the importance of technological
change in organizational setting. They argue that the core technology of the organization
develops through the incremental changes over a long period of time. Tichy and Ulrich
(1984) focus on the role of leadership in change management. Kegan and Lahey (2001)
highlight the role of conflicts and resistance in change management. They present a
systematic process to reduce the resistance for change and highlight the important steps
to reduce the resistance including knowledge about existing behaviors, examination of
contrary evidence, and an allowance for change in the behavior, and endorsement of new
behavior.
3.2.1.
Organizational Transformation
Transformation is viewed as the highest form of organizational change (Ackerman,
1986). In organizational transformation, the effect of change is a paradigm shift (Nutt &
Backoff, 1993) that is; change is considered to be a fundamental way of perceiving,
understanding and valuing the world (Kuhn, 1962). Paradigm shift in this way provides
the basis for organizational transformation taking place in contemporary organization. In
organizational transformation, the change process is corporation-wide: there is a change
in business strategies, systems, structures, line of authority, power distribution, as well as
in corporate values and culture (Nadler, 1982).
As observed by Golembiewski (1979) “Transformation is a redefinition of
relevant psychological space” (p. 413). The process of redefining and renewal of basic
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inputs and dimensions of organization is required to be systematic and formalized rather
than randomized. That systematic process would help the renewal of organization by the
implementation of modern, suitable and compatible systems, structures and cultures, and
removing the organizational components that do not work (Head, 1997). The redefinition
process also concentrates on the change in behavior, perception and continuous learning,
and to create innovation out of the transformation process (Cumming & Worley, 2001).
Therefore, transformation can simply be defined as the basic shift in attitude, belief and
cultural values (Bartunek & Louis, 1988). In more comprehensive terms, as observed by
Ackoff (1981) organizational transformation is the creation of a whole new form of
organization with new functions, structures and mindsets; that new form never existed
before, and is based on continuous learning and actions with knowledge and courage.
3.2.2.
Difference between Transformation and Other Types of Organizational
Change
When the concept of organizational change was emphasized in early 1950s, it was
primarily focused upon two types of organizational change: basic and incremental
(Lewin, 1951). Due to rapid changes in organizational environment over the last fifty
years, new, structured and well defined concepts of organizational change have emerged,
for example, continuous change and strategic change etc. Therefore, the requirement for
successful change management in contemporary organizational context is to handle these
various types of change in different ways (Wesis, 1994). For this reason, it is quite
relevant to emphasize the difference between transformational change and other types of
organizational change.
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There are various schools of thought having their distinctive view points on the
types of organizational change. Golembiewski, Billingsley and Yeager (1974) classify
organizational change into three types: alpha, beta, and gamma change. In alpha change,
participants extend what they are currently doing. In beta change, the basic standards of
the organization are altered, whereby the gamma change is a transition from one stage to
another stage.
Dunphy (1996) classifies organizational change into two forms: episodic and
continuous. Episodic change tends to be infrequent and discontinuous while continuous
change is ongoing, evolving, and cumulative. The distinguishing characteristic of
continuous change is its small, uninterrupted adjustments that are created simultaneously
across units, and which create cumulative and significant change (Moorman & Miner
1998). The continuous change activities are difficult, time consuming, and resource
dependent (Kanter, 1983).
In subsequent studies by other contributors, organizational change is classified
into three categories: incremental change (Ackerman, 1986), transitional change (Jick,
1993), and transformational change (Kotter, 1995). In this regard, incremental or
developmental change improves what the business is currently doing rather than creating
something new (Romanelli, & Tushman, 1994). It involves alteration and modification of
existing management and business processes (Callan, 1993), whereas, transitional change
replaces what already exists with something that is completely new. The organization
must dismantle and emotionally let go the old ways of operating while the new state is
being put into place (Dunphy & Stace, 1993). Transformational change, on the other
hand, introduces new and radically different form of organization’s mission, culture and
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leadership (Ackerman, 1986). According to Child and Smith (1987), transformational
change includes both radical and incremental change.
3.2.3.
The Key Processes of Organizational Transformation
Organizational change is a complex phenomenon and difficult to implement in
organizational setting. All three types of change i.e. incremental, transitional and
transformational change have different protocols of implementations. To discuss the
methodologies of implementing transitional and developmental change is not within the
scope of this research, therefore, in this subsection, only the key processes of
organizational transformation shall be discussed.
In the literature on organizational transformation, different researchers have
identified, discussed and described a number of methodologies to implement the process
of transformation change. While in this subsection of literature review, three important
approaches to understand the process of transformation change will be discussed. These
three approaches are presented by Chapman (2002), Lancourt and Savage (1995), and
Kotter (1995).
3.2.3.1
Chapman’s Approach
Chapman (2002) identified and examined the transformational change process into three
core elements. In the first part, it is necessary to define the nature and scope of
organization and their relationship with change objectives. Secondly, strategy of change
management e.g. primary and secondary change levers and involvement of stakeholders
37
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should be defined. Lastly, it is necessary to define the role of the change agent. The
details of the Chapman’s approach are presented in the table below:
Table 3.1. Key Process of Organizational Transformation
Central Issues for
Organizational Development


1
Nature and Scope of Organization
and the Purpose of Change



2
Strategy of Change Management


3
Roles of Change Agent


Core Elements of
Transformational Change
Organizations are multiple overlapping
systems
Change
improves
organizational
performance, as well as individual
development
Interlinks organizational purpose with
business partners, society and other
networks.
Primary change levers are attitude
beliefs and values
Secondary change levers are processes,
structure and system
Involvement of stakeholders is informed
by the notion of ‘organizational
citizenship’
CEO provides visionary leadership and
enable change
All members of the systems can be
change agents
External consultants partner the change
process.
Source: Chapman (2002, p.17)
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3.2.3.2
Lancourt and Savage’s Approach
Prior to Chapman (2002), two prominent researchers Lancourt and Savage (1995)
presented a new idea of successful transformation by dividing it into two parts: redefining
the business and focusing on the customer, and the new role of human resources.
1.
Redefining the Business and Focusing on the Customer
Transformational change in organization requires a basic shift in attitude, beliefs, and
cultural values, or redefinition of a relevant psychological space, and giving more
importance to the customer by considering him or her as a real boss. Besides, Lancourt
and Savage (1995) suggest an emphasis on teamwork, job specialization and nonhierarchical structure for successful transformation process.
2.
New Roles for Human Resources
In the second part of organizational transformation, the view of Lancourt and Savage
(1995) describes new roles of human resource. In the new role, development of work
teams and joining of the people on the basis of their competencies and interest is
considered as the basic hallmark of the transforming organization. There are three levels
of the workers or teams in transforming organizations: formal management,
project/change leader, and project coworkers.
In the new role of human resource, all employees (including the CEO) are
expected to work on multiple projects, with atleast one in their core competency and one
in which they feel they can add value to their other competencies or interests. Moreover,
39
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Lancourt and Savage concentrate on visible leadership that can guide the behavior of the
team members and provide them the following:
1.
The freedom of expression and consensus of decision making;
2.
Applying management by exception, and giving team members the authority to
make decision in their own circle;
3.
Make the coworkers committed to their work; and
4.
Fair and justified reward system.
3.2.3.3
Kotter’s Approach
The third and last approach to understand the process of transformation is presented by
Kotter (1995), who describes eight important steps for successful implementation of
transformation change. These steps are considered as the fundamental points for
successful transformation. Kotter’s approach includes the following eight steps:
1.
Create a Sense of Urgency
In this step, a manager creates an environment of change in the organization by
“overestimating the need for change” and bringing the employees out of their “comfort
zones” (p. 60). This stage starts from some individuals who are committed to change the
company’s competitive position, market situation, technological trends and financial
performance. The search of the “appropriate leadership”, “change agent”, “identification
of crisis” and “major opportunities” are important characteristics of this stage (p. 61).
40
Chapter-3
2.
Form a Team of Key Stakeholders Who Support the Initiative
According to Kotter (1995), a major change effort is impossible until and unless there are
“working groups with enough power” in organization to make the change efforts
successful (p. 62). These groups should include top executives and managers that they
can encourage the other members of teams to work together.
3.
Form a Vision: Appealing and Easy to Understand and Communicate
In this stage of transformation, managers and top executives create an organizational
vision that is easy and understandable for the members of organization. After creating the
vision, the next important step is to design the strategies to achieve newly created vision.
4.
Vision Must In-fact be Communicated
This step covers the process of communication of the newly created vision to all the
members of the organization. The method of communication should be appropriate that
all employees from CEO to lower-level workers understand the vision accurately. This
communication is an ongoing activity that will continue throughout the transformation
change process.
5.
Obstacles Must be Removed: Identify Barriers and Deal with Them
In this stage “new approaches of doing works”, “modified structures”, “systems and
activities” are adopted to achieve the new vision (Kotter, 1995, p. 64). The old ways of
doing business, ‘traditional ideas’, ‘actions’ and ‘risk avoiding behaviors’ and all
obstacles for change should be removed in this stage of transformation.
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6.
Plan for Short-term Wins
In successful transformation, short-term planning and goals setting is an essential
constituent. Short-term planning brings an early success in the organization. This early
success motivates the employees to achieve the long-term goals. For achieving the shortterm goals, rewards and benefits are provided to the employees who were involved in
short-term wins.
7.
Consolidating Improvements and Producing More Change
In this stage of transformation, some more activities are performed like “hiring”,
“promoting” and “developing” the employees who can implement change and achieve
the organizational vision (Kotter, 1995, p. 66). In this stage of transformation, new
projects are operationalized and all the outdated structures, policies and processes that do
not fit with the vision are removed.
8.
Institutionalizing New Approaches
The last important step in transformation process is “anchoring the changes” in
organizational culture (Kotter, 1995, p. 67). Two factors are considered important for this
purpose: first, to create the consensus amongst the workers that new approaches,
techniques, structures and processes are beneficial for organization as well as for
employees, and secondly, to ensure that successor of top management will continue the
change process.
In the above subsection, I have discussed three important approaches of
transformation change. After discussing these approaches it is necessary to discuss some
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important elements of transformation like organizational learning, leadership and
organizational inertia etc. In the following part these key elements are discussed in detail.
3.3.
3.3.1.
Some Key Aspects of Organizational Transformation
Organizational Learning
Organizational learning is the capacity or processes within an organization to maintain or
improve performance that is based on experience (Nevis, Di-Bella & Gould, 1995).
Tobin (1996) considers this phenomenon as “transformational learning” that is
identification, acquisition and application of information that enables an organization and
the people within that organization to reach their goals (p. 10). According to him, to
undertake transformational learning one must discover what he needs to know i.e.
uncover their area of unconscious ignorance, and to locate the information they need,
and, lastly, to apply that information into their work.
In the literature on organizational learning various researchers have discussed
different steps of the learning process. Huber (1991), for example, describes four steps in
the learning process: knowledge acquisition, information distribution, information
interpretation, and organizational memory.
In the above mentioned steps of learning, knowledge acquisition is a process of
obtaining the knowledge of work related dimensions. Information distribution is a
process of distributing and sharing the information with others that leads to understanding
and new information generation. Information interpretation is the process by which
43
Chapter-3
distributed information is given one or more commonly understood interpretations. In the
last step, knowledge is institutionalized for future use.
Moore (2005) identifies the learning process into six important steps, outlined as
the following:
1.
‘Pre-contemplation stage’ in which employees have no idea about the problems
and their deficiencies in knowledge areas.
2.
‘Contemplation stage’ in which employees have some information about the
problem area, but they are not committed to take action and change their behavior
and attitude.
3.
‘Preparation/determination stage’ in which employees are ready to change their
behavior, and to obtain new knowledge in near future. In this stage, employees of
the organization are determined to increase their self-efficacy and commitment for
upcoming actions.
4.
‘Action stage’ in which employees modify their behaviors to overcome the
problems.
5.
‘Maintenance stage’ in which employees are continuously engaged in knowledge
generation and acquisition for a longer period of time, until and unless they have
achieved their targets.
6.
‘Termination stage’ in which employees achieved their desired targets. In this
stage the behaviors and actions of employees are totally changed and there is no
learning after this point in time.
Organizational
learning
is
a
complex
phenomenon
in
organizational
transformation. In-depth discussion on this concept is beyond the scope of this research,
but as far as the relationship of learning and transformation is concerned, organizational
44
Chapter-3
learning has strong relationship with organizational transformation and change.
According to Ehrenberg and Stupak (1994), organizational learning has influenced a
change in many basic dimensions of the contemporary organization. It has modified the
organizational structure from vertical to horizontal (Polly, 1996); changed the control
system from formal to an information sharing system (Hurst, 1995; Rifikin, 1996); and
altered the business strategies from competitive to collaborative (Kumar & Dissel, 1996).
Therefore, in most of the postmodern organization, everyone is engaged in identifying
and solving problem, and enabling the organization to continuously experiment to
improve and increase its capabilities (Daft, 2001).
3.3.2.
Transformational Leadership
In the context of transformational change, leadership is an important variable (Hill,
Hazlett & Meegan, 2001). Burns (1978) defines leader as a person who can provide
movement in the organization. In addition to organizational movement, leader also
desires to influence the thinking of people and emphasizes the need for understanding the
change as a process (Heckscher, Eisenstat & Rice, 1994). Simply, leader is a person who
can provide vision and influence the behavior of the people to achieve that vision (Bennis
& Nanus, 1997). On the other hand, leadership is viewed as a relationship between leader
and workers. Ciulla (1998) defines leadership as:
Leadership is not a person or a position. It is a complex moral relationship
between people, based on trust, obligation, commitment, emotion, and a shared
vision of the good… (p. 15).
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In the literature on organizational theory, most of the earlier researchers have
focused on two types of leadership: transactional and transformational (Bass, 1998a;
Burns, 1978; Tichy, 1986; Vinzant & Crothers, 1998). Transformational leader
concentrates on moving the organization towards new directions, and for achieving better
results and outcomes (Burns, 1978). Pawar and Eastman (1997) define transformational
leader as a person who creates a dynamic organizational vision that often necessitates a
metamorphosis in cultural values to reflect greater innovation.
In transformational leadership, it might be necessary for the leader to understand
the needs of followers, and engage the followers as one person. Moreover, mutual
understanding, trust and evaluation are compulsory element of transformational
leadership that converts followers into leaders and may convert leaders into moral agents
(Burns, 1978). Besides, Bass (1998b) considers charisma, inspirational motivation, and
intellectual stimulation as important elements of transformational leadership. As a final
point, transformational leadership according to different researchers involves in
innovation which creates new pathways in organization to generate new changes for the
organization. (Mink, 1992; Tracey & Hinkin, 1998; Davidhizer & Shearer, 1997).
To be responsible for innovation and change, transformational leadership may
require the following characteristics:
1.
Firstly, the transformational leader must focus on his personal transformation
before going to transform other people or organization (Herrington, Bonem &
Furr, 2000). The personal-level transformation will produce self-confidence,
integrity and personal values (Dixon, 1998). These characteristics serve as the
46
Chapter-3
source of motivation for employees (Keller, 1995), and have a positive effect on
goals achievement in organization (Avolio, 1994; Finkelstein & Hambrick, 1996).
2.
Secondly, transformational leader should assess the priorities for people, and try
to modify these with the new ways of thinking (Keller, 1995). This modification
would generate a new culture in the organization.
3.
Thirdly, transformational leader should provide a new vision to the organization
and motivate the employees to achieve it (Bennis & Nanus, 1997).
4.
Fourthly, transformational leader should concentrate on continues learning
process for individuals as well as for the organization (Mink, 1992). Continuous
learning could implement the transformational change successfully (Dess, Picken
& Lyon, 1998).
5.
Fifthly, transformational leader should align internal structure with organizational
vision to achieve long-term goals (Covey, 1991).
Transactional leadership, on the other hand, is the management of planning and
policy (King, 1994). By using the bureaucracy (Tracey & Hinkin, 1998), power, and
existing organizational standards (Davidhizer & Shearer, 1997), transactional leader
concentrates on current system improvements rather than innovation and change.
3.3.3.
Organizational Inertia
In a complex and volatile environment, the external dimensions for organization are
changing rapidly (Fergusson & Langford, 2006). Besides the complexity and volatility of
the environment, normal changes in organization’s external environment, for example,
change in the demand of a product, and consumers’ taste etc. and the internal
environment, like development moves, and hiring and firing etc. create pressure on
47
Chapter-3
organization for change. Consequently, survival of the organization is difficult and
becomes challenging for the managers in both the situations (Milliken, 1990). Therefore,
it becomes significant to understand the environmental dynamics and change
organizational strategies and structures to keep in-line with those dynamics (Hannan &
Freeman, 1984).
The major problem for organizations in this situation is their inability to change
its core features as rapidly as environment change. According to Hannan and Freeman
(1984), the core features of organization include its stated goals, forms of authority,
technology and market strategy. All these features of organization compel it to maintain
the status quo and continue with the current strategy (Nelson & Sidney, 1982). This
strong association of the organization with current strategy has been described as
organizational inertia (Kelly & Amburgey, 1991; Gabor, Laszlo & Hannan, 2000). Gerry
(1987) had previously used the term ‘strategic drift’ for this concept. This phenomenon
refers to the situation in which environment changes rapidly but the organization’s
strategy fail to keep in-line with it. Organizational inertia is considered to be a
contaminating factor for organizational transformation (Hannan & Freeman, 1984). It
does not stop the change process, but makes the change process relatively slower. Due to
the slower process of change, organization cannot exploit the emerging short-term
opportunities on one hand, and on the other, cannot prepare itself to respond to the
environmental changes effectively.
In this research I considered organizational inertia as an intervening variable.
There are several factors in internal and external environments that can create inertia in
organizational settings. Some of the internal factors include inappropriate organizational
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vision, resource deficiency, political coalitions, physical resources, and personnel
deficiencies. In the external factors, I have attempted to analyze the political instability,
energy constraints, international pressures, and some basic economic indicators as the
potential sources to create organizational inertia. These internal and external factors of
environment resist the transformation of the organization in Pakistan and have the
potential to affect the organization of the developing countries.
3.3.4.
Organizational Mortality
After analyzing the work of different researchers, it has been considered that it is difficult
to implement the transformational change process. In the mainstream management
practices, it is important to achieve the intended goals of various transitions during the
transformation process successfully. According to organizational researchers, for
example, Bashein, Markus and Riley (1994) and Hammer and Champy (1993), about 70
percent change efforts fail to achieve this goal. The reason is attributed to the difficulty of
transitions of the transformation than what people have anticipated (Champy, 1995).
Many resources including time, money, market share, and other opportunities could be
lost in the process of strategic change (Arthur, 2001).
In the context of organizational mortality, researchers describe a strong
relationship between organizational environment, change and mortality. They hold the
view that change in organization depends upon changes in its environment. Therefore,
organization must attempt to adopt environmental change; otherwise death would be the
fate of that organization (Lawrence & Lorsch, 1967; Pfeffer & Salancik, 1978;
Thompson, 1967). Other researchers like Hannan and Freeman (1977) hold the view that
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Chapter-3
only those organizations will remain on the screen that best fit in the environmental
context and fulfill the environmental requirements.
As a final point, it may be argued that the failure in organizational transformation
could adversely affect the organization and produce a disastrous situation for
organization which may ultimately lead to organizational mortality.
3.4.
Conclusion
This chapter examined the concept of organizational transformation. In this chapter, some
basic definitions of organizational change, its types and its relationship with
organizational environment were discussed. This review concludes that organizational
transformation is a continuous activity with several phases of transition. Each phase has
its own specific targets. To achieve the targets of all the phases of transitions is a key to
successful transformation. Appropriate leadership, continuous learning, breaking up the
grip of inertia, and following along the proper procedures, are some basic principles for
successful transformation.
50
CHAPTER FOUR
Risk Analysis
4.1.
Introduction
Any study of organizational environment in the context of developing countries,
especially the one that focuses organizational transformation, requires an examination of
complex and challenging issues. The identification of environmental risks is one of these
issues. Organizational researchers suggest that the existence of environmental risks and
their relatively high intensity in the developing countries could be a major factor of
failure in the change efforts. Therefore, it is essential to examine the concepts of ‘risk’
and ‘risk analysis’, which has been carried out in the initial part of this chapter. It is
followed by a discussion on strategic risk analysis.
In the earlier chapters of literature review (Chapter Two and Chapter Three), the
discussion had focused organizational environment and its influence on organizational
transformation. It was concluded that owing to the environmental complexities,
organizational
transformation
becomes
relatively
difficult.
Because,
various
contaminating factors that exist in an organization’s internal and external environment
adversely affect the transformation process, in this research, the contaminating variables
are considered as environmental risks.
Chapter-4
4.2.
The Meaning and Theoretical Basis of Risk
There is no consensus amongst the researchers on the origin of the word ‘risk’. Some
researchers (e.g. Bernstein, 1996) are of the view that this word is derived from Italian
word risicare which means ‘to dare’. Researchers like Ewald (2000) hold the opinion that
this word is derived from the French word risqué, which was used in France for the first
time in 1578, and the word was used as both a noun and a verb.
Risk, in general, is considered as a difficult term to define at which no consensus
exists among researchers (Mamilton, Adolphs & Nerlich, 2007). Lack of consensus on
the definition of risk could be due to various reasons (Covello & Merkhofer, 1993), and
owing to various types of risks: economic risks, political risks, and health and safety risk
etc. Meacham (2004) states that in each of these approaches, the interpretation and
measurement of risk is a function of the context under examination. As far as the basic
definition of risk is concerned, different disciplines in this regard offered their unique
perspectives. In social sciences, risk is considered as a social construct not dependent on
numerical values but the social situation and conditional knowledge (Wynne, 1992).
Engineering sciences define risk as a numerical value that is a function of probability and
consequences (Rassmussen, 1990). Psychologists are of an opinion that risk does not
exist outside the mind; it is simply a concept that humans developed to deal with
uncertainties of life (Slovic, 1992).
In organizational studies, researchers define this concept in several ways: Hines
and Montgomery (1990) consider risk as expected value of a loss; Fillmore and Atkins
(1992) consider it as possibility of an unwelcome outcome; whereas, the Project
52
Chapter-4
Management Institute (2000) explains risk as any factor that keeps the project away from
obtaining its objective(s).
4.3.
Difference between Risk and Uncertainty
Risk and uncertainty are viewed differently in organizational studies. The Webster
Dictionary (2006) defines uncertainty as a state of being uncertain. Luce & Raiffa (1957),
Gifford (1979), and Milliken (1987) describe uncertainty in a variety of ways. Luce and
Raiffa (1957) consider it as a more complex phenomenon than risk, with the view that,
uncertainty is a situation where the probability of the outcome of events is unknown as
compared to risk where the event has known probability of outcome. Gifford (1979)
states that:
Uncertainty is the inability to assign probability to outcomes and risk is ability to
assign such probabilities based on differing perceptions of the existence of orderly
relationship or pattern (p. 459).
Milliken (1987) holds the view that “uncertainty is an individual’s perceived
inability to predict something accurately” (p. 136). He discusses the two basic reasons of
uncertainty: lack of knowledge, and the inability to discriminate between relevant and
irrelevant data.
Despite the contemporary views on uncertainty, there are two models that are
commonly followed by researchers (Ellis & Spielberg, 2003). These are presented by
Duncan (1972), and Millikan (1987). Duncan focuses on the characteristics of
uncertainty, while Millikan discusses its various types. According to Duncan (1972),
there are following characteristics of uncertainties:
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Chapter-4
1.
Lack of information about the environmental factors associated with the given
decision making situation;
2.
Lack of knowledge of the outcome and effects of a specific decision
3.
Inability to assign probabilities with any degree of confidence, that is, how
environmental factors affect the success or failure of the decision unit in
performing its functions.
Milliken (1987) categorizes uncertainty into three types: state uncertainty, effect
uncertainty, and response uncertainty. State uncertainty is related with organizational
environment, and suggests that an individual is unable to predict the future changes in
organizational environment or its particular component. In this situation the top
management of an organization is uncertain about the validity of its decisions. Effect
uncertainty, on the other hand, is related with the individual’s ability to predict the effect
of environmental change on organization. According to Duncan (1972), it involves the
lack of understanding of cause and effect relationship, whereby the managers cannot be
sure about the effects of change in environment upon an organization. The response
uncertainty is related with the “response option available to the organization, and what
the value or utility of each response might be” (Milliken, 1987, p. 137). It can be defined
as inability or lack of knowledge of the managers to decide the response options, or to
predict the consequences of each response (Taylor, 1984).
4.4.
What Is Risk Analysis?
Beck (1992), a prominent researcher in risk analysis, holds the view that we live in a
society where we face new risks of unprecedented magnitude. As such, risk analysis
54
Chapter-4
becomes an important tool to cope with such risks and manage the environmental
complexities (Holt, 2004).
Several organizational researchers have attempted to define and examine risk
analysis. Esterman and Kosuke (2005) consider risk analysis as a process of risk
identification, whereas, Borgelt and Falk (2007) discuss it as a process of both
identification and assessment of all risks to produce valid inputs for decision making.
Beck (1992) explains risk analysis as a tool to calculate the degree of risk by multiplying
the negative effects of a bad event with its probability1.
The work of Vose (2008) and Aven (2008) provide a basic understanding of risk
analysis. Vose (2008) states that “risk analysis concerns itself with the quantification of
risk, the modeling of identified risks and how to make decisions from those models” (p.
4), whereas, Aven (2008) defines the concept of risk analysis as “a systematic use of
information to identify hazards, threats and opportunities, as well as their causes and
consequences, and then express risk” (P.6)
4.5.
Process of Risk Analysis
Risk analysis is relatively a ‘young field’ in organizational studies (Deisler & Schwing,
2003). With regards to its stages suggested by various organizational researchers (like
Aven, 2008; Mythen & Walklate, 2008), to understand and examine the process of risk
1
There are various research organizations working specifically on risk analysis e.g. mc2 Consulting,
Bridge Field Group, and the Institute of Risk Management, etc. All these organizations have different
opinions and approaches to risk analysis.
55
Chapter-4
analysis, the model of Vose (2008) appears to be the most appropriate. It consists of
following four steps:
4.5.1.
Define Objectives of the Project
Objectives are an organization’s performance targets i.e. the results and the outcomes it
wants to achieve, while organizational objectives convert managerial statements of
strategic vision into specific workable targets (Thompson & Strickland, 2001). To carry
out risk analysis, a clear definition of business objectives is essential. Without knowing
the objectives of a business/project, managers cannot identify the risks that can arise out
of the context (Emblemsvag & Kjolstad, 2002). Therefore, in the process of risk analysis,
systematic definition of objectives is necessary to identify the potential threats.
4.5.2.
Identification of Risks
Risk identification is the process to determine the risks that might affect the project. Risk
identification is a complex process; therefore all the stakeholders including project team,
risk management team, subject experts, customers, outside experts, and the end users, are
all involved in this course of action (Project Management Institute, 2000). There are
various techniques which are used for this purpose. The Institute of Risk Management
(2002) recommends a range of techniques to identify risks: brainstorming, interviews,
delphi technique, expert opinion, experience from other projects, and review of project
information including planning, analysis and designs, and dependency modeling.
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4.5.3.
Risk Evaluation
The process of risk evaluation determines the priorities and treatments for risks (Olson,
2005). In this stage, the already identified risks are classified for the purpose of their
treatment. Keeping in view the objectives of risk evaluation, various researchers have
attempted to identify and classify the risks. Robin Holt (2004) discusses two types of
risk: symmetric risks, and asymmetric risks. Symmetric are short-term risks while
asymmetric are long-term risks. The Institute of Risk Management (2002) categories
risks into three types: accepted risks, rejected risks, and significant risks. Accepted risks
are within an acceptable level and do not require any treatment, but are kept under review
(Meacham, 2004). Rejected risks are those risks which have no significant effect on the
project. Significant risks, on the other hand, have a significant effect on the project, and
demand a special treatment. An important point which has to be considered in this regard
is the behavior of risk e.g. several types of consequences of each risk, and/or their
interrelationships. Therefore, before making decision about their treatments, it is
necessary to examine and evaluate all the aspects and dimensions of risk (Holt, 2004). In
this phase some additional planning is required for the purpose of safety e.g. in the case
of accepted risks, it is necessary to decide the risk owner, who would be responsible for
reviewing and monitoring the risks. Similarly, in the case of significant risks, it is
necessary to decide about the elements responsible for rework or extra work if required
for proper treatment of risk.
Irrespective of this classification, the Her Majesty Treasury in the United
Kingdom (2004) has classified risks into four types: external risks, operational risks,
financial risks, and risks related to human resource. External risks arise from the external
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environment, for example, political risks, economic risks, socio-cultural risks, and
legal/regulatory risks etc. An organization cannot control these, but take some action to
moderate their effects on the organization. Operational risks are related to the current
operations, like, lack of resources, and product failure etc. Financial risks are associated
with financial resources, for example, shortage of finance, earlier maturities of liabilities,
and high interest rates etc. The last type of risk is related with human resources, for
example, inefficient work force, strikes, hostile labor unions, and low productivity of
workers etc.
4.5.4.
Risk Treatment
In risk treatment phase, the major task is the identification and implementation of
measures to modify risks (Clemen & Winkler, 1999). The preparation of risk treatment
usually requires inputs from different stakeholders like project owner, project manager,
and project financer etc. If there is an unacceptable risk in the project, it is necessary to
inform all the stakeholders regarding the status of risk. In this regard, the most important
component of risk treatment is cost-benefit analysis. Cost includes both tangible and
intangible costs. Therefore, care must be taken to ensure that risk treatment does not
exceed its benefits. There are many approaches to risk treatment, developed by various
prominent researchers. Based on the research of Vose (2008), following treatments of
risks could be identified:
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Chapter-4
1.
To increase the inputs/resources allocated for the project;
2.
To collect more data so as to get better understanding of the risks;
3.
To allow for contingency plans regarding the time, cost, and specifications;
4.
To implement a plan which allows for minimum number and extent of risks;
5.
To share the risks with partners, and contractors etc;
6.
To transfer the risk to other parties like insurance companies etc;
7.
To cancel the project; or
8.
To take no action.
4.6.
Strategic Risk Analysis
Strategic risks are those risks which can create problems for the organization to achieve
its strategic objectives (Emblemsvag & Kjolstad, 2002). Strategic risks generate various
strategic issues for the organization e.g. failure of projects, long-term decrease in
profitability, and high production etc. Strategic risk analysis is an in-depth study of risks
and their strategic effects on the organization. In this type of analysis, the major task for
managers is to compare the potential risks with organizational objectives by considering
different strengths and weaknesses of the organization. This will generate new
opportunities and threats for organization in the long-run (Hindle, 2000). Emblemsvag
and Kjolstad (2002) explain strategic risk analysis with regards to the following three
steps:
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1.
Identify the objectives of the business;
2.
Communicate risks to all the stakeholders, and classify the risks by considering
different strengths, weaknesses, opportunities, and threats; and
3.
4.7.
Calculate the possibilities and consequences of risks.
Integration of Organizational Transformation, Environmental
Complexity and Environmental Risk
Transformational change is a continuous process that affects most of the organizational
dimensions. As mentioned in the previous chapters, transformational change has a strong
relationship with the environment; therefore, any positive or negative change in
organizational environment will ultimately affect the change process. In the following
subsections, I have attempted to create a logical relationship between environmental
complexity, environmental risks and transformational change process.
4.7.1
Environment: Its Critical Role in Organizational Transformation
Organizational environment has a strong influence on organization’s strategic
performance’ is a widespread idea in contemporary management literature (Boyne &
Meier, 2009). Lynn, Heinrich and Hill (2000) hold the view that political, economic,
legal, and social dimensions of environment have direct and indirect effects on
organizational performance, structures, processes and managerial behaviors. The effect of
economic resources, market structure, and political regulation on organizational
performance and change has also been discussed by Boyne (2003).
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In studying the transformational change process, the focal point of most of the
earlier studies was environmental turbulence and complexity (Harris, 2004;
Castrogiovanni, 1991). Turbulence refers to unpredictable changes in organizational
environment (Dess & Beard, 1984; Boyne, 2003) while, complexity refers to the number
of variables in the external circumstances that confront an organization (Fernandez, 2005;
Heinrich & Fournier, 2004). The study of environmental complexity and turbulence is
basically the study of environmental change, which has strong effects on organizational
dynamics, as described in contingency theory by Burn and Stalker (1961). To cope with
environmental changes, organization has limited options to stay with inertia (Miles &
Cameron, 1982; Miller & Friesen, 1984). Because the environment is assumed to have
the power to select a group of those organizations which best serve its needs (Hannan &
Freeman, 1989), organization has no other option but strategic change to align with
environmental changes.
My research focuses on the analysis of environmental risks emerged in the
context of turbulence and complexity. This would be a difficult task in which
organizational environment, organization’s internal dimensions and the feasibility of
transformational change in complex environment are different aspects of analysis.
4.7.2.
Relationship of Environmental Complexity and Risk
Environmental complexity is the number and heterogeneity of factors in the environment
as already discussed in Chapter Two. The relationship between environmental
complexity and environmental risks is positive, as elaborated by Fariborz (1996), who
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states that; “the more complex and changing the environment, the higher is the level of
environmental risks and uncertainty (p. 696).”
In complexity theory, the negative relationship of complexity with organizational
performance and its positive relationship with environmental risks are supported by a
wide range of research studies including Fernandez (2005) and Heinrich & Fournier
(2004). Complexity theory deals with the notion of complex systems which have many
parts, interacting with each other in different ways (Tsoukas & Hatch, 2001). The
richness of these interactions forms a complex system that has the capability to undergo
spontaneous self-organization (Stevens & Hassett, 2007). A self-organization of the
factors in environment creates a situation that can affect the organizational performance.
As suggested by Byrne (1998), self organization of factors exists in both internal and
external environment of the organization. This situation according to various researchers
creates a dissipative system in the environment. Dissipative system is the one that is not
in equilibrium (Waldrop, 1993). This disequilibrium of dissipative system is often said
to exist on the edge of chaos (Lewin, 1993; Marion, 1999).
After reviewing the literature on complexity theory, I presume that there are two
types of dissipative system: internal dissipative system, and external dissipative system.
The dissipative system, whether it is internal or external, has many factors that can affect
the organizational performance. These factors are considered by researchers as
environmental risks e.g. Byrne (1998). Therefore, it may be concluded that there is a
positive relationship between environmental complexity and environmental risks.
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4.7.3.
Relationship of Transformational Change and Environmental Risk
As outlined in Chapter Three that transformation is a corporate-wide change. In corporate
wide change, especially when it is implemented in a complex environment as explained
by Byrne (1998), the intensity of risks would be relatively higher. This high intensity of
risks exists in both internal and external complexities of the environment (Duncan, 1972).
Therefore, these risks adversely affect the change process, and compel the transforming
organization to maintain the status quo (Hannan & Freeman, 1984).
In the developing countries like Pakistan, organizational transformation
becomes a challenging task. There are several risks existing in organizational
environment that create problems for researchers to understand and analyze the
environment and solve its complexities (Majid & Yasir, 2008; Latham & Braun, 2009).
Therefore, in complex environment of the developing countries, the chances of failure of
transformational change process are more than those of the environmental context of the
developed countries.
4.8.
Conclusion
After providing an account of organizational environment and the context of
transformation in the previous chapters, this chapter attempts to analyze the concept of
risks in an organizational setting. The concept of risk has been defined from a variety of
perspectives, followed up by the discussion on different steps in risks analysis. This
chapter also examined the relationships between environmental complexity, risks and
transformational change by discussing various aspects. The discussion concludes that the
environment of the developing countries could be more complex than the environment of
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the developed countries. For this reason, it has relatively higher number of environmental
risks, and the implementation of transformational change could be a difficult task.
The next part of this dissertation discusses the contextual and methodological
issues of this research. This part focuses on macro environment issues like Pakistan’s
economy, textile sector of Pakistan, research methodology, data collection process, and
some methodological concerns of the research.
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