Change, Easier Said than Done

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THE NATURE OF COMPETITION

One of the main insights of organizational ecology is that the environment of a firm is made up largely of other firms. Scholars in this tradition therefore have looked closely at how organizations affect each other. A key theory put forward in the original paper by Hannan and Freeman is “density dependence,” which says that organizations’ vital rates—their founding rates, growth, and mortality—depend on the total number of organizations within the relevant population. Population density is said to have two separate effects: through legitimation and through competition.

Legitimation is the process by which a certain way of doing things comes to be seen as natural or taken for granted. Legitimation increases founding rates and reduces mortality rates. Competition arises when organizations need to rely on the same pool of resources, such as capital and customers. Competition has the opposite effect of legitimation: It reduces founding rates and raises mortality rates.

Rising population density increases both legitimation and competition. However, the force of legitimation is stronger when the population density is rising from a low base, such as in the early history of an industry. The competition effect is stronger at higher densities. Combining both effects, the theory predicts that founding rates will show an inverted U–shape relationship with density, first rising as legitimation increases, then falling as competition kicks in. For the same reason, mortality rates should show a U-shape pattern, falling at first, then rising. The basic tenets of density dependence theory have been widely accepted and demonstrated to apply in many contexts.

A newer take on the organizational environment is the “Red Queen” theory, which highlights the relative nature of progress. The theory is borrowed from ecology’s Red Queen hypothesis that successful adaptation in one species is tantamount to a worsening environment for others, which must adapt in turn to cope with the new conditions. The theory’s name is inspired by the character in Lewis Carroll’s Through the Looking Glass who seems to be running but is staying on the same spot. In a 1996 paper, William Barnett describes Red Queen competition among organizations as a process of mutual learning. A company is forced by direct competition to improve its performance, in turn increasing the pressure on its rivals, thus creating a virtuous circle of learning and competition.

Barnett and David McKendrick of the University of California, San Diego, have tested this theory against data on the global hard disk drive industry. Tracking more than 150 firms over four decades, they found that those with a history of enduring competition had a higher chance of survival than those that avoided competition by technological or geographic differentiation. In line with Red Queen theory, it appears that isolation from competition, while having short-term advantages, deprives an organization of the long-term benefit of an ecology of learning, thus stymieing innovation. Their study also suggests that a lack of domestic competitive experience can prove to be a critical disadvantage when a firm is thrust into global competition.

AGING AND ADAPTING

Organizational ecology has helped to illuminate what happens to industries over time. Many other studies have suggested that young organizations suffer a so-called “liability of newness” and have a higher risk of failure than old ones. Research in organizational ecology challenges this conclusion. Its more comprehensive data suggest that what seems like the effect of age might really be an effect of size: Infant companies may be vulnerable because they are small, not because they are young. When size is taken into account, the liability of newness often is canceled out by the liability of obsolescence.

One of the key challenges that organizations face as they age is the need to adapt to changing circumstances. Hannan’s original hunch continues to be borne out by organizational ecology research: Change is easier said than done. The social and economic environment at the time of an organization’s founding can have an enduring impact on its mission, structure, and operation. Those that try to transform core elements of their structure often experience increased risk of failure.

The scholars do not claim that organizational change is always dangerous. In the context of dramatic environmental shift, it may be necessary and beneficial to change core organizational features. However, in most cases the process of change itself can be so disruptive in the short term that the organization never gets to see the long-term benefit.

The opposing view, that organizational change is helpful and simple, may arise from case studies of successful organizations—the kind found in popular management books. These star firms may have undergone successful transformations, but their experience is not representative of the vast population of firms. “It is tempting—and many analysts succumb—to infer from this information that, had other organizations attempted the same changes, they too would have experienced success. Unfortunately, this inference comes from considering data that are heavily biased toward the successful firms,” Carroll and Hannan write.

Of course, an enduring industry, taken as a whole, can be seen to adapt to its changing environment. But organizational ecology holds that the driving mechanism for an industry’s evolution is unlikely to be the adaptation of its individual firms. Instead, it is through the selective replacement of outdated organizations that industries adapt. In the airline industry, for example, the once-dominant Pan Am, TWA, and Eastern are all no more. Old household names in retailing such as Montgomery Ward, Sears, and J.C. Penney have given way to Wal-Mart and Target. And steel giants such as Bethlehem and U.S. Steel have lost out to mini-mills such as Nucor. Thus, companies die while industries evolve. One of the current forays in this research direction is the Stanford Project on Emerging Companies, or SPEC, which Hannan directs together with James Baron, the Walter Kenneth Kilpatrick Professor of Organizational Behavior and Human Resources.

The project tracked the evolution of nearly 200 high-technology startups in Silicon Valley between 1980 and 1996, and was later extended to mid-2001, creating probably the most comprehensive database on the histories, structures, and human resource practices of this global center of entrepreneurship.

The study found several different basic models for employment relations. The most common was what the researchers call the “engineering” model, which involves selecting staff based on specific task abilities, using challenging work as the basis for employee attachment to the firm, and controlling and coordinating employee effort through peer groups. Some firms later transitioned to a “bureaucracy” model, in which control becomes more formalized.

The researchers have found that—in line with organizational ecology’s theories about the disruptive effects of change—companies that reorganized their human resource blueprints tended to suffer higher employee turnover and diminished performance. Enterprises in which the blueprint changed were more than twice as likely to fail as similar firms with blueprints that were stable. Over a three-year period, the latter firms grew at almost triple the rate of the former.

Personnel changes at the top are not disruptive as such. It is when chief executives change employment relationships that staff turnover increases. In fact, changing the blueprint seems to be most disruptive when it is implemented by the company’s first CEO, who then stays on. This could be because the founder–CEO’s continued presence serves as a reminder that the organization has deviated from its original model.

The findings are especially significant, the scholars note, because it is hard to imagine a setting in which constant flux is more prevalent and where organizational change seems more justified than Silicon Valley. Given the benefits of staying the course, the authors recommend that entrepreneurs should pay more attention to picking an appropriate organizational model from the start. The study challenges the view—popular in the heyday of Silicon Valley’s “built to flip” ethos—that steady organization-building is passé in a new economy flying at Internet speed.

They add that the initial blueprint at founding should be a compromise between the current and the expected future needs —a point that few company founders seem to care about. “It’s by no means uncommon to see a founder spend more time and energy fretting about the scalability of the phone system or IT platform than about the scalability of the culture and practices for managing employees,” write Hannan and Baron.

A quarter-century since the publication of his seminal paper, Hannan says his own thinking has evolved. As one looks more closely at what exactly these organizational forms are that make up a population, it is clear that they are not merely manifestations of formal technical features. “It’s clear that they are social constructions, rooted in identities, and at some level as cultural as you can get,” he says.

Hannan does not claim to be setting the agenda for organizational ecology. The scholars in this area draw on certain shared analytical ideas but, like the industries they study, organizational ecology today is marked by theoretical diversity. This is good news, Hannan says: “It assures that talented young people still join it.” It may not be long, therefore, before they start calling him a great-grandfather.