The existing literature usually stresses the capacity of organizations to learn about and adapt to uncertain, changing environments. We think this emphasis is misplaced. The most important issues about the applicability of evolutionary-ecological theories to organizations concern the timing of changes.
Learning and adjusting structure enhance the chance of survival only if the speed of response is commensurate with the temporal patterns of relevant environments. Indeed, the worst of all possible worlds is to change structure continually only to find each time upon reorganization that the environment has already shifted to some new configuration that demands yet a different structure. Learning and structural inertia must be considered in a dynamic context. Do organizations learn about their environments and change strategies and structures as quickly as their environments change? If the answer is negative, replacement or selection arguments are potentially applicable.
Three things must be known in order to answer questions about the applicability of selection theories to populations of organizations. The first issue is the temporal pattern of changes in key environments. Are typical changes small or large, regular or irregular, rapid or slow? The second issue is the speed of learning mechanisms. How long does it take to obtain, process, and evaluate information on key environments? The third issue is the responsiveness of the structure to designed changes. How quickly can an organization be reorganized?
Claiming that organizational structures are subject to strong inertial forces is not the same as claiming that organizations never change. Rather, it means that organizations respond relatively slowly to the occurrence of threats and opportunities in their environments. Therefore, structural inertia must be defined in relative and dynamic terms. It refers to comparisons of the typical rates of change of the processes identified in the previous paragraph. In particular, structures of organizations have high inertia when the speed of reorganization is much lower than the rate at which environmental conditions change. Thus the concept of inertia, like fitness, refers to a correspondence between the behavioral capabilities of a class of organizations and their environments.
Our definition of structural inertia implies that a particular class of orga-nizations might have high inertia in the context of one environment but not in another. For example, the speed of technical change in the semiconductor industry has been very high over the past twenty years. Firms that would be considered remarkably flexible in other industries have not been able to reorganize quickly enough to keep up with changing technologies.
An important threat to extant organizations is the creation of organizations designed specifically to take advantage of some new set of opportunities. When the cost of building an organization is low and the expected time from initiation to full production is short, this kind of threat is intense unless there are legal barriers to the entry of new organizations. If existing organizations cannot change their strategies and structures more quickly than entrepreneurs can begin new organizations, new competitors can establish footholds. Other things being equal, the faster the speed with which new organizations can be built, the greater is the relative inertia of a set of existing structures.
Even such a successful firm as IBM moves ponderously to take advantage of new opportunities. Granted, IBM eventually moved into the market for minicomputers and microcomputers and may come to dominate them. Still, the protracted period of assessing those markets, waiting for technologies to stabilize, and reorganizing production and marketing operations created the opportunity for new firms to become established. As a consequence, the structure of the computer industry is almost certainly different from the way it would have been had IBM been willing and able to move quickly. The point is that IBM did change its strategy somewhat, but this change took long enough that new firms using different strategies and structures were able to flourish, as in the case of the makers of clones of IBM microcomputers.
Organizations are special corporate actors. Like other corporate actors, they are structures for accomplishing collective action as well as repositories of corporate resources. Unlike other collective actors, organizations receive public legitimation and social support as agents for accomplishing specific and limited goals. Although individual members often manipulate organizations to serve private goals, and organizations operate in ways that diverge from their public goals, the basis on which organizations initially mobilize resources and gain support from society is their claim to accomplish some specific set of ends such as making a profit, treating the sick, or producing basic scientific research.
Creating an organization means mobilizing several kinds of scarce re- sources. Organization builders accumulate capital, commitment of potential members, entrepreneurial skills, and legitimacy (see Stinchcombe 1965). Once such resources have been invested in building an organizational structure, they are difficult to recover. Although one can sell the physical assets of a disbanded organization and sometimes its name, most resources used to build it are lost when it is dissolved. Not only are the costs of starting an organization nontrivial, but organizations consume resources in maintaining and reproducing their structures rather than in performing collective action. Just as in the case of biotic creatures, there is a substantial metabolic overhead relative to the amount of work performed. Thus the creation of a permanent organization as a solution to a problem of collective action is costly compared to other alternatives.
Why do individuals and other social actors agree to commit scarce resources to such expensive solutions to problems of collective action? A number of answers to this question have been put forth (see Scott 1987, pp. 143-159, for an insightful review). The new institutional economics argues that organizations arise to fill the gaps created by market failure (Arrow 1974). Williamson’s (1975, 1985) influential analysis proposes that organizations are more efficient than markets in situations in which economic transactions must be completed in the face of opportunism, uncertainty, and small-numbers bargaining. Although sociologists tend to deny that organizations arise mainly in response to market failures, they tend to agree that organizations have special efficiency properties, emphasizing their efficiency and effectiveness for coordinating complex tasks (Blau and Scott 1962; Thompson 1967).
Although these efficiency arguments are plausible, it is not obvious that they are correct. Many detailed accounts of organizational processes raise serious doubts that organizations minimize the costs of completing many kinds of transactions. Indeed, there appears to be a strong tendency for organizations to become ends in themselves and to accumulate personnel and an elaborate structure far beyond the technical demands of work. Moreover, many organizations perform very simple tasks that involve low levels of coordination. In contrast, collections of skilled workers collaborating in ad hoc groups can often complete quite complex tasks. From the perspective of the performance of a single complex collective action, it is not obvious that a permanent organization has any technical advantage.
We emphasize different competencies. The first of these is reliability. Organizations have unusual capacities to produce collective products of a given quality repeatedly. In a world of uncertainty, potential members, investors, and clients may value reliability of performance more than effi- ciency. That is, rational actors may be willing to pay a high price for the certainty that a given product or service of a certain minimum quality will be available when it is needed. Reliability depends on the variance of performance, including its timeliness, rather than its average level.
Organizations have higher levels of reliability than ad hoc collectives in two senses: one cross-sectional and the other temporal. Cross-sectional reliability means that an outcome chosen at random from a population of organizations will have a lower variance than one chosen at random from a population of other kinds of producers. Temporal reliability means that variability over time in the quality, including timing of delivery, of an outcome is lower for those produced by organizations than for those produced by ad hoc groups. Overall, we argue that the distinctive competence of organizations lies in the capacity to generate collective actions with relatively small variance in quality.
Organizations have a second property that gives them an advantage in the modern world: accountability. The spread of general norms of rationality (Weber 1968) and a variety of internal and external contingencies demand that organizations be able to account rationally for their actions. They must be able to document how resources have been used and to reconstruct the sequences of organizational decisions, rules, and actions that produced particular outcomes. This does not necessarily mean that organizations must tell the truth to their members and to the public about how resources were used or how some debacle came about; what matters is that organizations produce internally consistent accounts indicating that appropriate rules and procedures existed to produce rational allocations of resources and appropriate organizational actions.
Norms of procedural rationality are pervasive in the modern world. Structural organizational legitimacy, in the sense of high probability that powerful collective actors will endorse an organization’s actions (Stinch- combe 1968), depends on ostensible conformity to these norms. Coleman (1974) has argued that corporate actors favor other corporate actors over individuals. We add that corporate actors especially favor other corporate actors that give signals of procedural rationality and accountability.
Testing for accountability is especially intense during organization building, the process of initial resource mobilization. Potential members want assurance that their investments of time and commitment will not be wasted. When membership involves an employment relation, potential members often want guarantees that careers within the organization are managed in some rational way. Potential investors or supporters also assess accountability. In fact, the profession of public accountancy arose in the United States in response to the desires of British investors in American railroads for assurances that their investments were being managed in appropriate ways (Chandler 1977). Demands for accounting rationality in this narrow sense are both widespread and intense in modern societies. For example, the federal government will not allocate research grants or contracts to organizations that have not passed a federal audit, meaning that they have given evidence of possessing the appropriate rules and procedures for accounting for the use of federal funds.
Accountability testing is also severe when resources contract. Members and clients who would otherwise be willing to overlook waste typically change their views when budgets and services are being cut. Pressures for accountability are especially intense when (1) organizations produce symbolic or information-loaded products, such as education; (2) substantial risk exists, as in medical care; (3) long-term relations between the organization and its employees or clients are typical; and (4) the organization’s purposes are ostensibly political (Weber 1968). Our arguments presumably apply with special force to organizations in these categories. Still, we think that pressures toward accountability are generally strong and getting stronger. The trend toward litigating disputes and pressures for formal equality in modern polities intensify demands for accountability. All organizations seem to be subject to at least moderate levels of accountability testing.
The modern world favors collective actors that can demonstrate or at least reasonably claim a capacity for reliable performance and can account rationally for their actions. So it favors organizations over other kinds of collectives and favors certain kinds of organizations over others, since not all organizations have these properties in equal measure. Selection within organizational populations tends to eliminate organizations with low relia- bility and accountability. The selection processes work in several ways. Partly they reflect testing by key actors and environments in the organization- building stage; potential members, investors, and other interested parties apply tests of reliability and accountability to proposed new ventures. Such testing continues after founding. Unreliability and failures of accountability at any stage in a subsequent lifetime threaten an organization’s ability to maintain commitment of members and clients as well as its ability to acquire additional resources. Thus we assume that selection in populations of organizations in modern societies favors forms with high reliability of performance and high levels of accountability.
When does an organization have the capacity to produce collective out- comes of a certain minimum quality repeatedly? The most important pre- requisite is so commonplace that we take it for granted. Reliable performance requires that an organization continually reproduce its structure—it must have very nearly the same structure today that it had yesterday. Among other things, this means that structures of roles, authority, and communication must be reproducible from day to day. In other words, reliability and accountability require that organizational structures be highly reproducible.
A structure can conceivably be reproduced repeatedly by negotiation and conscious decision-making; the members of an organization with such practices might happen to decide each day to recreate the structure that existed the previous day. But this seems unlikely. Reproducibility is far more likely under different conditions. In general, organizations attain reproducibility of structure through processes of institutionalization and by creating highly standardized routines.
The first solution, institutionalization, is a two-edged sword. It greatly lowers the cost of collective action by giving an organization a taken-for- granted character such that members do not continually question organizational purposes, authority relations, and so forth. Reproduction of structure occurs without apparent effort in highly institutionalized structures. The other edge of the sword is inertia; the very factors that make a system reproducible make it resistant to change. In particular, to the extent that an organization comes to be valued for itself, changes in structural arrangements become moral and political rather than technical issues. Attempts at redesigning structures in organizations built on moral commitment are likely to spark bursts of collective opposition premised on moral claims in favor of the status quo. Even if such opposition does not prevail, it delays change considerably.
As a brake on structural change, institutionalization applies both to the organization as a whole and to its subunits. But what about the diversity among sets of differentiated activities within the organization? Some kinds of organizations perform diverse sets of activities, sometimes in parallel and sometimes sequentially. Military organizations provide a striking example; they maintain peacetime and wartime structures. Similarly, labor unions gear up for organizing drives or for waves of strikes and then return to more placid bread-and-butter collective bargaining. Manufacturing firms concentrate sometimes on redesigning products and at other times on marketing an extant set of products. Each phase of organizational activity involves mobilizing different kinds of structures of communication and coordination. In a real sense these kinds of organizations can be said to use different structures in different phases.
Does this mean that these organizations have somehow escaped inertial tendencies? We think not, at least from the perspective of attempts at building theories of organizational change. These organizations have multiple routines; they shift from one routine (or set of routines) to another in a fairly mechanical fashion. We think that organizations have high inertia both in the sets of routines employed and in the set of rules used to switch between routines.
According to Nelson and Winter (1982, p. 96) routines are the “source of continuity in the behavioral patterns of organizations.” They are patterns of activity that can be invoked repeatedly by members and subunits. One way of conceiving of routines is as organizational memory; an organization’s repertoire of routines is the set of collective actions that it can do from memory. Nelson and Winter emphasize that organizations remember by doing. Like knowledge of elementary algebra or high school Latin, collective knowledge as the basis of organizational routines decays rapidly with disuse. Even occasional use reveals some decay in recall and demonstrates the need to reinvest in learning to keep skills at their former levels. Organizations that have the capacity to use a broad repertoire of routines do so by virtue of large investments in keeping their routines sharp. For example, peacetime armies devote a great deal of their resources to simulating wartime situations for training. Armies that fail to make such an investment experience great difficulty in making the transition to battle readiness.
The fact that organizational routines decay with disuse implies that orga- nizations face the classic dilemma of specialism versus generalism in de- ciding how many routines to maintain at any fixed level of resources. Generalists—organizations with many routines—are no less inert than specialists in the manner in which they adapt to environmental change in the sense that they still use a limited number of routines. As Nelson and Winter (1982, p. 134) put it: “It is quite inappropriate to conceive of firm behavior in terms of deliberate choice from a broad menu of alternatives that some outside observer considers to be ‘available’ to the organization. The menu is not broad, it is narrow and idiosyncratic . . . Efforts to understand the functioning of industries and larger systems should come to grips with the fact that highly flexible adaptation to change is not likely to characterize the behavior of individual firms.”
We think that it is a reasonable first approximation to think of organiza- tions as possessing relatively fixed repertoires of highly reproducible routines. Then the argument of this chapter can be applied either to the organization as a whole, where the issue is the diversity of the repertoire, or to the individual routine. Thus we argue that the properties that give some organizations reproducibility also make them highly resistant to structural change, whether designed or not. As we noted earlier, this means that some aspects of structure can be changed only slowly and at considerable cost because many resources must be applied to produce structural change. Such structures have a dead weight quality; there are large lags in response to environmental changes and to attempts by decisionmakers to implement change. Since lags in response can be longer than typical environmental fluctuations and longer than the attention spans of managers and outside authorities, inertia often blocks structural change completely.
The inertia of reproducible organizations is usually viewed as a pathol- ogy. A classic statement of this position is Merton’s (1957) essay on the dysfunctions of bureaucracy. High levels of inertia may produce serious mismatches between organizational outcomes and the intentions of members and clients in situations in changing environments. On the other hand, organizations that try to reorganize frequently may produce very little and have slight chances of survival. Here the issue is the cause of structural inertia rather than its consequences. Our argument is that resistance to structural change is a likely by-product of the ability to reproduce a structure with high fidelity: high levels of reproducibility of structure imply strong inertial pressures.
The three assumptions of this section form the core of our argument. Taken together, they imply that selection within populations of organizations in modern societies favors organizations whose structures have high inertia. This argument holds that structural inertia can be a consequence of selection rather than a precondition. All that is required is that some organizations in an initial population have high levels of reproducibility with associated high levels of inertia and that selection pressures be reasonably strong. Under such conditions, selection pressures in modern societies favor organizations whose structures are resistant to change, which makes selection arguments all the more applicable.
Source: Hannan Michael T., Freeman John (1993), Organizational Ecology, Harvard University Press; Reprint edition.