Variations in Intrinsic Founding Rates in Organizational Populations

We begin with variation among organizational populations in intrinsic growth rates, that is, the rates of growth in the absence of any resource or competitive constraint. One advantage of the ecological perspective is that it directs attention to the possible importance of such variations in the social world. Although the fact and its implications have not received much if any attention, organizational forms appear to differ greatly in intrinsic speed of expansion. In this section we review a bioecological theory of life history strategies and then consider parallel issues in organizational ecology.

1. Life History Strategies

Mac Arthur and Levins (1964) proposed that evolution shapes adaptive strategies in part by affecting the investment made in each reproductive attempt. An opportunist strategy leads to many reproductive events with fixed energy and material resources spread thinly over attempts. Because the investment in each reproductive event is quite small, the life chances of each offspring are poor. However, populations using this strategy grow rapidly under favorable conditions. So this strategy maximizes the intrinsic growth rate, the speed of growth in an open environment. Because the parameter that indexes an intrinsic growth rate is conventionally denoted by r in ecological models, this type of life history strategy is called an r-strategy.

The polar opposite strategy makes a small number of reproductive events and invests much energy and time in each one. Individual offspring have relatively good life chances under this strategy. As a result, populations using such strategies can expand even in the face of dense competitive pressure. That is, they can expand even when most competing populations are close to their carrying capacities and demand on resources is high. Because carrying capacities are typically denoted by K in ecological models, the strategy of maximizing the ability to expand even in the face of dense competition is called a K-strategy.

Like the distinction between specialist and generalist strategies discussed in the previous chapter, these polar life history strategies represent different positions on a classical evolutionary tradeoff. For the r-strategy, fast growth rates provide the capacity to exploit new and ephemeral opportunities quickly, but at the expense of the capacity to withstand dense competition. For the ^- strategy, extensive investment in each reproductive attempt provides the ability to withstand competitive pressure, but at the expense of lowering greatly the speed with which new opportunities can be exploited.

Selection among populations using different life history strategies depends on the volatility of the environment. Environments that change slowly and regularly favor ^-strategists. Environments whose variations are rapid and uncertain favor r-strategists. That is, r-strategies are favored only when the high death rate (low life expectancy) characteristic of entities using such strategies can be more than balanced by high birth rates.

Analysts of business strategy have identified strategies that parallel those just discussed: first mover strategies and efficient production strategies. First mover or first to market strategists rely on the capacity to move quickly into markets opened by technical change or other social changes (Williamson 1975). Efficient producers rely on stringent managerial controls and efficient organization to enter markets opened by first movers and to outcompete the first movers by driving costs and prices down.

Business analysts have treated these strategies as properties of individual firms. They tend to think of first movers as firms that have developed a capacity to identify new opportunities and to change structures and procedures quickly to take advantage of them. But many first movers do not appear to have such flexible strategies. Rather, they develop the specialized capacity to move quickly in a small number of directions within a particular technological or industrial context. For example, in the semiconductor industry, new entrants have commonly begun by investing heavily in a narrow capacity for research and development. They have also tended to delay acquiring manufacturing capacities.20 Such firms begin when an entrepreneur raises capital to fund a specialized team of designers. Since teams of designers can be assembled much more quickly than an efficient manufacturing organization and plant, initial entrants into new markets are likely to be mainly firms specializing in design and product development. Such firms often eventually develop their own manufacturing operations, but they tend to add production capacity in stages rather than by building a plant with scale efficiencies at the outset. Often they contract with larger established firms for production, or they have their products manufactured by specialists in production, the so- called silicon foundries.

New branches of technology are often populated initially by new firms using first mover strategies. Some new entrants achieve very high growth rates for some time, as is typical for successful /–strategists. Firms that specialize in efficient production are slower to move into new markets and new branches of the technology. But once they do move, they tend to compete successfully against the first movers and thus seize the market. One would expect death rates among /–strategists to rise relative to those of AT- strategists as the market and technology develop, and this does seem to have been the case in the semiconductor industry.

This example conveys some of the advantages of conceptualizing the dynamics of organizational populations in terms of life history strategies. One advantage is that this approach emphasizes the interplay of the life histories of industries and populations with the life histories of the organizations that comprise those industries and populations. As industries pass through stages of high and low technical and social change, the relative abundances of subpopulations relying on first mover strategies and efficient production strategies change systematically. Changes in relative abundances affect the life chances of organizations with each strategy.

This approach also provides a clear illustration of the logic of population analysis. Populations of r-strategist organizations flourish under conditions of rapid technical and social change not because the member organizations have the capacity for flexible response to widely varying conditions; rather they flourish because the speed with which they can be constructed allows a founding rate that is high enough to offset high mortality rates. Indeed, individual mortality rates of r-strategists are typically much higher than those of individual ^-strategists at every stage in the development of an industry. And even though organizational r-strategists may populate many diverse environments, this does not mean that the same set of flexible firms moves freely from one environment to the other as conditions change.

2. Variations in Speed of Founding

Forms of organization differ in their intrinsic growth rates, their rates of growth in the absence of resource constraints, because they vary greatly in characteristic uses of personnel, resources, and legitimacy. Some kinds of organizations have superb efficiency and high legitimacy. Once founded, such organizations have long expected lifetimes and often come to dominate their sectors. But such organizations are difficult to create. They use considerable capital and skilled staff, which are typically in short supply. Their rates of founding are also sensitive to turbulence in the environment because the complicated routines that convey high efficiency take longer to learn and stabilize. These organizations are, therefore, particularly vulnerable to early environmental difficulties. As a result, rates of initiation and rates of successful completion of organizing attempts are typically low for these kinds of organizations. One consequence is that such organizations are relatively rare. Some imagined or planned “best” organizational forms may never appear. On the other hand, some kinds of organizations, which may seem trivial to analysts who delight in complex structures, persist in large numbers even though individually they have poor life chances because of scanty resources and low legitimacy. Understanding these differences in abundance requires analyzing differences among forms in ease and speed of founding.

As we discussed in Chapter 4, Simon (1962) argued that evolution favors structures composed of stable subassemblies arranged in a simple hierarchy.

Disruption caused by environmental turbulence is more likely to destroy uncompleted structures than structures that have been fully developed. Structures built of subassemblies that can be completed rapidly, therefore, minimize exposure to high risk of destruction.

Forms differ greatly in structural complexity even at founding. Some are formed like Simon’s simple hierarchies, with commands and flows of infor- mation running along simple chains. Others, like so-called matrix organiza- tions, have overlapping controls and cross-cutting flows. Organizations with complex structures have more complex dynamics than do those with simple hierarchical structures. It presumably takes much longer to complete a complex structure than a hierarchy, as Simon argued. Other things being equal, a hierarchical organization will be up and running faster than a nonhierarchy.

Not all kinds of organizations, however, can rely on simple hierarchies to carry out their programs of activity. Social movement organizations can, and often do, have a simple, hierarchical cell structure. General hospitals do not, because professional and bureaucratic authority are located in different parts of the hospital structure. Such organizations necessarily have cross-cutting, and often partially competing, control structures. More generally, choice of organization strategy partly constrains the range of feasible initial simplicity.

Small organizations can obviously be built faster than big ones, just as houses can be built faster than skyscrapers. A store-front church can be established overnight, but it takes years to build a nuclear power plant. Organizations using forms that require a large scale to carry out routine activities, therefore, have long gestation periods.

Some kinds of organizations, like retail stores, operate in market contexts with only minimal levels of institutional control. Others, like hospitals and public utilities, face heavy public regulation. Two dimensions of institutional control and regulation seem relevant to ease and speed of starting: concentration of external control and degree of licensing. When control is focused and concentrated, the maximum speed of organization building depends on the speed of decision-making by the relevant agency. When control is dispersed, especially when lines of authority overlap, authorization for new ventures, especially for new organizational forms, can take a very long time. The general proposition is that extensive and dispersed external controls lengthen the gestation period for new organizations.

The spread of knowledge about how any kind of organization works also affects the ease and speed with which new organizations of the type can be built (Stinchcombe 1965). One way in which knowledge of how to build an organization can be widely disseminated is through codification. Franchised restaurants, for example, spread rapidly because they use a standard, codified form. Reliance on such a codified form makes it easier to convince lenders that the organization can actually be built and run profitably. It also simplifies the tasks of hiring and training employees and writing contracts with suppliers. In short, franchises are based on formulas for organizing that are codified organizational forms.

Simplicity, scale, regulation, and requirements for specialized knowledge about building and operating an organization affect the speed with which resources can be mobilized to create it. Factors that lengthen periods of organization building depress growth rates of the population by lowering founding rates. We think that this effect occurs in three main ways.

First, long periods of gestation increase the costs of organizing. Entre- preneurs and potential participants face high opportunity costs because their resources and time do not yield any payoffs during the building period. It takes large and fairly certain gains from organizing to induce people to invest in long-run projects, and many proposed organizations promise quite uncertain returns. Second, lengthy periods of start-up intensify selection pressure. New organizations face a strong liability of newness. The mortality rates of organizations are presumably even higher in the start-up period, before they actually begin operations. Third, the longer the wait from attempted initiation to full functioning, the greater is the difficulty in fine- tuning organizational strategy and structure to opportunities and constraints in the environment. Ability to forecast the future declines with the length of the forecast period, probably at least exponentially. Slow-to-build organizations must forecast environments over much longer periods than quick-assembly organizations. This tendency accentuates the risk of investing in efforts to create slow-to-build organizations.

These arguments imply that variations in intrinsic growth rates affect organizational evolution. Organizational populations are replenished with new entrants, many of which are likely to be simple and small. Even if large size and complex strategy and structure convey strong survival advantages, organizational communities seldom contain only or even mainly populations of large, complex organizations. That is, populations whose forms allow high founding rates tend to persist even when individual organizations in these populations have short life expectancies.

Populations of easy-to-build organizations can reasonably be described as r-strategists. As we pointed out earlier, such forms characteristically require small initial resources and can be built rapidly. Thus populations of quick-assembly organizations have high intrinsic growth rates and can take advantage of ephemeral resources. At the same time, individual members of such populations have short life expectancies because of their small size and lack of dominance. Our proposition that easy-to-build organizations proliferate in modern society amounts to an argument that the character of environmental variations in such societies favors r-strategists, or more precisely that r-strategist populations do not face overwhelmingly strong selection pressure.

Source: Hannan Michael T., Freeman John (1993), Organizational Ecology, Harvard University Press; Reprint edition.

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