New organizations presumably have lower levels of reproducibility than older ones. As Stinchcombe (1965) pointed out, new organizations typically rely on the cooperation of strangers. Development of trust and smooth working relationships takes time, as does the working out of routines. Initially there is much learning by doing and comparing alternatives. Existing organizations have an advantage over new ones in that it is easier to continue existing routines than to create new ones or borrow old ones (Nelson and Winter 1982, pp. 99-107). Such arguments underlie the commonly observed monotonically declining cost curve at the firm level, the so-called learning curve.
In addition, reliability and accountability of organizational action depend on members’ having acquired a range of skills that are specific to the organization, such as knowledge of specialized rules (especially how to cut through “red tape”) and tacit understandings about political agreements among departments. Because such skills have little or no value outside the organization, members may be reluctant to invest heavily in acquiring them until an organization has proved itself (Becker 1975). Once an organization survives the initial period of testing by the environment, it makes more sense for members to make investments in organization-specific learning. In this sense, early success breeds the conditions for later success. Thus collective action becomes more reliable and accountable with age simply because of the temporal pattern of investments by members in organization-specific skills. Moreover, the collective returns to investments by members in organization-specific learning may take time to be realized, just as for other forms of human capital. For both of these reasons, the levels of reliability and accountability of organizational action should increase with age, at least initially. Once members have made ex- tensive investments in acquiring organization-specific skills, the cost to them of switching to other organizations rises. Consequently the stake of members in keeping the organization going tends to rise as it ages, and they will presumably make greater efforts in its behalf. Finally, processes of institutionalization also take time. In particular, it takes time for an organization to acquire institutional reality to its members and to become valued in its own right.
Taken together, these assumptions imply that reproducibility of struc-ture increases monotonically with age. Combined with our first derivation, this proposition implies that structural inertia increases monotonically with age, and that organizational mortality rates decrease with age.
The so-called liability-of-newness hypothesis (Stinchcombe 1965) has been well documented empirically, as we show in Part III. Mortality rates appear to decline approximately exponentially as organizations age. One explanation for this finding is that reproducibility rises roughly exponentially with age over the early years of an organization’s life.
Processes of external legitimation also take time. Although an organization must have some minimal level of public legitimacy in order to mobilize sufficient resources to begin operations, new organizations and new orga- nizational forms have rather weak claims on public and official support. Nothing legitimates both individual organizations and forms more than longevity. Old organizations tend to develop dense webs of exchange, to affiliate with centers of power, and to acquire an aura of inevitability. External actors may also wait for an initial period of testing to be passed before making investments in exchange relations with new organizations. Thus age dependence in processes of institutionalization in the environment and in developing exchange relationships with relevant sectors of the environment may account for the relationships stated in this section. The argument to this point cannot distinguish between the internal and the external sources of the relationships.
If dampened response to environmental threats and opportunities is the price paid for reliable and accountable collective action, organizations respond on average more slowly than individuals to environmental changes. However, some organizations are little more than extensions of the wills of dominant coalitions or individuals; they have no lives of their own. Such organizations may change strategy and structure in response to environmental changes almost as quickly as the individuals who control them. Change in populations of such organizations may operate as much by transformation as by selection.
Except in exceptional cases, only relatively small organizations fit this description. An organization can be a simple tool of a dominant leader only when the leader does not delegate authority and power through long chains of command. Failure to delegate usually causes problems in large organizations. Indeed, the failure of moderate-sized organizations is often explained as resulting from the unwillingness of a founder-leader to delegate responsibility as the organization grew. (Of course, this is an example of inertia at the level of key actors within the organization.)
One way to conceptualize these issues is to assume that there is a critical size, which may vary by form of organization and also, perhaps, by age, at which failure to delegate power sharply limits viability. In such a threshold model, organizations may be quite responsive below the threshold level of size, while organizations above the threshold tend to have higher inertia. Or the relationship between size and inertia may be roughly continuous. Downs (1967, p. 60) argues that for the case of public bureaus, “the increasing size of the bureau leads to a gradual ossification of its action . . . the spread and flexibility of its operation steadily diminish.” Whether there is a threshold as we have suggested or a continuous relationship as Downs believes, it seems clear to us that the level of structural inertia increases with size for each form of organization.
This assumption seems to suggest that selection arguments are more appropriate for large organizations than for small ones, contrary to the widespread opinion discussed in Chapter 2. However, the situation is more complex than this. The likelihood that an organization will adjust structure to changing environmental circumstances depends on two factors: the rate of undertaking structural change and the probability of succeeding in im- plementing change, given an attempt. The assumption stated above suggests that the first quantity, the rate of attempting change, is higher for small organizations. But what about the second quantity?
It is helpful in answering this question to complicate the model slightly. Fundamental change, that is, change in core aspects of structure, rarely occurs overnight. More commonly, an organization spends some period of time reorganizing, either by design or happenstance. Usually there is a period of time during which existing rules and structures are being dismantled or successfully challenged and new ones are being created to replace them. Similarly, existing links with the environment are cut and new links forged. During such periods, organizations have elements of both old and new structures. The presence of multiple rules and structures greatly complicates organizational action; so too does a shifting set of environmental relations. Such changes increase the likelihood of conflict within an organization as contending parties seek to shape rules to benefit their self-interest.
Fundamental reorganization may sometimes occur gradually and imper- ceptibly. But sometimes sharp breaks with the past can be discerned, and one can identify the approximate time of onset of the reorganization. One clear example is a declaration of bankruptcy in order to obtain relief from creditors during a period of attempted reorganization. In many other circumstances, organizational leaders announce planned shifts in strategy and structure such as entries into new markets and internal restructuring.
In such cases it may be helpful to introduce a new state into the model: the state of attempting fundamental reorganization. Figure 4.1 depicts the possible transitions in this expanded state space. The parameters associated with each transition, the μ‘s, are transition rates. In terms of this representation, the assumption given above states that the rate of moving to the state of reorganization decreases with size. But it says nothing about the other rates.
The processes of dismantling one structure and building another make organizational action unstable. Consequently, the variance of quality and timeliness of collective action decline during reorganization. That is, the process of attempting reorganization lowers reliability of performance. This assumption along with the core argument of the chapter implies that attempts at reorganization increase mortality rates.
In the midst of structural reorganization, organizations are highly vul- nerable to environmental shocks. Large size presumably enhances the capacity to withstand such shocks. Small organizations have small margins for error because they cannot easily reduce the scope of their operations very much in response to temporary setbacks. Thus organizational mortality rates decrease with size. Indeed, the claim that mortality rates decrease with size is nothing more than a restatement of the idea advanced earlier (Hannan and Freeman 1977) that longer time spans must be used to study replacement in populations of large organizations. We assume that size has qualitatively similar effects on all three mortality rates in Figure 4.1: μd, μe, and μf. Thus small organizations are assumed to be more likely than large ones to enter the state of reorganization but are also more likely to exit this state by mortality.
Figure 4 .1 Rates of transition between structures
Finally, there is the issue of success at implementing change, the rate of moving from reorganization to new-structure. An organization undertaking reorganization can successfully make the transition to the new state or it can drift back to its original structure, assuming that it does not die. The model in Figure 4.1 contains two rates that pertain to these processes: μc, the rate of moving to the new structure, and μb, the rate of returning to the old one. The effect of size on these rates is unclear. On the one hand, the greater inertia of large organizations might lower the rate of success at reorganization; on the other hand, success at reorganization might depend on the magnitude of resources applied to the task. Since large organizations typically have more resources than small ones, this line of reasoning suggests that the rate of achieving structural change increases with size.
The relationship between size and the rate of structural change is inde-terminate in our theory for two reasons. The first is ignorance about the effects of size on rates of completing structural reorganization, conditional on having attempted it. The second source of indeterminacy is the implication that small organizations are more likely to attempt structural change but are also more likely to suffer mortality in the attempt.
The model in Figure 4.1 may be substantively interesting in its own right, assuming that approximate information on dates of leaving states of reor- ganization can be obtained, which may not often be the case. This model provides a framework for addressing a variety of questions about inertia and change. It has the advantage of transforming what have been mainly rhetorical questions about the applicability of the ecological perspective into specific research questions. For example, consider again the question of life-cycle variations discussed in the previous section. Recall that we assume that reproducibility increases with age because routines become worked out, role relations stabilize, and so forth. What effect, if any, does structural reorganization have on these processes? Reorganization is sometimes tantamount to creating a new organization. When it involves such fundamental change, work groups are reshuffled bringing strangers into contact; routines are revised; lines of communication are reshaped: and the mix of resources used by the organization is changed. In this situation reorganization robs an organization’s history of survival value. That is, reorganization reduces the reliability of performance to that of a new organization. The stability of the previous structure does not contribute to reducing variability with new sets of procedures, role relations, and so forth.
If internal processes are solely responsible for the tendency of organiza- tional mortality rates to decline with age, the mortality rate for an organization that has just entered the state new-structure should be similar to the mortality rate of a completely new organization with that structure (and levels of resources). In this sense, reorganization sets the liability-of- newness clock back toward zero. In other words, structural reorganization produces a liability of newness. If, for example, one assumes that the hazard of mortality has a Gompertz form (discussed in Chapter 8), then the mortality rate has the form:
where y’ > 0. Then for the case of an organization founded at t0 that switches to this structure at tn > t0, the mortality rate is given under this scenario by
That is, development over the period (t0, tn) has no impact on the organi- zation’s mortality rate, other things being equal.
The argument in the preceding paragraphs can be viewed as one way to formalize some long-standing notions about organizational crises. Child and Kieser (1981, p. 48) put the issue as follows: “To some extent, a crisis successfully overcome may represent a new birth, in the sense that changes initiated are sufficiently radical for a new identity to emerge.’’ We suggest that such questions be viewed in terms of shifts in age dependencies in organizational mortality rates.
External processes may also account for the tendency of mortality rates to decline with age. For example, we mentioned the tendency for organizations to acquire legitimacy simply by virtue of longevity as well as the fact that it takes time for organizations to develop enduring exchange relations with key actors in the environment. Some sorts of changes in strategy and structure strain external relations, especially when the changes imply a shift in ostensible goals. But simple structural reorganization, without any apparent change of goals, does not rob an organization’s history of its value for public legitimacy and does not necessarily upset exchange relations with the environment. Old organizations can presumably count on their existing exchange partners for support during and following such structural change.
If the liability of newness reflects internal processes, the mortality rate will jump with structural changes. In contrast, if the decline in the mortality rate with age reflects mainly the operation of external processes of legitimacy and exchange, the mortality rate will not jump when structural changes do not imply a change in basic goals. That is, arguments about internal and external processes lead to different predictions about the effect of structural reorganization on the mortality rate. Therefore, the study of such effects may shed light on the relative importance of internal and external processes in accounting for age variation in the mortality rate in various organizational populations.
Finally, there is no reason to suspect that the mortality rate declines with duration in the state of reorganization. On the contrary, as the length of time over which reorganization is attempted increases, the costs (especially the opportunity costs) of reorganization increase. As the fraction of organizational resources devoted to reorganization increases, the capacity of the organization to produce collective products declines along with its capacity to defend itself from internal and external challenges. Hence protracted periods of reorganization disrupt organizational continuity and increase the risk of mortality. That is, the mortality rate of organizations attempting structural change rises with the duration of the reorganization.
This framework can perhaps elucidate another claim in the literature on organizations. March (1982, p. 567), in commenting on research on organi- zational change, suggests that “organizations facing bad times will follow riskier and riskier strategies, thus simultaneously increasing their chances of survival and reducing their life expectancy. Choices that seek to reverse a decline, for example, may not maximize expected value. As a consequence, for those that do not survive, efforts to survive will have speeded up the process of failure.” It is hard to imagine how an action can both increase a survival probability and increase the mortality rate in conventional models for the mortality rate because life expectancy is a monotoni- cally decreasing function of the mortality rate. However, the framework introduced above is consistent with this sort of pattern.
Consider the case in which the mortality rate of organizations in some environment rises precipitously at a certain moment t\, perhaps as a result of some discontinuous change in the environment. The mortality rate of organizations that retain their structures, ¡xd, will gradually decline to an asymptote that is considerably higher than the asymptotic rate in the old environment.
Suppose that some organizations in the population attempt structural change at t\. Consider two kinds of trajectories of mortality rates by age.
The dashed trajectory in Figure 4.2 depicts the mortality rate of an organi- zation that successfully implements the new structure at The dotted trajectory pertains to an organization that reverts to the old structure at t4. In a collection of histories like those in Figure 4.2, one would see that strategic action to promote survival exposes an organization to great risks, thereby “reducing its life expectancy” (in the words of March). But, because the mortality rate declines rapidly with duration in the new structure, a successful transformation eventually leads to a lower mortality rate. So the change may appear to “increase chances of survival.” However, it is not clear that structural change necessarily increases unconditional life expectancy; this depends on the various rates. Still, introducing the competing risks of mortality and reorganization allows one to deal systematically with this complicated problem.
We argued earlier that large organizations are less likely than small ones to initiate radical structural change. Does this mean that we think larger organizations have greater inertia, as Downs (1967) and others have claimed? If inertia is equated with low absolute rates of initiating structural change, it does. When inertia is viewed in comparative terms, as we argue it should be, the relationship of size to inertia is more complicated than the literature has indicated.
Figure 4.2 Trajectories of mortality rates by age
We derived the proposition that organizational mortality rates decline with size. This statement is equivalent to the proposition that time scales of selection processes stretch with size, as we noted earlier. One way to visualize such a relationship is to consider environmental variations as composed of a spectrum of frequencies of varying lengths: hourly, daily, weekly, annually. Small organizations are more sensitive to high-frequency variations than large organizations. For example, short-term variations in the availability of credit may be catastrophic to small businesses but only a minor nuisance to giant firms. To the extent that large organizations can buffer themselves against the effects of high-frequency variations, their viability depends mainly on lower- frequency variations; the latter become the crucial adaptive problem for large organizations. In other words, the temporal dimensions of selection environments vary by size.
We proposed earlier that inertia be defined in terms of speed of adjustment relative to the temporal pattern of key environmental changes. Although small organizations are less ponderous than large ones and can therefore adjust structures more rapidly, the environmental variations to which they are sensitive tend to change with much higher frequency. Therefore, whether the adjustment speeds of small organizations exceed those of large ones compared to the volatility of relevant environments is an open question. One can easily imagine cases in which the reverse is true, in which elephantine organizations face environments that change so slowly that they are relatively less inert than the smallest organizations.
The complexity of organizational arrangements may also affect the strength of inertial forces. Although the term “complexity” is used frequently in the literature to refer to the numbers of subunits or to the relative sizes of subunits, we use the term to refer to patterns of links among subunits. Following Simon (1962), we identify a simple structure with a hierarchical set of links, which means that subunits can be clustered within units in the fashion of Chinese boxes, a lattice in technical terms. Hierarchical systems have the property that flows of information, commands, and resources are localized: an adjustment within one unit affects only units within the same branch of the hierarchy. Simon (1962) argued that hierarchical patterns have an evolutionary advantage: “Nature loves hierarchy.” Research on population ecology supports Simon’s argument. For example, May (1974), Siljak (1975), and Ladde and Siljak (1976) show analytically and with simulation experiments that ecological networks are destabilized when links of predation, competition, or symbiosis are introduced. Both the number of links and the complexity of the pattern affect stability.
We think that similar arguments apply to structural change within orga- nizations. When links among subunits of an organization are hierarchical, one unit can change its structure without requiring any adjustment by other units outside its branch. However, when the pattern of links is non- hierarchical, change in one subunit requires adjustment by many more subunits. Such adjustment processes can have cycles; change in one unit can set off reactions in other units, which in turn require adjustment by the unit that initiated the change. Long chains of adjustment may reduce the speed with which organizations can reorganize in response to environmental threats and opportunities.
Although slow response does not necessarily imply a lower rate of at- tempting structural change, it seems likely that this is the tendency. As we noted earlier, a slow speed of response increases the likelihood that the environment will have changed before an organization can complete a process of reorganization. Knowledge of this fact may dissuade organizational leaders from initiating change and may serve as a powerful objection to proposed change by parties who benefit from the status quo.
Complex systems have slow response times not because they are any slower than simpler systems in detecting environmental threats and oppor- tunities but because the process of adjustment takes longer. In terms of the framework developed in earlier sections, this argument implies that complexity increases the expected duration of reorganization. That is, once a complex organization has begun structural change, it will tend to be exposed to a longer period of reorganization than a simpler organization attempting similar changes. Therefore, complexity increases the risk of mortality due to reorganization.
A complete analysis requires consideration of the effects of complexity on rates of initiating change and of its effects on success in implementing change, as we discussed earlier in analyzing the effects of size. We are not yet ready to make any claims about the effects of complexity on these rates. Still, the proposition that complexity protracts reorganization suggests that population ecological analysis might be more appropriate for explaining change in populations of complex organizations than in populations of simple ones because complexity increases inertia by at least one mechanism. This result, like that concerning the effect of size, disagrees with the conventional wisdom.
The goal of this chapter has been to clarify the conditions under which it is reasonable to assume that organizational structures have inertia in the face of environmental turbulence. We have argued that selection pressures in modern societies favor organizations that can reliably produce collective action and can account rationally for their activities. A prerequisite for reliable and accountable performance is the capacity to reproduce a structure with high fidelity. The price paid for high-fidelity reproduction is structural inertia. Thus if selection favors reliable, accountable organizations, it also favors organizations with high levels of inertia. In this sense, inertia can be considered to be a by-product of selection. Our argument on this point may be considered an instance of the more general evolutionary argument that selection tends to favor stable systems (Simon 1962).
Of course, the claim that selection favors organizations with high inertia is not a warrant for assuming that most organizations have high inertia. Most organizational populations are replenished more or less continuously by an inflow of new members. Younger organizations tend to have less inertia than older ones, and new organizations are more likely to adopt structures that differ greatly from those that would dominate any steady state of the process subject to selection and closed to new entries.
Organizational selection operates on many dimensions besides repro- ducibility of structure. If selection pressures on specific features of structure are sufficiently strong, organizations with the characteristics appropriate to the environment are favored even if they have relatively low levels of reproducibility. By the same token, environments in which change is turbulent and uncertain may not constitute a systematic regime of selection; the traits that are favored may shift frequently enough that no clear trend emerges. Such settings may favor organizational forms that can take quick advantage of new opportunities. The capacity to respond quickly to new opportunities presumably competes with the capacity to perform reliably and accountably (see Brittain and Freeman 1980; Freeman 1982). Such dynamics may dilute the importance of reliability and accountability in organizational selection. For all these reasons, it is not sufficient to assume that selection processes favor organizations with high inertia and to proceed as though observed populations contain only such organizations.
Source: Hannan Michael T., Freeman John (1993), Organizational Ecology, Harvard University Press; Reprint edition.