How do organizations evolve?

Bus 374Dr. Rajiv Krishnan Kozhikode

Structural Inertia and Organizational Change

• Revisiting Hannan & Freeman’s (1977) arguments on inertia.

Inertia as an outcome of selection not a pre-condition for selection

But, selection actually favors the inert organizations.

A recap of the two dominant views on organizational change

• Selection:– Variability is a result of new organizations and

organizational forms replacing old ones• Adaptation:– Variability is a result of strategic adaptation by

individual organizations in response to changes in the environment

How does biotic evolution view this problem?

• Change/innovation is a random process (e.g., through mutation and recombination)

• If an innovation by any chance increases life chances, it will be retained and it tends to be widely adopted.

• But managers have been known to constantly strive to innovate

• So is organizational change not as random as biotic change?

Loose coupling between managerial intentions and organizational change

• According to March and colleagues’ random transformation theory, organizations change occurs as an endogenous process and it is decoupled from managerial intent and environmental demands.

• i.e., organizations have their own lives• Organizations might change, but neither in

perfect alignment with the environment, nor in line with managerial motives

Timing of change

• Instead of asking do organizations change, ask when do they change.

• Adaptation makes sense only if it is delivered on time

• Else, organizations might be constantly striving to change, only to find that every new configuration is outdated.

Three important considerations

• Temporal pattern of change in the environment• Speed of the learning mechanism• Speed of applying learning to change efforts• Thus, inertia is not simply inability to change,

but inability to change at the rate suitable to the environment.

• Consider IBM’s foray into PC business, or Sony’s foray into portable digital music players

Some important selection expectations from organizations

• Reliability– Lesser variance in performance is valued– Both cross-section and temporal reliability prevails

• i.e., actions of organizations from same industry resemble one another than they do with organizations of a different type

• An organization’s action in period one resemble its action in another period

• Accountability– Accountable organizations are valued– Organizations need to stand by their actions

• Reproducibility– Reliability and Accountability requires reproducibility

How is it related to inertia and survival?

• Reproducibility generates structural inertia• Hence, selection favors inert organizations

• Reorganization attempts reduces reproducibility

• Reorganization attempts increases death rate• The longer the length of the reorganization

attempt, the lesser the survival chance

Age, Size and inertia

• Reproducibility increases with age• So, inertia increases with age• Interestingly, death rate decreases with age

(i.e., liability of newness)

• Inertia also increases with size• Bigger organizations survive longer

Bill Barnett’s Red Queen Competition

Inspiration from Lewis Carroll’s “Through the looking glass”

• Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else – if you run very fast for a long time, as we’ve been doing.”

“A slow sort of country!” said the Red Queen. “Now, here, you see, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Competitive experience, adaptation and survival

• Cost of search are high than the benefits, so generally organizations do not search.

• Red-queen competition will force organizations to adopt in an incremental manner… not necessarily through managerial action

• Red queen competitors co-evolve• But over time, competency traps might develop

– If competition was in the distant past, organizations that survived that competition might get cocky and wont search.

– But, if competition is more recent, they might have to search to stay ahead

• So Red Queen can be maladaptive

Results from Chicago Banking Industry

• Banks with more competitive experiences recently were less likely to fail

• Banks with more competitive experiences in the distant past were more likely to fail

• Banks competing with other banks with more recent competitive experiences tend to fail

• Banks with greater variance in duration of competitive activity tend to fail

That’s it for this week

• For next week, we will look at how organizations interact with one another