BUS 374 – Session 3 Organization theory Session 2: Why do organizations exist?

Agenda O Memo presentation #1 (Marx, 1867) O Memo discussion #1 O Memo presentation #2 (Coase, 1937) O Memo discussion #2 O Why are there so many different types of organizations?

Organizational Ecology Hannan and freeman, 1977 “Why are there so many different types of organizations?”

Adaptation School O Adaptation O Managerial agency is paramount O Capable of adapting to the environment O Differences in managerial capacity to adapt to environment O Diversity among organizations, hence an outcome of adaptation

Limitations to adaptation O Internal Limitations O Sunk costs O Information asymmetry about firm’s complete operations/contingencies O Internal political struggle O Normative agreements (this is how we have been doing it)

Limitations to adaptation O External Limitations O Legal and fiscal barriers to entry and exit (continuances is expected) O Information asymmetry about environmental demands O Loss of legitimacy when there is change O Individual rationality => Collective irrationality

What is the alternative? O Take adaptation with a lot of scope conditions O Supplement adaptation with selection models O Competition produces isomorphism with environment O Niches develop to produce isomorphism in dynamic environments

So how is selection different from adaptation? O Level of analysis is the aggregate… O Individual organizations O A population of individual organizations O A community of populations O Diversity is a property of aggregates of organizations O Communities are not stable O New organizations bring about change and replace old ones O New populations replace old populations

Organizational form O It is a blueprint for organizational action, for transforming inputs into outputs. O It determines what niches an organization is good at occupying O Organizations with similar forms are a population O Can be inferred (theoretically) by examining O Formal structure O Pattern of activities O Normative order

Fitness to the environment O Diversity in environmental resources causes diversity in organizational forms O Multiple distinguishable environmental configurations O One organizational form suitable to that environment O i.e., there is a tendency for isomorphism with the environment

Competition and isomorphism O Carrying capacity: O How much resources is available O how many organizations can the environment carry O Competition for limited resources O Survival of the fittest O If two populations exist that utilizes same limited resource combinations, the fittest will survive among the two. O Alternatively choose a different resource combination O When there are greater constraints on resources then there will be greater variability

Niches O Area in a constrained resource space in which one population outcompetes all other populations. O Hence, all populations occupy distinct niches. O But resource constraints can be either stable or dynamic… O So, while some organizations try to operate in multiple niches – Generalists O Others try to specialize in one niche.

Specialists vs. Generalists O Specialists thrive in stable environments O Generalists try to make use of dynamism O But not always, as reorganization is costly even for generalists O Fine grained change need not be good for generalists but Coarse grained will be…

Organization form revisited Hsu and Hannan (2005) O While population ecology has progressed by leaps and bounds, the idea of organizational form is still primitive and functional O Uses conventional industry classifications to identify organizational forms O Banks, Hotels, Automobile producers, Museums, Semi conductor firms, newspapers, etc. O Or uses niches within industries O Micro breweries, bio-tech firms, credit unions, ethnic newspapers O Or even unconventional industries O Social movements, worker cooperatives, political parties

What is the problem?

An identity based approach O What is identity? O Social codes, or sets of rules, specifying the features that an organization is expected to possess O How do get there? O Ask what audience think O Are a set of firm covered by the same analysts? O Do similar job candidates apply for jobs of a certain set of firms (i.e., Look at candidate pool for a firm)

What if there are multiple set of audience? O They might all be in complete agreement O No confusion – codes persist O Audiences might disagree? O Perhaps can play one against the other O But there can be more harm than good O It is important to link identity to issue of theoretical interest. O Further, audience agreement can be an analytical consideration for the future

Identity to Form O Identities lead to categories O i.e., organizations of similar identities can be seen as a category O But being categorized might not mean much O If deviation from category defaults is punished by the audience then it is consequential O Presence of punishments for category deviation is the sign of existence of a form

When is deviance punished? O When a category attains some critical mass (e.g., Musicals as a separate genre) O Identity characteristics become category defaults – i.e., taken for granted O Any organization that deviates defaults attract suspicion O But O High status organizations get some leeway. O Complex identities also get leeway O Generalist identities get leeway (supermarket vs specialty stores)

Identities change O Resistance to existing codes O Micro breweries O Threats to form’s survival O US Food Coops - from coop identity to capitalist identity to coop identity

That’s it for today O For our next session we will try to answer: O DO ORGANIZATIONS ACT SIMILARLY?