Organizational Ecology, A Review

November 12, 2011 § Leave a comment

ECOLOGY

Org ecology is an open natural systems model at the ecological level of analysis.

Open systems consists of coalitions of interest groups highly influenced by the environment and natural systems consist of collectivities seeking survival (Scott 03).

The ecological level of analysis examines relations of organizations to the environment or relations that develop between organizations (Selznick 49, Pfeff & Sal 78).

Resource dependence, Marxist theory, institutional theory and postmodern theory all operate at the ecological level.

Community ecology, inter/intra-organizational ecology and institutional ecology are different variants of the organizational ecology stream of literature but I will focus on population ecology (Astley 85; Zucker 89; HannnanFreem 77; Aldrich 79).

The difference between population, community and institutional ecology is primarily organizational grouping. Community ecology uses the areal organizational field level focusing on network relations between organizations in the same geographical area.

Institutional ecology uses the functional organizational field viewing the societal sector as a collection of orgs that influence the focal organization, and constitute a recognized area of organizational life (Scott Meyer 91, Di & Powell, 83).

Population ecology studies populations of orgs the key research question why some org forms survive over others and why there are some many kinds of organization (H&F 77).

H&F 89 describe org populations as having similar blueprints, unitary character and common dependence on the environment.

Natural selection theory of organizations contends that org forms best fit to the environment are selected and proliferate.

Baum & Amburgey (02) argue the field is based on 3 main observations: 1. Aggregates of orgs exhibit diversity, 2. Orgs are inert compared to environmental changes and 3. Orgs appear and disappear continuously.

Population ecology studies the birth and death rates of a population determined by variation, selection, and retention effects of the environment.

Population ecology assumes variations provide raw material for selection processes, but orgs find difficulty in identifying and replicating successful variations.

Org ecologists argue that environmental constraints don’t allow firms to adapt and that selection is more likely.

The question then becomes what underlying change mechanisms cause birth or death of organizations in a niche and how niches evolve.

Key mechanisms of org ecology are inertia, niche width, resource partitioning, population dynamics and density dependence.

Inertia theory (Carroll 85; H&F 84) assumes that individual firm do not change due to both internal and external constraints.

Internal constraints consist of core and peripheral characteristics, peripheral protecting the core.

Core characteristics such as goals, forms of authority, core technology, and market strategy are difficult to reflect and act on.

External constraints are the firm characteristics that are signaled to the environment when growing, such as reliability and accountability.

These characteristics develop routinization, preventing change.

Even pop ecologists that accept orgs can change argue legitimacy selects out orgs without reliability or accountability resulting in a population resistance to change.

Niche width theory describes a niche as a particular combination of resources required to support a given type of population (H&F77).

A niches is realized when the equilibrium of the system support optimal org forms into which all organizations are isomorphic.

Systems are rarely in equilibrium and niche theory attempts to predict what happens when the environment varies.

Generalists and specialists are a popular typology in niche theory; generalists feed on varied features of the environment, give priority to exploitation, while specialists exploit optimally narrow environmental resources.

Resource partitioning theory (Carrol 85) proposes that as markets increase, large generalists move to the center of the market, due to economies of scale, freeing peripherial resources for specialists to develop.

Carrol & Swam (01) supported the theory in the brewery market.

Population dynamics (Carrol & Dela 82) offer that given a population, previous founding or failure signal opportunity or threat to potential entrants and the effect is informational, however it has not been well supported empirically.

Density is the number of orgs present at a given time in the population.

Density dependence argues that at low densities the increase of density increases legitimacy in turn increasing resources available to the population resulting in a mutualistic effect.

However, at high densities, competition decreases legitimacy reducing the resources available to the population resulting in a competitive effect.

Competitive and mutual effects are added in the main prediction of density dependence.

H&F (89) found a curvilinear inverse U-shaped effect of density on births.

B&P (95) found a curvilinear U-shaped relationship of density on deaths.

Hannan et al’s (95) study on the automotive industry demonstrates range differences between legitimacy effects which are earlier and on a larger geographic scale as compared to competition.

ECOLOGY

 

Organizational Economics, A Review (2 of 2)

November 11, 2011 § Leave a comment

Economist identified three sources of principal-agent problems as moral hazard, adverse selection and asymmetric information (Akerlof 70; Spence 73; Arrow 85).

The delegation of decision making authority is problematic because interests diverge and the principal is unable to monitor the agent without cost.

The theory explores the issues of controlling and monitoring for the alignment of interests (Dalton et al, 03).

However, agents develop power bases and owners become dependent on expertise.

Labor wields power through union activity, strikes and slowdowns.

Individuals interfacing with suppliers and regulatory agencies also gain power.

Hickson et al (71) made three propositions about power based on Emerson’s (62) definition: 1. If you can cope with uncertainty, 2. Have low substitutability and 3. Have high centrality, through pervasiveness (degree) and immediacy (affect) then the greater the power.

 

Criticisms of governance models is the asocialized view of the actor as self-interested, atomistic, market oriented and uninfluenced by social relations. There is an unrealistic view of motivation as primarily financial gain, however behavioral research shows individuals are also motivated by things such as status and community (Hirsh et al, 90).

Guarding against opportunistic behavior can stifle initiative, creativity, entrepreneurship and innovation within firms (Davis et al, 97).

Critiques led to a more socialized version of agency theory on whether incentives have more symbolic than economic value, whether demographic similarities is a true determinant of incentives, and whether increased board control is balanced by the social influence of management (Westphal Zajac 94,98,02).

 

Resource based view is a competence based model that asks why firms are different and answers because firms own specific rents.

Penrose (59) first had the idea of resources shaping firm behavior and org growth over time.

RBV assumes markets host imperfections and was developed in response to structure-conduct-performance and firm performance in industrial economics (Bain 50; Porter 80; Barney 86).

RBV focuses on the continuing search for rent and ways that unique resources can be deployed in changing circumstance (Rumelt 74).

RBV argues that attributes of the firm that are hard to copy drive performance and competitive advantage (Rumelt 84,87).

Resources of interest are valuable, rare, inimitable and non-tradable (VRIN) (Barney 91).

 

There is a strong epistemological criticism that RBV is tautology (Priem Butler 01; Williamson 99).

The existence of resources is based on differential performance which is then used to predict …performance.

The view does not address when a resource is crucial if everything has a unique resource and more resources are always better than less.

Finally, the theory ignores the environment which weakens any predictions on developing resources that may become obsolescent with environmental variation.

 

Dynamic capability research explores how firms build and sustain competitive advantage in dynamic markets.

Dynamic capabilities derive from managerial processes and competence only generates rents if based on routines difficult to imitate and heterogeneity is an outcome of Schumpterian competition (creative destruction) (Teece Pisano 97).

Dynamic capability has a strong affinity with learning perspectives, sustained competitive advantages depend on effective manipulation of knowledge sources.

 

Eisenhardt & Martin (00) explained dynamic capabilities by its contrast to RBV:

  • RBV assets purchasable, DC assets deploy and recombine
  • RBV rents assets, DC rents transformation
  • RBV inimitable resource, DC inimitable processes
  • RBV specific assets, DC specific skills, acq, learning
  • RBV assets valuable, DC assets inimitable
  • RBV no isolation of rents, DC isolation of rents
  • RBV vs. SCP, DC vs. TCE

ECONOMICS

Organizational Economics, A Review (1 of 2)

November 10, 2011 § Leave a comment

ECONOMICS

Org economics began with Coase’s (37) challenge of economic assumptions of perfect markets.

Coase asked why are there firms if markets are efficient and if firms could be more efficient how is the market not one huge firm?

The common assumptions of org economics are profit maximization, bounded or perfect rationality and that competition is the major driving force. There are two major paradigms of organizational economics.

Governance models focus on the exchange dynamics of actors and consist of transaction cost economics (Will 75), agency theory (Jens & Meck 76) and property rights (Hart 89).

Competency models focus on internal factor of differentiation such as the resource based view (Penrose 59), dynamic capabilities (Teece 84) and industrial organization (Porter 79).

Behavioral theory of the firm is an info processing perspective (C&M 63) that uses cognitive constructs at the org level such as goals, expectations and choices constructed by processes where individual cognitions are in relationship.

The Carnegie School led by M,S&G (58) introduced bounded rationality to explain limited info processing abilities that lead to quasi-resolutions of contradicting goals made compatible by local rationality, satisficing, and sequential attention to goals.

Rules, programs, schedules departmentalization, hierarchy, delegation and micro-coordination are coordination mechanisms organizations use to increase info processing. Organizations group tasks to minimize coordination, or transaction, costs and focus on efficiency.

Transaction cost analysis is an open rational system model studying orgs at the ecological level whether to make or buy a material or product.

In transaction cost economics there are two main governance structure, the market and the organization.

Transactions, the unit of analysis, are exchanges negotiated by contracts where parties are assumed to operate in self-interest.

Transaction cost economics has two key behavioral assumptions 1. Bounded rationality prevents the ability to see all possible consequences of the contract and 2. Opportunism prevents the possibility of relying on promises.

However those two factors alone are not enough to prevent proper contracting if the market operates with perfect information and competition. Williamson formalized three conditions that prevent reliance on contracts: 1. Uncertainty regarding unfolding events pertaining to the contract, 2. Asset specifity where the investment required for a contract is tied to it and 3. Frequency of the transactions is expected with regularity.

Market failures framework explains Williamson (85) fundamental transformation that predicts situations where bringing exchanges into the firm is better than leaving them in the marketplace.

In situations where exchangers have good opportunities to cheat and there are few exchangers to choose from it is better to bring the exchange inside the organization.

Freeland’s (00) seminal example is of GM and Fischer Body who made a big investment to supply GM.

Fisher Body made the investment and GM’s difficult in replicating the investment rapidly and cheaply elsewhere led GM to acquire Fischer Body. Organizations supplant long-term open contracts among exchange partners, replaced by employment contracts where people sell the promise to obey command (Commons 24).

A criticism of transaction cost is that it only explains static arbitrage, not the dynamic emergence of a firm and has no predictive power regarding the performance difference between firms.

There are claims it overestimates the power of hierarchical controls and incentive systems and underestimates the extent economic behavior is embedded in a web of social relations (Milgrom Roberts 88; Uzzi 97).

Opportunism has been critiqued as an unnecessary assumption and questioned whether an independent cause or a consequence of context (Conner Prahalad 96; Ghoshal Moran 96).

Agency theory focuses on conflicts of interest intrinsic to corporate governance typically between principal and agent (Barney Hesterley, 96).

Positive agency theory is a theory of firm ownership capital structure that examines the power and politics of corporate control, assuming the rationality of actors and constraints of real governance situations (Jen & Meck, 76, Eisenhardt 89).

Property rights include ownership and control not just the principal-agent problem (Alchian Demsetz 72, Hart 89).

Agency theory claims firms do not have unity of action and that political arenas generate asymmetric info because principals and agents are boundedly rational, self-interested, opportunistic and risk averse (Allison 71).

ECONOMICS

Hierarchy and Boundaries, A Review

November 7, 2011 § Leave a comment

HIERARCHY AND BOUNDARIES

Fayol’s (1919) administrative theory is a guideline for structures and relationships.

Administrative theory is a guideline for decision-making that uses a formalizing rationalization and “top down” approach where jobs are antecedent to the worker.

Administrative theory was attacked as truisms or contradictory statements.

Bureaucratic theory by Weber (47) introduced an administrative structure with rational-legal authority where a belief in the legality of normative rules gives the elevated the right to issue commands.

Rational-legal is supplanting traditional authority due to the modern state, capitalism, and its technical superiority. Bureaucracy has subdivision functions that owner-managers originally did themselves such as the existence of administrative staff.

Rational Decision-Making by Simon (76) focuses on processes of goal specificity, formalization, and rational decision-making.

Simon proposed “administrative man” who pursues self-interests, though he doesn’t always know what they are, aware of some possible decision alternatives, but is willing to settle for an adequate over optimal solution.

Organizations simplify support by restricting ends so goals can be delegated, simplifying decision-making for participants.

Hierarchy is a centralized communication network promoting consistency of decisions and activities.

Hierarchy helps us understand how decisions of individuals and organization can be directed toward ultimate organizational goals.

Rational systems perspectives of organizations improve efficiency through division of labor, reduced transaction costs, more efficient information processing, and more effective monitoring.

Organizations help monitor and give incentives to agents doing coordinated, cooperative work.

Cooperative situations involving complex tasks give rise to hierarchical structures(Scott 03).

Mintzberg (79) states, “Every organized human activity gives rise to two fundamental and opposing requirements: division of labor into various tasks to be performed, and coordination of these tasks to accomplish the activity.”

Weber (57) noted hierarchical structure position implies roles with associated bases of power and legitimacy.

French & Raven (59) claim the “more legitimate the coercion the less it will produce resistance and decreased attraction”.

Pure hierarchical authority could be functional-exchange, associated with reward-punishment.

Boundary setting and boundary spanning consists of a collectivity bounded by a network of social relations governed by a normative order applicable to participants (Scott 03).

Boundaries are difficult to define because they are both diffuse and dynamic.

Hannan and Freeman (89) admit boundary definition of organizations is a variable that changes as technology and other environmental forces affect it.

Realists adopt boundary definitions used by participants and nominalist researchers choose boundaries that serve analytic purposes.

Network theorists look at interaction frequencies and locate boundaries where frequencies diminish.

Resource dependency theorists (Pfeffer and Salancik 78) focus activities that change when one moves across a boundary.

Most organizations define boundaries by differentiation of members and non-members via some criteria of recruitment. Rational theorists define organizational boundaries that contribute to organizational rationality.

CONTINGENCY. HIERARCHY-BOUNDARIES

 

Contingency, A Review

November 6, 2011 § Leave a comment

CONTINGENGY

Lawrence and Lorsch’s (67) contingency theory proposes that the degree of uncertainty and the rate of change lead to the rate of development.

Contingency theory is an open rational perspective at the structural level and argues organizational types vary because they have adapted to different environments.

A homogeneous, stable environment leads to a greater formalization-hierarchical form.

Strategic contingency claims decisions are “constrained but not determined” by technical and environmental conditions.

Jay Galbraith (73) focused on optimal structures contingent on environments and argued there is no one best way to organize, countering the optimizing notions of rational theorists.

Organizations with internal features that best match environments achieve the best adaptation (Scott, 03).

Different subunits may confront different external demands causing differing formalization, centralization, and planning times.

The more varied the environments confronted, the more differentiated the structural needs, and the more difficult coordination and the more resources necessary.

Although there is general support for contingency theory, the relations are weak.

There are methodological problems and definitions of structural features that makes cross-comparison difficult due to different levels of analysis, contradictory findings, and simple versus complex structural levels.

Work groups with multiple tasks and structures don’t fit existing theoretical simplifications.

Highly correlated features are tested individually. Contingency theory often fails to account for the effects of social context and institutions.

Thompson’s levels model (67) proposes that the three perspectives apply in differing amounts to different organizations.

The rational perspective focuses on the technical level and the natural focuses on the managerial, while the open perspective focuses on the institutional level.

Organizations “strive to be rational although, natural and open” (Scott, 03).

Rational perspectives focus on effectiveness and efficiency.

At the institutional level the organization is open to the environment and must adapt.

Managers mediate between open institutional level and closed technical level.

As technical focus shifts to institutional analysis, the key factor moves from efficiency to legitimacy of social action.

CONTINGENCY. HIERARCHY-BOUNDARIES

 

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