How do organizations evolve?

How do organizations evolve?
Bus 374
Dr. 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
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
• 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configuration is outdated.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
• 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
• Reproducibility generates structural inertia
• Hence, selection favors inert organizations
• Reorganization attempts reduces
• 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
“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

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