Explaining the Failure of Incumbents with Population Ecology Theory and Structural Inertia

[Music]

so welcome back to the session scoping

the need for innovation at the

Organization 11 so far we have

understood but the failure of incumbents

is and in this video we want to explain

its occurrence and we do so by means of

the population ecology theory and

extension the structure inertia concept

so in this video we really focus on the

explanation of the failure of incumbents

and population ecology the theory was

follows the logic of the theory of

evolution that has been developed by

Darwin in 1859 and it's translated to

the organizational context to explain

the birth development and the death of

organizational forms so the core

underlying questions of this work is why

is there such a large variety of

organizational forms in a given context

in a given industry and how do those

organizational forms emerge develop and

eventually die what are the environment

environmental forces that drive change

in those settings and what are the

factors that limit that constrained the

organization's flexibility so why is an

organization to some degree inert in

population ecology we focus on the

population of organizations and not on

individual firms we develop such

evolutionary models to explain the

variation that exists in the population

the selection that occurs over time and

the retention within the population and

we've always focus on the population of

we investigate the inertia the inertial

pressures that occur in organizations

and their effect on the probability of

survival of organizational forms in the

population the approach of this theory

is to develop theorizing that is that

can be applied to a broad range of

organizations and not only to specific

firms inside a population there are a

number of key assumptions in population

ecology theory and first of all

population ecologists assume that the

efforts of a firm to adapt to changes at

some degree random with regards to the

value of those efforts so whether the

changes that the company that an

organization makes our of any value is

to some degree random they assume that

the selection of organizational forms

happens in a way that stable and

reproducible structures are favored so

because organizations are inert that

they underlie these inertia pressures

they can only imperfectly follow in

Vermont environmental changes and the

changes occur at the population level

due to the selection processes so the

population of firms and a given industry

changes over time and not the firm

adapts to those changes

it's more the population so this

highlights that managers can not do so

much with regards to organizational

change it's more like the environment

and how the environment is set up

determines which organizational forms

are selected to

exist even longer and also those guys

here developing or following the logic

of population ecology acknowledge that

firms and managers have bounded

rationality so they have limited

information population ecology was

developed by Hannon and Freeman it was

first published in 1977 and it's

extension structure inertia as a core

concept was added in 1984 Henin was

professor of management and a professor

of sociology at Stanford and he also had

an appointment of a professor of

organization theory at Durham University

Freeman who already passed away in 2008

was professor of entrepreneurship and

innovation at University of California

at Berkeley so let's focus on the key

concepts of population ecology theory to

a larger degree so the core concept of

the theory is the concept of the

population and the population is defined

as a class of similar organizations that

face similar environmental

vulnerabilities and have this similar

internal form and this population is

bounded by a common system so it means

that the population of organization

exists in a specific geography and a

specific political environment or a

specific economic environment so this

for example could be that all technical

universities in Germany

so the tu9 that they are a population of

technology technology universities

because they are similar organizations

technical universities have a similar

form having faculties and schools and so

on and they have a common system so the

German system of higher education around

them this is also true for German

automakers so see this Forks bar porsche

et cetera they also have a

system around them the German market and

the German legislation regulation and so

on they have a similar form and are

similar organizations in a similar in a

specific industry so this is the logic

of focusing on populations the next

important concept in population

ecologists theory are the forces for

change so the population the

organizational forms in the population

they underlie different forces for

change for example competition so if

there are new market entrants then

competition increases inside the

industry or the market borders the

market boundaries could change for

example due to globalization we are not

only looking at the German market but

the European or even the world market

therefore competition increases that

could be technological change so for

example there could be a new technology

emerging that disrupts the existing core

technology as in the example of analog

photography when digital imaging

occurred there was such a technological

change that force change in that

industry

there could be ethical or social

pressure for example stakeholders could

increase the pressure of the

organizations and a specific industry by

stating that the social norms on working

routines have changed work routines

should be more safe not yeah a decrease

so decreasing the likelihood that

employees are injured or or died during

work so this is also a social now norm

that could force change or nowadays the

call the call for sustainability could

also be such as a social or ethical

pressure on organizations also in the

last decade

and the Western civilization's often

discussed this demographic pressure on

organization organizations because the

workforce ages over time there is also

the question where the work routines can

stick the same or whether certain

products can exist any longer it might

be political pressure new regulations

also related to what we already talked

about sustainability they could for

instance be new regulations around

energy consumption or energy generation

that certain technologies like nuclear

power in Germany or nowadays discussed

coal power in Germany yeah are

prohibited by the by the government

there might be also economic pressure

like for instance banks so banking

industry in Germany and in Europe and

worldwide experienced a very low

interest rates nowadays due to the

financial crisis back in 2008 and 2009

this also generates pressure on their

business model because they were earning

money money because of having higher

interest rate when they give money then

have then the interest rate that they

have to pay when they get money so if

the interest rates reduce then this gap

between those two interest rates yeah

gets smaller so these are forces for

changes that might occur and that might

drive the population to change but then

there are also inertial pressures that

constrain the flexibility of the

existing organizations and population

ecology Theory distinct two different

constraints one is internal constraints

and the other is then external

constraints internal constraints to

change are for example Tsang costs

organizations have invested in plants

and equipment and specialized people in

people skills

so they have four somehow somehow in the

history build-up a capability and this

somehow yeah can be seen as Suncoast but

also as an internal constraint to what

can be changed or cannot be changed then

we also have internal information

constraints the core decision-makers

might not have all the information that

the subunits of the organization have

some YouTube political constraints some

subunits might even hold back

information in I mean in change there

might also be a reorganization occurring

so that leaders of subunits lose their

organizational power to some degree or

lose budget lose employees so they might

hold back specific information because

of these political constraints this

political power play inside the

organization and then there's also

organizational history I mean and in the

organization there might be an agreement

on what is the right way to do things so

this is related to organizational

culture so what do we do and how do we

do it in the organization and this also

generates some kind of organization a

legacy that might make the organization

nod and constrain its flexibility

internally and then there are also

external constraints to organizations

flexibility there might be legal and

fiscal barriers so the organization

might not change to a specific way

because market entry or exit is

prohibited there might be external

information constraints getting external

information getting market information

getting technological information might

be expensive or might be due to external

patterns to patterns from the competitor

even prohibited so there are constraints

to get new need and technological

information there's also a question of

organizational legitimacy so adapt

in the organization to some new

technology or new circumstances might be

seen as not let legitimate it and

there's also the problem of collective

rationality when one organization

changes in the population to a certain

degree in a certain way that might this

might be rational for this organization

but might not be necessarily rational

for all the organizations in the

population one way might work for a

specific organization but might not work

for other organizations and these

constraints result in so-called inertia

and a company is viewed as inert if the

speed of reorganization is lower than

the rate of change in the environment

with this key concepts in mind we can

develop proposition on how

organizational evolution how a

population of organization evolves over

time and this is what population ecology

theory is doing there are three steps in

organization evolution that this theory

discusses first variation then selection

then retention so if we take a look at a

specific organizational forms then these

forms yeah they go through these forces

of change and also the inertia pressures

and population ecology theory argues

that new organizational forms emerge

only due to entrepreneurial activity

inter population imitation spin-offs

from existing firms or government

governmental intervention due to the

interplay of these forces for change and

the inertia pressures and depending on

these forces and their interplay there

might be new organizational forms that

are separated hours out of the existing

organizational forms so perhaps there

are spin-offs of existing firms so the

existing organization of

is separated out into new distinct forms

or there is the foundation of new

organization this refers to the

entrepreneurial activity so new

organizations emerge in organizational

forms emerge due to changing

environmental conditions and as stated

earlier the variations are seen as

somehow random with regard to the future

value so there might exist many

different new organizational forms

inside the population but whether they

have value in the future this will be

yeah this has to be clarified it's it's

not predictable at the moment and those

variations that occur are also part of

the overall population of organizations

that we looked at so there might be for

instance a new or a changing demand and

automobile industry so that cars should

be less expensive and lower quality of

XA is exact but acceptable so the

existing organizational forms that exist

in the market loss let's say the Macias

BMWs and Forex balance in of the world

they decide to develop new

organizational forms that can cope with

these exist these specific new demands

they could separate out new

organizational forms the organizations

that are built around fulfilling these

needs but whether these new

organizational forms are off any value

this has to be decided in future so this

would be a separation of a new

organizational form but this new

organizational form would also be part

of the overall population of German

automakers so after variation selection

processes take part so we have this

different organization of

forms in the population and these

different organizational forms they

compete for scarce resources so for

investments for example or for for sales

in that face the reliability and

accountability is core and we will talk

about this later when we talk about

structural inertia in greater detail so

reliability means whether the products

the outcomes have a reliable quality

this determines whether organizational

forms inside the population can increase

their sales and accountability means

whether the firm can increase its

accountability can show that its

decisions are valid can show that it is

a good investment to invest in the firm

then it can acquire external funding and

can grow based on external funding so it

depends on the organizational form

whether it can fulfill this basic market

demands of reliability and

accountability and they will compete for

those resources for sales and for

investments inside their industry and

then those organizational forms that are

that have the greatest fits to the to

the market demands they will survive and

this is again in the logic of Darvin the

survival of the fittest organizational

form inside the population and those

organizational forms that have an

illiquid and an adequate fit with the

environment with the market demands

those will die those organizations will

be shut down

so in retention so after we have the

survival of the fittest retention

activities will take place that means

organization will start developing

routines

standards and we'll start to develop

institutions in order to conserve the

activities that they do others

routinization or standardization so that

they conserve the activities that they

do and institutionalization means that

they conserve the culture beliefs and

values of the organization and by doing

so they generate an even stronger

inertia as a by-product so this was

population ecology as was described in

1977 by Hannon and Freeman as said they

have extended the theory by the notion

of structural inertia and let's go

through this briefly so in 1984 Hannon

Freeman published the were construction

inertia and they said okay in markets

organizations organizational forms have

to fulfill certain stakeholder

expectations for one stakeholders expect

strong reliability so they want

performance to be the same across

different products and over time that

yeah that occurs inside an organization

so let's take the automobile example if

Volkswagen produces a car in the night

shift or the day shift on Monday or

Tuesday it shouldn't matter so overtime

stakeholders want the product to have

the very same quality and they also

wanted four different products stemming

from the very same organization so they

wanted for the Volkswagen Golf for the

Polo and other cars as well that come

from the very same organization so over

the whole range over the whole portfolio

of products and over time they the

they called us want strong reliability

accountability goes more to the

stakeholder group of investors so

investors do invest in a company if they

judge the company's decision as as

mindful as valid as as has been done in

a way that their these decisions will

generate future profits because if I

invest in a company I have the

expectation to reap the future benefits

of the organization so in order to have

this accountability organizations have

to document and justify their resource

allocation so they have to show that

they comply with standards with ethics

and so on and organizations strive for

these survival enhancing effects of rub

reliability and accountability because

they really want to acquire external

resources from investors and they want

to sell the products there are outcomes

to the customers so they have to fulfill

strong reliability and strong

accountability expectations and how do

they do this usually by doing two things

they focus on standardization or

routinization so they establish stable

work routines like behavioral guidelines

of the organization's how to produce a

car they produce in an auto mobile

company things like mass production

routines with every car going from one

production step to the to the next and

about 90 seconds or so each screw has to

be fixed and with a certain force and so

on everything is standardized so that

the variability and performance is they

are almost not existing over time and

also over products so standardization

helps to get strong reliability

institutional

and turn helps to get strong

accountability because if we have

structures such as quality and risk

management or a carpet corporate

governance board

this helps to document and justify

resource allocations so by focusing on

standardization and institutionalization

firms create yeah inertia as a byproduct

of their managerial activities so as

said earlier inertia is defined as

having a lower speed of reorganization

than the rate of change in the

environment is so if a company is not

able to reorganize in a way an

organizational form is not able to

reorganize reorganize with a certain

speed to cope with the speed of

environmental change then it is thought

of being inert and then Hannon Freeman

distinguished between the core of the

organization and its periphery so the

core is rather stable and changes are

costly and everything that is more

peripheral to the organization is yeah

less costly to change and the core has

four components for one the stated goals

so the strategic objectives of the

organization so what do we want to do

what's our vision where do we want to go

the forms of authority so the structures

and rules of organization the

organizational chart so to say how the

company interacts internally the core

technology encoded in capital

investments infrastructure the people

that we have and their skills and also

the marketing strategy so how we get to

the market how we approach our customer

is also part of the core of the

organization and they argue that the

inertia of the organization in

Croesus the closer we come to the core

so with proximity to the core it's

getting harder to change the

organization it's hard to change the

core technology because of all the

investments think of an automobile

manufacturer having around 3,000

developers for combustion engines and

this organization changes core

technology to say electronic drives then

all the 3,000 developers will become

jobless and you can think about the

consequences that this has an

organizational disputes and strikes and

so on inertia increases also with

organizational age because standards and

institutions need time to occur only if

a standard is established for a certain

time people will comply with that people

will fully accept it people will fully

complied to it and institutions also

take time to be fully active in them in

the organization and also inertia

increases with size because lar large

organizations having let's say

production shifts they really need yeah

more standards they also need more

institutions to prove the expectation of

accountability so organizations that are

successful that stay in the market and

grew older and that grow with regards to

their size so they yeah we'll have even

more inertia and will even expect higher

costs of changes because of this inertia

so the whole logic of population ecology

can be summarized in a nice graph that

we will develop now and this has been

developed by attachment and O'Reilly

stating that congruence is a managerial

trap so if companies and managers follow

what the best is what both business

schools teach then this will lead and

certain circumstances to a managerial

trap so if we have an organization that

has a large fit so it has a congruence

and strategy the critical task of the

organization's fulfilling reliability

and accountability having the right

people having the right formal

organization having the right culture

then we have a good fitting

organizational form and this

organization will experience survival of

the fittest in other words this will be

a successful organizational form so this

organization will then grow older and

grew with regards to its size so we have

an organization getting larger more

structured older so the institutions

have time to really unfold the

activities the standards have time to

unfold their full potential so the

organization really gets even more

structured even more institutionalized

and even more inert so as a by-product

we generate inertia structural inertia

with regards to the standardization

activities and the institutionalization

activities but also cultural inertia by

yeah affecting the way how people think

about what the company does and how it

does these things and inertia and this

is the core idea of population ecology

as long as this environment is stable is

a guarantee for success a company that

is a nerd that does not change that is

perfectly fitting to the environment it

has a high likelihood of success of

being not selected out of the population

as long as the environment is stable but

if the environment shifts and shifts

with a certain speed then

this is a precondition for

organizational failure so this was a

nice summary of population ecology

theory population ecologists theory can

help us understand and explain why the

failure of incumbent emerges and

organizations and with that I thank you

for your attention and for watching this

video

you