short essay

Chapter 9

Managing Organizational Environments: General Paradigms

OVERVIEW

This chapter describes several major contemporary organizational paradigms, lines of theory, and research that are based on a particular view of organizational environments and their impact on organizations. Our discussion here focuses on resource dependence, transaction costs, and population ecology; we also refer back to two paradigms discussed in Chapters 2 and 3: contingency theory and institutional theory. We consider similarities and points of convergence in work conducted under the banner of different paradigms as well as differences among these. To provide broader insights into organizational phenomena, we conclude by considering the way in which different paradigms may be used in combination.

As organizational scholars continued to wrestle with the question of how to conceptualize organizational environments, they developed a number of paradigms (alternatively referred to as “perspectives,” “models,” “theories,” or just “approaches”). Merriam-Webster (2002) defines paradigm as a “theoretical framework of a scientific school or discipline within which theories, laws, and generalizations and the experiments performed in support of them are formulated.” We propose a rather more casual definition of this term: a paradigm is a way of looking at some phenomenon, which emphasizes or draws attention to certain aspects of it—and thus away from other aspects—as key to understanding the phenomenon. This definition is consistent with the way the term was used by Thomas Kuhn (1970) in a famous analysis of the development of physical sciences. As Kuhn noted, paradigms are not right or wrong, but they are predicated on the notion that certain questions are “more important” and certain approaches to answering those questions are “more useful.” At least as originally formulated, different organizational paradigms tended to focus on different kinds of outcomes to be explained (ranging from the creation of formal structure, to the formation of interorganizational relations, to the failure of existing organizations, and to the foundings of new ones) as well as on different aspects of organizational environments in explaining those outcomes (Pfeffer, 1993). As various scholars developed different paradigms over time, they tended to draw on one another’s arguments, so the boundaries have become more blurred than they were originally. In this chapter, we will try to give you a sense of the original formulations, to make the differences between these paradigms as clear as possible, but will also note points of intersection as well.

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Before beginning our discussion of the different paradigms, we should make clear that we are not proposing a scheme for classifying these approaches in terms of underlying assumptions or causal arguments. For this sort of analysis, you may want to see Burrell and Morgan (1979) and Astley and Van de Ven (1983) as well as Donaldson’s (1995) provocative assessment of contemporary organizational studies.

Here, we simply describe key assumptions and arguments of each paradigm to help you understand the logic and findings of research generated by these.

THE CONTINGENCY PARADIGM

Much of the research on sources of variation in organizations’ formal structure that we discussed in Chapters 2 and 3 can be categorized as representing what is usually referred to as contingency theory. Although the “theory” guiding this research was often more implicit than explicit (Schoonhoven, 1981), Donaldson (1995, 1996) suggests that the basic tenets essentially reflect the logic of structural-functionalist arguments from sociology, as described in Chapter 2. Thus, organizations’ structure is viewed as being created to serve certain functions, particularly the coordination and control of members’ activities. The effectiveness of different structural arrangements in carrying out these functions depends on (is contingent upon) conditions that an organization faces—its size, the kinds of technology that people use in their work, and so forth. Most of the early research within this tradition focused on internal characteristics as key contingencies, as we noted; that is, it reflected closed-systems approach to thinking about organizations.

However, some of the research also considered environmental conditions, particularly change in technology and customer demands for new products. A key example of this research is a study by Lawrence and Lorsch (1967), which we described in some detail in Chapter 8. To briefly recap, this study compared the structures of organizations in three industries: plastics (rapid change in the production technologies firms used and in the products they made), packaged foods (not as much change in production technologies but fairly frequent changes in products), and containers (little change in either technologies or products). They noted that differences in environmental conditions were closely related to the formal structure of successful firms: firms operating in environments characterized by frequent technological and product change generally were more structurally complex (differentiated) and had more elaborate structures to bring about integration among the differentiated units. Likewise, an earlier analysis by Burns and Stalker (1961) suggested very similar conclusions about the relation between the level of environmental change and formal structure. Thus, Scott (1981) summarizes the logic of contingency theory: “The best way to organize depends on the nature of the environment to which the organization must relate” (p. 114).

One issue that critics have raised about this approach (e.g., Child, 1972a) involves assumptions about the role of organizational decision-makers’ choice in bringing about the fit between formal structure and environmental contingencies (or for that matter, internal contingencies, such as size). There are two ways in which fit could be obtained, but work in this tradition rarely, if ever, spells out the mechanisms that are assumed to be at work. One mechanism involves strategic choice by decision-makers. Thus, decision-makers facing the same conditions simply draw the same conclusions about how to adapt their organizations and adopt the same structural arrangements. This argument would be consistent with much of the current literature that goes under the banner of strategy (e.g., Eisenhardt, 2002; Porter, 1980). Another mechanism through which fit between organizations’ structures and environmental conditions could be produced is selection—the demise of organizations whose structures were not consistent with the requirements of the environment and other conditions. This mechanism is emphasized by population ecologists, as we’ll discuss below.

THE RESOURCE DEPENDENCE PARADIGM

As noted in Chapter 8, work on interorganizational relations provided an important foundation for the development of another major paradigm, known as resource dependence theory. Evan’s (1966) work on interorganizational sets, which we described in the previous chapter, articulated some of the key arguments of resource dependence, as did an early analysis by Thompson and McEwen (1958) discussing the process of goal

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setting in organizations. In general, the resource dependence theory closely reflects the influence of the decision-making analyses of Herbert Simon and other members of the Carnegie School, described in Chapter 6. However, the development of the basic logic of this paradigm (and the assignment of the label, “resource dependence,” to it) is identified primarily with two main theorists: Jeffrey Pfeffer and Gerald Salancik (1978).

Key arguments of the resource dependence paradigm reflect two main assumptions about forces that drive organizational activities. The first is that organizations seek to ensure access to a stable flow of resources. That no organization is totally self-sustaining, a point underscored by Pfeffer and Salancik (1978:2), appears to be axiomatic. Even organizations that seem completely self-contained, such as isolated monasteries or agricultural communes, require some critical resources from outside their boundaries—new members, metal tools, even prosaic goods like salt and other materials necessary for the group’s survival and functioning. In order to ensure orderly operations, then, organizations must have access to those resources, either from individuals outside a focal organization or, more often, from other organizations. This means that all organizations must deal with resource dependencies.

A second key assumption that is underscored particularly in the forerunning work by Thompson and McEwen (1958) and Evan (1966) is that organizational decision-makers seek to maximize their autonomy. If an organization is to pursue its interests effectively (however those interests are defined), decision-makers need freedom to operate, to take whatever actions necessary for attaining specified ends. But dependencies on other individuals and groups for resources pose a threat to this autonomy because resource providers may withhold or threaten to withhold their exchanges if they are unhappy with organizational decisions. These sorts of considerations make power a key issue for decision-makers. Resource dependence, then, draws attention to power motives in explaining organizations’ actions. Following Emerson (1962), power is treated as a property of an exchange relationship, rather than a general characteristic of an actor (including organizational actors). As noted in Chapter 4, we can talk about A’s power vis-à-vis B but not about the absolute power of A (i.e., without reference to a given partner). Given these assumptions, a resource dependence paradigm focuses attention on power in dyadic exchange relations involving key resources and on different strategies that organizations may use to manage power relations.

Note that concerns with ensuring stable resource flows and with ensuring decision-making autonomy may sometimes lead to conflicting choices. For example, establishing long-term contracts with a given supplier might guarantee a stable flow of resources, but this would limit the organization’s ability to find and establish relationships with other suppliers who might provide a better deal. The choice of strategies, therefore, presumably reflects consideration of possible trade-offs between these two concerns.

Strategies for managing resource dependencies can be classified into two broad categories. One category involves actions that an organization can take independently, without securing the cooperation of a given exchange partner or set of partners. Thompson (1967:19) described a number of such actions an organization could take to, in his words, “seal off their core technologies from environmental influences.” We refer to these as autonomous strategies, and they include buffering, smoothing, forecasting, and rationing. The other broad category of strategies involves establishing ties to other organizations that provide resources to a focal organization; thus, we refer to these as interorganizational strategies. These ties vary in the level of resource commitments an organization must make and in the length of time that the commitment entails; they include contracts, co-optation, coalitions (or strategic alliances), and mergers.

Autonomous Strategies

Buffering refers to arrangements that allow an organization to absorb the effects of changes in resource flows, without necessarily trying to shape the flows directly (Thompson, 1967:20). On the input side, this involves stockpiling resources—obtaining resources when they are plentiful and relatively cheap and storing them for future use. So, for example, biodiesel fuel producers may purchase corn or soy products when there is a large supply of these and then store them for conversion into fuel at a later time point. Another, more subtle illustration of this scenario is when organizations provide managerial training for more employees than the number of open managerial positions or the numbers that are likely to be open in the near future; that way, the organization has a ready supply of management candidates available when positions do become open. On the

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output side, a buffering strategy takes the form of warehousing—storing goods that have been produced for exchange at a later time. Carpet manufacturers, for example, make different types of carpeting and store them so that they can be shipped when ordered by customers. The practice in some universities of hiring their own Ph.D. students who did not find a job in a given year as temporary lecturers could also be viewed as a form of this strategy. The effectiveness of buffering strategies depends largely on the degree to which the resources involved are subject to becoming obsolete or unusable over time. If demands for a resource change quickly— products go out of style or technology changes so that different types of resources are needed—organizations may end up holding resources that they can’t use.

Smoothing strategies (sometimes called leveling) entail practices that are designed to reduce variability in resource flows directly, rather than simply adapting to such variations, as in buffering (Thompson, 1967:21). These strategies often are aimed at variations in flows on the input side. An administratively oriented form of this involves scheduling. Thus, for example, medical clinics normally reserve some time slots and assign nonemergency patients to these; another example is the assignment of days and times to students for online enrollment. Both of these arrangements have the same goal: an orderly flow of resources (people, in these cases) through the organizational system. Smoothing can also take a market-oriented form, usually involving inducements to encourage transactions at particular times. Commuter railroads commonly offer off-peak rates (lower prices for travel in the middle of the business day, or on weekends); airlines offer lower fares during periods when fewer people are apt to travel; stores offer mid-January sales, when consumers are less likely to be in a buying mood. You could also think of organizations’ offers of early-retirement packages to their employees in this light; this can be a way to encourage the regular flow of personnel through the organization. The effectiveness of this strategy depends to a large degree on whether the demand for the resources is elastic (using economists’ terminology)—whether consumers and suppliers can and are willing to wait to transact with the organization. To give an obvious (if slightly dark) illustration of inelastic demand: patients who need pacemakers will not wait for a sale.

A third type of autonomous strategy that organizations may use is forecasting (Thompson, 1967:21). Like buffering, forecasting does not involve efforts to alter the flow of resources but does involve active monitoring of changes in flows and adaptation by the organization in response to expected changes. One prosaic example of this is the practice in many grocery stores of stocking more canned pumpkin in the late fall and early winter than in the spring or summer; they forecast that increased demand for this resource will occur around the holidays and lessened demand in summer months. Similarly, some hotels in resort areas open up in the late spring and summer (or late fall and winter, in skiing areas) and shut down in the opposite seasons, again based on expectations of changes in the flow of customers. This strategy can be effective when changes in flows are predictable and orderly; when changes are random (e.g., based on fads), forecasting is clearly not of much use to organizations—although, despite norms of rationality (Thompson’s favorite caveat), they may still try to use it.

And a final type of autonomous strategy is rationing (Thompson, 1967:23). This entails coping with uncertainty over the demand for a good or service produced by the organization by limiting its provision; the goal here is to minimize excess production of resources. One example of this strategy is provided by book publishers: when printing a book by an unknown author, publishers often make first runs fairly small. If the book is successful, more copies can be produced, but a smaller number of initial printings helps reduce “remainders” on the shelves at bookstores. Another example is provided by free legal services clinics, where the number of staff members is usually low; when there are more clients than counselors available, the clients simply have to wait. This strategy is effective primarily when the organization is the sole producer or in a position of monopoly or near-monopoly control. Since this often holds for public service agencies, it is not uncommon for such organizations to use this strategy. This condition holds less often for business organizations; by limiting production, businesses may run the risk of losing transactions to others who produce the same or substitutable goods and services. (In publishing, organizations enter into contracts with authors for copyright, which effectively gives these organizations a sort of monopoly power, at least for some specified period of time.)

Interorganizational Strategies

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Buffering, smoothing, forecasting, and rationing may help minimize dependence on other organizations and thus maintain autonomy in decision-making, but they are not always adequate to ensure stable resource flows to an organization. Consequently, organizations frequently pursue interorganizational strategies to deal with this issue. The use of such strategies is the major focus of contemporary research conducted under the banner of resource dependence (see Pfeffer and Salancik, 1978, for a summary of much of this research), which has investigated a number of different types, including bargaining, co-optation, strategic alliances, and mergers. As we’ll discuss in another section of this chapter, where we describe the transaction cost paradigm, the first and last of these strategies—bargaining and mergers—have also been of central concern.

Bargaining refers to the establishment of formal but relatively short-term exchange agreements with another organization (Thompson and McEwen, 1958). There are abundant examples of this strategy: a company enters into an agreement with a union to pay a specified wage for labor for a specified period of time; one firm agrees to buy a given quantity of some good from another firm; an organization rents space from another organization for a defined leasing period, and so on. Such exchange relationships are not necessarily limited to monetary transactions. For example, in one case that we’re familiar with, a nonprofit agency that provides workforce training for the unemployed entered into an agreement with a local bank, permitting the latter to use its computer facilities for training bank employees, in exchange for allowing some of the nonprofit’s clients to receive the training. This strategy goes beyond a pure market relationship, that is, one where the exchanges are immediate and involve no ongoing relation, but not much. It does secure a flow of resources to an organization but only for a limited period of time; on the other hand, it also entails little or no threat to its decision-making autonomy, since once the exchange agreement is up, a focal organization may simply choose not to renew it.

The second form of interorganizational strategy, co-optation, involves bringing representatives of another organization that provides (or can provide) important resources into the decision-making structure of a focal organization. Often, this involves appointments to the board of directors of an organization, as exemplified in the case of Chrysler automobile company, which, in the early 1980s, took the unprecedented step of appointing the president of the United Auto Workers union, Douglas Fraser, to its board. Similarly, examination of the board of trustees of most business schools will also illustrate this strategy: most, if not all, have individuals from large corporations or important local employers represented on their board.

As we noted, when we discussed work on interlocking directorates in Chapter 8, interlocks sometimes have been viewed as co-optative devices, a way of securing commitments from key resource-providing organizations. Thus, cooptation was commonly offered as an explanation for why banks and other financial institutions were so often selected to be on other organizations’ boards throughout most of the twentieth century (Mizruchi, 2004). Creating ties to other organizations this way can help an organization ensure a flow of resources in a number of ways (Perrow, 1961; Pfeffer, 1972; Pfeffer and Salancik, 1978). First, it provides a channel of communication that can be important in facilitating resource exchanges. For example, a board member who is employed by a bank that is considering changes in its loan policies may convey this information to members of a focal organization during a board meeting; that may affect the focal organization’s ability to prepare for these changes to make sure it can obtain needed loans. Second, when a member of one organization is appointed to the board of another, she or he may feel an obligation to help direct resources to the latter. Thus, representatives of large corporations who sit on university boards of trustees are apt to help direct the donations of their corporation to the university. And finally, having representatives of other, powerful organizations on an organization’s board can help provide it with legitimacy, and this can increase support not only from the organization represented on the board but from others as well. Hence, a new organization formed to lobby for regulations involving environmental issues might put a member of the Audubon Society or Sierra Club on its board to help legitimate itself with possible donors; such legitimacy is likely to affect individuals’ and organizations’ willingness to provide donations and support to the new organization (Meyer and Rowan, 1977; Zucker, 1986).

However, this strategy also poses a much greater threat to a focal organization’s decision-making autonomy than bargaining, since resource providers are in a direct position to shape decision outcomes. A prime example of this is provided by Selznick’s (1966) now-classic study of the Tennessee Valley Authority (TVA). The Tennessee Valley Authority Act was passed by the U.S. Congress in 1933 with the aim of helping

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southern farmers who had been especially hard-hit by the Great Depression, by providing electric power to the region, manufacturing cheap fertilizers, and providing other forms of support for agricultural production. One of the mandates of the Act was that the organization created to operate these projects be democratic by having local organizations and citizens participate in its decision-making processes. Doing this could be viewed as a co-optative process, whereby the organization gained political support from local constituents. As Selznick’s account underscores, however, co-optation is a two-way process. He documents how the TVA ended up largely representing the interests of the wealthier farmers in the area (who were active members of the local organizations from which the TVA recruited participants), rather than the truly economically disadvantaged ones, whom it was presumably intended to help the most. The inherent threats to autonomy associated with this strategy suggest that it is more likely to be used by organizations that are relatively weaker— where the need to ensure resource flows outweighs the potential costs of loss of autonomy. This is consistent with findings from research by Davis (1996), showing that less than 5 percent of large corporations had representatives of firms that served as key buyers or suppliers to the corporation on their boards; large corporations presumably have sufficient resource flows to make the potential costs of co-optation efforts not worth paying.

A third strategy, which is broadly referred to as coalition (Thompson and McEwen, 1958), involves the commitment of resources by two or more organizations to some relatively long-term joint activities. Our use of the term coalition, then, encompasses arrangements that go under an array of labels: joint ventures, alliances (or strategic alliances), and joint programs (Child, 2005). One example of the use of this strategy is provided by the hybrid electric vehicle (HEV) project that was begun in 1993 with financial support from General Motors (GM), Ford, Daimler-Chrysler (then Chrysler), and the Department of Energy’s National Renewable Energy Laboratory (NREL). The project’s purpose was to conduct research leading to the production of a market-ready hybrid vehicle in a decade (http://www.nrel.gov/vehiclesandfuels/hev/about.html). Although the ultimate goal is still being pursued, the contributing firms all were able to make use of the research findings from the project. Another example of a coalitional strategy is provided by the Inter-University Consortium for Political and Social Research (ICPSR), which is a data archive (a place where researchers can find data sets to use in research) that is headquartered at the University of Michigan. This organization is supported by a large number of academic organizations, whose faculty and students are given the rights to use the data and resources of the organization. Still another example is represented by Butachimie, an organization that manufactures a chemical used by two competing chemical companies, DuPont and Rhône-Poulenc Rorer. Although competitors, the companies cooperated in forming Butachimie to serve as a supplier for both companies (Child, 2005).

These kinds of arrangements help participating organizations secure resources that they may need in the present, or that they anticipate needing in the future, while sharing the costs and potential risks associated with getting those resources. However, such arrangements often also require a substantial amount of initial and ongoing investment of resources to the coalition project. Because the contributing organizations lose unilateral control over those resources once they’ve been committed (because decisions about their use are made by some joint governance arrangement), there is some loss of autonomy for participating organizations (Coleman, 1974). For example, the HEV project was put under the authority of the NREL, a separate organization that ran the research. The automakers who contributed to the project could try to influence NREL’s decisions (and almost certainly did so), but none of them had complete individual control of how their investments were spent by the project. Likewise, at ICPSR, no one university sets policy on what data sets are acquired or what the rules for use are. The potential costs of allowing other organizations to have some say over resources that a focal organization has contributed may be a key reason that one of the strongest predictors of two organizations forming an alliance is a past alliance (Aiken and Hage, 1968; Gulati, 1995a; Gulati and Gargiulo, 1999); this allows organizations to develop trust and knowledge of the other that aides in facilitates joint decision-making.

A final form of interorganizational strategy involves mergers, the joining of two organizations so that they become, legally, a single one. There are different types of mergers, each of which deals with different aspects of resource dependence. A symbiotic merger involves organizations that carry out different but related activities, that is, ones that are exchange partners (actual or potential). This kind of merger is also referred to as vertical integration, because it involves combining organizations at different “levels” of a supply chain. Thus, for example, when Will Durant purchased a bankrupt automobile manufacturing business in 1904, Buick

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Motors, and then created franchise businesses that were responsible for sales and distributions of Buick automobiles, he engaged in “forward integration”; when he bought companies that provided parts used in the manufacturing of the automobiles, he was involved in “backwards integration” (Chandler, 1962).

Symbiotic mergers ensure control over a set of resources that a focal organization requires (Pfeffer and Salancik, 1978:114). A competitive merger, on the other hand, involves organizations that carry out the same kinds of activities, that is, competitors, as the term suggests. This is sometimes called horizontal integration, and one example is provided by the merger in 2003 of two unions: Hotel Employees and Restaurant Employees (HERE) and UNITE (which to represented laundry workers and other service industries). This merger, resulting in UNITE HERE!, allowed the unions to avoid expending resources on competitive unionizing drives and to pool resources for organizing, lobbying, and mobilizing workers. This type of merger not only allows more effective use of resources through economies of scale, but also limits options available to exchange partners, and this facilitates resource flows as well (Pfeffer and Salancik, 1978).

There is another type of merger, diversification, that involves one or more organizations that are unrelated—neither potential exchange partners nor competitors. Such mergers may result in conglomerates, extremely large organizations composed of businesses in many different industries. One example is Beatrice Foods, which started out as a small dairy products company in the 1890s but by the 1970s owned such diverse companies as Avis (car rentals), Playtex (women’s undergarments), Good and Plenty (candy), and Riley Tannery (leather goods). The logic behind such mergers is that the organizations in the conglomerate face different markets that are likely to rise and fall independently. Thus, the combined organization diversifies its risks: when one part of the organization faces conditions that lower its revenues, it can be subsidized by other parts that are (it is hoped) facing more promising conditions. This strategy, then, is intended to address problems of resource flows (although its efficacy was called into general question in the 1980s; see Davis, Diekmann, and Tinsley, 1994).

Mergers can provide a very strong means of ensuring ongoing flows of resources, especially symbiotic mergers. However, firms that use this strategy for this purpose also must commit a large amount of resources to the acquisition, and there are potential problems in terms of the decision-making autonomy, for the acquiring firm as well as the one acquired (Casciaro and Piskorski, 2005). This is because efforts to integrate two sets of decision-makers into a single governance structure are difficult despite careful planning and can produce unexpected conflicts and negotiations (Graebner and Eisenhardt, 2004). Pfeffer and Salancik’s research examining industry-level data on rates of mergers (1978; see also Pfeffer, 1972) suggests that symbiotic mergers are likely to be undertaken primarily when exchanges are very frequent, that is, when there is a high level of resource dependence between firms. Competitive mergers, on the other hand, are more likely to occur in industries with an intermediate level of concentration (i.e., not those dominated by a few large firms, nor those characterized by a large number of small, competing firms). The explanation offered for this finding is that in concentrated industries, competitor firms are often so large that the costs of acquisition outweigh the benefits (and antitrust regulations could prevent such mergers), whereas in industries with very low levels of concentration, a merger with a competitor produces very small gains, because the number of competitors is so great. Thus, the greatest gains to merging horizontally occur at intermediate levels of concentration in an industry.

Internal Power Relations

Of the various paradigms that we’ll discuss in this chapter, resource dependence is the only one that explicitly considers how environmental relations may affect relations among different units and groups within an organization. Drawing on the image of organizations suggested by the Carnegie School as coalitions of groups that simultaneously have common and competing interests (Cyert and March, 1963), Pfeffer and Salancik have examined how an organization’s dependence on external resources shapes decisions about the internal distribution of resources to different groups. They argue that groups or subunits that broker important resource dependencies for an organization will be more powerful coalitional members (Perrow, 1970) and thus are likely to receive a larger share of the organization’s resources. In line with this, their research on a university showed that departments that brought in higher levels of external research funds and contracts and that external

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agencies ranked higher in levels of prestige (an important resource for academic organizations) were assigned more valued and scarce organizational resources, such as support for graduate students (Pfeffer and Salancik, 1974). Moreover, the relative power of a department affected the proportion of the university’s general budget that it received, independent of the number of students taught in department course or the number of faculty members in the department. In general, these findings are consistent with the notion that subunits and groups that are involved in the acquisition of key resources by an organization will exert more influence on decision- making within an organization. This is also consistent with later work by Fligstein (1990) and others linking changes in the representation of various functional groups in top-level management to changes in corporations’ environments that made different types of resources more valued by corporations.

THE TRANSACTION COST PARADIGM

A third paradigm, transaction cost, is similar in many ways to that of resource dependence. One point of similarity is that both focus on the problem of organizational decision-making in response to environmental conditions. This common focus probably reflects the fact that the major architect of transaction costs analysis, Oliver Williamson, received graduate training at Carnegie Mellon University, as did Jeffrey Pfeffer, one of the theorists most closely identified with resource dependence. As we’ve noted, this institution was home base for Herbert Simon, James March, and others deeply engaged in studying decision-making processes in organizations. Also like resource dependence, transaction cost analysis seeks to explain the conditions that affect which strategies decision-makers use to manage exchange relationships. The latter, though, draws on work by an economist, John Coase (1937), to frame a key question underlying this paradigm, namely: Why do organizations draw their boundaries where they do? (To be more precise, Coase asked why there are organizations at all; this is a more extreme version of the boundary question and more clearly reflects the underlying faith of economists in the normal efficiency of markets for the creation and distribution of resources.) That is, a transaction cost paradigm focuses on explaining why organizations externalize some transactions—rely on the market to manage exchange relationships—and internalize others—rely on hierarchical control to manage exchanges (David and Han, 2004).

Reflecting its roots in economics, a transaction cost analysis starts with the notion that, theoretically, production units can obtain any resource they need in the market. Consider the case of producing some simple object, such as a coffee cup. In theory, one unit (which we’ll call A Company) could dig up the clay used for forming parts of the cup, another unit (B Company) could purchase clay to create the bowl of the cup, another unit (C Company) could also purchase clay to create the handles of the cup, while another unit (D Company) could purchase the bowls and handles and attach these together to form the cup, still another (E Company) could purchase the cups and apply a glaze, and so on. The question is: Under what conditions are these units likely to be combined, to become a single organization (e.g., the ABCDE Company, producing whole finished cups from clay), rather than continuing to operate as discrete exchange partners? This, Williamson (1981, 1983) argues, depends on transaction costs.

Transaction costs are those that are associated with the transfer of goods or services “across a technologically separable interface” (Williamson, 1981:552). The notion of a “technologically separable interface” implies that there are some activities that are inherently bundled, because of either temporality or necessary physical proximity or both. To have one person assigned responsibility for putting a button in place and another to push the needle through the button hole to sew it on makes little sense. But within those sorts of limits, it is possible to have a very high degree of specialization, as the cup-producing example above suggests. Whenever individuals or units specialize in one part of the production process and then pass the product along to another unit specializing in another part of the process, there are transaction costs—for example, from a buyer’s standpoint, there are costs associated with being sure that a particular good or resource is available when it’s needed, at a reasonable price, and at a level of quality that’s required (all this is apt to entail time and financial costs involved in specifying, enforcing, and renegotiating contracts and/or monitoring sellers).

These costs are affected by, in Williamson’s words, “human nature as we know it” (1981:553). In particular, there are two posited characteristics of human nature that are relevant here: (1) bounded rationality, which limits people’s ability to anticipate future events and states and thus to design exchange agreements that

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cover all contingencies; and (2) propensities toward opportunism, that is, inclinations to take advantage of exchange partners when possible, by misrepresentation, extortion, and so forth. If people were not opportunistic, bounded rationality would be much less problematic; when circumstances affecting the exchange changed unexpectedly, new agreements could be readily constructed if everyone could be counted on to act in good faith. Without bounded rationality, opportunistic behavior presumably would be recognized and anticipated and thus pose no threat to workable contracts or agreements. But opportunism in combination with bounded rationality can make market-based exchanges, very problematic.

Williamson argues that the extent to which these characteristics of individuals create problems for market exchanges depends on three characteristics of the transaction: (1) uncertainty, which involves the reliability with which some needed good or service is available when needed; (2) frequency, the degree to which a given producer regularly needs access to a good or service from an exchange partner in order to carry out its activities; and (3) asset specificity, the degree to which a good or service is specialized to a particular set of exchange partners. (Note that these conditions are very similar to those that define “strategic contingencies,” discussed in Chapter 4.) Asset specificity is viewed as an especially critical dimension of transactions, one that is related to the number of alternative exchange partners available. If asset specificity is very high, a seller may have a product that can only be used by one buyer; likewise, from a buyer’s standpoint, high asset specificity may mean that there is only one seller of a product that a buyer needs. On the other hand, with low asset specificity, there are apt to be many sellers and buyers available to transact with. Asset specificity can take a variety of forms. One is site specificity, which occurs when exchange partners are in such close proximity that it affects the costs associated with a particular exchange relation compared to other possible ones (e.g., a steel mill located right next door to a mining company). Physical specificity describes situations where parts or equipment needed to produce a product or the product itself is specialized for a particular exchange (e.g., a company produces catalytic converters that are used by only one car manufacturer). And human asset specificity is said to exist when individuals have particular knowledge or skills that are valuable only for a particular exchange relationship (e.g., an administrator who is well versed in an idiosyncratic bookkeeping system of a company). (Economists usually refer to the latter skills and knowledge as “firm-specific”; see Becker, 1964.)

Frequent need for a good or service and uncertainty over its provision can increase transaction costs, insofar as exchange partners have to be located and exchanges negotiated and renegotiated over and over again. These problems are lessened, though, when there is no asset specificity—when there are many potential exchange partners available. The greatest problem for market exchange is created by asset specificity, because this implies a “small numbers problem”—a lack of alternatives when a given exchange relationship turns out to be unsatisfactory. If an unanticipated problem is encountered with an exchange agreement (because bounded rationality limited the ability to specify how such problems will be handled), time and effort must be spent negotiating a new contract; the option of simply finding a new exchange partner is foreclosed. Moreover, under these circumstances, it’s more likely that at least one of the exchange partners will act opportunistically and seek to exploit the other, because they know the other has no alternative.

As the costs of market exchange rise, the attractiveness of bringing transaction partners together under the umbrella of a single organization increases. The hierarchical authority that characterizes organizations allows for resolution “by fiat” of conflicts surrounding transactions, thus eliminating time-consuming and potentially expensive negotiations. Moreover, as part of a single organization, information about production costs and other characteristics of goods and services is generally accessible to all parties, reducing the ability to engage in opportunistic behavior. However, there are costs associated with transactions that occur within the boundaries of organizations as well; these are referred to as “governance costs.” They include costs associated with administration and coordination—hiring people to supervise production, to handle personnel issues, and to keep records, expanding physical facilities, maintain excessing capacity perhaps (having more employees and space than needed when business slows), and so forth. When goods and services are purchased on the market, other organizations bear these costs. Thus, transaction cost theorists argue that only when transaction costs (those of market-based exchanges) exceed governance costs (those of organizationally based exchange) will organizations internalize exchanges; otherwise, they will rely on the market to manage exchange relations. This is sometimes described as “make or buy” decisions; internalization involves “make” decisions, whereas

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externalization involves “buy” decisions. David and Han (2004), reviewing a large number of empirical studies derived from a transaction cost paradigm, find that there is generally a fairly high level of support for its predictions of make-or-buy decisions.

Comparing Transaction Costs with Resource Dependence

You may notice that “buy” decisions map on to the strategy that resource dependence theorists discuss as bargaining, whereas “make” decisions map on to the strategy of merger (symbiotic mergers, in particular). Thus, the two paradigms draw attention to some similar kinds of strategies that organizations may use to manage environmental relations. In both cases, the choice of strategies is assumed to be primarily conditioned by dependencies. The notion of dependence is inherent in the concept of asset specificity and its implication of limited numbers of alternative exchange partners. In line with this, resource dependence theorists recognize that “concentration of control” of needed resources in the hands of a few exchange partners or a single one is a key element of dependence (Pfeffer and Salancik, 1978:52). Moreover, both paradigms emphasize conscious, calculated choices by organizational decision-makers in explaining organizational structure. Although work in each tradition explicitly recognizes that decision-makers are characterized by bounded rationality, the emphasis is more on the rationality than the bounds. For example, although Williamson discusses the way in which bounded rationality limits people’s ability to formulate complete contracts, the notion that decisions to make or buy are based on comparison of governance costs with market-based transaction costs is predicated on the assumption that decision-makers are able to forecast and make complex calculations of the impact of various factors on exchanges (Tolbert and Zucker, 1996).

The primary differences between these paradigms stem from assumptions or emphases that characterize the academic disciplines of the primary theorists, namely, economics and sociology. In line with economics, transaction costs analysis assumes that decision-makers are concerned with maximizing profit (of which minimizing costs is an important part). Resource dependence analyses, on the other hand, assume that organizational decision-makers are also concerned with maximizing their organization’s power and autonomy; this loosening of the emphasis on profit maximization is more consistent with a sociological approach. Perhaps partly because of its focus on more purely cost concerns as a driver of behavior, a transaction costs paradigm seems in some ways to be more elegant. However, this focus may limit its utility in explaining various types of organizational behavior. Thus, it is not easily extended to consideration of how organizations seek to manage relations with competitors; its use in addressing questions about conditions that are likely to increase the occurrence of competitive mergers, coalitional behavior, or co-optation is unclear. Williamson (1991) does consider a third type of strategy, in addition to market-based and organizationally based exchange relationships, that involves what he refers to as a hybrid form. This is an arrangement where an exchange relationship between partners who are more or less independent is brokered by a third party; as examples, he offers the case of a public utility, whose relationship with customers is overseen by a regulatory agency, and franchises, who operate fairly independently of one another but are governed by a parent company. But the idea that one organization might actually cultivate the dependence of another organization, and be able to do so because of the relative power imbalance between the organizations, does not rest easily within a transaction cost framework. This is precisely what GM did with its suppliers, though, and it was able to do so because it was the biggest game in town. As Pfeffer and Salancik (1978:54) note, GM used to insist that its suppliers (who were nominally independent—certainly not part of the formal structure of GM) allow the company to audit the suppliers’ financial records; suppliers were willing to do this because GM had large contracts to award. Auditing further increased GM’s power because it then had information about what suppliers’ actual costs were and could determine what charges were within a “reasonable” profit margin. By explicitly drawing attention to the use of power in exchange relations, resource dependence provides some additional insights into organization and environment relations that might be missed with a transaction cost paradigm alone.

THE INSTITUTIONAL PARADIGM

The underlying assumptions about the nature of organizational decision-making contained in both resource

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dependence and transaction costs paradigms, as described above, contrast sharply with those suggested by two other major paradigms: institutional theory and population ecology. We described the basic logic of institutional theory in Chapter 3 in some detail, so as with contingency theory, we’ll just offer a short recap and a little elaboration here.

Whereas resource dependence and transaction cost underscore interorganizational exchange relations as key to understanding how environments affect organizations, institutional theory emphasizes the effects of widespread social definitions of how organizations “ought” to look and “ought” to operate; these sorts of normative forces are referred to as the institutional environment. As we noted previously, theorists have suggested a number of sources that help create the institutional environment: government and other powerful resource-controlling organizations that set requirements; professional associations and organizations that have special claims to expert authority and that promote particular practices and arrangements; and networks of organizations whose members observe and often imitate one another (DiMaggio and Powell, 1983; Meyer and Rowan, 1977). Scott (2008) refers to these, respectively, as the regulative, normative, and cognitive dimensions of the institutional environment. In general, institutional theorists predict that as elements of formal structure (e.g., affirmative action offices, chief financial officers, total quality management programs) become institutionalized—defined as right and proper components of well-run organizations by these sources— organizations that don’t have these elements will be increasingly likely to adopt them, regardless of whether they have particular problems or issues that might make such structures useful to the organization’s functioning (Tolbert and Zucker, 1983).

A key problem with much of the empirical work based on institutional theory is that it gives almost no attention to measuring whether some element of structure is institutionalized—widely, normatively accepted or not—independent of the number of organizations that has adopted the structure. (This is also a problem for population ecology’s approach to measuring legitimation—a concept that’s virtually identical to that of institutionalization—as we’ll discuss below.) This lack of separate measures of institutionalization makes it difficult to compare the utility of an institutional explanation with those that emphasize highly calculated, rational choices by organizational decision-makers; the latter approach could conclude that all decision-makers simply reached the same conclusion about the need to adopt a given structure by independent avenues (Tolbert and Zucker, 1996).

This issue is tied to an assumption underlying this paradigm, that organizational decision-makers are very vulnerable to pressures for conformity and prone to follow the herd, particularly as uncertainty surrounding decisions increases. This assumption has served as the source of some criticism for this paradigm (Hall, 1992; Hirsch and Lounsbury, 1997; Oliver, 1991). Critics suggest that it is based on an “oversocialized” conception of individuals (Wrong, 1961) and that there is no place in it for agency, or independent, purposive action (DiMaggio, 1988). There is certainly some validity to these criticisms. As we noted at the outset of this chapter, one of the things that paradigms do is to focus attention of some selected aspects of phenomena that are to be explained and ignore other aspects. Hence, the resource dependence and transaction costs paradigms emphasize agency and choice and ignore more conformity-driven, less independently calculated aspects of decision- making. Both characterizations of organizational decision-making probably represent accurate depictions, although perhaps at different points in time and under different circumstances.

In line with institutional theory’s arguments, though, there are a number of studies that indicate that, once a certain number of organizations or individuals have adopted some practice, the strongest predictor of adoption by others is the number of previous adopters (Banerjee, 1992; Bikchandani, Hirshleifer, and Welch, 1992; Fligstein, 1985; Palmer, Jennings, and Zhou, 1993; Tolbert and Zucker, 1983). The popular press also provides some insights into how institutionalization processes shape organizational decision-makers’ choices. For example, a New York Times article reported that business firms are establishing formal intelligence departments to keep tabs on competitors from home and abroad. One source is quoted as saying that “understanding your competitors’ positions and how they might evolve is the essence of the strategic game” (Prokesch, 1985).

THE POPULATION ECOLOGY PARADIGM

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Like institutional theory, the line of work known as population ecology also underscores the “boundedness” of decision processes in organizations, although this issue is relevant to this tradition primarily because of a key underlying assumption, namely, most organizations do not change fundamentally over time (they are “inert”). One of the distinguishing features of population ecology is that it was not developed to explain changes in individual organizations (such as the creation of formal structure or the formation of relations with other organizations); rather it was formulated with the aim of accounting for large-scale shifts that characterize groups of organizations, or organizational populations (Aldrich, 1979, 1999; Aldrich and Pfeffer, 1976; Bidwell and Kasarda, 1985; Carroll, 1985; Carroll and Swaminathan, 2000; Hannan and Freeman, 1977b, 1989; Haveman, 1992, 1993a; McKelvey, 1982). As an example of this kind of change, consider the case of the hotel industry in the United States. For many years, up through the early 1950s at least, this industry was dominated by stand-alone, independent organizations—from the small mom-and-pop motor courts that dotted U.S. highways to the grand Plaza Hotel in New York City and the classic Hotel Del Coronado in San Diego. Today, the industry is dominated by big chains—Howard Johnsons, Hiltons, Sheratons, Marriotts, etc.—that have largely replaced the small individually owned motor courts and that have acquired most, if not all, of the original urban classic hotels. Population ecologists would describe this as the replacement of one form of organization (in this case, independently owned, single establishments) by another (corporately owned, multisite chains). Similar population shifts can be seen in higher education, where the once-dominant form of organization, liberal arts colleges, has largely been eclipsed by the rise of larger research universities at one end and community colleges at the other (Kraatz and Zajac, 1996). Yet another example is provided by gas stations, where what used to be common, the full-service gas station with a mechanic on the premises, has been replaced by self-service stations with no mechanic—albeit often with a small food mart. Population ecology seeks to explain how such large-scale shifts come about. This focus on the forest rather than the trees (i.e., population change rather than individual organizational change) provided a new and very generative approach to examining organizations.

Given the focus on populations, the first natural question that you might raise is: How do you define an organizational population? This question turns out to be surprisingly difficult to answer simply. Although population ecology draws heavily on biological imagery and evolutionary theory, organizations differ in a number of key ways from biological phenomenon, which can make the analogies problematic (Carroll and Hannan, 2000). In a seminal article, Hannan and Freeman (1977b:937) identify a population as a set of organizations that share a common organizational form and an organizational form as a “blueprint for organizational action, for transforming inputs into outputs.” They elaborate:

The blueprint can usually be inferred, albeit in somewhat different ways, by examining any of the following: (1) the formal structure of the organization in the narrow sense—tables of organization, written rules of operation, etc.; (2) the patterns of activity within the organization—what actually gets done by whom; or (3) the normative order—the ways of organizing that are defined as right and proper by both members and relevant sectors of the environment.

In empirical practice, much of the research in this tradition has relied largely on the latter approach, using commonly accepted distinctions among organizations, much like those given in the examples above (i.e., individually owned motor courts, liberal arts colleges, full-service gas stations). More recent formal definitions have underscored this; a form is defined as a “recognizable pattern that takes on rule-like standing” (Carroll and Hannan, 2000:67).

So how do the kinds of population changes described above occur? As we noted, population ecology is premised on the assumption that most organizations do not change fundamentally over time. That is, organizations are assumed to be characterized by a high degree of inertia, and adaptation to environmental changes is expected to be a rare phenomenon. They may change on the margins (e.g., adding new positions, altering bookkeeping systems) but not in “core” aspects such as their main technology, customer base, goals. For example, special-language newspapers have rarely (if ever) morphed into general, mass-audience newspapers (Carroll and Delacroix, 1982) or large convention-oriented hotels do not normally turn into specialized boutique hotels (Ingram and Inman, 1996).

Hannan and Freeman (1984) list a number of factors that are important sources of inertia. One source is sunk costs in equipment, personnel, and location. For example, switching to a new operating system in a

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computer-manufacturing company requires a very large investment not only in hardware but in training and/or recruiting new people who are knowledgeable of the system. Even going from an all-women’s college to one that is coeducational requires changes in facilities (dorms, bathrooms, locker rooms, etc.) and personnel that are more costly than you might expect and that often limit such changes (Perratta, 2007). A second contributor to inertia is limited information about changes that are occurring in the environment, which make it hard for decision-makers to recognize the need for change and to decide what kind of change will be effective. Thus, in the 1970s, U.S. automakers were completely surprised by the impact of the oil embargo on customer preferences and severely underestimated the length of time the embargo would have its effects; consequently they continued to produce large, gas-guzzling autos (Katz, 1985). Even if decision-makers are able to recognize the need for change, there may be such high political costs associated with a change that they are unwilling to pay those costs; this is a third source of inertia. Major changes in organizations necessarily involve major reallocation of resources among groups and divisions, and such reallocation efforts can become a key source of significant infighting among members (Bacharach, Bamberger, and Sonnenstuhl, 1996). Given the uncertainties surrounding the outcomes of change processes, anticipation of such politics can provide strong incentives not to undertake the changes (Lawler, Thye, and Yoon, 2008). Legal and fiscal barriers to entry or exit from an industry constitute a fourth major source of inertia. Thus, a group medical practice cannot simply become a hospital because the requirement for this transformation-purchasing additional equipment, meeting the standards for accreditation, to locate increased staffing, and so forth-barriers to entry. Likewise, public universities cannot simply declare themselves independent of state governments and become private universities (Tolbert, 1985).

Moreover, population ecologists argue that when older organizations overcome these sorts of inertial pressures and actually undertake significant major changes, their chances of failing increase because they become subject to the “liability of newness.” This concept refers to a commonly observed positive relationship between organizational age and chances of surviving; newly founded organizations have a much higher death rate than older organizations (Aldrich and Marsden, 1988). There are several reasons for this relationship. One is that in relatively new organizations, routines and procedures are less well worked out and understood by organizational members. In consequence, they often function with less reliability than older organizations, and customers will not continue to transact with an organization that is undependable (Aldrich, 2005). A second, related factor is that newer organizations often lack legitimacy; they don’t have an established record of performance, so when errors or problems occur, customers or other exchange partners are less likely to give them the benefit of the doubt, to see these as a one-time issue (Zimmerman and Zeitz, 2002).

Hence, instead of adaptation by individual organizations, population ecologists argue that the major motor of population change is evolution, resulting from the deaths of organizations with a given form and the births of new organizations with a different form. You may recall from basic biology that there are four main processes involved in evolution: variation, competition, selection, and retention (Aldrich, 1999). Thus, population change starts with variation, the emergence of one or more organizations with a form that is different from those of existing organizations. Ecologists have typically not been particularly concerned with explaining why variations occur or the conditions that give rise to such variations (though see Burton and Beckman, 2007). They assume that an entrepreneur or set of entrepreneurs, in a search for competitive advantage, are apt to try new forms of organization, and that this happens with some frequency. Such variations are necessary for the second process, competition, to occur. From a theoretical standpoint, population ecologists are interested in competition between different forms of organization rather than competition among organizations with the same form (Hannan and Freeman, 1977b), although this is not always evident in empirical analyses. It is assumed that organizations with different forms but occupying the same niche (i.e., requiring the same set of resources—labor, customers, materials, etc.) will ultimately begin to compete for resources. When that happens, the growth of one population will occur at the expense of the other; organizations in the latter set will have increasing rates of failure as more and more organizations with a different form are founded and expand. Thus, the outcome of competition is selection, the death of organizations whose forms are less well fit to environmental conditions. And the counterpart of selection for the surviving form of organization is retention. In biology, of course, retention occurs because individual members have certain “successful” genes that they pass along to their offspring. Presumably, for organizations, this process entails the observation by

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entrepreneurs of the success of a given form of organization and the subsequent adoption of that form when they found new organizations.

While population ecologists’ original theorizing focused on the dynamics of competition between two or more populations of organizations, many of the empirical studies in this tradition and later theorizing focused primarily on competition within a population of organizations. Thus, researchers gave attention to the way in which the number of organizations in a given population (referred to as organizational density) affected the survival and founding rates of organizations within that same population. A common finding from an array of studies conducted of organizations within different industries and at different points in historical time was that there was a curvilinear relationship between the number of organizations in a population and both survival and founding rates. These relations are described in terms of “density dependence” and are portrayed in Figures 9-1 and 9-2.

FIGURE 9-1 Density Dependence and Failure Rates Within an Organizational Population

FIGURE 9-2 Density Dependence and Founding Rates Within an Organizational Population

The initial downward slope of the line in Figure 9-1, portraying the relation between density dependence and organizational failure, indicates that as the number of organizations in a population increases, the likelihood of any given organization failing decreases, at least up to a point. However, the upturn in the slope means that after that point, increases in the number of organizations lead to increases in the likelihood of organizational failures. The curve shown in Figure 9-2, the relation between density dependence and foundings of new organizations, implies the reverse: Increases in the number of organizations of a given type lead to more foundings of that type, again up to a point; once a threshold number is reached, the rate of foundings begins to decline with further increases.

Carroll and Hannan (2000) have labeled this line of research as the demography of corporations, since it examines patterns and processes of organizational births and deaths, much as human demography investigates

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general patterns of increases and declines in human populations. These common curvilinear relations between density and organizational death and founding rates are explained in terms of two key processes: legitimation and competition. When new types of organizations are created, because people are unfamiliar with them, they are likely to be concerned about whether the organizations will be reliable and a little reluctant to transact with them—the sort of problems we discussed earlier in terms of the notion of “liability of newness.” Another way to put this is that they lack legitimacy. As more organizations of that type get founded and become more commonplace, they gain legitimacy. Thus, increases in density are associated with greater legitimacy, leading to lower rates of failure, and to further foundings of that type of organization. As more and more organizations are created, however, competition between organizations for resources begins to intensify so that at some level of density, the forces of competition outweigh those of legitimacy, and rates of failure begin to rise. Presumably, entrepreneurs observe this and become less willing to invest their time and effort in creating new organizations of that same type, resulting in declining rates of founding.

Both the older and newer versions of population ecology have led to some novel and provocative insights into the nature of organizations and generated a vast array of studies on the conditions that increase organizations’ chances of being founded, and of failing. It should be noted, however, that the empirical evidence in support of some key arguments in this tradition is quite mixed, particularly evidence for the key claims that organizations are characterized by a very high degree of inertia and rarely engage in substantial change and that when they do, they are very apt to die. While there is some evidence that is consistent with this claim (e.g., Amburgey, Kelly, and Barnett, 1993; Barnett and McKendrick, 2004), there is also a fair amount of evidence that organizations do indeed change and that this is likely to enhance their survival chances. For example, in a series of studies of organizations involved in the savings and loan business, a business that was hit by a major environmental shift in the early 1980s in the form of deregulation, Haveman (1992, 1993b) found that many organizations substantially changed their core customer base and markets and that making such changes contributed to the organizations’ survival. Likewise, a review of research by Miner and Haunschild (1995) also provided evidence of adaptational changes that occurred across several populations of organizations. Other research by Haveman (1993a) indicated that smaller organizations often found it more difficult to undertake such significant adaptive changes, which is consistent with the suggestion that population ecology arguments of strong inertial forces may be more applicable to younger and smaller organizations than to larger organizations with more resources (Aldrich and Pfeffer, 1976).

Other criticisms of this approach include that of Van de Ven (1979), who suggests that the notion of “fit” between the environment and organizations is unclear. According to Van de Ven, population ecologists appear to use fit as

either an unquestioned axiom or inductive generalization in a causal model that asserts that organizational environment determines structure because effective or surviving organizations adopt structures that fit their environmental niches relatively better than those that do not survive. To avoid a tautology, the proposition implicitly reduces to the hypothesis that organizational survival or effectiveness moderates the relationship between environment and structure. (p. 323)

This is interesting, because effectiveness is scarcely mentioned by population ecology theorists. Van de Ven goes on to criticize the population ecology model for drawing too heavily on analogies with biological systems, a criticism that is echoed by Young (1988, 1989), who argues that the approach may be suited for only a narrow range of organizational phenomena. To illustrate this issue, compare the notion of the death of a biological organism with that of an organization. Death in the former case is usually quite clear, but this is more difficult to judge for organizations. When a restaurant changes owners without ceasing operations (although perhaps undergoing a substantial change in menu, hours of operation, and so forth), it can be debated whether the first organization died and a new one came into existence, or whether the same organization survived over time. Likewise, when an organization is acquired by another organization through a merger, whether to count that as a death is also open to question.

All paradigms have their limitations, however, as we noted repeatedly; by definition, each offers ways of explaining some organizational phenomena, while ignoring other phenomena. Thus, some of the most promising avenues of research often involve combining ideas and insights from different paradigms. Below, we

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describe just a few examples of such research to give you a sense of how different paradigms can be used in combination.

COMBINING PARADIGMS

A number of studies have suggested the utility of combining resource dependence and institutional paradigms. Oliver (1991), for example, suggested that organizations’ responses to institutional pressure were strongly shaped by patterns of dependence. Thus, when organizations have more diversified dependencies, they may be better able to resist pressures by some constituents to follow institutional prescriptions, by pointing to the competing demands of other constituents. The more concentrated dependencies, presumably, the more an institutional perspective may be relevant to explaining the adoption of new structures. Goodstein (1994) combined institutional and resource dependence paradigms in an examination of the extent to which organizations get involved with work-family issues; similar evidence comes from studies by Blum, Fields, and Goodman (1994), in an analysis of the proportion of women in management, and by Gooderham, Nordhaug, and Ringdal (1999), in an analysis of the adoption of human resource practices in a set of European firms. Taking a slightly different tack, Tolbert and Zucker’s (1983) analysis of the spread of civil service procedures among city governments suggested that resource dependencies are likely to affect the adoption of structures before the structures become institutionalized. However, once institutionalization processes begin, dependencies have less and less of an effect on decisions to adopt the structures. Instead, the number of other organizations having previously adopted it becomes the most powerful predictor of adoption. Thus, these studies suggest that the impact of institutionalization on organizations’ adoption of formal structures may be mediated by dependency patterns, and the converse may hold as well: the impact of dependencies on the adoption of structures may lessen as structures become progressively more institutionalized.

Other studies have demonstrated points of convergence between institutional and population ecology paradigms. A study by Haveman, Rao, and Paruchuri (2007) indicated that as certain structural arrangements in banks became more institutionalized (accepted as consistent with core values of modern, bureaucratic organization), banks that had these structures were more likely to survive. Likewise, a study by Sine, Haveman, and Tolbert (2005) of organizations in the new, independent power sector combines insights from both population ecology and institutional paradigms. This study indicated that organizations with technologies that were more innovative (less consistent with institutionalized technologies) were more likely to be founded and to survive when resources were more abundant (because of favorable tax policies), when court rulings provided more stability for the industry, and before industry associations began to promote (i.e., institutionalize) particular technologies.

And a growing body of work on resource partitioning combines insights from resource dependence and population ecology to explain the emergence and survival of small, specialized firms in niches dominated by a few large firms (e.g., Baum and Haveman, 1997; Dowell, 2006; Ingram and Inman, 1996).

SUMMARY AND CONCLUSIONS

The claim that forces outside of organizations, the environment, fundamentally affect the form that organizations take, their ability to achieve their goals, and their chances of survival is hardly earthshaking. Yet grasping the processes through which these outcomes are produced is a difficult and complex task. Because of this complexity, different theorists have often resorted to focusing on a selected set of environmental factors and a selected set of organizational outcomes in developing an understanding of organizational-environment relations. At this point in time, there appears to be a strong sentiment among organizational theorists that the time has come to cease being paradigm warriors, advocating one approach as “the best,” and to seek fuller explanations through combining perspectives. As this is done, we should increasingly be able to move toward the elusive goal of specifying which theoretical explanations work in which settings and thus have truly meaningful explanations of organizations.

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EXERCISES

Which theoretical paradigms do you find most appealing? Why? For each paradigm, discuss a situation you’ve experienced (or read about) in organizations that it would

help explain. What aspects of the situation were not accounted for by a given paradigm?

1. 2.

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