Memo
To:
Prof. Rajiv Krishnan Kozhikode
Bus 374 Instructor
Cc:
Will Li, Jimmy Zhao, Abbott (JiaYuan) Liu
Bus 374 Team 11 members
From:
Chienn Weng (Stella) Ngu
Bus 374 Team 11 member
Date:
May 29, 2013
Re:
Why are there so many different types of organization?
Introduction
The purpose of this memo is to use The Population Ecology of Organizations, by Michael T.
Hannan and John Freeman, to, first, answer “why there [are] so many different types of
organization” exists. Secondly, is to apply real world phenomenon to Hannan’s and Freeman’s
Arguments and, lastly, discuss the validity of their arguments and assumptions. Hannan and
Freeman uses an ecological perspective, combination of biology and sociology, in analyzing the
development and disappearance of organizations resulting from the influence of environmental
and competitive conditions by introducing two mechanisms: Adaptive and selection learning.
They, then, extends the selection mechanism in introducing the competition theory under stable
environmental conditions and niche theory under dynamic conditions.
Theory Background
According to the adaptation perspective, organizational manager or leader adjusts the
organization to its environment by properly observing its environment and formulating relevant
strategies. However, the adaption theory has many limitations: sunk costs, information
constraints, internal political struggle, normative agreement, barriers to entry or exit, loss of
legitimacy, and collective irrationality. Due to the many limitations of Adaptation, Hannan and
Freeman considers the selection perspective and extends on Hawley’s classic theory on human
ecology by specifying on “isomorphism between organizational structure and environmental
demand” (Hannan and Freeman, 1977) using the competition and niche theory.
Isomorphism can result from selecting an organizational form, a blueprint of doing business,
out of a community, selection learning, or by adjusting the organizational behavior after learned
of an optimal response, adaptation learning. The selection mechanism also has an emphasis on
competition within an environment’s carrying capacity. According to the competition theory,
when two populations of organizations uses identical resources but differ in some aspect of
organizational form, only the fittest population would survive as the less fit population would be
eliminated. Niche theory, on the other hand, expands on the competition theory into dynamic
situations. Here the ‘niche’ of a population is defined as that area in a constraint space (Hannan
& Freeman, 1977). Niche theory describes the differential survival capabilities of specialist and
generalist organizations, where specialists occupy a narrow niche field but have a higher fitness
level to the environment as compared to generalists that occupy a wider niche field but have a
lower fitness level to the environment.
Why are there so many different types of organizations?
Under the Adaptation mechanism, there are different managerial capacities to adapt to the
environment, which could result in the different types of organization, as each individual
manager has different control and experiences. However, Hannan and Freeman states that “there
is no reason to presume [adaptation is the primary or only reason] that [reflects] the structural
variability among organizations” (Hannan and Freeman, 1977). Arguably, because of individual
rationality as it will lead to a collective irrationality problem, where everyone does the same
thing, which creates similarity among organization rather than differentiate them.
As mention, competition theory is about the survival of the fitness of populations. The
organizational forms that fail are due to the fact that other forms within that population have
successfully compete for the essential resources. In that case, Organizations could choose to exit
the market into other areas or to compete in the market with a different resource combination,
which will result in the formation of the different types of organization. The reason being is that
different organizational form is caused by the diversity and constraints of those environmental
resources. In Addition, because only one organizational form is suitable for that particular
environment and there are multiple different environments, it, therefore, creates multiple
different organizations.
According to the niche theory, there are two types of organization: Specialist and Generalists.
This would create different types of organizations. The reason being is that there will be multiple
specialist organizations that occupy different single distinct niches. Additionally, there would
also be multiple generalist organizations that would occupy multiple different niches. No matter
which type the organization chooses, it would result in competition with other organizations and
creating multiple variations in organizational forms.
Theoretical Assumptions vs. Real world Phenomenon
An example of the competition theory is the first introduction of Apple’s iPad that created an
increasing trend as more people know about it. Competition was ensued with those that did not
keep up with this trend selected out of the market and other brands, such as Microsoft, Acer,
blackberry, etc., join the market with their own version of a tablet, which created a greater
variability in organizational form. This example extends the argument of the competition theory,
however it could be modified so that it implies to dynamic situations as well, because with the
advanced technologies of today, new competitors could arise at any time and any rate creating a
frequently changing environment, which also means that organizations has to constantly
innovate .As compared to when Hannan and Freeman wrote this article, where technologies were
not that advanced.
Niche theory also indicates that specialism is favorable in stable, certain, environments and
generalism being favorable in dynamic environments. However, genaraliam is not always
optimal in dynamic situations. Sony Corporation, for example, suffered from the frequently
changing environmental state even though it chose the generalism approach. Although Sony was
successful for it’s playstation and walkman in 2000, things starts to fall in 2002 due to the
technological change: the coming of Apple's iPod, which Sony’s Walkman was not able to
compete with, and Apple’s and Samsung’s smart phone for which Sony Ericsson has lost its
unique, and TV images of Samsung and Sharp that Sony is incompatible with. The reason being
is that Sony was not able to keep up with the environmental change due to the time and effort it
has to spend in adjusting its structures, which lead Sony to be unable to invent new significant
product and loose leadership in it’s previously significant products. Therefore, Generalism is
only successful when there are at least areas where that the organizations could be successful in.
Several examples of specialist organizations are Dell, multinational computer technology
corporation, and Harley-Davidson, American motorcycle manufacturer. Although these
organizations extend the niche theory by specializing in only one distinct niche, they also
challenge the niche theory. The reason being is that Dell and Harley-Davidson could survive in
dynamic environmental situations due to the fact of that their brand and product image. For
example, Dell has an image of being a computer and gaming hardware, Alienware,
customization expert, therefore, even if the environment has changed, computer gamers would
always be an Alienware fan. Similarly, with Harley-Davidson’s motocycle, a Harley-Davidson
fan would always be a fan of Harley-Davidson.
Real world phenomenon develop theory
After reading through Hannan’s and Freeman’s arguments of the reasons behind the
existence of different types of organization, we thought that brand identity and product image are
the key elements that should be included in making their arguments, because it is the brand and
product image that creates the demand of the consumers and the competitive advantage in the
survival of the fitness in any particular environment. Furthermore, it is the brand and product
image that would help the organization, whether specialism or generalism, to survive dynamic
environments as the image is already implanted in the consumer’s mind.
Conclusion
Although Hannan’s and Freeman’s arguments were written in the 1970s, they are still fairly
applicable in our current society. However their arguments should be modified, so that it includes
the assumptions of a successful brand and product image in differentiating one’s organization
from other organizations, rather than just emphasizing on “differentiat[ing] either territorially or
functionally, yielding a more complex division of labor” (Hannan and Freeman, 1977), but this
does not mean that it was not valid in its time. From the examples given by Hannan and Freeman,
we can see that the differences between their time and ours is the perception of brand image,
because, during that time, technologies was not that advanced as compared today, thus leading
the organizational leaders of that time to believe that it is only the structure and process of the
organization that creates the competitive advantage and being more fit in that environment.
References
Dell. (n.d.). Dell: The power to do more. Retrieved from http://www.dell.ca
Sony. (n.d.). Sony: Make.believe. Retrieved from http://www.sony.net/SonyInfo/CorporateInfo/
Hannan, M. T., & Freeman, J. 1977. The population ecology of organizations. American Journal
of Sociology, 82(5): 929-964.