To:Prof. Rajiv Krishnan Kozhikode

Memo

To:Prof. Rajiv Krishnan Kozhikode

Bus 374 Instructor

Cc:Will Li, Jimmy Zhao, Abbott (JiaYuan) Liu

Bus 374 Team 11 members

From:ChiennWeng (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, byMichael 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 usesan ecologicalperspective, combination of biology and sociology, in analyzing the development and disappearance of organizations resulting from theinfluence 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 environmentby properly observing its environment andformulating relevantstrategies.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 byspecifying 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 ofdoing business, out of a community, selection learning, or by adjusting the organizational behavior after learned of an optimal response, adaptation learning. The selection mechanismalso has an emphasis on competition within an environment’s carrying capacity.According to the competition theory, whentwo 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 wouldbe 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, wherespecialists occupy a narrow niche field but have a higher fitness level to the environment as compared to generalists that occupy awider 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, aseach 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 constraintsof 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 isfavorable 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. AlthoughSony wassuccessful 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 init’s previously significant products. Therefore, Generalismis only successful when there are at least areas where that theorganizations 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

Sony.(n.d.).Sony: Make.believe. Retrieved from

Hannan, M. T., & Freeman, J. 1977.The population ecology of organizations.American Journal of Sociology, 82(5): 929-964.