3. The impact of competition on organizational behavior and intraorganizational characteristics

3.1 Competition as a general precondition for autoplastic adaptive behavior

The theoretical paradigm of “contingent organization” presupposes that organizations are forced (or at least: positively induced) to adapt rationally to their environment because if they don’t, they would be punished by being eliminated or at least by reduced profits and weaker chances of further growth.

This “social Darwinist” view is based on the premise that there are heavy environmental constraints which cannot be eliminated by organizational action: so that organizations have to accept them as given structural conditions which limit (or even: determine) their courses of action.

Of course, this condition is best fulfilled in highly competitive environments which offer no opportunities for “exit” strategies” (e. g. by getting governmental subsidies or by becoming a monopolist player.

But as decades of organizational research have shown, larger companies have often a large variety of options for alleviating competitive pressures: e.g. by mergers, informal alliances by creating interlocking directorates, joint ventures or other arrangements of interorganizational affiliation (Selznick, 1949; Thompson, 1967; Pfeffer and Salancik, 1978; Burt, 1983).

On the other hand, organizations can escape by migrating to specialized niches where competition is (still) low or absent. Its has been found that small firms are often more disposed to fill such new niches because they are better able to adapt flexibly their whole internal organization (Carroll 1984; Pelham 2000). This flexibility may be seen as a functional substitute for their lower ability to cope actively with given market conditions (and even more: to their total inability to dominate existing markets).

Thus, the whole following discussion does exclusively apply to firms which are not escaping from, but actively coping with a given competitive situation: because exit options do not exist or because they are considered as more costly or risky than remaining within the existing field of competition.

3.2. The high significance of firm-specific factors

A firm’s capacity to be profitable on its product market is a result of many different causal factors, some of them associated with the structure of the whole industry, others with characteristics of the “industrial district” where the firm is located; but most of all: with the specific firm’s capabilities and resources. (Marsden 1998). Empirical studies show that such particular factors on the level of the single organization (and its staff) far outweigh the influence of overall industry factors (Rumelt 1991).

It has further been substantiated that from the point of view of competitiveness and profitability, the most precious assets a firm possesses are most often not its tangible resources (like land, buildings, raw materials etc.), but highly intangible extrinsic assets (like customer goodwill, patents trademarks and copyrights) on the one hand and intangible intrinsic assets (like staff skills, management capacities and efficient forms of organizational cooperation) on the other (Marsden 1998).

While many authors stress the importance of extrinsic factors (including licenses and joint ventures) (Hamel & Prahalad 1989), others put the emphasis on the acquisition of intrinsic capacities (e .g. by collective learning) (Argyris 1994; Senge 1990).

These two views may easily be reconciliated by taking time factors into account: When fundamental new action capacities have to be acquired within as very short time, there is no alternative than “buying” such capacities on external markets; when more time is available, endogenous developments (e. g. by advanced training of employees) may be more profitable and efficient (Marsden 1998).

On the other hand, a heavy reliance on external factors proves unwise when the environment is very unstable. Thus, the increase in environmental instability and volatility which has occurred in the last decades has brought a shift from external to internal assets: “....we have the claim that changes in the business environment have rendered the positioning approach irrelevant and that the only sound basis for sustainable competitive advantage is the development and exploitation of those resources and capabilities which are, or will become, the core competences of the organization.

Indeed, the claim is made that core competences are more critical than the external environment as a basis for strategy determination, because the environment is in too much of a state of change to base any strategy on it.” (Marsden 1998).

3.3. General impacts of competition on intraorganizational processes and structures

While competition has always been acknowledged in economic theory as a condition heavily determining a firm’s behavior and performances (e. g. Weiss 1963; Bain 1968), its impact on staff characteristics intraorganizational structures - a genuinely sociological issue - has long been neglected. With the exception of two early publications of Arnold Rose 1955 and Simpson & Gully (both studying voluntary associations), research on the causal correlates of competition has mainly been initiated in the 70ies: particularly with Rushing’s comparative studies of profit and nonprofit hospitals (Rushing 1974; 1976) and Pfeffer & Leblebici’s study of small manufacturing organizations.

On a most general level, it has been found that competition increases the degree to which organizations turn their attention toward their external environment (instead of focusing introvertedly on their own internal affairs). This is exemplified by the empirical study of Rushing who found that only competitive hospitals were likely to increase their medical personnel in accordance with rising numbers of patients (Rushing 1974).

As a consequence of this shift toward environmental concerns, , intraorganizational structures and processes are affected in at least four different ways:

First,by necessitating more attention to environmental circumstances, competition induces a higher degree of organizational activation.

As Arnold Rose has established in his early comparative study on voluntary associations, organizations which face external competition (or even opposition) mobilize more internal resources and maintain a higher basic level of internal communication (e. g. in terms of more frequent assemblies, board meetings etc) In particular, Rose has observed there is an increasing meeting activity on the leadership level, which may indicate the heightened need for speedy, flexible decisions. (Rose 1955),

In addition, competitive associations were more likely to stabilize a high activation level by establishing a large number of paid full-time roles, while noncompetitive organizations were better able to rely exclusively on unpaid volunteers (Rose 1955). As a logical consequence, they then become more dependent on the constant inflow of money - which may again reinforce their need to fight fiercely for competitive success (e. g. for securing regular revenues by gaining and keeping a high number of paying members).

Secondly, general needs for high adaptability increase the need for basic levels of skill. High competitive intensity means that firms have to maintain high levels of generalized “adaptability”: so that they are permanently able to respond rapidly to unpredictable environmental developments and events.

While this generalized insecurity may lower the need for highly specific qualifications (because these may quickly become obsolescent in a rapidly changing environment), it raises the need for employees with a rather high level of basic skills: so that they are capable of participating in advanced training courses (or of learning additional matters by themselves): “Adaptability assumes a certain threshold of skills, underpinned by the habit of learning itself. When schools fail to foster the ability to learn, they defeat the possibility of lifelong learning. As technology and foreign competition continue to raise standards of performance and skill expected of Americans, those people without basic skills will not be able to reach even the first rung of the value ladder.” (Doyle 1990). In concrete terms, this may imply that highly competitive firms articulate higher needs for personnel with at least a minimal skill level (e. g. basic vocational training or advanced general education), because such people are more likely to bring along such generalized abilities (and motivations) for further learning. I

n a major recent empirical study encompassing ca 750 firms from eight European regions, it has been shown that about three out of four enterprises considered a “skilled workforce” as the most important factor for sustaining their competitive advantage (Schienstock /Kautonen / Roponen 1998). This accords with Aaker (1989) who found that reputation for quality was rated as the most important basis for competitive advantage by the managers questioned.

Likewise, a comparative industrial survey in the Finnish Tampere region has clearly shown that

firms see the skills of their employees as the most important resource enabling them to compete successfully on their markets firms with higher skilled personnel were more likely to introduce process innovations as well as product innovations. [4] In fact, the survey showed that particularly process innovations were extremely rare in firms with a low level of skills. Generally, increased global competition seems to induce firms of all size to increase their innovativeness (e. g,. by expanding their budget in R & D).

This implies a growing need for many different types of skills and qualifications: particularly for rather diffuse creative and entrepreneurial talents and social competencies (not essentially related to educational knowledge and formal degrees): “With regard to the qualification needs we found some interesting results. For companies in the Tampere region some kind of "new thinking" associated with creativity and entrepreneurship is more important, while the improvement of professional skills is obviously seen as a less pressing problem. The need to develop the technical, international and social skills of their workforce is also stressed by companies.” [5] Table 3.1: Percentages of firms advocating different training needs for their employees (Finnish study in the Tampere region 1997) [6]

Creativity / entrepreneurship Technical skills International skills Social Skills Management skills Professional skills 62% 58% 50% 43% 33% 36%

The rather informal character of these skills - as well as the increased environmental volatility which hampers forecasts and planning procedures - may be responsible for the finding that most Finnish firms rely more on “ad hoc” training procedures than on longer-term systematic courses. [7]

This high importance of informal skills accords well with the notion that one of the most significant competitive assets of a firm consists in its pool of “tacit knowledge” which is not acquired by regular education (and thus cannot be important by recruiting employees with specific formal certificates and degrees).

As a general rule, the most profitable and enduring competitive advantages of a firm stem from particularistic resources which cannot be copied and transferred: so that they are not available to other firms. This is easily seen when different bases of skills and knowledge are compared .

When production processes are based completely on completely explicit scientific knowledge (like chemical recipes for the production of medical dugs) or on professional skills transmitted in formal schooling, firms have no stable advantages because exactly the same competencies can be acquired by any other firms. On the other hand, there are firms which can exploit “monopolistic rents” almost forever because they rely on implicit knowledge which remains in their “private possession” because it is transmitted only by means of informal socialization processes within the organization. (Itami 1987; Ghemawat 1991).

The gains stemming from such exclusive “invisible assets” (Itami) can far outweigh the handicaps stemming from the fact that fluctuations are costly and rapid expansion of staff may be impossible because every new employee has to engage in time-consuming “learning-on-the job” processes and (informal socialization by peers) in order to master such skills

Some main consequences associated with Advanced Manufacturing technologies (AMT) seem to originate from the fact that their efficient use depends very heavily of such tacit knowledge: so that only a minority of all firms is able to exploit fully these new technological potentials:

“.....tacit knowledge becomes crucial to implementing AMT. For example, work flows and system sub-routines that have evolved to accommodate fast design/engineering changes or product modifications are likely to be firm-specific with cross-functional patterns that have become ingrained over an extended period. Successful design, placement and flow of flexible manufacturing cells, for example, are more contingent on the firm-specific work flows and organizational routines than on the advanced nature of the equipment. Procedures such as materials handling, coding schemes and the creation of component/product families in a given AMT system also represent highly tacit skills, because their use largely depends on the insight, heuristics and experience of the people involved.” (Lei/Hitt/Goldhar 1996).

Similarly, the importance of tacit knowledge rises when organization switch from highly formalized bureaucratic structures to decentralized, loosely-coupled structures, because explicit written rules and programs have to be substituted by more informal, less visible norms and procedures (Lei/Hitt/Goldhar 1996).

This salience of tacit knowledge loosens the degree to which competitive success is connected to higher (formal) skill levels among employees, because even individuals without vocational education may be able to acquire it, while highly educated employees may not grasp it because they are too much oriented toward transorganizational (e. g. professional) sources of knowledge and information.

Third,decentralized decision making structures are needed in order to react to rapidly changing needs of customers and to sudden unforeseen moves of significant competing enterprises.

Thus, Moores and Duncan have found that under high competition, New Zealand firms are more profitable when their degree of centralization is low, while centralized firms work more successful in less competitive contexts. (Moores / Duncan 1989). Similar findings have been reported by Neghandi and Reimann (1972).

As a possible explanation, it is argued that under high environmental pressures, highly centralized firms risk to be maladaptive, because too many tasks are delegated upwards to a permanently overloaded peak. Less decentralized firms may be better able to satisfy customers because their employees are freer to oriented their activities toward the client’s needs.

In fact, only decentralized organizations may be able to institutionalize many “boundary roles” able to collect relevant information about their environment and to use this knowledge for reacting quickly to changing market conditions and their competitor’s actions.

On the other logical extreme, monopolistic firms can easily give priority to concerns of internal efficiency, because their customers cannot escape when they are dissatisfied with the quality of the products or the level of services - a phenomenon well known from the world of public administration [8]. In such cases, organizations do better to cultivate an introverted orientation: giving more priority to smooth, efficient internal functioning than to customers or other environmental sources of trouble.

By aiming to combine increased adaptiveness with high levels of system integration, “Team Empowerment” has the double advantage of making command chains shorter and decision processes swifter on the one hand, without creating too much individual discretion and leeway on the other.

At the same time, teams are social group contexts capable of socializing employees into the company’s culture and making them acquainted with highly specific skills and practices: so that newcomer’s become swiftly assimilated “on the job”: without expensive measures of formal education and training.

“Increased control in primary work groups over purpose, context, and system dynamics increases the group members' understanding of their local business logic. This understanding increases their potential or capacity to contribute to organizational learning in the sense defined by Cole (1994), namely to identify, standardize, and diffuse best practice. Their sensitivity in perception is greater and thereby their ability to identify best practice is heightened, both in terms of the range of situations scanned and the radicalness of or deviation of perceived best practice from their own established practice.” (Adler/Docherty 1998). Also in cases where price competition prevails, teams can be media for diffusing and institutionalizing cost-saving strategies in he whole enterprise, so that all employees become more committed to the overarching goals of increasing efficiency:

“The key to successful confrontational strategy and lean management lies in the existence of a committed, motivated, and managerially aware workforce. It is not sufficient to simply launch cost reduction programs.

Without the right organizational context, these programs will not work. In Japanese firms, the workforce is usually organized into self-guided teams, or groups, and it is these teams that actually achieve the firms' cost reduction objectives. Consequently, the way in which the teams are motivated helps to determine the success of the firms' cost reduction programs.” (Cooper 1996).

Finally, it is widely acknowledged that competition increases the need for powerful mechanisms of organizational control and integration.

When firms operate in a competitive environment, they quickly learn when their organization is insufficient: when resources are wasted, when the same work is done twice because of lack of internal communication, when tasks cannot be readily completed because the contributions of different subunits are not coordinated, when buildings or machines are suboptimally used because there is no sufficient overview and planning of activities; when employees produce too little because they are not sufficiently supervised; when managers cannot solve urgent problems because they have not acquired the necessary knowledge and skills, when customers get angry because they experience inconsistencies in organizational services.

All these shortcomings are costly, and they have to be minimized by means of efficient management and techniques for coordination, planning and control.

“....an organization facing a highly competitive setting cannot afford to make many mistakes, nor can it be substantially less efficient than its important competitors. The greater external pressures on an organization under conditions of competition leads to a demand for even more interlocking of organizational behaviors and more coordination and control within an organization.” (Pfeffer/Leblebici 1973: 270).

Thus, Arnold Rose has found that competitive organizations show a higher tendency to formalize their structures and activities: e.g. by relying on written statutes, rules and protocols. Such formalization provides them with an easy access to intraorganizational information - which may be highly functional for optimizing coordination and for securing an efficient use of internal resources.

Similarly, Rushing has found that hospitals in noncompetitive settings are much more likely to expand their activities without investing in correlative mechanisms of organizational integration (e. g. by increasing the clerical component and the administrative ratio), while competitive clinics show a clear tendency to increase complexity and integrative components at the same pace (Rushing 1976). This also accords with the findings of Lawrence and Lorsch that the most successful firms are those which combine high levels of systemic differentiation and integration (Lawrence and Lorsch 1967: 53).

These integrative needs can become so dominant that competitive organizations have to streamline their activities and to reduce the number of different subunits and roles, because the higher their internal differentiation, the higher the correlative needs for integration. Such endeavors then may easily override countervailing decentralization tendencies associated with high levels of innovation, heterogeneity and change.

Thus, Pfeffer and Leblebici have empirically demonstrated that many relationships asserted by organizational “contingency theory” hold only under conditions of less intensive competition (for instance the positive impact stemming from the number of products (and product changes) on the number of organizational subunits on the decentralization of managerial competencies and on the specification of decision making procedures) (Pfeffer/Leblebici 1973).

In contradiction to the propositions of Moores and Duncan (1989), this reasoning implies that when competition is intensive, centralized organizations show a better performance - even when they engage in highly variable production processes and face considerable environmental uncertainties, Of course, competitive firms too have to cope with such complexities, but they react to mainly by elaborating their hierarchy, not by decentralization:

“The tall structure, with its increased review and control of decision making, it utilized when change or heterogeneity is confronted by an organization in a competitive environment. Conversely, horizontal differentiation, or departmentalization, is employed when the organization is in a less competitive environment.” (Pfeffer/Leblebici 1973)

3.4 Price competition and quality competition: two highly divergent challenges with contradictory organizational implications

As consumers always want “the best offer for the lowest price”, firms have a certain leeway to which extent they compete by lowering prices or by raising the “quality” of their products or services. (Veliyath /Fitzgerald 2000). While in most cases, a mixed strategy will prevail, price competition certainly dominates when products cannot be differentiated qualitatively (e. g. in the case of gasoline or standardized silicon chips (Marsden 1998)); and quality competition is stressed when prices are not flexible (e. g. because of interfirm cartellization or governmental regulations).

Generally, it is difficult to cope with intensive price competition and high quality competition at the same time, because these two conditions demand highly divergent measures of adaptation. Thus, price competition often forces firms to downsize in order to reduce costs at the short-term; but because dismissals most often lead to less personnel in the R & D sector, the firm’s capacities to innovate are weakened and its chances for longer-term perspectives of survival and growth may be reduced (Bruton / Keels / Shook 1996). In other cases, high price competition induces firms to substitute higher-paid skilled personnel by cheaper unskilled employees: thus reducing their general capacities to deliver high-quality products and to implement strategies of quality improvement. (Budros 1997).

Leaving aside such exogenous contingencies, it can generalized that price competition and quality competition are correlates of two diametrically opposed market structures.

1. Price competition dominates in “stable markets”: characterized by “mature”, basically invariant products and consolidated, steady consumer demands.

   As the products- as the technologies used for fabrication - remain basically the same, market rivalry of suppliers focuses on price competition. Thus, survival and market shares become highly dependent on rationalizing processes and minimizing costs. Vice versa, high price competition imposes a need to focus on a small range of highly standardized mass products, on highly institutionalized production procedures and on consolidated, “mature” market conditions: so that all organizational processes can be streamlined in a cost-minimizing way (Hambrick 1983; Ward / Bickford / Leong 1996).

   Insofar as price competitors are innovative, they will focus on process rather than product innovations (Porter 1980; Miller 1986).

   Environmental stability is most important when the costs of expensive capital investments have to be regained.

   “A cost leadership strategy works best under conditions of environmental stability in which neither customers nor competitors substantively alter their aggregate behavior. Such environmental stability serves to ameliorate the risk associated with large fixed investments in process and plant needed to sustain low unit costs with mature products.” (Ward / Bickford/ Leong 1996) As a consequence, successful price competitors are likely to maintain rather bureaucratized structure characterized by extensive formalization and centralized decision making procedures:

   “The characteristic organizational structure of cost leaders is a highly centralized machine bureaucracy, with a key role played by the technical specialists who design the manufacturing and logistic systems. Important structural decisions regarding capacity and technology are made centrally. Relatively few substantive decisions are made by lower or middle management, who are charged with following plans, maintaining the large investment in plant and equipment and running facilities to take full advantage of scale economies.” (Ward / Bickford / Leong 1996). Given their high needs for intraorganizational stability, price competitors are more likely to search new market outlets for given production lines than to change procedures in order to keep existing markets (Ward / Bickford / Leong 1996).

2. Quality competition reigns in dynamic environments in innovative and unconsolidated markets

   At the other extreme, there are highly volatile markets characterized by new products rapidly changing because of technological innovations on the one hand and constantly shifting market conditions and consumer preferences on the other.

   Under these conditions, competition focuses on optimizing product quality as well as the quality of customer services: goals which demand continuous efforts in environmental scanning, knowledge acquirement and technological innovation “If management regards the environment as stable or static, attention will be highly focused on rationalization, productivity, and profitability. Within the automobile industry, this strategy is often referred to as ‘Fordism.’

   If management regards the environment as characterized by change and turbulence, it will give high priority to competence development and the abilities to adjust, develop, and innovate. Within the automobile industry this strategy is often referred to as ‘Toyotism.’ (Adler/Docherty 1998). Given two firms facing the same current market conditions, they can nevertheless follow divergent strategies according to their horizons of time.

   The short-term oriented firm A will prefer price competition for optimizing its sales in the face of current competitors and for maximizing this year’s profit; while firm B will prefer product development and innovation in order to conquer additional markets and/or to remain competitive in the middle- and longer-term future (Howard 1990).

3.5 The highly divergent behavioral consequences of price and quality competition for the coping firms

On a most general level. price competition and quality competition diverge highly in the degree of specificity of the adaptation problems to which they give rise.

For economic enterprises of any kind, price competition may generate extreme worries, but it is always a precisely defined problem apt to evoke rationally designed coping strategies:

First of all, the problem itself can easily be identified in objective measurable terms: there are competitors trying to produce the same product with less costs and sell it more cheaply.

Secondly, there is a highly consensual, determinate way how the problem shall be solved: (reduction of costs)

And thirdly, coping strategies can be rationally chosen because

1. it is often known ex ante that certain measures are apt to reduce costs and/or
2. when a measure is taken, its effect on costs and prices can quickly be assessed.

When competition is about “quality” (of products or services), the situation is usually much more diffuse:

First, ‘higher quality” is an unprecise multidimensional concept; it’s real meaning is not objectively defined, but depends on the perceptions and evaluation of the customers. (Sherman 1992; Cooper 1996; Veliyath/Fitzgerald 2000).

Secondly, it is not very clear in which way the problem shall be solved: there are innumerable steps to be taken to change products and services: e.g. to shorten the delays in shipping, to increase the spectrum of available variants, to lengthen the lifetime of products, to establish better support line etc. - and nobody can know exactly how investments in these different aspects will pay out...

And third, the causal effects of the measures taken cannot be easily assessed. For instance, when improved products are better sold, this may be caused by a series of intermingled factors (e. g. because in the meantime, the brand has become more popular or the customer preferences have changed....).

If measurements are possible at all, unrealistically high investments in technology, organization and personnel have to made in order to establish the necessary procedures:

“....increased resources are necessary to measure the quality of output or the performance of agents. Sorting, grading, labeling, trade marks, warranties, licensing, time and motion studies and a variety of other techniques to measure the performance of agents are all, albeit costly and imperfect, devices to measure the characteristics of goods and services and the performance of agents. Despite the existence of such devices the dissipation of income is evident all around us in the difficulty of measuring the quality of automobile repairs, in evaluating the safety characteristics of products and the quality of medical services, or in measuring educational output. The problems of evaluating performance are even more acute in hierarchies because of the difficulties of achieving low cost measurement of the multiple dimensions of an agent's performance.” (North 1996)

3.6 The broadened scope of quality competition

The high prevalence of quality competition is illustrated by a transnational company survey encompassing eight European regions, where Schienstock et. al have found that “high product quality” was the foremost factor to which most firms attributed their advantage in competing with rival enterprises (Schienstock/Kautonen/Roponen 1998).

Similarly, Chaston and Mangles (1997) have found that the most important influences on performance included optimization of employee productivity, development of new products, investments in continuous improvements of product quality and measurement of customer quality expectations.

But the term “quality” has assumed a much broadened meaning than in the past. While in traditional industrial competition, the term referred almost exclusively to intrinsic attributes of the physical product (e. g. its durability, its precise and reliable functioning etc.), it now tends to encompass all stages of a firms activity: from the criteria applied in the choice of raw materials and production procedures (e. g. ecological considerations) right to the support services offered after customers have bought it and set it in operation.

The raising salience of post-selling quality performance has been illustrated by the aforementioned comparative study which has found that about 40% of all firms defined “after sales services” as their essential competitive advantage. (Schienstock /Kautonen/Roponen 1998).

3.7 The New Ubiquity of Price competition

When trade relations become global, price competition becomes more ubiquitous because local and regional protection break down. In particular, most firms from highly developed countries like Switzerland are increasingly challenged by cheaper competitors from low-wage countries.

In the past, many Swiss firms could reduce competitiveness by producing high quality products, because no other firms in other countries were able to reach the same levels. In fact, the label “Swiss Made” was a long time sufficient to provide the reputation of high quality - a collective reputation from which all singular branches and companies could profit without having to generate and their own individual reputation.

Thus, the rather high competitive success of many Swiss firms in foreign markets may at least partially be attributed to the “structural competitiveness” of Switzerland as an “industrial district”: i.- e. as a territory endowed with many advantageous traits vis-à -vis other geographical regions. [9]

In the last decades, more and more firms from more and more countries acquired such capacities, and given the lower level of wages in most world regions, many of them are no better disposed to keep selling prices low.

As a consequences, most firms have recently experienced an environmental change in a way that they are now forced to cope with intensive quality and price competition at the same time.

This trend has also been substantiated in the Finnish Tampere region:

“Companies in the Tampere region concentrate on high quality niche markets in the first place. They see quality and time of delivery as their competitive advantage. These niche markets, however, do not present a safe segment any longer. More companies from all over the world have learned to produce high quality. What is now needed is to produce high quality and user-friendly products at a reasonable price and to deliver them on time.” [10] In order to escape the cumulative pressures of quality and price competition, firms are forced to outperform competitors in other respects: by being quicker than other in introducing new products or by being more flexible to react to changed customers needs:

“Nowadays companies from all over the world can manufacture products of high quality at low costs, sell them for a reasonable price and deliver them within a short time period. Success within the global market mainly depends on the capability of companies to rapidly and continuously produce new products and services; innovativeness is the number one factor in global competition.” (Schienstock, Kautonen/Roponen1998).

3.8 Some factors influencing a firm’s capacity to cope with intensive competition

1. 3.8.1 Firm size

   Since the time of Karl Marx, it is common wisdom that the evolution of private capitalism tends to produce larger enterprises, because big firms are better able to survive in economic competition.

   Within the Fordist paradigm of industrial organization, this relationship has primarily been elaborated with respect to price competition: Thus, it has been argued that for many different reasons; larger firms are better able to minimize costs by realizing of “economies of scale”: e. g. because they can exercise monopsonic power on suppliers or because they are better able to make use of highly routinized mass production technologies (which result in an downgrading of required skills). More recently, it has been observed that larger firms have a similar edge in exploiting “economies of scope”: associated with the basic fact when producing good A, a firm may have lower costs of producing related goods B,C,D.

   For the case of quality competition instead, contradictory theoretical argumentations have been proposed. On the one hand, Piore and Sable have asserted that small firms practicing craft-like production styles are better able to cope with the newer trends towards customized high-quality products, because they have more flexibility to adjust outputs (quantitatively and qualitatively) to such new demands (Piore/Sabel 1984). On the other hand, it is also widely acknowledged that larger firms have higher capacities to develop large amounts of specialized knowledge and skills, and to maintain collaborative relationships with universities or other innovation-oriented institutions (Schienstock/Kautonen/Loponen 1998).

   In addition, they can engage in risky innovative endeavors with less fears because conventional procedures can be maintained at the same time (within other subunits of the same organization). “....larger organizations, although less likely to attempt core changes in the first place, are less likely to die during a core change attempt. Largeness can buffer organizations from the disruptive effects of core change by helping, for example, to maintain both old and new ways of doing things during the transition or to overcome short-term deprivations and competitive challenges that accompany the change attempt.” (Baum / Singh 1996). Empirically, various studies have shown that larger companies are more likely to innovate, Thus,. The Finnish study in the Tampere region has shown that firms above 200 employees are much more prone to innovate by introducing new products as well as new production procedures). [11]

   On the other hand, larger firms are often characterized by traditional Taylorist structures which go along with a high percentage of unskilled labour - a factor hampering innovativeness in many respects (Schienstock/Kautonen/Roponen 1998). Thus, it has been observed that while large firms cultivate develop and maintain highest expertise and skills in most areas, they are often not capable of exploiting it fully for their own purposes. Instead, many experts - frustrated by lacking opportunities to realize their ideas and be promoted - leave the firm in order to found new “spin-off” enterprises. These small new firms then are often developing and licensing innovations (which then might be bought back later by the larger firms) (Brittain/Freeman 1980).

   Additionally, several empirical studies have shown that while larger firm may be more capable of providing the capital and human resources necessary for improvements or innovations, they are often heavily handicapped by rigid internal structures and a tendency to focus more on internal than on environmental matters.

   Thus, larger firms have been found to maintain a lower degree of market orientation and to show signs of complacency and inertia which makes them unfit for risky measures of change (March 1981; Aldrich & Auster 1986; Hitt et. Al. 1990). Their mere structural complexity leads to reduced capacities for information processing and slower speed in executing formally decided measures and plans (Galbraith 1977; Pelham 2000).

   By contrast, smaller firms can be expected to react more flexibly to environmental stimuli of any kind, because more employees occupy boundary roles [12], because their structures are less bureaucratized, and their communication systems less complicated (Katz 1970; Feigenbaum and Karnani (1991 etc.):

   “Small is beautiful. It is much easier for the new venture founder to attend to the myriad of details in running a totally competitive business unit as long as it is still small with only a handful of employees. Perhaps, one of the reasons new ventures are able to blossom early, is the fact that the very nature of their smallness permits adaptability and rapid response.” (Slevin / Covin 1995). Consequently, while larger firms may draw more advantages from their institutional embedments and their capacity to control salient environmental factors, such advantages may be more than offset by their smaller capacity to maintain intensive environmental relations:

   ” Although large firms can dominate commodity markets based on cost or financial advantages, larger industrial manufacturing concerns may be at a disadvantage, compared to smaller firms, in their ability to learn from their market environment due to lessened contact between senior managers and customers as well as customer contact personnel. This lessened level of contact can lead to internally focused operations and production/technical orientations that may fail to adjust to changing market conditions. This internal focus, combined with significant sunk costs and bureaucratic inertia, could render large firms more vulnerable to changing industry conditions because of the difficulty they have modifying strategy.” (Pelham 2000). This reasoning also implies that size is an intervening variable moderating the relationship between firm strategies and achieved performance. Thus, when a small firm focuses on a market-oriented strategy, it is more likely to gain significant competitive advantages than a bigger firm, because it is better able to adjust its whole internal organization to the external strategic needs (Pelham 2000). Thus

   “...market orientation may provide small firms with a potential competitive advantage over larger firms where layers of management and bureaucracy make understanding customers more difficult and also increases the difficulty of promoting a cohesive customer-oriented culture.” (Pelham 2000). Many larger firms try to exploit such advantages by segmenting themselves into smaller divisions, thus combining the functional advantages of smallness and bigness at the same time: “The creation of small profit centers reduces the growth of organizational bureaucracy yet allows the firm to respond quickly to changes in the competitive environment. Firms that have adopted the confrontation strategy cannot afford either the extra costs of unnecessary bureaucracy or he slowing of the firm's reflexes that such a bureaucracy causes.

   By keeping the effective firm size small, empire building becomes almost impossible, and a firm can maintain its ability to adapt quickly to changes n competitive conditions.” (Cooper 1996).

   Finally, it has to be considered that quality competition offers to many small firms excellent chances for survival and growth which are less available to larger enterprises.

   Many firms try to reduce competitive pressures by migrating to less contested niches. They typically do this by developing and producing highly specific products addressed to highly specified customer segments. The smaller the firm, the more probable that it finds such a highly specific small niche which offers a sufficiently large and stable base of subsistence. The bigger firms need larger markets which are less likely to be uncontested (or to compete simultaneously in different market niches which are unlikely to be all equally uncontested).

   Niche specialization means that a firm tries to exploit quasi-monopolistic rents by conquering a leader position within a narrowly defined field. This usually implies that it commits all resources to raise the quality standard of its production and products by optimizing its technology and organization and by internalizing highly professional skills.

   “The niche differentiator often requires a more highly skilled workforce than others in its industry. This is particularly true of the niche quality differentiator, which often counts on production people to have the know-how to build a high quality product in the absence of formal process controls used in high volume settings. Although various mechanisms are available to achieve quality, total quality management (TQM) programs are currently favored by a wide spectrum of firms, including niche manufacturers.” (Ward/Bickford/Leong 1996)

2. 3.8.2 Expanding or shrinking markets

   For three different reasons, firms operating on expanding markets are better able to react rationally to competitive challenges and to implement successful adaptive change

   1. When niches contract, innovative behavior is hampered by the prospective than whenever it fails, the organization risks to be wiped out completely. On the other hand, expanding markets provide “buffers” because even when experimental new procedures turn out bad, the mere market expansion makes it probable that the company still can still survive. Corroborating this hypothesis, Baum / Singh (1996) have found that competing Day care and nursery schools were more successful in environmental adaptation under expansive than under contractive conditions.

   2. During phases of growth, organizations are usually quite free to enlarge existing and/or build new structures and the recruit additional personnel in strict accordance with their changing needs. In addition, expanding firms have also better chances to upgrade their skills by hiring highly qualified employees, because they can offer secure jobs and promising careers (Russell 1997). And finally, their employees may be better motivated to engage in advanced training because given their long-term employment, they can reasonably expect that such investments will pay out.

      During periods of decline and contraction however, adaptations are hampered by factors of many sorts: e g. by ossified habits and traditions, by lacking flexibility of leadership, by legal norms inhibiting the dismissal of employees, by poor opportunities to hire qualified personnel etc.

      Thus, Freeman and Hannan have found that expanding schools enlarge their administrative component quite in pace with their growing absolute size, while shrinking schools tend to keep their clerical apparatus too large (Freeman / Hannan 1975; Pfeffer 1978).

   3. Expanding markets allow for more specialization. When firms are operating on expanding markets, they have better chances to survive in highly specialized niches, because it is more likely that such specialized niches are also submitted to growth (Romanelli 1989). Thus, they are better equipped to commit their resources irreversibly to highly specified purposes: so that they can maximize their efficiency in a way compatible with very intensive price competition.

   On the other hand, they are also well able to survive when they sacrifice efficiency for remaining more flexible and innovative, because when markets expand, inefficiencies are not punished so harshly as in shrinking environments. (Romanelli 1989). Thus, they have more leeway to follow very different strategies, so that they will develop highly divergent procedures and organizational forms (=high statistical dispersion).

   In shrinking markets, firms do better to keep their resources in a more liquid, reversible condition, because they may face the contingency of having to give up their traditional product lines altogether and to switch to completely new product lines (and corresponding markets). But exactly this strategy may be blocked because price competition is so high that firms have to be completely committed to highly routinized, efficiency-oriented procedures.

   Finally, it has also been observed that expansion and contracting processes have highly divergent influences on the average level of skills.

   When firms have to downsize their staff because they are competing with little success (and/or within shrinking markets), they may still be forced to upgrade the skill the level of their labor force (either by selectively dismiss unskilled personnel or by substituting less skilled by more educated employees.

   The reason is that the total variety of organizational tasks has to be allocated to fewer heads, so that each average worker has to be able to cope with a larger variety of different tasks. Consequently it is more likely that any roles also contain more complex problems which necessitate to hire workers with a higher basic level of knowledge and skills. In a Canadian case study conducted by Bob Russell, this increased role polyvalence has been found to be the major factor for higher skill demands in reorganizing firms (Russell 1997).

   Thus, when firms switching to lean production procedures may need higher skills, this may not be primarily caused by increased task complexity and higher qualifications demanded for functioning in “empowered teams”. Instead the more trivial reason may lie in the “horizontal expansion of jobs” (each comprising a larger spectrum of rather undemanding single tasks) (Russell 1997).

   Expanding markets instead provide optimal opportunities for implementing standardized procedures and for buying capital-intensive mass production technologies - so that roles can be more specialized and taylorized and a shift toward lower skilled personnel may be observed.

3. 3.8.3 Age of the Organization

   For two reasons, it may be expected that older organizations are less likely to react adaptively to competition.

   On the one hand, older organizations are more likely to have highly consolidated and rigidified structures, so that they are less disposed to react to any external stimuli with internal change and innovative procedures (Hannan, Freeman 1984; Davis & Stout 1992). Miller argues that as organizations age, their very early success makes them assume more simple structural forms which may diminish their capacities for future adaptive change:

   “....a troublesome paradox exists: the sources of dangerous simplicity may underlie initial success and, thus, may be doubly difficult to combat. Indeed, it is very hard to distinguish between the concentration and passionate dedication so necessary for success and competitive advantage and the simplistic fixations and extremes that lead to failure.” (Miller 1993: 119): Thus, Baum and Singh have found in their comparative study of day care facilities that older organizations were more likely to experience disruption when their markets niches changes (Baum / Singh 1996).

   Secondly, older organizations are less likely to succumb because they enjoy higher “social legitimation” (Hannan & Carroll 1992) and because they are more integrated into supporting institutional environments. For instance, they are more likely to enjoy a high public reputation, to be supported by highly loyal employees, to profit from a high status among customers; to be embedded in supportive elite networks, to enjoy the help of public agencies, to have a high standing on the labour market, and to get bank credits when needed. (DiMaggio and Powell, 1983; Mintz and Schwartz, 1985; Podolny, 1993; Barnett 1997).

   As a consequence, social Darwinist selection processes in economic markets don’t guarantee to the “survival of the fittest”, because with increasing age, survivors are increasingly protected from direct impacts of environmental competitive pressures. “The net result is that the strong-survivor hypothesis is self-defeating. Environmental selection increases competitiveness, but by increasing concentration, it triggers the rise of large, impervious, but increasingly impotent organizations.” Barnett 1997). Thus, many older firms tend to become overstaffed without being punished immediately for these inefficiencies., This is seen in the regularity that many of them have to regain their competitive capacities by downsizing when environmental competition pressures suddenly increase (Budros 1997).

   Even younger organizations may share competitive weaknesses when they are “spin off’s” of older firms: because they are likely to have “inherited” their mother’s shortcomings (Barnett 1997).

   Empirical studies indicate that the increasing survival chances associated with higher age accrue disproportionately to larger organizations. In fact, smaller firms seem to suffer from a “liability of obsolescence” which leads to increasing risks of mortality over time. (Ranger-Moore, 1991; Barron, West, and Hannah, 1994; Baum, 1996).