Why are Firms Different? Why Successful Firms Differ?

Why are Firms Different? Why Successful Firms Differ?

It is an obvious fact that firms differ. However, according to Carroll (1993) it is important to distinguish between the questions why firms differ from why successful firms differ from a sociological point of view.
Based on different theories and empirical research he summarizes the following sources that cause firms to deviate from the equilibrium state, i.e. the “temporal equilibrium of the competitive system within which organizations operate and compete” or, in other words, characteristics, which make a firm different (Carroll, G. R., 1993).

WHY FIRMS DIFFER

• DISPOSITIONAL INDIVIDUAL SOURCES: the entrepreneur is considered a social embodiment of the firm itself, meaning that depending on his entrepreneurial personality organizations differ on structural level and stages of development.
• SITUATIONAL INDIVIDUAL SOURCES: this source considers the situational factors that drive the entrepreneur’s decision to become self-employed such as unemployment rates, retirement, forced resignation, parental self-employment and marital status; empirical studies suggest that such social structures may have an impact on the types of organizations that are founded as a result.
• ORGANIZATIONAL SOURCES - SPIN-OFFS: the rates at which existing firms create new firms differ substantially; these differences may occur as consequences of structural arrangements and events such as perceived jeopardized internal career prospects by employees, who as a result decide to start a new firm, CEO succession from the outside, corporate takeover from a firm in another industry, and demographic bulges of older workers, all of which lead to higher rates of spin-offs.
• ORGANIZATIONAL SOURCES-INTERNAL CHANGE: firms differ as a result of manager’s rational planning process (although undirected or unintentional organizational change is not unheard of), suggesting that firm heterogeneity is an effect of the transformation of existing firms; furthermore there is a distinction between the type of change that occurs – change in the core features (mission, function, technology, etc) and in the much more often occurring change in the peripheral features (products, location, subunits, etc ).
• ENVIRONMENTAL SOURCES: it is not enough to say that firms differ as a result of diversity of the environments or availability of resources; it is important to discern which types of environmental changes cause firms to stray away from the equilibrium; technological breakthroughs, political discontinuities in government (changes of regime and ideologies), changes in the distributions of ethnic groups (migration, discrimination, etc) are among the major groups of environmental changes that my bring firm distinction.
• ORGANIZATIONAL BLUEPRINTS: considering the question where do organizational blueprints come from may lead to a different firm distinction – whether the blueprint is resulting from the creativity of the entrepreneur, borrowed from another existing firm, or even bought from an outside source, and not to forget the possibility that the blueprint may be less conscious and controllable.

WHY SUCCESSFUL FIRMS DIFFER
The second issue Carroll (1993) considers is why successful firms differ, pointing out several general criteria found in different theories that drive the process towards success (efficiency) in a state of disequilibrium that ensures existence in equilibrium:

• PORTER'S ECONOMIC MODEL: in Porter’s view (1980) short-term profitability and long-run survival indicate efficiency in an organization; he argues that the key factor that determines a firm’s success is its market positioning with only three market positions that are feasible in the long run – low-cost production, production differentiation and segmented focus.
• CONTINGENCY THEORY: this theory suggests that the factors that determine efficient organizational structure are size, technology and environment; Blau (1970) defines the relationship between efficient administrative overhead and organizational size; Woodward (1965) points out that there are three main types of technological systems and each of them requires different configuration of the organization so that it can function effectively; Lawrence and Lorsch (1967) argue that greater structural integration and integrative effort are essential for firms in heterogeneous environments.
• RESOURCE DEPENDENCE MODELS: reducing or overcoming environmental uncertainty through internal organizational “buffering” strategies (such as coding, stockpiling, differentiation, etc) and external inter-organizational “bridging” strategies (such as cooptation, alliance, joint venture, merger, etc) is a key factor for success (Thompson, J. D., 1967).
• DISPOSITIONAL MODELS: the focus is on the entrepreneurial human capital in the face of the CEO of an organization and his leadership style that is the “most important criterion for success” (Carroll, G. R., 1993).
• TRANSACTION-COST ECONOMICS: the criteria for a state of equilibrium is cost minimization through minimizing the production costs and economizing the transaction costs involved in the production process (Williamson, O. E., 1985); among the factors that determine the optimal level or shape of an organization are asset specificity, uncertainty and frequency of transaction, which are tied to the transaction costs (Williamson, O. E., 1985).
• ORGANIZATIONAL ECOLOGY: with the main focus on organizational survival, different theorists set different equilibrium criteria such as market compatibility (Freeman and Hannan, 1982; Carroll, G. R., 1985), institutional legitimacy (Singh, Tucker and House, 1986), political environments and related turmoil (Carroll et al., 1988).
• INSTITUTIONAL THEORY AND THE STATE: the way to reach efficiency is through normatively defined models or “socially constructed definitions of appropriate ways to organize” (Carroll, G. R., 1993), where it comes the role of government or any other professional institutions to set those models.
• ADAPTATION VS. SELECTION: how successful a firm could be is determined by how strong are the interdependencies between firms in relation to the strength of the selection process, especially concerning business level units (Rumelt, R. P., 1991); it is important not only the likelihood of success after a particular action is implemented but also the risks involved in undertaking such action in the first place (Carroll, G. R., 1993).

If the criteria for a firm’s success are known, then why there are still firms that do not follow that path and stray away from the equilibrium efficient levels? Carroll (1996) finds the following reasons: environmental expectations, ambiguity excellence, imitation inability, structural constraints and precariousness of change.

Sources:
Carroll, G. R. (1993) “A Sociological View on Why Firms Differ”, Strategic Management Journal, Vol. 14, No. 4, pp. 237-249
Porter, M. E. (1980) “Competitive Strategy”, Free Press, New York
Blau, P. M. (1970) “A formal theory of differentiation in organizations”, American Sociological Review, 35, pp. 201-218
Woodward, J. (1965) “Industrial Organization: Theory and Practice”, Oxford University Press, New York
Lawrence, P. and J. Lorsch (1967) “Organization and Environment”, Harvard University Press, Cam- bridge, MA
Thompson, J. D. (1967) “Organizations in Action”, McGraw Hill, New York
Williamson, O. E. (1985) “The Economic Institutions of Capitalism”, Free Press, New York
Freeman, J. and M. T. Hannah (1982) “Niche width and the dynamics of organizational populations”, American Journal of Sociology, 88, pp. 1116-1145
Carroll, G. R. (1985) “Concentration and specialization: Dynamics of niche width in populations of organizations”, American Journal of Sociology, 90, pp. 71-93
Singh, J., D. J. Tucker and R. J. House (1986) “Organizational legitimacy and the liability of newness”, Administrative Science Quarterly, 31, pp. 171-193
Carroll, G. R., J. Delacroix and J. Goodstein (1988) “The political environments of organizations: An ecological view”, In B. Staw and L. Cummings (eds), Research in Organizational Behavior, Vol. 10. JAI, Greenwich, CT
Rumelt, R. P. (1991) “How much does industry matter?”, Strategic Management Journal, 12(3), pp. 167-185.