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Category:Firm Studies

Table of Contents

Organizational change and development

Understanding the patterns of organizational change and development is a central goal in both organization science and economic research on the theory of the firm. In discussing the growth of firms, scholars have often referred to Gibrat’s (1931) seminal contribution in which he argued that expected firm growth rates are independent of size. This means, it is hardly possible to find any systematic economic regularity explaining the growth of firms. One interpretation of this finding is that there are so many influences at work that no general relation between any factor and the growth of firms can be described. However, more recent reearch has found some regularities in the growth of firms (cf. Sutton 1997 and Caves 1998). Using a comprehensive data set of manufacturing firms, Evans (1987b) shows that firm growth decreases with age and size. This departure from Gibrat’s Law holds particularly for small firms (Evans 1987a, Hall 1987). Further, the volatility of growth decreases with age and size. Another consistent empirical regularity is that the probability of survival of a firm increases with firm size and age (Evans 1987a, Hall 1987). Theoretical explanations for these regularities emphasize learning (Jovanovic 1982) and innovation processes (Gort and Klepper 1982; Klepper and Graddy 1990; Klepper 1996). These results indicate that the growth rates of firms undergo a systematic change as firms become older.

Evolutionary economists have approached the question of regularly appearing patterns of growth and development by considering how firm organizations coordinate and combine resources in a dynamic market environment (Nelson and Winter 1982; Langlois and Robertson 1995; Teece, Pisano and Shuen 1997; Rathe and Witt 2001). Entrepreneurs play an important role in this process. They are one crucial source of novelty as they define innovative ways of using the available resources (Witt 1998). Developing a business conception is a cognitive process in which the entrepreneurs build an understanding of the products or services to be offered, and of how to coordinate their making. Considering this entrepreneurial function, the evolutionary approach explicitly acknowledges that firms differ with respect to the accumulated knowledge and competences (Penrose 1959; Nelson 1991). This also explains the heterogeneity across firms, even if they operate under very similar market conditions. While some firms continuously grow over a long period of time and become large corporations, many firms stagnate at a certain level, or even fail in their attempt to grow and go bankrupt.

Yet research has also shown that, despite all differences, there are some patterns in the development process that most firms have in common. For example, Witt (2000) argues that companies regularly reach a critical phase as they grow. A growing number of employees render it increasingly difficult for an entrepreneur to maintain a sufficient level of communication and interaction among the firm members. Consequently, the entrepreneurs and employees increasingly diverge in their understanding of the firm’s business conception. Developing different cognitive frames about the meaning of the business conception, in turn, increases the variations of the employees’ behavior. Thus, effective coordination declines. Such growth thresholds are a fundamental problem because the entrepreneurs have not only to retain cognitive coherence within the established organizational structure. In addition, they have to transform the growing firm toward another organizational structure to operate profitably. This pressure to change the prevalent mode of coordination produces specific patterns of development. Witt (2000) argues that the newly adopted organizational structure, i.e. the mode of coordination, is contingent on the mode of coordination in the early, pre-threshold phase of the firm. The existence of these contingencies may explain the emergence of specific developmental pattern.

This line of arguments suggests that the organizational structure is systematically affected throughout various phases of the firm’s development. Yet it is still unclear to what extent the firm growth affects the transformation of the organizational structure, and how the transformation process occurs. It is even more unclear whether there is any regularity in a firm’s development process. Therefore, the following questions may be considered in a research agenda in evolutionary economics. What exactly happens to the organizational structure when a firm grows? Does growth systematically change some organizational features? Why and how do firms differ in their development patterns? Examining the transformation processes along these questions may detect the regularities of organizational change that occur during the firm’s life span.

Sketch of a framework

To address these research questions, an analytical framework needs to specify different aspects of six categories that are central in the development process of firms: 1) the growth, 2) the growth thresholds, 3) the initial mode of coordination, 4) the post-threshold mode of coordination, 5) organizational change, and 6) the business conception. The starting point for an empirical investigation of the developmental process is to conceptualize and measure firm growth and emerging growth thresholds. Different variables to identify growth and growth crises are listed in the table below.

The mode of coordination in the start-up phase and the post-threshold mode of coordination constitute the next two important conceptualization categories. To analyze the mode of coordination, data are required for two specific aspects of the coordination regime. These are the cognitive coherence on the one hand and the organizational structure on the other hand. First, cognitive coherence is difficult to identify directly. It is also difficult to specify the degree of coherence within an organizational context. However, this conceptualization category is central to understand the emergence of the organizational crisis and the firms’ transformation into another organizational phase of the development process. Cognitive coherence may be approximated by identifying the characteristics of the human resource management practices, e.g. the extensive involvement of employees in problem-solving, the regular labor-management communication and information sharing, and job security pledges vs. close supervision, strict work rules, narrow job responsibility, and no practice of information and frequent communication. Another way to measure the degree to which firm members share the business conception is to closely assess the relationship between the entrepreneurs and the firm members, or the relationship among the members of the top management. Second, considering the organizational structure, the number of hierarchies or the extent to which the entrepreneurs delegates responsibilities to other firm members are variables that would be relevant to understand the mode of coordination in the entrepreneurial phase.
Variables to identify organizational change are closely connected to the conceptualization of the initial and post-threshold mode of coordination. For example, changes in the number of hierarchies, the extent of responsibilities delegated to organizational subunits, or changes in the number of divisions indicate organizational change. After adopting a post-threshold mode of coordination, a firm may also experience further events in its development process. Thus, an analysis of the firms’ development process may include variables such as post-threshold growth and performance, and mergers and acquisitions.

Finally, assessing the development process of firms needs a conceptualization of the entrepreneur’s business conception. Understanding the business conception requires to collect information on the content of the business conception. This includes data on the entrepreneurs’ innovative ideas, and on how they plan to allocate and coordinate the resources within their firms to provide innovative products or services. The table below gives an overview for conceptualizing and measuring the six categories central in the firms’ development process.

Variables for Comparing Firms

Download Tables as Word File File:Table 2.doc