1) The document discusses the debate around whether organisational inertia in small and medium enterprises (SMEs) is resolved by better management or whether incompetent management gets weeded out through selection. 2) Research found that during recessions, SMEs with higher adaptability in outputs had greater longevity than competitors, showing the importance of adaptability. 3) The study concluded that both competitive selection and a firm's developmental adaptability through routines contribute to industry change and survival. Adaptability was particularly important for survival during the recession.

1. Is organisational inertia in SMEs
resolved by better management
while the incompetent get
weeded out?
Stephen Herman
23rd January 2013

2. Adaptation v selection
Summary of the debate-1
• For the strategy school (Cyert and
March, 1963; Child, 1972; Chandler, 1977;
Pfeffer and Salancik,1978; Miles and
Snow, 1978; Porter, 1980, Levinthal, 1991)
, organisational inertia is a management
problem that, though not easy to solve, does
get resolved by better managers, while
incompetent management gets weeded out

3. Adaptation v selection
Summary of the debate-2
• In the organisational ecology
paradigm,(Hannan and Freeman
1977, 1984, 1989), firms fail not because of
bad management but because the effort to
overcome inertia involves trade-offs to the key
survivability markers of accountability and
reliability such that better management
cannot actually deal with the structural
problem

4. Neoclassical economics
• The neoclassical view of firm survival and
industrial change is the survival of the fittest
leading to equilibrium market outcomes
(Friedman, 1953)
• The focus is on market structure as a proxy for
the degree of competition, with whatever is
inside the ‘black box’ of the firm as a side issue

5. Organisation science v.
organisational ecology
• The conversation between organisation science
and organisational ecology is sparse because:
• Differences in theoretical and empirical
approaches
• Use of different datasets and firm sizes
• The differences in granularity make it hard for
strategists to see the relevance of organisational
ecology to their work if there is no role for
management choice

6. Adaptation v selection
Evolutionary perspective
• Adaptation and selection are neither opposite
processes nor are they mutually exclusive
• Adaptation is an essential an unavoidable part of
any relevant evolutionary process
• Any evolutionary process that involves selection
must also involve adaptation as well and
adaptation matters with regard to selection

7. Does it matter?
• Government policy is focused on high-growth
firms
• Evolutionary economics, encompassing both
adaptability and inertia, can shed further light
on the issues
• Methodology – large-scale cross industry
study
• SMEs are not adequately studied

8. Why SMEs?
• UK economy has 4.3 million businesses, of
which:
• 1.2 million have employees
• only 26,000 (0.6 per cent) were classified as
medium-sized (50–249 employees)
• only 6,000 (0.1 per cent) were classified as
large (250+ employees).
• 99.3 per cent were small (0–49 employees)

9. Agenda
• Look at the issues of adaptability and survival from an
evolutionary perspective
• Present recent research findings on the
adaptability/inertia/survival nexus as it relates to the SME
market
• Challenge any exclusive role of selection in explaining industry
attributes. Even if selection generates larger industry-level
outcomes, adaptability is still important
• In a sharp recession, however, only the firms with more
potential to adapt their output have an advantage relative to
their rivals that can confer relatively greater longevity and
survivability

10. Terms – 1
• Adaptation - some structure or behaviour that
makes it more likely a firm will survive in its
environment(Maynard-Smith,1976) . A firm that
is adapted displays fit with the demands of its
environment (Toulmin,1981)
• Adaptability - the potential to adjust to changing
circumstances in a way that is relevant.
Adaptability is about the capacity to respond to
changes in the selection environment

11. Terms - 2
• Stability - the state or quality of being
stable, with the strength to stand without
being moved or overthrown
• Inertia - the inability to move or, more
weakly, an inability to shift from current
momentum

12. Terms-3
• Routines - dispositions or capacities that shape the
way various overlapping cohorts within the firm
actually proceed in response to a series of signals to
act, rather than actual processes
(Hodgson, 2004, 2007)
• Organisational adaptability is then specifically defined
as:
– the capacity of an organisation to change its
strategies, structures, procedures or other core
attributes, in anticipation of, or in response to, a change in
its environment, including changes in relations with other
organisations

13. Evolutionary economics -1
• Darwinian notions of evolution and ideas of non-equilibrium through
inheritance, variation and selection
• More generally, variation and selection act on different entities, variation
on the replicator (genotype/‘routines’) and selection on the interactor
(phenotype/the firm). If the entity or organism survives to reproduce, the
process restarts
• Evolutionary economics assumes that the adaptability of firms can be a
positive source of increased survivorship
• At the same time, evolutionary economics also acknowledges stability and
inertia as an integral part of the story (Simon, 1955; Nelson and
Winter, 1982)
• Routines generate both adaptability and inertia and both contribute to the
mechanisms of selection and retention (Hodgson, 2007)

14. Evo-devo
• Evo-devo - the argument that both evolutionary (evo) and
developmental (devo) process are likely to be equally
fundamental to understanding change in a broad range of
complex systems
• Variation in genes may also arise by mutation-driven
changes in gene regulation (Goodman and Cochlin, 2000)
• New features of organisms are made and run by various
‘core processes’ but used in different combinations at
different times and to different extents of their output, just
as a box of Lego can create a variety of different results
(Gerhart and Kirschner,2007)

15. Evolutionary economics - 2
• Selection operates on firms, which are themselves the
result of the development of progressively expressed
routine behaviours over the lifetime of the firm
• The ‘routines within a firm’ framework (the replicator-
interactor nexus) shows both competitive selection and
developmental adaptability combining to explain industrial
change
• Given that Darwinian evolution is all about populations of
entities rather than the study of single developing
entities, then the replicator and interactor concepts
provide a good link for understanding the development of
both individual entities and the evolution of whole
populations (Hodgson and Knudsen, 2007, 2010)

16. Lamarckian’ adaptability and
‘Darwinian’ selection.
• Darwinism is a causal theory of evolution that requires the inheritance of
genetic guidelines, variation of those genotypes (replicators/routines) and
the subsequent selection of the resulting phenotype (interactor/firm)
• Lamarckism is the inheritance within the genome of characteristics
acquired by the phenotype/firm interacting with its environment.
Lamarckism proposes that physical changes lead to changes in the genetic
coding and that these changes are inherited
• Organisational scientists expresses the ability of firms to change both their
routines and structures so as to avoid being selected out, whereas
organisational organisational ecologists insist that most firms have a
negligible zone of strategic discretion to avoid being selected out
• Lamarckian inheritance, within a Darwinian framework, implies that some
development in a phenotype impacts on its own genotype in some
epigenetic fashion

17. Methodology
• Concentration on the four constituent areas of any firm: sales and
marketing, production, administration and human resources, and
corporate strategy
• Examined not the quantities of operation in routines but the levels of
adaptability firms perceive they actually achieve or believe they would
experience in the face of both continuous and discontinuous internal and
external change
• The adaptability instrument is the composite measure of the potential to
adapt routines across the four constituent areas, capturing a picture of the
interactions between the strategies, structures and procedures within the
firm
• A relatively large sample of observations of a representative set of small
and medium-sized enterprises (909)
• Re-sample respondents in the depths of recession 18 months on to look at
the relationship between previously calculated adaptability and the
subsequent degree of survival

18. Results - 1
• Older firms more adaptable than younger
• No relationship between adaptability and
revenues, profits and employees
• Higher congruence of routines associated with
higher adaptability
• No relationship between adaptability and
levels of formal procedures
• Higher adaptability associated with
implementation of innovation

19. Results - 2
• Higher adaptability associated with flexibility
of senior team and willingness to use external
consultants
• Adaptability not associated with number of
new managers in last 5 years
• No relationship with competitive advantage
• No relationship between adaptability and
dynamic or price competition

20. Recession survey results -1
• Survivability not related to overall adaptability
• Survivability associated with adaptability in
production
• Survivability related to % change in revenues
• Survivability not related to % change in profits

21. Survey of those gone out of business
• Fatal hazard of a rapid and significant loss in revenues for whatever
reason in firms that were unable to adjust their cost of sales and/or
had relatively high fixed costs to variable costs
• Flexibility in managing output more important than attempting
ambidextrous strategies?
• Not cash flow problem initially caused by withdrawal of banking
facilities. This followed as a result of a significantly reduced trading
position and the likelihood firm it would not survive in the short or
medium term
• There were also no reports that bad debts or late payments by
customers caused problems and there were no significant non-
financial effects contributing to business failure, other than the
unhelpful fall in the value of sterling for importers

22. Conclusions - 1
• Both competitive selection and developmental adaptability
combine to explain industrial change and differences in
adaptability between firms are of significance. Routines can
be observed and measured even when defined as behavioural
tendencies
• In a sharp recession, only those with more adaptability in
outputs have an advantage relative to their rivals that can
confer relatively greater longevity and survivability. At the
population level, the effects of structural inertia that hinder
adaptation when the environment changes are magnified and
the mollifying effects of adaptability are reduced

23. Conclusions - 2
• Merit in a different theoretical framework from textbook
economics, strategy-choice theory and organisational
ecology in which to view adaptability in the economic
analysis of the firm
• This is one based on operationalising the context-specific
mechanisms of evolutionary economics under the umbrella
of Darwinian evolutionary principles
• Suggests further research that blends the abstract
framework of evolutionary economics with an empirical
look at the detailed processes of routines in real firms

24. Thank you
Discussion /Questions