Chapter summary

The principal research questions concern the role of individual adaptations versus competitive selection in the transformation of a population of SMEs and the circumstances under which, and the degree to which, firm adaptability contributes to survival. Does size lead to greater potential for adaptation or inertia? Do survivors have exceptional and entrepreneurial leaders and/or management teams and are they really adaptable or innovative in some way? Organisational ecology says that inertia is a typical state for firms such that they have little room for strategic manoeuvre and can do little to prevent their being selected out in due course. Inertia in this view is the result of previous successes and a consequence of selection, as well as an attribute that enhances survival, as inertia-disrupting organisational change leads to reduced performance and death. Even if inertia is relative and organisations do change all the time in some way, inertia for the ecologists still slows change such that firms find it almost impossible to keep pace with environmental ‘drift’.

Can having a greater potential to be adaptable reduce the chances of being selected out? To what extent does adaptability and/or selection account for the characteristics of a population of firms specifically consisting of SMEs? What circumstances drive individual firms to become more adaptable or more inert? Are older or larger firms more or less adaptable than younger and smaller firms? At the population level, does structural inertia increase with age and average adaptability decrease with age or vice versa? Related questions concern the relationship, if any, between adaptability and innovative capacity, entrepreneurship, the competitive environment and other factors such as having (dispositions for) routines to change routines. A particular research question arising, given the timing of the research, is what happens to any relationship between firm adaptability and survival in a recession?

This Chapter also looked beyond the immediate boundaries of the disciplines that claim some insight into these issues and explored the more theoretical areas of Darwinian evolution and how that concept is expressed in the specific domain of evolutionary economics, as well as exploring the evo-devo concept, which has potential implications for

evolutionary economics. It looked at what textbook economics, evolutionary economics, strategy-based theories and organisational ecology have to say about adaptability and its relationship to a range of variables from the perspectives of those theoretical views, backed by empirical data where appropriate.

A key specific issue that emerged across all the disciplines was the relationship between firm age, adaptability and survival. Organisational ecologists maintain that older firms are more inert/less adaptable (Carroll, 1984; Hannan and Freeman, 1989; Harreld, O’Reilley and Tushman, 2007), while, for organisational strategists, older, surviving firms have learned to be, and remain, more adaptable (Levinthal, 1991; Durand and Coeurderoy, 2001).

If the probability of failure conditional on age (the hazard rate) declines with age for any reason, (Phillips and Kirchhoff, 1989; Audretsch and Mahmood, 1995), does adaptability increase or decrease with age? For organisational strategists, individual adaptability must increase with age as entrepreneurs and their teams learn to adapt (Levinthal, 1991) and the more flexible companies must also be better able to interpret the signals coming from the market and then progressively adapt to them (Schindehutte and Morris, 2001), generating rising average adaptability. For the organisational ecologists, by contrast, at the population level structural inertia increases with age, whatever adaptability is occurring at the individual level. The corollary of this is that average adaptability must be decreasing with age where selection processes significantly favour those with high levels of inertia (Hannan and Freeman, 1984). For evolutionary economists, both adaptability and selection should matter in some combination yet to be determined.

Beyond age, the various theories suggest that average firm adaptability should also be associated with firm size, either by employees or turnover or profit levels. For the organisational strategists (Chandler, 1977; Pfeffer and Salancik, 1978; Porter, 1980), even allowing for trade-offs and balancing the costs and benefits of adaptability, adaptability should be positively associated with size, revenues and profits, all of which should be the products of survival.

Both the strategy and evolutionary approaches to adaptability and survival suggest that the ability to adapt to environmental changedepends on the ability to maintain consistency in internal processes. The better all the routines work together, the better the firm should be able to manage change, and even execute an ambidextrous strategy. It is an open question,

however, whether having higher levels of formal procedures to govern the operation of routines are necessary for the smooth introduction of change? Do they permit the rapid transformation of any changes into standard procedures and/or do they just produce inertia?

If they do both, what might be the boundary conditions between them?

Similarly, there is an open question at the population level, whether innovation is a risky and disruptive exercise that makes firms more prone to failure through the disruption and loss of competence from changes in routine and patterns of internal relationships? Or is it an adaptive process that contributes to survival? There is also a question for survivability about the relationship between the more rapid adoption of technology and the willingness to try new ideas and the ‘handedness’ of the firm to implement new ideas successfully.

There is also scant empirical evidence on the contribution of entrepreneurship to adaptability and survival, and whether a willingness to make use of external advice and guidance or bringing in managers from other firms with different experience can contribute to firm adaptability.

At the population level, organisational ecology sees selection operating within the population through some kind of competitive advantage (or disadvantage) of some traits relative to others. For the organisational strategists and neoclassical economists, competition would also be expected to prompt firms to adapt to remain competitive and survive, whether prompted by new competitors and/or price competition. Evolutionary economics, by contrast, suggests that firms are driven not merely by profit maximisation but also by the desire to survive in the environment in which they operate, so that adaptability is directed more towards this overall goal rather than tackling various forms of competition head on.

Finally, if those with a greater potential to adapt have some advantage relative to their rivals that confers greater longevity, it is a reasonable conjecture (but an outstanding empirical issue) that this advantage confers even greater benefit during recession because such potential should let a firm adjust relatively fast to rapidly changing external factors.

The next Chapter looks at a methodology for collecting and analysing data to look at these outstanding questions. It details the data collection method and discusses the development of an adaptability instrument that measures not so much the quantities of operation as in

many previous studies but more the levels of adaptability the firm expresses in the context of continual internal and external change, including other contributing factors to adaptability such as staff involvement and flexibility. It describes a methodology and process for gathering data at the routines level from a whole population of firms, encompassing multiple industries and sectors, bringing a novel perspective to the study.

2.13.1 Summary list of research questions

1. Does average firm adaptability correlate with average firm age and is adaptability associated with firm survival? Does structural inertia increases with age and average adaptability decrease with age?

2. Are larger firms more adaptable than smaller firms?

3. Is higher adaptability associated with higher levels of formal procedures or lower levels?

4. Is adaptability associated with innovative capacity (the more rapid adoption of technology, the willingness to try new ideas and the ability to implement new ideas/bring new products to market)?

5. Is adaptability associated with the use of external advisers or with new senior management?

6. Is adaptability correlated with the competitive environment (new competitor or price competition)?

7. Does adaptability help survival in a downturn?

CHAPTER 3 METHODOLOGY

The previous chapter looked at the theoretical and empirical literature on adaptability and survival in populations of SMEs. It looked at the competing claims of conventional economics, evolutionary economics, traditional strategic management theory and organisational ecology in explaining the evolution of populations of firms through the mix of firm-level adaptation and selection in the population. The chapter concluded that examining the research problem through the lens of evolutionary economics, where adaptability and inertia are integral parts of the story, is a fruitful approach. This is especially so if the idea of routines as behavioural tendencies can be operationalised.

This chapter discusses a methodology for operationalising an adaptability instrument, the data collected to populate it and the associated data gathered in order to look at issues of adaptability, inertia and survival. It justifies the data collected and the associated data analysis strategy. It includes details of the data collection method and pilot studies, response rates and bias in three surveys used to collect the data and it comments on the limitations of survey methodology in general.

A background section on the relationship between the methodology and the research issues is followed by a discussion of the adaptability instrument and then the pre-recession survey of a sample of SMEs to populate it and generate other relevant data. A next section covers the follow-up survey carried out during the depths of a recession to look at the relationship between adaptability and survival in such circumstances. A final part discusses the role and nature of a subsequent survey of those respondents who went out of business between the two surveys to find out more about what was driving these business deaths.

3.1 Background

This dissertation takes a line through disparate arguments about the adaptability/selection nexus by looking at it through the perspective of evolutionary economics, where routines –

those recurring organisational interaction patterns – are a source of both adaptability and inertia. A further objective was to address the lack of empirical work around the subject on datasets of a whole population of firms taken from multiple industries and sectors, though this work is clearly not intended to be a longitudinal study and the emphasis here is firmly on the SME sector.

The working definition of organisational adaptability adopted in chapter 2 and repeated here is 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. The resulting adaptations may well not improve performance but they are generally intended, by some benchmark, to do so.

Again, the term ‘adaptability’ is used consistently to refer to the potential to adapt of individual firms and ‘adaptation’ refers to outcomes. Change at the population level is always referred to as the ‘average (or mean) adaptability’ of the population of individual firms.