Category Archives: Organizational Permeability & Dynamics

Recent Reflections on Organizational Permeability and Dynamics

There are a number of posts from the old list serve that look like they can stand on their own as relatively independent threads. But I was struck by the number of them that seemed quite related. There might have been a good deal of time that had passed between them, or they may have been sparked by independent events or ideas, but I kept on noting how they were related. They didn’t feel like they could stand up as independent threads – they felt like they needed to be adapted such that they could be combined into one coherent line of thought. Some of those linkages were clear at the time, but others not until I was faced with this task of figuring out how to coherently move them to another platform.

These particular posts address issues like organizational permeability & dynamics, mapping shareholders & stakeholders, how economic power might be best defined by the extent to which individuals have roots in multiple organizations, and even one about how social movements might affect the trajectory of business firms. The principle that is unifying these for me at the moment is something that always hovered around the edge of our work, but I don’t feel like I ever said explicitly until now – we can’t really understand how any firm will behave at any given point in time without a fuller historical perspective on how past firms have traversed through their entire life cycle.

This problem was especially acute in the entrepreneurial field that we were in. Almost all the studies with which we interacted were about new firms. What can we tell about the likelihood of success of an entrepreneurial endeavor from their initial behavior? It looks like this perspective obstructs us from key insights that comes from the patterns that firms settle into as they get older (and frequently as they die). To what extent does adherence to or deviation from those patterns tell us about how firms that are new to the world might fare (beyond the old platitudes like willingness to innovate, being lean and efficient, having the will/desire to grow, and all that nonsense).

I think this principle was implicitly behind your thinking when you pointed out the variability in the commonly held notions of what constitutes an entrepreneurial venture that led to our “elements of entrepreneurial success” framework. As you said at the time, some see an entrepreneurial venture solely as the time of enormously high return on an initial investment where it is important to exit before the firm settles into established patterns. Others see it as the growth of a fledgling firm into a large concern that employs many people and creates a large multiplier effect. We had other varying definitions as well. But this perspective only makes sense if one steps back from the specific behaviors of any one (or any series of) new firm and looks at the problem from a broader context that looks at a wide variety of firms in different contexts and at different life stages.

I suppose we had an even simpler implementation of this broader perspective when we did the functional differentiation study. While that still involved newer firms, we did ask a broader question of how the functions the entrepreneurs were doing when they first started the firm differed from what they were doing after they had been at it a few years. Again, we had to take a broader perspective for this to make sense. From my recollections of those times, we were taking these steps implicitly. The thinking still seemed implicit (present, but implicit) in many of these posts we placed on the list serve. For me, this is only becoming more explicit (though I am struggling to be articulate about it – it still needs work) as I try to think about the best way to make sense of and organize some of these previous thoughts.

Perhaps there is literature that has already made this jump (I saw a vague Facebook post not long ago that referred to a political piece that appeared to be making reference to multi-organizational economic power theory), but I don’t remember it from the time we were active. I remember pieces that made reference to the idea of the life cycle of firms, but I don’t remember those as much more than perfunctory. Then again, perhaps there was an extensive literature to which we didn’t pay a lot of attention because we didn’t fully grasp its applicability.

I’d be curious to hear your reactions and recollections around any of this. I felt like there might be some sort of revelation here when it first occurred to me, but my difficulties in articulating it are giving me second thoughts. Maybe I haven’t put my finger on what’s uniting these posts, but I’m pretty sure there’s something that does.

Social Movements & Organizational Behavior

Becky and I went to see Michael Moore’s Capitalism: A Love Story last night. What was most valuable for me was that in our fairly extensive post-movie discussion, I found myself coming back again and again to the ideas I’ve been trying to develop in our posts. The movie discussion led me to a series of questions about the impact of social movements on organizational behavior. How do private sector organizations typically react when they are in the path of a successful social movement? A better understanding of that process might be beneficial to participants in those movements and the organizations that are directly and indirectly affected by movement activities.

Back in March, I posted the following as part of a reaction to Malcolm Gladwell’s Outliers:

“The key to understanding entrepreneurial success, then, has less to do with the success of the newcomers than it does with the failure of established firms to preserve what they have…An interesting insight on this came to me from Robert W. McChesney’s Communication Revolution. While not a new idea, I was moved by how concisely he put it. McChesney warns his readers to beware of firms who obtain a disproportionate amount of their profit margin from the currying of political advantage rather than the inherent value of their products. He is speaking about media conglomerates, but the same notion applies to any other established ventures as well. Those who have will fight to keep – if they succeed, newcomers will be thwarted. If they fail, newcomers will step in. Failure of the old does as much (if not more) to explain entrepreneurial success than the victories of the new. Perhaps some of the more interesting entrepreneurial opportunities can be found in areas where established firms have to rely on political advantage to maintain their success.”

Inherent in this discussion was the notion that pressure on existing firms looking to maintain their current advantage was coming from other economic actors (both direct and indirect “competitors”) seeking to carve out a niche of their own that may impinge on the territory of established concerns. What I had not seriously considered at the time was the impact of largely non-economic actors seeking to impinge on the territory of established concerns on behalf of the “public good”. How do preservation strategies differ given the different types of pressure?

There are a couple of ways that pressure from social movements differs from that provided by other economic actors. First, it is usually indirect. In most instances, movements target governments to make policy changes that affect the terms within which the established concerns can operate rather than go after the firms directly. Direct attacks on firms from social movements are usually more episodic and in search of more concrete, short-term concessions. I suspect most firms find these easier to placate or ignore. The more serious, longer-term threats are aimed at the public sector to change the conditions in which the firms are allowed to operate.

Second, social movement pressure usually focuses on questioning whether established concerns have the rights or proper justification to conduct business as they do. Other economic actors rarely have any interest in such fundamental questions. They are merely seeking a piece of the action. Hence, the stakes of social movement pressure are usually significantly higher. They can go as far as questioning the rights of specific firms to exist. The game in this arena has to be at least a bit different, though I suspect that outcomes are not that different when both or either of these types of pressure are successful.

I guess the question is how do firms divest from core businesses when public forces make it clear that the time to conduct those businesses is clearly limited? I suspect that the path is largely:

1. Utilize all lobbying and public relations resources available to delay public action against the business activities for as long as possible.

2. Once political momentum has built to the point where lobbying and public relations efforts are no longer effective, shift marketing to areas or countries where regulations or restrictions have yet to be enacted or seriously considered.

3. Shift the assets accumulated from the questioned practices to other firms or activities such that the impact on future wealth creation activities is minimal. A number of the more recent posts have been concerned with this particular step.

For social movements to be truly effective, their goal should probably be to force questioned businesses to move exclusively to step 3 as quickly as possible, and perhaps even focus on removing barriers to doing so. This is probably a tough step for most garden-variety lefties, thought perhaps essential to the achievement of stated goals.

There are a number of examples of this process currently in play. One that is further along the path is tobacco. Utility companies are clearly beginning this journey. The days of centralized electricity grids are clearly numbered. It is only a matter of time before decentralized production and storage is a fact of life. The path that utilities take to adapt to that reality is at the crux of the process that needs to be delineated. It’s also looking like the health insurance industry may soon be facing this road.

This process is also capable of playing itself out in shorter cycles with alarming implications. A recent book on health care economics by Shannon Brownlee entitled Overtreated (highly recommended if you’re at all interested in this topic) does a brief chronicle of the life cycle of the pain medication known as Vioxx. It’s astounding. Well before the drug was ever introduced, Merck knew full well that the FDA would be eventually be forced to pull it from the market because it would be incapable of withstanding clinical scrutiny. But they figured if they could build a way to keep it on the market for a few years, they could make a killing. And that’s exactly what they did. They used this process effectively in open defiance of the public interest.

It seems to me that this is another important piece of the puzzle laid out in previous posts that needs to be better understood to get a fuller picture of organizational permeability and dynamics. This also introduces a slant on public policy implications that may not have been clear from previous discussions. The framework here is patchy, but I wanted to at least note the highlights of this movie conversation in case it could be used in further development of some of the ideas with which I’ve been recently preoccupied.

Thanks as always for indulging me…


Can Economic Power Be Measured by Organizational Diversification?

An addendum to yesterday’s post…If you think more about mapping all the shareholders and stakeholders of a particular organization – or mapping all the organizations for which a particular individual is (or has been) a shareholder or stakeholder – a number of interesting questions emerge. Among the most intriguing is the extent to which wealth, status and power can be measured or attributed to the number of organizations in which an individual or entity is directly involved or invested. If our hunch that the boundaries of economic organizations and related institutions are highly blurred is correct, then it would only make sense that the most powerful individuals and entities are those that have direct involvement and influence in the greatest number of organizations. Hence, wealth, status and power are most aggressively pursued by getting involved in as many (influential) organizations as possible. Given basic limitations of human resources and attention, there is probably something of an upper limit to the number of organizations for which it pays to be active and affiliated. But within those limits (which can probably be at least loosely defined without too much effort), more is likely to be better than fewer.

This concept is probably easiest to understand when applied to individuals. For the overwhelming majority of people who work for someone else for a living at the level of middle management or below, the only economic organization in which they are truly invested is the one for which they work. There are some that might develop close ties with a particular client or vendor, but most are only directly invested (via their labor) in their employer. Opportunities for affiliation with other organizations for these people are largely available through volunteer opportunities in their spare time (or via their limited disposable income). And while there are some genuine opportunities to develop strong ties, investments and influence to other organizations through volunteer efforts, there is overwhelming pressure placed on people to limit their involvement to consumption of services or proxy memberships. Hence, in many developed societies, most people rarely have meaningful investment or influence in more than one organization.

We begin to see a little more flexibility (and organizational diversification) in a number of the professional occupations, where trade associations, professional societies and training requirements compel members to maintain involvement and connections with a myriad of organizations. While the multiple organizational contacts are a requirement for those being trained into the profession, they can become very expensive to maintain once individuals have settled into careers. Some types of organizations (Universities, for instance) are better at supporting their employees in maintaining those multiple affiliations than others, and hence those same organizations are likely to be better in developing active collaborations with other organizations in their everyday work. It’s probably no mistake that these tend to be the places rated as the best places to work in the society. Others may be better served in the future by increasing their support of employees maintaining their professional affiliations with other organizations (more on that in a bit…).

The “entrepreneur” plays an interesting role in this scheme, because almost by definition, they have to establish some type of foothold in a myriad of different organizations in order to obtain the suppliers and customers to sustain a new venture. Those most comfortable with making those types of contacts (as well as those who step into a new venture with those already intact) may have a better chance of keeping their heads above water with a new firm. Here’s an overstated but intriguing hypothesis: opportunities for failure are likely to be greater for new firms that are more dependent on attracting disparate individuals to their business than those who have secured the support of existing organizations. Individual networks, though highly important and occasionally capable of generating enormous payoffs, have a higher rate of error than networks of organizations.

As one gets into the upper echelons of organizations and organizational power, meaningful links with other organizations become commonplace enough to suggest that the links alone are a useful measure of that power. As I mentioned yesterday, fortunes can accumulate to the point that investment in organizations completely independent of one’s own becomes compelling. These are the people serving on multiple boards of directors or seeking high public office. They are more apt to cross-pollinate disparate organizations via seemingly spurious individual connections. Their influence is wielded through their impact on multiple organizations, not just the one through which they are primarily affiliated.

Let’s get Marxist for a minute. If the case can be made (and I suspect it has) that the notion that power is held by controlling the means of production is dated, perhaps it can be replaced by the notion that power is held through active involvement in a myriad of economic organizations and related institutions. Conversely, control over others is exerted by restricting the number of organizations within which they are involved. Hence, labor is kept in place by limiting their meaningful involvement to the organization that employs them. It’s funny that that this is the objective that much of organized labor is fighting to maintain. Perhaps this is the cognitive dissonance that they have yet to acknowledge…

While an intriguing and compelling view of the world can be drawn from this “Neo-Marxist” perspective, I suspect it remains an open question as to how much hoarding of this type of “power” is desirable. I think a compelling case can be made for pushing organizational permeability further down in all organizations. It is certainly more in keeping with the notion of transient employment practices that characterize most of the modern world. If any job experience required more direct involvement with a multitude of other organizations, termination of employment in one firm might lead to smoother transition of employment to another. This would limit the pain of the initial termination as well as limit the need for the public sector to assume responsibility for the individual during the transition. It’s a network/relationship view of the world, but one that might lead to a more smoothly functioning society if a greater proportion of the population were integrated into these fluid-boundary networks.

People are already using the Internet to do some of this on an individual basis, but the world is not going to transform until this extends more broadly to organizations and institutions and goes beyond connections made by technology. Some of this will come as conventional organizations adopt to a new world view, and some as individuals create new organizations from their individual networking tools. Either way, the implications are fascinating…

Shareholder/Stakeholder Mapping

It’s occurring to me that a number of our more interesting conversations – both past and present – might be best advanced by an attempt to draw “maps” of shareholders and stakeholders over the full life cycle of any firm. I don’t think anyone would care to dispute the notion the stakeholders and shareholders change over the life of a firm, but I’m not sure we’ve seen much work on how those changes come about – who maintains an interest and who divests (and when), distinguishing between “active” and “defensive” interests, understanding how existing stakeholders seek to recruit new members or remove others, and tracing when stakeholders hold “exclusive” interests in a firm and when they allow their interests to be more diversified.

To overstate the case a little, it should be possible to look at the growth trajectory of any firm and be able to identify the specific stakeholders and shareholders as well as the exact nature of their interest in the firm at any point on the curve. We should also be able to roughly predict how stakeholder and shareholder membership and behavior will respond to changes in growth and performance. Or, more modestly, we should at least be able to better understand the issues that stakeholders and shareholders are likely to confront during various points of the life cycle of a successful firm.

As a crude initial example, let’s go back to the wildly successful startup firms that our friends in entrepreneurial studies are so fond of trying to find. The initial impetus for this line of thinking goes back to the question you asked years ago about how long does a firm remain “entrepreneurial”? More specifically, you raised the point that there were a class of venture capitalists who were only interested in a successful firm during its initial period of rapid exponential growth, and would look to divest the moment the growth rate showed the first signs of slowing. So those people may now opt out, but that does not mean that the firm is unprofitable – there are likely to be other types of investors looking to get in, albeit with slightly different goals. As this firm settles into a more steady growth rate, it becomes more important to labor, the public sector, new firms that might grow out of its multiplier effect, etc. Perhaps the society starts to believe that the firm’s product or service needs to be integrated into public education. New stakeholders come in, whereas old ones begin to turn their interests elsewhere…

After a while, growth starts to plateau or decline. Perhaps the product or service has become commodified. Some investors begin to drift. The firm places inordinate interest in reducing labor costs or seeking structural advantages from the public sector. Previous labor stakeholders become more defensive and many drop out, replaced with new labor stakeholders in lower-wage areas or countries. While some older investors seek to protect their previous investments or drop out, new investors who see value in breaking off parts of the firm to incorporate into other concerns become attracted. The public sector seeks new ways to replace the jobs that have been lost.

An interesting variable in all of this is the original “owner” of the firm. Let’s assume for the moment that she started in her garage and tied most of her own personal assets into the start of the firm. Perhaps she was like the venture capitalist who got out early by selling the potential of the firm to another buyer at an enormous premium. If she stayed, there is likely to have come a point where a large percentage of her personal assets would be more rationally invested in some firm other than her own. Perhaps this led to significant interests in other ventures, board memberships in both the private and public sector and other developments that blur the boundaries of the original firm and countless others. By the time her original firm ceased operation, hardly anyone noticed – both the functions and assets had been seamlessly integrated into other concerns.

This is all skeletal and crude, but hopefully enough to provide a grasp of the idea. I think it might provide a more accessible framework to the “elements of entrepreneurial success” ideas we conceived years ago, and also begin to give some real teeth to the “blurring organizational boundaries” argument that everyone understands intuitively but have yet to formally identify or define. The strategy here is not unlike the one we used for our product-market taxonomy years ago – start back at where an organizational boundary may have been clean and identify the processes that begin to make it blurry.


Malcolm Gladwell, Again…

Being down for a few days with a minor illness has given me an opportunity to get through Malcolm Gladwell’s Outliers. After finishing the book, I went back and looked at the post I wrote here about his first book. It’s amazing how much of that post is as applicable to this latest book as it was to the first. The basic themes that seem to always apply are:

  • Gladwell latches on to an important insight, and expounds upon it in an enticing and insightful manner.
  • He makes beautiful use of engaging stories to make his points, though his pure reliance on those stories (and the inconvenient links between them that he carefully chooses not to address) do more damage to some of his arguments that I suspect he realizes.
  • His motivation to explore the topic at hand tends to be driven by belief in fantasies that undermine his ability to emerge with a better overall understanding of the world.
  • For all the flaws and infuriating tendencies, his work is still highly provocative, worth the effort and moving thought in a roughly positive manner.

In this particular book, the nice insight is the notion that success does not come from nowhere, and that context is as or more important than individual initiative in achieving it. It’s a case that I’ve wanted to make for years, but my take has always been too pedestrian (remember the “resume study” I wanted to do of the biotech industry?).  Gladwell is great at finding clever and sexy ways to bring forth his key points.   At first, I was impressed and enticed by the way he showed that some of the elements of that “context for success” were even more random than anything I would have ever considered. The stuff about birth order and cultural legacy seemed like pure genius. Until…

It occurred to me that the “randomness” of the contextual elements he was identifying underscored his fundamental belief in the Horatio Alger view of success. While there may be no such thing as a purely “self made man”, those who succeed need to acknowledge the heroics of others in getting them where they are. Gladwell ultimately does not acknowledge systematic advantages. Instead, success is individual initiative mixed in with a little dumb luck and some heroics from those who came before. Two steps forward, three steps back.

Gladwell tips his cap towards his delusions at the end of the second-to-last chapter. “We look at the young Bill Gates and marvel that our world allowed that thirteen-year-old to become a fabulously successful entrepreneur. But that’s the wrong lesson. Our world only allowed one thirteen-year-old access to a time-sharing terminal in 1968. If a million teenagers had been given the same opportunity, how many more Microsofts would we have today?” The answer, of course, is probably none, and Gladwell’s failure to understand that shows that he doesn’t truly grasp his own insights.

As you’ve heard me say a million times before, the reason that the answer to Gladwell’s question is near zero is because the social system will not allow that many newcomers to be successful at any one time. Too much entrepreneurial success would be too disruptive to the system, and would require too many more people or firms currently accumulating wealth to stop doing so at the rate to which they’ve become accustomed. All the individual initiative in the world is not going to stop that from happening. Newcomers will usually be undone by the efforts of established wealth to keep what they have. The key to understanding entrepreneurial success, then, has less to do with the success of the newcomers than it does with the failure of established firms to preserve what they have.

An interesting insight on this came to me from Robert W. McChesney’s Communication Revolution. While not a new idea, I was moved by how concisely he put it. McChesney warns his readers to beware of firms who obtain a disproportionate amount of their profit margin from the currying of political advantage rather than the inherent value of their products. He is speaking about media conglomerates, but the same notion applies to any other established ventures as well. Those who have will fight to keep – if they succeed, newcomers will be thwarted. If they fail, newcomers will step in. Failure of the old does as much (if not more) to explain entrepreneurial success than the victories of the new. Perhaps some of the more interesting entrepreneurial opportunities can be found in areas where established firms have to rely on political advantage to maintain their success. Of course, this may be a chicken-and-the-egg question; the shift of profitability from the inherent value of products or services to the currying of favor on behalf of those products is sometimes driven by modest successes from competitors. Clayton Christianson’s work speaks to this, and the recent debates on “net neutrality” provide an interesting example. There’s also all the stuff around the American automakers, but the barriers to entry in an industry like that are so high that it might be a different beast. Still worthy of understanding, but perhaps a different beast.

But maybe I’m too tough on Gladwell. Spectacular failure is frequently more valuable to forwarding thought than is modest success, and I love the fact that he seems willing to cross that line. We’re all the better for it…