Organizational ecology has a second theory of firm death called the liability of newness and it concerns age dependence. Whereas before we talked about density dependence, now we're shifting to age dependence. The main idea of this theory is that new organizations are most likely to fail because their internal structure and external dependence relationships are not well elaborated and established yet. So, internally the members have to learn all these new roles and relations that a new organizational form requires and it prevents them from getting down to business, which is like focusing on inputs and output flows. Externally, they lack the legitimacy and stable relations that older firms have so it makes it difficult to attract support. Hence, with age comes a greater chance of survival and this is confounded with size somewhat and many argue that that's the deciding factor. So, what you have here is this notion that the older a firm is, the more established its structures are and worked out so it can focus on production of input and output. But new firms have to figure all these things out, so while they may eventually arrive at a better form that fits the environment, there's much to be done to establish that. Now the liability of newness also applies to times of crisis and in these periods, many organisations triy to change internally. And when this happens, the internal structure no longer reflects the firm's accumulated history and is robbed of prior survival value. So here, changes in the core features of an organisation become problematic. The missions and values of an organisation, when they change, create all kinds of problems for the firm and they can help explain organizational death. Firms that try to change abruptly in the environment, because of pressures, could easily die. So, changes in short run strategies, however, and peripheral features are more consistent with the adaptive perspectives of population ecology. It's more these peripheral, less core features that are easier to change so as to meet the environment. However, it's harder to kind of change the internal features. Because when you do, when you change these kind of core features of the technology and the social structure, all sorts of other things have to happen as well so as to make that transition feasible and aligned with the environment. So often those kind of create more problems than benefits. A third theory about firm survival and death is called Niche theory. And here the general idea is that different environmental conditions favor specialist or generalist organizational forms. So a specialist firm is one that focuses on a particular technology and takes the risk of maximizing their exploitation of an environment, fully realizing it could easily change. A generalist firm is one that exploits multiple environments or a broad niche at lower levels so that it has greater security in the face of environmental shifts. So for example in the wine industry, take mass production forms like Gallo that produces these wines like burgundy, chablique, claire, madeira, port, rind, sherry and toke, named really from geographic regions. And in many instances they really just generate jug wines of lower quality versions at a much lower cost than, say, your family winery in the local area of California here. Now the thing is that the generalist production accounts for the bulk of wine sales, so it's quite lucrative, and it's hard for smaller firms and wineries to compete with them. So, in contrast, specialist firms in the wine industry are farm wineries that produce varietal wines named on the basis of a specific grape, and labeled with kind of an appellation of origin. So, it's kind of a very different focus. You'll see here the difference between Page Mill winery, which is a specialist firm right up the road here, versus Gallo, or even Robert Mondavi, which is a large mass producing winery. So, one is a generalist, the other is a specialist. So now you have some sense of a generalist or a specialist, we can start to talk about the theories of how a niche favors one or the other. One is called Niche Width theory and it's posited by Hannan and Freeman back in 1977. Niche width theory focuses on two aspects of environmental variability to explain differential survival of the specialist or generalist firm. In my earlier discussion of ecological processes I described how populations of organizations can occupy the same niche, or the same domain of unique environmental resources, and then depend upon identical environmental resources. So if two populations of organizations occupy the same niche while differing in some organizational characteristic, the argument of selection is that the population with the less fit environmental characteristic will be eliminated. Now, when it comes to generalists and specialists though, the organizations respond to environments differently so it gets a little more complicated. Generalist organizations have more slack. They've drawn different resources or realized niches so they can survive changes in one environment over another if resources wash out, right? In contrast, specialist organizations are leaner and they try to exploit resources in a single environment or a single realized niche. Now, generalist firms are not optimally suited for any single situation, so as such they have a wide fundamental niche with many realized niches kind of favoring the generalist. A firm that spans two or more different parts of the environment like a generalist, will be able to respond for the environment regardless of what the environment is or is not doing. However it kind of incure a cost of covering this wider portion of the environment, therefore generalist firms benefit from wide niches and unstable markets because they have these diversified kind of interests and efforts and they can handle volatility. In contrast, specialist firms are suited to narrow stable niches. And a narrow niche has resources suited to a small range of products and therefore the specialists get this kind of favor out of that context. They succeed in narrow niches and stable markets. So, in those contexts they can exploit their fit with a realized niche and ignore other niches. And in an environment that's stable, they can outcompete the generalists because the generalists can't maximize their share of the market like the specialists can. The specialist doesn't have to pay overhead costs of doing multiple things. So the specialist can better fit special interests, while the generalists are ready to address changes in environmental interest should one niche grow in size over the other. Now, a second type of niche theory calls into question whether generalist firms succeed more in unstable environments and if specialist firms succeed more in stable environments, but the theory really has to do with the level of change and variation that one focuses upon. As such, niche effects on specialist or generalist survival really depends on whether one regards environmental variation as fine-grained or coarse-grained. On the surface, it makes sense that stable environments encourage specialist organizations and that unstable environments lead to the mushrooming of generalist organizations, but Hannan and Freeman argue that this is not true for all cases. Whether generalists or specialists are favored by environmental change is determined by a combination of the distance between two kinds of firms, or how specialized and generalized the firm currently is, as well as the grain of the environmental variation. So, by this fine-grained variation where there's typically short durations, small increment kind of changes, compared to the lifetime of the organization. So that's one kind of variation, and the second is a coarse-grained variation that refers to long-term changes. So here you have a change in the political structure of the country or the passing of certain laws. Now when an environmental change is rapid and fine grained, it's better to be a specialist. You're more nimble and can adjust to those. When the environmental changes are rapid and coarse grained, however, it's preferred to be a generalist because specialists may not survive long enough to incrementally shift to that optimal state. So, here's where the distance between types play in as well. If you're a specialist firm that is far from being a generalist, then fine-grained variation probably won't get you to survive in an environment undergoing rapid coarse-grained change due to these kind of shifts in political structure and laws. So, this is kind of an elaboration of the prior theory on niche width to now being one about more specific cases of change that are either fine-grained or coarse-grained, so it's to favor specialist or generalist kinds of firms. Let's consider a brief example. In developing these lectures for you, I've really tried hard to find visuals that can demonstrate the core ideas and concepts. But I'm always limited to what I can find on the Creative Commons, because in order to post something openly and publicly, I would either have to get permission from the publisher and author or I I can just borrow from the the Creative Commons where everything is free for public use. So in searching around on the Creative Commons, I finally found some images where analysts tried to identify structural changes in the stock market, and those changes reveal where it was susceptible to systematic collapse. What was interesting was that they found stable, normal market behavior to entail strong residual correlations, and the stocks were correlated in a segmented fashion. So here, at the bottom next to me, is an image of stocks most correlated and you see the different sections much like a realized niche space, or narrow niches where a specialist can win, and it looks like it's for the normal market behaviour or stable kind of environment. In the case of the abnormal market which was post-2001, 9/11 kind of stuff when the markets fell and tanked, we see the stocks suddenly had very strong correlations with each other across the board. And they lose correlation with the residuals and that means there is a great deal of volatility and interdependence. So, in this instance we have an environment where realized niches collide and firms compete for the same resources, and here the specialists probably would die off if the niche does not fit them and the generalists tend to survive to see another day. So now in this case, the details really aren't so important. What I want to give to you is some kind of figurative or conceptual image or representation that you can hold onto in your mind so that you get some grasp of the theory and the concepts. That's all. A third type of niche theory is called Resource Partitioning Theory, and it's advanced by Glenn Carol. This theory describes niche-width dynamics to explain the differential survival capabilities of specialists in generalists firms. Now, prior formulations argue for fitness to a set and it predicts that for a given population one optimal strategy exists or at least it suggests that. In contrast, Carol proposes that competition among large generalist organizations to occupy the center of a market frees up resources at the periphery that can be used by small specialist firms without engaging in direct competition with the generalist. Anand Swaminthon has a paper on how this occurs in wine, and Glenn Carol, one of his collaborators also describes how it occurs for beer. So we have these two markets, wine and beer. And as you can imagine, for both industries, there are generalist and specialist firms. For wine, Robert Mondavi, here the bottle to my side, is a generalist firm, right? And then the farm wineries, like the one up the road here called Page Mills is specialist, is far less volume and focused on a particular varietals, For beer, Anheuser-Busch can be onsidered a generalist kind of firm. And then our local beers here in the San Francisco area, like Anchor Steam, Red Seal Ale, those kinds of things, are microbrews and they can be considered specialists that focus on varietals. Now, Glen Carroll and Swimanathan both find that a crowding of generalists in the market kind of creates opportunities for specialists. So when Budweiser, Coors, Anheuser- Busch, Heineken, Miller Beer, etc, all those generalist beer companies start to compete with each other they create room for microbrews to emerge and survive. The same thing for wine, you have Robert Mondavi, Gallo, Sutter Home, Woodbridge and all the other mass produced wineries that kind of do jug wine and boxed wine that are competing with one another, and that opens up farm winery production. Now both of the papers that I'm talking about here find a growth in these specialist firms over the last two decades as the wine production, mass production between these generalist firms increased. So it's an argument about resource partitioning within a niche, so that the specialists have room to kind of survive. So like I said, Carroll and Swaminathan argue that the competition between generalists and opening up of market space for specialists is a process of resource partitioning. And that process of resource partitioning has a distinct mechanisms that gives rise to the specialist kind of circumstances where they can succeed. And it's in contrast to density dependence, to some extent. So it's a more specific theory for these cases of resource partitioning. The first mechanism is a process of customization. Here the argument is that small firms are flexible, and they can customize their products to particular consumer tastes. In contrast, the large firms are slow and they are unable to adapt quickly to those changing tastes. But this kind of creates another issue which was identity, who you are matters, and even though major brewers can copy the technical aspects of micro breweries, they wouldn't be very successful at it because they aren't independently owned businesses. And in this case it seems to matter greatly who you are and not what you do. In fact, contract brewers also fail in terms of getting into this partition of the market. So, what it seems like is that consumers put great faith in small producers to make these quality products. And consumers might be reacting to mass society and its production techniques or even the advertising of Bud verses Miller constantly on the airwaves. Consumers may be purchasing as a form of self expression, they get tired of the same thing all the time and they want these individualized local breweries and wines. They may see their purchase as a form of status generation and expression, that they're distinctive through that purchase. If you had this general, this glut of general brews and wines there can arise this specialty market for quality, and the market segments seem to thrive or grow, this specialist market segment seems to thrive and grow on customization and identity. Now on the surface resource partitioning theory seems to counter density dependence. For example, density dependence argued that with greater density, or the number of firms in an environment, legitimacy becomes less salient and competition decides firm fates. In contrast, resource partitioning argues the environment is partitioned and that for generalists the competition occurs but not for specialists. In this partitioning environment, the specialists can thrive and appeal to quality and identities which are more legitimation processes. So therefore resource partitioning really helps explain how in general density dependence can hold for the main industry, but then there are smaller niches where legitimacy mechanisms can still apply like to, say, markets at the margins. One question that kind of remains unclear is whether generalist firms can eventually figure out a micro brew or a fine wine product and win over customers. So for example, Robert Mondavi, and even Miller Beer, have developed wines and beers that challenge the quality of specialist wines and beers. I mean, they even win critical claim and awards like Fry Brothers has a wine that people think is pretty good, as well as Miller Beer having micro brews or Sam Adam's that outperform these small, micro-breweries, so it just might take longer for them to have this critical acclaim and to enter those specialist markets. But, what happens is, the generalist firms can kind of enter both segments of the resource partition by accomplishing
