Fligstein, Niel

The Structural Transformation of American Industry

Introduction

Fligstein identifies diversification as the dominant structural change in American industry between 1919-1979. In this chapter, he suggests a theoretical framework in which to consider this change, and presents findings from an empirical analysis of data from the 100 largest corporations during this 60 year period. In his introduction (p.311) he identifies four "mechanisms which promote or inhibit industrial change":

1. role of existing strategy, structure and power distribution in organizational inertia

2. turbulence in organizational fields such that actors can implement change

3. entrance of new organizations into existing fields exemplify behavior for other firms

4. institutionalization

Fligstein also suggests that he clarifies work on institutionalism by illustrating that:

1. organizational fields are created and transformed through the previous listed mechanisms

2. institutional theories overstate the role of norms and underestimate the power of actors in the construction of organization fields

3. institutionalists too often support market-based accounts of organizational change.

Important Terms / Concepts

As defined by Fligstein (pp. 331-314) an "organizational field" is distinct from the concept of a niche. He states that the concepts share a conception of an objective external reality imposed on an organization. But he claims: "The idea of a field suggests that the environment and the niche are themselves constructions of organizations and their key actors." Organizations can control fields on the basis of (1) size: larger firms have an advantage and (2) if all members expect to benefit from stable rules, cooperation is likely.

Fligstein claims that his view of actors differs from that of traditional rationality or bounded rationality. (p. 315) Rationality assumes perfect information and 'maximization', while bounded rationality assumes imperfect information and 'satisfying'. Fligstein claims that both approaches assume that information is 'neutral' and does not require interpretation. Thus he offers a view of actors as filling an interpretive (exercising cognition and perception) role in uncertain environments.

Theoretical Reflections / Historical Overview of Diversification

According to Fligstein, organizations operate in 3 institutional spheres:

1. the existing structure and strategy

2. a set of organizations (and actors) comprising the organizational field

3. the state

Fligstein describes the existing strategy in American business before 1920 as manufacturing based attempts to control markets through price leading and vertical integration. In the 1920s he cites the beginning of a shift to sales and marketing strategies of diversification which looked to growth through increased sales. According to Fligstein,

Theoretical Reflections / Historical Overview of Diversification (cont.)

these shifts in strategy correspond with a change in the locus of power within organizations from manufacturing to sales/marketing personnel. Fligstein argues that the emergence of a new strategy (diversification) requires "shocks" to stable organizational fields. He claims that in the post 1920 period the state provided two such shocks; the Depression and the growth of federal anti-trust policies which outlawed prior strategies of growth through product related mergers.

The Case of Diversification

Fligstein notes that economists and business historians have provided the following accounts for diversification:

Markets present opportunities which are acted on by executives, firms exit slow growth industries and enter fast growth industries, and firms treat product mix as investments and divest to spread risk. Fligstein argues that these accounts do not properly consider the "structural and historical conditions under which diversification takes place".

Data, Methods / Results

Fligstein uses data on the 100 largest American firms from 1919-1979. His dependent variable is firm strategy defined as either: product-dominant (>70% of revenues from a single industry), product-related (firms produce in multiple but related markets), or product-unrelated (no one product accounts for >70% of revenue).

I will largely ignore the technicalities of his analysis (separate logistic regressions for 6 ten year periods) and focus on two independent variables which he discusses at some length: the background of the firm president and the concentration of firms in a organizational field who adopt diversification. According to Fligstein, the background of the firm president (manufacturing, sales/marketing, finance) is an indication of his likely strategy. (As already stated, sales/marketing personnel are more likely to advocate diversification strategies). Fligstein also found support for his hypothesis concerning institutionalization: as the percentage of firms adopting diversification in an industry increased, other firms followed their lead.

Fligstein concludes (p. 334) that firms which altered their strategies responded to two forces: (1) key organizational actors who articulated a new strategy and had the power to make it happen and (2) other firms in the organizational field acted as role models for strategic change.