Fligstein, "The Structural Transformation of...Large Firms." 1991

This is a chapter in the DiMaggio book on neoinstitutionalism. I think it is a classically well-organized and cleverly written piece of work: F. presents his case, describes the theoretical background, suggests a new twist on an old theme, and then supports it with a data set. I guess it is the kind of piece that would excite a specialist in organizational studies- I suspect my enthusiasm is a private one. But I will try to convey why this piece is important.

Basically:

In a nutshell, F. argues that the population of large firms in the US since the 1920s changed in two ways by 1979: those that remained large over this period of time became diversified (PepsiCo buying up Car X and freight trains or things of this nature) and those firms which became large did so through diversification (get it??). In other words, he argues that firms did not become or remain large by increasing their output of their main product line (whatever that line is) but rather through purchasing other businesses in other sectors of the economy which had nothing to do with the company's original product.

F. suggests that four factors affect diversification (either positively or negatively):

1.) the existing structure of an org. (if the people in positions of power want change, change will happen).

2.) turbulence (if an org is doing fine it is unlikely to change; if the weather gets rough, it is more likely to alter its course of action and diversify).

3.) the examples provided by other orgs (if one company grows through diversification, others are likely to follow suit).

4.) "forces of institutionalization" (once change is an accepted business practice, it becomes more likely to be repeated).

F. believes that studies of institutions are too market-dependent (if the market demands it, orgs will accommodate the market- the rational action perspective). Instead, while recognizing that the market plays a role in org change, he downplays its role in favor of other (more important) factors. One of the main reasons firms grew through diversification was because of federal anti-trust laws which were enforced starting in the 1920s. Firms found that growing within their own industry was prevented by such laws... What else could they do? The feds had mandated a limit on org growth within certain economic sectors, but could not prevent growth through diversification. Orgs with money to expand were forced to do so through new channels, and so some did. It didn't take long for others to catch on.

Note one of the main benefits of diversification: if you are diversified, you are buffered against fluctuations in the environment (F. does not mention the environment in his article, yet it is implied throughout). In a stable environment, the need to diversify is weak (ecologically); but if the economy is changing rapidly, what is hot today may be gone by tomorrow- the only way to protect yourself is by investing in several different markets, and not allowing fluctuations in one affect the production in another. Diversification creates stability, and stability is the essence of long-term expansion. This is what the US firms did.

The Ford model of manufacture-just-one-thing-as-best-you-can-and-as-much-as-you-can was the peak of the old model of production. Mass production and expansion within a certain industry is the way firms used to grow, and it worked well for a very long time (after all, what would Ford know about, say, producing computer chips?). F. argues this changed starting in the 1920s with a rapidly changing market, the influence of marketing campaigns, and changes in federal law. By the Great Depression, diversification was becoming an accepted part of American business... In fact, though the Great Depression destroyed many American businesses, the only tactic that lead to firm growth during the Depression was diversification!!

BUT... for diversification to spread, actors had to perceive the new strategy and find the power to act. So far, F's argument has been an ecological one. Now he argues that shifts in the way organizational leaders saw firms led to diversification. "Firms in the modern era no longer view themselves as operating in a particular business, but instead view any business as an investment that must pay off." The mode of expansion was no longer increased sales, but mergers. Ford and his predecessors perceived of themselves as "car manufacturers" or "clothing manufacturers," but this idea died in the first half of the 20th century. This is the point of neoinstitutionalism: the ideas define what is possible, and the idea of diversification did not exist until the 1920s.

If shocks provide the conditions for change (meteors striking the earth kill off the dinosaurs and allow the mammals to expand), the other necessary factors is actors who respond to those changes in ways that are beneficial to the organization. Different people within a firm see problems in different lights: sales and marketing will have a different take on problems than manufacturing or R&D, and different actors will propose different solutions to problems. F. argues that the people in power of firms in the 1920s and onward were ones that saw solutions through diversification. They were not the heads of engineering (who might see new product development as a source of new revenue) or manufacturing (who might suggest increased production) or salesmen (who might suggest increased advertising)-- instead, they were men (sorry) strictly interested in profit, wherever it came from, and if that meant combining a paper products plant with a dry-wall manufacturer, they would do it.

Having made his arguemnt, F. goes on to support it with (convincing) data. It is not worth dwelling on this aspect of the article- suffice to say that it seems watertight (to me), and that his argument is not strictly theoretical. His evidence "supports the view that orgs that grew to occupy the list of the hundred largest orgs did so by altering their existing strategies" (i.e., by employing diversification over other possible strategies). Firms that did not change also did not grow. "This implies that diversification was a strategy of highly growth-oriented orgs which spread to other large orgs when the actors in those orgs perceived the advantage of doing so." Again, here is N.I. in action: the perceptions of actors in positions of power influenced the way that the orgs behaved and, ultimately, expanded. The actors who come up with the ideas cannot know beforehand that their solutions will be effective, only that some solutions "seem likely" (or seem "un"likely) to have a particular effect. Once a particular perception exists (e.g., diversification is good) it may spread across the field and new pressures can be created for other orgs to conform to the "successful" model by employing the apparently successful technique. The definition of what is appropriate now dominates org behavior!

F. emphasizes that this process is historically specific: that the 1920s to the 1970s was unique, and not necessarily reproducible, but he demonstrates (creatively, I think) how the emphasis on diversification took place, and the effect it had on org size. Once the example of diversification re-defined the rules of org existence, diversification spread.