Between a Rock and a Hard Place: Organizational Change and Performance Under Conditions of Fundamental Environmental Transformation

Abstract

This paper examines the proposition that change is detrimental to organizational performance and survival chances.I propose that organizational change may benefit organizational performance and survival chances if it occurs in response to dramatic restructuring of environmental conditions and if it builds on established routines and competences.These propositions are tested on the savings and loan industry in California, which has experienced technological, economic, and regulatory shifts that have forced savings and loan associations to change or die.Findings indicate that most changes enhance financial performance, one is harmful to performance, and three diminish failure rates.These results support the model developed here and suggest that the question of whether change is hazardous should be replaced by the questions of under what conditions change may be hazardous or helpful and whether the direction of change affects its impact on performance and survival.'Ecological theory (Hannan and Freeman, 1977, 1984, 1989) posits that organizational change is limited by strong inertial pressures.Eight constraints on organizational adaptation are proposed, four internal and four external.The internal constraints are investment in plant, equipment, and specialized personnel; limits on the internal information received by decision makers; internal political constraints supportive of vested interests; and organizational history, which justifies past action and prevents consideration of alternative strategies.The external pressures for stability are legal and economic barriers to entry into new areas of activity; constraints on the external information gathered by decision makers; legitimacy considerations; and the problem of collective rationality and the general equilibrium.The assumption of strong structural inertia has two implications: (1) Organizational change is infrequent, much less frequent than environmental change.(2) When change does occur, it sets back the liability-of-newness clock (Stinchcombe, 1965; Amburgey, Kelly, and Barnett, 1990), rendering performance less reliable and thereby hurting survival chances (Hannan and Freeman, 1984: 159; 1989: 83).Moreover, undertaking change diverts resources from operating to reorganizing, reducing the efficiency of organizational operations.These assertions are not novel.It has long been recognized in the organizations literature that change is difficult.Merton's (1957: 195-206) essay on bureaucratic structure and personality described two dysfunctions of bureaucracy that relate to organizational inertia.First, bureaucracies are subject to excessive rigidity in the application of rules and regulations.This severely constrains their ability to change in response to environmental shifts or internal organizational growth.Second, bureaucracies are inherently conservative and resistant to innovation.In the model developed by Crozier (1964: 175-208), based on observations of French public agencies, bureaucratic organizations are seen as increasingly rigid over time, subject to a bureaucratic "vicious circle."Crozier argued that increased dependence