Sociology in Switzerland

Lehrstuhl Prof. Dr. Geser

Home:  "Wandel der Arbeitswelt"

Wandel der Arbeitswelt


Market Competition and the Organizational  Demand for Skills

Empirical evidence from Swiss Industrial and Service Enterprises

Hans Geser

July 2001



Table of Contents

1. Introduction

2. The “open system” and “contingency” perspective of formal organizations

3. The impact of competition on organizational behavior and intraorganizational characteristics

3.1 Competition as a general precondition for autoplastic adaptive behavior
3.2 The high significance of firm-specific factors
3.3 General impact of competition on intraorganizational processes and structures
3.4 Price competition and quality competition: two highly divergent challenges with contradictory organizational implications
3.5 The highly divergent behavioral consequences of price and quality competition for the coping firms
3.6 The broadened scope of quality competition
3.7 The New Ubiquity of Price competition
3.8 Some factors influencing a firm’s capacity to cope with intensive competition
4. Methodology and Data Sources
4.1 The sample and the two Surveys
4.2 Operationalizing the intensity of competition
4.3 On the measurement of the dependent variables


5. Empirical Results

5.1 Prevalent patterns and antecedents of price and quality competition among Swiss firms

5.2 Competitive intensity and staff qualifications

5.3 The scope of advanced training

5.4 The scope of introductory training

5.5 The Impact of Competition on the importance of various skills

6. Conclusions


1. Introduction

As one of the most ubiquitous condition of social life, competition is present whenever two or more actors aspire to reach the same singular goals (e. g. winning a game) or to increase their share of the same scarce resource (e.g. customers, votes, territories, etc.). While social psychology has accumulated considerable evidence about the behavior of competing individuals within small groups (e. g. Deutsch 1949; Johnson/Johnson 1989) as well as the correlates of intergroup competition (e.g. Sherif et. al 1954/1961) Bornstein et. al 1999), it falls into the realm of organizational sociology to analyze competitive relations between mesosocial voluntary associations (e. g. social movements organizations, political parties) on the one hand and corporate actors like firms, schools and hospitals (or macro-entities like nation-states and international alliances) on the other.Such research efforts can easily be justified by considering how fundamentally the economic sector of modern societies is determined by competitive intercorporate relations, how deeply processes of political participation and regime formation are shaped by the competition between political parties, and how insufficiently historical developments would be understood without taking into account the rivalry between feudal landowners, nation-states or larger (e. g. imperial and colonial ) territorial actors.

The perennial tendency to keep the scientific analysis of these different specimens of competition within the boundaries of highly segregated special disciplines (economics, political science etc.) has hitherto hampered the development of a more generalized theory which would be applicable to all types of collective social actors alike. On the other hand, organizational research since the 1960ies has produced much empirical evidence and theoretical argumentations which could contribute to such an ambitious endeavor. In particular, several studies have addressed the question how external competitive relations impinge on organizational behavior and intraorganizational structures and processes - by way of causal determination or at least by restraining the options for strategic choice and tactical actions.

Only marginally (if at all) , such studies have touched the question raised in this present paper:

How does the occurrence and intensity of competition relate to the level of human resources: to the composition of organizational staff and to the level (and kinds) of required skills?

Evidently, this question has become increasingly salient recently insofar as many current (economical as well as technological and socio-cultural) developments have the common effect of increasing the pace and intensity of competition faced by companies in all economic sectors. For instance, tariff barriers and other protective governmental regulations become eliminated in the course of neoliberalist policies; new firms from emerging countries are entering markets hitherto comfortably managed by few well-established corporations; the pace of technological innovation and product obsolescence has increased; and customers and business partners have become more demanding and more ready to articulate dissatisfactions. (Adler/Docherty 1998). During the 1990ies, economic recession has contributed to a shrinkage of many markets, so that competitive intensity (particularly in the realm of prices) has increased. [1]

Thus, many firms currently operate under conditions of “hypercompetitivity” (D’Aveni 1994) which forces them to commit many resources to continuous environmental scanning and learning processes, to reconsider permanently all their structures, commitments, planning schemes and operational activities, and to implement time-limited fast-response strategies in order to adapt to short-term unforeseen developments and events (Hamel & Prahalad 1989; Hill 1988). In addition, it can be assumed that in comparison to previous decades., competitive relations have nowadays more direct repercussions on the role of individual employees, and thus on the level of required skills. For instance, downsizing has the effect that a larger percentage of employees have to deal with customers and other extraorganizational concerns. Likewise the tendency to desaggregate monolithic enterprises into rather autonomous divisions or profit centers has the effect that more members have to adopt a commercial perspective because they have become incumbents of “boundary roles”. And finally, modern lean production and “total quality” philosophies aim at committing every employee to an “entrepreneurial spirit”: thus aspiring a condition where all activities of all members are continuously oriented at the firm’s most salient and invariant goal: prevailing within an environment of ever more intensive competition.

Table of Contents


2. The “open system” and “contingency” perspective of formal organizations

Since several decades, there is a general trend that economic firms have to focus ever more attention, energy and resources to extraorganizational concerns, because environmental conditions are getting more complex, volatile and unpredictable, and more decisive for the company’s chances of survival and growth. Thus, societal pressures to conform to ecological standards, nondiscriminatory practices and many other legal regulations have increased, customers and other stakeholders are better organized and more inclined to articulate grievances or even file suits, and outsourcing and “just-in-time” strategies have created a more densely-knit web of interdependencies among different firms. And most importantly: creating values for customers and clients has become the major goal around which all business activities are organized, and the implementation of such customer-oriented strategies demands that these ideas are understood and practiced on all organizational levels and by every single subunit and individual employee (Adler & Docherty 1998; Horte et. al 1996).

Given the increasing salience of all these environmental factors, firms may institutionalize a general “market-oriented” philosophy which gives priority to external adaptation at the cost of internal organizational concerns (e. g. job stability or work satisfaction) (Gordon 1986; Budros 1997). Since the early 1960ies, organizational sociology has reacted to these developments (or in some way even anticipated them) by developing “open systems” models of formal organizations: seeing them as reactive and adaptive (and less frequently even as proactive) entities within a challenging environmental field. These approaches contrasted with earlier stages of organization sociology which were characterized by a neglect of such environmental relations. For instance, classical socio-technical systems theory was focusing almost exclusively on intraorganizational aspects, especially on the role situation of the shop floor worker, (Adler & Docherty 1998). Doing this, it followed the classical Marxist approach which defined the worker as the major “stakeholder” of business organizations. Extraorganizational relationships were regarded solely as the prerogative or interest of management, which was supposed to have a perspective completely different than that of ordinary workers (Adler & Docherty 1998).
While such “introverted” perspectives always tended to see its objects as specimens of a modal single type of “bureaucratic organization” (in the tradition of Max Weber and Taylorist “administrative science”), these new environmentally oriented approaches have brought a major shift toward comparative analyses: by proposing a manifold of typologies which classify organizations according to their modes of environmental relations (like “mechanic” vs. “organic management” (Burns & Stalker 1961)). When Hickson tried to make an inventory of these taxonomic typologies as early as 1966, he found more than 20 highly similar variants: all of them contrasting “more bureaucratic” (= formalized/centralized/specific ) and “less bureaucratic (=informal/decentralized/diffuse) kinds of organizational structures (Hickson 1966). Concerning the environment, all of them also stressed the same crucial dimensions: particularly the degree of uncertainty, variability and heterogeneity of environmental events and developments, or the degree to which causal means-end relationships of organizational behavior (particularly in the production sector) were explicitly known (e. g. Perrow 1967).
All these approaches have converged in the rather diffuse, but influential “contingency” paradigm which asserts that there is not one single “best type” of formal organization, but a range of different types optimally adapted to different environmental configurations.

The major substantive hypothesis of contingency theory can be summarized by the simple statement that coping with high complexity engenders higher levels of informality and decentralization.

The larger the heterogeneity, variability and unpredictability of external stimuli, demands and pressures that impinge on an organization, the more it has to develop a structure where many individuals and subunits are capable and allowed to scan the environment, to collect and transmit information, to react rapidly to changed circumstances and to participate in collectively binding corporate decisions.

Conducting one of the earliest empirical studies to substantiate these relationships, Simpson and Gulley have found out that voluntary associations with multiple goals and adaptation problems are more likely to develop a highly decentralized internal structure, and to involve a large percentage of membership in its major activities. In addition, they tend to maintain more complex processes of intraorganizational communication in order to keep up with the larger quantity of inflowing information (Simpson & Gulley 1962). Later studies (mainly focusing on industrial enterprises) have confirmed that as environmental changes become more manifold , less predictable and more rapid at the same time, it becomes increasingly important that all subunits and all individual employees in the corporation are capable and motivated for change:
“Coping with complexity and rapid, often stochastic, change requires focus on goals, responsibility, and discretion throughout the entire organization, understanding of the company and its context and coping with the dynamics, i.e., change and learning.” (Adler & Docherty 1998).

As a result. control structures become decentralized, in order to empower all employees for making decisions in accordance with their own understanding of the companies interests and goals:
“Power shifts from the hierarchy to the control of the product by all. Power is based on skill, knowledge, and experience of the matter at hand. It requires putting complex systems into a human scale, i.e., creating an understanding of the world of work in a way all members of the organization can grasp. Employees accept the authority to make decisions related to their work as it is directed toward a shared vision of the purpose of the enterprise. It is dependent on understanding where the company is going, why it is that way, and importance of the workers' role. (Adler & Docherty 1998).

Consequently, a high basic level of intelligence and skill is necessary across all categories of workers and employees, and the need for higher educated personnel rises. In particular, employees have to be able to accumulate their own experiences on the job and to engage in autodidactic endeavors of advanced training (e. g. Industry Canada 1998). Transcending this one-sided focusing on “complexity”, a major synthesis of an environmentally oriented organization theory has been proposed by Lawrence (1981) who argues that all economic firms experience two types of insufficiencies which engender highly divergent strategies of adaptations:

1) Scarcity of information:
Firms have to cope with uncertainties because they have not sufficient knowledge about their environment and its future developments on the one hand and about internal means-end relationships on the other. Such uncertainties force them to keep their resources in a highly liquid condition: so that they can easily adapt to unpredictable circumstances by reallocating their capital, by migrating to other contexts, by exchanging their personnel, by buying new technology and by redefining internal procedures and organizational structures. In addition, they have to promote higher levels of functional differentiation: so that more specialized roles and subunits are available for expanding or redirecting the range of tasks and activities..

2) Scarcity of resources
Typically, firms operate under conditions of constraints concerning the use of personnel, raw materials, production facilities and all other costly resources. Particularly under conditions of intensive price competitivity, they have to minimize costs and to maximize efficiency in order to survive and maintain their markets. This usually implies that existing resources are highly specified and committed: by freezing moneys in long-term equipment which has to “pay out” during its use, by hiring staff with highly specialized skills which have to be updated or modified by expensive training investments every other year; and by optimizing production processes by working out routinized and standardized procedures implemented for long periods of time. In short: they have to give priority to goals of intraorganizational optimization: thus reducing their potential to mobilize liquid “slack resources” when unpredicted new circumstances arise.

As both contradictory strains are usually present, each firm has to find ways to equilibrate efficiency and adaptation needs at the same time. When uncertainties are relatively low and resource constraints high, organizations are likely to adopt highly formalized and centralized “machine bureaucracies”; when uncertainties are considerable and resource scarcities insignificant, they will tend toward loosely structured “adhocracies” of the “organic management type” (Lawrence 1981). When both strains are very intensive, they may tend toward “simple structures” characterized by small, unstable organizational units; and when both are low or absent, optimal conditions exist for the unfolding of “professional bureaucracies” (typically found in subsidized public service organizations and governmental administrations) (Lawrence 1981).

Within this conceptual framework, competition can easily be characterized as an environmental condition which is difficult to cope with because it generates substantial uncertainties on the one hand and resource scarcities on the other. Like many other approaches within the paradigm of “contingency theory”, the theoretical model Lawrence proposed was (at least implicitly) heavily indebted to the “social neodarwinist” approaches which focus on ecological and evolutionary studies of “commensalistic” organizational populations (e. g. Hannan & Freeman 1977; Brittain & Freeman 1980). [2]
In the following, several students of the topic have emphasized the shortcomings of such biologist views which see organizations mainly as adaptive actors vis-à-vis a dominant environment determining their chances of survival and growth. Instead, it has been stressed that while such one-sided adaptations are unquestionably frequent and of high importance, organizational environments can also be dependent variables: insofar as firms
a) choose specific strategies which then lead to specific correlative environmental conditions (e. g. by deciding to rely on specific products, technologies or raw materials or by cooperating with other firms).
b) intentionally select specific environments (e. g. by choosing plant locations, by deciding to enter certain market niches or to appeal to certain segments of customers etc.)
c) shape actively their environments (e. g. by buying out dangerous competitors, erecting barriers of entry, exerting pressures on governmental (regulative or subsidizing) agencies etc.

In fact, contingency theory has never succeeded in eradicating the basic heretic question: Do organizations really adapt?
As Baum and Singh (1996) have noted, not all organizational sociologists share the premise that organizations are adaptable social systems capable and motivated to design their structures and processes in optimal accordance with environmental needs. On the one hand, the “Lamarckian adaptionists” try to demonstrate that organizations respond to external threats and opportunities by revising their internal procedures and structures - even if they do this intuitively or even accidentally: more by trial and error processes than by rational analysis and design. (e.g., Chandler 1977; Pfeffer & Salancik 1978; Rumelt 1986; Thompson 1967). On the other hand, the “Darwinian selectionists” assert that economic evolution proceeds by a constant replacement of unfit organizations by fitter ones. They perceive firms as rather inert and/or randomly moving entities more likely to be wiped out than to adapt when environmental circumstances change to the worse. (e. g. Amburgey, Kelly & Barnett 1993; Hannan & Freeman 1977, 1984;1989):
“....even when actors strive to cope with their environments, action may be random with respect to adaptation as long as the environments are highly uncertain or the connections between means and ends are not well understood. It is the match between action and environmental outcomes that must be random on average for selection models to apply.” (Hannan & Freeman 1989:22).

Consequently, studying organizational change mainly means: focusing on the differential birth and death rates of various organizational forms (Boone & Witteloostuijn1995).
The two perspectives can be reconciled by making use of the empirical regularity that new branches often start by a selectionist phase characterized by the rapid foundation and elimination of many small firms (“r-selection”), while more mature market niches are often occupied rather few highly experienced players which have learned to survive by coping actively with environmental problems - or simply by dominating markets (“K-selection”) (Hannan & Freeman 1977; 1992; Brittain & Freeman 1980).

Thus, in contrast to the older “contingency theory” of organizations which has given priority to the unilateral influence of the environment on intraorganizational processes and structures (Burns & Stalker 1961, Hambrick, 1983, 1985; Miller & Friesen, 1984) , newer research studies focus on more bilateral causal relationships conditioned by strategic organization action. (e. g. Swamidass / Newell 1987). More specifically: by deciding about entering new product markets, cooperating with other firms, outsourcing specific tasks, migrating to other countries, changing production technologies or modifying the skill demands of their employees, firms basically change their environments instead of adapting to given environmental conditions. The more degrees of freedom they have in making strategic choices, the more environment-structure - relationships can be reduced to insignificance.(Porter 1980; Miller 1986; 88).

There is consensus that when we see organizations adapting to their environment, this is a very complicated process influenced by many intervening factors. (Kieser & Kubiceck 1983:355). Thus, change is not happening automatically, but has to be implemented intentionally by managerial decisions and implementations. This implies that “adaptive” strategies can be objectively dysfunctional (e. g. when environmental problems and opportunities are not adequately perceived and interpreted); that they may occur as discontinuous events, with too much delay - or never at all.
Concerning the causal relationships between environmental and organizational change, it is important to notice that such change does not always take place in the form of explicitly decided and implemented measures of reorganization. Particularly when a firm is very small, change can happen without formal reorganization measures because the few employees can easily adapt on an informal level: by changing cooperation patterns, leadership procedures and communication intensities according to current needs. The larger an organization, the less it can effectively change without implementing formal measures: e.g. by hiring additional employees, by subdividing or merging subunits, redefining role duties and competences, or by switching explicitly to new “firm philosophies” and strategic goals. Thus, it is not surprising to find that smaller companies show much lower correlations between any variables of intraorganizational structure and any indicators of external performance (Pelham & Wilson 1995). [3]
Most often, adaptive processes cannot be realized fully, but only in a piecemeal fashion, because traditional habits cannot be broken and/or management lacks the will or power needed for a systematic implementation (Cooper 1996; Miller & Chen 1994). Thus, Burgelmann (1991) argues that most organizational changes are “induced” processes highly compatible with existing strategies, activities and structures; while only few of them are “autonomous” measures apt to enlarge the firm’s domain and to renew its adaptive capabilities (e. g. when it initiates new production lines or enters new markets) (Burgelmann 1991).

On a general level, reorganizational measures may be inhibited by the basic fact that organizations have a vital interest to be stable actors in order to be highly reliable to their customers and suppliers and in order make use of the cost-saving qualities of routinized procedures (Hannan & Freeman 1989:74; Boone & Witteloostuijn 1995). In addition, all change involves risks because the consequences of acting differently are more difficult to predict than consequences of keeping activities as they are. (Greve 1998). Thus, a major precondition facilitating organizational change is the capacity and motivation of a firm to tolerate risks: a variable highly dependent on subjective preferences on the one hand and objective capabilities (e. g. buffering slack resources) on the other (Miller & Chen 1994; Greve 1998).

It has also been argued that most organizations are not able to adapt optimally to their environmental circumstances because they lack sufficient knowledge about their internal capacities and shortcomings. For instance, they are not well informed about the competencies of their personnel and about the potential savings which could be realized by rational reorganization:
“To date, the development of tools for analyzing environmental opportunities and threats has proceeded much more rapidly than the development of tools for analyzing a firm's internal strengths and weaknesses.“ (Barney 1995).

The more informal and decentralized an organization, the more it is prone to experience such handicaps because informality means that little systematic information about intraorganizational structures and processes can be collected, and decentralization implies that much information remains on the level of specific subsystems, so that top managers remain insufficiently informed. Because of such shortcomings,, low potentials for rational environmental adaptation has been found in samples of Canadian day care facilities (Baum & Singh 1996) and in Californian wineries (Delacroix and Swaminathan 1991).

Finally, it has to be considered that any successful adaptation presupposes a certain pool of uncommitted “discretionary resources” which can be dedicated to the required new processes of decision-making, planning and implementation. While competitive challenges may be necessary to stimulate higher levels of performance and encompassing endeavors of adaptive reorganization, the constraints they generate for the firm should not be so heavy that organizations lose all capacities for autonomous actions. Instead, the should have the “slack” needed to conceive and try out new activities, to become temporarily absorbed by learning processes, to initiate product innovations and market campaigns which can easily fail, or to survive periods of fundamental reorganization during which much energy is absorbed by elaborating and implementing new structures and norms (Kieser/Kubicek 1983). Thus, Lawrence rightly argues that organizational learning and innovation processes will be most likely when intermediate (instead of high) levels of environmental constraints (in terms of informational uncertainties and/or resource scarcities) prevail (Lawrence 1981).

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3. The impact of competition on organizational behavior and intraorganizational characteristics

3.1. Competition as a general precondition for autoplastic adaptive behavior

The theoretical paradigm of “contingent organization” presupposes that organizations are forced (or at least: positively induced) to adapt rationally to their environment because if they don’t, they would be punished by being eliminated or at least by reduced profits and weaker chances of further growth. This “social Darwinist” view is based on the premise that there are heavy environmental constraints which cannot be eliminated by organizational action: so that organizations have to accept them as given structural conditions which limit (or even: determine) their courses of action. Of course, this condition is best fulfilled in highly competitive environments which offer no opportunities for “exit” strategies” (e. g. by getting governmental subsidies or by becoming a monopolist player.
But as decades of organizational research have shown, larger companies have often a large variety of options for alleviating competitive pressures: e.g. by mergers, informal alliances by creating interlocking directorates, joint ventures or other arrangements of interorganizational affiliation (Selznick, 1949; Thompson, 1967; Pfeffer and Salancik, 1978; Burt, 1983). On the other hand, organizations can escape by migrating to specialized niches where competition is (still) low or absent. Its has been found that small firms are often more disposed to fill such new niches because they are better able to adapt flexibly their whole internal organization (Carroll 1984; Pelham 2000). This flexibility may be seen as a functional substitute for their lower ability to cope actively with given market conditions (and even more: to their total inability to dominate existing markets).
Thus, the whole following discussion does exclusively apply to firms which are not escaping from, but actively coping with a given competitive situation: because exit options do not exist or because they are considered as more costly or risky than remaining within the existing field of competition.

3.2. The high significance of firm-specific factors

A firm’s capacity to be profitable on its product market is a result of many different causal factors, some of them associated with the structure of the whole industry, others with characteristics of the “industrial district” where the firm is located; but most of all: with the specific firm’s capabilities and resources (Marsden 1998). Empirical studies show that such particular factors on the level of the single organization (and its staff) far outweigh the influence of overall industry factors (Rumelt 1991). It has further been substantiated that from the point of view of competitiveness and profitability, the most precious assets a firm possesses are most often not its tangible resources (like land, buildings, raw materials etc.), but highly intangible external resources (like customer goodwill, patents trademarks and copyrights) on the one hand and intangible internal resources (like staff skills, management capacities and efficient forms of organizational cooperation) on the other (Marsden 1998).
While many authors stress the importance of extrinsic factors (including licenses and joint ventures) (Hamel & Prahalad 1989), others put the emphasis on the acquisition of intrinsic capacities (e .g. by collective learning) (Argyris 1994; Senge 1990). These two views may easily be reconciliated by taking time factors into account: When fundamental new action capacities have to be acquired within as very short time, there is no alternative than “buying” such capacities on external markets; when more time is available, endogenous developments (e. g. by advanced training of employees) may be more profitable and efficient (Marsden 1998).
On the other hand, a heavy reliance on external factors proves unwise when the environment is very unstable. Thus, the increase in environmental instability and volatility which has occurred in the last decades has brought a shift from external to internal assets:
“....we have the claim that changes in the business environment have rendered the positioning approach irrelevant and that the only sound basis for sustainable competitive advantage is the development and exploitation of those resources and capabilities which are, or will become, the core competences of the organization. Indeed, the claim is made that core competences are more critical than the external environment as a basis for strategy determination, because the environment is in too much of a state of change to base any strategy on it.” (Marsden 1998).

3.3. General impacts of competition on intraorganizational processes and structures

While competition has always been acknowledged in economic theory as a condition heavily determining a firm’s behavior and performances (e. g. Weiss 1963; Bain 1968), its impact on staff characteristics intraorganizational structures - a genuinely sociological issue - has long been neglected. With the exception of two early publications of Arnold Rose 1955 and Simpson & Gully (both studying voluntary associations), research on the causal correlates of competition has mainly been initiated in the 1970ies: particularly with Rushing’s comparative studies of profit and nonprofit hospitals (Rushing 1974; 1976) and Pfeffer & Leblebici’s study of small manufacturing organizations. On a most general level, it has been found that competition increases the degree to which organizations turn their attention toward their external environment (instead of focusing introvertedly on their own internal affairs). This is exemplified by the empirical study of Rushing who found that only competitive hospitals were likely to increase their medical personnel in accordance with rising numbers of patients (Rushing 1974).

As a consequence of this shift toward environmental concerns, , intraorganizational structures and processes are affected in at least four different ways:

First, by necessitating more attention to environmental circumstances, competition induces a higher degree of organizational activation.
As Arnold Rose has established in his early comparative study on voluntary associations, organizations which face external competition (or even opposition) mobilize more internal resources and maintain a higher basic level of internal communication (e. g. in terms of more frequent assemblies, board meetings etc) In particular, Rose has observed there is an increasing meeting activity on the leadership level, which may indicate the heightened need for speedy, flexible decisions. (Rose 1955), In addition, competitive associations were more likely to stabilize a high activation level by establishing a large number of paid full-time roles, while noncompetitive organizations were better able to rely exclusively on unpaid volunteers (Rose 1955). As a logical consequence, they then become more dependent on the constant inflow of money - which may again reinforce their need to fight fiercely for competitive success (e. g. for securing regular revenues by gaining and keeping a high number of paying members).

Secondly, general needs for high adaptability increase the need for basic levels of skill. High competitive intensity means that firms have to maintain high levels of generalized “adaptability”: so that they are permanently able to respond rapidly to unpredictable environmental developments and events.

While a condition of generalized insecurity may lower the need for highly specific qualifications (because these may quickly become obsolescent in a rapidly changing environment), it raises the need for employees with a rather high level of basic skills: so that they are capable of participating in advanced training courses (or of learning additional matters by themselves):
“Adaptability assumes a certain threshold of skills, underpinned by the habit of learning itself. When schools fail to foster the ability to learn, they defeat the possibility of lifelong learning. As technology and foreign competition continue to raise standards of performance and skill expected of Americans, those people without basic skills will not be able to reach even the first rung of the value ladder.” (Doyle 1990).

In concrete terms, this may imply that highly competitive firms articulate higher needs for personnel with at least a minimal skill level (e. g. basic vocational training or advanced general education), because such people are more likely to bring along such generalized abilities (and motivations) for further learning.

In a major recent empirical study including ca. 750 firms from eight European regions, it has been shown that about three out of four enterprises considered a “skilled workforce” as the most important factor for sustaining their competitive advantage (Schienstock /Kautonen / Roponen 1998). This accords with Aaker (1989) who found that reputation for quality was rated as the most important basis for competitive advantage by the managers questioned. Likewise, a comparative industrial survey in the Finnish Tampere region has clearly shown that
- firms see the skills of their employees as the most important resource enabling them to compete successfully on their markets;
- firms with higher skilled personnel were more likely to introduce process innovations as well as product innovations. [4]
In fact, the survey showed that particularly process innovations were extremely rare in firms with a low level of skills.

Generally, increased global competition seems to induce firms of all size to increase their innovativeness (e. g,. by expanding their budget in R & D). This implies a growing need for many different types of skills and qualifications: particularly for rather diffuse creative and entrepreneurial talents and social competencies (not essentially related to educational knowledge and formal degrees):
“With regard to the qualification needs we found some interesting results. For companies in the Tampere region some kind of "new thinking" associated with creativity and entrepreneurship is more important, while the improvement of professional skills is obviously seen as a less pressing problem. The need to develop the technical, international and social skills of their workforce is also stressed by companies.” [5]

Table 3.1: Percentages of firms advocating different training needs for their employees
(Finnish study in the Tampere region 1997)

Technical skills International skills Social Skills Management skills Professional skills
62% 58% 50% 43% 33% 36%

The rather informal character of these skills - as well as the increased environmental volatility which hampers forecasts and planning procedures - may be responsible for the finding that most Finnish firms rely more on “ad hoc” training procedures than on longer-term systematic courses. [7] This high importance of informal skills accords well with the notion that one of the most significant competitive assets of a firm consists in its pool of “tacit knowledge” which is not acquired by regular education (and thus cannot be important by recruiting employees with specific formal certificates and degrees).

As a general rule, the most profitable and enduring competitive advantages of a firm stem from particularistic resources which cannot be copied and transferred: so that they are not available to other firms. This is easily seen when different bases of skills and knowledge are compared. When production processes are based completely on completely explicit scientific knowledge (like chemical recipes for the production of medical dugs) or on professional skills transmitted in formal schooling, firms have no stable advantages because exactly the same competencies can be acquired by any other firms. On the other hand, there are firms which can exploit “monopolistic rents” almost forever, as they rely on implicit knowledge which remains in their “private possession” because it is transmitted only by means of informal socialization processes within the organization. (Itami 1987; Ghemawat 1991). The gains stemming from such exclusive “invisible assets” (Itami) can far outweigh the handicaps stemming from the fact that fluctuations are costly and rapid expansion of staff may be impossible because every new employee has to engage in time-consuming “learning-on-the job” processes and (informal socialization by peers) in order to master such skills

Some main consequences associated with Advanced Manufacturing technologies (AMT) seem to originate from the fact that their efficient use depends very heavily of such tacit knowledge: so that only a minority of all firms is able to exploit fully these new technological potentials:
“.....tacit knowledge becomes crucial to implementing AMT. For example, work flows and system sub-routines that have evolved to accommodate fast design/engineering changes or product modifications are likely to be firm-specific with cross-functional patterns that have become ingrained over an extended period. Successful design, placement and flow of flexible manufacturing cells, for example, are more contingent on the firm-specific work flows and organizational routines than on the advanced nature of the equipment. Procedures such as materials handling, coding schemes and the creation of component/product families in a given AMT system also represent highly tacit skills, because their use largely depends on the insight, heuristics and experience of the people involved.” (Lei/Hitt/Goldhar 1996).

Similarly, the importance of tacit knowledge rises when organization switch from highly formalized bureaucratic structures to decentralized, loosely-coupled structures, because explicit written rules and programs have to be substituted by more informal, less visible norms and procedures (Lei/Hitt/Goldhar 1996). This salience of tacit knowledge loosens the degree to which competitive success is connected to higher (formal) skill levels among employees, because even individuals without vocational education may be able to acquire it, while highly educated employees may not grasp it because they are too much oriented toward transorganizational (e. g. professional) sources of knowledge and information.

Third, decentralized decision making structures are needed in order to react to rapidly changing needs of customers and to sudden unforeseen moves of significant competing enterprises.

Thus, Moores and Duncan have found that under high competition, New Zealand firms are more profitable when their degree of centralization is low, while centralized firms work more successful in less competitive contexts. (Moores & Duncan 1989). Similar findings have been reported by Neghandi and Reimann (1972). As a possible explanation, it is argued that under high environmental pressures, highly centralized firms risk to be maladaptive, because too many tasks are delegated upwards to a permanently overloaded peak. Less decentralized firms may be better able to satisfy customers because their employees are freer to oriented their activities toward the client’s needs. In fact, only decentralized organizations may be able to institutionalize many “boundary roles” able to collect relevant information about their environment and to use this knowledge for reacting quickly to changing market conditions and their competitor’s actions.
On the other logical extreme, monopolistic firms can easily give priority to concerns of internal efficiency, because their customers cannot escape when they are dissatisfied with the quality of the products or the level of services - a phenomenon well known from the world of public administration [8]. In such cases, organizations do better to cultivate an introverted orientation: giving more priority to smooth, efficient internal functioning than to customers or other environmental sources of trouble.

By aiming to combine increased adaptiveness with high levels of system integration, “team empowerment” has the double advantage of making command chains shorter and decision processes swifter on the one hand, without creating too much individual discretion and leeway on the other. At the same time, teams are social group contexts capable of socializing employees into the company’s culture and making them acquainted with highly specific skills and practices: so that newcomer’s become swiftly assimilated “on the job”: without expensive measures of formal education and training.
“Increased control in primary work groups over purpose, context, and system dynamics increases the group members' understanding of their local business logic. This understanding increases their potential or capacity to contribute to organizational learning in the sense defined by Cole (1994), namely to identify, standardize, and diffuse best practice. Their sensitivity in perception is greater and thereby their ability to identify best practice is heightened, both in terms of the range of situations scanned and the radicalness of or deviation of perceived best practice from their own established practice.” (Adler & Docherty 1998).

Also in cases where price competition prevails, teams can be media for diffusing and institutionalizing cost-saving strategies in he whole enterprise, so that all employees become more committed to the overarching goals of increasing efficiency:
“The key to successful confrontational strategy and lean management lies in the existence of a committed, motivated, and managerially aware workforce. It is not sufficient to simply launch cost reduction programs. Without the right organizational context, these programs will not work. In Japanese firms, the workforce is usually organized into self-guided teams, or groups, and it is these teams that actually achieve the firms' cost reduction objectives. Consequently, the way in which the teams are motivated helps to determine the success of the firms' cost reduction programs.” (Cooper 1996).

Fourth, finally, it is widely acknowledged that competition increases the need for powerful mechanisms of organizational control and integration.

When firms operate in a competitive environment, they quickly learn when their organization is insufficient: when resources are wasted, when the same work is done twice because of lack of internal communication, when tasks cannot be readily completed because the contributions of different subunits are not coordinated, when buildings or machines are suboptimally used because there is no sufficient overview and planning of activities; when employees produce too little because they are not sufficiently supervised; when managers cannot solve urgent problems because they have not acquired the necessary knowledge and skills, when customers get angry because they experience poor organizational services......
All these shortcomings are costly, and they have to be minimized by means of efficient management and techniques for coordination, planning and control.
“ organization facing a highly competitive setting cannot afford to make many mistakes, nor can it be substantially less efficient than its important competitors. The greater external pressures on an organization under conditions of competition leads to a demand for even more interlocking of organizational behaviors and more coordination and control within an organization.” (Pfeffer & Leblebici 1973: 270).

Thus, Arnold Rose has found that competitive organizations show a higher tendency to formalize their structures and activities: e.g. by relying on written statutes, rules and protocols. Such formalization provides them with an easy access to intraorganizational information - which may be highly functional for optimizing coordination and for securing an efficient use of internal resources. Similarly, Rushing has found that hospitals in noncompetitive settings are much more likely to expand their activities without investing in correlative mechanisms of organizational integration (e. g. by increasing the clerical component and the administrative ratio), while competitive clinics show a clear tendency to increase complexity and integrative components at the same pace (Rushing 1976). This also accords with the findings of Lawrence and Lorsch that the most successful firms are those which combine high levels of systemic differentiation and integration (Lawrence and Lorsch 1967: 53).
These integrative needs can become so dominant that competitive organizations have to streamline their activities and to reduce the number of different subunits and roles, because the higher their internal differentiation, the higher the correlative needs for integration. Such endeavors then may easily override countervailing decentralization tendencies associated with high levels of innovation, heterogeneity and change. Thus, Pfeffer and Leblebici have empirically demonstrated that many relationships asserted by organizational “contingency theory” hold only under conditions of less intensive competition (for instance the positive impact stemming from the number of products (and product changes) on the number of organizational subunits on the decentralization of managerial competencies and on the specification of decision making procedures) (Pfeffer & Leblebici 1973). In contradiction to the propositions of Moores and Duncan (1989), this reasoning implies that when competition is intensive, centralized organizations show a better performance - even when they engage in highly variable production processes and face considerable environmental uncertainties. Of course, competitive firms too have to cope with such complexities, but they react to mainly by elaborating their hierarchy, not by decentralization:

“The tall structure, with its increased review and control of decision making, it utilized when change or heterogeneity is confronted by an organization in a competitive environment. Conversely, horizontal differentiation, or departmentalization, is employed when the organization is in a less competitive environment.” (Pfeffer & Leblebici 1973)


3.4 Price competition and quality competition: two highly divergent challenges with contradictory organizational implications

As consumers always want “the best offer for the lowest price”, firms have a certain leeway to which extent they compete by lowering the prices or by raising the quality of their products or services. (Veliyath & Fitzgerald 2000). While in most cases, a mixed strategy will prevail, price competition certainly dominates when products cannot be differentiated qualitatively (e. g. in the case of gasoline or standardized silicon chips (Marsden 1998)); and quality competition is stressed when prices are not flexible (e. g. because of interfirm cartellization or governmental regulations).

Generally, it is difficult to cope with intensive price competition and high quality competition at the same time, because these two conditions demand highly divergent measures of adaptation. Thus, price competition often forces firms to downsize in order to reduce costs at the short-term; but because dismissals most often lead to less personnel in the R & D sector, the firm’s capacities to innovate are weakened and its chances for longer-term perspectives of survival and growth may be reduced (Bruton / Keels / Shook 1996). In other cases, high price competition induces firms to substitute higher-paid skilled personnel by cheaper unskilled employees: thus reducing their general capacities to deliver high-quality products and to implement strategies of quality improvement. (Budros 1997).

Leaving aside such exogenous contingencies, it can generalized that price competition and quality competition are correlates of two diametrically opposed market structures.

a) Price competition dominates in “stable markets”: characterized by “mature”, basically invariant products and consolidated, steady consumer demands.
To the degree that the products - and/or the technologies used for fabrication - remain basically the same, market rivalry of suppliers focuses on price competition. Thus, survival and market shares become highly dependent on rationalizing processes and minimizing costs. Vice versa, high price competition imposes a need to focus on a small range of highly standardized mass products, on highly institutionalized production procedures and on consolidated, “mature” market conditions: so that all organizational processes can be streamlined in a cost-minimizing way (Hambrick 1983; Ward / Bickford / Leong 1996). Insofar as price competitors are innovative, they will focus on process rather than product innovations (Porter 1980; Miller 1986). Environmental stability is most important when the costs of expensive capital investments have to be regained.
“A cost leadership strategy works best under conditions of environmental stability in which neither customers nor competitors substantively alter their aggregate behavior. Such environmental stability serves to ameliorate the risk associated with large fixed investments in process and plant needed to sustain low unit costs with mature products.” (Ward/Bickford/ Leong 1996)

As a consequence, successful price competitors are likely to maintain rather bureaucratized structure characterized by extensive formalization and centralized decision making procedures:
“The characteristic organizational structure of cost leaders is a highly centralized machine bureaucracy, with a key role played by the technical specialists who design the manufacturing and logistic systems. Important structural decisions regarding capacity and technology are made centrally. Relatively few substantive decisions are made by lower or middle management, who are charged with following plans, maintaining the large investment in plant and equipment and running facilities to take full advantage of scale economies.” (Ward / Bickford / Leong 1996).

Given their high needs for intraorganizational stability, price competitors are more likely to search new market outlets for given production lines than to change procedures in order to keep existing markets (Ward / Bickford / Leong 1996).

b) Quality competition reigns in dynamic environments in innovative and unconsolidated markets
At the other extreme, there are highly volatile markets characterized by new products rapidly changing because of technological innovations on the one hand and constantly shifting market conditions and consumer preferences on the other. Under these conditions, competition focuses on optimizing product quality as well as the quality of customer services: goals which demand continuous efforts in environmental scanning, knowledge acquirement and technological innovation
“If management regards the environment as stable or static, attention will be highly focused on rationalization, productivity, and profitability. Within the automobile industry, this strategy is often referred to as ‘Fordism.’If management regards the environment as characterized by change and turbulence, it will give high priority to competence development and the abilities to adjust, develop, and innovate. Within the automobile industry this strategy is often referred to as ‘Toyotism’."(Adler/Docherty 1998).

Given two firms facing the same current market conditions, they can nevertheless follow divergent strategies according to their horizons of time. The short-term oriented firm A will prefer price competition for optimizing its sales in the face of current competitors and for maximizing this year’s profit; while firm B will prefer product development and innovation in order to conquer additional markets and/or to remain competitive in the middle- and longer-term future (Howard 1990).


3.5 The highly divergent behavioral consequences of price and quality competition for the coping firms

On a most general level, price competition and quality competition diverge highly in the degree of specificity of the adaptation problems to which they give rise.
For economic enterprises of any kind, price competition may generate extreme worries, but it is always a precisely defined problem apt to evoke rationally designed coping strategies: First of all, the problem itself can easily be identified in objective measurable terms: there are competitors trying to produce the same product with less costs and sell it more cheaply. Secondly, there is a highly consensual, determinate way how the problem shall be solved: (reduction of costs) And thirdly, coping strategies can be rationally chosen because (a) it is often known ex ante that certain measures are apt to reduce costs and/or (b) when a measure is taken, its effect on costs and prices can quickly be assessed.
When competition is about “quality” (of products or services), the situation is usually much more diffuse. First, ‘higher quality” is an unprecise multidimensional concept; it’s real meaning is not objectively defined, but depends on the perceptions and evaluation of the customers. (Sherman 1992; Cooper 1996; Veliyath/Fitzgerald 2000). Secondly, it is not very clear in which way the problem shall be solved: there are innumerable steps to be taken to change products and services: e.g. to shorten the delays in shipping, to increase the spectrum of available variants, to lengthen the lifetime of products, to establish better support line etc. - and nobody can know exactly how investments in these different aspects will pay out. And third, the causal effects of the measures taken cannot be easily assessed. For instance, when improved products are better sold, this may be caused by a series of intermingled factors (e. g. because in the meantime, the brand has become more popular or the customer preferences have changed....).

If measurements are possible at all, unrealistically high investments in technology, organization and personnel have to made in order to establish the necessary procedures:

“....increased resources are necessary to measure the quality of output or the performance of agents. Sorting, grading, labeling, trade marks, warranties, licensing, time and motion studies and a variety of other techniques to measure the performance of agents are all, albeit costly and imperfect, devices to measure the characteristics of goods and services and the performance of agents. Despite the existence of such devices the dissipation of income is evident all around us in the difficulty of measuring the quality of automobile repairs, in evaluating the safety characteristics of products and the quality of medical services, or in measuring educational output. The problems of evaluating performance are even more acute in hierarchies because of the difficulties of achieving low cost measurement of the multiple dimensions of an agent's performance.” (North 1996)


3.6 The broadened scope of quality competition

The high prevalence of quality competition is illustrated by a transnational company survey encompassing eight European regions, where Schienstock et. al have found that “high product quality” was the foremost factor to which most firms attributed their advantage in competing with rival enterprises (Schienstock/Kautonen/Roponen 1998). Similarly, Chaston and Mangles (1997) have found that the most important influences on performance included optimization of employee productivity, development of new products, investments in continuous improvements of product quality and measurement of customer quality expectations. But the term “quality” has assumed a much broadened meaning than in the past. While in traditional industrial competition, the term referred almost exclusively to intrinsic attributes of the physical product (e. g. its durability, its precise and reliable functioning etc.), it now tends to encompass all stages of a firms activity: from the criteria applied in the choice of raw materials and production procedures (e. g. ecological considerations) right to the support services offered after customers have bought it and set it in operation. The raising salience of post-selling quality performance has been illustrated by the aforementioned comparative study which has found that about 40% of all firms defined “after sales services” as their essential competitive advantage. (Schienstock/Kautonen/Roponen 1998).


3.7 The new ubiquity of price competition

When trade relations become global, price competition becomes more ubiquitous because local and regional protection break down. In particular, most firms from highly developed countries like Switzerland are increasingly challenged by cheaper competitors from low-wage countries. In the past, many Swiss firms could reduce competitiveness by producing high quality products, because no other firms in other countries were able to reach the same levels. In fact, the label “Swiss Made” was a long time sufficient to provide the reputation of high quality - a collective reputation from which all singular branches and companies could profit without having to generate and their own individual reputation. Thus, the rather high competitive success of many Swiss firms in foreign markets may at least partially be attributed to the “structural competitiveness” of Switzerland as an “industrial district”: i.- e. as a territory endowed with many advantageous traits vis-à-vis other geographical regions. [9]
In the last decades, more and more firms from more and more countries acquired such capacities, and given the lower level of wages in most world regions, many of them are no better disposed to keep selling prices low. As a consequences, most firms have recently experienced an environmental change in a way that they are now forced to cope with intensive quality and price competition at the same time. This trend has also been substantiated in the Finnish Tampere region:

“Companies in the Tampere region concentrate on high quality niche markets in the first place. They see quality and time of delivery as their competitive advantage. These niche markets, however, do not present a safe segment any longer. More companies from all over the world have learned to produce high quality. What is now needed is to produce high quality and user-friendly products at a reasonable price and to deliver them on time.” [10]

In order to escape the cumulative pressures of quality and price competition, firms are forced to outperform competitors in other respects: by being quicker than other in introducing new products or by being more flexible to react to changed customers needs:

“Nowadays companies from all over the world can manufacture products of high quality at low costs, sell them for a reasonable price and deliver them within a short time period. Success within the global market mainly depends on the capability of companies to rapidly and continuously produce new products and services; innovativeness is the number one factor in global competition.” (Schienstock/Kautonen/Roponen1998).


3.8 Some factors influencing a firm’s capacity to cope with intensive competition

3.8.1 Firm size

Since the time of Karl Marx, it is common wisdom that the evolution of private capitalism tends to produce larger enterprises, because big firms are better able to survive in economic competition. Within the Fordist paradigm of industrial organization, this relationship has primarily been elaborated with respect to price competition. Thus, it has been argued that for many different reasons; larger firms are better able to minimize costs by realizing of “economies of scale”: e. g. because they can exercise monopsonic power on suppliers or because they are better able to make use of highly routinized mass production technologies (which result in an downgrading of required skills). More recently, it has been observed that larger firms have a similar edge in exploiting “economies of scope”: associated with the basic fact when producing good A, a firm may have lower costs of producing related goods B,C,D.

For the case of quality competition instead, contradictory theoretical argumentations have been proposed. On the one hand, Piore and Sable have asserted that small firms practicing craft-like production styles are better able to cope with the newer trends towards customized high-quality products, because they have more flexibility to adjust outputs (quantitatively and qualitatively) to such new demands (Piore & Sabel 1984). On the other hand, it is also widely acknowledged that larger firms have higher capacities to develop large amounts of specialized knowledge and skills, and to maintain collaborative relationships with universities or other innovation-oriented institutions (Schienstock/Kautonen/Loponen 1998). In addition, they can engage in risky innovative endeavors with less fears because conventional procedures can be maintained at the same time (within other subunits of the same organization).
“....larger organizations, although less likely to attempt core changes in the first place, are less likely to die during a core change attempt. Largeness can buffer organizations from the disruptive effects of core change by helping, for example, to maintain both old and new ways of doing things during the transition or to overcome short-term deprivations and competitive challenges that accompany the change attempt.” (Baum & Singh 1996).

Empirically, various studies have shown that larger companies are more likely to innovate, Thus,. The Finnish study in the Tampere region has shown that firms above 200 employees are much more prone to innovate by introducing new products as well as new production procedures). [11]  On the other hand, larger firms are often characterized by traditional Taylorist structures which go along with a high percentage of unskilled labour - a factor hampering innovativeness in many respects (Schienstock/Kautonen/Roponen 1998). Thus, it has been observed that while large firms cultivate develop and maintain highest expertise and skills in most areas, they are often not capable of exploiting it fully for their own purposes. Instead, many experts - frustrated by lacking opportunities to realize their ideas and be promoted - leave the firm in order to found new “spin-off” enterprises. These small new firms then are often developing and licensing innovations (which then might be bought back later by the larger firms) (Brittain & Freeman 1980). Additionally, several empirical studies have shown that while larger firm may be more capable of providing the capital and human resources necessary for improvements or innovations, they are often heavily handicapped by rigid internal structures and a tendency to focus more on internal than on environmental matters. Thus, larger firms have been found to maintain a lower degree of market orientation and to show signs of complacency and inertia which makes them unfit for risky measures of change (March 1981; Aldrich & Auster 1986; Hitt et. Al. 1990). Their mere structural complexity leads to reduced capacities for information processing and slower speed in executing formally decided measures and plans (Galbraith 1977; Pelham 2000).  By contrast, smaller firms can be expected to react more flexibly to environmental stimuli of any kind, because more employees occupy boundary roles [12], because their structures are less bureaucratized and their communication systems less complicated (Katz 1970; Feigenbaum & Karnani 1991 etc.):
“Small is beautiful. It is much easier for the new venture founder to attend to the myriad of details in running a totally competitive business unit as long as it is still small with only a handful of employees. Perhaps, one of the reasons new ventures are able to blossom early, is the fact that the very nature of their smallness permits adaptability and rapid response.” (Slevin & Covin 1995).

Consequently,  while larger firms may draw more advantages from their institutional embedments and their capacity to control salient environmental factors, such advantages may be more than offset by their smaller capacity to maintain intensive environmental relations:
”Although large firms can dominate commodity markets based on cost or financial advantages, larger industrial manufacturing concerns may be at a disadvantage, compared to smaller firms, in their ability to learn from their market environment due to lessened contact between senior managers and customers as well as customer contact personnel. This lessened level of contact can lead to internally focused operations and production/technical orientations that may fail to adjust to changing market conditions. This internal focus, combined with significant sunk costs and bureaucratic inertia, could render large firms more vulnerable to changing industry conditions because of the difficulty they have modifying strategy.” (Pelham 2000).

This reasoning also implies that size is an intervening variable moderating the relationship between firm strategies and achieved performance. Thus, when a small firm focuses on a market-oriented strategy, it is more likely to gain significant competitive advantages than a bigger firm, because it is better able to adjust its whole internal organization to the external strategic needs (Pelham 2000).
“ orientation may provide small firms with a potential competitive advantage over larger firms where layers of management and bureaucracy make understanding customers more difficult and also increases the difficulty of promoting a cohesive customer-oriented culture.” (Pelham 2000).

Many larger firms try to exploit such advantages by segmenting themselves into smaller divisions, thus combining the functional advantages of smallness and bigness at the same time:
“The creation of small profit centers reduces the growth of organizational bureaucracy yet allows the firm to respond quickly to changes in the competitive environment. Firms that have adopted the confrontation strategy cannot afford either the extra costs of unnecessary bureaucracy or he slowing of the firm's reflexes that such a bureaucracy causes. By keeping the effective firm size small, empire building becomes almost impossible, and a firm can maintain its ability to adapt quickly to changes n competitive conditions.” (Cooper 1996).

Finally, it has to be considered that quality competition offers to many small firms excellent chances for survival and growth which are less available to larger enterprises. Many firms try to reduce competitive pressures by migrating to less contested niches. They typically do this by developing and producing highly specific products addressed to highly specified customer segments. The smaller the firm, the more probable that it finds such a highly specific small niche which offers a sufficiently large and stable base of subsistence. The bigger firms need larger markets which are less likely to be uncontested (or to compete simultaneously in different market niches which are unlikely to be all equally uncontested). Niche specialization means that a firm tries to exploit quasi-monopolistic rents by conquering a leader position within a narrowly defined field. This usually implies that it commits all resources to raise the quality standard of its production and products by optimizing its technology and organization and by internalizing highly professional skills.

“The niche differentiator often requires a more highly skilled workforce than others in its industry. This is particularly true of the niche quality differentiator, which often counts on production people to have the know-how to build a high quality product in the absence of formal process controls used in high volume settings. Although various mechanisms are available to achieve quality, total quality management (TQM) programs are currently favored by a wide spectrum of firms, including niche manufacturers.” (Ward/Bickford/Leong 1996)

3.8.2 Expanding or shrinking markets

For three different reasons, firms operating on expanding markets are better able to react rationally to competitive challenges and to implement successful adaptive change.
1) When niches contract, innovative behavior is hampered by the prospective than whenever it fails, the organization risks to be wiped out completely. On the other hand, expanding markets provide “buffers” because even when experimental new procedures turn out bad, the mere market expansion makes it probable that the company still can still survive. Corroborating this hypothesis, Baum & Singh (1996) have found that competing Day care and nursery schools were more successful in environmental adaptation under expansive than under contractive conditions.
2) During phases of growth, organizations are usually quite free to enlarge existing and/or build new structures and the recruit additional personnel in strict accordance with their changing needs. In addition, expanding firms have also better chances to upgrade their skills by hiring highly qualified employees, because they can offer secure jobs and promising careers (Russell 1997). And finally, their employees may be better motivated to engage in advanced training because given their long-term employment, they can reasonably expect that such investments will pay out. During periods of decline and contraction however, adaptations are hampered by factors of many sorts: e g. by ossified habits and traditions, by lacking flexibility of leadership, by legal norms inhibiting the dismissal of employees, by poor opportunities to hire qualified personnel etc. Thus, Freeman and Hannan have found that expanding schools enlarge their administrative component quite in pace with their growing absolute size, while shrinking schools tend to keep their clerical apparatus too large (Freeman / Hannan 1975; Pfeffer 1978).
3) Growing markets allow for more specialization. When firms are operating in expanding environments, they have better chances to survive in highly specialized niches, because it is more likely that such specialized niches are also submitted to growth (Romanelli 1989). Thus, they are better equipped to commit their resources irreversibly to highly specified purposes: so that they can maximize their efficiency in a way compatible with very intensive price competition. On the other hand, they are also well able to survive when they sacrifice efficiency for remaining more flexible and innovative, because when markets expand, inefficiencies are not punished so harshly as in shrinking environments (Romanelli 1989). Thus, they have more leeway to follow very different strategies, so that they will develop highly divergent procedures and organizational forms (=high statistical dispersion).  In shrinking markets, by contrast, firms do better to keep their resources in a more liquid, reversible condition, because they may face the contingency of having to give up their traditional product lines altogether and to switch to completely new product lines (and corresponding markets). But exactly this strategy may be blocked because price competition is so high that firms have to be completely committed to highly routinized, efficiency-oriented procedures.

Finally, it has also been observed that expansion and contracting processes have highly divergent influences on the average level of skills.  When firms have to downsize their staff because they are competing with little success (and/or within shrinking markets), they may still be forced to upgrade the skill the level of their labor force (either by selectively dismiss unskilled personnel or by substituting less skilled by more educated employees). The reason is that the total variety of organizational tasks has to be allocated to fewer heads, so that each average worker has to be able to cope with a larger variety of different tasks. Consequently it is more likely that any role also entail more complex problems which necessitate to hire workers with a higher basic level of knowledge and skills. In a Canadian case study conducted by Bob Russell, this increased role polyvalence has been found to be the major factor for higher skill demands in reorganizing firms (Russell 1997). Thus, when firms switching to lean production procedures may need higher skills, this may not be primarily caused by increased task complexity and higher qualifications demanded for functioning in “empowered teams”. Instead the more trivial reason may lie in the “horizontal expansion of jobs” (each comprising a larger spectrum of rather undemanding single tasks) (Russell 1997). Expanding markets instead provide optimal opportunities for implementing standardized procedures and for buying capital-intensive mass production technologies - so that roles can be more specialized and taylorized and a shift toward lower skilled personnel may be observed.


3.8.3 Age of the Organization

For two reasons, it may be expected that older organizations are less likely to react adaptively to competition. On the one hand, older organizations are more likely to have highly consolidated and rigidified structures, so that they are less disposed to react to any external stimuli with internal change and innovative procedures (Hannan, Freeman 1984; Davis & Stout 1992). Miller argues that as organizations age, their very early success makes them assume more simple structural forms which may diminish their capacities for future adaptive change:

“....a troublesome paradox exists: the sources of dangerous simplicity may underlie initial success and, thus, may be doubly difficult to combat. Indeed, it is very hard to distinguish between the concentration and passionate dedication so necessary for success and competitive advantage and the simplistic fixations and extremes that lead to failure.” (Miller 1993: 119):

Thus, Baum and Singh have found in their comparative study of day care facilities that older organizations were more likely to experience disruption when their markets niches changes (Baum & Singh 1996).

Secondly, older organizations are less likely to succumb because they enjoy higher “social legitimation” (Hannan & Carroll 1992) and because they are more integrated into supporting institutional environments. For instance, they are more likely to enjoy a high public reputation, to be supported by highly loyal employees, to profit from a high status among customers; to be embedded in supportive elite networks, to enjoy the help of public agencies, to have a high standing on the labour market, and to get bank credits when needed. (DiMaggio & Powell, 1983; Mintz & Schwartz, 1985; Podolny, 1993; Barnett 1997). As a consequence, social Darwinist selection processes in economic markets don’t guarantee the “survival of the fittest”, because with increasing age, survivors are increasingly protected from direct impacts of environmental competitive pressures.

“The net result is that the strong-survivor hypothesis is self-defeating. Environmental selection increases competitiveness, but by increasing concentration, it triggers the rise of large, impervious, but increasingly impotent organizations.” Barnett 1997).

Thus, many older firms tend to become overstaffed without being punished immediately for these inefficiencies. This is seen in the regularity that many of them have to regain their competitive capacities by downsizing when environmental competition pressures suddenly increase (Budros 1997). Even younger organizations may share competitive weaknesses when they are “spin off’s” of older firms: because they are likely to have “inherited” their mother’s shortcomings (Barnett 1997). Empirical studies indicate that the increasing survival chances associated with higher age accrue disproportionately to larger organizations. In fact, smaller firms seem to suffer from a “liability of obsolescence” which leads to increasing risks of mortality over time (Ranger-Moore, 1991; Barron/West/Hannah, 1994; Baum, 1996).

Table of Contents

4. Methodology and Data Sources

4.1 The sample and the two Surveys

The data used in the following empirical analyses stem from two surveys conducted in 1996 and 1998 by the Economic Department of the Federal Technical University in Zurich (Switzerland), both of them comprising several thousand private enterprises of the industrial and the tertiary sector.
The aim of the first survey (in spring 1996) was to collect information about the firm’s market conditions on the one hand and their innovative behavior strategies on the other. Based on the Federal census of economic enterprises of 1991, a sample of 5377 businesses (stratified according to branches and size categories) was selected, of which 1748 firms (=32.5) have returned the filled-out questionnaire.
The second survey (in spring 1998) has focused on the composition of the firm’s work force and skill requirements and their activities in the realm of primary as well as advanced vocational education. It comprised a revised and enlarged sample constituted on the basis of the Swiss Federal business census of 1995. The questionnaire was sent to the personnel managers of 7170 enterprises, and the return rate was 30% (=2132 cases).
As a consequence of the rather low return rates on the one hand and the diverging composition of the two survey samples on the other, only 885 companies have participated in both surveys. They constitute the final sample on which the following statistical analyses are based. Control tests indicate that the composition of this sample does not deviate heavily from the original stratified sample: which means that it comprises a rather equilibrated collection of businesses from 28 different economic branches - and in each of those firms of very different size (Table 4.1).

Table 4.1: Frequency distribution of firms in the total sample: according to size categories and economic sectors
Economic sector:

 Size of the firm

30 or less 30- 200 201 or more Total
Industry/Construction 233 246 79 558
Services 183 106 38 327
Total 216 352 118 885


4.2 Operationalizing the intensity of competition

In the first survey conducted in 1996, the informants were asked to give a judgment on the intensity of competition the firm currently faces on its sales markets:
(a) in there realm of prices
(b) in the realm of non-price aspects (=quality standards of products, services or technological factors).
On both dimensions, informants had to choose a scale value ranging from 1 (very low) to 5 (very high). While all the firms were able to locate themselves on the price competition scale, forty of them (=4.5%) didn’t give a judgment about the degree of non-price competition.
As shown in Table 4.2, the distribution of the firms is highly skewed toward higher levels of competitive intensity, particularly in the realm of prices.

Table 4.2: Frequency distribution of firms on the two scales of “intensity of competition” (percentage values)

Value on the “intensity of competition”-scale

1 2 3 4 5  
Price Competition 3.0
Quality competition 5.1


4.3 On the measurement of the dependent variables

In the second survey conducted in 1998, informants were asked to indicate the firm’s size of staff on five levels of occupational qualification:
1) employees full academic degrees;
2) employees with advanced vocational diplomas or certificates officially acknowledged by the federal government (e. g. diplomas in accounting, engineering, marketing etc.);
3) employees who have finished an ordinary vocational education (an apprenticeship usually taking three or four years);
4) unskilled or semi-skilled personnel (without any formal vocational degrees);
5) personnel enrolled in apprenticeship or other training programs.

In addition, they were asked whether the firm had the intention to increase, maintain or decrease the number of personnel in these same five categories (within the following two years: 1988-99). These data are only available for a reduced sample, because various managers (particularly of larger enterprises) were not able to provide precise figures, and even more of them were uncertain about the firm’s future employment perspectives.
When overall percentages are calculated, it is seen that almost half of all employees are located on the apprenticeship level, while more than 30% are unskilled and less than one out of six has acquired any higher educational degrees Table 4.3). This distribution is a characteristic outcome of the Swiss “dualistic” system of primary vocational education which is based on a mix between practical in-house training and theoretical education in external vocational institutions (Geser 1999).

Table 4.3: Staff on different skill levels: current percentage figures and direction of envisaged future change.
Level of education: Percentage of current staff (N= )

Envisaged change in the coming two years (% of firms)

expansion stagnation shrinkage
Academic degrees 4.88 (800) 19.8 76.9 3.4 (618)
Advanced vocational degrees 11.80 (800) 36.6 61.2 2.2 (725)
Apprenticeship 45.54 (801) 39.2 54.7 6.1 (786)
Unskilled 31.51 (799) 12.1 49.3 38.5 (687)
Trainees, Apprentices 6.69 (801) 15.9 76.6 7.5 (624)

In addition, the prevalence of formal advanced training was measured by asking respondents (a) whether the firm made use of internal or external programs for advanced vocational training, and  (b) how many employees were enrolled in such courses. It was found that 71% of all firms made use of internal programs and 53% of external educational institutions (and 40% of both). Among all the firms which made use of any formal mode of advanced training, the average enrollment rate was 39%. In order to grasp the level of informal on-the-job training (as an indicator of job complexity), informants were asked how much time new incumbents of operative production roles usually needed to get fully skilled in their respective job, and whether this introductory time has recently increased, decreased or remained on the same level. The time indicated ranged from one day to two years, with an arithmetic mean of 68.5 and a median of 40 days. Most respondents held that this initial training period has recently increased (42%) or at least remained on the same level (51%). Finally, we wanted to know which skills were considered to be “essential” or at least “important” for average incumbents of operative roles.

Table 4.4: Importance given to various skills for ordinary operative workers
in the production department (Percentages of firms)

Type of skill:

Degree of importance

Absolutely essential Very important Important Rather unimportant Completely unimportant (N=)
General education 2 13 51 28 5 (792)
Foreign Languages 7 14 24 40 17 (771)
Computer skills 12 17 35 25 11 (765)
Vocational knowledge and skills 26 45 23 6 1 (783)
Longer-term work experience 13 43 37 7 0 (805)
Manual dexterity 18 36 30 14 2 (771)
Planning and organization skills 6 25 49 16 4 (808)
Communicative skills 19 45 33 3 1 (826)
Skills to cope with conflicts 9 36 44 9 1 815)
Creativity, innovativeness 8 31 43 17 1 (815)
Autonomy, self-guidance 23 52 23 2 0 (840)
Flexibility 26 47 25 2 0 (823)


Evidently there are two very different categories of highly essential skills: one centering on specialized vocational knowledge, and the other clustering around highly informal “key qualifications” (Schlüsselqualifikationen) related to personal action capacities (flexibility and autonomy) on the one hand and to social competencies (particularly communicative skills) on the other (Table 4.4).

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[1] For a discussion of the relationship between market contraction and competitive intensity, see: Gimeno et. al. 1997).

[2]In their book publication “Organizational Ecology of 1989, Hannan Freeman have summarized the results of 15 years of empirical research.

[3] This also accords with the early finding of Simpson & Gully that only larger voluntary associations show high correlations between the complexity of external pressures and various aspects of intraorganizational structure (e. g. decentralization, membership involvement and the intensity of internal communication).

[4]“Main findings from the firm survey of the Regis project. Regional Innovation Systems: Designing for the future”.

[5] Dito.
[6] Dito.
[7] Dito.
[8] See for instance Mohr 1971 who has substantiated this lack of adaptive motivation in the case of public health agencies.
[9] For a discussion of the “industrial district” theory see Sabel et. al. 1987; Pyke and Sengenberger 1994; Schienstock et. al. 1998.
[10]“Main findings from the firm survey of the Regis project. Regional Innovation Systems: Designing for the future”.
[11] "Main findings from the firm survey of the Regis project: "Regional Innovation Systems: Designing for the future.” 1997. For similar relationships in other European regions, see Schienstock/Kautonen/Roponen 1998).
[12] This is an implication of Peter Blaus axiomatic theory which states that the larger a system (of any kind), the smaller its periphery in relationship to its total size. (Blau 1977: 19ff).
Last update: 02.07.2014
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