Small is beautiful? Organizational identity and growth rates in a partitioned market.

TL;DR: In this paper, the authors argue that the demise of regional utilities contributed to sharpen the identity of municipal utilities as oppositional identities to that of national-wide utilities, ultimately creating durable boundaries among forms.

Abstract: The present paper aims at contributing to the discussion on the determinants of organizational diversity by illustrating the process of identity-based resource partitioning observed in the German electricity market after deregulation from 2001 to 2008. We contend that the demise of regional utilities contributed to sharpen the identity of municipal utilities as oppositional identities to that of nation-wide utilities, ultimately creating durable boundaries among forms. Identity-based partitioning however heterogeneously affected the growth of municipal utilities due to the substantial differences in terms of strategies and endowments such firms. The potential ramifications of peripheral firms’ success on the distinctiveness of their collective identity and, thus, for the durability of diversity are discussed.

Summary

Introduction

• The study of the evolution of organizational diversity is central to a broad range of research streams such as industrial organization (Tirole, 1988), strategic management (Porter, 1980), institutional theory (DiMaggio and Powell, 1983) and organizational ecology (Hannan and Freeman, 1977).
• The authors aim at contributing to this stream of research by discussing the forces that may challenge or, conversely, prolong the durability of resource partitioning within a market.
• As identities of peripheral producers are often rooted into size differences compared to market leaders, the authors will focus on firm growth rates.
• Because a mixed method -- i.e., qualitative and quantitative - - is employed to explore their research questions, the next section is meant to introduce the reader to the empirical context under investigation.

The Empirical Setting

• The German electricity retail market after deregulation offers an excellent context to study the effects of competitive release and organizational identities on market partitioning.
• By providing these services, local authorities acted in the interests of "the common good of the local community" (Wollmann, 2002).
• Before the deregulation, around 900 electricity suppliers served German end customers including industrial, commercial and household customers in their respective monopoly regions (Die Welt, 1998).
• In 1997, eight utilities (the “Big Eight”) operated at the supra-regional level and around 80 companies operated at the regional level.
• The renaissance of the MUs is also discussed in the mass media (e.g. Financial Times Deutschland, 2008; Frankfurter Rundschau, 2009; Die Tageszeitung, 2010).

Theory and Hypotheses

• In developing their hypotheses, along with the theoretical arguments the authors will make use of the qualitative data obtained from four main sources.
• (iii) Reports based on BDEW customer surveys (BDEW household customer survey, 1999-2009; BDEW commercial customer survey 2000-2009): funded by BDEW and conducted by PROMIT Institut fuer Prognose, Marktforschung & Informationstechniken with a sample size of 1200 household customers and 1040 commercial customers from 13 business areas.
• (iv) 11 semi-structured in-depth interviews the authors have conducted between 2008 and 2010, each lasting 1 to 2 hours.

Competitive Release

• Recent theoretical developments (Hannan et al., 2007; Polos et al., 2010) emphasize competitive release as the key trigger of resource partitioning.
• According to ifm study (ifm 2006), customers perceive the identities of the NWUs and their “own municipal utilities” as distinct and oppositional.
• The MU Wedel matched its image with one of its newly gained customersFC St. Pauli, a local soccer club – i.e., “Just like the authors as a small local company, the club also has to fight with passion and creativity against the big players with a lot money… a Davidagainst-Goliath-situation”, as the CEO put it.
• Building on the arguments and evidence presented, the authors propose an hypothesis which juxtaposes the growth rates of peripheral and center organizations triggered under competitive release.

Beyond Homogeneous Peripheries: Variations of Intrinsic Appeal and Engagement

• In the former section, the authors followed the spirit of traditional resource partitioning studies, which mostly concentrate on prototypical – i.e., average -- peripheral firms.
• The primary focus of resource partitioning.the authors.
• More specifically, the authors challenge the average effect of resource partitioning along two dimensions: identity matching remains contingent on the fitness (i.e., intrinsic appeal) to audience preferences; and the intensity of the engagement with the claimed identity varies across firms as well.
• The authors challenge this assumption pointing to the differences in the intrinsic appeal of MUs across geographical communities (H2).
• Moreover, by taking a closer look on firm level actions (i.e., engagement), the authors will reflect upon the effects of engagement on organizational viability (H3).

Variations in Identity Matching: Intrinsic Appeal

• The matching to audience tastes or characteristics may be defined in terms of intrinsic appeal (as inferred from an audience member’s social position, see McPherson 1983).
• Audience preferences can be segmented along multiple dimensions.
• According to qualitative evidence and to a recent survey (TNS Emnid, 2009), localness and environmental friendliness became the two defining features of the MU identity.
• The factual high percentage of electricity generated by their coal plants and especially nuclear power plants have made their claims anything but authentic and the NWUs are duly called “nuclear utilities” (e.g. Der Spiegel, 2002; Financial Times Deutschland, 2010).

Variations in Identity Claims: Engagement

• Peripheral organizations vary also along the intensity of the identity claims made (see Carroll and Swaminathan, 2000).
• Engagement activities aimed at developing and displaying credible signals of authenticity and commitments towards the claimed identities are especially rewarded (see Carroll and Swaminathan, 2000; Baron, 2004; Hsu and Hannan, 2005; Hannan et al., 2007).
• As market concentration increased, the Big Four emerges as the prominent enemies and substantial threat to the MUs.
• Due to their prominent position in the retail market, NWUs have attempted to lure the MUs to “cooperate” with them.

Interaction between Intrinsic Appeal and Engagement

• While the credibility of an MU identity claim and its matching to local preferences may act independently in increasing the growth rates of MUs (see H2 and H3), it seems intuitive to think that the co-existence of these two conditions further amplifies the benefits gathered by MUs.
• In a similar vein, intrinsic appeal should amplify the effect of engagement on fitness.
• Better fit with local tastes will obviously make a credible identity claim appear more authentic and more convincing.
• Nonetheless, the lack of intrinsic appeal of their identity in the eyes of local audience members reduces significantly the returns from fitness.
• Therefore, the authors propose the following hypothesis:.

Data Source

• To test their hypotheses, the authors have collected various datasets.
• The authors chose to focus on the household customer segment because they expect the hypothesized effects to be stronger among household customers rather than, e.g., large industrial firms.
• The data were primarily obtained from the BDEW annual data publication (BDEW Jahresdaten der Stromversorger 2001-2008).
• As the umbrella trade association for the German electricity and 3 Covering the industry from 1998 – i.e., the year in which the deregulation started -- is not possible for two reasons: first, there existed no data for 1999 and 2000; second, although the authors have sales data for 1998, the categorization of end customers was different.
• The information gathered from the home pages of MUs and from various cooperation groups, as well as from German national and local newspaper articles using LexisNexis, served to double-checked and complement the data collected.

Variables

• The authors dependent variable is organizational growth.
• To proxy Localness, the authors employed the voter turnout in county elections (for a discussion see the validity issues section).
• Cooperation activities of collective purchasing and trading were thus labelled Economic Engagement.
• The nationwide firms with large-scale power plants generated electricity and sold it to the regional utilities; regional utilities then distributed it to municipal utilities which then sell to end customers (FES 1991, Brandt 2006, Krisp 2007).
• The authors log-transformed the control variables except the two density ones to reduce the skewness of their distributions.

Model Specification

• One of the most commonly used growth models is the one proposed by Gibrat, which assumes size-independent growth (but see Barnett and Carroll, 1987; Barron, West & Hannan, 1995).
• By transforming the equation into its natural logarithm, the authors obtain the following log- linear model which can be estimated using linear regression: ( ) ( ).
• The authors use least square dummy variable regression models which include a dummy variable for each firm to isolate unobserved differences across firms (see also Sorensen, 1999; Greve, 2008).
• Similarly, the authors also added dummy variables at the county level to control the unobserved heterogeneity across communities.
• Since the test of the first hypothesis employs a time-constant covariate (i.e., the MU dummy), random effects estimates are reported.

Results

• Table 3 provides the results obtained when testing Hypothesis 1.
• Model 2 tests Hypothesis 2 concerning the impact of intrinsic appeal (i.e., matching) on the growth rates of MUs.
• It has been argued that firm growth rates decrease with age (Harrison, 2004).

Discussion and Conclusions

• Drawing inspiration from the limitations of existing research on resource partitioning (Carroll, 1985; Carroll and Swaminathan, 2000) and by relying on recent developments in organization ecology (Hannan et al., 2007), the authors aimed at improving their understanding of the processes of identity-based partitioning by focusing on organizational growth rates.
• The beneficial effect of competitive release is not uniform across peripheral organizations due to their heterogeneity in terms of identity claims and of matching to local preferences: peripheral producers that enjoyed a greater match between their identity and local preferences grew faster.
• As a consequence of the emergence of separate and oppositional identities, meaningful boundaries between center and peripheral forms get established.
• The theoretical model of Polos and colleagues focuses mainly on the audience side effect of competitive release, namely the matching part of their model.

Figures

TABLE 2 Bivariate Correlations

TABLE 6 Additional Analysis 1. Least Square Dummy Variables Models of Growth Rates of the MUs, 2001-2008 (Using an Alternative Measure of Localness)

TABLE 1 Descriptive Statistics

TABLE 5 Least Square Dummy Variable Models of Growth Rates of the MUs, 2001-2008

TABLE 4 Least Square Dummy Variables Models of Growth Rates of the MUs, 2001-2008 (Size in Household Customer Segment)

TABLE 9 Additional Analysis 4. Least Square Dummy Variable Models of Growth Rates of the NWUs and MUs, 2001-2008 (Size in Industrial and Commercial Customer Segment)

TABLE 8 Additional Analysis 3. Fixed Effects Models of Growth Rates of the NWUs and MUs, 2001-2008 (Robustness Check for H2 to H4)

TABLE 3 Random Effect Models of Growth Rates of NWUs and MUs, 2001-2008

FIGURE 1: The NWUs representing the confusing market (left side) and the “own municipal utilities” (right side) (Source: ifm 2006)

FIGURE 2. The oppositional images of MUs and private utilities (Source: TNS Emnid survey 2009)

TABLE 7 Additional Analysis 2. GEE Models of Growth Rates of the NWUs and MUs, 2001- 2008 (Robustness Check for H1)

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1
Small is beautiful? Organizational Identity and
Growth Rates in a Partitioned Market
Min Liu
Filippo Carlo Wezel
Durham University Business School
Ushaw College
DH7 9RH
Durham, United Kingdom
University of Lugano
Faculty of Economics
Via Giuseppe Buffi, 13
CH-6904 Lugano, Switzerland
min.liu@durham.ac.uk
wezelf@usi.ch
Version
June 2012

2
Small is beautiful? Organizational Identity and
Growth Rates in a Partitioned Market
Abstract
The present paper aims at contributing to the discussion on the determinants of organizational
diversity by illustrating the process of identity-based resource partitioning observed in the
German electricity market after deregulation from 2001 to 2008. We contend that the demise
of regional utilities contributed to sharpen the identity of municipal utilities as oppositional
identities to that of nation-wide utilities, ultimately creating durable boundaries among forms.
Identity-based partitioning however heterogeneously affected the growth of municipal
utilities due to the substantial differences in terms of strategies and endowments such firms.
The potential ramifications of peripheral firms’ success on the distinctiveness of their
collective identity and, thus, for the durability of diversity are discussed.

3
Introduction
The study of the evolution of organizational diversity is central to a broad range of
research streams such as industrial organization (Tirole, 1988), strategic management (Porter,
1980), institutional theory (DiMaggio and Powell, 1983) and organizational ecology (Hannan
and Freeman, 1977). The scholarly interests in organizational diversity derive from its broad
implications for individuals, organizations, industries, markets and societies in general.
Diversity impacts individual career opportunities (Hannan, 1988), stimulates entrepreneurial
activities (Greve, Pozner & Rao 2006) and innovation (Bain, 1956; Scherer, 1980), influences
industrial evolution and market structures (Carroll, 1985), and impinges on the production of
culture (Peterson and Berger, 1975) and collective actions aiming at societal changes (Olzak
and Ryo, 2007).
Resource partitioning theory (Carroll, 1985) is a theory fragment within organization
ecology directly concerned with the emergence of organizational diversity. This theory
argues that the competitive process dictated by economies of scale drives smaller generalists
out of the market. The few survivors grow larger and eventually come to dominate the
market, increasing market concentration. As covering the whole market range is not in line
with the strategies of these firms, peripheral demand is left unsatisfied. A different type of
firm – i.e., specialists -- emerge to target this unmet demand. Empirical support for resource
partitioning has been obtained from a wide variety of industries such as telephone,
cooperative banking, airline, beer brewing, wine making, newspaper, auditing and car
manufacturing (for a review see Carroll, Dobrev & Swaminathan 2002).
A key assumption of resource partitioning pertains to the equilibrium associated with
the ensuing segmentation – i.e., to its durability, see Polos, Hannan & Carroll, 2010. This
view appears at odds with that of other scholars who have argued in favor of cyclical
processes of market concentration and diversity (e.g., Peterson and Berger 1975). We aim at

4
contributing to this stream of research by discussing the forces that may challenge or,
conversely, prolong the durability of resource partitioning within a market. In particular, our
arguments will center on: (i) how oppositional identities contribute to organizational diversity
through the creation of durable boundaries among forms (Carroll and Swaminathan, 2000);
and (ii) how identity based partitioning may heterogeneously affect peripheral organizations
due to substantial differences across such firms in terms of strategies and endowments.
Eventually, the enduring success of peripheral firms may contribute to challenge the
coherence of their collective identity and to blur its distinctiveness with respect to market
leaders.
To reach these goals, we will rely on two recent developments of resource
partitioning. First, empirical evidence (Carroll and Swaminathan, 2000) suggests that identity
differences – rather than scope diseconomies as originally argued (Carroll, 1985) -- are
fundamental to the durability of resource partitioning. Indeed, in the US brewery movement,
the success of specialist breweries did not rely on a different quality of the output. What
mattered was the difference in the identity of the producers which sustained the emergence of
market partitioning. Second, recent theoretical developments emphasized competitive release
as the critical trigger of partitioning and distinguished three producer segments: center, near-
center (those that by failing contribute to release resources) and peripheral producers (Hannan
et al., 2007; Polos, Hannan & Carroll, 2010).
The goal of this paper is therefore twofold. First, we aim at providing evidence about
the theoretical mechanism of competitive release and to illustrate the larger benefits gathered
by peripheral organizations compared to local subsidiaries of center organizations. Second,
we wish to move beyond the average beneficial effect of partitioning on peripheral
organizations and to illustrate the substantial differences among peripheral organizations in
terms of identity claims and identity matching. The constructs of engagement and intrinsic

Frequently asked questions

Q1. What have the authors contributed in "Small is beautiful? organizational identity and growth rates in a partitioned market" ?

The present paper aims at contributing to the discussion on the determinants of organizational diversity by illustrating the process of identity-based resource partitioning observed in the German electricity market after deregulation from 2001 to 2008. The potential ramifications of peripheral firms ’ success on the distinctiveness of their collective identity and, thus, for the durability of diversity are discussed. 

Q2. What future works have the authors mentioned in the paper "Small is beautiful? organizational identity and growth rates in a partitioned market" ?

In case of two oppositional schemas, high grade of membership in one category precludes the possibility that the engagement in the oppositional category will generate actual appeal. Future research should investigate the tension between size and growth rates during partitioning processes and the effects of increased fragmentation of market peripheries. Last, the present paper contributes to research on organizational diversity driven by form identity as follows. For instance, the results reported in Table 5 suggest that, in their context, the market periphery is becoming increasingly fragmented.