Adaptability and Survival in Populations of Small and Medium Enterprises

Abstract

There is disagreement in the literature about the relative roles of selection (competition) and adaptation in explaining industrial change. For some, the possibilities for adaptation by individual firms are highly limited, and instead the key drivers of industry-level change are the extinction of some firms and the birth of others. Others stress that survival is all about the ways in which a firm can choose to adapt to changes in the external environment and to changes in competition. This dissertation takes the view there is a false dichotomy between adaptation and selection, that they are not opposites and that adaptation is an essential an unavoidable part of any relevant evolutionary process. Even if selection generates larger industry-level outcomes, adaptability is still important. It is then an empirical matter of the relative strengths of adaptability and selection in particular circumstances. The work makes a clear distinction between an adaptation, a change to an individual (firm) that enables the individual to be better fitted to its environment, and adaptability, the potential to adjust to changes in the selection environment. In looking for causal explanations, the approach adopted here acknowledges that causes relate to potentialities or dispositions and not to effects or events. Using this approach, the adopted methodology maintains that business routines, even when defined as capacities or dispositions rather than behaviours, can still be measured and used to generate an adaptability instrument. It is then possible to look at the relationship between the adaptability instrument and survival. The research looks particularly at the adaptability and survival of small and medium size firms, as they constitute the majority of enterprises in the UK and are empirically under-represented in previous research. This thesis looks at the evolution of populations of such firms through the mix of firm-level adaptation and selection in the population. The methodology concentrated on the four constituent areas of any firm: sales and marketing, production, administration and human resources, and corporate strategy. It examined not the quantities of operation in routines as in many previous studies but the levels of adaptability firms perceive they actually achieve or believe they would experience in the face of both continuous and discontinuous internal and external change. The adaptability instrument is the composite measure of the potential to adapt routines across the four constituent areas, capturing a picture of the interactions between the strategies, structures and procedures within the firm. The methodology also involved a relatively large sample of observations of a representative set of small and medium-sized enterprises, addressing the lack of previous empirical work on datasets of a whole population of firms taken from multiple industries and sectors. It was also possible to re-sample respondents in the depths of a recession 18 months later in order to look at the relationship between previously calculated adaptability and the subsequent degree of survival. The results challenge the exclusive role of selection only in explaining industry attributes and suggest that adaptability is important for firm survival. Even if selection generates larger industry-level outcomes, adaptability is still important. The research demonstrates that both competitive selection and developmental adaptability combine to explain industrial change and that any differences in adaptability between firms are of significance. In a sharp recession, however, only the firms with more potential to adapt their output in response to falling demand, and so better protect their cash flow against any contracting credit availability, have an advantage relative to their rivals that can confer relatively greater longevity and survivability. Other factors contribute to survival more strongly in recession than in more stable times and, while adaptability still matters, the slightly lower adaptability of older cohorts of firms masks the positive value of adaptability. At the individual firm level during sharp recession, indirect competition through customers choosing not to spend, or spend scarce resources elsewhere, rapidly de-selects those with weak cash flow management, poor cash reserves or poor credit worthiness. The criteria adopted for degrees of failure were heavily dependent on the context of use but reflected common parlance among the survey respondents. The findings of this research point to the merits of a theoretical framework different from much textbook economics, strategy-choice theory and organisational ecology. The findings support an evolutionary approach that in turn corresponds with recent developments in the theoretical framework known as Generalised Darwinism.