Population ecology of entrepreneurship
Population Ecology Theory: Survival of the Fittest in Business
Why do industries seem to explode with new startups, only to suffer a mass extinction event later? Population Ecology Theory (also known as Organizational Ecology) explains business through the lens of biology.
Proposed by Hannan and Freeman (1977), the theory hangs on the assumption that environments have a fixed "carrying capacity." Just as a forest can only support a certain number of wolves, a market can only support a fixed number of organizations.
The Tension: Legitimacy vs. Competition
The theory describes a fundamental tension in the lifecycle of an industry, known as Density Dependence.
As more organizations enter a new market, two opposing forces occur:
- Legitimacy (Early Stage): At first, new entrants help each other. The more firms there are, the more "legitimate" the new industry appears to customers and investors. Survival rates improve.
- Competition (Late Stage): Once a certain density is reached, the market becomes crowded. Resources become scarce, and mortality rates skyrocket as firms fight for survival.
Organizational Inertia: Why Giants Can't Dance
Why does innovation usually come from startups rather than big companies? Population Ecology argues that established firms suffer from Structural Inertia.
Inertial forces guarantee that most innovations will come from new entrants. Old firms cannot change fast enough because of:
- Internal Restraints: Sunk costs, rigid culture, and impaired managerial cognition.
- External Restraints: Government regulations and barriers to exit.
Niches: Generalists vs. Specialists
To survive, firms must choose a strategy based on the environment:
- Specialists: Organizations that exploit a narrow environmental niche. They are highly efficient but risk extinction if their specific niche disappears.
- Generalists: Organizations that span many niches. They are sub-optimal in every specific area, but they diversify their risk across many customers.
The Three Hazards of Mortality
The theory predicts when a firm is most likely to die based on its age:
- Liability of Newness: Failure risks are high at birth due to a lack of legitimacy and trust.
- Liability of Adolescence: Firms survive infancy and gain support, but then hit resource constraints that raise mortality risks as they try to scale.
- Liability of Aging: Older firms face inertia. They become too rigid to adapt to environmental changes (Senescence).
Video: Organizational Ecology Explained
References
Freeman, J., Carroll, G. R., & Hannan, M. T. (1983). The liability of newness: Age dependence in organizational death rates. American Sociological Review, 692-710.
Hannan, M. T., & Freeman, J. (1977). The population ecology of organizations. American Journal of Sociology, 82(5), 929-964.
