liability of newness
Claudia Bird Schoonhoven
The origin of the phrase ‘‘liability of newness’’ can be traced to Arthur Stinchcombe’s article on social structure and organizations, published in 1965. In this article Stinchcombe argues that poorly understood conditions are responsible for the comparative death rates of new and old organizations and particularly for why a higher proportion of new organizations appear to fail than older ones. Stinchcombe’s implicit definition of the liability of newness is that new organizations face a constellation of problems associated with their newly founded status which renders them particularly prone to failure. Stinchcombe argues that four main problems comprise the liability of new ness and that social conditions at the time of founding affect the degree of liability a new firm faces.
First, new organizations – especially new types of organizations – generally involve the creation and learning of new roles. Some organizational roles must be invented de nouveau – and regard less, all roles require learning by the new organization’s members. Initially, new organizations must contend with employees’ generalized skills acquired prior to the new firm’s founding until sufficient time has passed for employees to learn and efficiently execute their new roles. Essentially, a new firm must invest time, either explicitly or implicitly, in educating its new employees to execute their responsibilities. In an older organization, by contrast, position incumbents can efficiently transmit to their successors organization specific skills required for the smooth execution of a role, including other wise implicit knowledge such as dealing with sources of tension and conflict.
Second, the process of inventing and learning new roles is costly because of the time required for invention and learning. The creation of a new role requires negotiation with others in the organization to agree that the role and its responsibilities are appropriate. As a consequence, role creation and its negotiation involve uncertainty, interpersonal conflict, and temporary organizational inefficiencies. Therefore, this process in volves trial and error as new employees invent and refine their new roles. Much is taken for granted in organizations and generalized skills brought from a prior organization may require substantial customizing for use in the new organization, depending on the other roles also being created and customized for the new con text. In a larger well established organization, several coordinated positions may, in combination, execute a given function – say perhaps the many different jobs in a financial accounting department. In a new organization, the account ant must define and execute the entire set of tasks, including how to systematically extract the relevant data from others in an efficient manner – some of whom may not understand that the accountant expects them to deliver ac curate and timely data. Thus, the ‘‘creation of new roles’’ really involves the creation of a new system of roles, responsibilities, and relation ships between positions in the new organization.
Third, new organizations rely heavily on ‘‘social relations among strangers,’’ a famous Stinchcombe phrase. When a new organization is founded, the new employees are typically strangers to one another, with no job history in common. Interpersonal trust is initially very low among strangers; as a consequence, relationships between co workers in a new organization are precarious. Can you depend on others to execute their role responsibilities in a timely manner at a tolerable level of competence? Embedded in the phrase ‘‘social relations among strangers’’ is the understanding that in some cultures responsibilities to others, like family and friends, over ride obligations to relative strangers, even in the same work organization. Initially, low loyalty to the employment contract is likely to exist, and thus the commitment of a new hire to the new organization is also precarious. The degree to which the ‘‘social relations among strangers’’ liability is problematic for a new organization depends upon whether the external social structure emphasizes differences in the relative trust worthiness of strangers when compared to kin and friends. As a consequence, the culture in which a new organization is embedded can mediate or exacerbate this source of newness liabilities.
Stinchcombe’s fourth and last dimension of the liability of newness involves the difficulties that new organizations face in establishing relationships with other organizations, especially potential customers and suppliers. Whereas older organizations have built stable ties with their customers and suppliers over time, including knowing whom to call for action, new organizations must start from scratch to build stable relationships with external organizations. The stronger the ties between existing organizations (i.e., competitors and their customers), the more difficult it will be for the new organization to establish initial ties to outside firms.
Beyond these four described by Stinchcombe, yet another dimension of the liability of newness exists. New organizations established for the purpose of creating new knowledge face an additional liability, the liability of innovation. New firms founded in science based industries are especially prone to this threat to their survival. The time required to create the requisite know ledge for new products or services in new firms is uncertain. It is difficult to predict when the first working prototype will be complete and furthermore when revenue from the sales of those products on the market will be realized. The inability to predict time to prototype completion and first market sales may require that the new organization exist months longer than expected while paying for salaries and materials without revenues to support the expenses. As a consequence, new organizations attempting to create highly innovative products often take longer to achieve their first revenues (Schoon hoven, Eisenhardt, and Lyman, 1990). The longer the new firm must exist without a stable revenue stream, the higher the likelihood it will fail to survive.
To summarize, the liability of newness hinges on Stinchcombe’s assessment of internal organizational relationships, as well as relations with the external environment. Trust among members helps create an efficient organization, but it requires time to develop. Similarly, creating and refining roles, relationships, and routines, establishing relationships with other organizations, and learning about the external environment all take time. Once these patterned relationships are established, however, a social structure supporting the new organization’s survival chances has been created.
Research on the Liabilities of Newness
An indicator of the pervasive impact of Stinch combe’s original article is that it has been cited approximately 863 times since 1965. Initially, those who built on Stinchcombe’s insights were primarily organization theorists doing research on the relationship between social structure and organizations, writ large. For example, in the late 1960s, studies focused on utopian communities (Kanter, 1968), the evolution of organization environments (Terreberry, 1968), and the context of organization structures. However, these early papers did not focus on entrepreneurship or new firms per se.
Throughout the 1970s and 1990s a research base emerged conceptualized as the creation of new firms. In these works, the liabilities of new ness, proxied as age of firm, were studied in conjunction with firm survival. Early research in the organization ecology tradition found sup port for Stinchcombe’s argument that death rates of young organizations exceed those of older ones. For example, Carroll (1983) demonstrated this pattern of outcomes in a study of 63 diverse kinds of organizations. Freeman, Car roll, and Hannan (1983) found similar patterns for labor unions, semiconductor firms, and San Francisco newspaper publishers. More generally, these research findings are referred to as ‘‘negative age dependent mortality or death rates.’’ For reviews of the multitude of studies 172 liability of newness that have reported this pattern, see Aldrich and Marsden (1988), Singh and Lumsden (1990), and Hannan et al. (1998).
It should be noted, however, that some re search shows that mortality rates do not always decline monotonically after founding. That is, the life chances of organizations do not always improve with age. Referred to as the ‘‘liability of adolescence,’’ some have found that death rates sometimes increase for a brief early portion of the life span before declining over the remainder of the typical life span (e.g., Fichman and Levinthal, 1991). Others speak of the ‘‘liability of obsolescence.’’ In this case, increasing organizational age is argued to increase the mortality rate, primarily because organizations become locked on strategies and structures more appropriate for earlier years of their existence – those conditions which are now obsolete. This ‘‘lock’’ is sometimes referred to as structural inertia, where it becomes increasingly difficult for older organizations to adapt sufficiently to a changing environment. Lastly, there is some research on the ‘‘liability of senescence.’’ Some what akin to early descriptions of bureaucracy, the accumulation of rules, routines, and structures (i.e., red tape) renders an older organization less efficient and thus older organizations in these cases have higher mortality rates (Barron, West, and Hannan, 1994).
As these latter variations on ‘‘age liabilities’’ suggest, the relationship between organizational age and death rates is more complicated than it might appear. Complications might arise especially if unmeasured heterogeneity exists. It has been shown to generate spurious negative age dependence (Tuma and Hannan, 1984), which in the case of research on the liabilities of new ness can be confounding. An important source of unmeasured heterogeneity is the variable of organizational size, which was not controlled in some early studies of organizational age and mortality. Because organizations tend to grow with age, variation in size might account for observed low death rates of older organizations. We conclude that this issue is far from being resolved. For information on the joint effects of organizational age and size on death rates, see Hannan et al. (1998) and Hannan and Carroll (2000: 319–22), who conclude that several technical and substantive matters need clarification before the joint effects of age and size on organizational death rates can be clearly understood. In summary, organizational size likely should be controlled in the study of organizational age, ensuring that size is measured repeatedly over the life span of the organizations examined.
Entrepreneurial Actions to Ameliorate the Liabilities of Newness
Given what we know, what are practical actions entrepreneurs can take to minimize or ameliorate their own new ventures’ liabilities of newness? Recall that internally the liabilities of newness focus on new people, the new organization, and the creation of new technology. New organizations should not attempt to reinvent existing or older organizational practices; rather, they should import standard solutions for common problems faced by organizations in the industry. Common ways of organizing the accounting and customer service units exist within most industries, and thus adopting these procedures rather than inventing de novo routines is efficient for the new venture. This argument also suggests hiring industry experienced veterans already familiar with the routine functions needed for the new venture; their knowledge can substantially facilitate the organization and operations in early days of the new organization.
Part of the problem in creating and negotiating new roles is that some employees may take the limits of their perceived responsibilities seriously. Because many problems a new firm faces are novel to it and thus not included in anyone’s job description per se, problems may go un attended because no one perceives them as her or his responsibility. New firms require employees who can take initiative when new problems are encountered and who accept responsibility for getting work done perhaps beyond the perceived scope of their responsibilities. A high initiative and responsibility taking workforce has a better chance of collectively resolving a new firm’s problems than those who operate from the perspective of narrow job descriptions.
Founders and members of the top management team have a substantial effect on the life chances of a new venture. Creating a top management team with substantial heterogeneity has survival advantages for new ventures. For example, variation in years of experience in the liability of newness 173 industry, in technical expertise, education, and age all combine to create a top management with a mix of talents and viewpoints that advantage a new firm (Eisenhardt and Schoonhoven, 1989, 1990). Similarly, cutting edge, relatively young engineers led by industry experienced technical veterans enhance the new firm’s ability to get its innovative products to market. In addition to top management team heterogeneity new ventures would do well to obtain some non stranger top managers who have had previous joint work experience with one another and who have had at least three years of industry experience variation.
We also know that top management teams that seek modest innovation in their first products have advantages over those that seek to create highly innovative products. The liability of innovation is substantially reduced when firms tackle first products that can be created by building on existing knowledge rather than those derived from the creation of substantial new knowledge. Highly novel products consume R&D time and other resources and thus risk depleting the financial resources of a new company before the first product begins to produce stable revenues (Schoonhoven, Eisenhardt, and Lyman, 1990: 198).
Stinchcombe argued that external social conditions at the time of birth have an important effect on new venture survival. External newness liabilities focus on a new venture’s paucity of relationships with other organizations, especially those that may eventually develop a vested interest in the success of the new venture, such as potential investors. Schoonhoven and Eisenhardt (1992: 217) defined an incubator region as a confluence of industry specific resources contained within a circumscribed geographic area that may be mobilized to create and sustain new ventures in a given industry. A multidimensional concept, rich incubator regions contain a substantial number of existing same industry firms, a stock of industry savvy investors, armed with substantial capital for new venture investment, a stock of industry trained technical experts and production workers, and service firms that specialize in supporting the focal industry. These researchers found that new ventures established in incubator regions low in industry specific resources had a significantly higher risk of death at an early age (Schoonhoven and Eisenhardt, 1992: 240). This research supports the following conclusion: to reduce liabilities of newness, technology based entrepreneurs should locate their new firms in regions dense with industry specific resources such as industry suppliers, risk capital investors experienced with their industry, and industry experienced managers and production workers.
In summary, substantial research supports Stinchcombe’s (1965) early theorizing about the liabilities of newness, and specifically that new firms have a higher likelihood of failure than older firms. Additional research on new firms has shown that entrepreneurs may take practical actions to help reduce their ventures’ newness liabilities and as a consequence, enhance the likelihood of their new ventures’ survival.
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