Chain affiliation and the failure of Manhattan hotels, 1898-1980

Administrative Science Quarterly,  March, 1997  by Paul Ingram,  Joel A.C. Baum

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For comments on an earlier version of this paper, we are grateful to Linda Argote, John Freeman, Crist Inman, Jerry Salancik, ASO's Associate Editor Mark Mizruchi and anonymous reviewers, and seminar participants at the Hebrew University of Jerusalem and the University of Texas, Austin. For their data collection and coding efforts, thanks also go to Gretchen Dematera, Corrine Imbert, Bridget Ingram, Colin Ingram, Bill Krause, Alan Mibab, Kiril Okun, and Sheila Peterson.

In the automotive section of a Sunday newspaper, a journalist says of the British car manufacturer Lotus (which was recently divested by General Motors), "Free of the constraints, and resources of General Motors, Lotus soldiers on alone" (Swan, 1994: K1). That statement reflects two insights that deserve the critical attention of organization theorists. First, the statement recognizes that some large organizations (such as General Motors) encompass numerous smaller components (such as Lotus) that are themselves organizations. Second, the statement recognizes that the relationship to the large organization can mean both good and bad things to the component organization. Understanding what these pros and cons are is the focus of this paper.

Here we consider the implications for the fate of component organizations of affiliations to chains. The component organizations we focus on are hotels affiliated with hotel chains. While a chain affiliation may be a source of operating knowledge for a component, we also identify potential sources of strategic constraint. Further, a chain can affect the fate of its components by giving them resources, reputation, and market power. By altering the competitive strengths of their components, chains may also influence the competitive dynamics of industries. Therefore, we also consider the implications of chain affiliations for industry evolution. We examine these effects of chain affiliation on the fates of component organizations and competitive dynamics in an analysis of organizational failure in the Manhattan hotel industry.

Chains are collections of service organizations, doing substantially the same thing (often the only differentiation is in physical space), that are linked together into a larger organization. The relationships between the components of a chain are horizontal, although typically there are centralized parts of the chain, such as a distribution facility, that have vertical relationships to the components. There a-re a number of types of linkage between component and chain, including ownership, franchise agreement, or other types of contracts or agreements. Although analogous horizontal linkages between nonservice organizations exist, these are not typically categorized as chains. The relationship between Lotus and GM is an example. Both chains and nonservice collections of horizontally linked organizations could be described by the term "superorganizations."

There are many compelling implications of the structure of interdependencies among the components of a chain, First, the components of a chain are almost always capable of operating without the chain. It is not surprising to see an independent hotel, but it is surprising to see an independent finance or marketing unit. This easy separability of chain components invites the question of what the component gets from being part of the chain, which we try to answer here. The chain presumably imposes mutualistic relationships between organizations of the same type and is therefore the source of some unique advantages, especially in twentieth-century North America, where interorganizational linkages between similar organizations are often viewed as illegitimate because they restrict competition.

Second, the chain suggests an intriguing wrinkle for interorganizational competition. It is at the level of the component that the chain meets its competitors. As the president of what was then the largest hotel chain said in a 1937 advertisement, "the success of any group enterprise in the long run, is predicated on the success of each individual unit in the group." Chains are too diverse to be seen as rivals by independent organizations in the same industry, and independent organizations are too narrow to be seen as rivals by chains, but, according to definitions of competition based on the overlap of required resources (McPherson, 1983; Baum and Singh, 1994a, 1994b), the two organizational forms seem to compete, This tension between the competitive implications of component and chain motivated us to examine the effects of chain affiliations on the competitive dynamics of a population composed of component and independent organizations.

Third, the study of chains and other superorganizations promises to inform theories of organizational evolution and adaptation. While organizational ecology has focused on the replacement of inertial organizations as the principle mechanism by which populations respond to their environments (see Hannan and Freeman, 1989; Baum, 1996), even casual observation indicates that organizations are sometimes able to adapt to changes in their environments. An important step in reconciling the selection and adaption perspectives may be recognizing that sometimes selection works at the suborganizational level, which allows a persisting organization or superorganization to adapt (Aldrich, 1979; McKelvey, 1982; Nelson and Winter, 1982). By adding or dropping parts, organizations change. In this paper, we examine this phenomenon by studying the failure of chain components.