Olaf Storbeck reports that “a senior Frankfurt-based investment banker points to speculation that some global hedge funds see German corporates as a proxy for world trade and have bet against them” and that another “Frankfurt-based asset manager [adds] that the time when German blue-chips were the big winners of globalisation seemed to be gone.” Finally, Olaf says that “investors are also harbouring doubts about the sustainability of the business models of German carmakers and suppliers. Sales and profits of Volkswagen, Daimler, BMW and Continental hinge to a large extent on the internal combustion engine, which some see as a technology in decline.” This analysis gives us two important information about DAX: 1) It was highly identified as the representation of (successful) globalization, and 2) its constituents were successful due to their technologies and strategies. In these recent developments, we clearly observe structural inertia.
We can see DAX as a decentralized organization where the members are the global companies. If we assume for a second that they are in perfect coordination, could they still get rid of this adverse treatment? According to Hannan and Freeman (Structural Inertia and Organizational Change, American Sociological Review, 1984), this is highly unlikely, and structural inertia is responsible for this. To define structural inertia, we have to look at three factors: i) Temporal pattern of changes in key environments, ii) Speed of learning mechanisms, and iii) Responsiveness of the structure to designed changes. From this perspective, we can make some arguments about what could be done and why they would not succeed. First of all, changing the global image could have been a solution to this acute problem at hand. This could be achieved if either the companies included in DAX decrease their international operations or DAX replaces the companies that reproduce the global image of the index with local ones. The first proposition is impossible due to internal inertia such as sunk costs in international markets by individual companies as well as external inertia of probable barriers to exit. Similarly, the second proposition can not succeed due to the strict definition of DAX (inertia due to factor iii): “index members can be removed if they no longer rank in the top 45 largest companies, or added if they break the top 25”, meaning that the companies have to actually perform bad for the index to update. However, none of the members of the decentralized organization has incentives to do so and the structure will not respond to the proposed change; hence we can say that there is an internal political constraint to DAX that hinders change. Finally, addressing the out-dated technology problem, we could say that each member of the index would have incentive to invest more into R&D, which might be observed in long term. This analysis shows how prevalent the inertial forces are. The effects of the selection mechanism appear in the performance of DAX, “the German market lagging behind every major European index with the exception of the UK’s FTSE 100” (cited FT article).
*Structural Inertia, *Identity Formation, *Role Structuring, *Population Ecology