It's all in the name: failure-induced learning by multiunit chains.

Multiunit chains are a conspicuous feature of the modern economy. Chains are collections of service organizations that produce similar goods and services in several markets and are linked together under common ownership into larger superorganizations that make considerable effort to standardize and coordinate the behavior of their components (Ingram and Baum, 1997a). Often, geographic location is the only difference among a chain's components. Chains proliferated during the twentieth century and have now penetrated deeply into nearly every service field in which customers have some direct contact with the organization (Bradach, 1997; Greve and Baum, 2001).

Despite their significance, only recently have multiunit organizations begun to receive regular attention in organization theory and strategic management. Much of the recent work on multiunit organizations draws on ideas from organizational and interorganizational learning. This is not surprising. Chains emphasize replicating and coordinating a standard set of routines or capabilities in multiple locations. This emphasis on leveraging a set of valuable routines by spawning similar components across multiple geographical markets invites discussion of learning and knowledge transfer. Through transfer learning among components, multiunit chains not only replicate but also improve their routines, resulting in learning curves within each component and spillover learning among them (Darr, Argote, and Epple, 1995; Argote, 1999; Ingram and Baum, 2001; Mitchell et al., 2002). Multiunit organizations are also conduits for diffusion, making them prone to early adoption of new practices and strategies, both because practices and strategies spread rapidly within them and because their presence in multiple markets provides greater exposure to innovations (Greve, 1995, 1996).

In addition to generating scale economies and reducing operating costs, chains' strategic emphasis on standardization helps reduce uncertainty about their components' quality by combining them under a common corporate umbrella (Ingram, 1996). Consistency across a chain's components raises consumers' perceptions of their reliability in producing a given quality of service repeatedly. Accountability is also higher, because interdependence pressures each component to maintain and enhance its chain's standards--poor quality service in any component can damage the entire chain's reputation. This constraint increases beliefs in the trustworthiness of chain components, reducing consumers' search and monitoring costs.

Although not all chains try to develop reputations, many do. Securing such benefits requires consumers being able to identify various components as members of a chain in which they trust. Chains that give their components names that link them to each other and to the chain thus meet a necessary condition for building a reputation (Ingram, 1996). Research has shown that common naming of components is vital to the growth and survival of entire chains (Ingram, 1996; Ingram and Baum, 1997b) and their individual components (Ingram and Baum, 1997a; Baum and Ingram, 1998), with chains naming their components in common outperforming those that do not. Notably, the benefit of common naming to a chain depends on the degree to which other chains in the same field are also using the strategy (Baum, 1999). Thus, the benefit of adopting common naming in a given setting depends on the diffusion of common naming strategies in that population.

Although research has demonstrated the benefits of common naming for multiunit chains, no study has yet attempted to explain what leads chains to adopt this strategy. Nor has research examined why, despite the apparent benefits of common naming, some chains employ an alternative "local" naming strategy, in which components' names identify them with their locations, rather than with the chain (Ingram, 1996). A learning perspective seems particularly germane to an explanation of chains' naming strategies. Name choices are made repeatedly by chains and so are likely to be subject to an experiential process in which chains learn by repeating naming choices that appear successful. Naming strategy also seems a likely candidate for interorganizational learning. The uncertainty resulting from a growing chain's inexperience with naming multiple components can be reduced, for example, by observing and imitating (or avoiding) the naming strategies of other chains based on their outcomes.

A fundamental mechanism facilitating learning is experience (Huber, 1991; Cyert and March, 1992). According to learning theory, organizations adjust their behavior based on their own past performance and the performance of other organizations (Haveman, 1993; Haunschild and Miner, 1997; Greve, 1998). Although past research has tended to emphasize learning from success (e.g., learning by doing in which cumulative experience reduces costs or improves performance; imitating the practices of other organizations that appear successful), we focus on chains' learning from their own and other chains' naming strategy failures. Chains can potentially learn about a range of practices from their failures, for example, viable locations, component management and strategy, and staffing policies. Our interest, however, is in whether one of the lessons they learn is about the differential effectiveness of the common and local naming strategies and, in particular, the operational and competitive advantages of emphasizing coordination of a standard set of routines or capabilities in multiple locations to achieve the scale economies and reputation benefits associated with common naming of components relative to the capabilities for local adaptation associated with the local naming of components.

Because organizational and strategy failures are salient and well-publicized events rich in information that matters for competitive strategy (Ingram and Baum, 1997b), decision makers attend to them naturally (Ocasio, 1997), comparing both their own and others' failures and successes to gain insight into what causes failure and to learn what not to do. While organizational performance measures often come without clear definitions of what outcomes are acceptable (Haunschild and Miner, 1997; Greve, 1998), significant failures--here, the failure of one or more chain components--represent unambiguous and salient indicators of poor performance. We analyzed the effects of component failures in an empirical study of the adoption of a common naming strategy by the 32 chain nursing homes that operated in Ontario from January 1971 to December 1996. At the start of 1971, seven nursing home chains operated in Ontario, three of which used common naming, with one naming all its components in common. By the end of 1996, 12 of the 18 nursing home chains operating in the province used common naming, with six naming all their components in common. This dynamic, combined with prior research showing the benefit of common naming for Ontario nursing home chains (Baum, 1999), make it a useful empirical setting for the current study.