An overview of the overlap of research in strategy and sociology

1. Sociological Theory and Strategic Management Institutional Theory, Organizational Ecology & Networks OleksiyOsiyevskyy, PhD Student, Haskayne School of Business, University of Calgary Jan/31/2011 1

2. Part I. Institutional Theory 2

3. “Institutional theory attends to the deeper and more resilient aspects of social structure. It considers the processes by which structures, including schemas, rules, norms, and routines, become established as authoritative guidelines for social behavior. It inquires into how these elements are created, diffused, adopted, and adapted over space and time; and how they fall into decline and disuse.” Richard Scott (2004a) Not to confuse with institutional economics! 3 Institutional Theory: Definition

5. In management research the institutional theory is most widely applied in OTPictures source: Wikipedia

6. First widely-known insights emerged in 1970-1980th, in two distinct places: 5 Institutional Theory and Management Science Source: adapted from Scott (2004b)

7. “Institutionalised organizations: Formal structure as myth and ceremony” American Journal of Sociology, 83: 340-63. Key questions: how are the formal organizational structures formed? what is the role of formal structure in an organization? Stress on false assumptions of preceding prevailing theories of formal structure: (a) the formal organizational structure actually governs the activities (b) “the coordination and control of activity are the critical dimensions on which formal organizations have succeeded in the modern world” (p.342) (a)+(b) -> formal structures are constructed using rational considerations of actual “demands of their work activities” (p. 341) – (e.g., perspectives of Fayol, Weber, Chandler, etc.) 6 Institutional Theory: Meyer and Rowan, 1977

9. What governs their development?7 Institutional Theory: Meyer and Rowan, 1977

11. “Institutionalised organizations: Formal structure as myth and ceremony” American Journal of Sociology, 83: 340-63. Authors’ view: Proposition 1: "As rationalized institutional rules arise in given domains of work activity, formal organizations form and expand by incorporating these rules as structural elements“ (p.345) Proposition 2: "The more modernized the society, the more extended the rationlizedinstituional structure in given domains and the greater the number of domains containing rationlized institutions“ (p.345) 9 Institutional Theory: Meyer and Rowan, 1977

14. Proposition 6: “Institutionalized organizations seek to minimize inspection and evaluation by both internal managers and external constituents” (p.359)11 Institutional Theory: Meyer and Rowan, 1977

17. what makes organizations so similar with time (“without necessary making them more efficient”, p.147)?

18. Key theoretical propositions

19. rational bureaucracy remains the dominant organization form of companies

20. however, “structural change in organizations seems less and less driven by competition or by the need for efficiency” (p.147)13 Institutional Theory: DiMaggio and Powell, 1983

22. Bureaucratization and other forms homogeization are driven by structuration of organizational fields

23. Structuration, in turn, is driven primarily by the state and professions (that became “great rationalizers”)

24. “Highly structured organizational fields provide a context in which individual efforts to deal rationally with uncertainty and constraint often leads, in the aggregate, to homogeneity in structure, culture and output” (p.147).14 Institutional Theory: DiMaggio and Powell, 1983

26. similarity (instead of variability) of organizations increases as they change grouping together into “organizational fields” (organizations that “in the aggregate, constitute a recognized area of institutional life” (p. 148)).

27. these fields share key suppliers, resource and product consumers, and organizations that produce similar products or services.

28. once in a field:

29. organizations begin to become increasingly similar in form and processes which impacts their ability to change in the future

30. accept that the adoption of innovation may only provide legitimacy instead of performance improvement15 Institutional Theory: DiMaggio and Powell, 1983

32. “Whereas the Stanford models privileged widely shared symbolic models, DiMaggio and Powell stressed the importance of palpable network connections that transmitted coercive or normative pressures from institutional agents, such as the state and professional bodies, or mimetic influences stemming from similar or related organizations”Scott (2004b), pp.6-7 16 Institutional Theory: DiMaggio and Powell, 1983

34. Coercive Isomorphism – occurring as a result of formal and informal pressures exerted upon organizations by other organizations, cultural expectations, government mandates, legal requirements, societal pressures

35. Mimetic Isomorphism – occurring in face of uncertainties, when organizations tend to choose to model themselves on other organizations, attempting to imitate their success and methods for dealing with market uncertainties and ambiguity

36. Normative Isomorphism – professionalism causes isomorphic change as a result of the development of a common cognitive base by universities and the growth of professional networks that diffuse new models quickly across organizations. Particular mechanisms include:

37. personnel filtering due to educational background and affiliations

38. socialization processes within organizations

39. influence of central organizations17 Institutional Theory: DiMaggio and Powell, 1983

40. “The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields” American Sociological Review, 48: 147-160. “Each of the institutional isomorphic process can be expected to proceed in the absence of evidence that they increase internal organizational efficiency” (p.153) 18 Institutional Theory: DiMaggio and Powell, 1983

43. So far, key emphasis was on institutional construction and convergent change process

44. However, equally important but less explored is the mechanism of “deinstitutionalization”

45. Need to consider organizational members as active carriers of institutions (agency perspective)20 Institutional Theory: Dacin, Goodstein, & Scott, 2002

47. Functional – caused by perceived problems in performance level or utility of institutionalized practices

48. Political – driven by shifts in the interests and power distribution that supported the existing institutional context

49. Social – caused by differentiation of groups (e.g., diversity) or emergence of divergent practices and beliefs (e.g., caused by mergers or becoming global).21 Institutional Theory: Dacin, Goodstein, & Scott, 2002

51. Key premises

52. Density-dependence model (from organizational ecology theory): rate of organizational founding has an inverted U-shape relationship with density:

53. proportional to the degree to which the organization form is legitimate

56. Organizations imitate organizations within the population

57. Population = industry (p.596) / maybe better choice would be to use strategic groups?

58. “Interactions between organizations tend to be localized along a size gradient” (p.597)

59. Empirical evidence

60. Savings and loan industry in California

61. Deregulation of industry allows organizations to diversify23 Institutional Theory: Haveman, 1993

63. “in general, thrifts do not imitate the behavior of their size peers”

64. “the number of successful organizations incumbent in a market would influence rates of market entry”

65. “large organizations serve as especially strong role models for other large organizations but that highly profitable organizations serve as role models for all organizations, not just other profitable organizations”24 Institutional Theory: Haveman, 1993

67. “organizations attend to the actions of successful organizations and will imitate their behavior”

68. “the presence of successful incumbents in a new market will legitimate that market, making it more attractive to potential entrants”

69. “as the number of successful incumbents in a new market grows, a competitive effect will swamp the legitimation effect, making entry less attractive to other organizations”25 Institutional Theory: Haveman, 1993

71. Support the mimetic isomorphism hypothesis (institutional theory)

72. Verification of the density-dependence model (organizational ecology theory), applying it to the new context: diversification into the new market

73. Possible concerns:

74. Testing of theory on only one industry (possible idiosyncratic features)

75. Contradiction to two prior studies that failed to find mimetic isomorphism

76. Using only secondary financial data26 Institutional Theory: Haveman, 1993

77. Emphasis on environmental influence on strategy (both developed and implemented) More positive theoretical perspective Different understanding of rationality effectiveness and efficiency (e.g., profit) in structuralist perspective “socially constructed” rationality (e.g., gaining legitimacy and survival) in institutional theory Lots of practical insights, e.g. (some of them): Clayton Cristensen’s “Innovators’ Dilemma” showing the necessity to break up with the institutional rules (context) to launch disruptive innovations Strong emphasis on real effectiveness and efficiency in market economy should(???) lead to shift from “institutionalized” rationality to “real” rationality – functional pressure for deinstitutionalization Celebrated “Industry best practices” can in fact be highly rationalized institutional myths (in the form of conventional wisdom, regulatory requirements, business process models in IS, etc.) 27 Institutional Theory: Strategic Management Perspective

78. Limitations of institutional theory applied in strategic management field: Lack of normative (prescriptive) ideas The obvious necessity to conduct qualitative research (inside companies); the generally available secondary (financial and statistical) data is ususally not enough Not enough emphasis on the firm, strong bias towards environment analysis (addressed by neoinstitutional theory) 28 Institutional Theory: Strategic Management Perspective

79. Part II. Organizational Ecology 29

80. “Organizational ecology (also organizational demography and the population ecology of organizations) is a theoretical and empirical approach in the social sciences that is especially used in organizational studies. Organizational ecology utilizes insights from biology, economics, and sociology, and employs statistical analysis to try and understand the conditions under which organizations emerge, grow, and die.” Source: Wikipedia Some authors (e.g., Barron (2003)) consider organizational ecology to be a part of more general theory, the evolutionary theory, that tries to understand “dynamic processes such as emergence of new organizations and new forms of organization, changes in organizations, and the life cycles of industries” (p.74). Seminal paper that started the discussion in organizational ecology - Hannan, M. T. and Freeman, J. H. 1977. The population ecology of organizations. American Journal of Sociology, 82: 929-964. 30 Organizational Ecology: Roots and Scope

81. “The population ecology of organizations.” American Journal of Sociology, 82: 929-964. Key questions: Effects of environment on organizational structure Why are there so many kinds of organizations? Key Ideas: The dominating approach to the analysis of organization-environment hinders the further field’s development by failing to bring ecological models to handle the questions that are “preeminently ecological” Ecological models focus on selection, while researchers in management theory so far emphasize primarily adaptation perspective 31 Organizational Ecology: Hannan and Freeman, 1977

82. “The population ecology of organizations.” American Journal of Sociology, 82: 929-964. Problem of adaptation perspective: “Clearly, leaders of organizations do formulate strategies and organizations do adapt to environmental contingencies. As a result at least some of the relationship between structure and environment must reflect adaptive behavior or learning. But there is no reason to presume that the great structural variability among organizations reflects only or even primarily adaptation.” (p.930) Structural inertia limits the ability of organizations to adapt, and it is the main factor governing the choice between adaptation and selection models The stronger the environmental pressure and structural inertia, “the more likely that the logic of environmental selection is appropriate” (p.931). 32 Organizational Ecology: Hannan and Freeman, 1977

83. “The population ecology of organizations.” American Journal of Sociology, 82: 929-964. Internal factors causing structural inertia: Sunk costs Constraints on the information received by decision makers Internal political constraints Historical constraints (necessity to alter the normative agreements) / close link with institutional theory 33 Organizational Ecology: Hannan and Freeman, 1977

84. “The population ecology of organizations.” American Journal of Sociology, 82: 929-964. External pressures causing structural inertia: Legal and fiscal barriers to entry and exit from markets External constraints on information (particularly in turbulent situations, when it is most essential) Legitimacy constraints / close link with institutional theory Collective rationality problem 34 Organizational Ecology: Hannan and Freeman, 1977

85. “The population ecology of organizations.” American Journal of Sociology, 82: 929-964. Unit of analysis – population of organizations “a population of organizations consists of all the organizations within a particular boundary that have a common form” (p.936) “an organizational form is a blueprint for organizational action, for transforming inputs into outputs” (p.935) 35 Organizational Ecology: Hannan and Freeman, 1977

86. “The population ecology of organizations.” American Journal of Sociology, 82: 929-964. Adaption as a feature of an organization in evolutionary process The capacity to adapt is itself subject to evolution “organizations develop the capacity to adapt at the cost of lowered performance levels in stable environments. Whether or not such adaptable organizational forms will survive (i.e., resist selection) depends on the nature of the environment and the competitive situation” (p.937) 36 Organizational Ecology: Hannan and Freeman, 1977

87. “The population ecology of organizations.” American Journal of Sociology, 82: 929-964. Two sources of isomorphism (p.939): “nonoptimal forms are selected out of a community of organizations” - selection pressure “organizational decision makers learn optimal responses and adjust organizational behavior accordingly” – adaptation. Important note: different explanation of mechanisms of isomorphism comparing to institutional theory (e.g., DiMaggio & Powell, 1983). 37 Organizational Ecology: Hannan and Freeman, 1977

88. “The population ecology of organizations.” American Journal of Sociology, 82: 929-964. Ecological model of competition (p.941): X1 – population size k1 – the capacity of the environment to support X1 r1 – natural rate of population growth Important note: this the first version of density-dependence model 38 Organizational Ecology: Hannan and Freeman, 1977

89. “The population ecology of organizations.” American Journal of Sociology, 82: 929-964. Niche theory: “social organizations in equilibrium will exhibit structural features that are specialized to salient features of the resource environment” (p.946) – because of isomorphism mechanisms When the environment is not stable, the relative fitness of a company is determined by its specialism/generalism: 39 Organizational Ecology: Hannan and Freeman, 1977 Source: Barron (2003), adapted from Hannan and Freeman (1989)

90. “Localized competition and organizational failure in the Manhattan hotel industry, 1898-1990” Empirical study of effect of localized competition on rates of failure in the Manhattan hotel industry Key theoretical framework – density-dependence model (organizational ecology), adjusted: The competition in the model must be localized, i.e., include only part of the whole population, since “the potential intensity of competition between organizations is proportional to the overlap or intersection of their resource requirements” (p.581) Competition is localized on three dimensions: size, geographic location, and price Failure rate as the primary focus of analysis 40 Organizational Ecology: Baum and Mezias, 1992

91. “Localized competition and organizational failure in the Manhattan hotel industry, 1898-1990” Empirical evidence Data on Manhattan hotels industry 100-years time span 593 hotels in sample Key results Intensity of competition depends on similarity in terms of size, geographic location, and price Competitors are localized within particular segments of the distribution variation 41 Organizational Ecology: Baum and Mezias, 1992

92. Emphasis on environmental influence on strategy Primarily positive theoretical perspective Complementary to IO “worldview” Population of organizations = strategic groups ??? Multiple links with institutional theory, e.g.: Institutionalization as pressure for structural inertia Legitimacy 42 Organizational Ecology: Strategic Management Perspective

93. Different understanding of rationality effectiveness and efficiency (e.g., profit) in structuralist perspective “rationality of natural selection” in organizational ecology perspective Limitations of organizational ecology theory applied in strategic management field: Lack of normative (prescriptive) ideas ??? (what else?) 43 Organizational Ecology: Strategic Management Perspective

94. Part III. Networks 44

95. “Economic action and social structure: The problem of embeddedness.” American Journal of Sociology, 91: 481-510. Key questions: How behavior and institutions are affected by social relations? To which extent the economic action is embedded in structures of social relations Key Ideas: Today there are two basic perspectives on the question of how social relations influence economic activity: “undersocialized” – neoclassical economic view, extremely autonomous (atomized) rational behavior in pursuit of self-interest “oversocialized” – sociological view, “the behavior and institutions to be analyzed are so constrained by ongoing social relations that to construe them as independent is a grievous misunderstanding” (p.482) 45 Networks: Granovetter, 1985

96. “Economic action and social structure: The problem of embeddedness.” American Journal of Sociology, 91: 481-510. Author’s view – both conceptions are not accurate: “A fruitful analysis of human action requires us to avoid the atomization implicit in the theoretical extremes of under- and oversocialized conceptions. Actors do not behave or decide as atoms outside a social context, nor do they adhere slavishly to a script written for them by the particular intersection of social categories that they happen to occupy. Their attempts at purposive action are instead embedded in concrete, ongoing systems of social relations.” (p.487) 46 Networks: Granovetter, 1985

97. “Economic action and social structure: The problem of embeddedness.” American Journal of Sociology, 91: 481-510. Mechanisms of handling of malfeasance in economy: 47 Networks: Granovetter, 1985 “The embeddedness approach to the problem of trust and order in economic life, then, threads its way between the oversocialized approach of generalized morality and the undersocialized one of impersonal, institutional arrangements by following and analyzing concrete patterns of social relations. “ (p.493)

98. “Economic action and social structure: The problem of embeddedness.” American Journal of Sociology, 91: 481-510. Discussion of markets and hierarchies research program (Oliver Williamson’s ideas): Williamson’s question: “under what circumstances economic functions are performed within the boundaries of hierarchical firms rather than by market processes that cross these boundaries” (p.493) Williamson’s answer: “the organizational form observed in any situation is that which deals most efficiently with the cost of economic transactions” (p.493). In particular, internal hierarchy is preferred over market transactions because of market failures: “Bounded rationality” problem “Opportunism” problem 48 Networks: Granovetter, 1985

99. “Economic action and social structure: The problem of embeddedness.” American Journal of Sociology, 91: 481-510. Discussion of markets and hierarchies research program (Oliver Williamson’s ideas): 49 Networks: Granovetter, 1985 Source: Williamson (1986), p.117

100. “Economic action and social structure: The problem of embeddedness.” American Journal of Sociology, 91: 481-510. Critique of markets and hierarchies research program: “The efficacy of hierarchical power within the firm is overplayed” (p.494) It is an “undersocialized conception that neglects the role of social relations among individuals in different firms in bringing order to economic life” (p.495) “A wedge is opened here for analysis of social structural influences on market behavior. But Williamson treats these examples as exceptions and also fails to appreciate the extent to which the dyadic relations he describes are themselves embedded in broader systems of social relations” (p.495) 50 Networks: Granovetter, 1985

101. “Economic action and social structure: The problem of embeddedness.” American Journal of Sociology, 91: 481-510. The author's alternative to markets and hierarchies research program: “I argue that the anonymous market of neoclassical models is virtually nonexistent in economic life and that transactions of all kinds are rife with the social connections described.” (p.495) “the network of social relations within the firm might be more dense and long-lasting on the average than that existing between” (p.495) “there is evidence all around us of the extent to which business relations are mixed up with social ones” (p.495) “It is not only at top levels that firms are connected by networks of personal relations, but at all levels where transactions must take place” 51 Networks: Granovetter, 1985

103. “we should expect pressures toward vertical integration in a market where transacting firms lack a network of personal relations that connects them or where such a network eventuates in conflict, disorder, opportunism, or malfeasance. On the other hand, where a stable network of relations mediates complex transactions and generates standards of behavior between firms, such pressures should be absent.” (p.503)52 Networks: Granovetter, 1985

105. Preceding theoretical view on the question

106. TCE (transaction cost ecomonomics), inherited from prior vertical integration (“make-or-buy”) studies

107. Problem: ignorance of trust building between the partners (e.g., in case of repeated alliances)53 Networks: Gulati, 1995

109. Nonequity-based (market exchanges). Key problem – possible opportunistic behavior of partners

110. R&D alliances are considered exceptionally risky (thus, must tend to be equity-based, according to TCE view)

111. Key theoretical proposition: previous experience of alliances builds trust between partners, resulting in less frequent usage of equity-based ventures in future54 Networks: Gulati, 1995

113. 1970-1989 time span

114. Unit of analysis – individual joint venture announced

115. Statistical technique:

116. “Logit” regression55 Networks: Gulati, 1995

118. (2) that the larger the number of prior alliances between two firms, the less likely are their subsequent alliances to be equity based – trust approach prediction supported

119. (3) that the larger the number of prior equity alliances across two firms, the less likely their subsequent alliances are to be equity based – trust approach prediction supported

120. (4) that international alliances are more likely to be equity based than domestic alliances – trust approach prediction supported56 Networks: Gulati, 1995

121. Emphasis on environmental (social networks) influence on strategy (both developed and implemented) Positive theoretical perspective, but easy to derive practical implications Links with organizational ecology (pressures from the network of connections), and institutional theory (networks as the source of pressure for isomorphism) Alternative perspective on industry economics, not based on neoclassical model of rational atomic actors Practical implications, e.g.: Stakeholder management (in terms of building trust) Global business Lamitations: Hard to research ??? other ??? 57 Networks: Strategic Management Perspective

122. Barron, D. 2003. “Evolutionary theory” pp.74-97, in The Oxford Handbook of Strategy, v.1, Faulkner, D.O. and Campbell, A., eds, Oxford: Oxford University Press. Baum, J. A. C. and Mezias, S. J. 1992. “Localized competition and organizational failure in the Manhattan hotel industry, 1898-1990”, Administrative Science Quarterly, 37: 580-84. Dacin, MT., Goodstein, J. & W.R. Scott. 2002. “Institutional theory and institutional change: Introduction to the special research forum.” The Academy of Management Journal, 45(1): 43-56. DiMaggio, P.J. & Powell, W.W. 1983. “The iron cage revisited: Institutional isomorphism and collective rationality in organisational fields.” American Sociological Review, 48, 147-160. Granovetter, M. 1985. “Economic action and social structure: The problem of embeddedness.” American Journal of Sociology, 91: 481-510. Gulati, R. 1995. “Does familiarity breed trust? The implications of repeated ties for contractual choice in alliances.” Academy of Management Journal, 38: 85-112. Haveman, H. A. 1993. “Follow the leader: Mimetic isomorphism and entry into new markets.” Administrative Science Quarterly, 38: 593-627. Hannan, M. T. and Freeman, J. H. 1977. “The population ecology of organizations.” American Journal of Sociology, 82: 929-964. Loveridge, R. 2003. “Institutional approaches to strategy” pp.98-131, in The Oxford Handbook of Strategy, v.1, Faulkner, D.O. and Campbell, A., eds, Oxford: Oxford University Press. Meyer, J. W. and Rowan, B. 1977. “Institutionalised organizations: Formal structure as myth and ceremony.” American Journal of Sociology, 83: 340-63. Scott, W. Richard 1995. Institutions and Organizations. Thousand Oaks, CA: Sage. Scott, W. Richard 2004a. “Institutional theory.” pp. 408-14, in Encyclopedia of Social Theory, George Ritzer, ed. Thousand Oaks, CA: Sage. Scott, W. Richard 2004b. “Institutional Theory: Contributing to a Theoretical Research Program”, in Great Minds in Management: The Process of Theory Development, Ken G. Smith and Michael A. Hitt, eds. Oxford UK: Oxford University Press. Retrieved from http://icos.groups.si.umich.edu/Institutional%20Theory%20Oxford04.pdf Williamson, O. 1986. “Economic organization. Firms, markets, and policy control” . NY: New York University Press. References 58