Institutional Theory Flashcards
What is IT?
Institutional theory tries to explain how institutions and organizations interact and how organizations react to external pressures originated from the state, the law, the professions, national cultures or norms and not (like New Institutional Theory) how they affect costs of exchange (like New Institutional Theory).
It seeks to explain increasing homogeneity among organizations over time for the sake of increasing legitimacy of organizations in public: at the beginning of the life cycle, organizational fields display
considerable diversity in approach and form, but over time as a field becomes well established there is an inexorable push towards homogenization.
The organizational field as the key concept constitutes a recognized area of institutional life: key supplier, resource and product consumers, regulatory agencies and other organizations that produce similar
services or products.
Key assumptions
✓ Bounded rationality due to imperfect information and cognitive limitations of decision makers
✓ Embeddedness of organizations in institutional environment (political, legal, social, cultural)
✓ Institutional environment creates expectations regarding appropriate and desirable organizational structures, strategies and processes
✓ Organizations resemble one another due to institutional pressures
✓ Organizational survival depends more on legitimacy (i.e. social fitness) than on efficiency (i.e. economic fitness)
✓ Organizations as respondents to institutional pressures (macro perspective) and shapers of institutional environment (micro perspective)
Basic Idea DiMaggio & Powell
• In contrast to population ecology, they don’t want to understand diversity and variety but similarity/homogeneity of organizations
• Over time organizations in one institutional field or one organizational field will become increasingly similar (homogenization)
• Focus on institutions and their interrelationship with organizations
• Organizations’ diversity will be reduced over time due to institutional pressures
Essence of the theory:
• At the beginning of lifecycle of an organizational field there’s huge diversity/ heterogeneity in structures, strategies and practices
• After a time, organizations are exposed to institutions; over time they conform to the expectations of institutions in their respective environment and they lose in diversity as they converge.
→ THIS PROCESS OF CONVERGENCE IS KNOWN AS ISOMORPHISM
• Reasons for organizations to become similar/homogeneous:
o Competitive isomorphism → Result of selection (population ecology theory)
o Institutional isomorphism → Organizations worry less about efficiency and more about legitimacy, because legitimacy (perception that the organization is
acceptable, desirable and appropriate) drives the access to scarce resources and the survival of organizations
Institutions
Institutions are regulative, normative and cognitive structures that provide stability to social
interactions. They are socially constructed rules of the (social) game, which guide and constrain human behavior and interactions. Examples are: Formal and informal rules, laws and regulations, behavioral norms, values and professional standards, symbols, schemes and beliefs, etc.
Regulative:
They are regulative rules based on laws, rules and regulations which are legally sanctioned and must be obtained.
Normative:
These are binding expectations which are morally governed and some kind of social obligation. They should be obtained and are based on appropriateness.
Cognitive:
These rules are based on a taken-for-granted basis/ a shared understanding and
might be obtained
Legitimacy vc Efficiency
“Legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions.”
It is a shared perception of appropriateness and desirability, i.e. an organization and its structures, strategies and practices are considered as acceptable by others.
Organizational legitimacy is more important for organizational survival than organizational efficiency and thus organizational survival depends primarily on legitimacy (social fitness).
Organizational legitimacy facilitates resource access and protects the organization from external critique. To obtain and maintain legitimacy organizations conform to institutional pressures which in turn originate from institutions such as the state, the law, the professions, national cultures or norms. Conformity to institutional pressures then triggers a process of homogenization in organizational structures, strategies and practices.
Efficiency (economic fitness) is less essential for organizational survival. Organizations can obtain and maintain legitimacy (and survive) by adopting prevailing structures, strategies and practices irrespective of their effectiveness. Homogenization in organizational structures, strategies and practices can be better explained by institutional isomorphism
than by competitive isomorphism.
Subjects of legitimation (who is assessed): individuals, (top management) teams, organizations and their specific structures, strategies and practices
Sources of legitimacy (who does assessment): audiences include the state, regulatory authorities, accreditation agencies, the media or the general public
Types of legitimacy (cause for giving legitimacy): include pragmatic (based on audiences’ self
interested calculations), moral (based on audiences’ normative evaluations) and cognitive legitimacy (based on audiences cognitive acceptance of entity as necessary or inevitable)
Macro vs. Micro Perspective
Contrast between institutional diffusion and institutional entrepreneurship.
Organizations can be seen as respondents to institutional pressures (macro perspective) and shapers of institutional environment (micro perspective).
Macro Perspective → Institutional Diffusion
Institutions are exogenous and exert pressure on organizations within a field. Based on
institutional determinism organizations act as passive respondents as they conform to external expectations and norms by adopting socially accepted structures, strategies and practices.
Micro Perspective → Institutional Entrepreneurship
Institutions are endogenous and shaped by the behavior of organizations within a field.
Under the assumption of organizational agency organizations act as active shapers and define external expectations and norms thereby creating, maintaining and repairing institutions.
Isomorphism
“Isomorphism is a constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions.”
- It is a process of homogenization fuelled by conformity to institutional pressures and describes the idealtypical
response of organizations to institutional pressures.
- It triggers organizations within a certain organizational field to conform to socially accepted structures, strategies, and practices irrespective of their effectiveness and thereby leads to homogenization of the organizational field.
- It is motivated by the need for legitimacy rather than efficiency.
Determinants on the organizational level: degree of resource dependence (+), uncertainty about means-ends links (+), ambiguity of organizational goals (+), reliance on academic credentials (+) & participation in trade associations (+)
Determinants on the organizational field level: centralization of resources (+), transactions with the state (+), variety of organizational models (-), technological uncertainty (+), degree of professionalization (+)
Types of isomorphism
❖ Coercive Isomorphism: means conformity to expectations of powerful entities such as the state, regulators or dominant partners. It is motivated by the need to maintain endorsement and salient due to political control & dependencies. It is perceived as a
force or act of persuasion → Examples: Environmental regulations, accounting and reporting rules, corporate governance codes, Interfirm IT infrastructure
❖ Normative isomorphism: Normative isomorphism primary stems from professionalization (Professionalization: collective struggle of an occupation to define the conditions and methods of their work). Especially two aspects of professionalization cause isomorphism: the homogeneity of professionals and the growth of professional networks. With universities and professional training institutes producing managers and staff with the same education and mindset,
individuals become almost interchangeable across different organizations. This is supported by the fact that in specific organizational fields managers and key staff are drawn from the same universities and filtered on a common set of attributes and thus, approach decisions in much the same way. → Examples: Standardized training programs, common socialization processes, professional career tracks, shared vocabularies
❖ Mimetic Isomorphism: does not derive from outer pressure. Instead organizations tend to model themselves after similar organizations in their field that they perceive to be more legitimate or successful even though it is not rational from an efficiency perspective. This is motivated by the need to overcome uncertainty. It is salient due to visibility of peer behaviour and perceived as a decision-making heuristic. When
organizational technologies are poorly understood when goals are ambiguous, or when the environment creates symbolic uncertainty, organizations may model
themselves on other organizations.
→ Examples: Management fashions such as
TQM, new organizational structures, business models
Decoupling
Decoupling means separation of visible formal structures from operational activities, and thereby decoupling organizational legitimacy and efficiency, to survive.
It is a strategy of combining organizational legitimacy and efficiency to ensure organizational survival.
Organization’s overall goal is survival, which is in turn dependent on both legitimacy and also efficiency. Hence, the organization decouples both parts to maximize the probability for survival.
Normally, there is a conflict between legitimacy and efficiency: Legitimacy threatens efficiency and efficiency on the other hand threatens legitimacy. Solution to this conflict is the decoupling of institutionalized structures from operational coordination and control activities (separation of visible structures and internal operations).
This means preservation of standardized, legitimate and formal structures while activities or management practices vary in response to an organization’s operational considerations.
Institutional Arbitrage
Institutional Arbitrage is a “solution” to enhance efficiency while preserving legitimacy in the own institutional environment (one type of institutional decoupling) in an attempt to optimize organizational survival prospects.
It described the exploitation of institutional differences between home and host country environments by organizations.
It overcomes the tension between maintaining legitimacy and pursuing efficiency goals by using institutional differences (e.g. regulations, norms, rules or societal pressures) in environments. Non-compliant activities are decoupled by outsourcing them to other institutional environments. Examples are: producing cloths in other countries, where regulations are much less strict and production much cheaper.
Strategies as response to organizational pressure
Organizations have a broad range of possible responses to organizational pressures:
Acquiesce: means habiting by following invisible, taken-for-granted norms, imitating by mimicking institutional models or complying by obeying rules and accepting norms.
Comprise: means balancing expectations of multiple constituents, pacifying by placating and accommodating institutional elements or bargaining by negotiating with institutional stakeholders.
Avoid: means concealing by disguising conformity, buffering by loosening institutional attachments or escaping by changing goals, activities, or domains.
Defy: means to dismiss by ignoring explicit norms and values, challenging by contesting rules and requirements or attacking by assaulting the sources of institutional pressures.
Manipulate: means co-opting by importing influential constituents, influencing by shaping values and criteria or controlling by dominating institutional constituents and processes.
