BUS 374 – Session 4 Organization theory Do organizations always act similarly?

Agenda Memo presentation #1 (Hannan & Freeman, 1977) Memo discussion #1 Memo presentation #2 (Hsu & Hannan, 2005) Memo discussion #2 Do organizations always act similarly?

New Institutional Theory DiMaggio & Powell, 1983 “Do organizations always act similarly?”

Iron Cage Revisited Bureaucracy as an Iron Cage – Max Weber Set up for increasing efficiency of government machinery But once set, it takes a life of its own… Rules, procedures and hierarchy for the sake of rules and not for efficiency

Too many procedures and redundant hierarchy

Increasing adoption of bureaucracy in organizations “making organizations more similar without necessarily making them more efficient” But why? Isomorphic pressures Competitive isomorphism as discussed by Hannan & Freeman (1977) is important But more importantly, institutional isomorphism – a form of legitimacy seeking

Institutional sources of isomorphism Coercive Mimetic Normative

Coercive isomorphism Pressures from organizations that the organization in question in connected to or dependent on. Government mandates Suppliers Consumers Can be both explicit and subtle

Some predictions for coercive isomorphism Organization level A-1: Dependence on another organization A-2: Centralization of resource supply positively moderates A-1 Field level B-1: Dependence on single (or homogenous) source(s) in a field B-2: Greater state intervention

Mimetic isomorphism Modelling after successful organizations Driven by uncertainty about what the best course of action is Also by causal ambiguity Consulting firms play a role Sometimes even innovation can be a result of imitation (of processes) – i.e., setting up an R&D division.

Some predictions for mimetic isomorphism Organization level A-3: Uncertainty leads to imitation of successful organization’s practices A-4: Ambiguity of goals leads to imitation of successful organization's actions Field level B-3: Fewer the models, quicker the isomorphism B-4: Greater uncertainty and more ambiguity of goals, stronger isomorphic tendencies

Normative isomorphism Pressures which are brought about by professions People hired with similar education backgrounds will tend to approach problems in similar way Inter-organizational mobility of personnel can lead to import of norms

Some predictions for normative isomorphism Organization level A-5: Reliance on academic credentials for hiring leads to similarity of practices A-6: Executives participating in professional organizations can lead to similarity of practices Field level B-5: More professionalism in the field, more isomorphism

Middle status conformity – Phillips & Zuckerman, 2001 Isomorphic behavior is status dependent High and low status actors deviate Middle status actors conform

Action evaluation by audience Audience classify offerings as legitimate i.e., legitimacy is a yes or no Screen out illegitimate offerings Select among legitimate offerings Over time, status implies legitimate offerings Higher the status, higher the implied legitimacy of offerings But middle status are scrutinized Low status are not even considered

Why middle status conform Middle status players risk status downgrades High status players enjoy a relatively stable position due to default legitimacy Low status players do not get evaluated and don’t pursue legitimate actions, as it is costly and useless for status mobility

High, Middle and Low High: The legitimate players Middle: The wannabes legitimate players Low: The Non players

Empirical test 1: Silicon valley law firms Corporate law most coveted Family law is not so Diversification of corporate law firms into family law is seen as deviance High status actors can show it as a value addition to their corporate clientele (a disclaimer) Middle status actors cant say the same Low status actors don’t care Found a U shaped relationship between status and diversification into family law

Empirical test 2: Investment analysts To make informed buy/sell recommendations analysts need insider information Insiders will be reluctant to provide information if analysts is likely to issue a sell recommendation So analyst are discredited for issuing sell recommendation Large institutional investors seek honesty from analyst But institutional investors also know that an analyst without good standing with insiders will not be able to make good judgment, hence a compromise is a hold recomendation

Status difference in buy/sell recommendations High status analyst can issue sell recommendations as they will be seen as the bold ones who did report their recommendation honestly Low status analyst issue sell recommendations as they do not have insider network and neither can they get it by conforming to their expectations Middle status analyst issue buy recommendations alone to keep their network with insiders intact – i.e., to remain legitimate Found U shaped relationship between status and issuance of sell recommendation

That’s it for today For our next session we will have our EXAM: IN Class, Open Book (i.e., you are allowed to bring the articles, lecture slides and memos) Short-answer type questions