Institutional theory core ideas, isomorphism and financial market institutions

Hello everyone,

following up on the last SBM lecture, I would like to point your attention to some more ideas about institutions, institutionalist core ideas and isomorphism. I will particularly point out some ideas with respect to financial markets institutions and norms.

According to Hoffman (1999), institutions are beliefs and norms that describe reality for an entity, explaining what is and is not, what can be acted upon and what cannot. We encounter institutions everywhere in our lives: e.g. family, money, financial markets, definition of firms, etc.

The financial markets institutions, for example, explain what publicly traded firms are and what they should do and which norms to follow, e.g. increasing stock value. Conforming to those norms gives the firm legitimacy, i.e. social acceptance and credibility. Firms that fail to follow legitimate means are said to be more likely to fail.

According to institutionalists, while early adoption of a practice is driven by efficiency considerations, later adoption of a practice is driven by legitimacy considerations. As a practice becomes widely diffused by organizations, this practice adopts a norm status and moreover, organizations become isomorphic, i.e. they come to resemble one another.

Robin pointed out three mechanisms of isomorphism (DiMaggio & Powell,1983) in the lecture. I am not going to repeat them, but provide some examples.

• Coercive isomorphism: Sticking to the example of financial markets institutions and publicly traded firms, the widely known Sarbanes-Oxley Act (2002) e.g. prescribes a set of practices that US publicly traded firms should follow.
• Normative isomorphism: Results from professionalization. Professionals can be inside an organization (e.g. finance or HR managers) or outside an organization (e.g. security analysts, rating agencies, members of accounting boards, etc.) They often have similar backgrounds and view the world in a similar fashion. As we know, security analysts for instance developed the norm that publicly traded firms are expected to report earnings each quarter that meet or exceed the security analysts’ consensus forecasts.
• Mimetic isomorphism: occurs when managers are uncertain about what to do. To be on the safer side, they copy organizations that are perceived as more legitimate. Mimetic isomorphism can diffuse via indirect and direct contacts: 1) indirect contacts being e.g. consultants advising an organization on imitating a legitimate organization although the focal organization has no direct contact with the other firm and 2) direct contacts being e.g. firms whose directors sit on a certain board of directors of a firm that is perceived as adopting legitimate practices.

If you want to know more about responses a firm can adopt to pressures of conformity and resistance to norms, check out the article by Oliver (1991).

Hoffman, A. J. 1999. Institutional evolution and change: Environmentalism and the U.S. chemical industry. Academy of Management Journal. 42(4): 351-371.

DiMaggio, P. J., & Powell, W. W. 1983. The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review. 48(2): 147-160.

Oliver, C. 1991. Strategic responses to institutional processes. Academy of ManagementReview. 16(1): 145-179.

 

 

 

 

Organizational change / implementing a change strategy

In the past weeks, we studied companies like Valmet or Nokia that were/are often confronted with potential new business opportunities as well as changing environments. For this matter, I would like to draw your attention to the concept of organizational change. All organizations might have to change at some point, as their environment changes, opportunities emerge, their competitive environment changes, new technologies emerge, regulation changes, etc. Organizations have to adapt or change in order to remain effective.

However, being confronted with such changes is often difficult and challenging to cope with, especially if organizational inertia for example is present. Managers need recognize the necessity or unavoidability of organizational change at time. Hence, I would like to point out some methods how managers can successfully accomplish organizational change.

Nature of change:

• Revolutionary change: rapid, broad, dramatic resulting in radical transformations of doing business, new goals and structures
• Evolutionary change: gradual, narrow, incremental often involving only minor adjustments instead of transforming the whole organization

Change initiators:

• Organizational goals
• Economic forces
• Political forces
• Social forces
• Mimetic forces
• Competition

Change is often unavoidable, yet nevertheless risky for many organizations. According to Ghosal & Bartlett (1996) and also Palmer et al. (2009), between half and two third of major organizational changes fail. This is often due to resistance to organizational change.

When implementing a change strategy, consider carefully 1) how much resistance to expect and 2) the speed of change to ultimately successfully manage resistance to change. Here are finally a few methods to deal with resistance to organizational change ( Kotter & Schlesinger, 2008):

• Education and commitment: to inform people about the rationale for change (downside: time-consuming)
• Participation and involvement: to involve employee or other stakeholders as participants in the process of organizational change (downside: time-consuming and may potentially alter goals)
• Facilitation and support: to provide support such as emotional training (downside: time-consuming, costly)
• Negotiation and agreement: to offer incentives to resisters (downside: could lead to blackmailing or mounting demands)
• Manipulation and co-optation: to “buy-in” or exert power on resisters (cooptation) (downside: could have repercussions)
• Explicit and implicit coercion: to threat resisters (downside: resignation of people)

Ghoshal, S., & Bartlett, C. A. 1996. Rebuilding behavioral context: A blueprint for corporate renewal. Sloan Management Review. 37(2): 23-36.
Kotter, J. P., & Schlesinger, L. A. 2008. Choosing strategies for change. Harvard Business Review. 86(7-8): 130-139.
Palmer, I., Dunford, R., & Akin, G. 2009. Managing organizational change. McGraw-Hill/Irwin: New York, N.Y.

I have been looking into the topic a lot. Please let me know if you would like to know more about the topic, have examples, etc. Another topic you might be interested in is strategic renewal.