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Institutional Theory
Institutional theory addresses the central question of why all
organizations in a field tend to look and act the same (DiMaggio &
Powell, 1983). The core concept of institutional theory is that
organizational structures and processes tend to acquire meaning and
achieve stability in their own right, rather than on the basis of their
effectiveness and efficiency in achieving desired ends, such as the
mission and goals of the organization (Lincoln, 1995). In the initial
stages of the organizational life cycle, there is considerable variety in
organizational forms. Over time, however, there is startling homogeneity
in organizational structures and practices.
Institutional theory posits that institutions are a critical component
in the environment. Institutions have been defined as regulative,
normative, and cognitive structures and activities that provide stability
and meaning for social behavior (Scott, 1995, p. 33). Examples of
institutions include laws, regulations, customs, social and professional
norms, culture, and ethics. Institutions exert a constraining influence
over organizations, called isomorphism, that forces organizations in the
same population to resemble other organizations that face the same set
of environmental conditions (Hawley, 1968).
Institutions exert three types of isomorphic pressure on
organizations: coercive, normative, and mimetic (DiMaggio & Powell,
1983). Coercive isomorphism refers to pressure from entities who have
resources on which an organization depends. Mimetic isomorphism
refers to the imitation or copying of other successful organizations when
an organization is uncertain about what to do. Normative isomorphism
refers to following professional standards and practices established by
education and training methods, professional networks, and movement
of employees among firms.
New organizational forms typically do not emerge on the basis of the
availability of an unused resource. Instead, new organizational forms
emerge once they are viewed by society as legitimate (Aldrich & Fiol,
1994). Legitimacy refers to the extent to which an organizations actions
are socially accepted and approved by various internal and external
stakeholders (Kostova, Roth, & Dacin, 2008) and are consistent with
widely held norms, rules, and beliefs (Sonpar, Pazzaglia, & Kornijenko,
2009). When organizations submit to institutional pressures and
conform to social norms for certain organizational structures and
processes, they are rewarded by earning increased legitimacy, resources,
and survival capabilities for their operations (Oliver, 1997; Yang &
Konrad, 2010).
Institutional theory posits that institutionalized activities occur due
to influences on three levels: individual, organizational, and
interorganizational (Oliver, 1997). On the individual level, managers
follow norms, habits, customs, and traditions, both consciously and
unconsciously (Berger & Luckmann, 1967). On the organizational level,
shared political, social, cultural, and belief systems all support following
traditions of institutionalized activities. On the interorganizational level,
pressures from government, industry alliances, and expectations from
society define what is socially acceptable and expected organizational
behavior, which pressures organizations to look and act the same
(DiMaggio & Powell, 1983).
Institutional theorists are especially interested in examining those
organizational structures and practices that have no obvious economic or
technical purpose. For example, an organization might retain an
unreliable supplier merely out of habit, or because it has always done it
that way. An action has become institutionalized when the reason for
its existence is merely that everybody else is doing it too. Institutional
theorists argue that many organizational actions are so taken for granted
that managers no longer question why a specific action was started or
why a specific action should continue (Oliver, 1997).
Institutional theorists have gone astray, such as in the
misinterpretation of DiMaggio and Powells classic iron cage paper
(1983). DiMaggio and Powell argued that organizations become
isomorphic within their institutional environments. Institutional
researchers erroneously took this work to mean that (1) organizations
become isomorphic with each other, so over time, all become identical to
each other; and (2) organizations are only passive to the elements and
forces in their environments (Suddaby, 2010).
In response, DiMaggio (1988) attempted to get institutional theorists
back on track. He argued that organizations are not prisoners of their
environmental forces. He stressed that organizations often act in creative
ways to change their institutional environments, in a process that he
labeled institutional entrepreneurship.
As a result of this change in theoretical focus, institutional theorists
investigated how organizations can act as change agents. For example,
Oliver (1991) examined the range of ways in which organizations can
conform or resist. More specifically, in response to institutional
pressures and expectations to conform, organizations can adopt the
following strategies (in ascending order of active organizational
resistance): acquiescence, compromise, avoidance, defiance, or
manipulation.
Institutional entrepreneurs are actors who create new organizations
or transform existing ones (DiMaggio, 1988; Garud, Hardy, & Maguire,
2007). The actors can be individuals, groups, organizations, or groups of
organizations, but they must both initiate and implement divergent
changes (Battilana, Leca, & Boxenbaum, 2009).
Institutional theory research underwent a significant change in the
late 1970s and early 1980s. Prior to that time, classical institutional
theorists examined such issues as coalitions, competing values,
influence, power, and informal structures (Greenwood & Hinings, 1996).
Selznick (1957) is often cited as a source of the old approach. The new
(neo) institutional theorists examine organizations at the field level amid
both competitive and cooperative exchanges with other organizations,
and focus on legitimate and taken for granted structures and processes.
Suddaby (2010) proposed four areas of research that appear to be the
promising avenues for future institutional theory: categories, language,
work, and aesthetics. Heugens and Lander (2009) examined three
ongoing disputes among institutional theorists. First is the quarrel
regarding the supremacy of structure over agency. This debate examines
whether organizational structures and processes emerge due to macro
societal forces or due to organizations taking action to create them.
Second is the continuing debate over the influence of conformity on
organizational performance. Third is the examination of the influence of
within-field variability on the extent to which organizations adopt
structures and practices that are similar to their peers, and the rate at
which they do so.
Criticisms and Critiques of the Theory
Although there is considerable agreement in the institutional theory
literature on the necessity and benefits of legitimacy, there are
exceptions. For example, Kraatz and Zajac (1996) found little evidence
supporting the constraints of legitimacy. Phillips and Zuckerman (2001)
argued that it is the middle-status players who feel the need to act
legitimately. High-status players have the reputational capital to deviate
from the norm, and low-status players have to do whatever it takes to
survive, whether legitimate or not.
Some researchers have questioned the reasoning behind moving
from classic institutional theory and solely toward new institutional
theory (Koelble, 1995; Selznick, 1996). The old and new approaches both
have their advantages and disadvantages, and should be integrated into
modern institutional theory.
Another criticism of institutional theory has had to do with the way
that institutions have been measured. Peters (2000) argued that
researchers have overlooked the problem of appropriately measuring
institutions. Suddaby (2010) argued that institutional research moved
from treating organizations as passive dopes to hypermuscular
supermen (p. 15). Any change, no matter how slight, is treated as
institutional, and any change agent is regarded as an institutional
entrepreneur. Dacin, Goodstein, and Scott (2002) warned that
institutional research should only value instances of significant,
profound, field-level change, and not merely incremental changes.
Critics have argued that the processes underlying institutionalization
have not been examined (Phillips, Lawrence, & Hardy, 2004).
Institutional theory has tended to focus on the effects of
institutionalization rather than on the process through which
organizations become institutionalized. This has resulted in a view of
organizations merely as black boxes with nothing of value inside.
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