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Similar to most outside-in theories, however, contingency theory has a rather mechanistic and deterministic conception of management, which leaves little discretion to management to influence the external environment (Bourgeois, 1984). Nevertheless, the influence of contingency theory is still present today, given that it has “laid the groundwork for an approach to organizational theory that views organizations and their various subsystems as adaptive entities in relation to their environment.” (Jaffee, 2001: 214). This perspective is even present in some of the inside-out perspectives, such as the dynamic capabilities perspective, which I will discuss below. Resource Dependence Theory Whereas the I/O literature focuses on the positioning of an organization relative to the structural forces in an industry, and Contingency Theory on the adaptation of the organization’s internal structures to cope with the external context, the Resource Dependence Theory (RDT) is mainly interested in the management of the interdependencies organizations have with their surroundings.

In the introduction to a revised version of the seminal work in Resource Dependence Theory, “The External Control of Organizations: A Resource Dependence Perspective”

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(Pfeffer & Salancik, 1978), Jeffrey Pfeffer summarized the core of the RDT in three major themes (Pfeffer & Salancik, 2003). First, he argued that the central theme in the resource dependence theory is that the social context in which organizations operated, mattered: “The idea was that if you wanted to understand organizational choices and actions, one place to begin this inquiry was to focus less on internal dynamics and the values and beliefs of leaders and more on the situations in which organizations were located and the pressures and constraints that emanated from those situations.” (Pfeffer & Salancik, 2003). An important implication for this is the decreasing impact of managers and individuals in explaining organizational performance and to put much more emphasis on the organization as an economic actor embedded in networks of interdependencies and social relationships (Granovetter, 1985).

The second theme featured the construct of “power” as a critical ingredient for organizational survival or success. Underlying the RDT, and largely influenced by the contemporary discussions in the general economics literature, are the strategic influences that come with power asymmetries between organizations. Power asymmetries may lead organizations to hold-up situations (Williamson, 1975) and opportunistic behavior (Williamson, 1985). Due to the particularities of a firm’s interdependencies and their embeddedness in the social space, some organizations acquire more powers than others.

The third theme is the role of organizational strategy. Given the organizational dependencies on the external environment, the role of the strategist is to seek opportunities to diminish the dependencies on other organizations by coopting sources of constraint (Selznick,

1949) and to negotiate more favorable dependencies. In this sense, the RDT is one of the few outside-in perspectives that allows for managerial discretion in the management of externally imposed constraints (Pfeffer & Salancik, 1978; Oliver, 1991; Jaffee, 2001): “rather than viewing organizations as largely passive or impotent in relation to environmental forces, resource dependence theory emphasizes proactive strategies that can be pursued to deal with environmental constraints” (Jaffee, 2001: 218).

Taken together, the role of strategy according to the RDT is to work towards two related objectives: (1) to acquire control over critical resources to minimize the organizational dependence on external actors, and (2) to ensure a control over resources that further a dependency of the external environment on the focal firm.

Chapter 2 Institutional theory Whereas the RDT already expanded the influence of the social context on organizational performance, institutional theory further emphasized the notion that organizational success and survival is essentially determined by the prevailing institutional forces in which firms operate (Meyer & Rowan, 1977; DiMaggio & Powell, 1983). Rather than focussing on the question how organizations differ from one another, DiMaggio and Powell were interested in the question “why there is such startling homogeneity of organizational forms and practices” (1983: 148). Institutional theorists are unsatisfied with the arguments from economic theories that homogeneity in markets and organizations is the result of rational choices of individuals that are guided by economic pressures for efficiency.

Many organizations and individuals, they argue, develop and continue practices and organizational forms that are clearly at odds with the prescriptions of economic optimization.

Instead, organizational behaviour is the result of choices that are made within a range of possibilities that are determined by habits, traditions, taken-for-granted and cultural assumptions, but also by legally or other normatively imposed restrictions (product standards, occupational safety, etc). “A key institutional insight is that individual preferences and choices cannot be understood apart from the larger cultural setting and historical period in which they are embedded.” (Powell, 1991) Institutional theory posits that organizations will seek social approval or “legitimacy” (Suchman, 1995) through conformity with the ‘isomorphic’ pressures of social prescriptions and expectations (Meyer & Rowan, 1977; DiMaggio & Powell, 1983; Oliver, 1997; Dacin, 1997; Zimmerman & Zeitz, 2002), especially in uncertain and unstable situations. They do so,


“Organizational success depends on factors other than efficient coordination and control of productive activities. Independent of their productive efficiency, organizations which exist in highly elaborated institutional environments and succeed in becoming isomorphic with these environments gain the legitimacy and resources needed to survive” (Meyer & Rowan, 1977: 352).

New firms in search for resources, for example, depend a great deal on the perceived and projected legitimacy that they have relative to the institutional expectations in which they operate (Dacin, 1997; Zimmerman & Zeitz, 2002; Davidsson, Hunter, & Klofsten, 2006). The motives for organizational and individual behaviour thus “extend beyond economic optimization to social justification and social obligation” (Oliver, 1997: 699).

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Institutions rest on three pillars (Scott, 2001): a regulative, a normative and a cognitive pillar. Each of these pillars is the result of an institutional force (DiMaggio & Powell, 1983) that shapes the expectations and norms of each pillar. Coercive pressures (norms and rules that are enforced through legal means and sanctions) result in regulative institutions;

normative pressures (the norms and social obligations that come with membership of a community) result in normative institutions; and mimetic forces (the norms and taken-forgranted assumptions that are engrained in habitual interactions and behaviours) result in cognitive institutions. Alternative denominations of these categories have also been used in the literature. Spender, for example, formulated the central role of strategic management as dealing with uncertainty. He further argued that “industry recipes” – “the shared knowledgebase that those socialized into an industry take as familiar professional common sense” (Spender, 1989: 66) – are important elements that managers tap into to resolve the uncertainty in their environment. In DiMaggio and Powell’s (1983) framework, these “industry recipes” would be equivalent to the cognitive institutions that firms use to deal with environmental uncertainty. Similarly, Prahalad and Bettis’s coined the concept of the “dominant logic” as “a mind set or world view or conceptualization of the business and the administrative tools to accomplish goals and make decisions in that business.” (Prahalad & Bettis, 1986: 491).

Dominant logics, like cognitive institutions, are the result of people developing a shared understanding of the world, by interacting with each other over an extended period of time.

Such shared understanding not only drive people’s interpretations, but are enacted as a shared reality as well.

Despite the powerful message and new insights from the institutional theory as developed by DiMaggio and Powell, and Meyer and Rowan, this theory has been criticized for the fact that “much of the imagery of institutional theory portrays organizations too passively and depicts environments as overly constraining” (Powell, 1991). From the end of the 1980’s and the beginning of the 1990’s, much of the theoretical (Oliver, 1991; Barley & Tolbert, 1997; Seo & Creed, 2002) and empirical (Leblebici, Salancik, Copay, & King, 1991;

Brint & Karabel, 1991; Palmer & Barber, 2001; Seo & Creed, 2002; Greenwood & Suddaby,

2006) work within institutional theory has increasingly embraced more latitude in the way organizations can go about their institutional context. Especially when the institutional context results in contradictory expectations (Oliver, 1991; Seo & Creed, 2002), or when it threatens the very survival of the organization (Sherer & Lee, 2002; Greenwood, Suddaby, & Hinings, 2002), will organizations take action beyond what is considered institutionally legitimate. Depending on the context in which an organization operates, it may develop a

Chapter 2

range of strategies that range from conformity all the way to the manipulation of the institutions (Oliver, 1991). Recently, these latter strategies have been getting specific attention, because they represent a “paradox of embeddedness” (Seo & Creed, 2002): how can organizations change the very institutions that guide their thinking about the options they can take?

The implication of institutional theory for strategy is that organizational survival and success depends on the legitimacy a firm can develop in its context. Besides carefully assessing the organizational efficiency, strategists should take the institutional expectations of the environments in which they operate into account. Yet, depending on a number of contextual factors, a number of strategies can be developed that may have as their goal to influence the institutional context. Population Ecology Largely in line with many of the insights of institutional theory and increasingly intertwined with it (Dacin, 1997), the Population Ecology derives its theoretical assertions from the metaphorical comparison of organizational populations with those of biological populations. Importantly, the level of analysis in population ecology is not at the level of individual organizations, but at the level of a population, a collection of organizations in an industry (Jaffee, 2001). Similarly, the analytical focus of the ‘outside world’ is not on the entire environment, but on a population’s ecological niche: the resource pool that a population draws from and for which its members compete (Hatch & Cunliffe, 2006). As a result, the Population Ecology perspective is informative on what strategies are best suited for populations in a particular environment (Jaffee, 2001).

Population ecologists are especially interested in organizational ‘birth’ and ‘death’:

organizational success can therefore be measures by its survival or not. The central conception of population ecologists is that performance is the result of a system of variation, selection, and retention of practices developed by organizations that compete for scarce resources for their survival (Hannan & Freeman, 1977; Hannan & Freeman, 1984). Whereas some variety may exist in strategies and organizational forms within a population, resource scarcities will start a selection process that favors the survival of the best suited organizations and the ‘death’ of others. Markets thereby follow a logic that is akin to the Darwinian logic of natural systems. In order to increase the possibility of survival, however, organizations may ‘mimic’ the strategies and organizational forms of successful organizations, hoping to be retained by the population as a result.

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