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17Institutional 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 ofinstitutions 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 haveresources 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

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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

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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 theirenvironmental 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).

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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 onorganizational 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 TheoryAlthough 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 institutionaltheory (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

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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 whichorganizations become institutionalized. This has resulted in a view of

organizations merely as black boxes with nothing of value inside. 1

1https://www.inkling.com/store/book/management-and-organization-theory-jeffrey-miles-

1st/?chapterId=6e9f0e30e1b04dc0818bb6f74d27ea0d