The institutional environment is the rules, regulations and norms to which organizations must abide in order to maintain legitimacy and support. For example, in order for a dental practice to be viewed as legitimate and survive here in town, the dentist must abide by a set of internal and external institutional norms, like having a building, providing employees with a salary, dressing professionally and dentist accreditation. However,according to Selznick's institutionalism, the institutional environment is not some abstract entity, autonomous from individuals. People run institutions and organize them in ways to better achieve their interests (Stinchcombe 1997).
According to institutional theory, organizations change as a result of coersive pressures from the institutional environment. The institutional environment molds organizations through cooptation through both formal and informal mechanisms. According to Selznick (1966:13): "Cooptation is the process of absorbing new elements into the leadership or policy-determining structures of an organization as a means of averting threats to its stability or existence." Cooptation can occur theory formal or informal means. Formal cooptation occurs when the process of absorbing new elements into leadership is public. An example of formal cooptation is a change in official appointments to key posts. Formal cooptation is associated with problems of legitimacy for the ruling group. Informal cooptation, on the other hand, occurs when the process of absorbing new elements into leadership is private. Informal cooptation is associated with pressure from powerful groups in the external environment. For example, although it was intended to be a grassroots administration, preexisting agricultural institutions were able to influence the decisions of the TVA, and create a constituency relationship between land-grant colleges and the Agricultural Relations Department of the TVA. Tensions between the formal structures of the organization and institutional power resulted in cooptation and a deviation from its intended purpose.
Institutional theory is a significant study in the field of organizational sociology, as it forced researchers to include the environment in their analysis. Institutional theory demonstrates how organizations can “take a life of their own” despite the will of organizational leaders. This advanced the field of organizational studies by moving research beyond the closed system approach and viewing organizations as systems open to the external environment.
According to population ecology, organizations are determined by their external environment. Organizations that best fit the environment survive and others fail (Hannan and Freeman 1977). From the population ecology perspective, organizations go through three stages: variation, selection and retention. Throughout the stage of variation, organizations within the population implement and try out different mechanisms. At this stage, organizations are loosely coupled, meaning that they are made up of loose, flexible relations. As organizations develop over time, they become more tightly coupled and less adaptable to change (Hannan and Freeman 1984). Selection is a process in which organizations are selected by the environment. From this perspective, organizations with a superior fit with the environment succeed; those with a poor fit fail. Additionally, the selection process favors organizations which have developed concrete organizational structures that are difficult to change (Hannan and Freeman 1984). Retention is the stage where some organizations with certain structures grow while others do not. However, once they arrive at the retention phase, organizations are tightly coupled with a structure made up of many inflexible relationships. Organizations face constraints limiting them from changing their structure and adapting to the external environment. As such, population ecology minimizes the importance of individual organizational change and adaption (Singh and Lumsden 1990).
Like institutional theory, population ecology accounts for the importance of legitimacy for organizations to survive. From the population ecology perspective, the selection process favors organizations with legitimacy and institutional support (Sing and Lumsden 1990). Furthermore, legitimacy is affected by population density. Legitimacy is low when a new organizational form first emerges and becomes increasingly legitimate as the population density expands (Hannan and Carrol 1995). Although Hannan and Carrol (1995) claim their is no inconsistency between institutional and population ecology arguments, the two perspectives are different. Whereas institutional theory accounts for group influence on what is determined legitimate, population ecology assumes legitimacy is purely the result of population size (Baum and Powell 1995).
There are both strengths and weaknesses associated with the population ecology view of organizational environments. One of the strengths of population ecology is that it shows how organizations are constrained by their environment (Hannan and Freeman 1984). This forces researchers to address issues of the environment when developing organizational theory. However, although population ecology promotes researchers to address the environment, it takes on the extreme view of environmental determinism. Population ecology just explains how environments influence organizations; it does now explain how organizations influence their environments. Furthermore, by viewing organizations as passive agents, population ecology fails to explain change among individual organizations. Instead, it sees single organizations as relatively stable and change as something that occurs primarily at the population level, as a result of the environmental selection process (not variation within organizations). However, there is ample evidence of individual companies making dramatic changes to their structure and taking action to influence their institutional environment. For example, over the course of time, General Motors has dramatically changed its organizational structure and it has used political pressure to influence public policy in such a way that ensures its survival. In conclusion, population ecology is problematic, as it fails to account for these empirical events. It leaves out organizations and individuals as social actors and fails to explain change within organizations.
Resource Dependence Theory
According to resource dependence theory, organizations are not essentially cooperative; instead they are characterized by conflict over power and resources. Organizations are made up of coalitions with multiple and competing interests. As such, conflict and instability is embedded within organizations. Since organizations are dependent upon resources controlled by their environment, they are uncertain of their survival. Those who are seen to best manage critical uncertainties are able to have power in organizations. As such, as ideas about the critical uncertainties facing an organization shift, so does power in organizations. Groups attempt to acquire power by decreasing capital dependence, and controlling critical resources and information systems. Organizational change is the result of competing groups exercising power in an attempt to decrease uncertainty and increase power and control.
Resource dependence theory contradicts population ecology explanations of the factors contributing to organizational survival. Whereas population ecology relates survival rates to population characteristics like population density, resource dependence theory relates survival rates to an organization's position within the resource dependence network. For example, population ecology would claim corporate takeovers are the result of problems with legitimacy and organizational fit (e.g., a small organizational size, and low return on equity). On the other hand, resource dependence would claim it is the result of resource dependence relations (e.g., structural autonomy, organizational constraint on others and both indirect and direct interlocks). Palmer, Barber, Zhou and Soysal (1995) conduct an empirical analysis testing the explanatory power of the competing theories. They found resource dependence perspectives receive more empirical support (Palmer, Barber, Zhou and Soysal 1995).
Resource dependence theory is a strong, influential theory which accounts for power relations within and between organizations (Davis and Cobb 2010). Unlike population ecology, resource dependence theory recognizes organizations as powerful social actors. Organizations are characterized as political entities characterized by competition and complexity. Organizational goals are not always singular or clear. The dominance of particular goals in organizations is the result of power relations. In conclusion, resource dependence theory provides a stepping stone to understand the influence of power on organizational behavior.
According to neo-institutionalism, organizational behavior is not the effect of rationally calculated action, but the result of taken-for-granted, institutionalized myths (Davis, Diekmann and Tinsley 1994). Institutional myths are stories and explanations which take on a rule-like status governing human behavior (Meyer and Rowan 1977). For example, an institutional myth in the United States is that an architect must be licensed to be effective, and as a result, if all other things are held constant, individuals, with rule-like status, will choose to hire a licensed architect over a non-licensed one. As such, architects are obligated to become and stay licensed. In conclusion, organizations are pressured to incorporate institutionalized myths into their formal structure to increase their legitimacy and survival capacities.
Like population ecology, neo-institutionalism focuses on continuity and similarities among organizations and fails to adequately explain organizational change. From this perspective, as organizations develop, they are less likely to change as the field becomes increasingly stable. According to neo-institutionalism, organizations face isomorphic pressures. Isomorphism is how institutional myths constrain organizations and force them to become increasingly homogeneous. Isomorphism has a major influence on organizations. According to Meyer and Rowan (1977:538): "Isomorphism with environmental institutions has some major consequences for organizations: (a) they incorporate elements which are legitimated externally, rather than in terms of efficiency; (b) they employ external or ceremonial assessment criteria to define the value of structural elements, and (c) dependence on externally fixed institutions reduced turbulence and maintains stability. As a result, it is argued here, institutional isomorphism promotes the success and survival of organizations." In short, the selection process favors organizations which are similar to their institutional environment due to isomorphic pressures. As organizational fields develop, organizations which survive within the field tend to become increasingly simular. As such, neo-institutionalism fails to adequately explain differentiation and change among organizations.
According to neo-institutionalism, institutional myths influence organizations through mimetic, normative and coercive isomorphic pressures (DiMaggio and Powell 1983). Mimetic isomorphism is how organizations tend to become increasingly similar as a result of standard responses to uncertainty. For example, it can be argued that due to the success of Kinder Morgan, oil and gas distribution companies facing uncertainty mimicked the prestigious company and began to adopt the Master Limited Partnership organizational structure. Normative isomorphism is how organizations tend to become increasingly similar as a result of professionalization. For example, a psychiatrist will prescribe medication over natural remedies to manage depression due to American Psychiatric Association best practices and standards learned at professional conferences. On the other hand, coercive isomorphism is the result of political action and the coercive authority of groups. For example, political action may result in environmental regulations to which organizations are forced to conform. In short, according to neo-institutionalism, organizational behavior and change is a result of particular mimetic, normative and coercive institutional pressures. However, in a study of change among private liberal art colleges, Kraatz and Zajac (1996) found little support for neo-institutional arguments: schools become increasingly different over time and do not mimic prestigious organizations in their field. As such, neo-institutional theory does not adequately explain how organizations respond and adapt to their institutional environment.
The assumptions and claims of neo-institutional theories come with their own set of strengths and weaknesses. Neo-institutionalism accounts for the institutional environment. However, this element is often taken to the extreme, such that it fails to account for individuals. Whereas institutional theory focuses on how individuals use coercive pressures to attempt to organize the institutional environment in a way that better achieves their interests, neo-institutionalism tends to emphasize mimetic pressures and ignore coercive ones (Mizruchi and Fein 1999). Like population ecology, neo-institutional theories make the fault of studying society without studying people and minimize the importance of how groups use power to better achieve their interests at the expense of others.
Baum, Joel A.C. and Walter W. Powell. 1995. “Cultivating an Institutional Ecology of Organizations: Comment on Hannan, Carroll, Dundon, and Torres.” American Sociological Review 60:529–538.
Davis, Gerald and Adam Cobb. 2010. “Resource Dependence Theory: Past and Future.” Pp. 21-42 in Stanford’s Organization Theory Renaissance, 1970-2000. Bingley, NY: Emerald Group.
Davis, Gerald F., Kristina A. Diekmann, and Catherine H. Tinsley. 1994. “The Decline and Fall of the Conglomerate Firm in the 1980s: The Deinstitutionalization of an Organizational Form.” American Sociological Review 59:547–570.
DiMaggio, Paul J. and Walter W. Powell. 1983. “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields.” American Sociological Review 48:147–160.
Hannan, Michael T. and Glenn R. Carroll. 1995. “Theory Building and Cheap Talk about Legitimation: Reply to Baum and Powell.” American Sociological Review 60:539–544.
Hannan, Michael and John Freeman. 1977. “The Population Ecology of Organizations.” American Journal of Sociology 82:929–964.
Hannan, Michael and John Freeman. 1984. “Structural Inertia and Organizational Change.” American Sociological Review 49:149–164.
Kraatz, Matthew S. and Edward J. Zajac. 1996. “Exploring the Limits of the New Institutionalism: The Causes and Consequences of Illegitimate Organizational Change.” American Sociological Review 61:812–836.
Meyer, John and Brian Rowan. 1977. “Institutionalized Organizations: Formal Structure as Myth and Ceremony.” American Journal of Sociology 83:340–363.
Mizruchi, Mark and Lisa Fein. 1999. “The Social Construction of Organizational Knowledge: A study of the Uses of Coercive, Mimetic, and Normative Isomorphism. Administrative Science Quarterly 44:653–683.
Palmer, Donald, Brad Barber, Xueguang Zhou, and Yasemin Soysal. 1995. “The Friendly and Predatory Acquisitions of Large U.S. Corporations in the 1960s: The Other Contested Terrain. American Sociological Review 60:469–499.
Pfeffer, Jeffrey and Gerald R. Salancik. 1978. The External Control of Organizations: A Resource Dependence Perspective. New York: Harper and Row.
Selznick, Philip. 1966. TVA and the Grass Roots. New York: Harper and Row.
Singh, Jitendra V. and Charles J. Lumsden. 1990. “Theory and Research in Organizational Ecology.” Annual Review of Sociology 16:161-195.
Stinchcombe, Arthur. 1997. “On the Virtues of the Old Institutionalism.” Annual Review of Sociology 23:1–28.