Chapter Summary • 495
was asked about the large risks that were increasingly attached to these products. He responded with a quote that has become legendary:
“When the music stops, in terms of liquidity, things will be complicated.
But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Prince’s clear implication was that Citigroup had to compete like everyone else, even though there was some awareness that the bubble was not sustainable and would prove damaging to his bank.45
Individuals attempting to develop their businesses in contexts that are strongly linked to broader societal currents of thought must balance needs for technical efficiency and professional management in their plans with pressures for institutional legitimacy that push them toward conformity with prevailing ways of doing business. Heather Haveman and Hayagreeva Rao came to this conclusion after studying the evolution of the thrift industry in California.46 They examined the different forms of these early savings institutions, forerunners of S&Ls, that developed from the end of the nineteenth century through 1920, along with the parallel development of the institutional logics for thrifts. They found that these institutions developed in part as a result of experimentation and technical problem solving. They also developed under the influence of more macro pressures of large population growth and the development of values of bureaucracy and voluntary effort associated with Progressivism, in opposition to the less formal and more collective values characterizing early thrift plans.
It is sometimes unclear whether industry logics drive change in firm practices or whether they result from changes in practices. Put another way, the belief system in an industry can be a by-product of industry economics, or it can shape the industry economics. On the one hand, as industry participants experiment with new products and services, some prove more successful than others and come to be adopted. Once adopted, common beliefs develop around recognition of the benefits of the new products and services. At the same time, the industry or the broader society may have longstanding beliefs regarding such matters as the importance of research and development, opposition to government intervention, the value of individual initiatives, the fostering of family values, and the need for public education. The stronger these beliefs, the more possible it is that they may constrain experimentation in an industry or influence judgments made about products and services.
CHAPTER SUMMARY
Firms act within a broader social context that constrains how their strategic decisions are made and implemented. Culture and power relations within a firm comprise its internal social context, which influences how its managers make and implement decisions. The external social context of the firm includes its regulatory environment, its resource-dependence relationships, and its institutional domain.
Power refers to an individual actor’s ability to accomplish his or her goals by means of resources obtained through noncontractual exchange relationships. Particular positions within the firm permit the control of resources, information, and access and thus give their incumbents power and influence.
496 • Chapter 14 • Environment, Power, and Culture
Concentrating power within the firm can be helpful when there are high agency costs between managers and lower-level workers and when the firm’s environment is stable. It is harmful when there are high agency costs between levels of upper management and when the firm’s environment is unstable.
Culture is a set of collectively held values, beliefs, and norms of behavior among members of a firm that influences individual employee preferences and behaviors on the job. It frees them from the need to renegotiate their tasks, reduces their costs of making decisions, and permits more specialization of effort.
Culture controls the activities of employees on the basis of their attachment to the firm, rather than on the basis of individual incentives and monitoring. It mitigates power dynamics by creating “mutually reinforcing” norms that permit the emergence of mutually beneficial activities that would not be likely in the marketplace.
When a firm’s strategy “fits” with the demands of its environment, then its culture supports the direction of the firm and its policies, making it more efficient. When the environment changes, however, and requires firms to adapt to changes, culture is more likely to be inertial and lead to maladaptive firm behavior.
Firm behavior in the external environment is governed by rules and regulations that are supported by accepted behavioral norms as well as more formal sanctions. Regulations provide a common basis for action by all participants in an industry or a sector.
Regulation imposes costs on firms, including the direct costs of compliance, the indirect costs of forgone activities, and the costs of influencing regulators. Regulations may also strategically advantage regulated firms, by restricting entry and allowing incumbents to enjoy greater scale and reduced price competition.
Firms develop power dependence relationships in their environment that are characterized by asymmetries in information, resources, capabilities, and other factors.
Firms enter into cooperative relationships through long-term contracts, mergers and acquisitions, or strategic alliances and joint ventures, to manage these dependence relationships with other organizations and reduce environmental uncertainty.
Analogous to corporate culture, the institutional environment of firms also involves shared beliefs about the world, shared values about what is important, and norms about appropriate and inappropriate behaviors. These interrelated beliefs, values, material practices, and norms of behavior that exist in an industry at any given time are referred to as institutional logics.
It is sometimes possible to link changes in industry logics to specific external stimuli. In other industries, however, changes in industry logics occur as a result of multiple stimuli, without a clear external cause, and still significantly influence firms.
QUESTIONS
1.How does the resource-dependence view of power differ from the marketimperfections perspective of transactions-costs economics?
2.When might it not be reasonable to remedy a power differential with a critical buyer or supplier?
Endnotes • 497
3.Power often accrues to individuals who are very effective in their jobs or to firms that enjoy sustained high performance. If this is so, how is power different from basic competence, efficiency, or performance?
4.Major professional schools are highly competitive, and most applicants do not get past the admissions process. That makes admissions a critical gatekeeper function for these schools. Given that, why don’t admissions officers enjoy higher status and power among the faculty and staff of professional schools?
5.How might a favorable location in the interpersonal networks within a firm help an individual acquire and maintain additional bases of power?
6.How would you go about identifying the powerful people within your organization? What indicators would you look for? From what types of problems would these indicators suffer?
7.All firms operate within an institutional environment of some kind. How do the common beliefs, values, and norms of behavior that characterize the institutional environment affect the ability of firms to pursue sustainable strategies? Are institutional influences always constraining or can they ever promote competition and innovation?
8.Discuss the idea of structural holes in the context of competitive strategy. How can you link network advantage to value creation and competitive advantage for firms enjoying favorable positions?
9.While every firm has a culture, not all cultures are relevant for a decision maker or analyst. Under what conditions is it important to pay attention to culture? When is it less important to analyze the influence of culture?
10. Why is firm growth often antithetical to the maintenance of a stable corporate culture?
11. How can powerful individuals influence a firm’s culture? Do “superstar” CEOs really exert the influence on firms that is claimed for them in the popular business press? How much does the leader matter in a firm with a long history and a strong corporate culture?
12. “The more manageable a firm’s culture is, the less valuable it will be for the firm.” Agree or disagree—and explain.
13. Visitors to China are sometimes puzzled by the combination of a very strong central government and a very competitive economic system. What is the connection between the strength of government agencies and the type of market activities that develop within that regulatory context?
ENDNOTES
1Arrow, K. J., The Limits of Organization, New York, Norton, 1974, pp. 25–26.
2Cohan, W., House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, New York, Anchor Books, 2010, Chapter 18; Morris, C. R., The Trillion Dollar Meltdown, New York, Public Affairs, 2008.
3Piraino, T. A., “Reconciling Competition and Cooperation: A New Antitrust Stand for Joint Ventures,” William & Mary Law Review, 871, 1993–1994, p. 35.
498 • Chapter 14 • Environment, Power, and Culture
4Nasr, Vali, Forces of Fortune: The Rise of the New Muslim Middle Class and What It Will Mean for the World, New York, Free Press, 2009.
5Bjornskov, C., and N. Potrafke, “Politics and Privatization in Central and Eastern Europe: A Panel Data Analysis,” Economics of Transition, 19(2), April 2011, pp. 201–230.
6Barnard, C., The Functions of the Executive, Cambridge, MA, Harvard University Press, 1938, pp. 167–171; Zhao, H., Wayne, S. J., Glibkowski, B. C., and J. Bravo, “The Impact of Psychological Contract Breach on Work-Related Outcomes: A Meta-Analysis,” Personnel Psychology, 60(3), 2007, pp. 647–680.
7For the principles of social exchange, see Coleman, J. S., Foundations of Social Theory, Cambridge, MA, Belknap, 1990, Chapter 2.
8Bartlett, C. A., “McKinsey & Co., Managing Knowledge and Learning.” HBS Case (396357), January 20, 2000.
9Pfeffer, J., Managing with Power: Politics and Influence in Organizations, Boston, Harvard Business School Press, 1992; Pfeffer, J., Power in Organizations, Marshfield, MA, Pitman, 1981.
10Gouldner, A. W., “The Norm of Reciprocity: A Preliminary Statement,” American Sociological Review, 25, 1960, pp. 161–178.
11This is a variant of resource dependence referred to as the strategic contingencies view of power. See Hickson, D. J., Hinings, C. R., Lee, C. A., Schneck, R. E. and J. M. Pennings, “A Strategic Contingencies Theory of Intraorganizational Power,” Administrative Science Quarterly, 16, 1971, pp. 216–229.
12The material for this example is taken from Neustadt’s 1990 revision. See Neustadt, R. E., Presidential Power and the Modern Presidents, New York, Free Press, 1990. Also see Nelson, M., “Neustadt’s ‘Presidential Power’ at 50,” Chronicle of Higher Education, March 28, 2010.
13On the general point, see Lublin, J. S., “Chairman-CEO Split Gains Allies: Corporate Leaders Push for Firms to Improve Oversight by Separating Roles,” The Wall Street Journal, March 30, 2009, http://online.wsj.com/article/SB123816562313557465.html. For the Avon announcement, see Boyle, M., “Avon to See New CEO, Separating Top Role with Jung as Chairman,” San Francisco Chronicle, December 14, 2011.
14Burt, R. S., Structural Holes: The Social Structure of Competition, Cambridge, MA, Harvard University Press, 1992.
15Fernandez, R. M., and Gould, R. V., “A Dilemma of State Power: Brokerage and Influence in the National Health Policy Domain,” American Journal of Sociology, 99, May 1994, pp. 1455–1491.
16This example was developed from material in Byrne, J. A., The Whiz Kids, New York, Currency Doubleday, 1993. The Whiz Kids were a group of academics and operations analysts, including Reith, Charles Thorton, Robert McNamara, and Arjay Miller, who distinguished themselves in operations analysis for the Army Air Force in World War II and later joined the management of Ford as a group in early 1946. Most rose to senior positions within Ford, and two, McNamara and Miller, rose to its presidency.
17Weber, M., Economy and Society, Vol. 1, Berkeley, University of California Press, 1978, pp. 212–226.
18Gertner, R., Powers, E., and D. Scharfstein, “Learning about Internal Capital Markets from Corporate Spin-offs,” Journal of Finance, 57(6), December 2002, pp. 2479–2506.
19Rotemberg, J. J., “Power in Profit-Maximizing Organizations,” Journal of Economics and Management Strategy, 2, 1993, pp. 165–198.
20 Crystal, G., In Search of Excess, New York, Norton, 1991.
21Hallock, K., “Reciprocally Interlocking Boards of Directors and Executive Compensation,”
Journal of Financial and Quantitative Analysis, 32, 1997, pp. 331–341.
Endnotes • 499
22Hermalin, B., and M. Weisbach, “Endogenously Chosen Boards of Directors and Their Monitoring of the CEO,” American Economic Review, 88, 1998, pp. 96–118.
23Roberts, J., The Modern Firm. Oxford, Oxford University Press, 2004, p. 18. 24Kreps, D. M., “Corporate Culture and Economic Theory,” in Alt, J., and K. Shepsle
(eds.), Perspectives on Positive Political Economy, Cambridge, UK, Cambridge University, 1990.
25Roberts, The Modern Firm, pp. 41–44, 260–262.
26Feder, B. J. “The Little Project That Couldn’t: Others Learn from a Failed Test in Worker Democracy,” The New York Times, February 21, 1998; on ESOPs, see Kruse, D., Freeman, R., Blasi, J., Buchele, R., and A. Scharf, “Motivating Employee-Owners in ESOP Firms: Human Resource Policies and Company Performance,” NBER Working Paper #10177, December 2003.
27Barney, J. B., “Organizational Culture: Can It Be a Source of Sustained Competitive Advantage?” Academy of Management Review, 11, 1986, pp. 656–665.
28Kumar, N., India’s Global Powerhouses. Boston, Harvard Business Press, 2009, pp. 114–118.
29Kumar, India’s Global Powerhouses, pp. 95–106.
30This example was developed from the following sources: Pettigrew, A. M., The Awakening Giant: Continuity and Change at ICI, Oxford, UK, Blackwell, 1985, Chapter 10, pp. 376–437; Pettigrew, A. M., “Examining Change in the Long-Term Context of Culture and Politics,” Chapter 11 in Johannes M. Pennings and Associates, Organizational Strategy and Change,
San Francisco, Jossey-Bass, 1985, pp. 269–318.
31Bartlett, C. A., “McKinsey & Co., Managing Knowledge and Learning.” HBS Case (396357), January 20, 2000.
32Cramton, C. D., “The Mutual Knowledge Problem and Its Consequences for Dispersed Collaboration,” Organization Science, 12(3), May–June 2001, pp. 346–371; Ghosh, T., Yates, J., and W. Orlikowski, “Using Communication Norms for Coordination: Evidence from a Distributed Team.” Proceedings of the International Conference on Information Systems, 2004.
33Miller, G. J., The Political Economy of Hierarchy, Cambridge, UK, Cambridge University Press, 1992, Chapter 10; Kreps, D. M., A Course in Microeconomic Theory, Princeton, NJ, Princeton University Press, 1990, Chapter 14.
34For a discussion of cultural clash issues in acquisitions, see Haspeslagh, P. C., and D. B. Jemison, Managing Acquisitions: Creating Value Through Corporate Renewal, New York, Free Press, 1991. For a general discussion of these conflicting sets of values, see March, J. G., “Exploration and Exploitation in Organizational Learning,” Organizational Science, 2, 1991, pp. 71–87.
35Allatta, J. T., and H. Singh, “Evolving Communication Patterns in Response to an Acquisition Event.” Strategic Management Journal, 32(10), October 2011, pp. 1099–1118.
36Semadeni, M., and A. A. Cannella, “Examining the Performance Effects of Post Spin-Off Links to Parent Firms: Should the Apron Strings Be Cut?” Strategic Management Journal, 32(10), October 201, pp. 1083–1098.
37Scott, W. R., Institutions and Organizations, 2d ed., Thousand Oaks, CA, Sage, 2001.
38North, D. C., Institutions, Institutional Change, and Economic Performance, Cambridge, UK, Cambridge University Press, 1990.
39Baron, D. P., Business and Its Environment, 3d ed., New York, Prentice-Hall, 2000. 40Pfeffer, J., “Merger as a Response to Organizational Interdependence,” Administrative
Science Quarterly, 17, 1972, pp. 382–394; Brenner, M., and Z. Shapira, “Environmental Uncertainty as Determining Merger Activity,” Chapter 3 in W. Goldberg (ed.), Mergers, New York, Nichols Publishing, 1983, pp. 51–65; Finkelstein, S., “Interindustry Merger Patterns and Resource Dependence: A Replication and Extension of Pfeffer (1972),” Strategic Management Journal, 18, 1997, pp. 787–810.
500 • Chapter 14 • Environment, Power, and Culture
41Khanna, T., and K. G. Palepu, Winning in Emerging Markets, Boston, Harvard Business Press, 2010, pp. 13–50.
42Podolny, J., “A Status-based Model of Market Competition,” American Journal of Sociology, 98, 1993, pp. 829–872.
43On Hurricane Katrina, see U.S. Government, National Commission on the DP Deepwater Horizon Oil Spill and Offshore Drilling. Report to the President. January 2011; Huffman, M. “Real Katrina Hero? Wal-Mart, Study Says,” ConsumerAffairs.com, http://articles. moneycentral.msn.com/Insurance/InsureYourHome/RealKatrinaHeroWalMartStudySays. aspx. On the News Corporation scandal, see Sandle, P., “Quick Guide to the News Corp Hacking Scandal,” Reuters, July 21. 2011.
44Lewis, M., The New New Thing: A Silicon Valley Story, New York, Penguin, 2001.
45Michiyo, N., and D. Wighton, “Citigroup Chief Stays Bullish on Buy-outs,” The Financial Times, July 9, 2007. For an analysis of the more general change in financial industry logic, see Shivdasani, A., and Y. Wang, “Did Structured Credit Fuel the LBO Boom,” Working Paper, Kenan-Flagler School. April 23, 2009.
46Haveman, H. A., and H. Rao, “Institutional and Organizational Coevolution in the Thrift Industry,” American Journal of Sociology, 102, 1997, pp. 1606–1628.