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Caged companies

Updated Friday, 11th September 2009

Brian Smith explores institutional theory and explains why all executives should take note

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Here’s a little two-part test for you. When was the last time you heard someone in your company or organisation talk about change? Changing strategies, changing business models, changing culture, changing attitudes... yada yada yada. I’ll bet it was recently and I’ll bet the time before that wasn’t too long ago either. Modern management philosophy seems obsessed with change. Now here’s the second part. If you have been around long enough, say five years or more, to look at what has actually changed in your organisation, how much real change do you see? Discount the superficial stuff like titles, organisation charts and so on. How much of the essence of what happens in your place, the good and the bad, has changed? If you work in an organisation that is typical of the ones I study, the answer is “Not that much really”. The French, as ever, have an expression for this. Plus ça change, plus la même. The more things change, the more they stay the same.

When I was a young graduate trainee, I sometimes wondered how it felt to be one of those senior guys who always talked about change. I imagined the feelings of power and authority and looked forward to the day I’d get there and would be able to put things right. . When I got reached that level, those memories seemed innocent and naïve as my dominant feeling, and those of my senior peers, was that of frustration. Everything we tried came to a fizzle, rather than a big bang. Why, I wondered, was it so difficult to get anything done? I got an echo of those frustrations just the other day when I read about Adair Turner, Chairman of the Financial Services Authority, was talking about changing the “bloated” and “socially useless” sector that he’s in charge of regulating. Now there’s a man with a change-management challenge.

all the good stuff is wrapped up in jargon

When I moved into academia, I was surprised and, to be honest, a little irritated that there existed a whole body of research that spoke directly to these frustrations of senior managers. Surprised because I considered myself a pretty well-read executive and irritated because if I’d known this stuff earlier it would have helped me get things done. The problem is, as with much management research, all the good stuff is wrapped up in jargon and published in journals that managers never get to read.

A good example of this hidden but useful work is institutional theory, generally acknowledged to be the creation of Selznick. In essence, this body of work describes organisations like the big banks as being confined by the values of their external environment. Dimaggio and Powell expanded on this, describing three sets of pressures: coercive (legal), normative (cultural) and mimetic (seeking to imitate). Their paper’s title “The Iron Cage Revisited” is a pretty good description of how many of my management colleagues felt. When I first read this work, the scales fell from my eyes. Some of the pressures were obvious in my job (e.g. coercive legal and regulatory pressures) but others only became understandable when I put my experience in the context of institutional theory. The hassle I had gotten from research and development, for example, or from the sales team, were obvious examples of normative pressures stemming from the sub-cultures of their professions. And mimetic pressures were clearly seen in all the pressure to adopt “industry best practice” that, whilst we justified it in rational terms, often seemed a senior management whim that we were forced to serve. This rationalisation of emotional whims is also discussed by the institutional theorists, who talk about “rationalised myths” as a way firms maintain “social legitimacy” in their business environment.

I now use institutional theory in my work trying to understand how firms compete. I’ve discovered that the jargon and journals aren’t the only reason this valuable knowledge isn’t used much by practising executives. The other reason is that they usually prefer simple, quick answers and institutional theory doesn’t do quick and simple easily. It needs thought and careful application. Take, for example, the question of how to reform the banks which, as I write, the G20 finance ministers are grappling with. If they understood institutional theory they would seek and answer that addressed the three sets of pressures that “cage” that market and make it act the way it does. But this sophisticated approach would be difficult and wouldn’t make for good, politically useful, sound-bites. So I predict they’ll take a simplistic approach and shout about bonuses, which is easy, politically popular and practically useless.

So, whilst I try not to have regrets, I do regret that that I’d not learnt about institutional theory earlier. It would have made me a more effective, and rather less frustrated, executive. Still, if you’re an executive reading this, there’s still time for you. Brave the jargon, throw out your suspicion of the academic and learn some more about institutional theory. Or of course you could create a rationalised myth for why you don’t. And stay in your iron cage.

Find out more

The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organisational Fields’
by P DiMaggio & W Powell
in American Sociology Review, 48

Leadership in Administration: A Sociological Interpretation
by P Selznick, published by Harper and Row






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