Despite a long tradition of research on organizational mortality, organizational theorists have not examined the effect of incentive contracting on firm survival. This paper fills this gap by examining the effect of incentive contracting on the survival of U.S. business format franchise systems over the period 1984-1996. The paper finds empirical support for several hypotheses derived from efficient contracting theory. In general, large firms that adopt policies which screen agents, signal quality, and control agents' free-riding are more likely to survive than large firms which do not adopt these policies.
Strategy research consists of a balance between positive and normative theory. Normative theories suggest particular heuristics, or cognitive representations, to find appropriate solutions. Heuristics permit faster solutions to real-time problems; they also suffer from the potential of negative transfer to inappropriate applications. The theory of real options provides the appropriate heuristic framing of competencies and exploratory search. A real options approach marries the theory of financial options to foundational ideas in strategy, organizational theory, and complex systems. We join these approaches to identify three pairs of concepts: scarce factor and the underlying asset in option theory, inertia and irreversibility, and the ruggedness of landscape and option values. Strategic theories of resources largely define a core competence as unique and nonimmutable. In doing so, this definition has wrongly forgotten Barney's initial insight into scarce factor markets as determining the valuation of a competitive asset. Financial theory of real options derives its heuristics of investing in exploratory search by inferring future value of today's investments from market prices. We apply the three conceptual pairs to the evaluation of capabilities as real options through a formal descriptive model. The valuation of core capabilities is derived from observing the price dynamics of correlated strategic factors in the market. Because of inertia, managers cannot easily adjust the wrong set of organizational capabilities to the emergence of market opportunities. However, firms that have made investments in capabilities appropriate to these opportunities are able to respond. From this description, we define core competence as the choice of capabilities that permits the firm to make the best response to market opportunities. The heuristic framing of capabilities as real options guides the normative evaluation of the balance between exploitation and exploration.
Recent conceptualizations of trends in the structure of U.S. industry have focused on the relative importance of markets, hierarchies, and hybrid intermediate forms. This paper advances the discussion by distinguishing three ideal-typical forms of organization and their corresponding coordination mechanisms: market/price, hierarchy/authority, and community/trust. Different institutions combine the three forms/mechanisms in different proportions. Economic and organizational theory have shown that, compared to trust, price and authority are relatively ineffective means of dealing with knowledge-based assets. Therefore, as knowledge becomes increasingly important in our economy, we should expect high-trust institutional forms to proliferate. A review of trends in employment relations, interdivisional relations, and interfirm relations finds evidence suggesting that the effect of growing knowledge-intensity may indeed be a trend toward greater reliance on trust. There is also reason to believe that the form of trust most effective in this context is a distinctively modern kind—“reflective trust”—as opposed to traditionalistic, “blind” trust. Such a trend to reflective trust appears to threaten the privileges of currently dominant social actors, and these actors' resistance, in combination with the complex interdependencies between price, authority, and trust mechanisms, imparts a halting character to the trend. But the momentum of this trend nevertheless appears to be self-reinforcing, which suggests that it may ultimately challenge the foundations of our capitalist form of society while simultaneously creating the foundations of a new, postcapitalist form.
This paper is about two managers of Red Cross refugee camps in Tanzania who manage by exception in rather exceptional circumstances. Using a model of managerial work that delineates roles carried out at the information, people, and action levels, inside and outside the unit, these managers' activities concentrate especially on communicating and controlling a chaotic situation in a steady state, at least temporarily. While many other managers appear to be moving away from conventional forms of managing—to more linking instead of leading and convincing instead of controlling, etc.—here are two managers who seem to be going the other way, precisely because their situation is so unconventionally risky. Ned Bowman's great contribution has been not just about risks and options per se, but in the risks that he himself took and the options that he himself exposed. In this spirit, the paper concludes with a plea for the opening up not simply of content, but of context.
A central debate in organizational theory concerns how organizations evolve. There are two diametrically opposing viewpoints. Adaptation theories predict that change occurs as fluid organizations adjust to meet shifting environmental demands, while selection theories predict that change occurs through the differential selection and replacement of inert organizations as environmental demands vary over time. Our paper bridges these polar opposites by using a punctuated equilibrium framework to examine organizations' responses to discontinuous industry-level change. This framework recognizes that the histories of many industries are occasionally punctuated by dramatic exogenous shocks, such as radical technological innovation, social and political turmoil, major changes in government regulation, and economic crashes. Our central thesis is that such environmental punctuations dramatically reduce pressures and rewards for organizational inertia and thereby alter both organizations' propensities for change and their survival chances following change. We focus on one form of punctuation, major regulatory change, and study firms in two industries: general hospitals and savings and loan associations. For organizations in both industries, we examine three important outcomes: shifts in organizational domain, CEO succession, and changes in financial performance. Our analyses show that punctuational regulatory change prompts shifts in organizational domains and executive leadership. Additionally, post-punctuation domain change and post-punctuation CEO succession both affect subsequent performance. We discuss our results in light of current thinking about the content and process effects of core organizational change, which has been developed in the context of stable environments. Finally, we argue for the development of more temporally sensitive theories of organizational action.
This study seeks to expand our understanding of interorganizational emulation decisions made by top administrators in a broad sample of American colleges and universities. We analyze their emulation choices and show that these decision makers tend to emulate universities similar to their own. Our findings suggest, however, that the choice of emulation target within one's industry is not simply a matter of choosing the most structurally similar organization, but rather that identity-related attributes, such as reputation, organizational image, and organizational identity, also play a significant role in the emulation decision. The data also show that industry subgroups based on emulation decisions (strategic reference groups) differ in both structural and identity-related attributes. Further, interorganizational emulation decisions based on tactics of upward comparison (e.g., emulating universities with better reputations) are associated with greater strategic change, while downward comparisons are associated with greater perceived external threat. Finally, the data show that top management's perceptions of the university's level of environmental threat are related to their choice of a more coarse-grained or fine-grained set of attributes when determining the emulation target. We discuss some of these findings’implications for theory and practice.
How are decision practices fostered in organizations and how are they linked to decision outcomes? This study addresses these questions by examining one financial institution's efforts to standardize and control decision making across geographically separated organizational units. We argue that decision-maker behavior is situated and is not simply a function of individual choice. Rather, in organizational settings decision-makers are subject to a hierarchy of influences that affect the decision processes they use and their resulting decision choices. To test our ideas, we examined 900 borrower “risk rating” decisions and found general support for our hypotheses. Decision makers were more likely to use the prescribed practice when decisions were important, when the decision target was known, and when the decision maker was located in a larger subunit. Decision makers altered their decision practices in the short term, but in the long term they appeared to partially revert to their earlier practices. Reliance on prescribed practice fostered stability in decisions, but surprisingly appeared to negatively affect future judgments. The findings indicate that organizations can change the more microaspects of decision making, but these changes may be transitory. Moreover the results suggest that decision makers may become complacent when they rely on prescribed decision practices, a tendency that can have untoward consequences for the organizations in which they are embedded.
We argue that the debate regarding the performance implications of demographic diversity can be usefully reframed in terms of the network variables that reflect distinct forms of social capital. Scholars who are pessimistic about the performance of diverse teams base their view on the hypothesis that decreased network density—the average strength of the relationship among team members—lowers a team's capacity for coordination. The optimistic view is founded on the hypothesis that teams that are characterized by high network heterogeneity, whereby relationships on the team cut across salient demographic boundaries, enjoy an enhanced learning capability. We test each of these hypotheses directly and thereby avoid the problematic assumption that they contradict one another. Our analysis of data on the social networks, organizational tenure, and productivity of 224 corporate R…D teams indicates that both network variables help account for team productivity. These findings support a recasting of the diversity-performance debate in terms of the network processes that are more proximate to outcomes of interest.