The interface and convergence of the strategic management and organizational environment domains

Journal of Management 1994, Vol. 20, No. 2, 201-262

The Interface and Convergence of the Strategic Management and Organizational Environment Domains Allen C. Bluedorn Richard A. Johnson Debra K. Cartwright Bruce R. Barringer L%eUniversityof Missouri-Columbia Extending BluedornS (1993) review of environmental contingency theory, we examine the strategic management research conductedfrom 1980-1993 that explicitly deals with the environmental domain. Framing our approach as a constrained strategic choice perspective, ourfocus on this intersection of the strategic management and organizational environment literature leads us to examine six spectfk subsets of this literature: (1) strategic leadership and upper echelons; (2) scanning; (3) interorganizational relationships; (4) institutional theory; (5) organizational alignment; and (6) strategic control and evaluation. In our discussions of these topics, we identify research trends and generalizations as well as identify promising research possibilities and questions for future research. In this vein, we conclude the article with our identification of several possibilities for theoretical syntheses and theory development.

A few years ago, one of this article’s authors proposed an article focusing on organizational size and environments for the Yearly Review of Management. The proposal was accepted and work proceeded on the article (Bluedorn, 1993). During the course of that work, the author discovered that the amount of theoretical and empirical research devoted to organizational environments was so voluminous that he had to restrict the coverage in his article to material directly related to the traditional environmental contingency model of organizations (e.g., Burns & Stalker, 1961; Lawrence & Lorsch, 1967). This choice, like so many other strategic choices, framed the discussion as far as what was included and what was excluded from that article. Conspicuous by its volume and focus was the set of excluded materials dealing with strategic management and the environment.

Direct all correspondence to: Allen C. Bluedorn, University of Missouri-Columbia, Columbia, Missouri 65211. mgmtblue@mizzouI .missouri.edu Copyright

@ 1994 by JAI Press Inc. 0149-2063 201

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This material is most clearly exemplified in the debate between environmental determinism and strategic choice (Astley & Van de Ven, 1983) although other considerations obtain as well (e.g., Bourgeois, 1980). The focus of that debate concerns the relative role strategic choice plays compared to the role of environmental determinism in the affairs of organizations, with the most extreme position being taken by the population ecologists (e.g., Hannan & Freeman, 1989) that environmental factors acting as selection forces determine organizational survival. The strategic choice camp does not seem to offer as extreme and obverse a position, as the constraints of the environment and many other factors are usually acknowledged to be parameters within which strategic choices are made. Indeed, this recognition was made by Child (1972, pp. 23) in perhaps the strongest statement of the strategic choice perspective as he described the “degree of strategic choice” and an organization’s dependency upon its environment as imposing “a degree of constraint upon those directing an organization.” Other authors from a variety of perspectives (e.g., Boeker, 1991; Brunsman & Sharfman, 1993; Burgelman, 1990; 1991; Henderson, 1989; Hitt & Tyler, 1991; Hrebiniak & Joyce, 1985; Levinthal, 1991) have analyzed this often fatuous debate, but we believe the most sensible description and sophisticated integration of these perspectives can be found in the work of Hambrick and Finkelstein (1987). They addressed the strategic choice issue in terms of the decision-making discretion held by strategic decision makers, particularly CEO’s. Their analysis indicates that such discretion is subject to three sets of constraints originating in: (1) the task environment; (2) the organization; and (3) the CEO’s themselves, with their later research (Finkelstein & Hambrick, 1990) demonstrating the important moderating impact of discretion on several variables related to organizational performance. Prescott’s (1986) finding that organizational environments moderate the relationship between strategy and performance also supports this perspective. Our position concurs with many of the authors who have joined this discussion; to wit: we believe important, that is to say, strategic choices are made for organizations, largely by members of their dominant coalitions, and these choices result in organizational strategies and structures that may then be acted upon by environmental forces that may operate in the manner described in the population ecology literature (Hannan & Freeman, 1989; Hannan & Carroll, 1992). Moreover, with Hambrick & Finkelstein (1987), Child (1972), and others, we believe that the degree of managerial discretion, hence the latitude for strategic choice, will vary from situation to situation and from time to time due to constraints in organizational environments and from other sources. We will, thus, discuss the literature in the organizational environment/ strategic management domain from the perspective of constrained strategic choice that we have just described. This exploration will be guided by Child’s (1972, pp. 16-19) original framework and will parallel Bluedorn’s (1993) sizeand-environment review by focusing on materials published during the period from 1980 to 1993.’ Child’s framework emphasized the strategic choices made by an organization’s dominant coalition, and the point that these choices will JOURNAL OF MANAGEMENT,

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be affected by what he terms the coalition’s “prior ideology.” Hambrick and Finkelstein (1987) expanded this concept to an entire set of organizational and managerial concepts. Thus, our exploration will begin with an examination of the strategic choice makers themselves. Child then indicated that the process leading to strategic choices begins with an evaluation of the situation. We see this evaluation as consisting of two components: (1) gathering information or scanning; and (2) processing the scanned information. Thus, after considering the choice makers themselves, we will examine their scanning and information processing activities. In Child’s view, strategic choices then follow from the interpretation of scanned information. As such, we will examine two especially important forms of strategic choice, the analyses of which received considerable attention during the period on which this article is primarily focused: (1) the strategic choices considered in interorganizational relationship decisions-merge? acquire? network? form of network? and (2) the strategic choices involved in dealing with the organization’s institutional environment. Finally, Child’s framework specifies a feedback loop for the ultimate success or failure of strategic choices that will influence subsequent strategic choices. Consequently, we will conclude our explorations with a consideration of two elements directly related to this loop, the issues of: (1) organizational alignment or fit; and (2) corporate control. Because we cover such a voluminous set of literature and so many issues, we present our conclusions and recommendation for each specific topic at the end of its respective section of the article rather than presenting them collectively, as is often customary, in a section at the end of the paper. We made this strategic choice due to the constraints we observed in our own information processing ability. That is to say, such an omnibus discussion located so far from the discussion of the specific issues would make it hard for most readers to remember the particulars upon which such a discussion would be based. Strategic Leadership: The Upper-Echelon Discretion

is a product

of experience..

Choice Makers

.

-Hambrick

and Finkelstein, 1987, p. 373

Perhaps the central element in determining the fit between strategy and environment is the top management team (TMT) because the TMT, following Child’s (1972) model, is the primary agent that scans and interprets the organization’s environment, makes strategic choices, and monitors the results of those choices. Thus, strategic change may require the replacement of the top executive and other TMT members in order to be effective (Chandler, 1962; Hofer, 1980; Miller & Friesen, 1980; Tushman & Romanelli, 1985). Several authors have made the link between the characteristics of the managers who make strategic choices and strategy (e.g., Andrews, 1971; Hambrick & Mason, 1984; Szilagyi & Schweiger, 1984). Andrews argued for this link by stating that “there is no way to divorce the decision determining the most sensible economic JOURNAL OF MANAGEMENT,

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strategy from the personal values of those who make the choice” (Andrews, 1971, p. 34). March and Simon (1958) argued that each decision maker brings a unique knowledge base (experiences, skills etc.) to an administrative situation. Our discussion of strategic leadership or upper echelons theory will proceed with an examination of the following two topics: (1) operationalization and measurement; and (2) relationships between characteristics and behavior of top management team members. Measurement

There are almost as many ways to operationalize TMT characteristics and behaviors as there are studies examining these issues. One important point that needs to be made is that these characteristics and behaviors are, at best, proxies for cognitive processes. It may, for example, be unrealistic to assume that a CEO’s age will be directly related to strategy. A more appropriate argument might be that older managers may take more time in collecting and integrating information as well as decision making (Taylor, 1975) and may be more committed to the status quo (Stevens, Beyer & Trite, 1978). In general, these variables can be placed into one of two categories: (1) TMT demographic characteristics; and (2) TMT behaviors. Demographic characteristics are generally operationalized as average characteristics for the top management team (e.g., Hambrick & Mason, 1984) or the individual characteristics of the CEO (e.g., Helmich & Brown, 1972). Commonly used operationalizations include the following TMT data: (1) age; (2) industry, organizational or executive tenure; (3) education level; and (4) functional or occupational background. In addition, heterogeneity or homogeneity measures have been used in an attempt to proxy group processes as opposed to simple averages (e.g., Pfeffer, 1983). Behavior has been operationalized in multiple ways, the more common ways of which include: (1) how the TMT defines business problems; (2) TMT member turnover; (3) their risk propensity; (4) decision making style; (5) internal/external locus of control; and (6) leadership style. Another issue that surfaces in many of these studies is that the choice of measure may ultimately influence the results. For example, executive tenure, organizational tenure and industry tenure may be proxies for different constructs, namely, TMT group interactions, socialization with the organizations and overall knowledge and experience in the industry respectively, but the operationalizations may overlap considerably causing problems in the analysis (e.g., a lack of discriminant validity). Conceptual Framework

Research in the area of strategic leadership, upper echelons, or the top management team has examined multiple linkages between the environment, top management characteristics, behaviors and strategy. Hambrick (1989) provided an interesting and useful framework through which the effects of strategic leadership can be examined. Based on a modified version of JOURNAL OF MANAGEMENT,

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TMT or CEO Characteristics

TMT or CEO

Environment or Organizational Con text

Figure 1.

Firm Strategy, Structure or Conduct

The Relationship Among Leadership, Firm Strategy, and the Environment (modified from Hambrick, 1989)

Hambrick’s model (Figure l), we will focus on the relationships between strategic leadership, environment and firm strategy/ structure. As depicted in Figure 1, three paths are of interest in this review. The first path examines the relationship between environmental context and managerial characteristics. The second path depicts the relationship between managerial characteristics and firm strategy. Taken together, paths one and two reflect the effect of strategic leadership on the environment/strategy link. The third path examines the link between managerial characteristics and strategy with environment as a moderator. Table 1 presents the articles examined in this review by path category. In order to simplify the following discussion, high levels of firm performance are assumed to indicate a good “fit”(Venkatraman, 1989) between strategy and the environment. Therefore, in studies that find a positive relationship between managerial characteristics and firm performance, we have assumed that this relationship indicates these characteristics relate positively to strategy/ environment “fit.” The Environment-to-Leadership Link. Research investigating the relationship between the environment and strategic leadership has focused primarily on selecting managers to fit the environment. The basic argument JOURNAL OF MANAGEMENT,

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Leadership,

Firm

Results suggest that multiple organizational “clocks” driven by the environment have distinct effects on inertia and change. Environmental jolts are associated with increased change in team structures to allow adaptation to competitive conditions. Industry age was found to have an effect on the age of senior executives within the industry.

Conceptual

53 large diversified firms between 1965 to 1980.

Hurst, Rush & White (1989) Jauch & Osborn (1981) Kerr & Jackofsky (1989), Wood & Bandura (1989) Szilagyi & Schweiger (1984) & Wissema, Van Der Pol & Messer (1980).

Pfeffer (1983)

Song (1982)

Conceptual / theoretical papers:

CEO background and prior experience is significantly associated with the diversification strategy of the firm. This has implications for boards of directors in their search for and selection of top executives.

Examined the link between founding TMT, strategy and environment to the performance of newly founded US semiconductor firms. The size of the TMT, members’ past experiences together and heterogeneity in industry experience were linked with higher growth.

98 semiconductor firms founded between 1978 and 1985.

Eisenhardt (1990)

& Schoonhoven

Performance among small firms was positively related to an organic structure, entrepreneurial strategic posture, long term orientation by top management and concern for predicting industry trends. Benign environments, performance was related to a conservative management posture, financial management, and a mechanistic structure.

161 small manufacturing

Covin & Slevin (1989)

firms.

Results suggest that more innovative banks are managed by more educated teams, with diverse functional backgrounds.

199 banks state-chartered and national banks in the mid-west.

Path 2: Strategic leadership to firm strategy

/ review paper.

Bantel & Jackson (1989)

(1993)

Path 1: Environment to strategic leadership

Longitudinal data from 104 firms in the cement industry between 1900-1986.

and Environment

Keck & Tushman

Strategy

The proportion of outsiders (executives hired from outside the firm in prospector firms was significantly greater than in analyzers or defenders. Executives with marketing backgrounds were more prevalent in prospectors and analyzers. Analyzers tend to have a stronger production orientation and a weaker finance orientation than defenders.

Findings or Implications

between

79 managers from 3 tobacco firms.

the Relationships

Chaganti & Sambharya (1987)

Examining

Data

Studies

Study

Table 1.

Inside/ outside CEOs affect how much strategic change will occur. Insiders are associated with less change within two years of starting. Board involvement in restructuring (strategic change) is negatively effected by TMT tenure, TMT organization tenure and TMT education level. Results suggest TMT power can minimize board involvement even during performance declines. In a study of firm’s adaptations to environmental jolts he found that ideological variables are better predictors of adaptation than are structural variables. Results suggest support for a fit between the environment and firm strategy and their relationship to firm performance. Long-tenured CEOs were less likely to achieve this fit than their counterparts with less tenure. Top performers have significantly different managerial profiles than poorly performing firms as well as similar characteristics across all five industries.

Survey data from 204 presidents of chemical and allied products firms.

92 TMT/ insider board members from restructuring firms.

19 hospitals affected by a physicians strike.

95 firms based in Quebec.

953 top managers from 150 firms in the dairy, footwear, tire, mobile home and machine tool industries.

Helmich & Brown (1972)

Johnson, Hoskisson Hitt (1993)

Meyer (1982)

Miller (1991)

Norburn & Birley (1988)

(continued)

Values of the TMT affect the organization’s

Data from 320 staff members and 16 executives from 16 health and welfare organizations.

Hage & Dewar (1973)

&

Younger managers with less experience are more likely to alter their strategies with changing environmental conditions.

855 managers from 27 railroads.

Grimm & Smith (1991)

level of innovation.

This paper uses an empirical case study where a new CEO initiates a successful strategic change. A theoretical framework is developed between the CEO actions, rational planning and emergent political behavior.

Empirical case study

Greiner & Bhambri (1989)

(1989)

Govindarajan

Both change in firm size and TMT tenure were positively related to decision comprehensiveness. The level of comprehensiveness persists over several years suggesting considerable inertia.

Survey data from 45 firms in the paint and coating and the forest product industries. Results suggest that SBU strategy interacts with functional background, locus of control, and problem solving style to influence SBU effectiveness. Stresses the need to match general managers to SBU strategy.

& Iaquinto

Fredrickson (1989)

Top managers power (structural, ownership, prestige and to a lesser extent, expert power) are positively related to strategic choice.

Survey data from 1763 managers.

Data from 121 SBUs.

(1992)

Finkelstein

5 “! z P

0

.y w

6

: P 2 8 f g “-1

:

?j ?

2

Gupta (1984), Hambrick & Fukutomi (1991), Staw, Sandelands & Dutton (1981).

Conceptual / theoretical papers:

Interindustry stratification is a function of structural parameters and top managements responses to the environment.

114 firms in the financial services industry.

Fombrun & Zajac (1987)

Executive’s industry tenure is a determinant of commitment to the status quo (CSQ) and has a much stronger relationship with CSQ than does organizational tenure. Firm performance is positively related to CSQ; this relationship in stronger in high-discretion than in low discretion industries. Strong support was found for the rational/analytical choice perspective in evaluating acquisition candidates. Industry and executive characteristics also affect target evaluations.

690 senior executives from large U.S. firms.

Survey data from 69 top executives of firms in the southwest U.S.

Hambrick, Geletkanycz & Fredrickson (1993)

Hitt & Tyler (1991)

Executives had high power if, by virtue either of their functional area or scanning behavior, they coped with the dominant requirement imposed by the environment or lirm strategy.

195 executives form 20 organizations operating in the hospital or insurance industries or colleges.

Hambrick (1981a)

Gupta & Govindarajan (1984) 58 SBUs within 8 Fortune 500 firms. Marketing experience, risk propensity and tolerance for ambiguity on the part of the general manager contribute to effectiveness in “bu~d”strate~es but hamper in the case of “harvest” strategies.

Executive team tenure was found to have a significant effect on strategy and performance, with long-tenured teams following more persistent strategies, strategies that conformed with industry tendencies and exhibiting performance close to the industry average. These relationships were strongest where managers had high discretion.

100 firms in the computer, chemical, and natural-gas distribution industries.

Finkelstein & Hambrick (1990)

Path 3: Strategic leadership to firm strategy moderated by the environment

Changes in corporate strategy were related to TMTs characterized by lower average age, shorter organizational tenure, higher team tenure, higher education levels, and educational specialization heterogeneity.

Archival data from 87 firms that underwent some form of strategic change.

Managerial stewardship and financial strategies explain variance in performance in addition to organizational and environmental factors.

Wiersema & Bantel(1992)

firms over a

Path 2: Strategic leadership to firm strategy (continued)

Findings or implications

193 manufactu~ng 19 year period.

Data

(Continued)

Weiner & Mahoney (1981)

Study

Table 1.

Locus of control of top executives has a significant relationship with strategy and an indirect relationship to environment. An internal locus relates to riskier strategies than an external locus of control. This association is stronger in smaller firms. Homogenous top management teams interact more efficiently under intense competition while heterogeneous groups facilitate adaptation in the face of environmental change. Mayors are better able to make changes when their political constituencies are diffuse. CEO change decreases “death” rates in younger firms. Results suggest CEO change may be adaptive.

93 firms based in Quebec.

Survey data from 77 firms with 500 or fewer employees based in Quebec.

Multi-industry study of top executives from 33 firms based in Montreal.

84 Fortune 500 food and oil companies between 1976 to 1981.

Data from 30 U.S. cities over an 18 year period.

389 firms of which 107 “died” during the study period 1970-1982.

Gray & Ariss (1985), Hambrick & Finkelstein (1987), Hambrick & Mason (1984).

Miller & Droge (1986)

Miller, Droge & Toulouse (1988)

Miller, Kets de Vries & Toulouse (1982)

Murray (1989)

Salancik & Pfeffer (1977)

Singh, Tucker & House (1986)

Conceptual / theoretical papers:

Results suggest CEO need for achievement influences the intended rationality of the strategy-making process, which in turn influences structural formalization and integration. The latitude for strategic choice causes context and structure to be loosely coupled.

CEO need for achievement (nACH) and size have the strongest relationship with structure. In small firms, nACH and structure/strategy were highly related suggesting CEO personality effects strategy/ structure.

strategies require different

Strategies are self-reinforcing. competencies than defenders.

Data from 49 electronics & food processors, 19 hospitals and 16 colleges.

Miles & Snow (1978) Prospectors

High-interdependence firms had more TMT members with expertise in core functions (operations, marketing and R&D) than did low-interdependence firms. Low-interdependence firms were characterized by TMT backgrounds in finance, law, accounting, and general management. Highinterdependence firms displayed lower levels of tenure homogeneity than low-interdependence firms.

Archival data from 134 firms.

Michel & Hambrick (1992)

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here is that executives are not selected for these positions randomly. Most of these studies do not address whether the selection process represents a purposeful selection of managers with specific characteristics to match environmental requirements or a political/ Darwinian process (Hambrick (1989). For example, Song (1982) found that the background and prior experience of the CEO is significantly associated with the diversification strategy of the firm. Specifically, the firm’s diversification posture affects the number of different functional areas represented on the top management team. Pfeffer (1983) found that industry age has an effect on the age of senior executives within the industry. More recently, Keck and Tushman (1993) found that changes in the external environment affected the composition and heterogeneity of the TMT. Several conceptual articles have examined this relationship also (Szilagyi & Schweiger, 1984). For example, Jauch and Osborn (1981) identified four strategic profiles based on environmental conditions which in turn affect administrative philosophy. Hurst, Rush and White (1989) take this one step further and posit that TMTs should be composed of specific behavior types while Kerr and Jackofsky (1989) suggest that managerial development (as opposed to hiring executives with specific characteristics) may be a way to align strategy with the environment. Strategic-Leadership-to-Strategy/Structure Link. This second path of the model examines the relationship between the TMT and firm strategy/conduct. This perspective argues that the firm is a reflection of its top managers. The values, beliefs, and group interactions between TMT members and their cognitions affect strategic choice. Both managerial characteristics as well as behaviors have been used to assess this relationship. The personal values of the TMT can affect the level of innovation (Hage & Dewar, 1973) and the introduction of an insider versus outsider CEO is positively related to strategic change (Helmich & Brown, 1972). Very little attention, however, has been given to the type of changes brought about by insiders versus outsiders and the long-term effects of such changes. More recently, Miller (1991) found that long-tenured CEOs were less likely to achieve a fit between firm strategy and the environment than their counterparts with less tenure. However, Wiersema and Bantel (1992) found that TMT tenure was positively related to strategic change. These findings suggest that results are mixed regarding tenure or, perhaps, that the relationships are more complex than previously thought. Further research is necessary to disentangle these apparently conflicting findings. Future research might examine firms in different contexts. For example, Miller’s study examined a sample of firms in a specific geographic area whereas Wiersema and Bantel examined a specific type of firm, those that were undergoing some form of strategic change. Environment as a Moderator. The majority of studies have examined a more complex relationship between leadership and strategy by including the environment as a moderator. This path is characterized by the assumption that executive characteristics and behaviors may not affect strategic choices (i.e. strategy) in a uniform manner. The context (environment) in which the firm operates may restrict or constrain the range of choices available and limit managerial discretion (e.g., Hambrick & Finkelstein, 1987). JOURNAL OF MANAGEMENT,

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For example, Miller, Kets de Vries and Toulouse (1982) found that CEO personality exhibits a much stronger positive relationship with innovation in smaller firms than in larger firms. Hambrick, Geletkanycz and Fredrickson (1993) found that industry tenure exhibits a stronger relationship with managers’ commitment to the status quo in high-discretion as opposed to low discretion industries. Miller and Droge (1986) found that the CEO’s personality affects the structure of the organization. In small firms, the relationship between CEO need for achievement and structure/strategy were more highly related than in larger firms. Murray (1989) found that homogeneous TMTs are more effective under intense competition while heterogeneous TMTs facilitate adaptation in the face of environmental change. Most directly, Finkelstein and Hambrick (1990) found much stronger relationships between TMT tenure and performance, strategic persistence, and strategic conformity in a comparison of organizations in environments permitting high and low discretion respectively. Future Directions Overall, some generalizations can be made concerning TMT behaviors and characteristics. It is generally accepted that TMT age, organization tenure, homogeneity of functional background and an external locus of control are negatively related to a high degree of fit between strategy and environment. High levels of education, heterogeneity in functional background, internal focus and lower average tenure are positively related to adaptation and change. There are of course exceptions to these generalizations as in the aforementioned case of TMT tenure. One area that has not received much attention is the relationship between the board of directors and top management. The characteristics of the board of directors has not been examined in much detail with the exception of Pfeffer (1972; 1973), Kesner (1988) and Johnson, Hoskisson and Hitt (1993). With the exception of Johnson et al. (1993), no other studies have attempted to examine the interplay of manager and board characteristics in strategic decisions. In the last few years, boards of directors have become more proactive and may begin to affect the relationship between leadership and strategy/environment fit. Another area that might prove interesting would be to factor in high-velocity environments (Eisenhardt, 1989), network structures (Jarillo, 1988) and decision speed (Eisenhardt, 1989) into the leadership/strategy/environment equation. For example, what characteristics promote the trust necessary to efficiently manage a network organization or provide quick-responses to environmental/ competitor changes? Scanning The manager must be aware of an optionfor set.

-Hambrick

it to be part of the discretionary

& Finkelstein, 1987, p. 373.

Originally conceptualized as a boundary spanning task, scanning was initially defined as the managerial activity of learning about events and trends JOURNAL OF MANAGEMENT,

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Studies

Conceptual

406 top management teams in 108 European manufacturing firms.

Daft & Weick (1984)

Farh, Hoffman, & Hegarty (1984)

Ireland, Hitt, Bettis, & Auld De Porras (1987)

/ theoretical

/ theoretical

paper.

paper.

and top officers

56 managers from all ranks of one Brazilian and two Venezuelan manufacturing companies.

Dutton and Jackson (1987) Conceptual

A positive relationship was found between the proportion of internallyoriented members of the dominant coalition and four measures of the banks’ financial performance.

137 board members from 8 banks.

Pearce (1983)

and organizational

obtrusiveness

affect

of

forms of scanning and several

of opportunities

and threats. Perceived environmental uncertainty varied significantly by managerial level as did the relative importance of strength and weakness indicators.

Specified the attributes

Tests of the convergent and discriminant validity of a modified version of Hambrick’s scanning scales revealed major problems with the hours method of measuring scanning, but strong support for the frequencies and importance methods.

the environment

Use of an information source was positively related to perceptions sources’ availability and perceptions of task environment complexity.

362 professionals in the corporate HQ of a national bank holding company and a large manufacturing firm.

Culnan (1983)

Beliefs about scanning.

Distinguished automatic and directed-search sources of error in problem sensing.

paper.

Conceptual/

Kiesler & Sproull(l982)

theoretical

There was generally no or only a small relationship between strategy (prospector or defender) and scanning frequency, interest, and hours.

165 executives from 6 private liberal arts colleges, 5 voluntary hospitals, and 6 life insurance companies.

Hambrick (1982)

of critical important

195 executives (top three levels) from 8 liberal arts colleges, 6 general hospitals, and 6 life insurance firms.

Hambrick (1981b)

scanning of less

Executive power was positively correlated with environmental sectors but not with scanning environmental sectors.

195 executives from 8 private liberal arts colleges, 6 private hospitals, and 6 life insurance companies.

Hambrick

level and

There was a limited positive relationship between hierarchical scanning and between functional area and scanning.

Data

(1981a)

Scanning

Findings or Implications

Representative

Study

Table 2.

Scanning practices among Korean firms are more homogeneous than scanning practices among American firms.

83 MBA alumni from a large university. The presence of threats was more likely to be acknowledged than the presence of opportunities, and opportunities were more likely to be disavowed than threats.

S & L’s with a differentiation strategy placed more importance on evaluating opportunities and customers’ attitudes than those with a cost leadership strategy; S&L’s with a cost-leadership strategy placed more importance on evaluating competitors’ threats, policies, and tactics than S&L’s with a differentiation strategy. The task environment was perceived to be more uncertain than the remote environment; the greater the perceived environmental uncertainty of a sector, the greater the interest in scanning the sector; the greater the perceived environmental uncertainty, the greater the scanning frequency of a sector; and little relationship between source of i~ormat~on and perceived environmental uncertainty for the task environment, but some for the remote environment.

6 large South Korean companies.

75 senior American and 422 senior Japanese managers.

151 hospital CEOs from a single American state.

303 executive and graduate students from 16 countries at a major European business school.

Members of 45 product development teams.

44 CEOs from Texas savings and loan associations.

Top managers from 47 small to medium-sized Nigerian manufacturing firms.

156 CEOs from 156 public access hospitals in Texas.

Ghoshal(1988)

Jackson & Dutton (1988)

Sallivan & Nonaka (1988)

Thomas & McDaniel (1990)

Schneider & De Meyer (1991)

Ancona and Caldwell (1992)

Jennings and Lumpkin (1992)

Sawyerr (1993)

Thomas, Clark, & Gioia (1993)

Top management of for-profit hospitals focused more on external than on internal information; high information use was positively related to positive-gain interpretations (oppo~unities) and the interpretation of issues as controllable.

Developed a scale for “scouting” (scanning) and found that prolonged scouting was negatively related to several indicators of team performance.

Latin European nationals were more likely to interpret issues as crises and threats than German, Scandinavian, and North American nationals.

Domain offensive (as opposed to domain-defensive) strategies were associated with greater variable usage and interpretation of issues as controllable.

Japanese managers were more likely than American managers to interpret issues as threats.

Scanning frequency was positively correlated with strategic uncertainty; use of all modes of information was positively correlated with strategic uncertainty; and high performance firms revealed stronger correlations between scanning frequency and strategic uncertainty than low performance companies.

CEO’s and other top mangers in 50 Texas smart-to-medium-sized independent manufacturing firms.

Daft, Sormunen, & Parks (1988)

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in the organization’s environment (Hambrick, 1981a). As such, scanning becomes the first proactive step in the organization’s process of adapting to its environment (Child, 1972; Daft & Weick, 1984; Hambrick, 1981a), a process generically described as the scanning-interpretation-choice/ action sequence (Child, 1972; Thomas, Clark & Gioia, 1993). Although this conceptualization of scanning accurately describes most of the empirical and theoretical scanning research, one of the conclusions reached later in this section is that the concept of scanning activities can be usefully and appropriately expanded to include the scanner’s own organization in the field of scanned events and trends. Scanning can be described in several ways. Ghoshal (1988) distinguished formal scanning (a system consisting of a special unit dedicated to scanning and interpreting the organization’s environment) from informal scanning (a system based on the daily scanning activities of individual mangers). Within this categorization, most scanning research has dealt with the more informal forms of scanning. Moreover, Kiesler and Sproull (1982) distinguished automatic from directed scanning. Directed scanning has specific intentions and objectives whereas automatic scanning is a less conscious, often unconscious perception of phenomena such as the frequency and timing of events. At least intuitively, one would suspect that formal scanning would involve more directed scanning whereas informal scanning would involve more automatic scanning. Having introduced the scanning concept, the remainder of our examination of scanning will focus on the following topics: (1) scanning’s measurement; (2) the relationship between scanning and several other variables; and (3) the interpretation of scanned events and trends. The studies upon which the following discussion is based are summarized in Table 2. Measurement Aguilar (1967) pioneered scanning research and Kefelas and Schoderbeck (1973) conducted other important early research on this topic. (Ghoshal, [ 19851, thoroughly reviews the early scanning research.) Hambrick’s work (1981a; 1981b; 1982), however, established the methodological and conceptual archetype for contemporary scanning research, albeit his work was heavily influenced by Aguilar. Hambrick’s work dealt with two scanning issues: (1) What is scanned? and (2) What behavioral dimensions constitute scanning? Regarding the latter question, Hambrick distinguished and measured (1) the frequency with which an environmental sector was scanned; (2) the managerial interest in scanning a sector; and (3) the time devoted to scanning specific environmental sectors. As for what was scanned, Hambrick followed Miles and Snow (1978) and distinguished environmental sectors relevant to output, throughput, administration processes and added regulatory matters as a fourth concern. Scanning researchers would later add the task/ general environment distinction to the concept of generic environmental sectors (Daft, Sormunen & Parks, 1988; Sawyerr, 1993). Farh, Hoffman and Hegarty (1984) conducted a confirmatory factor analysis to examine Hambrick’s threefold approach to measuring scanning and JOURNAL OF MANAGEMENT,

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concluded that the frequency and interest approaches to scanning measurement were much more valid than the method of using estimates of hours devoted to the task. Their results provide a valuable caution to scanning researchers. Relationships

with Other Variables

Scanning research has investigated the relationships between scanning activities and several variables including managerial power, information sources, environmental characteristics, organizational performance, and business-level strategy. Business-level strategy. Attempts to link scanning behavior to businesslevel strategy have produced mixed results. Hambrick (1982) found few systematic relationships between scanning behavior and firm strategy (prospector or defender [Miles & Snow, 19781); however, Jennings and Lumpkin (1992) were more successful. Using two of Porter’s (1980) strategic types (differentiation versus cost-leadership), they found that a differentiation strategy was associated with an emphasis on evaluating opportunities whereas the costleadership strategy was more associated with the evaluation of competitor-based threats. Conspicuously absent were studies that examined the relationship between corporate strategy and scanning behaviors. The small number of existing studies and their mixed results provide ample opportunities for future research to clarify the scanning-business strategy relationship; and the fundamentally unexplored area of corporate-strategy-scanning relationships provides even more freedom for exploration. Power. Perhaps because only one study was identified that examined this issue, research on the relationship between scanning behavior and power tends to stand out. Hambrick (198 1b) found that the scanning of critical environmental sectors was positively related to executives’ power, but their scanning of less important sectors was unrelated to their power in the organization. If a primary function of scanning activity is uncertainty reduction, this relationship between scanning critical (strategic) sectors and power suggests a possible relationship between power and technology, a topic discussed later in this section. Uncertainty. Some of the most compelling scanning research results concern the relationships between uncertainty about the environment and scanning behavior. Daft et al. (1988) found that the greater the strategic uncertainty about an environmental sector, the greater the frequency with which it was scanned. Sawyerr (1993) replicated these results in a study of Nigerian organizations, by that not only replicating Daft et al.‘s results but increasing their generalizability to a wider domain of cultural and national traditions. Although the uncertainty about specific strategic environmental sectors differed between the two studies, the general proposition that uncertainty about strategic environmental sectors is strongly associated with scanning frequency and interest was strongly supported by both studies. As will be discussed in a following section on the use of scanned information to interpret phenomena as strengths, weakness, opportunities, or threats, scanning of the scanner’s own organization also occurs. The proposition relating uncertainty about strategic environmental sectors and scanning just JOURNAL OF MANAGEMENT,

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discussed may be generalizable to uncertainty about any strategically important phenomena inside or outside the organization. That is, the greater the uncertainty about a strategically important phenomenon, the greater the scanning attention it will receive. Regarding internal scanning, departments or divisions may be regarded as natural analogues to environmental sectors. Indeed, they may be less of an abstraction to managers than the somewhat arbitrarily defined environmental sectors. Information sources. Just as uncertainty and importance differentially draw scanning attention to specific environmental sectors, research has also investigated the possibility that similar variables would lead scanners to differentially employ specific types of information sources. Daft et al. (1988) however, found that perceptions of strategic uncertainty produced a mixed set of results in its ability to predict the use of internal versus external and personal versus written sources. They found positive correlations between perceptions of strategic uncertainty and all of these modes. Sawyerr (1993) similarly found mixed results. Thomas et al. (1993) did find external sources used more in high performing organizations. Investigating a different question, Culnan (1983) found a positive relationship between: (1) perceptions of source accessibility and the use of information sources; and (2) between task environment complexity and the use of information sources regarding it. Given Culnan’s findings and the generally mixed set of findings concerning information source utilization, future research would be prudent to include perceived information accessibility as a control variable, if not a moderating or mediating variable, in models of information sources use by scanners. Performance. Several studies revealed results that related scanning behaviors and organizational performance in significant ways. Pearce (1983) found that the proportion of internally-oriented members of a firm’s dominant coalition was positively related to scanning. Daft et al. (1988) found stronger positive correlations between scanning frequency and interest and strategic uncertainty in their set of high performing companies than in their set of low performing companies. Ancona and Caldwell’s (1992) research produced the disconcerting finding that prolonged scanning was negatively related to the performance of product development teams. Perhaps this finding is an example of Peters and Waterman’s (1982, p. 49) injunction to avoid “paralysis-inducedby-analysis.” As Ancona and Caldwell noted, at some point, the teams needed to begin implementing product design. Scouting (scanning) by itself could not become an enduring pattern. Ancona and Caldwell’s findings may have unearthed an important contingency in the relationship between scanning and performance. The proposition that more is always better may be incorrect, especially for organizations and units stalled in a pattern of continuous scanning, if the information the scanning produces is never utilized to generate action. Information Interpretation As specified previously, scanning has been conceptualized as the first stage in the scanning-interpretation-choice/ action sequence. This sequence underlies JOURNAL OF MANAGEMENT,

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the general strategic management premise that organizations should align their internal competencies with external opportunities. Distinguishing pure scanning from interpretation of scanned information is often difficult because, as the enactment paradigm (Daft & Weick, 1984) and Child’s (1972) model suggests, scanners will bring defining categories to their scanning activities before and as they scan. Thus, scanners are likely to be actively searching for opportunities and threats, or at least to simultaneously interpret information in the threat and opportunity categories, rather than follow the simple linear sequence of gathering information (scanning) and then interpreting it. Several studies have investigated the correlates of the standard SWOT category interpretations (strengths, weaknesses, opportunities, and threats). Stevenson (1976) found that a manager’s level in the organization’s hierarchy was strongly related to the attributes that were perceived as organizational strengths and weaknesses. He also found that the criteria managers used to determine whether an attribute was a strength or a weakness also differed substantially from each other. Conversely, (Hambrick, 1981a) found only a limited relationship between level in the hierarchy and general scanning activity. Ireland, Hitt, Bettis, and Auld De Porras (1987) found uncertainty perceptions varied by managerial level as did the importance of various organizational strength and weakness indicators. Regarding the interpretation of potential opportunities and threats, Jackson and Dutton (I 988) found that threats were more likely to be perceived than opportunities but that when perceived, opportunities were more likely to be disavowed than threats. Following Jackson and Dutton, Thomas et al. (1993) found high information use positively related to positive-gain interpretations (opportunities) and to the interpretation of these opportunities as controllable. Similarly, Jennings and Lumpkin (1992) found a differentiation strategy positively related to the evaluation of opportunities whereas companies with a cost-leadership strategy were more likely to focus on the definition and evaluation of threats. Thomas and McDaniel (1990) found that CEOs from hospitals with offensive strategies were more likely to use more variables to interpret an issue and were more likely to label an issue as controllable than were CEOs from hospitals with domain-defensive strategies. National culture. Three studies have related the influence of national culture to scanning interpretations: one indirectly, the other two directly. Ghoshal (1988) found scanning practices by South Korean manufacturers to be much more homogenous than their American counterparts. This difference suggests that South Korean interpretations, ceteris paribus, should be more similar and homogenous than American interpretations. Schneider and De Meyer (1991) found that Latin European managers (from France, Belgium, Italy, Spain, and Portugal) were more likely to interpret an issue as a crisis and a threat than North American or Scandanavian and German managers. Similarly, Sallivan and Nonaka (1988) found that Japanese managers were more likely than American managers to interpret issues as threats. Thus, the cultural tradition in which an organization is embedded and in which its managers have been reared is strongly related to the interpretation of scanned information. JOURNAL

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Future Directions Overall, the exploration of scanning phenomena has produced a solid foundation of basic research, a research base that seems poised for an expanded conceptualization that includes the scanner’s organization itself as a legitimate focus of scanning activity and research. Thomas et al. (1993, p. 241) have noted: “From a strategic perspective, however, scanning also involves searching an organization’s internal environment [emphases ours] to identify important elements that might bear on future performance.. .” Thus we anticipate a broadening of the scanning concept to include this larger set of phenomena, thereby also expanding the scope of scanning propositions. For example, some findings (see the uncertainty section of this discussion for specific references) can be regarded as the foundation for basic propositions such as the aforementioned perceived strategic uncertainty is positively related to scanning interest and frequency. However, more research on internal scanning is required to establish the generality of this basic proposition. Such research could measure unit uncertainty directly by asking for omnibus perceptions about it; however, unit technology may also characterize the relative amount of uncertainty managers are likely to perceive about the unit. Perrow (1970) distinguished technology along two dimensions, solution search behavior and number of exceptions, which he used to specify four types of technology. The two extreme types were routine (few exceptions occur and procedures for dealing with them are well understood) and nonroutine (many exceptions occur and procedures for dealing with them are undeveloped). Units with routine technologies will be much more predictable, hence managers will be more certain about them. Conversely, units with nonroutine technologies will be perceived as less predictable, hence more uncertain. Applying the general uncertainty-scanning proposition to internal scanning and technology results in the following testable proposition: Pl.

the more nonroutine a strategic unit’s technology, the greater the interest in scanning it and the greater the frequency of scanning

behavior in regard to it.

If the department is indeed an entity analogous to an environmental sector, Hambrick’s (1981b) finding of a positive relationship between scanning strategically important environmental sectors and managerial power suggests the following testable proposition for internal scanning research: P2. scanning strategically important organizational positively related to managerial power,

units will be

These propositions can be examined at both the business and corporate levels although the concept of technology might need to be replaced with omnibus perceptions of uncertainty for investigations of internal corporate-level scanning. This substitution could be necessary because each division a corporate executive would scan would be likely to contain several departments, each of JOURNAL

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which would have a different technology, thereby making it difficult to characterize the technology of an entire division. With a broader set of propositions, we also expect to see individual propositions becoming linked and developing into broader and broader middlerange theories following the process of theory development described by Bluedorn and Evered (1980). For example, the relationships between scanning and other phenomena are likely to be moderated by other factors as Boynton, Gales and Blackburn’s (1993) findings about the contingent nature of managers’ information-search behavior suggest. Thus, although scanning research has benefited from a steady, solid research stream produced by several researchers, its most exciting developments and findings seem yet to come. Information

Processing

It is important not to overlook thesejne distinctions between ‘reality’ and its evaluation because they can explain why organizational decision-makers in practice may not react to observable environmental changes.

-Child,

1972, p. 5

In order to make strategic decisions and choices, decision makers within the firm must seek out information in order to interpret relevant issues (Aguilar, 1967). Seeking out this information is the scanning process, a process we have seen that is strongly affected by managerial uncertainty about strategic matters. Galbraith (1977) argued that the level of information processing, the next step following scanning in Child’s (1972) framework, reflects uncertainty. The key assumption in this literature is that uncertainty and the level of information processed are closely related. Tushman and Nadler (1978) proposed that organizational effectiveness is related to the fit between information requirements for decision making and the ability of the organizational structure to provide that information. The following discussion examines the linkages between information processing and strategic decision making. Our discussion will proceed with an examination of the following three topics: (1) problem identification; (2) interpretation and classification; and (3) information type and usage. Lastly, future research directions will be discussed. Table 3 presents the studies examined and organizes them into two sections: (I) problem identification/ interpretation; and (2) information type and usage. Problem

Identification

Any discussion of information processing assumes that the firm receives stimuli that can be interpreted by decision makers who then respond with information processing activity. Staw, Sandelands and Dutton (198 1) presented a model that examines threat-rigidity in group and organizational settings. They argue that external threats may lead to a restriction of information due to informational overload, reliance on prior knowledge, or a constriction of control (due to centralization and formalization). Although this restriction may JOURNAL

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Processing,

This paper examines performance. Both positively related comprehensiveness inertia.

Survey data from 45 firms in the paint and coating and the forest product industries.

Fredrickson (1989)

This paper investigates the characteristics and concepts of threat and opportunity used by organizational decision makers to understand issues. Results suggest that managers are more sensitive to issue characteristics associated with threats than those with opportunities. Results suggest that firms tend to adopt more complete long-range planning processes as complexity and instability of the environment increases. This suggests that top management may centralize planning in small firms under adverse conditions, managers of large firms tend to be more open to information from many sources. Paper hypothesizes that a subunit would be more effective when its communication practices matched the level of uncertainty confronting the subunit. Results indicate that effectiveness can be enhanced by increasing communication under turbulent or decreasing it under stable conditions. The relationship involves the implicit assumption that subunits use the information communicated to them to enhance effectiveness.

Survey data from 78 general managers and strategic planners.

Survey data from 199 firms in 15 industries.

Data on communication, effectiveness and environment from 90 subunits in a midwest extension service.

Jackson & Dutton (1988)

Lindsay & Rue (1980)

Morrow (1981)

the link between decision comprehensiveness and firm change in firm size and executive team tenure were to decision comprehensiveness. These levels of persist over several years suggesting considerable

This study uses an information processing approach to develop a model for evaluating the goodness of fit between strategy and structure. Results generally confirm that information processing model as a means for better understanding of this relationship.

Interview data from 34 of the largest, successful (MNCs).

Egelhoff ( 1982)

& Iaquinto

Boundary spanning activity was strongly related to organizational performance. Information processing capability significantly affected the performance-boundary spanning relationship.

Survey data from 82 owner/ operators from small business firms.

are of

Dollinger (1984)

Section 1: Problem recognition Results of this study suggest that strategic planning students significantly vulnerable to hindsight bias. retrospective predictions project success were shifted in the direction of known outcomes.

Firm Strategy and Environment

Survey data from two samples of 48 and 26 MBA students respectively.

Findings or Implications

between Information

Bukszar & Connolly (1988)

the Relationships

Data

Studies Examining

Study

Table 3.

O’Reilly ( 1982)

Daft & Macintosh

(1981)

Conceptual / theoretical papers:

This paper examines managers work histories, their belief structures and three indexes of information processing in an ill-structured decision situation, Results suggest that managers do not seem particularly biased toward information relating to their functional background. This result is contrary to arguments from Dearborn & Simon’s work.

This study investigated strategic sensemaking (scanning, interpretation and action) and how these factors are linked to performance. Structural equation modeling results indicate increased use of information sources leads to higher profits, issues labeled as positive-gain were negatively related to profits, and controllable situations were positively related to profits.

This paper examines how strategy and the information processing structure of the TMT relate to how CEOs in different organizations interpreted the same situation. Organization strategy was positively related to variable usage. In addition, TMT information processing was positively related to variable usage as well as issue categorization (positive/ negative).

This paper tests a model that relates the amount and equivocality of information processing to the variety and analyzability of work-unit activities. Information processing increased with both task variety and analyzability; the use of equivocal information decreased with task analyzability. The frequency of use of four major information sources is explained by the assessibility of the source. This relationship may be due to: (1) social and economic costs associated with obtaining the information, (2) firm structure may restrict access to quality sources, and (3) incentive systems may bias decision makers into using a particular source.

Survey data from 253 individuals in 24 departments in 14 firms.

Survey data from 163 subjects from a county welfare agency.

Section 2: Information type and usage

Dutton & Duncan (1987a; 1987b), Dutton, Fahey & Narayanan (1983), Dutton & Jackson (1987), Kiesler & Sproull(1982), Staw, Sandelands & Dutton (1981) and Zajac & Bazerman (1991).

Survey data from 121 midcareer managers enrolled in an MBA program.

Walsh (1988)

Survey data from 15 1 hospital CEOs responding to two scenarios.

Survey data from 156 hospital CEOs using case-scenario methodology.

(1990)

Thomas, Clark & Gioia (1993)

Thomas & McDaniel

This paper tests hypotheses relating to managerial preferences for information channels. Message complexity and documentation were manipulated during the study. Results suggest cost minimization is positively related to voice mail usage. The relationship between corporate-level planning and information systems was examined empirically. Results indicate that planning processes are positively related to external and environmental information as well as informal sources of information. The relationship between financial performance and characteristics of corporate planning systems was investigated. Planning systems that combined an external focus with a long-term perspective were positively related to superior shareholder returns.

Survey data from 1000 technical, professional and administrative workers in a large industrial firm.

Survey data from 89 corporate planning executives or financial VPS.

Survey data from 89 corporate planning executives or financial VPS.

Daft & Lengel (1986), Duhaime

Reinsch & Beswick (1990)

Rhyne (1985)

Rhyne (1986)

Conceptual / theoretical papers:

& Schwenk (1985), Schwenk (1984) and Tushman

& Nadler (1978).

Using a sample of successful and unsuccessful firms, this study examines the relationship between strategy making and environment. Results suggest that high performers are more likely to boost analysis (information processing) in response to environmental dynamism. In addition, unsuccessful firms seem to reduce analysis during periods of hostility (threat) while successful firms show a marked tendency to increase analysis as hostility increases.

Survey data from 48 successful and 40 unsuccessful firms in the US and Canada.

Miller & Friesen (1983)

Section 2: Information type and usage (continued)

Data

Findings or Implications

(Continued)

Study

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not always be dysfunctional (Staw et al., 1981), it may affect the ability of top management to notice the problem, interpret it correctly and incorporate the stimuli (Kiesler & Sproull, 1982). Failure to incorporate the stimulus may leave environmental threats unchecked. Noticing and interpreting the problem may not always be obvious. For example, Zajac and Bazerman (199 1) argued that decision makers typically have “blind spots” when they consider contingent decisions of competitors. They argued that a “winners curse” may ensue under conditions of information asymmetry and lead to escalation of commitment, overconfidence in judgement and a limited perspective. Hindsight bias (Bukszar & Connolly, 1988) may also distort the interpretation of past decisions and lead to ill-advised changes. This discussion of “blind spots” may be particularly timely given the recent events at General Motors, Sears and IBM. At the operational level, Tushman and Romanelli (1985) argued that as strategic processes become routinized, commitment to standard practices increases as groups become more rigid in behavior patterns and decrease both the volume and diversity of information. This is consistent with Staw et al. (198 1) who argued that managers may rely on standardized rules and procedures when facing a threat. Along these lines, Lindsay and Rue (1980) suggested that top management may centralize planning in small firms as instability in the environment increases. Interestingly, managers of Iarge firms were found to be more open to multiple information sources. This somewhat surprising result suggests that large firms are more likely to detect problems that smaller firms. This of course does not mean that smaller firms are inherently inertia-bound, rather, it suggests that smaller firms may have specialized information sources that allow detailed analysis as opposed to relying on multiple sources of information. Our next topic, interpretation and classification, builds on problem identification and examines how the issue is interpreted.

Interpretation and ClassiJication Strategic decision makers in organizations are continuously bombarded with an array of ambiguous data that they must interpret (Dutton, Fahey & Narayanan, 1983). Dutton et al. (1983) argued that strategic issue diagnosis (SID) is important in that it may help remove “blinders” affecting strategic decision making. Consistent with Child (1972) and Mintzberg, Raisinghani and Theoret (1976), Dutton et al. (1983) argued that it is difficult to engage in strategic decision making without diagnosing the information. Meyer (1982) found that how a strategic issue is interpreted may affect what actions a firm takes. SID would seem to be a key in determining what is a strategic issue and how it is interpreted. Managers routinely deal with ill-structured problems that challenge their cognitive capacity (Mintzbeg et al., 1976). In response to this challenge, managers construct belief structures that are simplified representations of their world (cf. Child’s 1972 concept of prior ideology). Without these structures, managers would be overwhelmed by information of staggering complexity (Daft & Weick, 1984). Walsh (1988) examined belief structures, managers’ work JOURNAL OF MANAGEMENT,

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histories and information processing and suggested that managers’ belief structures are not particularly narrow. In fact, most managers used information from different functional domains to arrive at a decision, although managers with an external orientation (i.e., marketing) were more likely to request additional information from external sources. These belief structures may affect Dutton and Duncan’s (1987b) urgency assessment and feasibility assessment in strategic issue diagnosis. Donaldson and Lorsch (1983) argued that shared understandings (organizational beliefs) act as lenses through which managers perceive the world. Managers’ belief structures will doubtlessly influence their appraisal of the urgency and feasibility of action. Dutton and Duncan (1987b) argued that perceived need for change and perceived feasibility for change affect the momentum for change. In their model, a high momentum for change leads to radical change while a low momentum leads to more incremental change. How diagnosed issues are classified may be linked with the level of importance ascribed to the issue. Dutton and Jackson (1987) argued that issues labeled as opportunities or threats may have differential effects on the information search as well as on the motivations of key decision makers. Jackson and Dutton (1988) provided some support for these arguments because they found managers are more sensitive to issues classified as threats than those classified as opportunities. Thomas et al. (1993) found additional support in their study of hospitals. Using structural equation modeling, they found that increased use of information sources leads to higher profits as do issues labeled controllable. Interestingly, they found that issues categorized as positive-gain were negatively related to profits. This result suggests managers key almost exclusively on threats. Thomas and McDaniel (1990) argued that a change in information processing capacity may alter CEOs conceptual lenses and range of possible actions. They found that firms pursuing differentiation/ innovator strategies were more likely to increase information processing. Fredrickson and Iaquinto (1989) found that decision comprehensiveness persists over several years suggesting there is considerable inertia in the process. A detailed examination of strategic decision processes will not be presented here as it has been reviewed elsewhere (e.g., Rajagopalan, Rasheed & Datta, 1993).

Information Type and Usage Research in this area has centered on the type of information being collected and how it may be used. The information dimension frequently examined in organization theory is information amount (Galbraith, 1973; Tushman & Nadler, 1978). Miller and Friesen (1983) present evidence suggesting performance is positively related to the amount of information processed. Also, unsuccessful firms seem to reduce analysis during periods of hostility while successful firms increase analysis as hostility increases. Daft and Macintosh (1981) argued that the amount of information processed may not be the most appropriate method for examining information processing and “information-processing activity.” The argue for a new operationalization, JOURNAL OF MANAGEMENT,

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principal concern is that the amount of information processed may have little to do with the quality of the information. Daft and Macintosh (1981) suggest that information can be categorized as equivocal (multiple meanings) versus unequivocal information (leads to a single, uniform interpretation). The equivocality of the information is related to the variety and analyzability of the work-unit. They argue that the use of equivocal information decreases with task analyzability. This paper was followed by Daft and Lengel’s (1986), which posited a model linking uncertainty and information equivocality. A somewhat different perspective was taken by O’Reilly (1982) who found, similar to Culnan (1983-see the related discussion of information sources in the scanning section) that the frequency of use of four information sources is related to the accessibility of the source. O’Reilly examined three factors that may lead to limited accessibility: (1) social and economic costs associated with obtaining the information; (2) restricted or limited access to quality sources; and (3) incentive systems that may bias decision makers into using a particular source. This finding was somewhat supported by Reinsch and Beswick (1990) who found that costs may also influence the type of data gathered and used. These authors examined under what conditions decision makers would adopt voice mail and found when costs were deemed very important, use of voice mail was emphasized. Even after the information has been collected, managers may have to resort to cognitive simplification procedures to further reduce available information into some usable amount. Due to bounded rationality, managers may resort to heuristics in order to simplify their information processing tasks. As described earlier, managers must identify gaps between expectations or standards and performance (Schwenk, 1984). Given that the major purpose of gathering information is to assess these gaps, such heuristics may affect issue diagnosis and the type of information collected. In fact, the threshold point at which stimuli are interpreted as indicating a problem may vary from manager to manager, indicating managerial characteristics, cognitive biases and politics of the decision setting may affect decision outcomes (Schwenk, 1984). Duhaime and Schwenk (1985) posited that top managers use cognitive simplification processes when dealing with ill-defined problems such as acquisitions and divestitures. They argued that managers may suffer from illusion of control, engage in escalating commitment and use reasoning by analogy. More extensive planning processes were positively related to increased external and internal information (Rhyne, 1985). Planning systems that combine an external focus and a long-term perspective were positively related to shareholder returns. A detailed examination of strategic planning was not undertaken here as Rhyne (1986) and Pearce, Freeman and Robinson (1987) reviewed articles between 1970 and 1984. Pearce et al. (1987) suggested that the utility of formal strategic planning has not been borne out in empirical studies and that serious methodological problems may be the root of the problem. They suggested that contextual influences, lack of uniformity in measuring strategic planning, using an adequate time frame, controlling for moderating variables as well as how the plans are implemented has been largely overlooked. JOURNAL

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Future Directions Future researchers could address several relevant issues within this area. For example, Dutton and Duncan (1987b) argue that feasibility and urgency affect the momentum for change. What happens if the issue is diagnosed as a threat and no changes are initiated? Has there been a breakdown in the system? Are politics or personal ambitions of top managers impeding change? Jackson and Dutton’s (1988) results suggesting a threat bias contradicts research showing that decision makers often fail to recognize threats, with disastrous consequences for the organization (Starbuck, Greve & Hedberg, 1978). Jackson and Dutton (1988) identified the problem for the decision makers thereby removing identification from their analysis. It would be interesting to examine how well managers would be able to identify problems and then categorize them. Top management team locus of control, top management team characteristics and organizational ideology may affect responses and how the issue was interpreted. A separate issue here is whether the information requirements of the firm fit with the information processing capabilities of the firm (Tushman & Nadler, 1978). What does it take to match information requirements and processing capabilities? What is the role of environmental context? Large diversified firms operating in rapidly changing industries may have problems interpreting the volume of information they collect. What mechanisms facilitate the efficient simplification and distribution of this information? To this point in our discussions, we have been concerned with several factors and stages in the steps leading to strategic choices: (1) the characteristics of the top management team; (2) scanning; and (3) information processing. We have now arrived at the point in Child’s (1972) framework where strategic choices are made. In the following two sections we will consider two generic categories of strategic choice: (1) the choices involving the institutional environment; and (2) the choices involving specific kinds and degrees of relationships with other organizations. Interorganizational

Relationships

Similarly, the distinction between environment and the organization itself (the ‘inner ‘boundary of the environment) is relative to the goals and actions of organizational decision makers. -Child, 1972, p. 9

Although the need to neutralize uncertainty and manage change is clear (Andrews, 1986; Miles & Snow, 1978; Child, 1972), the question is how to do it. One alternative, grounded in the organizational perspectives of resource dependence and transaction cost economics (TCE), is through the formation of interorganizational relationships. These relationships, which involve the cooperation of two or more organizations, are collective strategies initiated to exploit emerging opportunities and manage environmental uncertainty (Bresser, 1988; Thorelli, 1986). In addition, through collective lobbying and similar JOURNAL

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activities these relationships can be proactive in shaping the context in which the firms operate (Oliver, 1990). Thus, interorganizational relationships offer a large array of strategic choices to top managers. The purpose of this section is to synthesize the literature on interorganizational relationships, particularly in regard to how these relationships help firms adapt to environmental change. Initially, the theoretical underpinnings of interorganizational relationships are articulated and discussed. As mentioned, the organizational perspectives of resource dependence and TCE provide important insights. Next, a framework for discussing the different forms of interorganizational relationships is advanced. Finally, our discussion of this topic concludes by exploring extensions to current research in this increasingly important area. Theoretical Background Firms have been engaging in interorganizational relationships to manage uncertainty throughout the history of American business (Chandler, 1977). Oliver defines the collective strategies that emerge from these relationships as “the relatively enduring transactions, flows, and linkages that occur between an organization and one or more organizations in its environment” (1990, p. 241). These relationship forms are distinct in that they represent an approach to uncertainty reduction that is “in-between” Williamson’s (1975) popular dichotomy of markets and hierarchies (Jarillo, 1988; Thorelli, 1986). Interorganizational relationships such as joint ventures, strategic alliances, and federations are neither open market nor vertical integration solutions to uncertainty reduction. Rather, these are hybrid forms of organizing which reflect the extraordinary lengths that firms will go to in their efforts to grapple with environmental change. Researchers have suggested a number of substantive ways in which interorganizational relationships may help organizations cope with environmental change. For example, these relationships may facilitate information flow (Osborn & Baughn, 1990) stabilize resource availability (Aiken & Hage, 1968), and increase organizational bargaining power (Pfeffer & Salancik, 1978). The following organizational perspectives provide theoretical insight into the manner in which interorganizational relationships achieve these and other desirable objectives. Resource dependence. Resource dependence is an organizational perspective grounded in sociology-based exchange theory (Cook, 1977; Levin & White, 1961; Weber, 1947). Within this perspective, the environment is assumed to contain scarce and critical resources that are essential to an organization’s survival (Pfeffer, 1978). According to Thompson (1967), an important source of uncertainty that organizations experience is the degree to which they are dependent upon other organizations for the resources they need in order to function. These other organizations may be suppliers, competitors, creditors or any other relevant entity in a firm’s external environment. In order to successfully manage this dependence, resource dependence theorists argue that organizations pursue two courses of action: (1) they acquire control over JOURNAL OF MANAGEMENT,

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resources that decrease their dependence on other organizations; and (2) they acquire control over resources that increase the dependence of other organizations on themselves (Pfeffer, 1981). Thus, an organization strives to increase its power (thereby reducing its dependence) relative to other organizations in its relevant environment (Thorelli, 1986; Kanter, 1979; Benson, 1975). Engaging in interorganizational relationships is one way for firms to achieve these objectives. Linkages are sought with those organizations that control critical resources or with other, equally dependent organizations. In both cases, an individual organization can increase its power relative to other organizations. For instance, joint ventures can transfer technical knowledge across firms, providing an advantage to joint venture partners relative to other industry participants (Kogut, 1988). Similarly, membership in a trade association (another form of interorganizational linkage) may provide member organizations with special services at low costs, along with legal and technical advice which may provide members an advantage in business negotiations with other organizations (Bresser, 1988). In addition, interorganizational linkages may be pursued to gain otherwise unavailable insights and information, as in the case of interlocking directorates (Schoorman, Bazerman & Atkin, 1981). In essence, interorganizational relationships form to enable organizations to interface more effectively with their relevant environments. Thompson (1967) argued that “cooperative strategies achieve power through the exchange of commitments, and hence the reduction of uncertainties for both parties” (p. 35). These relationships are not without costs, however. To varying degrees, they are prone to failure (Harrigan, 1988) and demand a high level of managerial input (Berg & Friedman, 1980). The contribution of the resource dependence perspective is that it provides insight into why firms pursue an increase in organizational power as a means of ensuring access to critical resources. Interorganizational linkages are one alternative for achieving this objective. Transaction cost economics (TCE). TCE is an organizational perspective which focuses on how organizations choose to transact based on the criterion of minimizing the sum of production and transaction costs (see, for example, Robins, 1987, for a review). Production costs vary across firms as a result of a number of industry and organizational factors (Porter, 1980). Transaction costs refer to the expenses involved in negotiating, implementing, and enforcing contracts. In his early writings, Williamson (1975; 1985) identified markets and hierarchies as the two modes of organizing, and later acknowledged the additional role of interorganizational forms (1991). It is assumed that the most efficient alternative will prevail for any given transaction confronting a firm. In the context of this section, the TCE perspective helps explain why, under certain circumstances, interorganizational relationships are the most efficient mode of organizing, and a number of researchers have provided valuable insights. Jarillo (1988), in his seminal article on strategic networks, argued that network forms of organizing are more efficient than markets or hierarchies in two conditions: (1) when it is technologically more efficient to perform activities in more than one firm; and (2) when a network arrangement minimizes the transaction costs for participating firms (Jarillo, 1990). Essential to Jarillo’s JOURNAL OF MANAGEMENT,

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concept of a strategic network is the existence of a ‘hub firm,’ which is the organization that initiates and maintains the network. The hub firm, in particular, benefits by specializing in those activities essential to its competitive advantage, while farming out peripheral activities to those firms in the network that specialize in those respective areas. All the firms in the network benefit by specializing in their particular areas of expertise, which lowers overall costs. A related argument was made by Kogut (1988) in reference to joint ventures. According to TCE, one of the principle features that characterizes high transaction cost situations is small numbers bargaining, which results in high switching costs as a result of the fact that assets are specialized to support trade between a small number of organizations. Joint ventures in these situations lower potential diseconomies of exit per firm. In addition, under specific conditions joint ventures are conducive to organizational learning and the transfer of tactical knowledge from one organization to another (Shan, 1990) and reduce costs for the joint venture partners through economies of scale in production (Henna& 1988). The TCE explanation for interorganizational relationships further emphasizes how these relationships help firms effectively interface with their environments. Particularly for risky endeavors, TCE seems to suggest that interorganizational relationship may be an essential alternative to traditional forms of organizing (Ring & Van de Ven, 1992). The forms of interorganizational relationships most commonly pursued in practice and discussed in the literature are shown in Table 4. These forms of organization vary significantly by the degree to which the participants are coupled. Tightly coupled forms of organizing, such as joint ventures, are those in which the participants are bound together by formal structures and may involve joint ownership. In contrast, loosely coupled forms of organizing, such as trade associations, involve a minimum of structure and seldom involve joint ownership. A brief discussion of each of the forms of interorganizational relationships identified in Table 4. Tightly Coupled Forms of Interorganizational

Relationships

Joint Ventures. Joint ventures are shared equity relationships between two or more otherwise independent organizations. Berg (1982) reported three primary reasons for the creation of joint ventures: (1) the creation of greater market power by combining resources or generating economies of scale; (2) risk sharing; and (3) the acquisition or sharing of information. In addition, joint ventures with foreign partners may be required for entry into some overseas markets (Kent, 1991) and, as mentioned previously, they may lower per firm exit costs for ventures involved in small numbers bargaining situations. In a synthesis of the literature on joint ventures, Oliver (1990) concluded that competitive uncertainty and industry concentration are predictors of joint venture activity. In particular, risk sharing in equity joint ventures reduces the uncertainties associated with initiating entrepreneurial activities. JOURNAL OF MANAGEMENT,

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Gupta & Lad (1983), Oliver (1990), Stabler Stabler & Aldrich (1983).

Bazerman & Schoorman (1983), Boyd, (1990), Pennings (1980,198 l), Schoorman, Bazerman & Atkin (1981) and Zajac (1988).

Loosely coupled. Distribute trade statistics, analyze industry trends, offer legal and technical advice and provide a platform for collective lobbying.

Loosely coupled. Information sharing, expertise enhanced organizational reputation.

Trade Associations

Interlocking

Directorates

Agreements

and

Harrigan

Loosely coupled. Arrangements between two or more firms that have strategic purposes but do not involve shared ownership.

Cooperative

(1987),

Fottler, Schermerhorn, Wong & Money (1982) Pfeffer & Salancik (1978), Oliver (1990), Provan (1980, 1983).

Tightly coupled. Established to manage and coordinate the activities of affiliate members (common in hospitals). The federation controls all or part of the management activities of the members.

Federation

(1988), Oliver (1990).

Jarillo (1988), Larson (1992), Powell (1990), Thorelli (1986).

Tightly coupled. A hub and wheel configuration with a focal firm at the hub organizing interdependencies of a complex array of firms.

Studies

Network Structure

Form

Berg & Friedman (1981), Duncan (1982), Harrigan (1985) Kogut (1988), McConnell & Nantell (1985).

Interorganizational

Tightly coupled. Two or more firms form a separate entity for a variety of strategic purposes (e.g., market power, efficiency, transfer of learning).

Mechanisms

Joint Venture

Coordination Representative

Interorganizational

Tightness of Coupling

Table 4.

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Network organizations. Network structures are not precisely defined in the literature. A relationship as simple as a manager’s personal tie to a business associate which leads to an exchange of information or resources constitutes a network (Dubini & Aldrich, 1991). In general, however, researchers see networks as a hub and wheel configuration with a focal organization at the “hub” organizing the interdependencies of a complex array of firms (Jarillo, 1988). The benefit of organizing in this manner is that each participating firm is permitted to focus on its specialty, leaving secondary activities to members of the network that specialize in those activities or other suppliers. In addition, time and money is saved if participation in the network lessens the need on the part of individual members to search for resources through normal organizational channels. The survival of a network is based on mutual trust, which is generated by the intrinsic advantage of remaining in the network rather than behaving opportunistically. The pervasiveness of this mode of organizing is unclear. Network organizations typically do not involve joint ownership. Federations. Federations consist of two or more independently owned organizations which have activities and services coordinated by a central management organization (Provan, 1984; Pfeffer & Salancik, 1978). All members must act on behalf of the interests of the federation as a whole, at least in regard to the activities under federation management. In return, the members benefit through lower supply costs resulting from the collective purchasing power of the federation members, professional management, and uncertainty reduction resulting from an increased availability of information. A disadvantage of federation membership is a partial loss of organizational autonomy. An example of a federation is a hospital consortium. As reported by Provan (1984), according to the American Hospital Association one-third of all nongovernmental not-for-profit hospitals in the U.S. are organized in this manner. Loosely Coupled Forms of Interorganizational

Relationships

Cooperative agreements. Cooperative agreements (or joint programs) are arrangements between two or more organizations that have a strategic purpose but do not involve shared ownership. This is a broad category that can include a number of interorganizational forms. For instance, Harrigan (1988) reported that General Electric has cooperative arrangements with Northern Telecom, Hitachi, and a number of other companies which do not involve shared ownership. These agreements may be established for a number of reasons including information sharing, efficiency considerations, and employee development (Oliver, 1990). An example of a cooperative agreement is two related but separately owned biotech firms that jointly lease expensive but infrequently used scientific equipment to share the lease expense and eliminate redundancy. Trade associations. Trade associations are a common form of interorganizational cooperation, especially among small manufacturing firms (Dollinger & Golden, 1992). The principle function of a trade associations is to provide members with special services at low costs (Olson, 1965) relevant JOURNAL OF MANAGEMENT,

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industry information, legal and technical advice (through trade journals and magazines), and provide a platform for collective lobbying (Oliver, 1990). These associations are particularly prevalent in industries where the threat of government intervention is high and lobbying activity is strong (Gupta & Lad, 1983). An example would be an industry that is protected by high tariffs on foreign imports. The breadth of services offered by most trade associations should provide participating organizations one additional means of reducing environmental uncertainty. Interlocking directorates. Interlocking directorates are the final form of interorganizational relationship presented in Table 4. This arrangement occurs when a director or executive of one firm sits on the board of a second firm, or when two firms have directors who also serve on the board of a third firm. A large body of literature exists on this topic (i.e., Schoorman, Bazerman & Atkin, 1981). As an indication of the pervasiveness of this issue, Bazerman and Schoorman (1983) characterized interlocking directorates as “the most widely used environmental management strategy” (p. 206). The principle benefit of interlocking directorates is uncertainty reduction for all parties involved (Boyd, 1990). Schoorman et a1.(1981) identified four potential ways in which this can happen: (1) through horizontal coordination linking competitors; (2) through vertical coordination linking an organization with suppliers; (3) through the expertise provided by the interlocked director; and (4) through enhancing the organization’s reputation if the interlocked director is a prestigious individual. As a result of uncertainty reduction, firms with interlocking directorates may formulate policies that are more precisely in tune with their environments than competitors without a similar advantage (Palmer, 1983). The only apparent disadvantages associated with interlocking directorates is a partial loss of organizational autonomy and flexibility, along with the possibility of a legal challenge to the appropriateness of a particular interlock (Schoorman et al., 1981). The advantages of each of the interorganizational relationships described above are consistent with the theoretical perspectives of resource dependence and TCE articulated earlier in this section. In each case, the interorganizational relationship, pursued in its proper context, has the potential to either reduce uncertainty, increase organizational power, or provide a mechanism that permits a firm to interface with its relevant environments in the most efficient manner possible. Future Directions

There are several areas involving the interface between interorganizational relationships and the environmental domain that may benefit from additional conceptualization and empirical research. Initially, while the motivations for engaging in interorganizational relationships are fairly well understood, there is virtually no empirical research that we are aware of that examines how the participants initially come together or how the relationships once established are maintained. A conceptual model of the developmental process of interorganizational relationships offered by JOURNAL OF MANAGEMENT,

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Ring and Van de Ven (1994) proves a starting point for this research. For instance, do firms include in their routine environmental scanning an assessment of potential “partners” as well as potential adversaries? Similarly, the organizational literature is virtually silent in regard to the manner in which cooperative arrangement are managed. Joint ventures are similar to mergers in that they involve the meshing together of elements from two previously separate firms. We know from the more mature literature on mergers that they often involve a host of administrative problems (Lubatkin, 1983). To what extent do these problems occur in joint ventures? Can we empirically demonstrate that transaction costs are actually reduced through interorganizational relationships? And specifically, under what circumstances can mutual trust among partners be relied upon as an effective governance mechanism? On an unrelated point, in a tightly coupled relationship like a network, does a joint planning process take place among the participants on a periodic basis? Once the network is established, how does it adjust to environmental change? If participation in a strategic network allows a firm to focus on its distinctive competencies and thereby improve efficiency, under what conditions do managers reinvest their savings in R & D? Are interorganizational relationships more prevalent in firms that pursue related diversification strategies as opposed to unrelated diversification, in large firms versus small firms, and in international firms versus strictly domestic firms? An investigation of these questions may further develop our understanding of interorganizational relationships. Institutional

Theory

In other words, the predictive power of the argument from environment is further qualiJied by the fact that decisions about organizational structure depend upon the prior processes of perception and evaluation and that the evaluation may well have other important referents apart from those of a purely economic nature. -Child, 1972, p. 5

The institutional approach deals with the choices made in response to or in compliance with the organization’s institutional environment. With roots back to Selznick (1957), it has recently been rejuvenated and modified within the organizational theory literature. Reviewers attribute the development of the “new” institutional theory to research published by Meyer (1977), Meyer and Rowan (1977) and later clarified and applied to formal organizations by Meyer and Scott, (1983). Most of the research in this area comes from sociology, including several comprehensive reviews (DiMaggio & Powell, 1991; Scott, 1987; Zucker, 1987), three influential books of institutional theory based readings (Meyer & Scott, 1983; 1992; Powell & DiMaggio, 1991; Zucker, 1988), as well as numerous articles. In addition, the ideas are beginning to infiltrate the strategy and management-based organizational theory literature as well. JOURNAL OF MANAGEMENT,

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Traditional conceptualizations of an organization’s environment focused almost exclusively on the organization’s task or technical environment. Institutional theorists add a new dimension to the concept of organizational environment by distinguishing between the organization’s technical and institutional environments (Meyer & Rowan, 1977; Scott & Meyer, 1983). The technical environment provides for the exchange of products or services and rewards based on effectiveness and efficiency. In contrast, the institutional environment furnishes the rules and requirements with which individual organizations must comply to gain the desired rewards of support and legitimacy. Institutional theorists do not agree on all aspects of the theory. One stream views the organization as an institutional form and emphasizes the process of institutionalization based on shared common understandings (Zucker, 1977; 1983; Tolbert & Zucker, 1983; Tolbert, 1985). Institutional factors develop from within the organization, by imitating similar organizations, or through network ties, but not from coercive state influences (Zucker, 1987). A concurrent stream, initiated by Meyer and Rowan (1977), studies the environment as an institution and how the elements of institutionalization provide explanations for organization structure and processes. They explore the mechanisms that motivate organizations to become isomorphic with their institutional forces. DiMaggio and Powell (1983) proposed the classic typology of isomorphic processes: coercive, mimetic, and normative and emphasized the roles of the nation-state and professions in shaping institutional forms. Broadening

Explanations

Through

Theory Integration

Institutional ideas and variables are frequently incorporated into research designs as either supplementary or alternative explanations to other theoretical perspectives. The discussion below describes compelling evidence that institutional theory broadens our understanding of how organizations interact with their environments strategically. The most common theory combinations are with population ecology, resource dependence, contingency, and strategic choice theories. These theory combinations help to explain the diffusion of innovation, organizational death rates, performance, the “liability of newness,” board involvement, organizational structure, isomorphism, and interorganizational relations. Studies we drew upon for the following discussion are presented in Table 5. Diffusion of innovation. One area where combining institutional theory with other theoretical explanations has enhanced understanding is the diffusion of innovation. Tolbert and Zucker’s (1983) study regarding the adoption of civil service reform identified a difference between the motives of early and late adopters. Early adopters “rationally” select an innovation to increase organizational “performance.” On the other hand, later adopters pursue an innovation to gain legitimacy. This pattern appears conceptually in the explanation of managerial “fads and fashions” by Abrahamson (1991). He incorporated the ideas of coercive and mimetic isomorphism and the pursuit of legitimacy as potential explanations for the adoption of innovations. JOURNAL OF MANAGEMENT,

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9

3 “N

“8

Oliver (1988)

156 voluntary social service organizations.

6 Korean firms.

901 hospitals.

Fennel & Alexander (1987)

;

Ghoshal(l988)

107 voluntary service firms that “died” between 1970-1982.

Singh, Tucker & House (1986)

Conceptual / theoretical paper.

100 large U.S. corporations from 1919-1979.

Fligstein (1985)

5 2 2

Zucker (1987)

281 public and private institutions.

Tolbert (1985)

Conceptual / theoretical paper.

Adoption of civil service procedures in 167 cities between 1883-1935.

Tolbert KcZucker (1983)

Scott (1987)

Membership in an interorganizational using bridging strategies.

Conceptual / theoretical paper.

DiMaggio & Powell (1983)

2 % $ 2 3 -i

External legitimacy is more strongly related to decreased organizational death rates than internal coordination.

Data from California school districts.

for efficiency reasons, later adopters

for diversification

network increases the likelihood of

and strategic explanations

(continued)

Between population ecology, institutional and strategic choice explanations of isomorphism, the strategic choice perspective received the most support.

Environmental scanning practices are highly homogenous in Korean firms vs. U.S. firms due to mimetic and normative isomorphic pressures.

Different definitions, levels of theoretical analysis and conceptualizations of institutional mechanisms exist even within the organizational theory literature. Distinguishes between the “environment as institution” and “organization as institution” perspectives.

Institutional environments, particularly the actions of the state and professions shape institutional patterns and mechanisms.

Provides institutional strategies.

Separate offices are established to handle high dependency relationships only if the relationships were not institutionalized.

Early adopters adopt innovations adopt to gain legitimacy.

Introduced the coercive, mimetic and theoretical normative isomorphism typology. Proposed predictors of isomorphic change.

Balanced institutional environments promote more rapid diffusion of new administrative services than imbalanced environments.

Formal structures reflect the “rationalized myths of institutional environments” rather than the technical requirements. Distinguishes between technical and institutional environments.

Rowan (1982)

Environment

Conceptual / theoretical paper,

and the Institutional

Findings or Implications

between Strategy

Meyer & Rowan (1977)

the Relationships

Data

Studies Examining

Study

Table 5.

(1991)

Abrahamson

and competitive

Firms imitated diversification decisions of large and profitable organizations. Large organizations imitated the actions of other large firms, but medium- and small-sized firms did not copy the actions of similarly sized firms. The influence of imitation was offset by competitive pressures in crowded markets.

Haveman (1993)

by serving

A population of 3 13 S&L’s in California between 1977 and 1987.

Both information processing and institutional perspectives help to explain the adoption, but not the abandonment of the matrix structure.

Provides a mathematical model comparing institutional “bandwagon” effects on innovation diffusion.

Director interlocks influenced corporate acquisition behavior as models for imitation and providing acquisition information.

1961-1978.

paper.

327 medium and large sized firms in 4 industries between 1981-1990.

(1993)

between

/ theoretical

Tests strategic choice and institutional explanations of board involvement. Board size, insider representation and level of diversification are negatively related to level of board involvement.

Haunschild

Conceptual

in 4 populations.

1375 hospitals

& Rosenkopf

25 organizations

Burns & Wholey (1993)

Abrahamson (1993)

Judge & Zeithaml(1992)

paper.

Firms in multinational enterprises face dual isomorphic pressures with the local institutional environment and the parent organization.

/ theoretical

paper.

Conceptual

& Singh (1991)

Sutton & Price

Rosenzweig

D’Aunno, (1991)

Develops a typology combining resource dependence and institutional perspectives to explain resistance to institutional processes.

efficient

/ theoretical

including

Conceptual

Develops a typology for the adoption of innovations choice, forced-selection, fad, and fashion explanations.

Oliver (1991)

paper.

Divisions of a diversified organization face dual isomorphic pressures. Isomorphism with the traditional sector is positively related to external support from the parent firm and other actors within the parent firm’s industry.

/ theoretical

Top 2 managers of 48 mental health treatment units, 195 drug abuse treatment units and 90 hybrids.

Conceptual

198 nonprofit

& Wasserman

Galaskiewicz (1989)

In uncertain environments, decision makers are more likely to imitate the behavior of organizations to which they have some relational network tie through boundary spanning personnel.

Discovered a cyclical pattern where poorly performing organizations demonstrated more rule-bound responses to externally induced innovation proposals, which tended to sustain their poor performance and make them more likely to respond in a rule-oriented manner.

13 nuclear power plants.

Marcus (1988)

organizations.

Findings or Implications

Data

(Continued)

Study

Table 5.

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Unfortunately, these processes may lead to the adoption of inefficient, as well as efficient innovations. Two more recent empirical studies test this principle as well. One uses mathematical modeling to compare institutional and competitive “bandwagon” effects on innovation diffusion (Abrahamson & Rosenkopf, 1993). In the other study, multivariate analysis compares information processing and institutional explanations of the adoption and abandonment of the matrix structure (Burns & Wholey, 1993). Both theories help to explain the adoption, but not the abandonment, of the matrix structure (Burns & Wholey, 1993). Marcus (1988) modified this approach slightly by exploring the concept of externally induced innovation. Rather than mimetic processes at work, he looked at coercive isomorphic processes created by regulatory agency recommendations for innovation in reaction to external threats. This study demonstrates the impact of prior performance on institutional responsespoorly performing organizations respond to government agency proposals with rule-oriented behavior. The rule-oriented response does not enhance their poor performance. Then, as poor performers, they are in the cyclical position to have external pressure for rule conformity once again. Higher performers maintain their autonomy, which reinforces their performance. Organizational death rates and performance. In a population ecologybased study of newspaper organizations from 1870 to 1980, Carroll and Huo (1986) conclude that institutional, not task variables, appeared to affect founding and death rates of newspapers. On the other hand, task variables affected performance strongly, but institutional variables did not. Using a surgical hospital sample over a shorter time span (1959 to 1979), Zucker (1986) supported the effect on firm exits, but found that performance and survival covary. In a related study regarding the “liability of newness” concept, Singh, Tucker, and House (1986) found that external legitimacy is more important than internal coordination in decreasing organizational death rates. In fact, most internal organization changes were unrelated to death rates, with the exception of chief executive change, which also decreased death rates. Board involvement. Judge and Zeithaml(1992) combine institutional and strategic choice perspectives to broaden knowledge regarding external influences on board involvement. Board involvement was defined as “making nonroutine, organization-wide resource allocation decisions that affect the longterm performance of an organization.” Institutional influences were measured in terms of organizational age and the level of diversification. In line with Oliver’s (199 1) principle of “constituent multiplicity,” the level of diversification and the level of board involvement were negatively related. Higher levels of diversity indicate exposure to multiple environments, which in turn leads to a diffusion of the isomorphic pressures. The anticipated inertial effects from organizational age were not found. In fact, the relationship between organizational age and board involvement is positive, indicating a potential experience factor or that the results are confounded by a previous environmental “jolt” that has encouraged norms for increased board involvement. JOURNAL OF MANAGEMENT,

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Organizational structure. Looking at the development of organizational structure, Rowan (1982) found that size does not provide a complete explanation of the addition and deletion of administrative positions in California public schools. The concept of isomorphism is required to understand the structural changes. Balanced institutional environments promoted more rapid diffusion of new administrative services than imbalanced environments. In another study regarding organizational structure, institutionalization (shared common understandings and social norms about appropriate behavior) helped to determine the conditions under which resource dependence hypotheses explain the process of structural differentiation in public and private institutions (Tolbert, 1985). Resource dependence theory would predict the establishment of separate administrative offices to cope with the requirements of a high dependency relationship. The research here demonstrates that this relationship exists, but only when dependent relationships were not institutionalized. The process of institutionalization corresponds to the isomorphism of an institutionalized structure. These arrangements tended to be adopted regardless of the level of dependence the organization faces. Fligstein (1985) incorporated the institutional and strategic choice theoretical perspectives to explain the diversification strategies of the 100 largest U.S. corporations from 1919-1979. He supported a combined theoretical explanation where strategic change occurs for one of two reasons: Either organizational leaders had both the ability to communicate and the power to implement a strategic shift in their diversification posture, or firms imitated other trend-setting organizations within their organizational field. This latter point reminds us of Rumelt’s (1974, p. 149) epigram (less quoted than Chandler’s [ 1962, p. 141“structure follows strategy”) that “structure also follows fashion.” In a separate study, Haunschild (1993) also investigated potential institutional influences on corporate acquisition behavior. Concentrating on the impact of director interlocks, her results indicated imitation based on modeling and information exchange provided a more powerful explanation than institutional interpretations. Zsomorphism. In addition to the examples already provided above, Oliver (1988) compared institutional, population ecology, and strategic choice explanations for isomorphism in an interorganizational field. Her findings demonstrated more support for the strategic choice model, but indicate that isomorphism affects organizational attributes differently. In a later article by the same author (Oliver, 1991), she switched perspectives by using resource dependence theory to supplement the institutional perspective. Most researchers implicitly assume a passive actor status to organizations confronted by institutional pressures for conformity. Just as firms attempt to cope with environmental uncertainty and constraining interdependencies, it is unlikely that firms would not try to discover strategies to handle institutional pressures. Oliver presents a potential taxonomy that ranges from acquiescence to manipulation, providing for variations in firms’ resistance, awareness, proactiveness, influence, and self-interest. JOURNAL

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Haveman (1993) combined organizational ecology and neoinstitutional perspectives to study isomorphic effects on market entry decisions in the California savings and loan population following deregulation. Her findings supported the institutional hypothesis that firms imitate successful (i.e., large and profitable) firms within their industry but provided only partial support for the hypothesis that firms were more likely to imitate similarly-sized organizations. This hypothesis held true only for large firms. In addition, the density-dependence model from the organizational ecology perspective enhanced institutional explanations by demonstrating the countervailing influences of legitimacy and competition on market entry rates. Haveman (1993, p. 624) concluded that “The pull of imitation, on which neoinstitutional theory focuses, is balanced by the brake of crowded markets.” Interorganizational relations. Several studies investigate the influence of organizational linkages on institutional processes. Fennel1 and Alexander (1987) compared the boundary spanning activities of independent hospitals as opposed to hospitals that are part of multiorganizational networks. Membership in the network increased the likelihood of using bridging or linking strategies as opposed to buffering strategies (Thompson, 1967). In a related study, Galaskiewicz and Wasserman (1989) showed that firms were more likely to imitate firms to which they had some relational tie through boundary-spanning personnel. Ghoshal’s (1988) study comparing the environmental scanning practices of Korean and American firms demonstrated that the Korean firms exhibit much more similarity in their scanning processes than their American counterparts. This finding furnishes additional evidence that the mimetic and normative isomorphic factors found in interorganizational relationships influence firm behavior. The higher degree of homogeneity found in Korean firms comes from the outside influence of a small consulting firm, Business Intelligence and Research Institute (BIRI), which established the model scanning unit within the Samsung group of companies. This became the accepted model throughout the country. Ghoshal expressed concern regarding the effects of this isomorphism on future needs for innovation. It would seem from these three studies that interorganizational relationships tend to increase the influence of mimetic and normative isomorphism on members of the network. Another area of study combining institutional pressures and interorganizational relationships is the idea of “dual pressures.” Firms that operate in multinational environments (Rosenzweig & Singh, 1991) or as a division within a diversified organization (D’Aunno, Sutton & Price, 1991) face conflicting institutional pressures. The local environment or industry in which they operate creates isomorphic pressures, as does the parent organization. The strength of these competing forces can influence financial support, organizational structure and processes, and the need for loose coupling in either of the networks, or perhaps in both. JOURNAL

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Future Directions There are multiple conceptualizations of institutional theory. Most of these perspectives are complementary and predict similar responses; however, the assumptions, definitions, and perspectives differ considerably. It is important for researchers to clearly define their frame of reference-particularly their conceptualization of institutional processes. Future research will likely continue to integrate institutional theory with more competition-oriented approaches such as population ecology and resource dependence theories. Both groups of theories can benefit from the broadened perspective. Institutional theory perspectives may pursue potential responses such as those suggested by Oliver (1991). From this perspective, research should attempt to identify what characteristics of the organization or the institutional environment generate more active responses. For example, what firm and environmental characteristics encourage an organization to pursue a manipulation strategy, rather than an avoidance or acquiescence strategy? Even within the same strategic category, what determines whether a firm pursuing a manipulation strategy selects a co-optation, influence, or control tactic to accomplish their goals? Oliver presents a series of hypotheses predicting increased resistance and provides some suggestions regarding empirical testing of these hypotheses. Future research should pursue empirical tests of these relationships. Competitive approaches benefit from understanding the pressures toward homogeneity and external influences on firm behavior. Powell (1991) suggested that researchers attempt to expand the scope of institutional theory. He felt that institutional researchers should explore the variation in institutional environments created by complex resource environments, industry structure, and competing demands. In addition, he proposed that contrary to current assumptions, the potential exists for innovation to develop from highly institutionalized organizations. These opportunities may develop from unsuccessful imitation efforts, novel combinations created by imitating dissimilar organizations, and incomplete institutionalization. Other avenues for promising research would be a more in-depth exploration of the influence of interorganizational networks and parentcompany relationships in diversified and multinational organizations. The idea of dual pressures presents a need to explore how organizations prioritized conflicting pressures. Finally, a natural area for exploration from the institutional perspective is the field of corporate social performance, an area recently and thoroughly reviewed by Wood (199 1a; 199 1b). It would be a natural extension because both areas are concerned with the issue of organizational legitimacy (Davis, 1973; Wood, 199lb). The conflicting findings about the relationship between economic performance and corporate social responsiveness (Alexander & Bucholtz, 1978; Aupperle, Carroll & Hatfield, 1985; Arlow & Gannon, 1982; Bragdon & Marlin, 1972; Cochran & Wood, 1984; Davidson & Worrell, 1988; Fogler & Nutt, 1975; Moskowitz, 1972; Sturdivant & Ginter, 1977; Ullmann, 1985; Vance, 1975) strongly suggest more research is needed, and the results JOURNAL OF MANAGEMENT,

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of the analysis from McGuire, Sundgren, and Schneeweis (1988) provide a potential avenue for research in this area. More specific tests are needed to determine if institutional pressures based on risk reduction provide helpful explanations of socially responsive behavior. Do these pressures lead to coercive, mimetic, or normative isomorphism? After making strategic choices such as those involving interorganizational relations and the institutional environment, the final portion of Child’s (1972) framework indicates that organizational performance levels will be affected and knowledge of these impacts will begin the choice-and-alignment cycle anew. Because the central premise of this perspective is that increased organizational alignment will produce higher levels of organizational performance, we will focus our discussion of the final portion of Child’s choice model on two issues: (1) control and evaluation systems; and (2) organizational alignment itself. Organizational

Alignment

If organizational structure is not adapted to its context, then opportunities are lost, costs rise, and the maintenance of the organization is threatened. -Child, 1972, p. 8 Strategic “fit” refers to a situation where an alignment exists between an organization’s strategy and its context (Venkatraman, 1989; Venkatraman & Prescott, 1990). The concept of organizational alignment or fit comes from the organizational contingency theories and conveys the idea that organizations must align the internal aspects of their organization with their environment (see Bluedorn [1993] for a review). When this alignment is present, corporate performance should increase (Venkatraman, 1989; Venkatraman & Prescott, 1990). In this section, we will examine the concept of alignment and its relationship to organizational environments. Measurement Extensive research in both the strategic management and the organizational theory literature falls into the category of, or at least considers the concept of “fit.” However, the results from these studies have been somewhat mixed. Confusion lies in the definition and operationalization of the fit concept. A number of critiques and/or recommendations for improvement have been written regarding the study of fit and contingency theories (Ginsberg & Venkatraman, 1985; Harrigan, 1983; Melcher & Melcher, 1980; Schoonhoven, 1981; Venkatraman, 1989; Venkatraman & Camillus, 1984; Venkatraman & Prescott, 1990). Venkatraman and Prescott (1990) provide a thorough review and critique of methodological approaches to the measurement of fit. They separate these approaches into reductionistic (looking at one to a few of the dimensions in a single study) and holistic (looking at the total package of variables simultaneously). Within the reductionistic perspective, fit can be conceived and operationalized as a moderator or interaction variable, a mediator or JOURNAL OF MANAGEMENT,

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intervening mechanism (where both direct and indirect effects are considered), or a match between two related variables (Venkatraman, 1989). Holistically, fit could be researched as a gestalt or cluster of attributes, the degree of adherence (lack of deviation) to an ideal profile specification, or the degree of internal consistency or covariation in a set of theoretically related variables (Venkatraman, 1989). Venkatraman and Prescott (1990) claim that the primary cause of conflicting findings and interpretations in this area is the different conceptions and operationalizations of this research. Arguing for the profile deviation method of determining fit, Venkatraman and Prescott (1990) looked at the degree to which strategic resource deployments coaligned with the ideal profile for a given environment. They demonstrated empirically that a misalignment between strategy and the environment was negatively related to performance. An especially important concern involves the statistical testing of fit propositions. Recent work by Edwards (1993; 1994; Edwards & Harrison, 1993; Edwards & Parry, 1994) is producing a revolution in the way researchers should examine fit hypotheses. This work basically calls into serious question all “fit” examinations that employ approaches based on either difference scores of any are met, these type or profile similarities. Unless stringent assumptions approaches are invalid and should be replaced with polynomial regression techniques, of which moderator regression is but one. In addition to being sounder statistically, Edwards’ approach allows for a much more precise specification of the form the fit relationship will take, thus allowing for greater precision in theoretical statements.

Organizational Adaptation to the Environment Contingency theory researchers stipulate that organizations must adapt their internal structure and processes to the conditions that exist in their environment. Several researchers have suggested that the idea is intuitively appealing, but difficult to implement. Much of the work in organizational alignment looks at the condition of environmental change and proposes internal mechanisms to enhance organizational flexibility. Suggestions include organizing using an organic (Burns & Stalker, 1961) or network structure (Jarillo, 1988) flexible manufacturing systems (De Meyer, Nakane, Miller & Ferdows 1989; Gerwin, 1993; Nemetz & Fry, 1988; Parthasarthy & Sethi, 1992; Swamidass & Newell, 1987) a culture that emphasizes flexibility-oriented values (Zammuto & O’Connor, 1992), decentralized decision-making, problem-solving teams, generalized personnel skills, increased emphasis on proactive training 1982) (Devanna & Tichy, 1990), enhanced information systems (Mascarenhas, and maintaining slack resources (Sharfman, Wolf, Chase & Tansik, 1988). Chakravarthy (1982) proposed a process model of adaptation, incorporating the idea of slack as a destabilizing force. Strategic managers must consider adaptation to changes in the external environment as well as changes created through internal processes. Lenz (1980) provided empirical results from a study of savings and loan associations that the alignment of environment, strategy and organization differs among high and low performers. JOURNAL OF MANAGEMENT,

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Miller (1992) discussed the difficulty created when the internal requirements contradict the external requirements. He argued that firms in these situations must make a choice between the two types of alignment. His data showed that organizations that fit the requirements of their external environment demonstrated the least alignment among their internal structural and process variables. He concluded that the adaptive tasks may need to be performed sequentially. Powell (1992) combined strategic fit factors such as industry, market share, generic strategy, and strategic group membership with the organizational alignment between environment and structure and tested for the impacts on financial performance. His study of two manufacturing industries indicated that these alignments create a sustainable competitive advantage and profits above those accounted for by industry and strategy variables. Smallfirms. Interest in small firms and their ability to adapt stems from the belief that size is negatively related to adaptability. Neilson (1974) empirically demonstrated that smaller firms exhibited greater interdepartmental interaction and faster response time to environmental changes. Meredith (1987) argued that small firms gain more than large firms from flexible manufacturing technologies because these new technologies enhance the small firm’s speed and flexibility. To offset this perceived disadvantage and improve firm profitability, many large firms are trying to downsize through layoffs and restructuring efforts. Some research exists that explores the organizational alignment of small firms in different environmental contexts. Covin and Slevin (1989) show that small firms in hostile environments exhibit higher performance levels when they have an organic structure, entrepreneurial strategic posture, a long-term orientation, and a proactive approach. In benign environments, higher performance comes in firms with a mechanistic structure, conservative strategic posture, conservative financial management practices, a short-term financial orientation, and a strong dependence on single customers. Fiegenbaum and Karnani (1991) focus on small firms and their ability to gain a sustainable competitive advantage through volume flexibility, or the capability to vary output volume in a market that experiences demand fluctuations. They do not have the advantages of scale and therefore, have less to lose by using volume flexibility. This competitive advantage is definitely stronger in volatile and capital intensive industries. Future Directions Future research will likely continue to pursue additional contingency variables that moderate a firm’s relationship between its strategy and the environment. In addition, different combinations of variables need to be explored because they will not appear in isolation. So far, most environmental conceptualizations have looked at broad dimensions of environmental uncertainty. As these definitions narrow to specific types of uncertainty, the appropriate firm response will vary as well. The roles of interorganizational networks and network structure are also prime candidates for future research. JOURNAL OF MANAGEMENT,

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Control and Evaluation Systems fiat

is, no manager knows for sure just what is allowable.

-Hambrick

and Finkelstein, 1987, p. 374

In order to know whether the organization is properly aligned, managers, especially the top management team, must evaluate and attempt to control the performance of units within the organization as well as the performance of the overall organization. Thus, one of the critical factors in improving firm performance (maintaining an alignment between strategy and the environment) is the set of controls top management uses to evaluate firm progress and strategies. Organizational control has many meanings and has been interpreted in multiple ways. Tannenbaum (1968) interpreted control as any process that helps align the actions of individuals with the interests of their employing firm. Firms usually use a “cybernetic” system (Boulding, 1956) based on: (1) superiors’ intentions; (2) an influence mechanism; and (3) evaluation and feedback. In general, most researchers have focused on the evaluation component of control systems although some (e.g., Cheng & McKinley, 1983; Hofstede, 1978; Kerr, 1985), have examined all three aspects of control. For the purposes of this review, our discussion of control centers on the evolution of research on control systems as well as the general target of the research. We will first examine early empirical and conceptual research that deals with broad categories of control (e.g., Ouchi, 1977). Our second concern is for how these ideas have been translated into strategic, financial and bureaucratic control mechanisms. Our third concern deals with research at the divisional or SBU level. Following our discussions of these three issues, we will examine research directions for control systems. Table 6 presents a description of the articles reviewed in this section. Behavior

and Output

Control

Early studies in this area focused on the basic need for control systems due to decentralization (Khandwalla, 1973), as well as the basic modes of control (Ouchi & Maguire, 1975). Ouchi and Maguire identified two modes of control: behavioral and output. Edstrom and Galbraith (1977) argued that managers of multinational firms (MNCs) develop a process of control based on socialization. They also contended that controls are cumulative, not substitutes (as opposed to Ouchi & Maguire [ 19751 who contend that output and behavioral controls are substitutes). Edstrom and Galbraith further argued that as firms become larger they retain centralized control procedures for non-routine problems and implement a system of bureaucratic controls (formalized rules and procedures) to manage routine problems. The socializing control strategy is implemented when non-routine decisions must be made at the subsidiary level. Ouchi (1979) advanced this perspective by suggesting a link between task characteristics, outcome measurability and control strategies. Three cells in Ouchi’s two-by-two matrix are based on performance based evaluations while the fourth, defined as imperfect task programmability and low outcome JOURNAL OF MANAGEMENT,

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Ettlie, Bridges & O’Keefe (1984)

Cheng & McKinley (1983)

Conceptual / theoretical papers:

(1985)

Systems,

Strategy

and Environment

(1977) Ouchi (1979; 1980) and Jaeger & Baliga (1985).

Results suggest that high task programmability and behavior measurement lead to behavior based control usage. As the cost of outcome measurement or uncertainty increases, behavior based control is more likely.

Results suggest that structure is related to control. Large organizations develop more complete measures of output. Homogeneous tasks within departments decreases the need for output controls. Firm size may lead to control loss.

Paper examines two modes of control, personal surveillance (behavior control) and measurement of outputs (output control). Results suggest that output control occurs when managers need to provide legitimate evidence of performance while behavior control is exerted when means-ends relations are known and instruction is possible.

Results indicate competition positively affects sophisticated management controls and delegation of authority. The more decentralized the firm is, the more controls it needs to use.

Firm

Survey data from 147 firms operating in the meat, fish and canning industries.

(continued)

Acquisitions result in larger organizations. Larger organizations promote more structural complexity, formalization and decentralization which were negatively related to new product introductions. Centralization is necessary for radical innovations to be adopted.

Part 2: Corporate level studies lnternational sample of 288 This study examined the contingency effect of bureaucratic control on academic research units. organizational performance. Results support the hypothesis that bureaucratic control, exercised through influence from national science policy on the choice of unit research themes will have a (+) effect on research unit productivity in fields with highly developed paradigms. This effect declines and becomes negative in fields with less developed paradigms.

Edstrom & Galbraith

95 specialty retail stores in a suburban shopping center.

Survey data from 78 full-line, nondiscount retail department stores.

Ouchi (1977)

Eisenhardt

329 managers ranging from assistant department managers to store managers.

firms.

Ouchi & Maguire (1975)

96 manufacturing

(1973)

Control

Findings or Implications

between

Part 1: Behavior and output controls

the Relationship

Khandwalla

Examining

Data

Studies

Study

Table 6.

Results suggest that strategies and control systems designed to pursue synergy are related to higher R&D intensities. The market negatively evaluates R&D for highly diversified firms. This suggests highly diversified firms emphasize financial controls which may increase managerial risk aversion and a focus on short-term performance.

Paper links two top executive functions (entrepreneurial and administrative) to the level of diversification and the types of control used, namely, strategic planning, strategic control and financial control.

Case study of 6 firms utilizing different control procedures.

Multi-industry study using 101 restructuring firms.

Survey data from 283 firms classified as control firms (no activity), restructuring and acquiring.

Survey data from 92 insider directors of restructuring firms.

Ruefli & Sarrazin (1981), Loescher (1984), Hill & Hoskisson (1987), Hitt, Hoskisson & Ireland (1990), Johnson, Hoskisson & Margulies (1990), and Hoskisson, Hitt & Hill (1991).

Chandler (1991)

Hoskisson & Johnson (1992)

Hitt, Hoskisson, Johnson & Moesel(l993)

Johnson, Hoskisson & Hitt (1993)

Conceptual / theoretical papers:

Results suggest that strategic control usage by top mana~ment decreases the need for board involvement to force restructuring. Top management is more likely to initiate restructuring when strategic controls are in place.

Results indicate that strategic controls are positively related to innovation and financial controls are negatively related to innovation in control firms. Innovative activity increases in restructuring firms if strategic controls are implemented. Bureaucratic controls have a negative effect on innovation in all categories.

Decreasing diversified scope through divestiture leads to an increase in R&D intensity. They argue that the related-linked firms are the dominant restructuring type due to an incompatible mix of financial and strategic controls.

The choice of diversification strategy systematically effects R&D intensity. The further argue that strategic control in less-diversified firms may facilitate R&D expenditures while financial control procedures serve to decrease R&D intensity (especially in high diversified firms).

Baysinger & Hoskisson (1989) 971 large multiproduct firms.

124 diversified firms.

Hoskisson SCHitt (1988)

Part 2: Corporate level studies (continued)

Findings or Implications

Bureaucratic controls result in more rigid and standardized managerial behavior that may contribute to organizational inertia.

Data

(Continued)

Romanelli & Tushman (1986) Conceptual i theoretical paper outlining a quasi-experimental design for longitudinal research on adaptation.

Study

Table 6.

Paper focuses on corporate-SBU relations. Openness in corporate-SBU relations and subjectivity in performance assessment are positively associated with effectiveness in firms trying to build market share or pursue differentiation as a competitive strategy. Paper examines whether business using different strategies are subject to different controls procedures. Results suggest that an appropriate match between all three administrative mechanisms (budget evaluative style, decentralization and locus of control) with strategy is associated with higher SBU effectiveness. A mismatch will be associated with low effectiveness. Investigates the relationships among control systems, resource sharing & competitive strategies and their effect on SBU performance. Output control and resource sharing are associated with higher effectiveness for low-cost strategies and behavior control and high resource sharing are associated with higher effectiveness for a differentiation strategy. Paper test hypotheses relating input, behavior and output controls with product-market variation, managers knowledge of cause-effect relations and the crystallization of standards of desirable performance. Productmarket variation is positively related to behavior control use. Work flow integration is associated with low use of behavior and output controls.

58 SBUs within 8 diversified firms.

121 SBU managers from 24 firms.

Gupta & Govindarajan (1991).

Govindarajan (1988)

Govindarajan & Fisher (1990) 121 SBU managers from 24 firms.

Survey data from 102 senior executives from single-business firms.

Gupta (1987)

Snell ( 1992)

Conceptual / theoretical papers:

This paper identifies four managerial control system components at the middle manager level: (1) budgets, (2) policies and procedures, (3) performance appraisal system, and (4) statistical reports.

Two-stage qualitative methodology involving interviews with middle and upper-middle managers.

Part 3: Divisional and SBU level studies

Daft & Macintosh (1984)

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AND BARRINGER

measurability, was identified as socialization or “clan” control. The next stage in the development of these ideas was Ouchi’s (1980) paper in which the transaction costs perspective was used to identify three mechanisms of control; markets, bureaucracies and clans. Clan based systems imply that individuals in the firm have low goal incongruence. This mechanism may replace bureaucratic mechanisms when the costs of measuring performance outcomes is high. Ouchi and Johnson (1978) identified US organizations which closely resemble “clan” forms. Eisenhardt (1985) tested a model which involved the integration of organization theory approaches with agency theory. Task programmability, information systems and uncertainty are combined to predict which control strategy, behavioral or outcome, is used. High programmability implies a knowledge of cause and effect relationships and therefore, leads to behavior based control. When behaviors cannot be fully observed, additional costs such as surveillance mechanisms, cost accounting measures, budget systems, or additional layers of management may be necessary. The alternative is to evaluate and reward based on outcomes (e.g., profitability). The result is a trade-off in which outcome measures are surrogates of behavior measures. After 1985 studies shifted away from this research direction to one directed more towards corporate controls and one towards divisional/ SBU research. Despite this shift, the basic assumptions have remained the same. Corporate Level Studies

Another complementary stream of research emerged in the early eighties that focused on examining which control systems are most appropriate for a given strategy. This line of research also examines the pitfalls of using inappropriate control mechanisms. Ettlie, Bridges and O’Keefe (1984) presented evidence that firms using acquisition strategies become more complex, formal and decentralized. These changes were found to be negatively related to new product introductions. They further argued that centralization is necessary for radical innovations to be adopted. This increase in formalization and firm size leads to a greater emphasis on bureaucratic controls which leads to standardized behavior and inertia (Romanelli & Tushman, 1986). Hill and Hoskisson (1987) examined three different types of economic benefits from multiproduct structures. They argued that synergistic, financial and vertical economies require different control arrangements. Financial controls require financial control systems (analogous to output controls (Eisenhardt, 1985). Decision making is decentralized and divisional mangers are evaluated on divisional profits or ROI (Hoskisson & Hitt, 1988). Pursuit of synergistic economies may be more appropriate for related diversification strategies in which tangible and intangible interrelationships are sought (Hill & Hoskisson, 1987; Porter, 1985). Vertical economies require a degree of central coordination and linkages between divisions (Child, 1984). The imposition of these linkages in order to achieve vertical or synergistic economies decreases the ability of the firm to realize financial economies. JOURNAL

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Hill and Hoskisson (1987) argued that as interrelationships increase and diversified scope increases, managers may be increasingly unable to process this information (required for strategic control use) and may rely more on financial evaluative criteria. This reliance on financial criteria may lead to risk avoidance and an emphasis on short-term profitability (Hoskisson, Hitt & Hill, 1991). Baysinger and Hoskisson (1989) and Hoskisson and Hitt (1988) provided evidence that high levels of diversification decrease R&D expenditures. A more extensive review of the unintended consequences of the multidivisionsal firm (M-form) can be found in (Hoskisson, Hill & Kim, 1993). Schreyogg and Steinmann (1987) proposed a more comprehensive model of strategic control that involves a feedforward process that includes strategic surveillance, premise control as well as implementation control (feedback process). This process is similar to that described by Ruefli & Sarrazin (1981). Chandler (199 1) examined this issue and concluded that strategic planning firms use very comprehensive control mechanisms embodying several of the concepts promoted by Schreyogg and Steinmann (1987). All three of these authors maintained that managers need to have detailed knowledge of firm operations in order for this system to work. Hill and Hoskisson’s (1987) information processing arguments support this assertion. More recently, Johnson, Hoskisson and Margulies (1990) argued that corporate restructuring (refocusing) may be linked to managerial control loss. Large diversified firms may have “overdiversified” and need to restructure in order for managers to regain strategic control. Hoskisson and Johnson (1992) presented evidence that suggests downscoping may reduce the span of control and the amount of information to be processed such that top management can reimplement strategic controls. Their examination of restructuring firms pre and post-restructuring indicated firms increase R&D post-restructuring. In addition, they also argued that many firms restructuring in the 1980s did so due to incompatible control procedures (strategic vs. financial controls) (Hill & Hoskisson, 1987). Consistent with this finding, Johnson, Hoskisson and Hitt (1993) found that managers were more likely to restructure the firm prior to drastic performance declines and board of director involvement if strategic controls were in place. Hitt, Hoskisson, Johnson and Moesel (1993) provided additional data which indicated that bureaucratic controls consistently inhibit R&D expenditures and that an emphasis of financial controls reduces innovation while strategic controls are positively related to innovation. Divisional and SBU Level Studies

A stream of divisional/ SBU research developed concurrently with research on corporate control. Gupta (1987) examined fifty-eight SBUs from 8 diversified firms and found that openness in corporate-SBU relationships and subjectivity in performance assessment were positively associated with effectiveness. Openness and subjectivity in performance assessment are analogous to the strategic controls discussed by corporate control researchers (Hill & Hoskisson, 1987; Hoskisson & Hitt, 1988; Hitt, Hoskisson & Ireland, 1990; Kerr, 1985). Govindarajan (1988) found that a match between administrative systems JOURNAL OF MANAGEMENT,

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(including controls) with strategy is associated with higher SBU effectiveness while a mismatch is associated with lower effectiveness. In a similar vein, Gupta and Govindarajan (1991) suggested that the nature of corporate control may vary across subsidiaries. Using multinational firms (MNCs) as an example, they argued that global innovators and integrated firms rely more on behavioral controls (strategic controls); implementors rely more on outcome (financial) control use. Lastly, Snell (1992) examined the relationship between input, behavior and output controls with product-market variation, managers knowledge of cause-effect relations and well developed standards of performance. Interestingly, Snell’s input control systems are in some ways similar to “clan” controls (Ouchi, 1979; 1980), but more closely aligned with input control (Jaeger & Baliga, 1985) in that they relate to selection and training of individuals. Future research might examine how control systems and pay are linked. Kerr (1985) provided some interesting insights but more work is needed in this area. Schreyogg and Steinmann’s (1987) operationalization may represent a more complete picture of strategic control. What is lacking now is a clear definition of strategic control. In addition, what type of information is used to assess performance? Future Directions

Discussions in previous sections have suggested that managerial characteristics are related to diversification posture (Michel & Hambrick, 1992) and that managerial locus of control may affect strategy and structure (Miller et al., 1982). Fligstein (1985; 1987) found that managers organize firms to reflect their perceptions of the world. He examined the relationship between the characteristics of managers and M-form adoption and found that managers with sales or finance backgrounds were more likely to switch to the M-form structure. In addition, top management teams may not, given the choice, use the same types of information given the same situation. Thus, managerial characteristics and ambitions may, in fact, influence the decision as to what types of control systems are implemented. Since managers have different personalities, some may be more suited to a strategic planning style analogous to Schreyogg and Steinmann (1987) or Goold and Campbell (1987) as opposed to a financial control style. Managerial functional backgrounds may determine the ability managers have of interpreting different types and modes of communication. Changes in management style may be most evident in tirms in which successions have occurred. Given the recent restructuring wave, it would be interesting to examine how potential conflicts with regards to control and reward systems have been resolved, if they have been resolved. Major restructurings may be another opportunity to examine the effect of managerial characteristics on the control system post-restructuring. Many firms initiate restructuring due to performance declines which may be brought about by inconsistencies in control systems (Hill & Hoskisson, 1987; Hoskisson & Johnson, 1992). One question that might be further explored would be whether managerial predispositions to a particular control type are overcome or whether they retain the same systems of control. JOURNAL OF MANAGEMENT,

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Conclusion Bluedorn and Evered (1980) developed a framework for describing a theory’s position in the theory-development life cycle as well as for charting different paths of theory development. This framework specified general tendencies for theories to increase in their scope (breadth of phenomena addressed) and explicitness (precision of theoretical statements) along a variety of paths. We see the topics covered in this article as subject to these same tendencies and possibilities. We expect the strategic leadership/ upper-echelons perspective’s explicitness to increase as research begins to test the processes underlying the empirical correlations between upper echelon factors such as age and functional background and variables such as strategy and organizational performance. If variables and propositions from areas such as group dynamics and organizational culture are used to more directly explain variables such as the effects of top management team tenure, the upper echelon perspective’s scope could also increase. Our discussion of scanning has anticipated this exploration of theoretical development. It identified trends toward the growing scope of the scanning concept as well as propositions for testing the scope-expansion suggestions. Scope could also increase if the streams of scanning and information processing research would begin to merge. Our discussions of these streams indicated that they were at times difficult to distinguish, and a unified model of the two phenomena would certainty cover a larger array of phenomena than either stream covers currently. Because the streams seem so closely related and often overlap in specific studies, we believe the potential for theoretical synthesis is especially promising between these two streams. The area of interorganizational relationships has relied considerably on the relatively broad and explicit transaction cost and resource dependence theories for much of its theoretical underpinning. It may be that a unique theory of interorganizational relationships is unnecessary, even though their investigation may yield new propositions and findings that could expand either or both of the theoretical perspectives upon which interorganizational relationship research is based. And as we noted, institutional theory could be applied to interorganizational relationships research, an application which would expand the theory’s scope as it is applied to their new domain. Indeed, the application of transaction cost, resource dependence, and institutional theories to the phenomena of interorganizational relationships represent a combination that could produce a synthesis that would represent a genuinely new theory. Although we have identified many theoretical opportunities in both this discussion and our previous discussions, threats have also been defined. For example, the revolution just beginning in the statistical treatment of the “fit” or “match” concept with polynomial regression seems threatening because it indicates that work based on difference scores or profile similarity indices may be invalid, thereby requiring reanalyses. This revolution seems likely, however, to spur researchers and theorists to make much more precise theoretical JOURNAL OF MANAGEMENT,

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statements, thereby increasing the explicitness of fit propositions in theories based on the fit concept. This revolution thus provides opportunities for greater theoretical precision and explicitness as well. Given the similarities between models of business-level and corporate-level control, a synthesis of models developed for these two different levels would entail a major increase in scope. The similarities and to some extent the overlap between these models also makes the synthesis seem to be more than just a possibility. We have tried to identify many of the possibilities for increasing the scope and explicitness of the theories and models dealing with the phenomena we have covered in this review. We emphasize that we have identified possibilities, and some of them seem more likely than others. None of them are certainties, however, for we hold with the physicist Niels Bohr, that prediction is difficult, especially about the future. Note 1.

We examined every issue of the following journals from 1980-1993 to prepare this article: Academy of Management Journal, Academy of Management Review, Administrative Science Quarterly, Journal of Management, Organization Science, and Strategic Management Journal.

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