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Institutional Theory, New and Old

Institutional theory refers to a line of organizational research that takes an open systems perspective to understanding organizations; that is, the theory looks at how an organization’s environment affects and interacts with the organization.  Typically, institutional theory is divided into “old” and “new.” Philip Selznick (1948) wrote the foundational work on old institutional theory, in which he conceived of organizations as organisms that adapted to environmental threats.  He regarded the formal and informal structures within organizations as being in tension; these together were in tension with their larger institutional environment. This institutional environment periodically may threaten an organization’s leaders’ legitimacy; in reaction, the organization’s leaders may elect to co-opt the threatening force from the environment in order to maintain legitimacy and survive, thus forcing the organization to adapt to its environment.

Old institutional theory and new institutional theory are both concerned with how organizations adapt to forces from their institutional environment and particularly how organizations do so in order to maintain legitimacy.  Unlike new institutional theory, though, old institutional theory is mostly reactive in its adaptation and views organizations through the natural perspective, wherein people in the organization have different goals but see the usefulness in working together through the organization to obtain resources. In new institutional theory, organizations are rational, implying that they are formalized and goal-driven.

New institutional theory generated new paradigms for understanding how institutional pressures shape organizations and drive organizational change. The foundational pieces of new institutional theory include Meyer and Rowan’s 1977 work that argued that formal structure emerges in organizations as these organizations adhere to institutional norms and beliefs from their larger organizational environment. As an organization adopts these beliefs, they become codified into the rules and practices that comprise an organization’s formal structure.  These rules, however, having been born out of institutional pressures to appear legitimate – which is critical in order to obtain resources in the organizational environment – may have nothing to do with efficiency or best organizational practices, despite being necessary for resource acquisition and survival. As a consequence, parts of an organization may become decoupled as the organization seeks to avoid conflict between reverence for the mythologized organizational rules and the organizational practices designed to meet actual organizational needs. DiMaggio and Powell (1983) build on new institutional theory by focusing on the institutional forces at a field-level that causes organizations to become similar over time.  In addition to adopting rules and practices in order to gain legitimacy, organizations also may adopt particular elements in order to appear normative within a field and also as a strategy for dealing with uncertainty by imitating those perceived as the most successful in their particular field (e.g. engaging in institutional isomorphism).

A major critique of new institutional theory is that it does not explain organizational adaptation. For instance, Kraatz and Zajac (1996) point out in their study of liberal arts schools’ adoption of professional programs that new institutional theories not only did not work in most instances, some effects actually were the opposite of what new institutional theory predicted. Another shortcoming of new institutional theory is the assumption of organizational adaptation and the neglect of organizational competition.  Population ecology argues that it is quite costly and difficult for organizations to adapt, suggesting that selection is more relevant than adaption (Hannan and Freeman 1977).  Finally, new institutional theory largely ignores agency.  The theory generally does not incorporate individual dynamics that may occur within organizations or choices that are not purely derived from organizational structure.

References

DiMaggio, Paul J. and Walter W. Powell. 1983. “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields.” American Sociological Review. 48:147-160.

Hannan, Michael T. and John H. Freeman. 1977. “The Population Ecology of Organizations.”  American Journal of Sociology. 82: 929-964.

Kraatz, Matthew S. and Edward J. Zajac. 1996. “Exploring the Limits of the New Institutionalism: The Causes and Consequences of Illegitimate Organizational Change.”  American Sociological Review 61:812-836.

Meyer, John W. and Brian Rowan.  1977.  “Institutionalized Organizations: Formal Structure as Myth and Ceremony.”  American Journal of Sociology.  83: 340-363.

Selznick, Philip. 1948. “Foundations of the Theory of Organization.” American Sociological Review 13(1): 25-35

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