Strategy in Context

BHS0035H

Institutional Environment
Anna Zueva

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Lecture overview
• We will start the discussion of how different specific
social actors in the organisation’s external environment
can influence the strategy of the organisation.
• In this session, we will focus on the broadest actors or
the social, political, economic, and other types of
institutions that structure the external operating
environment.
• We will use Institutional Theory as an analytical
framework for understanding the different types of
institutional pressures and the influence the can exert
on organisations.

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 Topic 3.5

Institutional Theory:
Institutions and organisational
legitimacy

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What is an institution?
• An institution is a broad term describing a variety of structures and forces that shape a
particular society (usually a nation state), for example:
– Government systems (e.g. representation methods,
government branches, government agencies)
– Financial systems (e.g. banking, stock markets)
– Educational systems (e.g. universities; apprenticeships)
• Formal and informal institutions:
– Formal: e.g. legal systems
– Informal: e.g. national cultures and sub-cultures
• External and internal institutions:
– External: e.g. government and financial systems
– Internal: e.g. organisational policies and practices
• Institutions and cultures have considerable (but hard to measure) impact on:
– Countries’ socio-economic performance
– Business activity

Douglas North (1990)

Institutional Theory

• It argues that pressures from both internal and external institutions

have important influences on strategies and structures that
organisations pursue.
– They define the broad norms or ‘rules of the game’ of organisational
operations
• Organisations that defy these institutional norms risk loosing
legitimacy and hence being excluded from the marketplace.
• Responding to the institutional pressures tends to lead to similarity in
the ways different organisations conduct business and the
organisational structures that are accepted.
– This process is called isomorphism.

Di-Maggio and Powell (1983), Scott (1995)

Legitimacy
• A ‘legitimate’ organisation is an organisation
that:
– Is accepted as right and proper by its key
stakeholders
– Is seen as having a right to operate
• ‘Legitimacy’ is a state of social acceptance

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Institutional Theory
• Institutional Theory is different from the Resource-Based View
– It focuses on the external environment as opposed to internal resources as
the main factor that influences organisational strategy
• Institutional Theory is similar to Porter’s perspective as Porter also
focuses on the external environment
– However, the focus of Institutional Theory is much broader than Porter’s.
• Institutional Theory is somewhat similar to PESTLE analysis.
However:
– It identifies more specific institutions and types of institutional forces
– It considers institutions internal to the organisation
– It explicitly focuses on how various institutional forces impact organisational
strategy and structure

Di-Maggio and Powell (1983), Scott (1995)

 Topic 3.6

Three types of institutional pressures

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Institutional Pressures

Types of Institutional
Pressures

Normative Coercive Mimetic

Pressures Pressures Pressures

External Mimetic Internal Mimetic

Pressures Pressures

Organisational
Behaviour and
Strategy 9
Types of institutional pressures 1

• Normative
– Cultural and social norms – e.g. long store opening hours in the US, vegan
food craze in the UK, miniature washing-machines in South-East Asia
– Example of impact on strategy: The need to adjust to local customer
preferences may force foreign firms into partnership with local firms who can
provide them with knowledge about local customer preferences
• UK supermarket Tesco entering a joint venture with China Resources
Enterprise in China.

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Di-Maggio and Powell (1983), Scott (1995)

Types of institutional pressures 2

• Coercive
– Government regulations and industry standards – e.g. health and
safety, toxic emissions.
– Example of impact on strategy: High tariffs in certain countries can
prevent foreign companies from exporting there and force them into
establishing local production facilities
• Toyota establishing car manufacture factories in the US in 1980s
to avoid high US tariffs of imported car.

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Di-Maggio and Powell (1983), Scott (1995)

 Types of institutional pressures 3

• Mimetic (from Greek “to copy”)

– Internal mimetic isomorphism – following established
organisational routines and strategies.
• Example: University students asking lecturers to provide them
with “sample good essays” when writing coursework
assignments.

– External mimetic isomorphism

– copying the behaviour of other
(successful) companies.
• Example: UK supermarket
Morrison’s starting a home
delivery service because all
other UK supermarkets were
already doing it. 12

Di-Maggio and Powell (1983), Scott (1995)

 Topic 3.7

National institutions:
How institutions shape operating
environments in different countries

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Importance of national institutions

Prof. Richard Whitley at Manchester Business

School:
• Nation states remain primary units of political
competition and mobilisation
• It is largely nation states that control:
– Property rights
– Industry entry and exit
– Corporate control market
– Labour standards

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Whitley (2003)
Liberal market economy: USA
• Stock market-based business financing:
– Dispersed ownership
– Ability to secure finance depends on firm’s valuation on equity markets
– Short-term strategic horizons in investments
• Education systems:
– Firms rarely provide extensive vocational training

• Labour relations:
– Labour representation in firm governance is not obligatory
– Labour unions are relatively weak and fragmented (firms generally do not consult unions
when making strategic decisions)
– Labour markets are highly fluid (firms may need good employee retention strategies)

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Hall and Soskice (2001)

Coordinated economy: Germany
• Capital market-based business financing:
– Ability to secure finance depends on firm’s reputation and relationships with other firms and
banks
– Other companies and banks can sit on supervisory boards
– Longer-term strategic horizons in investments

• Education systems:
– Industrial association and trade unions provide and supervise vocational training in cooperation
with firms, government and education institutions (apprenticeship system)

• Labour relations:
– Obligatory labour representation in firm governance (work councils)
– Strong and centralised trade unions (firms have to consult unions when making big strategic
decisions)

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Hall and Soskice (2001)

Implications for strategies - examples

• Non-wage labour costs are often high in Social Market- and Scandinavian
countries
– need to compensate with high productivity
• It is often easier to lay-off labour in Anglo-Saxon countries compared to
many continental ones
– need to have different labour market strategies
• Government is an important stakeholder in some developed and emerging
economies
– need to develop strategies that give the State with appropriate weight in
decision-making
• Above all – strategies need to comply with institutional pressures for the
organisations to maintain their legitimacy

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 Topic 3.7 Activity – Padlet Discussion
Uber Faces Institutional Pressures in London
Between 2017 and 2019 Uber – an online-booking taxi company – struggled to keep the licence
that allowed it to operate in London. London authorities made decisions to withdraw Uber’s
licence to operate on several occasions.

Explore the 2019 BBC article and a recording of 2017 news footage on the topic below and
answer the following question:

• What specific institutional pressures in London did Uber fail to comply with? (identify specific
pressures and the categories they fall into – normative, coercive or mimetic).

Uber loses licence to operate in London in 2019 – BBC article

Uber loses its London licence in 2017 – YouTube video 18

Uber in London discussion links
• Link to Padlet: https://padlet.com/azueva/hwte6y7s4ym3ufo3
Conclusions
• Societal institutions are diverse groups of powerful
stakeholders and powerful forces
• They shape the operational environment of organisations
• They influence strategies and structures adopted by
organisations
• In order to design appropriate strategies and achieve
legitimacy organisations must
– Respond to institutional pressures in appropriate manner
– Negotiate with various institutional actors

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References and further readings
• Campbell, J. L. (2004) Institutional Change and Globalization, Princeton, NJ: Princeton University
Press.
• Cernat, L. (2004). “The emerging European corporate governance model,” Journal of European
Public Policy, 11/1: 147-166.
• Di-Maggio, P. & Powell, W.W. (1983). The iron cage revisited: institutional isomorphism and
collective rationality in organizational fields. American Sociological Review, 48, 147-160.
• Hall, P. A. and Soskice, D. (2001). Varieties of Capitalism, Oxford University Press.
• Morrison, J. (2006). The International Business Environment, 2nd ed., Palgrave Macmillan.
• North, D. C. (1990). Institutions, Institutional Change and Economic Performance, Cambridge
University Press.
• Rhodes, M. and van Apeldoorn, B. (1997). “Capitalism versus capitalism in Western Europe,” in
Rhodes et al. (eds), Developments in Western European Politics, New York: St Martin’s Press.
• Scott, W. R. (1995). Institutions and organizations. Thousand Oaks, CA: Sage.
• Whitley, R. (1999). Divergent Capitalisms, New York: Oxford University Press.
• Whitley, R. (2003). “How National are Business Systems?” Presented to the workshop on National
Business Systems in the New Global Context, Oslo, 8-11 May 2003,
http://www.business.aau.dk/loc-nis/workshop3/paper_whitley.pdf.

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