I
Institutional Theory of Organizations Introduction
Olivier Berthod
Department of Management, Freie Universität
Berlin, Berlin, Germany
Synonyms
Institutionalism; Institutional analysis; Institu-
tional theory; New institutionalism; Organiza-
tional institutionalism
Definition
The institutional theory of organizations puts
institutions at the core of the analysis of organiza-
tions’ design and conduct. From this point of
view, organizations are local instantiations of
wider institutions. Institutions, understood as
taken-for-granted beliefs, rules, and norms,
shape the creation and spreading of organizational
forms, design features, and practices. Complying
with institutionalized prescriptions is considered a
means for gaining legitimacy, decreases uncer-
tainty, and increases intelligibility of organiza-
tion’s actions and activities.
# Springer International Publishing AG 2016
A. Farazmand (ed.), Global Encyclopedia of Public Administration, Public Policy, and Governance,
DOI 10.1007/978-3-319-31816-5_63-1
The rise of institutional arguments in organiza-
tional analysis reflects a sense of dissatisfaction
with theories that put efficiency at the core of
organizational action. Organizations do not oper-
ate in a vacuum. They must deal with a multitude
of external influences, such as cultural differ-
ences, legal requirements, conventions, and
norms, and with the demands raised by a diversity
of actors, e.g., suppliers, customers, regulatory
agencies, NGOs, or trade unions. Efficiency,
from this point of view, is subject to constant,
collective redefinition. The resulting beliefs,
rules, and persisting expectations explain choices
in formal structures and organizational practices
(e.g., ISO norms, information technologies, CSR
standards, or the divisional form). This idea was
provocative, because it explained why there was
such homogeneity of design features and practices
among organizations (Meyer and Rowan 1977;
DiMaggio and Powell 1983; Zucker 1977). This
approach is also referred to as the “new”
institutionalism – “new” to distinguish itself
from older treatments of organizations as institu-
tions in which issues of power, politics, and
change were more prominent. Contemporary
works, however, have reconciled both
approaches. This brief entry covers this
development.
2 Institutional Theory of Organizations
Why Institutional Explanations?
Institutions, broadly speaking, are those beliefs,
rules, roles, and symbolic elements capable of
affecting organizational forms independent of
resource flows and technical requirements (Scott
1991: 165). Such beliefs, rules, roles, and sym-
bolic elements can be of different natures (Scott
2013): regulative (i.e., required/enforced by law,
as it is the case with specific accounting stan-
dards), normative (i.e., enforced by a shared
sense of what is appropriate, e.g., the expectation
that elected leadership represents the interest of its
constituents), or cognitive (i.e., taken-for-granted,
mental models of how work should be done, as it
is the case with most routinized behavior in
organizations).
Economists interested in institutions tend to
focus on regulative institutions, while organiza-
tional scholars and political scientists embrace
societal norms and taken-for-granted beliefs as
drivers of organizational action. In earlier devel-
opments, institutional arguments remained close
to the notion of resource dependence. Each
organization needs specific resources to survive:
businesses need sales, venture capital, or invest-
ments; schools need students and funding from
state agencies; NGOs need fundraising and media
attention; unions need members and their fees;
etc. Resource dependence argues that organiza-
tions need to appear “legitimate” in the eyes of
the most important resource holders (customers,
blue-collar workers, investors, etc.). It predicts
that a business will generate more sales if its
functioning is considered appropriate by its cus-
tomers; an NGO will receive more funds from
charities if its headquarters are in the right build-
ing or city and appear powerful; a union might
generate more memberships if it focuses on a
specific rhetoric or highly desirable goals in its
communication, etc.
The resource-dependence approach, however,
was often not sufficient for an institutional argu-
ment. Legitimacy is defined as a generalized per-
ception or assumption that the actions of an entity
are desirable, proper, or appropriate (Suchmam
1995: 574). Institutional arguments (and organi-
zational institutionalism) moved beyond resource
dependence and explained why organizations
adopt legitimate design features and practices
without reflecting on their relevance. Specifically,
institutional explanations rely on the taken-for-
granted nature of institutions and not on utilitarian
arguments. Davis et al. (1994) made a clear dis-
tinction from resource-dependence arguments by
highlighting the idea that organizational practices
should be considered institutionalized if they are
widely accepted and used without recourse to
analysis or proof for their relevance and if they
withstand challenges on instrumental grounds
(see also Greenwood et al. 2008).
New Institutionalism and the Spreading
of Institutions
More than mere access to resources, relying on
institutions is a means for organizations to reduce
uncertainty and increase predictability and intelli-
gibility of their actions to their audience. Institu-
tions thus constrain, but also support/enable
organizational actions and decisions (Barley and
Tolbert 1997). The relational focus between orga-
nizations and audiences explains the spreading
and stability of organizational practices across
whole industries and policy arenas. In this case,
Institutional theory of organizations speaks of the
constitution of “organizational fields”. The con-
cept of “fields” has become popular for explaining
how taken-for-granted, shared understandings of
organizational designs and practices are debated
and shaped over time. A common misunderstand-
ing was to assume that “organizations are kind of
wacky, and (. . .) people are never rational”
(DiMaggio 1995: 395). Empirical studies chal-
lenged this misunderstanding. For example,
Fligstein (1985) studied the spread of the multi-
divisional organizational form among large firms
and looked for the causes of this diffusion
between 1919 and 1979. He found that firms
were aware rise of the mutidivisional form in
their environment and adopted it reflexively.
Going even further, Hoffman (1999) revealed
that fields emerge when organizations (or their
representatives) gather to discuss important topics
and shape current and/or nascent institutions. In
Institutional Theory of Organizations
other words, the spreading of institutions is a
political process that involves many organizations
with some interest in the issue at stake.
Development of the Institutional Theory
of Organizations
As hinted in the introduction, a divide had been
staged between tenants of an “old” and a “new”
institutionalism. The old institutionalism focused
more on organizations and how they become insti-
tutionalized. Defending older treatments of insti-
tutions and organizations (and organizations as
institutions), Abbott (1991) pointed out the rele-
vance of change and processes – two dimensions
that fell short in the new institutionalism and its
focus on homogeneity and stability. In a similar
vein, Selznick (1996) expressed concerns about
such a sharp differentiation. He worried that such
feuds would encourage an undesirable preoccupa-
tion with polarities and polemics (1996: 276)
instead of studying actual social policies, their
implementation, and their challenges. Finally,
Stinchcombe (1997) stressed that the new institu-
tionalism underestimated the willingness of peo-
ple to accept institutions for what they are or not:
The guts of institutions is that somebody some-
where really cares to hold an organization to the
standards and is often paid to do that (1997: 18).
Hirsch and Lounsbury (1997) pleaded for recon-
ciliation. They opposed the determinism of
overtly structural approaches. A unified institu-
tional theory, they said, would provide a more
accurate picture of organizational actions and
structures.
Consequently, organizational change has
become a major issue. Puzzled by radical organi-
zational change, Greenwood and Hinings (1996)
recognized that the new institutionalism, with its
focus on legitimacy and field-wide homogeneity,
failed to take change into account. Specifically,
the theory did not explain why some organizations
would adopt radical change in spite of institu-
tional pressure. The authors opened institutional
analysis to issues of power, commitments, and
interests within the organization. Since then, the
analytical interest of the institutional theory of
3
organizations has shifted from a focus on stable
structures toward individual and organizational
strategies and influences. DiMaggio (1988)
coined the idea of “institutional entrepreneurs”
to identify those individuals who set out to change
and disrupt institutionalized beliefs. Oliver (1991)
linked the institutional theory of organizations to
strategic management to account for variations in
organizational responses to institutional demands.
And on a more settled tone, Powell (1991) pro-
posed looking more closely at dynamics of insti-
tutional compliance to find out how enacting
institutionalized beliefs in fact contributes to the
evolution of these beliefs.
Consequently, research has considered the
dynamics of institutional emergence and the pro-
cess of institutional change (Dacin et al. 2002).
For example, Covaleski and Dirsmith (1988)
observed how a university adopted budgetary
practices that were deemed appropriate and how
actors contributed to modifying them using a sub-
sequent period of decline. Elsbach and Sutton
(1992) showed how decoupling legitimate struc-
tures from illegitimate activities facilitated the
work of spokespersons. Similarly, Hargadon and
Douglas (2001) showed how Edison overcame
institutional rigidity stemming from the gas indus-
try by adapting his electric bulb to the older gas
lamps, both in terms of design and of perfor-
mance. Battilana (2006) wondered how actors
manage to produce change when they see oppor-
tunities and found an explanation in the individ-
uals’ social position. Finally, Greenwood and
Suddaby (2006) asked similar questions and
observed the introduction of the multidisciplinary
practice as a new organizational form among pro-
fessional business services companies. They dem-
onstrated how centrality in field explained
exposure to dissonances and opportunities for
change.
Toward Institutional Pluralism
Institutional theory of organizations has moved
from a theory of stability toward a theory of
change. Riding this trend, the idea of pluralism
has become a major issue. A multitude of
4 Institutional Theory of Organizations

institutional forces infuse society and organiza- confrontation to silencing conflicts away,
tions. Friedland and Alford (1991) argued that a although the consequences of such strategies are
set of central logics underlies the most important not clear. The emergence of organizational iden-
institutions in western societies: the capitalist mar- tity is increasingly designated as an important
ket, the family, the state, religions and the democ- resource to institutionalize hybrid designs and
racy. These institutions are the cradle for a wealth reduce the potential for conflicts.
of institutional logics, with many of them
contradicting each other. The potential for con-
flicts and change is not negligible. As Thornton
Conclusion
and Ocasio put it: competing logics are not, by
themselves, an explanation of change in institu-
A chief feature of institutional theory of organiza-
tional logics but an antecedent or a consequence
tion is that it enables an alternative analysis of
(1999: 118).
questions relating to forms and design of organi-
An organization is often penetrated by institu-
zations in all sectors. The focus on legitimacy,
tional demands of a different sort. For example,
taken-for-granted beliefs, and field constituents
Townley (2002) documented the introduction of
provides both a dynamic and embedded view of
business planning and performance measures and
the conduct of organizations. This approach has
reports in cultural facilities and heritage sites in
been enriched by a wealth of empirical research.
Alberta, Canada: the operative core, i.e., museum
However, institutional theory has also been the
professionals and conservators in the province,
object of attacks. The notion of field is more
declared such attempts “heresy” and resisted the
elusive than, e.g., the notions of industry or
change. Pluralism, however, does not need to end
interorganizational networks; organizations are
in conflict. For example, Purdy and Gray (2009)
reduced to local instantiations of institutions; and
reported on the coexistence of multiple practices
the way individuals are perceived is often criti-
in state offices for dispute resolution, where no
cized as being overly simplistic. Nevertheless,
single organizational design seemed to dominate.
institutional theory provides strong arguments
Therefore, current debates entertain the possibility
about why and how organizations do the things
for organizations to hybridize their design to nav-
they do.
igate pluralism. Battilana and Lee (2014) note that
the boundaries between design features that were
typical for the private, public, and nonprofit sec-
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despite being a locus for creativity, are less stable
due to the tensions that emerge at the interplay of ▶ Organizational institutionalism
their sometimes contradictory features. A typical
example is social enterprises that combine ele-
ments from business organizations and charities
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