Institutional Analyses of Organizations: Legitimate but not Institutionalized

We review institutional theory to assess the direction of theory and research on institutional structures and processes. Our primary goal is to suggest an overall frame within which a coherent and interrelated body of theory and research might develop that would address institutional processes underlying stability and change of organizational structure. We select two theoretical threads, phenomenological and neo-functional approaches to organizations, and weave these in with rational choice to develop a coherent explanation of the conditions under which similar structures diffuse across organizations facing very different environments (or have very different structures when facing the same environment). We argue that resource dependence theory already provides a parsimonious explanation of why organizational structure becomes so similar across organizations facing similar environments; institutional theory has little to add to this scenario, except perhaps for a theory of organization-level ingratiation. Social does not imply non-rational, and socially-embedded does not mean unanalyzable. It is costly for each organization to de novo create its own structure, yet it also generally costly for an organization to adopt structure that is ill-suited to its main tasks and which may thus lower its performance. An efficient strategy for an organization, then, is to evaluate structures carefully by observing the effects of these structures in other organizations it deems similar, making an independent decision about whether or not to adopt those structures depending on assessment of the risk that adoption entails. There is a built-in bias toward stability of structure, since assessment is costly itself, leading to the often observed inertia of organizations. But at the same time, given renewal in the competition set, such a strategy may lead to organizational failure.