Dr. Bogodistov Yevgen

Frankfurt School of Finance & Management, Germany

DYNAMIC CAPABILITIES AND THE INSTITUTIONAL MISFIT: BREACH OF THE RULES AS A CURE AGAINST RIGIDITY

Introduction

In my research I aim to investigate organizational transformation in turbulent environments. To remain successful organizations have to constantly reconfigure their resources. Organizational institutions, similar to resources, have also to be reconfigured to face environmental challenges. I argue that the rules’ breach by individuals (customers or employees) represents an alarm for organizational inefficiencies. Thus, the organizations have to develop an information system which would allow for an inclusion of such events in a sensing capacity to minimize risks concerned with decision making, and a consequent resource reconfiguration.

Theory and the problem statement

Recently I have been investigating a case from a Ukrainian organization which, being a customer of a big international hardware producer, tried to resolve a specific hardware problem. The problem was forwarded to the support team of the hardware producer but no solution was found. The IT-department of the customer hacked the hardware and the related software and resolved the problem on its own. The solution was forwarded to the producer’s IT-Service. Nevertheless, instead of being thankful to the customer, the producer wanted to file a lawsuit against the customer since the solution was a result of a breach of licensing rules. I decided to investigate the issue, since I see in such relationships not a rules’ breach but a missing opportunity for the organizational development and, consequently, a loss of dynamic capabilities.

To remain successful in turbulent environments organizations have to constantly change their resource base to fit market requirements [9]. In his definition of organizational resources, particularly of organizational capital, Barney [1] approximates the institutional understanding of resources. Hodgson [5, p.2], for example, defines institutions as “systems of established and prevalent social rules that structure social interaction”. Institutions can be seen as both resources, like formal and informal planning or coordinating systems [1], and rules of work with other organizational resources, e.g. through organizing transactions [10].

In changing environments organizational institutions require institutional change [4]. In order to be successful organizations have to be constantly looking for opportunities and threats and reconfigure their resources accordingly [8]. Thus, having efficient and effective institutions requires information flows both from inside and outside the organization. This notion goes in line with the dynamic capabilities concept [e.g. 3; 8; 9] which proposes a notion of resource adaptation to meet environmental challenges. Since organizational institutions can be understood as organizational resources, I suggest transferring this approach to explain the institutional change.

In my rather conceptual approach I focus on the information flow and both formal and informal communication inside and outside an organization. I argue that rules’ breach and “complaining” concerning inefficient institutions is the information source for successful organizational change. Moreover, I argue that ignorance of such events might result in inefficient information systems.

This short paper starts with an example of rules’ breach by a customer. But my approach is also applicable to internal communication in a firm: employees might notice an institutional misfit resulting in low efficiency or effectiveness. The commonality between customers (as in the initial example) and employees is the fact that they might share values and goals of the organization. Customer’s IT-department did not switch to a substitute product, it decided to stay with their supplier and help to resolve the issue. Similarly, employees might sense the institutional misfit and perceive it as their own problem [7]. According to Söllner [7] an individual has four action options in the case he or she notices an institutional misfit: leave the organization (“exit”), remain silent (“silence”), report the problem (“voice”), or break the rule in the organization’s best interest (“dirty hands”) (see Figure 1). Two of these actions do not propose any inputs for organization’s dynamic capabilities: when an individual decides for an “exit” or “silence” strategy, the fact of institutional misfit gets lost. The other two strategies – “voice” and “dirty hands” – provide interesting inputs which may help an organization to change efficiently.

Fig. 1. Behavioral options in cases of perceived institutional misfit as proposed by Söllner [8]

Nevertheless, both “voice” and “dirty hands” are often perceived negatively. “Voice” is often perceived as “complaining” and “dirty hands” as a simple “rule breach”. My introducing example describes a situation where an organization decided to punish the source of important information instead of rewarding for the problem resolution. It was a difficult decision: breach of the rule should be punished to prevent similar rules’ breaches in the future; however, such punishment demotivated the customer to further help the organization with which they felt congruent due to shared values and goals.

I argue that a balanced information system inside a firm and between a firm and its customers is needed to enhance dynamic capabilities of the firm (see Figure 2). I use the term “balanced” since on the one hand we need an unbiased information flow; on the other hand, we see a need for a reward/punishment system. Every reward or punishment could bias the information flow by motivating or demotivating individuals to act. The wrong approach might increase risks of a wrong resource reconfiguration and result in a loss of dynamic capabilities which are a prerequisite for the organization’s success.

Figure 2. Information flow in the event of an institutional misfit

Conclusions

I argue that rules’ breach by stakeholders of an organization might become the key activator of the dynamic capability. If an organization wants to have a good dynamic capability, it should implement the “dirty hands” and “voice” options into its information system. This approach allows for incorporating of institutional theory [6] to the dynamic capability view and, consequently, to the resource-based theory [1; 2]. Rules’ breach might be a crucial factor for the quality of sensing, seizing, and reconfiguration capacities of an organization. The problem of punishment and reward of stakeholders in the events of “dirty hands” is, thus, directly related to the activation of dynamic capabilities.

The list of references:

1. Barney J. B. The future of resource-based theory: Revitalization or decline? / J. B. Barney, D. J. Ketchen, M. Wright // Journal of Management. – 2011. – № 5 (37). – P. 1299–1315.

2. Barreto I. Dynamic capabilities: A review of past research and an agenda for the future / I. Barreto // Journal of Management. – 2010. – № 1 (36). – P. 256–280.

3. Teece D. J. Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance / D. J. Teece // Strategic Management Journal. – 2007. – № 13 (28). – P. 1319–1350.

4. Barney J. Firm resources and sustained competitive advantage / J. Barney // Journal of management. – 1991. – № 1 (17). – P. 99–120.

5. Haase M. Institutional rigidity and the lock-in between mental models and ideologies / M. Haase, M. Roedenbeck, A. Söllner. – Reykjavik, Iceland, 2007.

6. Hodgson G. M. What are institutions? / G. M. Hodgson // Journal of Economic Issues. – 2006. – № 1 (40). – P. 1–25.

7. North D. C. Institutions, institutional change and economic performance / D. C. North. – Cambridge; New York: Cambridge University Press, 1990. – 159 p.

8. Söllner A. Individual behavior in cases of institutional misfit: The dirty hands of IMP-Group members / A. Söllner. – Dijon, France, 2002.

9. Teece D. J. Dynamic capabilities and strategic management / D. J. Teece, G. Pisano, A. Shuen // Strategic Management Journal. – 1997. – № 7 (18). – P. 509–533.

10. Williamson O. E. Transaction-cost economics: The governance of contractual relations / O. E. Williamson // Journal of Law and Economics. – 1979. – № 2 (22). – P. 233–261.