The innovative response to institutional demands

In the course “Seminar in HRS” in my masters year I had to write with three other team members an essay about different themes, this one is from the intervention perspective. “Introduction” is the part I solely wrote for the essay.

Introduction

In HRM not only economic motives are important but also other contextual factors influence strategic behavior. Organizations operate in societies with laws, customs and shared expectations for how employees are treated (Boxall & Purcell, 2016). HR policy makers need to take into account the different institutional setting in order to shape HR practices that are aligned with this context since “organizations compete not just for resources and customers, but for political power and institutional legitimacy, for social as well as economic fitness” (DiMaggio and Powell, 1983, p. 150). These settings are a strand of theorizing called new institutionalism that takes into consideration social, legal, and cultural forces in the study of HRM and the exploration of societal embeddedness of HR practices (Paauwe, 2004).

In this study of new institutionalism the contextually based human resource model (Paauwe, 1998), which can be seen in Appendix 1, is used to clarify the distinctive institutional demands working on the organization. As stated here above, organizations are enclosed in a social, cultural, and legal context (the SCL dimension in the model) and the perception that organizations are thoroughly embedded in broader institutional setting. Powell (1998) suggests that organizational practices are usually either direct observation of, or answer to, regulations and structures existing in the broader environment (Meyer & Rowan, 1977). A good example of such an institutional demand is the International Labour Organization (ILO) that promotes and pursuits social justice and human and labor rights. Another example is national legislation in the form of the Social Economic Council within the Netherlands. In Europe the European Social Charter operates that also has institutional demands in the form of the right to go on a strike as employees of an organization.

Oliver (1991) investigated how organizations can manage these institutional demands. However, Paauwe (2004) argues that her list of strategic responses is not complete since it lacks positive constructive response as in innovative responses. We agree in line with Paauwe that organizations have leeway in strategic choice and having an innovative response to institutional demands can give organizations competitive advantage, even in highly institutionalized context (Oliver, 1997).

Institutional demands

Indicators can be developed to identify the degree of institutionalization, which has an impact on the HRM practices implemented in organizations. Countries possess different cultural dimensions that can identify the degree of institutionalization, which in turn influences the HR practices implemented in an organization. Hofstede, Hofstede, and Minkov (2010) found six cultural dimensions on that countries differ; power distance, uncertainty avoidance, individualism (vs. collectivism), masculinity (vs. femininity), long term orientation (vs. short term orientation) and indulgence (vs. restraint). These cultural values influence the legislation, education, social stratification and political structure (Hofstede, 1980; Hofstede 1991). The first three can identify degrees of institutionalization (Milberg, Burke, Smith & Kallman, 1995). Firstly, countries high on uncertainty avoidance are shown to have a preference for many laws and regulations; therefore uncertainty avoidance could indicate the degree of institutionalization in a country. Secondly, high power distance cause lower levels of trust among people (Hofstede, 1980; Hofstede 1991), which implies that people would want to regulate and check actions of others they do not trust (also between organizations). Additionally, it causes a desire to reduce these distances (Mulder, 1977), which can be done by laws and regulations. Therefore, this could be an indicator for the degree of institutionalization. Moreover, in individualistic countries citizens are less likely to depend on institutions that could indicate a lower degree of institutionalization. An example of these indicators is the contrast between Scandinavian countries and (some) Latin countries. Scandinavian countries (Denmark, Norway, and Sweden) are low on power distance, low on uncertainty avoidance and individualistic, while Portugal and Mexico are high on power distance, high on uncertainty avoidance and collectivistic (Hofstede, 1980). Scandinavian countries are known to be welfare states, which includes a high degree of institutionalization. Therefore, if a country has a certain level of uncertainty avoidance, power distance and collectivism, this could indicate the degree of institutionalization.

The asylum sector is an example of a high institutionalized sector. The tasks belonging to an asylum application requires policy-makers and organizations from different domains to work closely together, for example border control, foreign affairs and social services (Alink, Boin, & T’Hart, 2001). Looking at some aspects of the process, one can already see how complex and institutionalized the asylum sector is. The admission policy begins with a screening of the background of asylum applicants. Where after embassies have to give this information to the foreign office within a certain time frame (Alink et al., 2001). This indicates just slightly the numerous parties involved and the enormous set of laws and regulations that go along with it.

Contrary to the asylum sector, the retail sector in the Netherlands is an illustration of a low institutionalized sector. In the Dutch retail sector, there is a low level of unionization. Furthermore, educational requirements are not necessary (Boon, Boselie, den Hartog, & Paauwe, 2009). Employees are trained on-the-job, sometimes complemented with an additional training. The Netherlands have regulations regarding minimum wages, weekly working hours and job security. Nonetheless, these regulations do not have a major impact on the daily operations in retail organizations (Boon, Paauwe, Boselie, & Den Hartog, 2009).
Institutional demands coming from social, cultural, and legal context have consequences for the leeway that actors have in shaping HR practices because these demands should be aligned in some degree with the HR practices (Boon et al., 2009), as seen in the model of Paauwe (1998) in Appendix 1. For example the asylum sector, which is mentioned above, is highly institutionalized and therefore has a low degree of leeway (Boon et al., 2009).

According to the actors’ perspective, the actors included in the dominant coalition decide how to deal with the degree of leeway, as can be seen in the model (Paauwe, 1998). These actors can be the top managers, HR managers and the line management (Boon et al., 2009; Paauwe, 2004). They have their own interests, but in order to avoid conflicts, the actors should work cooperatively (Paauwe, 2004).

On the one hand the actors that shape the HR practices can decide to implement an outside-in approach dealing with the institutional demands. This approach states that the actors act within the degree of leeway that is determined by the institutional demands. According to Paauwe (2004), actors should react on transactions with the environment. Thus, the actors conform to the institutional demands, without trying to expand or change the degree of leeway. Although, as stated by Deephouse (1999) conformation alone is not enough to let the organization survive long-term. The organization should also differentiate to some degree, in order to approach customers. Therefore, it can be concluded that an outside-in approach is not necessarily effective (Jaffee, 2001).

On the other hand actors could choose to try to change and expand their leeway in order to deal with the institutional demands (Boon et al., 2009). Even actors acting in a high-institutionalized context could choose to resist (some of) the demands in order to maintain an effective organization (Goodstein, 1994; Oliver, 1997). Oliver (1991) described five different strategic choices that the actors could follow in order to deal with the institutional demands. Actors can choose passive responses (acquiescence or compromising), whereby they consciously conform to (most of) the demands. Furthermore, actors can choose to avoid the demands (avoid). Lastly, the actors can choose to actively respond to the demands (defy or manipulate), whereby the demands are challenged or controlled by the actors (Oliver, 1991). By following these latter strategic choices (defy or manipulate), organizations differentiate themselves from other organizations. Consequently, organizations can be more effective because they face less competition (Deephouse, 1999). However, Paauwe (2004) states that the strategic choices are too negatively formulated (Boon et al., 2009). This may lead to the organization losing their image of being legit and therefore could risk long-term survivability (Greenwood & Hinings, 1996; Scott & Meyer, 1994).

Conclusion

Considering the negative consequences of both the outside-in and the (negatively formulated) inside-out approach, it can be concluded that another type of response by the actors should be considered. Organizations should balance their response to institutional demands between conformation and differentiation in a positive manner (Deephouse, 1999). Boon, Boselie, and Paauwe (2009) suggested the innovative response, which aims to actively develop a positive balance between competitive and institutional demands (Boon et al., 2009). These demands should be seen as challenging instead of hindrance (Lazarus, as cited in Babakus, Yavas & Ashill, 2009). Organizations can behave as innovative by using the institutional demands as potential to foster organizational advantage (LePine, Podsakoff, & LePine, 2005). The supermarket chain ‘Albert Heijn’ for example, faced institutional demands in the form of laws regarding working age. Employees who were younger than 16 were not allowed to work. In order to act in an innovative manner, Albert Heijn negotiated with trade unions and formed new labor contracts specially made for 15-year old employees. Albert Heijn shaped the institutional demands in such a way that these became challenging demands, instead of hindrance demands. Using this explanation, we want to emphasize that organizations should use an innovative response to shape and mold the institutional demands to improve competitive advantage.

 

The contextually based human resource theory

Appendix A: The contextually based human resource theory

 

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