Goal Selection Internally and Externally: A Behavioral Theory of Institutionalization

• Published date: 01 January 2018
• DOI: http://doi.org/10.1111/ijmr.12138
• Date: 01 January 2018
• Author: Daphne Teh,Henrich R. Greve

International Journal of Management Reviews, Vol. 20, S19–S38 (2018)

DOI: 10.1111/ijmr.12138

Goal Selection Internally and Externally:

A Behavioral Theory of Institutionalization

Henrich R. Greve and Daphne Teh

INSEAD, 1 Ayer Rajah Avenue, 138676 Singapore

Corresponding author email: henrich.greve@insead.edu

This paper examines a paradox in the behavioraltheory of the f‌irm, and highlights how

a complementary paradox from institutional theory suggests a theoretical integration

with potential for signif‌icant progress. Current behavioral theory of the f‌irm research

has a strong record of showing a broad range of organizational changes in response to

prof‌itability. This is far from the original conception of internal organizational goals

that trigger search in the vicinity of the problem. Prof‌itability is a non-specif‌ic goal

that results from a multitude of factors, and is in part an externally imposed goal. Its

central role in many organizational changes prompts the question of whether other

external goals affect the organization as well.In contrast, institutional theory is focused

on externally imposed practices,but usually examines specif‌ic actions rather than goals,

leading to a theory of action without goals. These paradoxesand corresponding gaps in

knowledgesuggest a need for a behavioral theory of organizational responsesto external

goals.

Introduction

The behavioral theory of the f‌irm is a milestone in

management research because of its shift from the

prescriptive works of early management theory and

the stylized assumptions of economic theory (Cy-

ert and March 1963). This work did not introduce

goals into management theory – indeed they were

central in earlier treatments (March and Simon 1958;

Simon 1964) – but it introduced theory of when and

how organizations respond to goals. The theory spec-

if‌ies that organizations have goals specifying what

outcomes should be pursued, and their experiences

shape decision-makers’ aspiration levels for satisfac-

tory performance (Cyert and March 1963, Chap. 6).

Performance below the aspiration level leads to prob-

lemistic search starting in the vicinity of the goal that

is belowthe aspiration level. The f‌irst solution thought

to result in performance that exceeds the aspiration

level will be chosen.

We are grateful for comments from the editors and review-

ers, as well as conversations with manycolleagues who con-

tributed to these ideas.

Key elements of the original theory are the inter-

nal and local nature of each goal, and a search for

solutions that is initially focused on the specif‌ic prob-

lem indicated by the goal showingperformance below

the aspiration level. The theory assumes that multiple

goals are active in an organization,and sees the choice

of goals as an important theoretical question. Early

work based on this theory validated its foundational

ideas: f‌irst, that changes were more likely following

performance below the aspiration level, especially in

less powerful organizationalunits (Manns and March

1978); second, that decision-makers updated their as-

piration levels by examining historical performance

records (Lant 1992); third, that performance below

the aspiration level was linked to organizational risk

taking (Bromiley 1991; Fiegenbaum and Thomas

1986).

The recent period of research on goals and aspira-

tion levels started with performance feedback theory,

which sees the difference between performance and

aspiration levels as a gap that affects organizational

change differently above and below the aspiration

level (Greve 1998, 2003a,b). This research has exam-

ined performance feedback effects on a wide range of

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S20 H.R. Greve and D. Teh

outcomes such as research and development (R&D)

(Vissa et al. 2010), innovations (Greve 2003a), prod-

uct introduction (Gaba and Joseph 2013), alliance for-

mation (Baum et al. 2005) and market entry (Barreto

2012). It has subtopics including the psychological

mechanisms behind the behaviors (Audia and Brion

2007) and responses to multiple goals (Gaba and

Joseph 2013; Greve 2008). Research on performance

feedback has made signif‌icant advances theoretically

and empirically (Gavetti et al. 2012; Shinkle 2012),

but it is not fully recognized that these advances have

caused current research to differ in important respects

from the original formulation. The key differences lie

in (1) the loss of the original focus on goal choice and

(2) movement towards broad goals with an external

focus, such as return on assets (ROA). As a result

of the attention to external goals, a new but still ne-

glected topic of research is (3) the role of institutional

environments in providing organizational goals.

The behavioral theory of the f‌irm is not the only

theory with a neglected topic of research. Institutional

theory has examined howorganizations come to adopt

practices as a result of regulatory pressure, normative

assessments or simply ‘taken for grantedness’ as a re-

sult of prevalence(DiMaggio and Powell 1983; Meyer

and Rowan 1977). It has amassed a substantial body

of evidence on how institutional forces reach deeply

into the organization, inf‌luencing structure, processes

and other outcomes (Scott 2001, 2008). This research

is different from research on goals because it sees the

use of a practice as the outcome to investigate, but

not whether there are also goals associated with this

use. This omission seems unnatural when practices

are given a normative assessment, as it is usually the

outcomes generated by the practice that are desired.

For example, although equality is the goal that fair

employment practices are supposed to achieve, ex-

tant studies have so far providedmore research on the

practices than on goal creation and pursuit (Edelman

1990, 1992).

As a result of the development of these two ma-

jor research traditions, the f‌ield of management now

has two complementary paradoxes: a theory that ex-

amines goals, but not their external and institutional

sources, and a theory of institutional effects that does

not examine goals. In the following, we review key

elements of these research traditions in order to char-

acterize the theoretical puzzle they have left to inves-

tigate. Weaim to show that their complementary gaps

can be addressed by extending the behavioral theory

of the f‌irm.

An element of behavioral theory of the f‌irm and

institutional theory that shapes their divergent treat-

ment of the external environment and organizational

goals are their notions of agency. In the behavioral

theory of the f‌irm, agency is placed at the level of

organizational coalitions, which are collectives of

individuals who share similar interests. Agency is

limited by the coalitions’ ability to make side pay-

ments to other coalitions, and is constrained by in-

dividuals’ bounded rationality as they lack the abil-

ity to access and process all available information

(Cyert and March 1963). In contrast, agency in in-

stitutional theory is largely discussed in relation to

the organization vs. external actors and the environ-

ment (DiMaggio and Powell1983; Meyer and Rowan

1977). Actors may not be fully aware of the insti-

tutions and beliefs that they have come to take for

granted. Hence, it is unsurprising that choices within

an organization are less explored; boundedly rational

actors may not even be aware that they can make a

choice.

The less agentic view of organizations in institu-

tional theory is matched with the idea that external

pressures can originate from a variety of sources

which include institutions and regulatory bodies

(Barnett and King 2008; Short and Toffel 2010), the

community (Greve and Rao 2012; Marquis 2003),

customers (Greve et al. 2016), the media (King

and Haveman 2008), social movement organizations

(Weber et al. 2008), and competitors (Desai 2011).

This means that institutional theory sees a broad range

of potential inf‌luences on organizational action. Thus,

although both theories assign limited agency to or-

ganizations, their orientation differs greatly – in the

behavioral theory of the f‌irm, agency is inwardly di-

rected, whereas in institutional theory, agency is ex-

ternally directed.

Our plan for the theoretical argument is illustrated

in Table 1. The next two sections of the paper re-

view the behavioral theory of the f‌irm before examin-

ing how performance feedback research has become

sophisticated in examining the effects of goals, but

has relied on the most common goals that face or-

ganizations; goals that are selected due to internal

and external pressures. This has allowed researchers

to defer the question of how goals are selected, but

not addressing this question means that performance

feedback theory currently has less to say about goal

selection than it could have,though, as discussed next,

there is also work addressing institutional sources of

goals. The following section examines how institu-

tional theory has a strong record of examining the link

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