Institutional Theory and Organizational Legitimacy in Knowledge Management

Knowledge and Its Forms in Organizations

In a competitive environment where change is the only constant phenomenon, learning and knowledge management are vital for the sustenance and growth of organizations. A precise universal definition of knowledge can be elusive, because it is complex and manifests itself in various forms in individuals as well as in organizations. Individual or tacit knowledge is confined to the people who possess it and cannot be structured or managed in the organizational sense. Implicit knowledge is difficult to communicate from person to person and is limited to the perception of the individual. Organizational or explicit knowledge, by contrast, can be documented into policies and procedures and made available to employees.

In whatever form, knowledge is regarded only within a system of legitimization that permits it to be accepted as knowledge (Mouritsen et al., 736). Put differently, knowledge is perceived and accepted based on social frameworks. The rational theory of knowledge management holds that organizations can be rational in acquiring and managing knowledge and have choices as to what type of knowledge they want to develop. As opposed to the rational model is the institutional theory, which holds that the institutional environment can impact the evolution of formal structures in organizations. Institutional theorists go further in arguing that the institutional environment can play a role greater than even market forces (DiMaggio and Powell, 150). In organizations that are early adopters or trend-setters, innovative structures that lead to improvements in efficiency and profitability are legitimized in the environment. In due course, such innovations gain the status of legitimacy, beyond which failure to comply with those structures is seen as deviant or irrational. When this happens, organizations — whether existing or new — readily subscribe to the legitimized structures, irrespective of whether doing so leads to improvement in organizational efficiency or performance.

Weber's Theory of Legitimacy and Institutionalization

Max Weber, one of the earliest proponents of legitimacy, held that in every social system, powerful sections make attempts to sow seeds of belief in the legitimacy of their power. His approach is based on the reality that people do not question or resist rules and practices that are accepted by society as legitimate. According to Weber, there are three types of legitimacy: traditional, charismatic, and legal-rational. The traditional form of legitimacy is based on the sanctity of beliefs and practices that have prevailed in the society since time immemorial. Charismatic legitimacy stems from devotion to the exemplary character of an individual. Legal-rational legitimacy is the consequence of people's willingness to acknowledge the legality of enacted rules (Raymond, 35).

Weber's supposition is based on the existence of a rational order, which leads people to believe they should follow what is socially labeled as legitimate. Weber's theory is important to institutionalization because he drew a distinction between what he called guaranteed law and general social norms. According to Weber, "an order will become law if it is externally guaranteed by the probability of physical or psychological coercion, to bring about conformity or avenge violation, will be applied by a staff of people holding themselves especially ready for that purpose." Thus, Weber distinguished regulatory institutions from other normative elements and asserted that the legal-rational form of legitimacy defines the form of authority in modern organizations. In essence, Weber advocated that bureaucracy is the most efficient form of organization and that managers should be impersonal and work within the framework of rules (Raymond, 36).

Institutional theorists are of the firm belief that organizations strive to attain stability and legitimacy within the cultural and normative framework of the society in which they operate. Institutional theory deals with the reproduction or imitation of organizational structures and behavior in response to the acts and framework of the state, the expectations of the profession, or — collectively — the institutional environment (Baum and Oliver, 1403).

Institutional Theory and Organizational Isomorphism

Organizational behavior in response to change may be characterized by three types of isomorphism — coercive, normative, and mimetic — which can result in the development and transformation of formal structures and attributes within the organization (DiMaggio and Powell, 151). Coercive isomorphism can arise from political, legal, or governmental coercion by institutions on the organization (Oliver, 162). It is only natural that organizations tend to yield to these pressures, as otherwise their very existence becomes uncertain. Normative isomorphism is the response of an organization to the attitudes and behavior of professional bodies, network groups, and regulatory institutions that directly or indirectly affect its functioning. As the organization interacts with professional and regulatory bodies, there is a transfer of knowledge that can be beneficial.

Mimetic isomorphism refers to the response of an organization in times of business uncertainty; it describes the tendency to imitate or follow the strategies and practices of other organizations perceived to be successful in the field. In another classification, there are three components of institutions — the normative, the regulative, and the cognitive — each providing the basis for evaluating legitimacy. Cognitive elements refer to the structural features, rules, and procedures that define the social systems and what types of actions are accepted in the social context. In reality, the cognitive framework provides the platform for normative and regulatory systems.

Within the organization, there are different levels at which legitimacy processes can take place — the entire organization, individual organizations, and specialized divisions. Generally, institutional approaches focus on the structures of organizational populations or sets of organizations. Some theorists have argued that organizational or population density is an indicator of cognitive legitimacy, since it measures the extent to which relevant actors regard a given form as natural and acceptable (Carroll and Hannan, 531). However, there are rather strong criticisms of this view, as it is not a direct method of assessing legitimacy.

With respect to individual organizations, research has pointed out that conformity to rules or norms can vary across different organizations within the same population. The same is true for sub-divisions or functions within an organization, especially where those divisions carry out different and independent functions. For instance, in hospitals, the technical and managerial functions are structurally differentiated, which leads to distinct legitimating processes.

Conclusion: Institutional Pressures and Knowledge Management

In the never-ending quest for legitimacy in the eyes of stakeholders and other interested parties, organizations tend to become similar over a period of time. The probability of such a phenomenon is high in today's dynamic and profit-driven business environment. In the wake of globalization and increasing liberalization of trade and commerce, organizations are compelled to compete hard in the marketplace, where customers have many alternatives and loyalty can no longer be taken for granted. Stakeholders play a major role in driving organizational performance by constantly monitoring performance and profitability and by influencing major future decisions.

Under these circumstances, organizations are compelled to seek legitimacy, irrespective of whether it provides sufficient value in every instance. The downside is that formal structures of legitimacy may impair efficiency and competitiveness, thus adversely affecting organizational performance. Understanding institutional perspectives and pressures enables organizations to identify the factors that promote and hinder the use of knowledge for improving performance. With this approach, an organization can aim to achieve a level of knowledge management that will enable its managers to devise and implement innovative strategies for sustained performance and success.

References

Baum, J.A. and Oliver, C. "Towards an institutional ecology of organizational founding." Academy of Management Journal 39 (1996): 1378–1427.

Carroll, G. and Hannan, M. "Density dependence in the evolution of populations of newspaper organizations." American Sociological Review 54 (1989): 524–541.

DiMaggio, P.J. and Powell, W.W. "The iron cage revisited: institutional isomorphism and collective rationality in organizational fields." American Sociological Review 48 (1983): 147–160.

Kloot, L. "Organizational learning and management control systems: responding to environmental change." Management Accounting Research 8 (1997): 47–73.

Mouritsen, J., Larsen, H.T., and Bukh, P.N.D. "Intellectual capital and the capable firm: narrating, visualising and numbering for managing knowledge." Accounting, Organizations and Society 26, no. 7/8 (2001): 735–762.

Oliver, C. "Strategic responses to institutional processes." Academy of Management Review 16, no. 1 (1991): 145–179.

Raymond, W. Jurisprudence, 5th ed. London: Blackstone Press, 1989.