Organizations have goals, and members of organizations try to meet those goals – especially if they are managers. This is obvious, but what has been less obvious is what level of performance on each goal they aspire to meet, and how they react to falling short of this level or exceeding it. Performance feedback theory is a body of research looking at this issue, starting with the classic book “A Behavioral Theory of the Firm” by Cyert and March and continuing with a long string of research articles, nearly all of them following “Organizational Learning from Performance Feedback” written by me.
The basics are well known by now. Firms – and people – learn how to aspire from their own past and from others like them. They do not try to improve when doing better than the aspiration level, but when doing worse they will sometimes try hard to improve, and at other times go rigid. When they have multiple goals, it is often possible to find out which goal is more important and is addressed before the others. The long string of repeated findings are typical of research that has captured an important piece of reality.
So why is there a new book now, “Organizational Learning from Performance and Aspirations,” by Pino Audia and myself? Because researchers are different from the firms we study. When things go well we wonder what else we can do, and how to improve. The answer, we think, is that there are quite a few things that are missing or can be fixed in this research. In the book we go into detail, but here are some of the leads to what we think can and should be done so that this research – which we think is still at its adolescent stage – can grow up.
First, take into account that individuals have goals too, and often these are simply to feel good about themselves. This is a major problem for self-improvement, and also for organizations that rely on managers to acknowledge that low performance is a problem that needs to be fixed. Managers who self-enhance will ignore warning signs. When does this happen, and what are the consequences?
Second, acknowledge that organizations and individuals do not just have one or possible two goals, but are often surrounded by multiple goals. They need to pick which one(s) to address, and it is not simply a matter of checking which goals are most consequential and show the lowest performance. In particular, hierarchies influence which goals matter most, and self-enhancement complicates things too.
Third, look to the organizational environment as a source of goals that the organization may not voluntarily adopt, but may be forced to adopt because powerful others want it to or, almost the opposite process, may be led into by managers who perform poorly on their main goals but discover environmental goals that they do well on and can use to impress their superiors.
Fourth, order our thinking about performance feedback to take into account all the levels of decision-making in organizations. Individual managers matter, organizational units matter, the organization as a whole is important, and the environment sets the stage.
In the book, we develop these threads of ideas further and try to make a wide set of proposals of research that can be pursued. We hope you find it useful and inspiring!
Audia, Pino G. and Henrich R. Greve. 2021. Organizational Learning from Performance and Aspirations: A Behavioral Perspective on Multiple Goals. Cambridge, UK: Cambridge University Press.
Management scholars have spent much time studying the diffusion of innovations, starting with work on new technologies and continuing to research on social practices such as institutional innovations and even strategic positions in markets. By now we know a lot about why some organizations are early adopters, and how other organizations are influenced by the number and status of early adopters, and by how close to them they are geographically or in social networks.
How about the diffusion of cleverness? By cleverness I mean small inventions that manipulate the rules in ways that are beneficial for the user, and may or may not be harmless to others. Clever innovations are very common in financial markets, where rules are everywhere, and clever interpretations of rules can be used as shortcuts. Because such clever interpretations often go against the original intent of the rule, they are usually controversial. A great example of cleverness is reverse mergers, which were studied by Ivana Naumovska, Ed Zajac,and Peggy Lee in a recent article in Academy of Management Journal.
A reverse merger (RM) is done as follows. A law firm registers a publicly listed company with stock, but the company does no business – it is just a shell. A private company that actually does business then goes public through a merger with the shell company, paying a small fee for the shell company and keeping the same ownership, unless the private owners also want to use the reverse merger to invite new ownership. This is a simple and inexpensive way to go public compared with an initial public offering. Clever, right? And as you might expect, US capital markets saw the diffusion of cleverness in the form of RMs during the mid-2000s, as Naumovska and coauthors found. They also found that this looked a lot like a regular diffusion process, where firms were more likely to use an RM the more prior RMs had happened.
So, is there anything special about the diffusion of cleverness? Yes, because clever innovations are shortcuts, and with shortcuts come controversy. Those who lose their advantage from the rules will be opposed, the press may become interested, and the regulators who made the rules will not be happy. And this happens more the more adoptions of cleverness have happened, so the cleverness is promoted by past adoptions but also undermined by past adoptions. Indeed, the SEC made rules to increase the reporting requirements of RM, though they did not otherwise make RMs harder. More importantly, the press turned against RMs and even stock market investors became skeptical and delivered lower returns to RM firms.
So, what does this teach us about the diffusion of cleverness? In some ways, it is similar to the diffusion of technological or business innovations, because innovations always come with uncertainty, and often the drawbacks of innovations are not discovered until many have adopted. When that happens, the process that follows is very similar to the RM diffusion and its later collapse. But there is an important difference that we need to keep in mind. Technological innovations are uncertain, so we know that some of them are mistakes but we do not know which ones.
Cleverness is different. Cleverness involves controversy nearly every time, so we can be confident that the diffusion of cleverness will see a collapse at some point. That is a good reason to be careful when evaluating a clever innovation, especially in financial markets where they are so frequent.
Naumovska, Ivana, Edward J. Zajac, and Peggy M. Lee. 2020. "Strength and Weakness in Numbers? Unpacking the Role of Prevalence in the Diffusion of Reverse Mergers." Academy of Management Journal forthcoming.
This blog is devoted to discussions of how events in the news illustrate organizational research and can be explained by organizational theory. It is only updated when I have time to spare.