MEMORANDUM
DATE:
July 26, 2013
TO:
Professor Rajiv Kozhikode
Teaching Assistant: Pooria Assadi
FROM:
Team 2- Christina Mai, Raymond Kailan, Afrakoma Amponsah and
Xueqing Zhang,
SUBJECT:
How are organizations evaluated?
Background
In “Staging Exchange Partner Choices: When Do Status And Reputation
Matter?” written by Michael Jensen and Aradhana Roy, the two authors are intrigued by
the idea that status and reputation are linear with one another when it comes to decision
making and ensuring quality of the organization. The authors protest that status and
reputation provide constraints to an organization in relation to potential options it can
choose from. Furthermore, Jensen and Roy propose that status acts as the outside layer
and reputation acts as the inner layer when it comes to decision making, where status
shapes the firm’s set of alternatives and reputation aids the firm by selecting among those
alternatives. In addition, status of an organization acts as a strong indicator of its overall
quality in comparison with its industry competitors. On the other hand, reputation
demonstrates the quality of individual services provided by the firm based on its past
historical performances, which presents a contrast between the two aspects of status and
reputation (Jensen and Roy, 2008). Reputation provides us with a scope into an
organization’s future performance by looking at its past activities. On the other hand,
status does not take past accomplishments into account.
Jensen and Roy suggest that accountability, which is the ability of an organization
to explain its actions and decisions to another status player, can give rise to status
anxiety. Status anxiety focuses on the concerns of an actor or an organization regarding
the loss of their status value when outsiders question the quality of their goods or services
(Jensen and Roy, 2008). Therefore, high status actors will choose to act with other high
status actors or firms when implementing a plan, good or services (Jensen and Roy,
2008). Consequently, firms perceive that by associating with high status actors, they are
projecting the credibility and accuracy of their affiliation as well as the products or
services that are produced from the relationship. For instance, when marketing geniuses
such as Apple introduce new products, like the MacBook Pro, they will often state the
specifications of the computer. Within those details, they will often provide consumers
with the name of the companies that help bring the product to life. For example, Intel, a
steady contributor to Apple’s computer products, has reaped tremendous benefits through
this relationship. The company is responsible for Apple’s MacBook’s Intel Core Duo
processors. Because Apple has been very successful since the millennium, Intel has also
gained from its relationship with Apple. Intel has basically associated itself with a high
status player such as Apple and the company now is perceived to be of high quality as
well. However, what if Intel were to associate itself with a low status player in the
computer industry? The company would suffer from social anxiety and would opt out of
doing so. It will feel that if the product were to fail in the market, then Intel will risk its
reputation and status as outsiders will question its sudden lack of quality. When we put
Jensen and Roy’s theory to test, it proves to be true in this case.
Key assumptions and Theoretical Arguments
In order to look at the relationship between status and reputation and how they
work in the decision making process, Jenson and Roy looked at the situation that
occurred after the collapse of Arthur Anderson. Firms that previously utilized their
auditing services were now being forced to find this service elsewhere. Therefore, they
wanted to examine whether these firms would search for other accounting firms who
occupied the same status bracket (now referred to as the Big 4 accounting firms) as
Arthur Anderson or did they search beyond this bracket. The authors found that firms that
were held more accountable to institutional stakeholders such a pension funds were more
likely to use the services of these high status auditors (The Big 4). They found firms that
were public and traded on either the NYSE or the NASDAQ were twice as likely to use
auditing services of the high status auditors. This conclusion can applied to public
organizations listed in other stock exchanges beyond the two being studied because all
public organizations have the desire to signal the credibility and accuracy of their
financial statements to their stakeholders and shareholders. Therefore, they would utilize
the services of these accounting firms because their high status infers that they occupy a
hierarchical position in their social structure which allows them to be perceived as a firm
providing higher overall quality of services in comparison to their competitors.
The authors also found that firms whose performance was considered stronger
than their competitors based on their return on investments, were more likely to use the
auditing services of the Big 4. The more successful a firm is, the more it wants to
preserve its accuracy and integrity towards shareholders because they have a lot more to
lose if in the case an inaccuracy in their financial statements were to be discovered by one
of their stakeholders. Therefore, by hiring auditors who have high status and a positive
reputation in their own industries, they are able to greatly reduce the potential of any
losses resulting for mistakes or inaccuracies. The authors conclude that although status
and reputation work hand in hand, overall status of a firm functions as a screening
mechanism, while specific reputations of each individual firm serves as a mechanism to
differentiate and select specific partners.
Real world organizational phenomenon
Through our analysis, we have found that although many organizations are indeed
evaluated initially based on their status followed by their reputation, there are instance
where the process does deviate from this procedure. The deviation is often introduced
through the cost-benefit analysis. In some cases, the deciding firm may be fully aware
that one of their alternatives has a better reputation or status compared to other, but the
cost benefit analysis inhibits them from selecting that firm because the costs may
outweigh the benefits. A typical example can be drawn from the international business
world especially in partnerships. In many cases, when an organization wants to form an
alliance or partnership, one of their main concerns is aligning their organization's
objectives and organizational culture with the partnering organization in order to avoid as
many unnecessary costs as possible that may arise from conflicts. They also must also
ensure that the partnering firm has complementary resources to their own in order to
operate in synergy. The complementary resources may arise in the form of technological,
human resource or marketing knowledge. These complimentary resources can be the
very assets that give rise to an organization's reputation, therefore, in the case of
international partnerships, the stage of selection based on reputation maybe more
prevalent than the status stratification stage. An example of such a relationship occurred
between Eli Lilly and Ranbaxy and their joint venture. Eli Lilly is considered one of the
top pharmaceutical companies in the word while Ranbaxy is not a contender for a top 100
position on this list. However, they were still able to produce a successful joint venture in
India. According to Jensen and Roy, Eli Lilly would be considered a high status firm in
the pharmaceutical industry therefore, they would only want to associate themselves with
other high status firms to avoid status anxiety. But Eli Lilly still entered a joint venture
with Ranbaxy because they recognized that Ranbaxy could provide them with the
complementary resources that they required to thrive in India. The two firms also shared
similar corporate cultures but respected the differences in organizational and national
culture that did arise. In this case, the joint venture was focused less on status and more
so on the complementary resources and their synergistic relationship.
In the venture capital industry, it also deviates from what Jenson and Roy have
suggested. The general partners are investing in new ventures with the money that limited
partners have provided, therefore, they are accountable to the institutional investors
(limited partners) such as pension funds and endowment funds. As Jenson and Roy have
suggested, the general partners would select the business with the highest status. But in
many cases such as Google and Amazon, the entrepreneurs who come up with the
business concept do not have an established reputation or status. Therefore, they are
selected based on the ability of their business to grow and prosper within their respective
industries, which eventually will help launch them into a situation where they can either
IPO or be acquired. Therefore, in the case of the venture capital industry, status and
reputation does not always narrow down the alternatives pool for the general partner
because it many case, they cannot provide constraints to the choices of potential business
venture.
Novel theoretical insight
From the examples given above, we can see that there are instances where
organizations use status and reputation as a method of selection at different layer of the
decision making process. However, these two criterion are not a fully exhausted listed of
mechanisms used in the decision making process. The cost benefit analysis as well as
organizational alignment play an important factor as well, which the authors have not
considered. A company may decide to evaluate alternatives based on status and
reputation, but they must consider other factors as well such as alignment of
organizational and corporate objectives as well as complementary resources in order to
have a synergistic relationship.
References:
Jensen, M., & Roy, A. (2008). Staging exchange partner choices: When do status and
reputation matter?. Academy of Management Journal, 51(3), 495-516.