This page intentionally left blank Organizational Learning from Performance Feedback A Behavioral Perspective on Innovation and Change Revisiting Cyert and March’s classic 1963 Behavioral Theory of the Firm, Henrich Greve offers an intriguing analysis of how firms evolve in response to feedback about their own performance. Based on ideas from organizational theory, social psychology, and economics, he ex- plains how manager s set goals, evaluate perfor mance, and determine strategic changes. Drawing on a range of recent studies, including the author’s own analysis of the Japanese shipbuilding industry, he reports on how theory fits current evidence on organizational change of risk taking, research and development expenses, innovativeness, investment in assets, and market strategy. The findings suggest that high-performing organizations quickly reduce their rates of change, but low-performing organizations only slowly increase those rates. Analysis of performance feedback is an important new direction for research and this book pro- vides valuable insights in how organizational learning interacts with other influences on organizational behaviour such as competitive rivalry and institutional influences.  .  is Professor of Strategy at the Norwegian School of Management BI, Norway. Organizational Learning from Performance Feedback A Behavioral Perspective on Innovation and Change Henrich R. Greve    Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge  , United Kingdom First published in print format isbn-13 978-0-521-81831-5 hardback isbn-13 978-0-521-53491-8 p a p erback isbn-13 978-0-511-06982-6 eBook (EBL) © Henrich R. Greve 2003 2003 Information on this title: www.cambrid g e.or g /9780521818315 This book is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. isbn-10 0-511-06982-0 eBook (EBL) isbn-10 0-521-81831-1 hardback isbn-10 0-521-53491-7 p a p erback Cambridge University Press has no responsibility for the persistence or accuracy of s for external or third-party internet websites referred to in this book, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Published in the United States of America by Cambridge University Press, New York www.cambridge.org - - - - - -       Contents Listoffigurespagevii Listoftablesviii Acknowledgmentsix 1Introduction1 2Foundations10 2.1Behavioraltheoryofthefirm12 2.2Socialpsychology20 2.3 Economics3 6 3 Model3 9 3.1Howaspirationsaremade40 3.2Howaspirationsaffectbehavior53 3.3Aspirationlevelsandadaptation65 3.4Howgoalvariablesarechosen70 4Applications76 4.1Risktaking77 4.2Researchanddevelopmentexpenditures87 4.3 Productinnovations94 4.4Facilityinvestment103 4.5Strategicchange112 4.6Summaryofevidence121 5Advancedtopics123 5.1Basicmethods123 5.2Estimationofaspirationlevels126 5.3 Generalconcernsinstudydesign13 2 5.4Radiobroadcasting136 5.5Shipbuilding140 6Conclusion147 6.1Practicalimplications148 6.2Relatedresearch165 6.3 Futureresearch180 References187 Index213 v Figures 2.1 Organizational decision process page 15 3.1 Performance-based adjustment of search and decision making 60 3.2 Possible reactions to performance feedback 61 3.3 Determinants of response to performance feedback 64 3.4 Risk as a function of cumulative resources 68 4.1 Determinants of innovations 102 4.2 Determinants of asset growth 109 4.3 Determinants of machinery growth 110 4.4 Format change in response to performance feedback 119 4.5 Innovative, satellite, and production change 120 6.1 Strategic change with homogeneous capabilities 162 6.2 Strategic change with heterogeneous capabilities 164 vii Tables 4.1 Linear regression models of research and development intensity page 92 4.2 Selected innovations in 1972, 1982, and 1992 98 4.3 Logit models of whether innovations were made 100 4.4 Poisson models of the number of inno vations 101 4.5 Models of shipyard asset growth in response to performance feedback 107 4.6 Models of machinery growth in response to performance feedback 108 4.7 Logit models of format change in response to performance feedback 118 viii [...]... point Organizations 4 Organizational Learning from Performance Feedback may change in response to low performance, but still not change enough to solve the problem Whether organizations make enough changes or not is a question of the functional form of the relation from performance to organizational change The critique that organizations make insufficient changes in response to low performance does not... are and how organizational decision making can be designed to take advantage of learning from feedback The dilemmas mentioned earlier in this chapter are again addressed there, but now with the added knowledge from empirical research on performance feedback Section 6.2 discusses the links between the theory of performance feedback and other theories of strategy and organizational change Performance. .. these two uses of performance feedback It should be clear that performance feedback theory speaks to important issues in the management of organizations Before drawing more detailed implications, however, we need to get into the core of the argument The book is organized as follows In chapter 2, the foundations 8 Organizational Learning from Performance Feedback of the theory of performance feedback... grant to me from the Stanford Center of Organizational Research and a grant to James G March from the Spencer Foundation The data collection on shipbuilding was supported by a grant from Japan’s Ministry of Education (administered by the Japan Research Foundation) 1 Introduction This book is about how organizations react to performance feedback It presents a theory of organizations learning from their... theoretical propositions and empirical support The research traditions described in this chapter underpin the theory of organizational learning from performance feedback, but are not a substitute for it Much of the theory and evidence they have amassed is on individual learning from performance feedback Such findings increase our confidence in theory positing similar effects at the organization level Individuals... advanced topics of interest to researchers on performance feedback in organizations Section 5.1 reviews the basic methods for estimating performance feedback effects directly from data on aspiration levels or indirectly from data on organizational changes in Introduction 9 behavior Section 5.2 discusses how to estimate social aspiration levels based on the performance of other organizations and historical... information in three Harvard Business School cases (Badaracco 1988; Green 1993; Keller 1994) 1 2 Organizational Learning from Performance Feedback Japanese-style supply network complete with equity positions in key suppliers and a supplier association, departing from its usual practice of obtaining supplies internally or from competitive bidding It made the new car brand Saturn, which was managed by a subsidiary... feedback theory predicts the timing and form of organizational change, which are important issues in other theories of organizational learning and cognition, as well as in institutional theory and population ecology These theories can be developed by incorporating the insights of performance feedback theory, and performance feedback theory can also learn from them Section 6.3 discusses gaps in our current... of this chapter is to show how the theory of organizational learning from performance feedback is built on a set of independent research traditions that have produced related findings These research traditions have developed along their own paths and have also examined issues that are not relevant to performance feedback theory, but parts can be selected from them that form a coherent body of theoretical... ideas of chapter 2 and develops a single model of organizational response to performance feedback that will be used to interpret the research in chapter 4 In addition, simulation models of how aspiration levels affect organizational change and performance are covered in section 3.3 This section introduces an important idea of this book: learning based on performance feedback and aspiration-level adjustment . the written permission of Cambridge University Press. isbn -10 0- 511 -06982-0 eBook (EBL) isbn -10 0-5 21- 818 31- 1 hardback isbn -10 0-5 21- 534 91- 7 p a p erback Cambridge University Press has no responsibility. United Kingdom First published in print format isbn -13 978-0-5 21- 818 31- 5 hardback isbn -13 978-0-5 21- 534 91- 8 p a p erback isbn -13 978-0- 511 -06982-6 eBook (EBL) © Henrich R. Greve 2003 2003 Information. Productinnovations94 4.4Facilityinvestment103 4.5Strategicchange 112 4.6Summaryofevidence1 21 5Advancedtopics123 5.1Basicmethods123 5.2Estimationofaspirationlevels126 5.3 Generalconcernsinstudydesign13 2 5.4Radiobroadcasting136 5.5Shipbuilding140 6Conclusion147 6.1Practicalimplications148 6.2Relatedresearch165 6.3 Futureresearch180 References187 Index 213 v Figures 2.1