MEMORANDUM

DATE: July 26, 2013

TO: Professor Rajiv Kozhikode

Teaching Assistant: PooriaAssadi

FROM: Team 2- Christina Mai, Raymond Kailan, AfrakomaAmponsah 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 oftheir 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 theirorganization'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 occurredbetween 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 butrespected 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 casessuch as Google and Amazon, the entrepreneurswho 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 oforganizational and corporate objectivesas 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.