Performance Impact of Management Practices:

Explaining (Rational) Behaviour during the 2008 Global Financial Crisis1

ABSTRACT

This article addresses how managing performance is itself a global crisis by examining how the

performance impact of management practices is a function of senior management’s orientation and

influence or contextual forces and conditions within and external to the organization. Two schools of

thought are considered in this debate – managerial or leadership theories, vis-à-vis situational or

contextual theories – arguing that management’s orientation and influence mediate between the

contextual forces and performance impact of management practices. The observed deficiencies in the

extant literature provide both theoretical and practical insights to advance knowledge about the

efficacy of management practices. The paper draws on UK governmental and company examples,

particularly during the 2008 global financial crisis, as empirical evidence to explicate and propose a

viewpoint. It concludes to suggest that the decisions of leaders were inevitable, in that they were made

(boundedly) rationally, but not necessarily optimally.

Keywords: management practices/change initiatives; performance impact; failure; contextual forces;

global financial crisis; performance management.

1 Reference: ‘Proceedings of the 25th Annual Conference of the British Academy of Management (BAM), 13-15 September 2011, Aston University, Birmingham, UK.

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Introduction

Numerous examples from a range of organizations, and from such persuasive institutions as the

Institute of Personnel Management (IPM, 1993), ODPM (2001, 2003), Audit Commission (2001),

ESRC (Porter and Ketels, 2003; Chau and Witcher, 2005) and CIPD (2006), assail us of moves to

introduce modern operations and human resource management practices of some sort to improve

quality and productivity in particular and organizational viability in general (see Ghobadian and

Gallear, 1996; Worrall and Cooper, 1998; Mayer et al. 2003; Shaw and Whittington, 2003).

Restructuring, delayering, downsizing, the introduction of new products and services, outsourcing,

quality circles, total quality management, six-sigma, lean thinking, lean production, business process

re-engineering, supply chain partnering, employee involvement, flexible working and various culture

change programmes are examples of several oft-cited, widely adopted, and frequently applied

operations and human resource management practices (Burnes, 2004; Coulson-Thomas and Coe,

1991; Ezzamel et al., 1994).

Despite being mainstream activities and primary enablers for many organizations and the

existence of anecdotal evidence of their bottom-line impact, a majority of these practices have fallen

from their height of popularity (Glover and Noon, 2005), failed to live up to their promises, or have

not reached their potential. It would therefore be wrong to portray these practices as effective as they

were initially expected (Burnes, 2004). The literature offers ample examples of management practices

that have gone wrong, some disastrously (Burnes, 2004; Kotter, 1996; Stickland, 1998), suggesting

lists of long, confusing and contradictory reasons and recipes. Although understanding the major

impediments to the performance impact of these practices requires an interdisciplinary investigation,

each of these approaches views the low performance impact of management practices from the

disciplinary angle of their originators, with the consequence of an incomplete and biased picture. So

it is necessary to distinguish between core, rather than peripheral, determinants of the failures of

management practices to have the intended performance impact on the organization.

The 2008 global financial crisis can be viewed from the perspective of being caused by

failures of poor leadership and control of the various performance management practices in use, and

this offers an opportune situation with which to explore how our synthesis of the literature on the

impact of management practices is an explanation of this, and if the behaviours of organizations and

their leaders during this time can be considered ‘rational’. While we concur with extant views that a

lack of management support of promising practices could adversely result in failing of their promises,

our proposition is that failure of management practices to achieve their intended performance

objectives can and should be investigated beyond a simple assertion of a lack of support and

commitment due to their individual, demographic and psychological characteristics (see Hambrick

and Mason, 1984; Janis, 1972; Staw et al., 1981; Miller, 1990; Brown and Starkey, 2000, Bennis and

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O’Toole, 2000) to encompass such mediating factors connected to the business context and

environment (Dess and Beard, 1984; Anderson and Tushman, 2001) and organizational ecology

(Hannan and Freeman, 1977; Agarwal et al., 2002; Currie, 1999). In doing so, we base our argument

on the notion of contextual factors and forces that hamper the unconditional and rational support of

management to promising practices. Of contextual forces, some relate to the (internal) organizational

issues, and others reflect on the organizational ecology which examines the environment in which

organizations compete. The present article heeds the suggestions offered by Porter and Ketels (2003)

that various organizational problems leave managers little option but to adapt themselves to the

economic, social, political and institutional context in which they work.

In this article, ‘management practices’, ‘management initiatives’, ‘change initiatives’, ‘change

programmes’ are the interchangeable terms which refer to those practices that are planned,

organization-wide, and transformational, thereby pursuing some long-term strategic objectives (see

Van de Ven and Poole, 2005). We therefore do not explore and examine the nature and extent of a

particular ‘management practice’ per se. Rather, we take ‘management practices’ as the frame around

which the cause-and-effect relationships between contextual forces and conditions, management’s

orientation and support, and the bottom-line impact and efficacy of a practice or initiative are

developed and analysed. The next section of this paper explains the management practices of interest,

then the section following presents the contextual forces, management orientation and explanation of

impact of such practices. The paper then goes on to bring in examples as empirical evidence from the

2008 global financial crisis, and the penultimate section discusses this in the light of how such

decisions during that time were rational behaviours in accordance with the literature, before

concluding.

Management practices: nature, scope, and impact

The view that the global business world has become infected by a virus that induces a permanent need

for organizational change (Sorge and Witteloostuijn, 2004) suggests a proliferation of interest in the

uptake of various management practices and initiatives, particularly the importance paid to various

operations management (OM) and human resource management (HRM) management practices. Most

notable examples of OM practices which focus on systems management are information and

communication technology, quality circles, total quality management, just-in-time, six-sigma, lean

thinking, lean production, business process re-engineering, and outsourcing – to name but a few. In

the same vein, HRM practices place a heavy focus on people management and employee-management

relationships and involve initiatives such as training, development, teamwork, empowerment,

performance appraisal and remuneration system, payment and reward system, employee involvement,

flexible working, amongst others (Siebers et al., 2008).

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At the micro level, top management of both for-profit and non-for-profit organizations have

pursued an array of management practices as effective means of enhancing productivity and quality,

maximising organizational performance, and simultaneously making the optimum use of the

organization’s resources. At a more macro level, the adoption of these management practices is

largely attributed to and being part of a far-reaching response to fierce national, regional and

international competition. In addition, the adoption and operationalisation of these practices and being

deeply embedded in the daily work processes and sub-processes of organizations are seen also “to

impact on organizational structures and cultures including, inter alia, fewer hierarchical levels, fewer

job classifications, the use of work teams, a step-change in commitment to training, and an entirely

new approach to quality” (Storey, 1992, p. 1). Others take a more pessimistic view and perceive the

impact of management practices (e.g. TQM) to reinforce existing power relations, hierarchical

structures, organizational bureaucracy and inequality and that the existing operational and human

resources practices present management with dilemmas and contradictions (McCabe, 1999). Of the

most influential impact of management practices (management innovations/initiatives) is the evident

degree of control that they offer to management. Taking the example of continuous improvement

practices, Boje and Winsor (1993) argue that tasked based involvement at the shopfloor level is

largely a method of control not least because it involves detailed specifications coming down from

management which employees must implement or perfect (McCabe, 1999).

Given the diverse nature of these management practices and differences in their scope and

focus, Wall and Wood (2005) advocate a contingency approach to their applications and performance

outcomes. They argue that while it is possible to predict a set of positive and desirable outcomes from

these practices, it is rather ill-advised to suggest a ‘one size fits all’ set of productivity enhancing

managerial practices. Edwards et al. (2004) led the way with their contingency hypothesis correlations

between sets of managerial practices and an associated set of desirable outcomes by suggesting that

the performance impact of management practices is more context-dependent and firm-specific. As

they point out, the overall performance impact of both OM and HRM management practices are

largely affected and influenced by the prevailing institutional environment (see Siebers et al., 2008).

A set of reports published over the past several years suggests that a set of factors, seen as

(dis)favourable for enhancing the performance impact of management practices, revolves around the

stance taken by the top management (Storey, 1992). The argument, in simplistic terms, is that “senior

management commitment to the idea is vital … [and] with it, the scepticism at lower levels can be

eventually surmounted; without it, even the most well-intentioned initiatives will soon wither”

(Storey, 1992, p. 43). One might suggest that the (dis)favourable performance impact of management

practices is largely a function of the existence of top management support and commitment. Thus, the

management support and orientation towards the adopted practices are integral to the sheer welter of

management practices and their intended impact on organizational performance. However, the

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current credit crunch of the global financial crisis usefully reminds us that even in the presence of full,

unconditional support of the management team, the adopted management practices are still

susceptible to undesirable outcomes and failure. An outstanding example among the panel of leading

international firms which have consciously adopted and implemented just-in-time production, more

famously known as the Toyota Production System (TPS) as its underlying management philosophy

and practice, is that of Toyota which now faces a fate similar to its rivals Honda and Nissan, both of

which have been forced to cut their full-year forecasts (Guardian Newspaper, 2008). In his account of

the devastating impact of the financial crisis as well as local and global contextual forces on Toyota’s

operations, the executive vice president of Toyota, Mitsuo Kinoshita, describes the current market

conditions and business environment as “unprecedented”, urging:

“We have encountered oil shocks and a surging Yen a number of times before, but have

overcome those problems and achieved growth … The financial crisis is negatively impacting

the real economy worldwide and automotive markets, especially in developed countries, are

contracting rapidly … This is an unprecedented situation. It’s impossible to tell when things

will start to improve.”

Nor is Mitsuo Kinoshita alone in confessing to low performance impact of its internationally-

renowned TPS operations management practice largely due to the massive and potentially

unprecedented environmental and contextual conditions. In response to the question of “Are we

bankrupt?”, the Wall Street Journal quoted Chrysler senior manager, Robert Nardelli, replied,

“Technically, no. Operationally, yes. The only thing that keeps us from going into bankruptcy is the

$10 billion investors entrusted us with.”

[Insert figure 1 about here]

In sum, studies on performance impact of management practices suggest a number of

alternative views about their impediments and enablers. On the one hand, as figure 1a shows, there

would appear to be ample prima facie evidence of considerable, profound, and adversarial impact of

contextual forces and conditions on the intended performance objectives of the management

programmes. As figure 1b also indicates, a second and alternative stream of related research strongly

views management’s capability, orientation, willingness, commitment and support as a major

determinant of the efficacy of management practices in achieving their intended performance

objectives. In line with these perspectives, we argue that a unified, integrated approach, linking these

two streams together, helps to develop a more robust framework for and offers a more holistic view

on the effectiveness and efficiency of various operations and HRM management practices. The

dynamics of contextual forces, management orientation and performance impact of management

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practices constitute the kernel of this article, around which the actions of leaders during the 2008

global financial crisis are in discussion.

Contextual forces, management orientation and impact of practices

Many advocates of management practices view the underlying assumptions of their proposed

initiatives as universally applicable to organizations of any kind and their associated activities with

virtually no attention to the nature of the uncertainty faced by the organization. The central premise of

this universal view is that the principles enunciated in management practices can be utilized as a

means of enhancing organizational productivity regardless of the type of the organization, the nature

of their products or service offerings, or the context in which they operate. Based on the initial work

of Hayes and Wheelwright (1984), the universal approach to adopting and implementing management

practices has been pursued by many businesses and widely disseminated by such works as

Schonberger’s (1986). This approach assists organizations to compete through the adoption of best (or

world-class) practices in a wide range of areas. In the search for such a tendency towards universalism

in the conceptualisation and diffusion of operations management practices (e.g. TQM initiatives),

Voss (1995) elucidates three main stimuli to have brought best practices to greater prominence: (i) the

outstanding performance of the Japanese manufacturing industry has led to a continuous focus in the

West on identifying, and adopting Japanese manufacturing practices; (ii) the growth of business

process-based approaches and benchmarking has led companies to identify their core practices and

processes and to seek out best in class practice; and (iii) the emergence of operations improvement

awards such as the Malcolm Baldrige National Quality Award (MBNQA), European Quality Award

(EQA), and the Deming Prize.

Despite the popularity of universal orientation towards management practices, it has received

extensive criticisms not least because of its failure to take into account the peculiarities of

organizations and their business environment ensued by failure of management practices to deliver

their intended performance objectives. In respect of the most celebrated and widely adopted

operations improvement management practices, namely TQM, Sitkin et al. (1994), for example, view

the notion of TQM as universally applicable to organizations, to be in danger of being ‘oversold’ (see

also Wilkinson et al., 1998).

Hence, the fallacy of universal best practices, more recent rigorous academic studies have

raised doubts as to the universal validity of the whole set of management practices (see Harrington,

1997). Taking the example of operations improvement initiatives, Sousa and Voss (2001) raise the

possibility of quality management practices being context dependent. Four studies stand out as the

main rigorous and explicit efforts in this area: Benson et al. (1991), Sitkin et al. (1994), Reed et al.

(1996), and Sousa and Voss (2001). Sousa and Voss’ (2001) study, for instance, strongly suggests that

process quality management practices are contingent on a plant’s manufacturing strategy, and

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identifies mechanisms between individual process practices, forming an internally coherent quality

management practice configuration matching a plant’s manufacturing strategy configuration (see also

Maani, 1989; Powell, 1995; Dow et al., 1999; Ahire, 1996). Clearly, all these studies have directly or

tangentially addressed the influence of context on quality management practice thus lending support

for a contingency approach to TQM. As a consequence, this poses the question of whether the

disappointment and dissatisfaction with TQM performance impact are due to conceptual flaws in the

TQM approach or implementation deficiencies. Many proponents (e.g. Atkinson, 1990; Hackman and

Wageman, 1995; Wilkinson et al., 1998; Reavill, 1999; Samson and Terziovski, 1999; Silvestro,

2001) recognise the virtues of the broad quality management model and attribute failures to

implementation problems. Hence, the overall patterns that emerge from the extant literature suggest

that, to quote Sitkin et al. (1994), “TQM is not a panacea that can be unthinkingly used, but that it

must be implemented with a clear sense of the degree to which the context is characterised by

uncertainty, nonroutineness, and or instability” (p. 538). Such observations are also echoed by

Wilkinson et al.’s (1998) argument that: “the success or failure of quality management initiatives may

have more to do with organization-specific factors, particularly the extent to which initiatives are

implemented in a strategic manner with continuing management commitment, than with sectoral

factors” (p. 183).

Accordingly, the universal orientation of operations management practice such as TQM has

been pointed out as contrasting with the contingent approach of management theory in general (Dean

and Bowen, 1994; Sitkin et al., 1994). The underlying assumption of contingency perspective to

adopting and implementing management practices hinges on the idea that management practices and

their associated assumptions should be matched appropriately to contextual and situational

requirements. Failing to do so will result in the loss of the potential contributions of management

practices. Within the contingency approach, enhancing performance impact of management practices

requires both structures and process characteristics that fit the degree of uncertainty in their

environment (Duncan, 1972; Miller, 1992; Sila, 2007). Contingency or contextual variables form the

context in which an organization functions and are divided into internal and external forces.

Depending on the academic discipline, organizational scholars have utilised a range of different

constructs as a means to operationalise internal and external contextual factors. In his study of the

effects of contextual factors on operations improvement practices such as TQM and overall

organizational performance, Sila (2007), for example, used organizational size and scope of

operations (i.e. domestic operating versus international operating firms) as contingency or contextual

factors. Within the domain of health care quality management, previous studies used centralisation of

decision making, formalisation of regulations, and organizational size as their contingency or

contextual factors (Wagner et al., 2001; Homburg et al., 1999). Overall, internal forces include the

degree of specialisation or work specificity required by existing technology, level of organizational

slack, experiences with previous changes, the culture of the organization, individual interests and

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characteristics of the managers, the power position or status characteristics of managers, structural

source of power, and compatibility of power and influence structures. External forces represent

situational characteristics usually exogenous to the focal organization or manager. These forces seem

to be rather uncontrollable or even difficult to be manipulated. Governmental regulations,

technological advances, forces that shape marketplace competition are some examples of external

forces (Armenakis and Bedeian, 1999).

Hence, both institutional factors and contingency forces may be regarded as contextual forces

that play a key role in the level of performance impact of management practices. Following the above

discussion, we propose that performance impact of management practices is a function of (a)

conformance to norms of acceptable practice (referred to as institutional factors – see DiMaggio and

Powell, 1983; Carruthers and Espeland, 1995; Sila, 2007), and (b) the degree of fit between

organizational structure and environmental uncertainty (referred to as contingency factors – see

Melan, 1998; Ellis et al., 2002; Reed et al., 1996). Conversely, performance impact of management

practices will be minimised where there is a perceived misfit for whatsoever reasons (see Donaldson,

2001).

There has been a long-held belief that the major factor that distinguishes successful

management practices and initiatives from the less successful or failed ones is the presence of

dynamic, effective and supportive senior management (see Howe, 1977; Sethi, 1978; Haganaees and

Hales, 1983; Tregoe et al., 1990; Riehl, 1988; Rodgers et al., 1993; Jones et al., 2000; Bennis and

O’Tool, 2000; Drucker, 1985; Burnes, 2004). For example, previous research found that the lack of

top management support poisoned efforts of organizations to manage strategically (Tregoe et al.,

1990), undermined the effectiveness of quality management programmes (Shetty, 1986), and plagued

the success of management-by-objectives (Sethi, 1978). In contrast, full-fledged support and

commitment from the top are found to be critical to the success of computer-aided decision support

systems (Neumann and Hadass, 1980), just-in-time materials planning programmes (Duncan, 1989),

human resource management initiatives (Bohlander and Kinicki, 1988), and for a whole host of other

breakthrough programmes (Witcher et al., 2008). Clearly, the findings highlight the need for

managers (top, middle and first level management) not just to acquire appropriate skills and

competences but also to adopt appropriate levels of orientation and commitment to managing

practices and resolving the constraints under which the adopted practices are being managed and

implemented.

In the organizational behaviour literature, commitment has been conceptualised in two

distinct ways (see Legge, 1995): one that refers to an individual’s psychological bond to an

organization and as affective attachment and identification (Coopey and Hartley, 1991), while another

regards it as the binding of the individual to behavioural acts (Becker, 1960; Kiesler, 1971; Salancik,

1977; Festinger, 1957). Whatever the approach to commitment and its related implications,

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commitment has become a variable of interest because of the belief that an increase in commitment to

practices leads, in some way, to an increase in organizational effectiveness. More specifically, Schein

(1978, 1992) views commitment as a dimension of organizational effectiveness, and Steers (1977)

sees it as a means of enhancing organizational effectiveness by improving people performance and

reducing turnover. To achieve the desired performance impact of management practices, Salancik

(1977) argues that commitment must be manifested not only in attitudes but also in actions and

behaviours. A common denominator of these studies, as well as the extant literature on organizational

commitment, is their emphasis on the paramount importance of employee commitment to the

organization – an indication that unconditional management support and commitment to practices are

taken for granted. Hence, there is still a need to extend these studies in understanding management

(top, middle and first line management) commitment to organizational practices in particular and to

organization generally.

Although there is general consensus on the latter, scepticism about there being little or a lack

of management commitment to organizational practices has been further reinforced by the high failure

rate of management practices (e.g. Sethi, 1978; Riehl, 1988; Rodgers et al., 1993; Jones et al., 2000;

Bennis and O’Tool, 2000; Burnes, 2004). Early analysis from more detailed case-study based research

highlighted exemplary behaviours of supportive and committed management as: pursuing the process

of adopting and implementing practices from planning to their successful execution, providing timely

and continuous feedback (Locke and Latham, 1990) to other managerial levels; establishing

continuous communications from the top down and from the bottom up, personal interest in lower

level accomplishments and problems (Rodgers et al., 1993); possessing a developmental orientation

to management programmes (i.e. focus on long-term growth of the firm, focus on the future) (Choi

and Behling, 1997); and visible and active participation and involvement in managing and

implementing practices (Leibowitz et al. 1985). In the absence of such behaviours, it is now widely

recognised that many organizations are not capable of adapting effectively to changes in their

environments with the consequence of the failure of their change management practices (see Choi and

Behling, 1997). However, the explanation for the lack of such behaviours, and therefore of

management commitment to practices, has so far remained unclear. Due to the existence of such

barriers, this pessimistic conclusion is difficult to avoid. We argue that current trends in managing

organizations in many large diversified sectors renders the ideals of the (change) management

practices and initiatives unobtainable (e.g. ESRC, 2004; Burnes, 2004; Shaw and Whittington, 2003;

Brindle, 1999; Lessem, 1998; Purcell, 1995; Rodgers and Hunter, 1991; Porter and Ketels, 2003;

Mayer et al., 2003; Mellahi and Wilkinson, 2004). Such a gloomy picture of management

commitment and support and strong evidence of descending into a culture of mis-(and ineffective)

management of organizational practices also pose the question, what drives or otherwise these

patterns of behaviour?

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The debates on management failure to manage the adopted practices effectively or achieve the

mission are stimulated by the contribution of Mellahi and Wilkinson (2004) who question the efficacy

of the existing but dominant single, unilateral and one-sided perspectives to organizational failure.

Based upon the two dominant deterministic and voluntaristic perspectives, they present a four-fold

classification of organizational theories on the causes of organizational failure. Our concern in this

paper in not to assess the efficacy of this integrative framework of determinants of organizational

failure (simply because we agree that an either or approach – as opposed to both perspectives – to

examining the failure phenomenon is futile and detrimental to a firm’s long-term growth and

competitiveness) nor to explore the phenomenon of organizational failure. Rather, we revisit the

dominant role of managers as the key decision makers and major determinants of organizational

success/failure (voluntaristic perspective) and suggest a shift from purely being proactive to being

more reactive to organizational issues and environmental conditions. Our suggestion here has a close

affinity with, and can be explained by, and interpreted through, Simon’s (1946) rationality and

bounded rationality theories as well as the work of contingency theorists, such as complex man vs.

complex organization (Schein, 1965; Kast and Rosenzweig, 1973; Lawrence and Lorsch, 1969;

Lorsch, 1973; Hall, 1972). In essence, we believe that existing conceptualisations of each of the two

dominant deterministic and voluntaristic perspectives and further suggestions to merge the two

perspectives have several limitations. First, much existing research on organizational failure views

managerial perceptions and orientations as something which either make or break a firm (Bennis and

O'Toole, 2000). So such an argument seems to undermine the underlying assumptions of the

deterministic paradigm. Second, the paramount importance of management to the success or failure of

the organization is refuted by Mellahi and Wilkinson’s finding that management actions do not yield

an organizational failure per se. So this view appears to be in contradiction with the central premise of

the voluntaristic perspective where managers’ mental models of the organizational issues and external

environment are perceived to act as the major determinant of organizational success and failure. In the

case of organizational failure, this contribution, however, does not tell us if management’s actions are

perceived to be legitimate, rationale and fair by stakeholders. Third, a plethora of past research on

management perceptions, orientations, and responses towards emerging forces and conditions tend to

view management’s actions and responses as static and confined to a discrete time frame (see Isabella,

1990). This conventional approach, however, seems to disregard the dynamics of the organizational

issues, the business environment, and the wider context in which a firm competes. Finally and fourth

and as is theorised in this article, there is a shortage of studies of organizational failure with a focus on

managerial perceptions and orientations and performance impact of management practices. Using

insights from Simon’s (1957) bounded rationality theory, we now use factual examples relating to the

2008 global financial crisis to examine the interface between organizational and environmental issues,

to reflect how (perfectly) rational decisions by managers are often not feasible in practice not least

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because of the finite computational resources available for making them and existing and emerging

environmental and organizational factors influencing them.

Empirical Evidence: Dynamics of Management Practices

While impediments to management practices and initiatives come in many forms, most authorities on

modern management practices as enablers of organizational change attribute most of the blame to

senior management (e.g. Isabella, 1990; Jones et al., 2000; Bennis and O’Tool, 2000; Abrahamson,

2000; Beer, 2003; Mayer et al. 2003; Shaw and Whittington, 2003; Beer and Nohria, 2000). However,

to attribute most of the blame for failure of the adopted practices to management, irrespective of the

potential impact of contextual inconsistencies on management’s orientations, seems to be rather

unconvincing as it poses a serious challenge to the advocates of deterministic perspectives. Indeed,

the impact of the 2008 global financial crisis was seen to be beyond management oversight and

control. In the words of a Hedge fund boss:

“… blaming us for credit crunch is like blaming passengers in a bus crash.” (Daily Mail,

2009).

Of course the intention here is not to defend the decisions and actions taken by every manager simply

because there is sufficient evidence of consciously taken decision and actions on the part of many

managers which resulted in seriously underestimating and undermining the peculiarities of business

environments ensued by their wider severe ramifications for the society and their stakeholders.

In view of all societal, economical, and political ramifications of the 2007-2010 crisis period,

a flurry of articles attempted to provide reasons for why, despite the heavy investment of all economic

sectors in modern management practices to improve their viability, the worst financial crisis since the

great depression of the 1930s has happened. A range of internal and external factors such as bankers’

and bank supervisors’ perception of risk, decline in bank capital, bank supervision over-reaction,

regulatory burden, and cost of increased legal exposure have widely been cited as the key forces

behind the credit crunch (Caprio et al., 2010). Clearly, these factors – referred to as ‘contextual

forces’ in the literature as pertinent to organizational change management – are multifaceted. While

some are temporary, secondary and peripheral in nature in terms of relative importance and will

correct themselves over time, others are structural, primary, and core, and will not be eliminated with

economic recovery.

A robust and well-established argument into the global failure of business is that, in the words

of the Britain’s former Chancellor, Alistair Darling, “the [management of] banks must take the blame

for irresponsibility in the credit markets”. In a similar vein, US President Barack Obama has

announced pay curbs for bank managers; in France, Nicolas Sarkozy has restricted traders’ rewards;

and more recently, the former UK Prime Minister Gordon Brown believed that ‘the International

11

Monetary Fund would endorse a global bank levy by April’ to put the blame on the management of

banks and financial institutions and partially heal and re-make the banking system. While pinning the

blame for the crisis on ineffective bank managers and incompetent regulators may have seemed

plausible enough during the turmoil of the past few years, we argue that unless the nature and

importance of both internal and external contextual forces which attract or distract an individual

manager from either supporting or abandoning a change practice and its wider organizational

objectives are identified, managers will be unfairly and unnecessarily blamed for the collapse of some

of the world’s most well known names such as Northern Rock, Royal Bank of Scotland, Woolworths,

Lehman Brothers, and the Big Three Detroit's auto-giants (i.e. General Motors, Ford, and Chrysler).

We argue that, depending on the nature and specific peculiarities of each contextual force and

condition, managers adopt and apply different assumptions and orientations at different times in the

process of managing practices. Contingent upon these factors, managers could not act completely

rationally in their orientations and follow-up decisions and actions. Instead, these factors provide a

ground for bounded and limited manager thought processes and their bounded computational ability,

thereby pressing down upon the manager either to support a change practice and run the organization

effectively or abandon it and fail to achieve its wider organizational objectives.

Previous contextual research indicates that they have primarily focused on the collective

responses taken by organizations in reacting to both internal and external environmental changes.

Meyer et al.’s (1993) study of industry- and organizational-level changes taking place in hospitals

from 1960 to 1980 revealed how changes in the contextual elements of differing competitive

environments were necessary for successful organizational adaptation across time. Kelly and

Amburgey’s (1991) study offers insights to complement those of Meyer et al. by concluding that,

inter alia, environmental change does not necessarily increase the probability of strategic re-

orientation (see also Amburgey et al., 1993). Several other authors investigated the nature and impact

of different contextual forces and concluded that in response to dramatic environmental changes, a

shift in organizational structures and activities would increase short-term financial and long-term

survival chances (Haveman, 1992), that organizations would resist pressures for change that are

inconsistent with their identity and image (Fox-Wolfgramm et al., 1998), and that a successful change

effort might depend more on the congruency or fit between content, contextual, and process

considerations than the nature of an intended change (Damanpour, 1991). Others further adopted

single industry and unique methodologies using mathematical techniques for modelling organizational

responses to environmental pressures (see Gresov et al., 1993; Sastry, 1997). Walker et al. (2007)

investigated the integrative influence of content, context, process, and individual differences on

organizational change efforts.

While these studies are notable for contributing to both theory and practice of organizational

change and therefore enhancing our understanding of the impact of internal/external forces on an

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organization’s effectiveness in responding to environmental changes, they have mainly been

concerned with the nature of change programmes or collected data from employees – as opposed to

how the contextual forces independently or indirectly through different managerial orientations

impacted on the intended performance objectives of a change programme. In addition, most

contextual studies have only investigated one of many contextual forces within a single case, thereby

failing to strengthen the results by replicating the pattern-matching, thus increasing confidence in the

robustness of the theory. Therefore, in creating a comprehensive understanding of the dynamics of

contextual forces and organizational responses, these studies have often neglected different

assumptions and orientations of managers, the extent of their rationality, and their resultants impact

on the change practice performance. In consequence, the precise nature of these different and

changing managerial orientations and support under different conditions and their impact on a change

programme performance objectives, however, have yet to be fully explicated.

Traditionally, researchers have viewed senior managers’ responses to emerging forces and

conditions to be static or limited to a discrete time frame (Isabella, 1990). However, as Isabella

succinctly put it, “as a change [management practice] unfolds, it demands continual adjustment and

presents unending change for all concerned” (1990, p. 7). Although, researchers frequently observe

that the idiosyncratic nature of senior managers’ orientations towards the adopted practices should

make them a special area of interest in organizational change management research, the precise nature

of their different orientations and support for different forces and conditions under which practices

unfold have generally been poorly researched. Such lack of research has contributed to limited

knowledge of the dynamics of senior management’s reactions towards different conditions and

circumstances under which a practice or programme unfolds, thereby thwarting understanding of the

complex set of contextual factors and conditions that contribute to senior management’s support or

otherwise of practices or programmes. Although researchers have investigated a range of contextual

forces and conditions in which an organization functions and therefore provided insights into the

impact of internal and external factors on the efficacy of a (change) practice or programme, there is a

notable dearth of research into the conditions under which managers decide to support or abandon a

practice or initiative in their organization (see Van de Ven and Poole, 2005, for a review). This

shortage of studies has meant little agreement on the relative impact of various contextual forces and

conditions on management’s orientation towards adopted initiatives. Thus, what is considered to be a

major force and determinant of management’s orientations towards a programme in one study may

not even be considered in another. Such limitation has restricted understanding of the wide range of

forces and conditions that may influence senior managers either to support or abandon a practice or

programme (see Isabella, 1990; Tsoukas and Chia, 2002; Van de Ven and Poole, 2005). Given the

aforementioned deficiencies in past research, there is a need to identify and elucidate the key

13

contextual forces and conditions that result in either management support of or abandoning a practice

or initiative.

Discussion: the Rationality of Behaviour

In addition to the profound impact of either contextual forces or management support for and

commitment to performance impact of practices (see Figure 1), and in an attempt to develop a more

holistic view of the factors that influence the performance impact of management practices, we argue

that such research should abandon an either/or approach and instead embed a dual approach to

studying the performance impact of management practices. As Figure 2 shows, we propose that

contextual forces and conditions play a part in shaping the nature and extent of management support

and orientation ensued by influencing the performance objectives of management practices. In simple

terms, the impact of contextual forces on management practices is viewed as something that is filtered

through the attitudes and orientations that a manager has. Although each of the elements of the

proposed unified model has its own theoretical underpinning, the integrated model in its totality

provides the basis for utilising a different analytical approach from that of individual theories of

deterministic and voluntaristic perspectives. On the one hand, the existing dominant theoretical

approach to studying the failure and factors of management practices influencing their efficacy (see

Figure 1) necessitates an imposed unilateral approach for organizational scholars to examine the

impact of either contextual forces or management’s orientations on the performance impact of

management practices. On the other hand, the synergy gained from integrating each of the two

perspectives (see Figure 2) presents organizational scholars the choice of a vast array of competing

possibilities to dish out the inefficacy of management practices and attribute it to the relevant sources.

Hence, managers adopt and apply different assumptions and orientations at different times in the

process of managing practices.

[Insert figure 2 about here]

Achieving a fair balance between the impediments to the efficacy of management practices in

terms of contextual forces – i.e. environmental forces, organizational issues – and the adjusted

management orientation would seem to require a subtle and multi-faceted theoretical approach which

could serve the specific requirements of each of the three elements of the integrated model.

Accordingly, a suggested theoretical perspective underpinning the proposed model is based on the

stream of work referred to as “contextual issues”, “contingency theory” (Armenakis and Bedeian,

1999; Lawrence and Lorsch, 1967; Thompson, 1967; Woodward, 1958), “rational action theory”

14

(Dawes, 1988; Von Neumann and Morgenstern, 1944) and “bounded rationality” (Simon, 1990;

Coleman, 1990). Such a multi-dimensional theoretical lens to formulate and construct the dynamics of

contextual forces, management’s orientation, and the performance impact of management practices is

needed both to compensate for the inadequacy of universalism in the conceptualisation and diffusion

of many management practices, and more importantly to attune to a variety of environmental and

organizational/internal influences and requirements.

Contextual issues which are composed of both environmental forces and internal or

organizational factors coalesce around the idea that the performance impact of management practices

is largely subject to and indeed a function of the environment in which a firm operates as well as the

internal organizational context in which the management practices are adopted and implemented

(Mellahi and Wilkinson, 2004). So since organizations are deeply embedded in their external

environments and embrace their own intra-firm procedures and processes, the performance impact of

management practices depends on the extent to which the contextual forces influence management’s

own orientation and attitude towards the adopted management practices. While contextual forces

external to the organization are difficult to manage and beyond management control, contextual issues

internal to the organization are rather easy to manage, can be manipulated by the management and

indeed influence the way managers decide to go along or abandon practices. Depending on the nature

of these external and internal contextual forces, the adopted management orientation towards the

practices could be productive and counter-productive for both the efficacy of practices and the overall

organizational performance.

Attempts to handle the differing external and internal conditions faced by organizations and to

improve the bottom-line impact of management practices effectively have resulted in the emergence

of contingency theory ensued by a vast array of contingency models. For Kast and Rosenzweig (1973,

p. ix), “the contingency view seeks to understand the interrelationships within and among subsystems

as well as between the organization and its environment and to define patterns of relationships or

configurations of variables … [and] emphasises the multivariate nature of organizations and attempts

to understand how organizations operate under varying conditions and in specific circumstances”. It

embraces a sensitivity to, a priority for, and a greater appreciation of, both intra- and inter-

organizational relationships. A predominant trend, observable in the extant research on utilising

contingency theory has been the diverse nature of contextual –i.e. individual, organizational and

environmental – variables that each study or model employs to reflect on different situational factors.

Of these, for example, the appropriate levels of style of leadership (Fiedler, 1967; Osborn and Hunt,

1975), job design (Hulin and Blood, 1968; Kennedy and O’Neill, 1958; MacKinney et al., 1962;

Turner and Lawrence, 1965), opportunities for participation in decision making (Alutto and Belasco,

1972; Conway, 1976; Singer, 1974; Vroom, 1960), and aspects of organizational structure (Burns and

Stalker, 1961; Lawrence and Lorsch, 1965; Perrow, 1967; Pugh et al., 1969) were reported to vary

15

according to certain situational factors. Given the diversity and expanded influence of contextual and

situational variables which are both within the remit of managers (organizational issues and individual

characteristic) and also extended beyond their control (environmental forces), Shepard and Hougland

(1978) unify and classify the existing contingency models into a few major integrated contingency

theories. Based upon a bundle of variables believed to mediate between strategies (e.g. leadership, job

design) and outcomes (e.g. satisfaction, productivity), they label their first approach as ‘complex man’

and call a second contingency approach as ‘complex organization’ (see Indik, 1968). Of these, the

focus of the former is on individual differences and the emphasis of the later is on organizational and

environmental forces. Since we have postulated that management’s orientation and attitude towards

the adopted practices will change in accordance with the environmental and organizational pressures

and experiences, both contingency theories of complex man and complex organization help enhance

the understanding of management’s reaction and decisions to the existing forces. The question

remains: to what extent are such management’s reactions and decisions in response to contextual

forces deemed rationale (to both themselves and to others)?

To illustrate this point and explore further the degree of rationality or otherwise of managers’

behavioural models for contextual forces decision-making, we gain insights from “rational action

(choice) theory” (Dawes, 1988; Von Neumann and Morgenstern, 1944) and “bounded rationality

theory” (Simon, 1990; Coleman, 1990). Rational action theory postulates that an individual (a

manager) acts as if balancing costs against benefits to arrive at an action that maximises personal

advantages. Thus, managers choose the best action according to unchanging and stable preference

functions and constraints facing them (Friedman, 1953). Accordingly, patterns of behaviours in

organizations reflect the choices made by managers as they try to maximise their benefits and

minimise their costs. Managers make decisions and take actions about how to cope with rather

predictable organizational issues and environmental uncertainty facing the organization by adopting a

rational process where they compare the costs and benefits of certain actions based on their own

preferences. This theory therefore postulates an ‘economic man’ who, in the course of being

‘economic’, is also rational. This man has impressively relevant, clear, and voluminous knowledge

about various aspects of the environment (Simon, 1955). This wealth of literature allows us to

distinguish between two types of underlying assumptions of rational action theory: core assumptions

versus peripheral assumptions. The core assumptions of rational action theory are composed of:

preference proposition, constraints proposition, and utility maximisation proposition. Peripheral or

supplementary assumptions, on the other hand, are specifications of the core assumptions: they

indicate that what kind of preferences or constraints are to be used in applications of the rational

action theory. The question remains as whether individuals always act rationally.

Rational action theory does not assume that actors always choose to behave ‘rationally’ or

that choices are ‘right’. But we assume that people always act rationally. Managers as rational actors

16

or value-maximising make choices in such a way to maximise outcomes. They choose emotionally or

from inadequate information. They may mistakenly calculate the outcome of a situation. Rationality

of their decision making is therefore restricted by the information they have, the cognitive limitations

of their minds, and the finite amount of time they have to make decisions (Simon, 1957; Williamson,

1981; Gigerenzer and Selten, 2002; Kahneman, 2003). To accommodate such restrictions to the extent

of rationality of organizational actors, Simon (1990; 1991) coined the term ‘bounded rationality’ as an

alternative basis for the mathematical modelling of decision making to argue that the decision maker

is a satisfier who seeks satisfactory solutions rather than an optimal one. Another way of looking at

bounded rationality is that because decision makers lack the ability and resources to arrive at the

optimal solution, they instead apply their rationality only after having greatly simplified the choices

available. But managers cannot always act according to their preferences. The concept of bounded

rationality revises this assumption to account for the fact that perfectly rational decisions are often not

feasible in practice due to the finite computational resources available for making them. Due to the

complexity of the situation, their inability to process and compute the expected utility of every

alternative action (coupled with tendency to be more realistic), economic agents employ the use of

heuristics to make decisions and judgements rather than a strict rigid rule of optimisation. In Simon’s

words, boundedly rational agents experience limits in formulating and solving complex problems and

in processing (receiving, string, retrieving, transmitting) information (cited by Williamson, 1981).

Four cases from an early banking investigation (ESRC, 2004) indicated that senior managers

were keen to take a fresh and critical look at the whole range of change initiatives in order to improve

quality and productivity and helping themselves out to improve quality and productivity to boost

commitment to make them successful. However it identified scepticism attached to the extent to

which top executives devote their time to support various organizational changes. Similarly, from the

2008 global financial crisis, the Financial Times columnist, Stefan Stern, expressed the turning away

from good management, citing Alfred Chandler, that modern capitalism had been achieved through

“the long-term stability and growth of their enterprises to those that maximised short-term profits”

(Stern, 2008), but this was no longer the case. Stern omitted Chandler’s (1977) next sentence, “the

continuing existence of their enterprises was essential to their lifetime careers”, asserting that banks

were “always chasing the next deal, too many businesses neglect the boring but crucial issue of

management”, and therefore, like rats that love their bait, managers pursued seemingly ‘boundedly

rational’ decisions, through involvement in the subprime markets for short-term gains and personal

bonuses (economic man), that were not necessarily most optimal, only eventually to be caught out.

Tom Stewart (former editor of Harvard Business Review) commented, “it is no accident that Goldman

Sachs … has survived [the 2008] crisis best … I bet that each of the players and victims in this credit

crisis began to smell the rot in their mortgage-derivatives books at about the same time, within weeks,

17

even days of each other” (see McKillop, 2009). Like for rats, “greed is bad, and stupidity is bad, but

bad management is worst of all” (ibid; see also Witcher and Chau, 2010)!

Conclusion

This article has explored how organizations and leaders during the 2008 global financial crisis

behaved and made strategic decisions were rational in the context of our synthesis of the literature on

the nature, scope and impact of management practices. We have discussed two separate and

disconnected theoretical perspectives underpinning the failure of management practices: deterministic

(contextual forces) versus voluntaristic (management’s orientations), and proposed a unified model

and several associated underpinning theoretical perspectives. The central premise and contribution of

the proposed model is that instead of regarding the issue of contextual forces and management

influences and orientations as an either/or phenomenon, it views contextual influence as something

that is filtered and mediated through the attitudes and orientations which a manager has. (Boundedly)

rational theory suggests that the decisions made by leaders during the 2008 financial crisis were

indeed rational, but not optimal.

Acknowledgment:

This work was supported by the Economic and Social Research Council grant (grant number: RES-

000-22-4227).

18

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Figures

(1.a) (1.b)

Contextual forces Management’s orientation

Performance impact of management practices

Figure 1. Factors influencing Performance impact of management practices

Management’s orientations and support

Contextual factors Performance impact of

Management practices

Figure 2. The interplay of contextual forces, management’s orientation, and performance impact of

management practices

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