Environmental Uncertainty, Strategic Deviation, and Firm Performance

Abstract

Understanding how the institutional transformation process unfolds and the role of strategic choice is a fundamental challenge to organizational research. Under periods of institutional change the adoption of a deviation strategy may be beneficial due to the opportunities afforded by the changing environment and institutional pressures. These arguments suggest that the role of strategic choice may be most influential and important during times of institutional change. We study the role of strategic deviation under uncertainty. By examining the U.S. banking industry during the 1980s, we explore the association between strategic deviation and firm performance when firms undergo radical environmental changes. In addition, we examine how the size of a firm moderates the relationship between strategic deviation and firm performance. The goal of this study was to examine if a strategy that deviates from industry norms has any effect on firm performance under the unusual uncertainty facing firms during an institutional transformation period after deregulation. Previous studies have examined how external environmental jolts such as deregulation can lead to heightened environmental uncertainty, but the consequences of strategic choice during regulatory change have received scant attention. We tested the hypotheses developed from strategic deviation literature and we posited that smaller firms would be able to dissociate themselves with institutional norms and have more success with deviation strategies. To test our hypotheses, we examined the U.S. banking industry during the period 1983-1990, a well-noted period of deregulation. The results of this study provide support for our hypotheses on the strategic deviation. Our findings show that firms that pursued strategies that deviated fromindustry norms outperformed those who followed standard industry behavior during a period of institutional transformation following the passing of deregulatory legislation. In addition, we found that firm size moderates the relationship between strategic deviation and firm performance; smaller firms had greater success at dissociating themselves from institutional pressure to conform. In summary, strategic deviation is positively associated with higher firm performance and this positive relationship is negatively moderated by the firm size. We discuss the roles of strategic choice under conditions of changing norms in industry and conclude with its implications.