From Hot Cakes to Cold Feet: A Contingent Perspective on the Relationship between Market Uncertainty and Status Homophily in the Formation of Alliances

• Author: Déborah Philippe,Francois Collet
• Date: 01 May 2014
• DOI: http://doi.org/10.1111/joms.12051
• Published date: 01 May 2014

From Hot Cakes to Cold Feet: A Contingent

Perspective on the Relationship between Market

Uncertainty and Status Homophily in the Formation

of Alliances

Francois Collet and Déborah Philippe

ESADE Business School, Ramon Llull University; University of Lausanne

ABSTRACT In this study, we reconsider the classical positive association between the level of

market uncertainty and an organization’s propensity to form ties with organizations of similar

status. Although prior research argues that the greater the uncertainty, the higher the level of

status homophily, we suggest that this relationship is contingent upon framing that affects

positive or negative valence towards uncertainty. In an up market, organizations tend to frame

uncertainty as upside risk, and thus will subsequently favour explorative uncertainty-mitigation

devices; whereas, in a down market, organizations primarily frame uncertainty as downward

risk, and thus will rely on more conservative uncertainty-mitigation mechanisms. We therefore

predict that a greater number of status-heterophilous ties will be formed in an up market than

in a down market. We discuss the implications of our results for status theory and more

broadly for research on strategic decision making under uncertainty.

Keywords: alliance, decision making, framing, homophily, status, uncertainty

INTRODUCTION

Uncertainty has been widely documented as a driving force behind the formation of

inter-organizational ties (Auster, 1992; Beckman et al., 2004; Pfeffer and Salancik,

1978). In research on strategic alliances, for instance, empirical studies suggest that

organizations facing environmental uncertainty will partner with other organizations

in an effort to share risks and acquire knowledge (Gulati, 1995a; Kogut, 1991; Luo,

1997). However, selecting an alliance partner represents a challenge in itself. Informa-

tion regarding potential partners is highly valued but scarce and costly to obtain

(Nohria, 1992); therefore, a key concern is to reduce uncertainty relative to potential

partners’ capabilities (Kogut, 1988) and trustworthiness (Gulati, 1995a). To cope with

Address for reprints: Francois Collet, Av. Pedralbes 60-62, 08034 Barcelona, Spain (francois.collet@esade.edu).

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© 2013 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 51:3 May 2014

doi: 10.1111/joms.12051

this dearth of information, market actors can rely on cues found in the surrounding

social structure (Beckert, 1996; DiMaggio and Powell, 1983; Meuleman et al., 2010;

Podolny, 1994).

Status constitutes one type of social cues that organizations can rely upon when

selecting an alliance partner. The status of an organization can be defined as the prestige

and recognition derived from its position in a hierarchical social structure (Gould, 2002;

Podolny, 2005; Washington and Zajac, 2005). Actors who possess discriminating status-

valued characteristics (Ridgeway and Berger, 1986) have been shown to enjoy significant

privileges (Gould, 2002).

Based on the assumption that quality is to some extent positively related to status,

status cues can discriminate among organizations when quality is difficult to observe

(Podolny, 2005). Podolny (2001) highlights the role of interorganizational relationships as

status signals and conceptualizes these relationships as ‘prisms’ through which external

audiences perceive a focal organization. According to this prism perspective, observers

infer an organization’s intrinsic quality from the status of the organizations it is con-

nected to (Benjamin and Podolny, 1999; Podolny, 2001; Washington and Zajac, 2005)

because the willingness of others to associate with the focal organization provides a

means for evaluating its unobservable characteristics (Podolny, 1994; Podolny and

Phillips, 1996).

An important claim of this relational view of status is that the manifest transfer

of resources (i.e. goods or services) is associated with a latent transfer of status between

partners (Podolny and Phillips, 1996; Stuart et al., 1999). The formation of a

relationship between a high-status actor and a low-status actor thus results in a loss of

status for the former and a gain for the latter (Podolny, 1994, 2005). As a consequence,

status anxiety – that is, the fear of being devalued because other market actors

within the field doubt the quality of one’s partners ( Jensen, 2006) – leads organizations

to enter and maintain relationships with partners of similar status (Chung et al.,

2000; Podolny, 1994; Rosenkopf and Padula, 2008), a phenomenon known as status

homophily.

Prior research has shown that the value granted to status signals depends on the level

of market uncertainty confronted by organizations. In the face of market uncertainty,

which cannot be controlled by a single organization (Beckman et al., 2004), the com-

plexity of the partner-selection process increases and the social structural position of

potential partners is used as a signal of quality. Consequently, the higher this uncertainty,

the greater the importantce of status, and the greater the inclination of organizations to

form homophilous ties (Podolny, 1994). As demonstrated in recent studies, however,

certain conditions can override this inclination to form homophilous ties. For instance,

high-status organizations may be willing to initiate ties with organizations of lower status

when they believe they can extract greater effort and commitment from low-status

partners (Castellucci and Ertug, 2010) or when they expect heterophilous ties to yield

informational benefits (Shipilov et al., 2011). Building on these studies, and in contrast to

prior research on status that posits a linear relationship between market uncertainty and

the value of status signals as substitutes to unobservable quality, we propose a more

nuanced vision of the classical positive association between the level of market uncer-

tainty and an organization’s propensity to form homophilous ties. Specifically, we argue

From Hot Cakes to Cold Feet 407

© 2013 John Wiley & Sons Ltd and Society for the Advancement of Management Studies