Keeping up with the reference group(s) The effects of geographic and economic reference groups

Abstract

The behavioral theory of the firm highlights the importance of social reference groups. Yet, the selection of social reference groups and their impact on organizational change has received little attention and theoretical development. In this paper, we distinguish two different reference groups. The geographical reference group entails geographically proximate organizations. The economic reference group consists of organizations that are comparable in terms of size and resources. Both reference groups provide valuable, yet different information and –in combination- provide a holistic picture of the organization's performance. However, geographic and economic reference groups have distinct characteristics, norms and values making them more or less susceptible to organizational change. Therefore, we posit that performance feedbacks coming from either of the two reference group differ in their effect on organizational change. We test our hypotheses in the German cooperative banking group from 2014 to 2017. We find that organizations' responses to geographic and economic performance feedback differ significantly. The results show that the distinct characteristics of the social reference group plays a crucial role in organizations' response to performance below or above aspirations.