A Socio-Cognitive Explanation of Organizational Grouping Decisions: Multidivisional Firms and the Formation of Their Divisions

We advance a socio-cognitive explanation of the grouping of a firm's activities into distinct divisions, each responsible for a specific set of activities. We argue that categorization creates expectations regarding which activities should be bundled, and grouping decisions that are inconsistent with these expectations are sanctioned. Hence, organizational grouping and reconfiguration decisions of multidivisional firms are influenced by categorical expectations, in addition to the interdependencies and shared external contingencies underlying a firm's activities and their perceptions and interpretations among managers. We also expect that the illegitimacy discount and associated performance penalty resulting from a firm's divergence in organizational grouping choices from categorical expectations will be lower for firms that span multiple categories or belong to an incoherent category. The socio-cognitive explanation we develop informs four theoretically relevant topics—labelling of organizational units, analogical reasoning, organizational identity, and categorical expectation violations—and has implications for future empirical research on organization design.