GB720 Unit 3 Institutional Theory Application Example

A Law That Never Named the Supplier: A Unit 3 Institutional Theory Application to Germany's Supply Chain Act

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Purdue University Global

GB720: Business Policy in a Global Economy

Unit 3 Institutional Theory Application

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[Date]

Harwell Structures, its plant and every event are composite and illustrative; the law, its thresholds and the theories cited are real.

The Law and Whom It Binds

Germany's Act on Corporate Due Diligence Obligations in Supply Chains took effect on January 1, 2023. It applied first to companies with at least 3,000 employees in Germany and, from January 2024, to those with at least 1,000. Covered companies must analyze human rights and environmental risks in their own operations and among their direct suppliers, take preventive and remedial measures, establish a complaints procedure open to people affected anywhere in the supply chain, and report annually. The Federal Office for Economic Affairs and Export Control oversees compliance and can impose fines.

Harwell Structures falls outside the law's scope. Its Hungarian plant near Gyor employs about 650 people and the company has no German employees. But two of its largest customers, German automakers, are within scope, and Harwell is their direct supplier. The law reaches Harwell only through them.

Predictions Fixed Before the Evidence

Three predictions were written down before the plant's records were examined, drawn from two theoretical accounts.

Prediction 1, from coercive isomorphism. DiMaggio and Powell (1983) argued that organizations come to resemble one another partly because of pressure from organizations they depend on. Because Harwell depends on its German customers for most of the plant's revenue, the theory predicts that the plant will adopt formal structures matching the customers' due diligence requirements, regardless of whether those structures improve its operations.

Prediction 2, from decoupling. Meyer and Rowan (1977) argued that organizations often adopt formal structures to gain legitimacy while keeping them separate from their actual work, so that the structures function as ceremony. The theory predicts that the plant's new policies and procedures will exist on paper but will change little in how the plant buys from suppliers or treats complaints.

Prediction 3, from the conditions of coupling. Bromley and Powell (2012) suggest that decoupling becomes harder when external parties monitor practice rather than policy. The theory predicts that where customers audit actual practices, the plant's structures will affect behavior; where they only collect documents, they will not.

What Changed

By the end of 2023, the plant had adopted a human rights policy modeled on its customers' supplier codes, set up a complaints channel accessible by phone and email in Hungarian, English and Romanian, and sent a due diligence questionnaire to its 140 direct suppliers. Each was adopted after a customer request, and each followed templates the customers provided. The policy's language matched the customers' codes almost word for word.

This evidence supports Prediction 1. The structures appeared because customers required them, and they took the form customers specified.

Adoption Without Integration

The plant's records show how the new structures were used. The complaints channel received three complaints in its first year: two from temporary workers about overtime pay and one anonymous complaint about a subcontractor's treatment of workers. The two pay complaints were forwarded to the plant's human resources office, where one was resolved after five months and the other remained open. The supplier questionnaire achieved a response rate of 61 percent, but responses were filed without review, and no purchasing decision referred to them. The human rights policy was not mentioned in any internal training during the year.

This evidence largely supports Prediction 2. The structures existed and satisfied the customers' document requests, but they were not integrated into the plant's purchasing or personnel practices.

The plant adopted everything its customers asked for and changed almost nothing they did not check.

The Subcontractor That Was Dropped

One episode departs from the pattern. The anonymous complaint concerned a staffing agency that supplied about 40 temporary workers to the plant's assembly lines and was alleged to charge workers recruitment fees and hold their identity documents. One of the German customers conducted an on-site audit of the plant in late 2023, a practice it had begun under the new law, and its auditors interviewed temporary workers. The interviews confirmed the allegations. Within six weeks the plant ended its contract with the agency, hired the workers it wanted to keep through a different provider and wrote a new clause into its staffing contracts prohibiting recruitment fees.

This episode supports Prediction 3. Where the customer examined practice directly, the plant's structures coupled with action. Where it collected only documents, they did not.

Why the Customers Enforced Differently

The two German customers took different approaches to the law, which is what made the comparison within one plant possible. One relied on questionnaires and document reviews, collecting the supplier's policy and complaints procedure and checking that they existed. The other combined document review with risk-based on-site audits, targeting suppliers in sectors and countries where its risk analysis flagged labor concerns, including the use of temporary agency workers. The second approach costs more and reaches fewer suppliers, but it observes practice rather than paper. From the plant's perspective, the two customers sent different signals about what mattered: the first asked for evidence of structures, the second for evidence of conduct.

Evidence Table

Scored against the evidence, the three predictions fare as follows. Prediction 1: supported, since all three structures were adopted at customers' request in the customers' form. Prediction 2: largely supported, since the structures had little effect on purchasing or personnel practice, with the exception of one complaint that was eventually resolved. Prediction 3: supported by one episode, in which an on-site audit produced a change in practice that document collection had not.

Rules Versus Enforcement

The case suggests that the law's effect on suppliers outside its scope depends less on the law's text than on how in-scope companies enforce it down their supply chains. Scott (2014) distinguishes the regulative, normative and cultural-cognitive pillars of institutions, and the case shows the regulative pillar operating at one remove: the law regulates the customers, and the customers' enforcement choices determine what reaches the supplier. Document requests produced ceremonial adoption. Audits produced change. The finding has a practical implication for Harwell: the structures that will matter in future are the ones its customers can observe in operation, and the ones that exist only on paper will remain vulnerable when an audit finally reaches them.

What the Case Cannot Show

One plant's experience over one year cannot show how the law affects suppliers generally. This plant is a composite drawn from accounts by people who work in automotive supply chains, and its purpose is to test whether the two theories explain what such a plant might plausibly experience. A study of many suppliers, comparing those subject to customer audits with those subject only to document requests, would be needed to test Prediction 3 properly.

References

Bromley, P., & Powell, W. W. (2012). From smoke and mirrors to walking the talk: Decoupling in the contemporary world. Academy of Management Annals, 6(1), 483-530. https://doi.org/10.5465/19416520.2012.684462

DiMaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48(2), 147-160. https://doi.org/10.2307/2095101

Meyer, J. W., & Rowan, B. (1977). Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83(2), 340-363. https://doi.org/10.1086/226550

Scott, W. R. (2014). Institutions and organizations: Ideas, interests, and identities (4th ed.). SAGE.