Cognition, Agency Theory and Organizational Failure: a Saskatchewan Wheat Pool Case Study

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Cognition, Agency Theory and Organizational Failure: a Saskatchewan Wheat Pool Case Study COGNITION, AGENCY THEORY AND ORGANIZATIONAL FAILURE: A SASKATCHEWAN WHEAT POOL CASE STUDY A Thesis Submitted to the College of Graduate Studies and Research In Partial Fulfillment of the Requirements For the Degree of Master of Science In the Department of Agricultural Economics University of Saskatchewan by Katherine Alice Lang © Katherine Alice Lang, December 2006. All Rights Reserved. The author has agreed that the University of Saskatchewan and its library may make this thesis freely available for inspection. The author further has agreed that permission for extensive copying of this thesis for scholarly purposes may be granted by the professor or professors who supervised the thesis work or, in their absence, by the Head of the Department or Dean of the College in which the thesis work was done. It is understood that any copying or publication or use of this thesis or parts thereof for financial gain shall not be allowed without the author’s permission. It is also understood that due recognition will be given to the author of this thesis and the University of Saskatchewan in any scholarly use of the material in this thesis. Request for permission to copy or make other use of the material in this thesis in whole or in part should be addressed to: Department Head Department of Agricultural Economics 51 Campus Drive, Room 3D34 University of Saskatchewan Saskatoon, Saskatchewan Canada, S7N 5A8 i ABSTRACT Lang, Katherine A. M.Sc. University of Saskatchewan, Saskatoon, December 2006. Cognition, Agency Theory and Organizational Failure: A Saskatchewan Wheat Pool Case Study. Supervisor: Dr. Murray E. Fulton The Saskatchewan Wheat Pool went from being the largest grain handler in western Canada in the mid 1990s to undertaking a $405 million debt restructuring in January 2003. Provincial grain handling market share had been over 60 percent for two decades prior to the Pool becoming publicly traded in 1996. With the share conversion, the Pool began a capital expenditure program in an effort to adapt to industry deregulation and to compete with the multinationals that were entering western Canada. This program was not successful. SWP’s long-term debt increased five fold over the period 1996–1999 and consecutive multi-million dollar net losses were incurred followed by the debt restructuring. This thesis uses dominant logic theory and the principal-agent problem to analyze what went wrong at SWP. Theory suggests organizations faced with major industry change may have difficulty revising their dominant logic, which leads to organizational failure. Not only is there a tendency to hold on to established beliefs, but the creation of new beliefs is prone to error because of bounded rationality. The existence of a principal-agent problem can worsen an organization’s ability to revise its dominant logic. Information asymmetry and the principal’s trust of the agent can lead to inaccurate beliefs and ineffective strategies being approved. The results of personal interviews with twenty-one past management and elected Saskatchewan Wheat Pool personnel and grain industry affiliates are presented and ii analyzed in a case study format. The results suggest that deregulation of the grain handling industry and the anticipated arrival of multinational competitors pressured the Pool to respond quickly to major industry change. The Pool had difficulty revising its dominant logic; it retained outdated beliefs and accepted inaccurate new beliefs. Interviewees described how some investments were built on erroneous beliefs and lacked complete due diligence. Evidence suggests the principal-agent problem was also at play. The need for confidentiality after the share conversion increased information asymmetry, and management took advantage of the board’s lack of experience as investments extended beyond the farm gate. The principal-agent problem in conjunction with an inaccurate revised dominant logic is a reasonable explanation for the Pool’s failure. iii ACKNOWLEDGEMENTS The author would like to thank the following persons for their support with the process and completion of this thesis. I would like to thank my supervisor Dr. Murray Fulton for letting me take on a branch of his very interesting agricultural co-operative research project. His enthusiasm and support was key to the successful completion of this thesis. I would also like to thank Professors Richard Gray and Ken Rosaasen, my other committee members, and Ian McCreary for his role as an external examiner. Their suggestions and comments were much appreciated. The willingness of twenty-two past management and elected personnel from the Saskatchewan Wheat Pool and the grain industry to participate in personal interviews was vital for the success of this thesis and I thank all of them for their time and honesty. Finally, I would also like to thank my parents Wayne and Rosetta Lang for their continued support and encouragement in my academic pursuits. iv TABLE OF CONTENTS PERMISSION TO USE......................................................................................................................................i ABSTRACT.........................................................................................................................................................ii ACKNOWLEDGEMENTS .............................................................................................................................iv TABLE OF CONTENTS ..................................................................................................................................v LIST OF TABLES ......................................................................................................................................... viii LIST OF FIGURES ..........................................................................................................................................ix LIST OF ABBREVIATIONS...........................................................................................................................x CHAPTER 1: INTRODUCTION ....................................................................................................................1 1.1. PROBLEM...............................................................................................................................................1 1.2. EXISTING EXPLANATIONS ON THE POOL’S FAILURE............................................................................2 1.3. PURPOSE AND OBJECTIVES...................................................................................................................3 1.4. ORGANIZATION OF THESIS ...................................................................................................................5 CHAPTER 2: STUDIES OF ORGANIZATIONAL AND CO-OP FAILURE........................................7 2.1. INTRODUCTION .....................................................................................................................................7 2.2. RESEARCH ON ORGANIZATIONAL FAILURES.......................................................................................7 2.3. RESEARCH ON CO-OP FAILURES ..........................................................................................................9 2.3.1. Tri Valley Growers ....................................................................................................................11 2.3.2. AgWay.........................................................................................................................................13 2.3.3. Rice Growers Association .........................................................................................................15 2.4. PROPOSITIONS .....................................................................................................................................17 2.4.1. Proposition 1 ..............................................................................................................................19 2.4.2. Proposition 2 ..............................................................................................................................20 CHAPTER 3: THEORETICAL FRAMEWORK AND LITERATURE REVIEW .............................22 3.1. INTRODUCTION ...................................................................................................................................22 3.2. COGNITION THEORY ...........................................................................................................................23 3.2.1. Bounded Rationality ..................................................................................................................24 3.2.2. Knowledge Structures................................................................................................................25 3.2.3. Knowledge of Decision Makers ................................................................................................26 3.2.4. Organizational Knowledge Structures .....................................................................................27 3.2.5. Dominant Logic..........................................................................................................................28 3.2.6. Cognitive Dissonance ................................................................................................................31 3.2.7. Adapting to Change ...................................................................................................................32 3.3. AGENCY THEORY................................................................................................................................33
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