Psyched Out Strategy: What is a firm?

Glenn Hoetker recently gave me the opportunity to consider what new contributions the field of psychology could offer to the strategy literature (see the description here). The video illustrates how behavior often depends more on perception than on reality — does it matter if the steering wheel is attached or not if the other driver acts as if it is? Often, researchers are interested in organizational outcomes and theorize that the underlying behaviors are driven by objective reality. What research opportunities are highlighted as we take seriously the subjective nature of our most central constructs?

In this installment, we explore the question, “what is a firm?” This is so taken for granted in the field that most of you will probably stop reading here.

Barnard defined an organization as a “system of consciously coordinated activities.” Jensen and Meckling defined a firm as a “nexus of contracts.” The widespread use of hybrid organizational forms means that neither metaphor actually zeros in on the operational definition of the firm used in most research.

Consider the range of hybrid organizational forms that occupy much of the strategy research (shameless plug: my paper with Rich Makadok). For example, alliances and communities of practice routinely extend “consciously coordinated activities” well beyond the formal boundaries of a “firm.” These collaborations are typically governed by a mixture of implicit and explicit contracts but strongly resemble the type of cooperation that was once viewed as indicative of transactions that take place within a firm. On the other hand, the competition that may occur between parent-owned franchise operations or autonomous business units can resemble rivalry once thought to be specific to market transactions.

What seems to matter is whether people behave as though they are part of a cooperative system or whether they view other units as rivals. This is a psychological question that is quite distinct from any legal distinction that might exist. Indeed, the organizational identity and identification literature explores this directly. Identity addresses the message delivered by the organization to characterize its own purpose (and boundaries). Organizational identification refers to the extent to which members of an organization consider themselves as members in describing their most central affiliations — do they adopt the firm’s goals as their own?

In other words, asking people about the extent to which they “feel” like they are part of a firm might yield results that are better aligned with theoretical constructs at the core of the strategy literature.

Of course, there is a rich literature on organizational identification. However, it has not been integrated with the theory of the firm. What kind of research program might result?

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5 Comments on “Psyched Out Strategy: What is a firm?”

  1. Very interesting post, and I look forward to reading your paper (which I’ve just downloaded). The line that jumped out to me was, “What seems to matter is whether people behave as though they are part of a cooperative system or whether they view other units as rivals.” Are you familiar with any research on systems that are both cooperative and competitive? I’m specifically thinking of the enterprise software industry, where resellers (“partners” or “alliances and channels”) depend on the software maker, and cooperate in selling, but also compete with the maker for individual deals. I’m curious because I’m a prospective doctoral student, and those types of boundaries were what I was hoping to research, but I’m wondering now if it’s already been explored.

  2. Steve Phelan says:

    Of course, Selznick’s ‘Leadership in Administration’ argued that the role of the leader was to change organizations into institutions by encouraging employees to see the firm as more than just a means to an end but an end in itself. I wrote a paper a long time ago called “Strategy as expectations management” which touched on a similar theme. However, I agree there is more that can be done in that direction – economists are not that comfortable with these sort of intrinsic motivation issues, thus leaving a gap.

  3. stevepostrel says:

    Kyle Mayer and Libby Weber are thinking along these lines by treating firms as interpretive systems, and Weber, Vern Glaser, and Derek Harmon are working on “Institutional Identities and Frames in Contracting.” I heard them at Session 148 of the SMS meetings on Monday. The flavor was very similar to what you’re describing. I think Kogut and Zander’s older OS paper had some of this stuff in it too.

  4. Nicolai Foss says:

    A plug: Lindenberg, S. and N.J. Foss.2011.Managing Joint Production Motivation. Academy of Management Review, 36: 500-525.

    One more: Foss, N.J. and S. Lindenberg. 2011. Teams, Team Motivation, and the Theory of the Firm.

    Lots of the issues above are dealt with in these papers, in particular Steve’s point about “encouraging employees to see the firm as more than just a means to an end but an end in itself.”

  5. Rich Makadok says:

    On the broader issue of how “perception versus reality” drives strategic decisions and performance outcomes (which was the initial starting point of Russ’s posting), I am very very very surprised that nobody (not even Mike himself) seems to have picked up on the promising approach suggested by Ryall’s (2003 ManSci) “Subjective Rationality, Self-Confirming Equilibrium…” paper. I wonder why not. It seems like a very powerful tool, yet it has only been cited 10 times, and 2 of those are self-citations. And 2 of the remaining 8 are from people who have already posted comments above on this page. Are we the only ones who have read this paper? This paper needs to get more air-time, and maybe a P.R. agent. And it especially needs to be applied to strategic factor markets as a way of adding meat to the bones of “superior expectations.” Just my two cents.
    — Rich

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