Psyched Out Strategy: What is a firm?Posted: November 10, 2011
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?