Microfoundations, One More Time: Individual Effects Trump Organizational Effects

The microfoundations-thing is misunderstood and abused in strategy.  I try not to even use the word any more – given that it gets thrown around so loosely (it seemed that every talk at an SMS a few years ago managed to slip the word in).  So some quick notes on microfoundations and strategy.

The “microfoundations”-effort in strategy is focused on the notion that individual-level heterogeneity matters – a lot.  This means that who an organization is composed of, who self-selects into it, who leaves, matters – a lot.  Extant theories of organization and capability don’t recognize this (for example, see Kogut and Zander, Nelson and Winter): in fact they argue that mobility is trivial, or (often implicitly) assume that individuals are homogeneous (by focusing directly on various collective constructs).  Organizational effects are said to trump individual effects.  But, I think the nested, individual-level effects trump higher level ones (individual>firm>industry effects) – some quick supporting points:

First, mobility:  Mobility is the great litmus test for where heterogeneity might lie.  If a particular individual leaves (in fact, who it is matters – a lot), does that impact organizational outcomes?  Individual mobility is needed since analysis of variance is confounded without it: what is attributed to the collective level might in fact be an individual-level effect.  A common mistake.

Second, Lotka distribution and variance within:  If you look at productive activity in any setting, you’ll quickly note that it is highly skewed.  The statistician Alfred Lotka pointed this out in 1926 in terms of scientific productivity, highlighting how in any population a few people are responsible for a radically disproportionate amount of productivity (measured in various ways): articles, citations, etc.  In many settings the 80-20 rule (20% of people are responsible for 80% of the output) doesn’t even begin to cover it.  So, look in any setting and you’ll find radical, nested heterogeneity – more heterogeneity within the system (this is often assumed away) than across.

Of course, it could be that highly talented individuals ALL select to be in a particular setting, which then might confound imputing heterogeneity.

Now, some common misunderstandings about microfoundations.  First, the above does not mean that there aren’t any collective effects (benefits of interaction, learning, routines, structures, context etc etc): of course there are!  But the first-order exercise ought to be to specify, as best we can, the nature and capabilities of the individuals involved.  After that collective and emergent effects can be properly tested.

Though, note that–and this is important–collective effects can also be of the variety where the whole is less than the sum of the parts.  Social psychology gives us lots of examples: social loafing and free-riding, influence (a la Asch), work on nominal versus interactive brainstorming, etc.  This is often not recognized as we tend to ascribe virtues (but not costs) to organizational culture, interaction, community, etc.  To complicate matters, individuals of course have much control over how much discretionary effort to put into collective tasks – (ah!) depending on the context.

Second, the microfoundations notion does not mean that we all become psychologists or über-reductionists, where we jump directly to genes or general intelligence (g), or we reduce everything back to the big bang.  The aforementioned are quite common caricatures of microfoundations, or points of ridicule unleashed on anyone advocating methodological individualism.  Rather, more simply, it is an approach that recognizes that individuals matter – and thus individuals are used as the basis for building models of social interaction and for explaining aggregate and emergent effects at the higher level.

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