Rethinking the firm: organizational approaches
Mitchell P. Koza
How does social science based organization theory describe the business firm? Sociology, political science, social psychology and ethnology have inspired two almost classical perspectives. One theorizes the firm as an arena for strategic behavior. The other underlines the way social pressure mechanisms structure a moral community dimension. Two additional approaches exist, less explored. The firm can be defined as a collective actor, the agenda for knowledge being to explain how far collective choice is possible. Or the firm may be studied from a cognitive perspective, as an organization which interprets and thinks. The article argues that organization theory offers a unitary if not limited view of the business firm. Social sciences basically debate around two alternative views which differentiate according to four characteristics: the action arena or the context of behavior; the teleological property of the unit; the payoff matrix or the sources of preferences with which members enter collective choice contexts; and the sources of managerial influence.
Keywords: organizational theory, collective action, cognitions, strategic behavior, Gemeinschaft, social function of the firm
Rationally constructed organizations pervade modern industrial societies. The bonds of tradition, manifest in kinship, tribe and community, have been supplanted by individuals’ membership in purposefully designed and administered organizations. These corporate actors are a fundamental unit of social integration and a major source of social stratification (Coleman 1990).
A prototype of these organizations is the modern business firm. Business firms produce wealth for individuals and societies, develop and exploit technologies which have led industrial revolutions, and influence, among other things, gender, race, ethnic, and class structures.
What is a business firm? One view describes business firms as political coalitions. Firms, in this view, are collections of subunits pursuing separate goals. The role of management is to structure inducements so that the individual subunits identify their interests with those of the firm and, thereby, contribute to its mission. Another view of the business firm describes it as a nexus for contracts between actors free to sell their skills and labor on the open market. The management role in this view is to define efficiently the content of contracts, monitor the term structure of the portfolio of contracts, and insure compliance with contractual obligations. Common to both of these formulations is the net-classical precept that business firms are arenas through which self-interested, self-seeking behavior is mobilized to accomplish collective instrumental aims.
It is no surprise that firms serve the utility-maximizing preferences of the individuals and groups who join and serve in these organizations. The strategic behavior of members, managed through an economy of incentives, is a persuasive ontology of firms.
Yet, even casual observation suggests limitations to this dominant view. People work overtime without reward, facilitate projects for others with little or no recognition, make heroic efforts to help firms survive, rally around efforts to improve the common good, and seek to advance social policy agendas. Individuals and groups bear costs that utility-maximizing approaches would not predict. Contributions can, and often do, exceed inducements.
Why do contributions-to-inducements ratios vary from utility-maximizing predictions? In a pioneering contribution, Chester Barnard (1938) argued that people are, at times, indifferent to costs and payoffs. People, in this view, engage in activities in which personal utilities are simply not evaluated. The ‘zone of indifference’ extends around each individual to a greater or lesser degree.
The indifference argument is persuasive, if only partially so. Few individuals have the capacity, let alone the patience, to evaluate the personal consequences of every encounter, request, and the like. However, while indifference is a useful explanation for why people do not calculate costs and benefits, it is insufficient to explain why people might bear for some time unnecessary costs when they are aware of them. Moreover, and more interestingly, the indifference argument does not explain why individual payoff matrices vary or what facilitates their change.
The time is right for a view of firms that explains the great diversity of motives, structures, and processes through which human action is mobilized and goals are achieved in these organizations.
Firms play a more important and complex role in society than current theory would lead one to expect. Utility maximization is only one function that business firms do, in fact, achieve. Additional functions include individuals’ identification and integration into the local community and the wider world, and the maintenance and, at times, reconstruction of the social fabric. A view of firms which acknowledges the importance of instrumental, expressive and institutional aspects usefully expands contemporary debates about business to include issues of organizational purpose, identification (Kogut and Zander 1996), ideology, and normative order. Current theory is not ‘wrong’ in any fundamental sense–it highlights single important aspects of business organizations. But current theory ignores many of the latent and unintended social functions that firms play.
The Firm as an Arena for Strategic Behavior
The firm may be managed through an economy of incentives. Incentives are the rewards and sanctions imposed by management. Well-designed incentives align individual goals and collectively produce managerially desired action. Designed poorly, incentives may produce subunit conflict, apathy, and poor firm performance. The agency and management literature has been concerned with ways of optimally and effectively designing incentive contracts.
Implicit in this view of the organization is the assumption that organizational actors, either persons or subunits such as departments, committees, and so on, possess preferences and influence resources. Preferences are understood as the optimal outcomes organizational actors desire as decision outcomes. They also are exogenous to the firm. Disproportionately high resource allocation in favor of an organizational subunit is a prototype of this preference. Sales and marketing departments, for example, may compete to have their respective projects funded from scarce company resources.
Influence processes, domination mechanisms and power games are employed to drive policy-making in directions consistent with desired outcomes. Examples of influence and politics include position or office, functional or professional expertise, side payments, information biases, and the like. The relative salience of influence bases may be viewed as the ‘weights’ that should be attached to predictions of the effects of influence attempts.
The Firm as a Moral Community
Another view of the firm relaxes the assumption of strong preferences (Selznick 1993). This view still assumes that organizational actors hold resources that may drive decision-making and the taking of action. It differs from the first view, however, by assuming that unitary or strong preferences for specific decision-making outcomes are not a necessary and permanent condition for cooperation. By treating preferences as endogenous, this view defines the role of management, not as activities aimed at building and administering an incentive economy, but as actions designed to help structure and change more or less plastic preferences.
Mechanisms which structure preferences include leadership (especially charismatic leadership), ideology building, socialization processes, face-to-face group dynamics, recruitment techniques, and environmental constituencies to which individuals have personal or professional loyalty. As in any society, a center exists in the firm which functions as a central value system, its existence resting on the fact that human beings have a need for personal communion, for incorporation into something which transcends their single existence (Shils 1975). Common to all of these social pressure mechanisms is the attempt to foster commitments, identifications, and loyalties. The literature on missionary, professional, and community organizations has documented the role of management in structuring preferences. Management operates by seducing when not by preaching.
The Firm as a Collective Actor
Discovering conditions under which decisions made collectively can approximate Pareto optimality is a classic problem for students of collective choice. Kenneth Arrow (1974) demonstrated that no single decision can conform to disparate preference orders in groups larger than two. Work on group decision-making explored factors of group composition, deliberative and voting procedures, and strategic behavior presumed to affect either the distribution of utilities among outcomes to a group’s members or the stability and bindingness of suboptimal decisions (for example, Black 1958; Coleman 1990). In general, the effects of such variables all point to a notable dilemma of social life. Many of the goods for which people wish cannot be obtained except by collective action, but as soon as groups form, most of the members will find their preferences compromised.
This dilemma lays the groundwork for the emergence of social control because in any group there must be some mechanism for making decisions binding. At one extreme, social control is achieved by unanimous preferences. At the other extreme, decisions are made autocratically and imposed coercively without regard for members’ preferences. Between these extremes lies the great diversity of political regimes through which members’ preferences are aggregated, deliberation takes place, and decisions are reached and effected.
This diversity has major historical and normative sources. It also arises from differences of social scale and social structural complexity, which, as they increase, require some coercive or representative mechanism that allows for either enforcement or deliberation in the light of constituents’ desires. As social scale or as collectivities become more complexly structured, collective choice tends to become formally organized, as, indeed, do all forms of collective endeavor (Weber 1948; Barnard 1938; Selznick 1949). For this reason, an important strand of collective choice studies concerns the ways in which formal organizations either provide regimes for collective decision-making or perform as discrete actors in collective choice situations, presumably as agents of their members.
Regarding the ways in which formal organizations provide regimes for collective decision-making, Mancur Olson (1965) argued persuasively that organizations are no more effective than other social groups in the attainment of Vilfredo Pareto’s optimality. Indeed, as their scale increases, organizations become decreasingly effective in this regard, even for the most active contributors to their collective action. Mainly inspired by Herbert Simon’s (1945) now familiar critique of the classical theory of organizations, work on decision-making processes of formal organizations (March and Simon 1958; Cyert and March 1963; March and Olsen 1976) has centered on two items. The first item is the informational and cognitive limits of rational analysis that create a regime of ‘satisficing’, rather than optimizing, decision-making in organizations. The second item is the degree to which such decisions provide an economy of incentives that encourages members to accept these less than optimal outcomes at some point short of coercion.
Regarding the way organizations perform as discrete actors in collective choice situations, neo-classical decision theory presented a framework for the analysis of decision-making. In such a framework, the actors are individuals, not groups. Collective choice is defined as an outcome of inter-organizational communication constrained by a characteristic local structure of inter-organizational relationships. However, the framework does not address either of the following two questions:
1 How does each organization act as an agent of its several members? For instance, what is the degree to which each organizational actor secures community decisions that approach optimality for its individual members?
2 What are the ways in which each organization fixes upon its own preference order?
These limitations suggest that the analysis of collective choice among organizational actors and among individual actors within organizations is complementary. James Coleman (1990) has pursued the question of agency, noting that an organization is disproportionately powerful in relation to any of its members. This disparity caused him to question whether or under what conditions an organization may serve as a responsive or responsible agent for its membership. In the sense of Pareto optimality, of course, an organization, presumably, cannot be a faithful agent, any more than any group can reach collective decisions that approximate each member’s order of preferences (in the absence of consensus). However, there is also the question of the degree to which the preferences of various subgroups are reflected in organizational policy.
From this perspective three related issues follow. These are the issues of (1) hierarchy and elites within organizations, (2) of the way power is distributed in an organization’s hierarchy, and (3) the political and normative variables that affect the responsiveness of elite decisions to the aggregate preference distribution of the membership. Olson’s (1965) treatise and subsequent work on participation in voluntary organizations (for example, Oliver et al. 1985) suggest that, in most organizations, the effective decision-making groups are likely to comprise only a small proportion of the membership. Apart from persons formally vested with decision-making responsibility, only a handful will be motivated strongly enough to contribute the time and effort that decision-making requires.
The Firm as an interpreting Actor
Firms should be considered as organizations that interpret and think. Treating the firm as an actor might open our approach to the criticism of ‘anthropomorphizing’ the firm. This line of work extends from Herbert Simon and has some support in modern organizational analysis. However, treating the firm as a unit of analysis, and exploring the implications of this assumption, produces powerful insights into the behaviour of firms and individuals. Rather than a limitation, reification of the firm is one of organizational theory’s most useful tools. The acts and non-acts of organizations are the consequences of cognitions, of theoretical references and assumptions. What are the causes and determinants of the choices and actions taken by firms? Why are certain specific policies and formal structures adopted, and others not? How does it happen that certain kinds of acts and non-acts occur which may or may not he identical across a cohort of firms?
Current organizational theory overemphasizes deterministic approaches. Firms are not considered as agents. They passively conform to macro forces or societal trends. The contents of their decisions reproduce and reflect cultural, ideological or belief patterns imposed on them by outside social forces. Illustrations of this perspective are quite numerous.
Sociological institutionalism, just to name one school of thought, underlines the importance of constraints such as conformity and legitimacy imperatives. Institutionalization is a process of a cognitive nature. The focus is less on such and such single organization, its specific context relegated to the background, and more on a population of organizations defined as a consequence of this context. Institutional studies study organizational fields (DiMaggio and Powell 1983). Such fields or bodies range from public institutions (regulatory policies, state legislators, and so on) to professional activities (associations and professions, standardization processes, certification agencies, and so on). The field in which a firm is embedded is examined as a whole, as an activity enacting rules, supervising or enforcing surveillance. It defines an institutional context within which each single organization plots its courses of action. Organizational reality is theoretically framed as a symbolic construction. Cultural messages are transmitted by specific sets: consulting companies, best practices, and so on. These organizations produce powerful isomorphic pressures.
Such a deterministic approach is in line with an old tradition. Iron cages in the manner of Max Weber treat the question of how firms think in a way which is quite close to the holistic perspective of Emile Durkheim or to the status of culture as defined by classical anthropologists. For instance, ideologies supposedly fulfill one role. They integrate a community, a class or an organization. Their single members adopt beliefs about action and representations of the world because they prefer to conform rather than deviate. The way they think does not help them know and perform, but believe. Such a perspective also implies that the processes of change which matter occur at the system level. To consider that firms are embedded in a set of exchanges and networks discards the firm as a platform for learning, the ability of some of its members to accumulate learning experiences and contents, and to reinforce or to modify them.
Alternative approaches have emerged which consider cognition as a research question. In other terms, single members construct and use cognitive capacities. They reason, analyze, and think (Daft and Weick 1984). The knowledge they produce is not a mere representation of the world that is more or less biased. Neither is it just part of a symbolic order. Cognitive activities have consequences for the taking of action and choice outcomes. Decision and communication processes in daily interactions and at all levels in the firm carry specific modes of thought and knowledge.
Cognitive sociology has given much attention to individuals. Ethno-methodology (Garfinkel 1984), rational choice or individual methodologism (Elster 1989; Boudon 2001), and reflexivity (Giddens 1987), each in their own way, refuse to treat the individual as a cultural idiot. By comparison, fewer studies deal with organizations in general and with firms in particular. A cognitive perspective considers firms and their members neither as passive social robots nor as rational computer programs. They look more like mental ‘bricoleurs’:
* They develop abilities to understand what they do while they do it
* They use implicit knowledge and operational skills, and
* They have good reasons to make errors, as far as prejudices and beliefs result from ways of reasoning in a logical manner.
Interpretative processes are produced in a collective way inside the organizational system (Eden and Spender 1998). Cognitions generate and diffuse knowledge that is both substantial and procedural. They drive behaviors. They provide coordination and cooperation mechanisms. Languages for action connect the firm’s ambitions and management’s actions, and headquarters and operational units (Michand and Thoenig 2003). Sharing a common language does not imply that within a firm the language is uniform, the same for everyone. When it exists, two partners located in an interactive situation make use of some identical cognitive references in the way that they carry out their respective actions and interactions.
Cognitions in action provide implicit decision criteria. They define causal relationships, choice indicators, and time and space horizons. Two different sources of languages exist. Exogenous languages are borrowed or imported from third-party sources, from the exterior of the interactive social body. Endogenous languages are codes through which content is constructed by the organization. They may not be in line with references or beliefs dominant in the environment. Management helps to generate and evolve practical theories and performative abilities. As a legitimate source, it sets up transitory arrangements between strategic and organizational requirements, it defines principles and it also transgresses them.
Approaching the firm as a cognitive organization allows a better understanding of its growth and its decline. Theories of endogenous growth challenge two ideas that theories of equilibrium had developed. One argues that the accumulation of knowledge and know-how that goes on in a socially organized collective is subject to the law of decreasing marginal productivity. The second one explains that, consequently, the gap between firms can only increase, not decrease. Markets have trouble managing complexity, imagination and trust. The latter are also difficult to induce through incentive-based or moral community models. An organizational theory of the firm explores how non-traded processes are invented that are implicit, unspoken, and derive from common experience. Firms are islands in societies and economies. They construct specific civilizations, senses, interpretations, and theories of action.
The Firm: Two Views
Table 1 summarizes and presents two alternative views of the firm. They are defined as ideal types (Weber 1948) by four profile characteristics:
* Action arena describes the context of behavior, which may range from self-interested and guileful to altruistically constructionist
* Purpose refers to the teleological property of the unit, which may range from the purely instrumental, seeking to create and distribute value per se, to expressive, providing identifications for members of the firm, and, as such, a source of social integration for its members
* Payoff matrix, a micro-level construct attributable to individual members of a firm, indicates the source of preferences with which individuals enter collective choice episodes, which may vary from exogenous and ‘brought in’ by participants to endogenous, that is to say, shaped by, among other phenomena, managerial action, and
* Levers indicate the main sources of managerial influence over behaviors and preferences; at one extreme this includes incentives, while at the other, ideology and the social construction of the normative system of values.
While these two extremes define analytically distinct forms, the firms in which individuals actually maintain membership, and which are observable, may be described as more or less strategically behavioral or morally community-like.
Introduction to the Special Issue
The motivation for this special issue began in 1998, when together we designed and conducted a doctoral seminar on these topics at INSEAD. We were intrigued that the field had seemed to converge on a unitary and, we felt, limited view of the business firm. These issues were subsequently explored in several EGOS meetings, as sub-themes organized by the co-editors. The articles presented in this special issue were part of a larger group of articles submitted to Organization Studies from a general call for papers, issued in 2001. All papers were reviewed anonymously, and were developed in the usual rigorous Organization Studies review process.
The articles in this special issue inform the debate regarding an organizational view of the business firm indicated above. Taken singly and together the contributions to this special issue extend the discussion of the business firm to include a more complex, interpretative approach, one which conforms, we believe, to the actual behavior of real people in familiar contexts.
David Courpasson and Francoise Dany explore the age-old question of why and how people obey, a central problem for an organizational approach to the business firm. The authors review traditional organizational and political theories of organization, and identify the limitations of these views. The authors propose the concept of ‘moral obedience’, which integrates bureaucratic and democratic criteria in understanding individuals’ motivation to obey. The purpose of business leaders, according to the authors, is to create loosened communities where people should feel a sense of duty and where, at the same time, a sense of being unique and competitive should remain strongly embedded in individual rationales. Through the analysis of three case studies, the authors explore the Verstehen of individuals as they experience opportunities for obedience or exit. Thus, obedience may derive from self-interest in firms, but just as important, and overlooked, are the instances of obedience which derive from powerful social norms and values governing behavior. Thus, firms should be viewed as a subset of a class of actors long identified by sociologists as social systems.
Extending this contingent line of argument to organizational populations, Arndt Sorge and Martin Brussig explore organizational processes of development, utilizing small enterprises in East Germany during 1990-94, a period and context in which business firms evolved from communist to capitalist macro-economic institutional structures. Analyzing qualitative studies and questionnaire responses from 120 smaller enterprises, the authors find economic performance and employment development are successfully predicted utilizing a typology of firms derived from an interactionist, co-evolutionary framework. This article persuasively argues that enactment and adaptation by firms and managers occurs frequently, and that the incidence of adaptation is more pervasive than previously thought. Structural inertia may be a property of both organizations and organizational environments (Hannan and Freeman 1989); adaptation and enactment, however, may derive from properties of management (compare Koza and Lewin 1998; Lewin and Koza 2001).
Do the above-mentioned ideal types contradict? Philippe d’Iribarne argues that the strategic arena model and the community model should be considered as complementary. In real life, firms as organizations are arrayed in the ‘swollen middle’ (Hennart 1993), incorporating features of both pure models. His article provides secondary analysis on two cases studies he had originally conducted about the influence of culture on economic organizations. One firm, located in Morocco, is characterized by a Gemeinschaft-like cultural Gestalt. The other firm is in the USA and seems closer to a Gesellschaft pattern. Evidence suggests that national and local cultural differences do not co-vary with contrasting modes of real functioning and management of the firm. Any firm, any strategic arena-oriented management, has to take into account the existence of some shared beliefs and values of what may be defined as sacred. Moral principles, the content of which may vary across firms and countries, are to a large extent diffused and imposed by the surrounding social fabric. The firm can use utility-maximizing preferences to mobilize individuals for its own benefit provided that it takes into account communitarian dimensions. Adhesion to beliefs and values remains silent as long as they are not transgressed.
Culture matters. It even offers a central issue around which a theory of the firm should be built. John Weeks and Charles Galunic define a programmatic essay for further research on the identity side of firms. Finding inspiration in biology, they argue that firms should not be considered through creationist and normative lenses, but as cultural entities which preexist and which are to be described. Culture is not an exogenous environmental factor, hut an intra-organizational property. Any firm distributes modes of thought, patterns of beliefs, communication and behaviors throughout its social fabric. The term ‘meme’ is suggested to name these modes and to be the unit of selection in cultural bodies. Theory and observation should explore how such memes evolve and diffuse, how in a genetic way intentional activities vary, select and retain modes of thought. The article discusses in depth the characteristics of these three mechanisms. Organizational theory should therefore explain why firms persist, why memes get selected. Firms are what they are because they are better ways for memes to replicate themselves than other forms of social interdependence and grouping.
Two Views of the
Action area Purpose Payoff matrix Levers
Strategic behavior Instrumental Exogenous Incentives
Identification/ Expressive/ Endogenous Ideology/
normative order institutional social
Arrow, Kenneth 1974 The limits of organization. New York: Norton.
Barnard, Chester I. 1938 The functions of the executive. Cambridge, MA: Harvard University Press.
Black, Duncan 1958 The theory of committees and elections. Cambridge: Cambridge University Press.
Boudon, Raymond 2001 The origin of values. London: Transaction.
Coleman, James S. 1990 Foundations of social theory. Cambridge, MA: Belknap Press.
Cyert, Richard M., and James G. March 1963 A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice Hall.
Daft, Richard. L., and Karl E. Weick 1984 “Toward a model of organizations and interpretation systems’.
Academy of Management Review 9/2: 284-295.
DiMaggio, Paul, and Woody W. Powell
1983 ‘The iron-cage revisited: Institutional isomorphism and collective rationality in organizational fields’. American Sociological Review 38/2: 147-160.
Eden C., and J. C. Spender, editors 1998 Managerial and organizational cognition. London: Sage.
Elster, Jon 1989 The cement of society. Cambridge: Cambridge University Press.
Garfinkel, Harold 1984 Studies of ethnomethodology. London: Polity Press.
Giddens, Anthony 1987 La constitution de la societe. Paris: PUF.
Hannan, Michael T., and John H. Freeman 1989 Organizational ecology. Cambridge, MA: Harvard University Press.
Hennart, Jean-Francois 1993 ‘Explaining the swollen middle: Why most transactions are a mix of “market” and “hierarchy”‘. Organization Science 4/4: 529-547.
Kogut, Bruce, and Udo Zander 1996 ‘What do firms do? Coordination, identity, and learning’. Organization Science 7/5: 502-518.
Koza, M. P., and A. Y. Lewin 1998 ‘The coevolution of strategic alliances’. Organization Science 9/3: 255-264.
Lewin, A. Y., and M. P. Koza 2001 ‘Coevolutionary processes of strategic adaptation and change: The promise and challenge of empirical research’. Organization Studies 22/6: v-xii.
March, James G., and Johan P. Olsen 1976 Ambiguity and choice in organizations. Bergen: Universitetforlaget.
March, James G., and Herbert A. Simon 1958 Organizations. New York: Wiley.
Michaud, Claude, and Jean-Claude Thoenig 2003 Making strategy and organisation compatible. London: Palgrave Macmillan.
Oliver, P., G. Marwell, and R. Teixeira 1985 ‘A theory of critical mass: Interdependence, group heterogeneity, and the production of collective action’. American Journal of Sociology 91/3: 522-556.
Olson, Mancur 1965 The logic of collective action: Public goods and the theory of groups. Cambridge, MA: Harvard University Press.
Selznick, Philip 1949 TVA and the grass roots: A study in the sociology or formal organization. Berkeley: University of California Press.
Selznick, Philip 1993 The moral community. Berkeley: University of California Press.
Shils, Edward 1975 Center and periphery. Chicago, IL: University of Chicago Press.
Simon, Herbert A. 1945 Administrative behavior: A stuclv of decision-making processes in administrative organizations. New York: Free Press.
Weber, Max 1948 From Max Weber: Essays in sociology, trans. H. H. Gerth and C. W. Mills. New York: Routledge and Kegan Paul.
Mitchell P. Koza is Director General and Professor of International Strategy at The European Center for Executive Development (CEDEP) in Fontainebleau. His research examines a variety of issues in international competitiveness, inter-organizational relations, and policy analysis. This is the second Special Issue of Organization Studies that Professor Koza has served as Guest Editor; the first volume explored issues related to co-evolution and multilevel analysis.
Address: CEDEP, Boulevard de Constance, 77305 Fontainebleau, France.
Jean-Clande Thoenig is Directeur de Recherche at the Centre National de la Recherche Scientifique, Groupe d’Analyse des Politiques Publiques and Ecole Normale Superieure, Cachan, and Professor of Sociology at INSEAD, Fontainebleau. His research concerns branding, organizational cognition, research and technology policy management, and governance in multilevel democracies.
Address: GAPP, ENS, 61 avenue du President Wilson, F-94235 Cachan, France.
COPYRIGHT 2003 Sage Publications, Inc.
COPYRIGHT 2004 Gale Group