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Rethinking the firm: organizational approaches

Organization Studies, Oct, 2003 by Mitchell P. Koza, Jean-Claude Thoenig

Abstract

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.

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Keywords: organizational theory, collective action, cognitions, strategic behavior, Gemeinschaft, social function of the firm

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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.

Rethinking the firm: organizational approaches

Organization Studies, Oct, 2003 by Mitchell P. Koza, Jean-Claude Thoenig

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