Firm as a Niche-Constructing Entity


Published on

Pavel Luksha. Paper presented at the 2007 Lyon meeting 'Analyses and transformations of the firm', dedicated to the implications of the emerging theory of organizational niche construction

Published in: Business, Technology
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Firm as a Niche-Constructing Entity

  1. 1. The firm as an environment-constructing entity Pavel O. Luksha http://www. Analyse(s) and transformation(s) of the firm Lyon, France 22-23 November 2007
  2. 2. Agenda <ul><li>‘ Nature of the firm’ debate </li></ul><ul><li>Firm’s causal powers over its environment </li></ul><ul><li>Consideration of firm/environment relations in economics, organizational and management theory </li></ul><ul><li>Niche construction in evolutionary biology </li></ul><ul><li>Niche construction by the firm </li></ul>
  3. 3. ‘ Nature of the firm’ debate <ul><li>Firm as a black box (autonomous and monolythic agent) in neoclassical theory </li></ul><ul><li>Transaction cost theory interpretations: </li></ul><ul><ul><li>fictionalist : firm as a ‘nexus of contracts’ that is a ‘legal fiction’ (Alchian 1984; Jensen, Meckling, 1976) </li></ul></ul><ul><ul><li>aggregationist : firm as a collection of real (non-human) assets that ‘glue’ the firm (Hart, 1989, 1995; Grossman, Hart, 1986) </li></ul></ul>
  4. 4. Firm as a real entity <ul><li>‘ Real entity’ interpretations: </li></ul><ul><ul><li>entity = emergent qualities of organizational level (system > sum of parts) </li></ul></ul><ul><ul><li>views arising in old institutional school / legal studies (Dewey, Freund, Brown etc), resource-based view (Penrose, Barney, Grant etc.) etc. </li></ul></ul><ul><ul><li>real entity is typically defined by ‘internal’ properties (Gindis, 2006, 2007) </li></ul></ul><ul><ul><li>need to be complemented by ‘external’ properties (defined in relation to environment) </li></ul></ul>
  5. 5. Firm as a real entity (2) <ul><li>Crucial external property: the firm as a real entity should have causal powers over its environment </li></ul><ul><li>We need to present instances and theory of the influence of causal power of the firm over its environment </li></ul>
  6. 6. Cases <ul><li>Important phenomenological evidences from business practice (ignored by current economic/organizational theory), e.g.: </li></ul><ul><ul><li>demand side: </li></ul></ul><ul><ul><ul><li>preference shift: evidences on manipulation of consumer preferences (Packard, 1957, Hastings et. al. 2003, Galst, White, 1976, Perrien et. al. 1997, etc.) </li></ul></ul></ul><ul><ul><ul><li>loyalty building (de Chernatony, McDonald, 1992) </li></ul></ul></ul><ul><ul><li>supply side </li></ul></ul><ul><ul><ul><li>creation of firm-specific supplier clusters, ‘ecogenesis’ (Normann, 2001) </li></ul></ul></ul><ul><ul><li>non-market strategies (Baron, 1995) (e.g.lobbying) </li></ul></ul>
  7. 7. Summary of cases THE FIRM Demand side : 1. differentiation of products 2. modification of preferences 3. building of recognizable brands Supply side : 1. creation of specialized suppliers 2. creation of specialized workforce Rivals : industrial leadership, oligopolic games, technological spillovers, … Investors management of investor expectations Legal environment : lobbying for more favourable laws, regulations, standards etc. Mass media / public opinion projection of favourable images of the firm
  8. 8. Firm-environment relationship <ul><li>Dominant paradigms of modeling firm/environment relationship were influenced by evolutionary thinking </li></ul><ul><ul><li>adaptationist </li></ul></ul><ul><ul><li>selectionist </li></ul></ul><ul><ul><li>coevolutionary </li></ul></ul><ul><li>Paradigms that ignored the issue whatsoever: </li></ul><ul><ul><li>fictionalist (firm / environment as a fiction) </li></ul></ul>
  9. 9. Adaptationist <ul><li>Approaches: </li></ul><ul><ul><li>neoclassical theory of the firm, structure-conduct-performance in industrial organization </li></ul></ul><ul><ul><li>dominating approach in organizational studies and strategic management </li></ul></ul><ul><li>Firms adjust in response to threats: </li></ul><ul><ul><li>the environment has a causal power that induces modifications and transformations in firms (usually seen as change in arrangement of individuals) </li></ul></ul><ul><ul><li>firms have little or no ability to modify their environments </li></ul></ul>
  10. 10. Selectionist <ul><li>Approaches </li></ul><ul><ul><li>(neo-Schumpeterian) evolutionary economic modeling </li></ul></ul><ul><ul><li>organizational ecology / environmental school of strategic management </li></ul></ul><ul><li>Firms are selected by environmental forces: </li></ul><ul><ul><li>organizations are rigid, and can be selected out if environment changes </li></ul></ul><ul><ul><li>organizational success is ascribed to processes of selection, over which organizations have little or no control </li></ul></ul>
  11. 11. Fictionalist <ul><li>Bundles together two approaches that are usually considered separately </li></ul><ul><li>Organization as a fiction: </li></ul><ul><ul><li>transaction cost interpretations (and related) </li></ul></ul><ul><li>Environment as a fiction: </li></ul><ul><ul><li>social constructivism sees environments as invented (Starbuck, 1976), having no independent existence (Smirich, Stubbart, 1985) </li></ul></ul><ul><li>In both approaches, the firm-environment distinction / relationship dissolves. It is a way to deny rather to understand. </li></ul>
  12. 12. Evolutionary non-reductionist <ul><li>Adaptationists / selectionists emphasize one aspect at the expense of other aspects (= reductionism) </li></ul><ul><li>Non-reductionist approaches: </li></ul><ul><ul><li>multi-level evolution (Baum, Singh, 1994) </li></ul></ul><ul><ul><li>organization-environment coevolution (March, 1994, Baum, Singh, 1994) [many theoretical / empirical studies in recent years] </li></ul></ul><ul><li>Admits the ability to significantly modify environment, but does not set out explicit models of environment construction </li></ul>
  13. 13. Niche construction: inspirations from evolutionary biology <ul><li>Domination of adaptationist / selectionist view in evolutionary biology </li></ul><ul><li>Gene-biased view: </li></ul><ul><ul><li>organism is but a mediator that translates natural selection pressures to help select genotypes (e.g. Dawkins) </li></ul></ul><ul><li>Criticisms that help remove bias: </li></ul><ul><ul><li>organisms are active in their environments (Lewontin, Levin, Lloyd etc.) </li></ul></ul><ul><ul><li>niche construction (Odling-Smee et. al. 2003): ability to modify environmental pressures </li></ul></ul>
  14. 14. Consideration of environment in adaptationist / selectionist paradigm E E’ G G’ natural selection natural selection genetic inheritance variation disturban- ces G – gene pool of a given population of organisms E – environment for given population of organisms G’ = f (G, E, ∆ (G)) ∆ (E) ∆ (G) Much of the traditional evolutionary studies treat environment as complex and independent from impact of population (adaptationist / selectionist view) [from (Laland et al.,2000), amended by the present author] E’ = h (E, ∆ (E))
  15. 15. Concept of niche construction E E’ G G’ ∆ (E) ∆ (G) natural selection niche construction niche construction natural selection E’ = h(G, E, ∆ (E)) G’ = f(G, E, ∆ (G)) genetic inheritance environment inheritance [from (Laland et al.,2000), amended by the present author] Niche construction: the process whereby organisms, through their metabolism, their activities, and their choices, modify their own and each other’s niches. Niche construction may result in changes in one or more natural selection pressures.
  16. 16. Niche construction: transplantation of a concept R’ = f (R, E, ∆(R)) E’ = h (R, E, ∆(E)) Niche construction: a change made to the environment (outside the boundary of the firm) that seriously impacts upon the decision making of firm’s counterparts, implying long-lasting alterations in their behavioural patterns E E’ R R’ ∆ (E) ∆ (R) environmental pressures production of environment production of environment environmental pressures institutional inheritance routine inheritance
  17. 17. Niche construction: transplantation of a concept (2) <ul><li>Organizations as significantly rigid structures (Hannan, Freeman, 1977, 1984; Staw et. al. 1981), preserved by reproduction of routines (implying the relative stability against the environment) </li></ul><ul><li>Organizational strategies as manifests of organizational capabilities (organization-specific resources) (Penrose, 1959, Prahalad&Hamel, 1990, Grant, 1996) </li></ul><ul><li>Organizational environment plasticity as a consequence of individual / group learning capabilities </li></ul>
  18. 18. General classification of niche construction unintended change of environment (self-organization effects) coordinated collective change of environment collective [=multiple niche constructors] innovative construction of environment (animal / human) ‘ extended phenotype’: routine reconstruction of necessary environment individual [= single niche constructor] Dawkins (2004): ‘niche changing’ Dawkins (2004): ‘niche construction’ not prescribed / not controlled prescribed / controlled action is…
  19. 19. Classified examples of niche construction in business - tacit collusion in oligopoly - pollution and overuse of common resources - financial crises - collusion (cartels etc.) - lobbying for necessary governmental decisions - establishment of rules for business community (e.g. in the financial market) collective [=multiple niche constructors] - spillover effects of innovation - externalities of individual production - differentiation - brand building, loyal customer base - lobbying - establishment of particular model of supply individual [= single niche constructor] not prescribed / not controlled prescribed / controlled action is…
  20. 20. Organizational mechanisms of niche construction <ul><li>Organizations can operate in a legitimate way only within their own borders: ‘King Midas’ effect of organization </li></ul><ul><li>Organizations can only transcend their borders by communications, using media as ‘extensions of themselves’ </li></ul><ul><li>Niche constructing effects are conveyed through communications (that establish demonstrations, reinforcements and learning contexts) </li></ul>
  21. 21. Institutional vehicles of niche construction <ul><li>Niche constructing communications of the organization are structured (repeatedly transmitted) by purposefully established ‘institutional vehicles’ </li></ul><ul><li>The institutional vehicle : an inter-organizational structure involving the media, the counterparts, the supporting agencies bounded by contractual arrangement </li></ul><ul><li>Initialization of vehicle operation is within organizational routines </li></ul><ul><li>The outcome of vehicle operation: new behavioural patterns / habits / behavioural models </li></ul>
  22. 22. Institutional vehicles of niche construction (2) emergent inter-organizational practices & resources THE FIRM COUNTERPART (individual/ collective) SUPPORTING AGENCIES routines & resources committed to the activity routines & resources committed to the activity habits/routines & resources invoked & affected by learning INSTITUTIONAL SET-UP contracts
  23. 23. Conclusions <ul><li>‘ Firm is a real entity’ views can be supported by evidences of environment constructing ability of organization </li></ul><ul><li>Firm-environment relation considerations are dominated by adaptationist / selectionist approaches </li></ul><ul><li>This situation closely mirrors mainstream views in evolutionary biology, criticized by a number of scholars (Lewontin etc.) </li></ul>
  24. 24. Conclusions (cont.) <ul><li>Insights on active role of organisms (niche construction) can be transplanted to understand environment constructing role of organizations (creation/ modification of long-term behavioural patterns) </li></ul><ul><li>Evidences of organizational niche construction are multiple (demand side, supply side, non-market strategy) </li></ul>
  25. 25. Firm as an environment-constructing entity <ul><li>The notion of the firm as an agent of adaptation and a subject of selection is contested. This notion is, at least, incomplete . </li></ul><ul><li>The firm should be seen as an entity that actively creates its own environment, and adjusts the constraints of its own adaptation and selection </li></ul>