Firm as a Niche-Constructing Entity

The firm as an environment-constructing entity

Analyse(s) and transformation(s) of the firm

Lyon, France

22-23 November 2007

Pavel O. Luksha

http://www. luksha.ru [email protected]

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Agenda

‘Nature of the firm’ debateFirm’s causal powers over its environmentConsideration of firm/environment

relations in economics, organizational and management theory

Niche construction in evolutionary biologyNiche construction by the firm

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‘Nature of the firm’ debate

Firm as a black box (autonomous and monolythic agent) in neoclassical theory

Transaction cost theory interpretations: fictionalist: firm as a ‘nexus of contracts’ that

is a ‘legal fiction’ (Alchian 1984; Jensen, Meckling, 1976)

aggregationist: firm as a collection of real (non-human) assets that ‘glue’ the firm (Hart, 1989, 1995; Grossman, Hart, 1986)

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Firm as a real entity

‘Real entity’ interpretations: entity = emergent qualities of organizational level

(system > sum of parts) views arising in old institutional school / legal studies

(Dewey, Freund, Brown etc), resource-based view (Penrose, Barney, Grant etc.) etc.

real entity is typically defined by ‘internal’ properties (Gindis, 2006, 2007)

need to be complemented by ‘external’ properties (defined in relation to environment)

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Firm as a real entity (2)

Crucial external property: the firm as a real entity should have causal powers over its environment

We need to present instances and theory of the influence of causal power of the firm over its environment

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CasesImportant phenomenological evidences from business

practice (ignored by current economic/organizational theory), e.g.: demand side:

preference shift: evidences on manipulation of consumer preferences (Packard, 1957, Hastings et. al. 2003, Galst, White, 1976, Perrien et. al. 1997, etc.)

loyalty building (de Chernatony, McDonald, 1992)

supply side creation of firm-specific supplier clusters, ‘ecogenesis’ (Normann, 2001)

non-market strategies (Baron, 1995) (e.g.lobbying)

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Summary of cases

THE FIRM

Demand side:1. differentiation of products2. modification of preferences3. building of recognizable brands

Supply side:1. creation of specialized suppliers2. creation of specialized workforce

Rivals:industrial leadership, oligopolic games, technological spillovers, …

Investorsmanagement of investor expectations

Legal environment:lobbying for more favourable laws, regulations, standards etc.

Mass media / public opinionprojection of favourable images of the firm

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Firm-environment relationship

Dominant paradigms of modeling firm/environment relationship were influenced by evolutionary thinking adaptationist selectionist coevolutionary

Paradigms that ignored the issue whatsoever: fictionalist (firm / environment as a fiction)

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AdaptationistApproaches:

neoclassical theory of the firm, structure-conduct-performance in industrial organization

dominating approach in organizational studies and strategic management

Firms adjust in response to threats: the environment has a causal power that induces

modifications and transformations in firms (usually seen as change in arrangement of individuals)

firms have little or no ability to modify their environments

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SelectionistApproaches

(neo-Schumpeterian) evolutionary economic modeling

organizational ecology / environmental school of strategic management

Firms are selected by environmental forces: organizations are rigid, and can be selected out if

environment changes organizational success is ascribed to processes of

selection, over which organizations have little or no control

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FictionalistBundles together two approaches that are usually

considered separatelyOrganization as a fiction:

transaction cost interpretations (and related)Environment as a fiction:

social constructivism sees environments as invented (Starbuck, 1976), having no independent existence (Smirich, Stubbart, 1985)

In both approaches, the firm-environment distinction / relationship dissolves. It is a way to deny rather to understand.

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Evolutionary non-reductionist

Adaptationists / selectionists emphasize one aspect at the expense of other aspects (= reductionism)

Non-reductionist approaches: multi-level evolution (Baum, Singh, 1994) organization-environment coevolution (March, 1994,

Baum, Singh, 1994) [many theoretical / empirical studies in recent years]

Admits the ability to significantly modify environment, but does not set out explicit models of environment construction

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Niche construction: inspirations from evolutionary biologyDomination of adaptationist / selectionist view in

evolutionary biologyGene-biased view:

organism is but a mediator that translates natural selection pressures to help select genotypes (e.g. Dawkins)

Criticisms that help remove bias: organisms are active in their environments (Lewontin,

Levin, Lloyd etc.) niche construction (Odling-Smee et. al. 2003): ability to

modify environmental pressures

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Consideration of environment in adaptationist / selectionist paradigm

E

E’

G

G’

natural selection

natural selection

gen

etic

in

herit

anc

e

variation

disturban-ces

G – gene pool of a given population of organismsE – 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))

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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))

gen

etic

in

herit

anc

e

envi

ron

men

t in

herit

anc

e

[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.

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Niche construction: transplantation of a concept

E

E’

R

R’

∆ (E) ∆ (R)environmental pressures

production of environment

production of environment

environmental pressures

inst

itut

iona

l in

heri

tanc

e

rout

ine

inhe

rita

nce

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

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Niche construction: transplantation of a concept (2) 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)

Organizational strategies as manifests of organizational capabilities (organization-specific resources) (Penrose, 1959, Prahalad&Hamel, 1990, Grant, 1996)

Organizational environment plasticity as a consequence of individual / group learning capabilities

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General classification of niche construction

action is… prescribed / controlled not prescribed / not

controlled

Dawkins (2004): ‘niche construction’

Dawkins (2004): ‘niche changing’

individual [= single niche constructor]

‘extended phenotype’: routine reconstruction of necessary environment

innovative construction of environment (animal / human)

collective [=multiple niche constructors]

coordinated collective change of environment

unintended change of environment (self-organization effects)

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Classified examples of niche construction in business

action is… prescribed / controlled not prescribed / not controlled

individual [= single niche constructor]

- differentiation

- brand building, loyal customer base

- lobbying

- establishment of particular model of supply

- spillover effects of innovation

- externalities of individual production

collective [=multiple niche constructors]

- collusion (cartels etc.)

- lobbying for necessary governmental decisions

- establishment of rules for business community (e.g. in the financial market)

- tacit collusion in oligopoly

- pollution and overuse of common resources

- financial crises

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Organizational mechanisms of niche constructionOrganizations can operate in a legitimate way

only within their own borders: ‘King Midas’ effect of organization

Organizations can only transcend their borders by communications, using media as ‘extensions of themselves’

Niche constructing effects are conveyed through communications (that establish demonstrations, reinforcements and learning contexts)

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Institutional vehicles of niche construction

Niche constructing communications of the organization are structured (repeatedly transmitted) by purposefully established ‘institutional vehicles’

The institutional vehicle: an inter-organizational structure involving the media, the counterparts, the supporting agencies bounded by contractual arrangement

Initialization of vehicle operation is within organizational routines

The outcome of vehicle operation: new behavioural patterns / habits / behavioural models

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Institutional vehicles of niche construction (2)

emergent inter-organizational practices & resources

THE FIRM COUNTERPART (individual/

collective)

SUPPORTINGAGENCIES

routines & resources committed to the activity

routines & resources committed to the activity

habits/routines & resources invoked & affected by learning

INSTITUTIONAL SET-UP

contracts

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Conclusions

1. ‘Firm is a real entity’ views can be supported by evidences of environment constructing ability of organization

2. Firm-environment relation considerations are dominated by adaptationist / selectionist approaches

3. This situation closely mirrors mainstream views in evolutionary biology, criticized by a number of scholars (Lewontin etc.)

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Conclusions (cont.)

4. 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)

5. Evidences of organizational niche construction are multiple (demand side, supply side, non-market strategy)

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Firm as an environment-constructing entityThe notion of the firm as an agent of

adaptation and a subject of selection is contested. This notion is, at least, incomplete.

The firm should be seen as an entity that actively creates its own environment, and adjusts the constraints of its own adaptation and selection