Theory of a Firm Essay

729 WordsAug 9, 20123 Pages
Two explanations for being ‘fit for purpose • How do organisations become ‘fit for purpose’ or ‘equipped to perform well’? • There are at least two kinds of answers to this question: 1. Design 2. Evolution Arguments for design Most economists and organisational theorists focus on the deliberate choices managers face in making their firms ‘fit for purpose’. In other words, it is assumed that there is a (group of) ‘planner(s)’ who design the organisation and its resources in such a way that it functions efficiently. Examples: incentives are aligned in such a way that agents are given the right motivations (agency theory); the boundaries of activities are drawn so that transaction costs are minimised (transaction cost economics); the hierarchical structure is designed to allow efficient communication. Arguments for evolution • An alternative approach holds that firms can become ‘equipped to perform well’, without being designed so, through a process of cumulative adaptation. • This approach is inspired by evolutionary biology The biological analogy • No place for arguments of design at all. • Rigorous explanation for adaptation of species to their environment: Charles Darwin (1809-1882): unplanned occurrences of chance variation within a population; natural selection due to pressures of the environment; retention of successful characteristics through inheritance. (Earlier: J.B. Lamarck (1744-1829): reinforcement of physical characteristic through acquired habits, retention of successful characteristics through inheritance Limits to analogy between biology and theory of the firm • In contrast to natural species, the functioning of firms (like any social construct) is more likely to be the product of both design, as well as less deliberate, “evolved” characteristics. • In firms there is no close analogy to

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