Topic 1

RCB 711
RESEARCH FOR COMMUNICATION

IN BUSINESS
COURSE READER
TOPIC 1: THE BUSINESS AS A

SYSTEM
2022
The Theory of the Firm
Production Function
Production Function
• States the relationship between inputs and
outputs
• Inputs – the factors of production classified
as:
– Land – all natural resources of the earth – not just
‘terra firma’!
• Price paid to acquire land = Rent
– Labour – all physical and mental human effort
involved in production
• Price paid to labour = Wages
– Capital – buildings, machinery and equipment not
used for its own sake but for the contribution it
makes to production
• Price paid for capital = Interest
Production Function
Inputs Process Output
Land
Product or
Labour service
generated
– value added
Capital
Analysis of Production Function:
Short Run
• In the short run at least one factor fixed in supply
but all other factors capable of being changed
• Reflects ways in which firms respond to changes in
output (demand)
• Can increase or decrease output using more or less
of some factors but some likely to be easier to
change than others
• Increase in total capacity only possible in the long
run
Short Run
In times of rising
sales (demand)
firms can increase
labour and capital
but only up to a
certain level – they
will be limited by
the amount of
space. In this
example, land is
the fixed factor
which cannot be
altered in the short
run.
Short Run
If demand slows
down, the firm can
reduce its variable
factors – in this
example it reduces
its labour and
capital but again,
land is the factor
which stays fixed.
Short Run
If demand slows
down, the firm can
reduce its variable
factors – in this
example, it
reduces its labour
and capital but
again, land is the
factor which stays
fixed.
Analysing the Production
Function: Long Run
• The long run is defined as the period of time taken to vary all
factors of production
– By doing this, the firm is able to increase its total
capacity – not just short term capacity
– Associated with a change in the scale of production
– The period of time varies according to the firm and the
industry
– In electricity supply, the time taken to build new capacity
could be many years; for a market stall holder, the ‘long
run’ could be as little as a few weeks or months!
Long Run
In the long run, the firm can change all its factors of production thus
increasing its total capacity. In this example it has doubled its capacity.
Production Function
• Mathematical representation of the
relationship:
• Q = f (K, L, La)
• Output (Q) is dependent upon the
amount of capital (K), Land (L)
and Labour (La) used
Costs
Costs
• In buying factor inputs, the firm will
incur costs
• Costs are classified as:
– Fixed costs – costs that are not related
directly to production – rent, rates,
insurance costs, admin costs. They can
change but not in relation to output
– Variable Costs – costs directly related to
variations in output. Raw materials
primarily
Costs
• Total Cost - the sum of all costs
incurred in production
• TC = FC + VC
• Average Cost – the cost per unit of
output
• AC = TC/Output
• Marginal Cost – the cost of one more
or one fewer units of production
• MC = TCn – TCn-1 units
Costs
• Short run – Diminishing marginal
returns results from adding
successive quantities of variable
factors to a fixed factor
• Long run – Increases in capacity
can lead to increasing, decreasing
or constant returns to scale
Revenue
Revenue
• Total revenue – the total amount
received from selling a given output
• TR = P x Q
• Average Revenue – the average
amount received from selling each unit
• AR = TR / Q
• Marginal revenue – the amount
received from selling one extra unit of
output
• MR = TRn – TR n-1 units
Profit
Profit
• Profit = TR – TC
• The reward for enterprise
• Profits help in the process of
directing resources to alternative
uses in free markets
• Relating price to costs helps a firm
to assess profitability in production
Profit
• Normal Profit – the minimum amount
required to keep a firm in its current
line of production
• Abnormal or Supernormal profit –
profit made over and above normal
profit
– Abnormal profit may exist in situations
where firms have market power
– Abnormal profits may indicate the existence
of welfare losses
– Could be taxed away without altering
resource allocation
Profit
• Sub-normal Profit – profit below
normal profit
– Firms may not exit the market even if
sub-normal profits made if they are
able to cover variable costs
– Cost of exit may be high
– Sub-normal profit may be temporary
(or perceived as such!)
Profit
• Assumption that firms aim to
maximise profit
• May not always hold true - there
are other objectives
• Profit maximising output would be
where MC = MR
Profit
Why? If Assume
the firm outputwere tois at
Cost/Revenue The
Ifproduce process
the firmthe continues
decides th to
MC 100 units. 104
The MC unit,
of
for
produce
this MC
each
MR –
one– The
successive
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addition
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unit toproduced.
total revenue100 asit
150 the
more of
101
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st
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is 20.
the addition
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145 Provided
toearns a result
total cost the MC is18,
isofnow
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extra (-105)
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theless
The than
producing
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addition the MR
one
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to total itfrom
140 this would reduce total
Reduces will
revenueof
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beproduction
more
selling
and
worth
is unit
that
140 ofthe
100
–
so would
th
unit
firm
not
total
expanding
output output
–to the as– it
price
Total
120
profit by beisadd
will 150.
worth 128 The firm
profit.
producing. can
is the difference
added
Added to this addreceived
worth the from
difference
expanding of
to total Added amount
The profit
between maximising
profit
profit to total the
output. costthe
selling that
and two
the is
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ADDEDunit.
revenue istowhere
total MR
received profit=
from
40
MC that 100th unit to profit
30
(130)
20
18 MR
100 101 102 103 104 Output

Costs
Production Function
Inputs
• Capital (K)
• Land (L)
• Labour (La)
Profit
Short Run
• At least one factor fixed

Long Run
• All factors variable

Revenue
Theory of Firms
Costs, Revenues and
Objectives
Theory of Firms
• Profit:
–Difference between Revenue
and Cost
Π = TR - TC
Theory of Firms
• Revenue = amount received from
the sale of goods or services
TR = P x Q
Theory of Firms
• Total Cost is the sum of all costs –
fixed, variable and semi-fixed
• Fixed Costs – do NOT depend on
quantity produced- Rent, Rates,
Insurance, etc.
• Variable Costs –vary directly with the
amount produced – raw materials
• Semi–Fixed Costs - may vary with
output but not directly – some types of
labour, energy costs
Theory of Firms
•Factor Costs:
• Labour – wages/salaries
• Land – rent
• Capital – interest
• Enterprise - profit
Theory of Firms
• Average Cost = Total cost divided
by the number of units produced
AC = TC/Q
AVC = TVC/Q
AFC = TFC/Q
Theory of Firms
• Marginal Cost
• The cost of producing one extra or one
less unit of output
MC = TCn units – TCn-1 / Q
• If TC of 100 units = £500 and TC of
producing 101 units is £505, MC =
£5.00
• Important concept
Theory of Firms
• Short and Long run:
• Short run – some factors fixed
and cannot be increased/reduced
• Long Run – time taken to vary all
factors of production
• Short and long run vary in all
industries:
Theory of Firms
• Railways – short run –’easy’ to
increase labour, long lead times for new
rolling stock – 5 years?
• Supermarkets – short run – can buy
new shelving, hire staff, etc but opening
of new stores takes several years
• Local Builder – short run buys new
tools, hires assistant; long run –
purchasing a new van – a couple of
months?
Theory of Firms
• Diminishing Marginal Returns
• Assumptions – some factors fixed
(e.g. capital and land)
• Adding variable factor – (labour)
• Total Product
• Average Product – TP / Q variable
factor (Qv)
• Marginal Product ΔTP/ΔQv
Theory of Firms
• Increasing the variable factor:
• TP rises at first, slows then falls
• AP rises at first then starts to fall
• MP rises, then falls, cuts AP at
highest point of AP, cuts horizontal
axis at point where TP starts to fall
Theory of Firms
• Objectives of firms:
• Profit maximisation
• Profit satisficing
• Long term survival
• Share price maximisation
• Revenue maximisation
• Brand loyalty
• Expansion and market dominance
Economics and Theory of the Firm, Chap. 1 of the
Handbook on Economics and Theory of the Firm, M.
Dietrich and Jackie Krafft (eds), Edward Elgar:
Cheltenham, 2012.
Michael Dietrich, Jackie Krafft
To cite this version:

Michael Dietrich, Jackie Krafft. Economics and Theory of the Firm, Chap. 1 of the Handbook on
Economics and Theory of the Firm, M. Dietrich and Jackie Krafft (eds), Edward Elgar: Cheltenham,
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PART I
INTRODUCTION
1
1. Economics and theory of the firm
Michael Dietrich and Jackie Krafft
1. INTRODUCTION
The title of this Handbook makes reference to the economics of the firm and the theory of the
firm. The economics of the firm characteristically concerns itself with issues of firm internal
structure, organization and boundaries. The theory of the firm analyses behaviour and
strategies in particular market contexts. Traditionally within economics these are viewed as
separate spheres of analysis. What happens inside the firm has long been studied
independently of what composes the details of the competitive environment of the firm and,
alternatively, market strategies emerge from a firm conceived as a black box. An early
statement of this separation is provided, for example, by Penrose (1980/1959)
... we shall not be involved in any quarrel with the theory of the ‘firm’ as part of a theory of price and
production, so long as it cultivates its own garden and we cultivate ours. (ibid, p. 10)
And to reinforce the same point
The economist’s ‘main conceptual schema’ is designed for the theory of price determination and resource
allocation, and it is unnecessary and inappropriate to try to reconcile this theory with ‘organization
theory’. (ibid, p. 14)
2
In a similar vein, but from a different tradition, Williamson (1985) suggests that exogenous
technologically separable units exist, that are characterized by some degree of asset
specificity. Exchange between these units takes place with resulting transaction costs. The
minimisation of these costs then results in firm organisation and more generally institutional
development.
Without wishing to undermine the fundamental contributions of either Edith Penrose or
Oliver Williamson, it is argued in this chapter that we must move beyond this separation and,
for example, examine how firm behaviour, strategies and competition (a characteristic of the
theory of the firm) interact with firm organisation. Hence, one guiding principle behind this
Handbook is that bridges should be created between these two areas of study. Without these
bridges potentially partial analysis can result. Two examples, developed in more detail below,
will be sufficient to illustrate this potentially partial analysis. First, an industry or
technological life-cycle perspective suggests that the nature of competition changes through
time. It is argued below that different approaches to the economics of the firm similarly
evolve through time in a manner linked to the underlying changes in the competitive
environment. Secondly, it is shown below that when account is taken of strategic interaction
in oligopoly contexts this has implications for a basic transaction cost account of the firm.
Both examples illustrate the potential importance of creating bridges between traditionally
separate areas.
This potential interaction is not, of course, a fundamentally new idea. For example Langlois
(2007), Casson (1997) or Morroni (1992, 2006) have developed work on the firm that can be
viewed as analysing this interaction. For example these authors suggest that organisational
characteristics and decisions can be analysed as affecting firm scale economies. For the
3
current authors interest in this approach to the firm goes back some time. Dietrich (1994)
suggested that we can really understand the firm only by taking account of governance
structure benefits as well as costs. The “benefits” encompass what is called here the theory of
the firm with a focus on external issues and the “costs” the economics of the firm with a focus
on internal issues. More recently Dietrich and Krafft (2011) present a framework to analyse
firm development, and specifically vertical integration, based on creating links between
technical and organizational aspects of the firm. They suggest that it is a truism that real firms
are both a technical and institutional entities. In reality, the firm is obviously a technical unit,
namely a unit that transforms factor inputs into outputs. This is originally where the theory of
the firm starts from analysing the impact of production and costs functions with demand on
the market. Equally, the firm is also an institutional unit, requiring that one pays attention to
its basic definition, its identity, its structure and boundaries which has become the usual
playground of the economics of the firm.
Of course it is always possible to assume one aspect exogenous (or in the extreme even ignore
it) and analyse the other in isolation. However the outcome is likely to end up with a partial
analysis. For instance, one can focus on the issue of asset specificity, an exogenous technical
characteristic supposed to generate motivation problems in a context of bounded rationality
and opportunism, and creating the development of institutional solutions. But an obvious
complexity here is that asset specificities imply non-contestable economic relationships that
can impact on the nature of the competitive environment. In turn the competitive environment
may feedback on to motivation problems. Alternatively, one can also focus on a given
organisational structure that may constrain the set of productive opportunities, leading to
increasing costs in terms of managerial and complementary assets.
4
2. RONALD COASE AND REAL FIRMS
This handbook develops a vision of the economics and theory of the firm that echoes work
opened up by Ronald Coase with his notion of realism. In his 1937 article 'The Nature of the
Firm', Coase proposes a research project that revolves around a realistic theory of the firm
(Coase, 1937/1993a):
it is all the more necessary not only that a clear definition of the word ‘firm’ should be given but that its
difference from a firm in the ‘real world’, if it exists, should be made clear. Mrs. Robinson has said that
‘the two questions to be asked of a set of assumptions in economics are : Are they tractable ? and : Do
they correspond to the real world ?’. Though, as Mrs. Robinson points out, ‘more often one set will be
manageable and the other realistic’, yet there may well be branches of theory where assumptions may be
both manageable and realistic. It is hoped to show (…) that a definition of a firm may be obtained which
is not only realistic in that is corresponds to what is meant by a firm in the real world, but is tractable (…)
(ibid, p. 18)
This idea is reflected throughout his various writings, each time further clarified. In one of his
most recent article, Coase (1998) returns to the notion of realist theory that the New
Institutional Economics can offer. According to Coase this theory is quite different from the
institutional economics of Commons and Mitchell, which does not offer any robust theory to
organize the vast collection of facts. This theory also differs from traditional analysis, which
is a pure theory, highly abstract and little affected by what happens in the real world (ibid, p.
72). Since Adam Smith, economists have mainly focused on the formalization of the invisible
hand, i.e. on the analysis of extreme decentralization. However, there are other possibilities to
develop economic analysis. We may be interested on how supply and demand determine
prices, but we may also analyze the factors that determine what goods and services will be
traded on markets and are charged a specific price. Coase believes that economists have
5
focused only on the first question, as they focused essentially on the issue of refining the
toolbox rather than the object of study:
In saying this I should not be thought to imply that these analytical tools are not extremely valuable. (…).
My point is different. I think we should use these analytical tools to study the economic system. I think
economists do have a subject matter : the study of the working of the economic system, a system in which
we earn and spend our incomes. (ibid., p. 73).
The realist theory of the firm should provide answers to questions like: what are the factors
that determine the relative costs coordination within a firm or on the market? What factors
determine the coordination between a firm and its supplier, client, partner or competitor?
How, ultimately, is achieved the coordination of this complex and interconnected structure of
the industry, which is also subject to the influence of the laws, of the social system, of
technological changes.
This distinction between pure theory and realistic theory of the firm is also strongly
denounced in his speech when he received the Nobel Prize in 1991, when he says that in the
pure theory of mainstream analysis (Coase, 1991):
What is studied is a system which lives in the minds of economists but not on earth. I have called the
result ‘blackboard economics’. The firm and the market appear by name but they lack any substance.
(ibid, p. 195).
However, in his 1993 article entitled 'The Nature of the Firm: Meaning', Coase explains the
methodology of his research project. Going back into the reasons that motivated the 1937
article, he explains that the argument has to be based on hypotheses both usable and realistic
(Coase, 1993b):
6
My article starts by making a methodological point : it is desirable that the assumptions we make should
be realistic. Most readers will pass over these opening sentences (Putterman omits them when reprinting
my article), and others will excuse what they read as a youthful mistake, believing, as so many modern
economists do, that we should choose our theories on the basis of the accuracy of their predictions, the
realism of their assumptions being utterly irrelevant. (…) In effect what this comes down to is that when
economists find that they are unable to analyze what is happening in the real world, they invent an
imaginary world which they should be capable of handling. (ibid, p. 52).
This idea is even further reinforced in a comment of an article by Posner (Coase, 1993c):
Posner (…) refers to my ‘dislike of abstraction’. This is wrong. It is true that I said, in my Warren Nutter
lecture, that the assumptions of our theory should be realistic. ‘Realism in assumptions forces us to
analyse the world that exists, not some imaginary world that does not’ (Coase, 1988, p. 65). But I go on to
say : ‘it is, of course, true that our assumption should not be completely realistic. There are factors we
leave out because we do not know how to handle them. There are others we exclude because we do not
feel the benefits of a more complete theory would be worth the costs involved in including them. Their
inclusion might, for example, greatly complicate the analysis without giving us greater understanding
about what is going on. Again, assumptions about other factors do not need to be realistic because they
are completely irrelevant (…) There are good reasons why the assumptions of one’s theories should not
be completely realistic but this does not seem that we should loose touch with reality’ (Coase, 1988, pp.
65-66). As this quotation indicates, I do not dislike abstraction. But the right degree of abstraction
depends on the problem that is being analysed. What I object to is mindless abstraction or the kind of
abstraction which does not help to understand the working of the economic system. My aim is to bring
existence an economic theory which is solidly based (ibid, p. 97).
It is therefore clear that the definition of the firm in the real world and in the analysis is a
fundamental issue in Coase’s work, leading to possible propositions on what is a theory to
understand how economic systems work.
7
In his article "Industrial Organization: A Proposal for Research", published in 1972 following
a conference in honor of the 50th anniversary of the NBER, Coase stresses that the object of
study of the realist theory he developed is the organization of industry, and not just the firm
(Coase, 1972):
We all know what is meant by the organization of industry. It describes the way in which the activities
undertaken within the economic system are divided up between firms. As we know, some firms embrace
many different activities; while for others, the range is narrowly circumscribed. Some firms are large ;
others, small. Some are vertically related; others are not. This is the organisation of industry or – as it is
used to be called – the structure of industry. What one would expect to learn from a study of industrial
organisation would be how industry is organised now, and how it differs from what it was in earlier
periods ; what forces were operative in bringing about this organisation of industry and how these forces
have been changing over time ; what the effects would be of proposals to change, through legal action of
various kinds, the forms of industrial organization. (ibid, p. 60).
And he adds:
But if we are to tackle the problem of industrial organisation seriously, a theory is needed. (ibid, p. 63).
The work he considers as important in guiding a realistic theory of the organization of
industry, are those by William Thorp, DH Robertson and Alfred Marshall. These references
have inspired his 1937 theory on the nature of the firm and fit also with his article of 1972 on
the organization of industry:
The way in which an industry is organized is thus dependent on the relation between the costs of carrying
out transactions on the market and the costs of organizing the same operations within that firm which can
perform this task at the lowest cost. Furthermore, the costs of organizing an activity within any given firm
8
depends on what other activities it is engaged in. A given set of activities will facilitate the carrying out of
some activities, but hinder the performance of others. It is these relationships which determine the actual
organization of industry. (…). But having said this, how far ahead are we ? We know very little about the
costs of conducting transactions on the market or what they depend on ; we know next to nothing about
the effects on costs of different groupings of activities within firms. About all we know is that the
working out of these interrelationships leads to a situation in which viable organizations are small in
relation to the economic system of which they are part. (ibid, p. 64).
Although the NBER contributions in this area were very few in 1972, Coase emphasizes in
particular three names Solomon Manufacturer ‘The trend of government activity in the US
since 1900’ ; Ralph Nelson, ‘Merger movements in American industry’ ; and Michael Gort,
‘Diversification and integration in American industry’:
This proposal for more research is founded on my belief that it is unlikely that we shall see significant
advances in our theory of the organisation of industry until we know more about what is that we must
explain. An inspired theoretician might do as well without such an empirical work, but my own feeling is
that the inspiration is most likely to come through the stimulus provided by the patterns, puzzles, and
anomalies revealed by systematic data-gathering, particularly when the prime need is to break our
existing habits of thought ” (ibid, pp. 70-71). Of the three works that I have mentionned, that by Professor
Gort comes closest to what I have in mind when I speak of the research on industrial organization that we
need today. Professor Gort does deal with the question of a range of activities organized within the firm,
and there can be few problems of importance in industrial organization on which he does not touch.
However, Professor Gort abandoned the more straightforward methods of earlier investigators, such as
William Thorp. He makes the central theme of his book a study of diversification. He measures trends in
diversification, and seeks to discover the economic characteristics of diversifying firms, and of the
industries entered by diversifying firms. Degrees of diversification are not, however, easy to define or to
measure, and the results which Professor Gort presents are difficult to interpret without knowledge of the
underlying industrial structure (ibid, pp. 72-73).
9
As we shall see later in this chapter, the reference to Michael Gort by Ronald Coase is of high
importance, since his work together with Steven Klepper on industry life cycles are
considered today as a central representation of how the drivers of change operate at the level
of firms and industries. This is, according to Coase, the premise of a realistic theory of
industry organization.
To develop a general approach to the firm in the spirit of Coase’s real firms, one has to
recognise that any real firm is made of two bases: technical (T) and institutional (I). The T
base is the traditional arena of the theory of the firm and the I base is covered by the
economics of the firm. To create linkages between T and I factors we can recognise that each
can act in one of three ways (Dietrich and Krafft, 2011): they can act as drivers of change,
they can govern change processes and they can act as attractors of change. To understand the
philosophy behind this Handbook each of these can be (briefly) considered in turn.
Analyses of the firm that emphasise T and I drivers of change are characteristically
Schumpeterian in nature. Although Schumpeter originally suggested that innovation covers
both T and I factors modern Schumpeterian analyses of the firm tend to prioritise T drivers
with I implications following from this in a manner that can be viewed as governing the
details of change processes. Although Schumpeter tends to inspire modern discussions of firm
change, equally other early writers on the firm emphasise T and I drivers, for example Smith
and Marx. In terms of more modern writing the competence and cognitive views of the firm
emphasise that change drivers are firm specific and frequently based on tacit and/or system
based knowledge.
10
The analysis of firm change processes can also be viewed as being governed by T and I
factors. For example the modern analysis of modularity and network effects emphasises that
firm adaptation is an important topic for analysis. I process factors are similarly important to
the analysis of the firm. For example, Galbraith’s technostructure can be viewed in this light
or the way that cognition and knowledge channel firm development. In addition Commons’
analysis of the firm as an amalgam of rules can be viewed in this light. Finally exogenous T
and I changes can act as attractors to which firms adjust. This is the method characteristically
adopted by Austrian views of entrepreneurship in which firm orientation is viewed as
adaptation to market and technical change. In addition transaction cost economics adopts the
same abstract logic. With regard to the latter tradition an important implication follows from
the attractor logic that is used. As Williamson (1991) himself emphasises, firm adaptation is
viewed as economising not strategising. This point is taken up in later discussion in this
chapter.
While different approaches to the firm can be analysed in terms of T and I factors that create
change drivers, govern change processes and act as attractors, three complexities can be
recognised that have influenced the structure and content of this Handbook. First the various
elements of the T-I, drivers, processes and attractors framework can be combined. Often this
combination is logically necessary. For example within transaction cost economics exogenous
technical innovation can change asset specificities that lead to institutional development
because of the new attractor(s). But also note that certain combinations create logical
difficulties. For example an emphasis on firm processes tends to downgrade the importance of
change attractors. In addition, frequently combining the various elements of real firm analysis
creates complexities that need to be managed. One approach here is to constrain analysis to
concentrate on particular aspects of firm activity as is done in parts VI and VII of this
11
Handbook that cover what are called “modern issues” and “firm strategies”. The second
complexity of real firm analysis is that the various possible linkages upon which it is based do
not create closed systems. Instead wider institutions and government policies channel the
manner in which various linkages can function. This is reflected in this volume by a number
of the chapters in part IV (on the multinational firm) and also in part VIII on economic
policies and the firm.
The final complexity of real firm analysis, is one in which the editors are particularly
interested. It involves locating the analysis of the firm in particular market or similar effects.
This is the logic for the inclusion of the chapters in part VI of this Handbook that cover
various “modern issues”. Two such specific market effects are useful tools to create bridges
between the theory and the economics of the firm: life cycle theory and oligopoly theory. In
the rest of the main body of this chapter, these two approaches to the analysis of firms and
markets will be used to explore possible interactions between the economics and theory of the
firm. The intention here is that the two approaches provide complementary insights –
although we will see that some of these insights are remarkably consistent. The
complementarity here is, of course, fundamentally methodological: on the one hand an
evolutionary perspective and on the other a comparative static and optimising approach. The
intention is not to provide an exhaustive discussion but instead to provide sufficient evidence
that analysis of the firm should create bridges characteristically separate areas of discussion.
3. THE FIRM IN INDUSTRY LIFE CYCLES
The growing body of analysis in the field of industrial dynamics since the 1980s may lead
people to think that a new domain of research has emerged. This is of course a misperception
12
since some early contributions provided first steps towards the elaboration of such an
approach. Schumpeter (1912, 1942) did significant work emphasising the role of the
entrepreneur in the development of innovation, as well as the evolution of industry in a
context of radical change. Marshall (1890, 1920) also proposed many lines of inquiry, such as
the fact that the economy is composed of different sectors, the growth and decline of which is
unequal and intrinsically dependent on the organisation of knowledge. Over the 1980s,
however, some authors built on the neglected work of Schumpeter and Marshall, and focused
on major changes that have taken place in industry structure, industrial leadership, economic
growth and innovation. The research program initiated by Nelson and Winter (1982), which
focused on evolutionary theory and economic change, opened the door to new interpretations.
In one of these new interpretations, Gort and Klepper (1982) tried to understand the long-term
evolution of innovative industries, and assessed that this long-term evolution is essentially
characterized by a life cycle in which industries, like bio-organisms, arise in their birth phase,
grow and mature in their development time, and decline in their death phase. The industry life
cycle clearly added value to the explanation of a large number of regularities occurring in
innovative industries: production increases in the initial stages and declines in the final stages;
entry is dominant in the early phases of the life cycle and is progressively dominated by exit
(a massive process of exit - a shakeout - occurs in the final stages of the life cycle); market
shares are highly volatile in the beginning, and tend to stabilise over time; product innovation
tends to be replaced by process innovation; first movers generally have a leadership position
which guarantees their long-term viability; product variety disappears over time, as a
dominant design emerges. One of these regularities, i.e. the shakeout, progressively became a
central regularity to be explored in industrial dynamics. Most of the recent debates attempted
to clarify when and why a shakeout occurs. Given the large body of literature it is somewhat
13
surprising that linkages have not been created with the insights offered by the economics of
the firm. This is what we intend to do here.
3.1. Development of technology, development of knowledge: possible sources of
shakeout
In the 1990s, the literature on industrial dynamics focused more and more on the shakeout
phenomenon, and attempted to clarify what occurs in pre-shakeout versus post-shakeout
periods. This attention is of course related to the crucial role of shakeout in the industry life
cycle: a cycle cannot be observed without a shakeout in mature stages of the industry. But
shakeout is also a key to understanding why a given industry is declining, and why major
actors of this industry tend to be superseded by new actors creating a new industry. Behind
this, there is the idea that a given technology can create profit opportunities for some time, but
that new technologies will recurrently be created and replace older ones. This Schumpeterian
vision of the dynamics of an economic system has been explored in recent contributions on
the shakeout in industry life cycle, with an emphasis on different determinants from a purely
external technological shock to more endogenous arguments related to the development of
knowledge at the level of the firm .
For Jovanovic and Mc Donald (1994), shakeout is generated by an external technological
shock, exogenous to the industry. The first technological shock sets in with the development
of the new product being launched on the market. Entry is stimulated by the emergence of
new profit opportunities related to this new technology/new product, but subsequently there is
a progressive reduction in profit margins and the industrial structure stabilizes on a limited
number of firms in the industry. At this stage, which corresponds to the maturity of the
industry, a new technological trajectory emerges and again stimulates the process of entry, in
14
the meantime, involving an adjustment of incumbent firms. The process of adjustment is
driven by a stochastic process and only a few firms survive this external shock. The shakeout
thus eliminates firms which failed to adapt themselves to the new technology.
Alternatively, Abernathy and Suarez (1978), and Abernathy and Clark (1985) have developed
an analysis of shakeout and dominant design. When a firm launches a new product in the
market, it must face a high level of uncertainty affecting both the conditions of demand and
supply. On the demand side, uncertainty comes from the fact that the firm does not know the
details of customers’ preferences. On the supply side, the conditions of production are also
highly uncertain and may evolve over time. Over time, uncertainty decreases and selection
operates. On the demand side, uncertainty decreases once customers of the new product have
tested the alternative characteristics, and acquired experience on what they expect from the
new product, which characteristics are more adapted to their personal taste and usage. On the
supply side, rival producers learn over time and accumulate experience on what customers
prefer. In time they also select a series of production techniques which are adapted to low cost
production. Since uncertainty decreases, the shakeout appears as an endogenous phenomenon.
Product innovation diminishes because most of the actors (producers and customers) are
naturally oriented towards the production and consumption of a standardized good. The
progressive emergence of a dominant design involves higher barriers to entry which
correspond with investments by incumbents in process innovation. Entry is thus limited, and
less efficient incumbent firms exit the industry.
Finally, Klepper (1996) relates the shakeout to the timing of entry. The reference is, here
again, the Schumpeterian hypothesis on the relation between firms’ size and R&D capacity.
But the novelty is that this hypothesis is discussed on the basis of a finer distinction between
15
firms which can eventually be incumbent, new entrant, or latecomer. Process innovation
decreases the average costs of large firms, which are the major actors of this type of
innovation. However, some key elements may erode the advantage of larger firms. For
instance, large firms have to cover specific costs, such as expansion costs, which limit their
growth. The activity of R&D can also exhibit decreasing returns to scale over time. Because
of these elements, early entrants can develop process innovations, sometimes much better
than incumbents or latecomers. Early entrants can thus enjoy a leadership position in process
innovation as, on the one hand, incumbents have to deal with other problems which are
related to their large size and, on the other hand, latecomers have to concentrate on product
innovation which allows them to grow to a minimum size in order to survive. The timing of
entry is thus a major determinant in the formation of a competitive advantage over
incumbents, as well as in long term survival over latecomers. This mechanism provides an
alternative explanation of the shakeout.
The idea of a shakeout essentially driven by the evolution of technology over the course of the
industry life cycle is thus progressively challenged by a new vision. The development,
accumulation, diffusion and usage of competencies are thus key elements which drive the
industry-life cycle and, as an outcome, involve a sensibly different vision of shakeout which
is closer to the Marshallian tradition. Mueller (1990, 1997) shows that the long term viability
of first movers is related in a large number of industries to specific features of demand (such
as set-up and switching costs, network externalities of final users, inertia effects due to the
customer’s uncertainty on quality, inertia effects due to the customer’s experience of existing
products and services), as well as supply (such as set-up and network externalities of
producers, economies of scale, cost-decreasing learning by using). Finally, Van Dijk (1998)
16
shows that increasing returns in R&D is not the major element in the first movers’
competitiveness, but that network effects have a rather decisive effect.
Industry life cycle analyses generally focus on industries in which competition and innovation
proceed from the interaction between firms (incumbents and entrants) within a given market,
delimited by the purchases and sales of an homogenous product. On some occasions,
however, vertical relationships between firms in the industry and their direct suppliers or
customers have a strong impact on the evolution of industries. Innovation processes require
the accumulation of complementary competencies, as well as an effective coordination
between firms which generate these competencies. Since the industry is characterized by
strong coordination between suppliers and producers, or producers and retailers, processes of
entry and exit become industry-specific. Alternative life cycle patterns thus appear, eventually
with non-shakeout phenomena. In some industries the emergence of specialized suppliers
tends to re-dynamize the entry process in the phase of maturity. They develop new production
processes, new specialized equipment, new technology at the upstream level and sell it to any
downstream potential entrant who can pay the price. They significantly decrease barriers to
entry and favor competition (Fransman, 1999; Krafft, 2010). In some cases, an industry was
created by an initial inventor or an academic researcher who decided to set up a firm to
exploit the commercial opportunities of his innovation. Many times, however, the production
and distribution of this innovation required the contribution of other actors, usually larger
firms. The coordination of competencies related to innovation on the one hand, and
complementary competencies related to production and distribution on the other hand,
strongly shaped the profile of evolution of the industry, and stimulated new entries
(Bresnahan and Raff, 1991; Mitchell, 1995; Klepper, 1997).
17
The coordination of similar competencies is also an important topic for researchers interested
in how innovations occur and their implications for firms and economic change. In some
industries there is a somewhat paradoxical phenomenon that both small, specialized firms and
large, diversified firms co-exist in the long run. Specific firms may come and go, and there
are certainly mergers, alliances, and bankruptcies, but the two types of firms seem to an extent
mutually dependent on each. This situation may lead to non-shakeout profiles of evolution,
with small firms and large firms surviving over the long run. It seems important to combine
such alliances with in-house R&D and competencies, because otherwise the firm has
difficulties in evaluating the potential of new ideas and techniques that are developed outside
the firm. In many cases, the intrinsic characteristics of knowledge in terms of codification and
appropriability requires extended interaction, and explains why collaboration occurs amongst
firms with similar competencies in order to stimulate innovation. But in the meantime,
ownership and control rights are important to understand who has alliances with whom and
are absolutely crucial in the evolution of the industry (Mc Kelvey, 1996; Saviotti, 1998).
Finally, the coherence that firms tend to develop in the coordination of similar and
complementary competences tend to appear as a major issue in industrial dynamics. About
some 20 years ago, Foss (1993) and Teece et al. (1994) claimed that coherence becomes a
cognitive concept incorporating elements such as organizational learning within the firm,
path-dependency characteristics, the depth and scope of technological opportunities in the
neighbourhood of the firm’s own technology and R&D activities, and the influence of the
selection environment. Today, the notion of coherence tends to get an operational content in
the industrial dynamics literature with the development of metrics on relatedness, proximity,
similarity and interconnectedness and how they tend to evolve over time (Nooteboom, 2004;
Krafft, Quatraro, Saviotti, 2011).
18
3.2. Industry dynamics and the nature of the firm
What conclusions can be drawn from this discussion of industry dynamics and life cycles with
regard to the nature of the firm? As a preliminary comment, we can first think that technology
essentially drives the life cycle of an industry, and is responsible for the shakeout. This calls
to mind Schumpeter’s vision of creative destruction in industrial dynamics. An entrepreneur
sets up a firm to introduce an invention. This firm grows and holds a monopoly position for
some time. But in time this firm is imitated by new entrants that eventually outperform the
initial firm. This situation can continue until another entrepreneur develops a new project
involving the exit of older and larger firms and the entry of new ones.
But we can also think about the shakeout in a different manner. We can consider that
knowledge and competencies drive the life cycle of the industry. In that case, closer to
Marshall’s vision, the growth of knowledge is linked to the ability of firms to ensure
coherence between internal economies (organization and direction of the resources of the
firm) and external economies (general development of the economy, including the role of
firms in the neighborhood). In this perspective, the shakeout affects firms differently, since
some firms might have the opportunity to accumulate specific knowledge and competencies,
and survive. In some cases non-shakeout patterns may thus emerge.
Beyond these background points about the relevance of earlier analysis to organisational as
well as technical factors we can suggest that the diversity of the empirical evidence, and
interpretations of this evidence, suggests that no single approach to the firm is relevant in all
circumstances. Consider, first, a Schumpeter inspired analysis that life cycles are
technologically driven with a key role played by the management of demand and supply side
19
uncertainties. To a large extent this can be mapped into, for example, a transaction cost
analysis of the firm. The technological driver is essentially exogenous to organisational
adaptation. The key role of uncertainty, and its link with large firm size, is also consistent
with this perspective on the firm (Williamson, 1985). But now consider a Marshallian
inspired analysis that emphasises the creation and management of knowledge. Here we can
echo, for example, Barnard (1938) and suggest that the creation of new knowledge is
endogenous to firm decisions and in terms of the economics of the firm we must account for
change processes not just adaptation to exogenous technological changes. In addition Barnard
is useful because he emphasises that firms are not long-lived. In terms of modern writing we
can incorporate competence perspectives on the firm, as suggested above. We are not
suggesting here that one approach (Schumpeter or Marshall) is universally relevant instead we
prefer to suggest that the approaches are relevant in different circumstances.
Consider now what might be considered the key insight of empirically based studies of
industry dynamic: the role of shakeout. Two key issues would appear to be appropriate here.
First, the nature and type of competition changes pre- and post- any shakeout. Pre-shakeout
intense competitive pressures result from firm entry and exit. Post-shakeout increased firm
size and reduced entry/exit implies the emergence of oligopolistic structures with the
complexity of strategic interdependence this implies. Arguably the economic-institutional
aspects of this post-shakeout world have been under-analysed. Hence an oligopoly model that
incorporates transaction costs is suggested below. The second issue we can take from the
earlier shakeout discussion is that we cannot automatically link shakeout with technical
progress because of the observed continuation of “old” technologies is some areas. This
continuing relevance of old technologies suggests a non-adaptation to technological attractors
20
because of the dominance of process considerations. In an organisational context, this
observation (once again) echoes Barnard’s work.
Finally, in this section, we can consider the issue of the boundaries of the firm. If we accept
the logic of an organisational life-cycle analysis firm boundaries can be analysed in terms of
the dominance of driver, process or attractor effects, and so (once again) no single approach is
likely to be relevant. In early life-cycle stages, with the dominance of technical and
organisational drivers we can suggest that firm boundaries are based on the restructuring of
institutional and technical knowledge linkages. In this context we can recognise the earlier
discussion of the restructuring of vertical relations and hence the relevance of a Richardson
(1972) based analysis of the firm and industry. When process considerations dominate firm
activity we can suggest that firm boundaries are based on attempts to establish organizational
and institutional rules. This establishment of rules will involve scale and scope effects along
the lines suggested by Chandler (1977, 1990) and hence increasing firm size. Using earlier
discussion we can suggest that this dominance of process, and the emergence of established
rules, requires a shakeout of firm activity and hence limitation on entry and exit. But at the
same time we should not over simplify the emergence of large firms, and expanding firm
boundaries, because of the possible complementarity between small and large firms. Hence
the established rules that govern organisational processes cover inter-firm as well as intra-firm
activity. Finally, when attractors dominate firm development this will be a response to
diffusing knowledge and rule stability in a post-shakeout world. In this context firm
boundaries can be understood in the context of efficiency seeking behaviour.
21
4. A FORMAL MODEL OF REAL FIRMS
In the previous sections links have been created between the theory and the economics of the
firm. The basic conclusion has been that no approach to the firm is uniquely dominant. In this
section a different approach to creating theoretical linkages is developed in terms of a simple
model of the firm. The basis of this modelling is the introduction of transaction cost features
into an otherwise standard model of the firm. This would appear to be an appropriate mode of
analysis for two reasons. First, there is a methodological consistency in the use of
comparative statics (Dietrich, 1994). Secondly the assumption of economising on transaction
costs is the dual of optimising behaviour.
4.1. A single firm
The simplicity of the modelling here is that all basic relationships are assumed linear, a
feature that is commented on as the discussion proceeds. The discussion is presented in two
stages. In this section a basic model for a single firm is developed. It is shown that predictions
apparently consistent with some observations in the life-cycle literature are forthcoming.
Following this a Cournot based duopoly analysis is presented. The objective here is to explore
the idea suggested above that transaction cost economics may gain particular relevance in
later life cycle stages that are characterised by relative knowledge stability and strategic
interaction. But, once again, linkages are created to the life-cycle and other literatures.
The basic model involves a standard and simple, single product firm but introduces possible
transaction cost effects into this. Obviously any firm undertakes many specific organisational
tasks that cover the management of output markets, intra-firm activity and input markets.
Following standard analysis we can think of these tasks in general terms as managing search,
22
negotiation and policing activities. To simplify technical detail we assume that these various
managerial tasks are undertaken in fixed proportions with no substitution between
organisational human and non-human inputs being possible. This simplification allows us to
create an aggregate measure of transaction costs (CT) that is simply the sum of the various
specific organisational costs. We therefore have a single measure of managerial activity that
can be applied in the different contexts. In addition this measure will be used as an indicator
of organisation size rather than using real output as a measure of firm size.
In terms of a firm’s demand for real output we assume the following linear form:
X = (a0/a1) – (1/a1)p + (a2/a1)CT [1a]
In [1a] X is output sold per period and p is selling price. The role of CT here involves, for
example, greater search and negotiation activity increasing output sold for any selling price.
The linearity assumptions in [1a] are clearly not realistic for large changes in the variables but
significantly simplify technical detail. It is more useful to re-write [1a] as an inverse demand
function:
p = a0 – a1X + a2CT [1b]
In turn [1b] allows us to define a firm’s total revenue:
TR = pX = a0X – a1X2 + a2CT(X) [1c]
A firm’s average production costs (ACP) are modelled as follows:
ACP = b0 – b1CT > 0 [2a]
With given CT formulation [2a] defines, of course, constant returns technology. The C T effect
can be thought of as either a more effective management of intra-firm activity affecting
productivity and costs and/or more effective search, negotiation and policing in input markets.
In [2a] it is clearly inappropriate to extrapolate beyond reasonable bounds, hence the
23
requirement that ACP is positive. This requirement suggests an organisational capacity
constraint:
CT < b0/b1 [2b]
Using [2a] we can define a firm’s total production costs (TCP):
TCP = b0X – b1CT(X) [2c]
In turn we use [2c] to define a firm’s total costs (TC):
TC = b0X – b1CT(X) + CT [2d]
Using [1c] and [2d] a firm’s profit function is:
π = a0X – a1X2 + a2CT(X) – [b0X – b1CT(X) + CT] [3a]
We can analyse [3a] in terms of short-run and long-run solutions. The short-run solution
involves profit maximising with two choice variables X and CT. Differentiating [3a] with
respect to these variables and setting the derivatives equal to zero:
 X  a0  2a1 X  a2  b1 CT  b0  0 [3b]
 CT  a2  b1 X  1  0 [3c]
Using [3b] we can define profit maximising output in terms of CT:
a0  b0 a2  b1
X  CT [4a]
2a1 2a1
In [4a] the first element on the right hand side is a traditional short-run viability condition for
firm activity. In the absence of transaction costs, the maximum price that can be charged (a 0)
must be greater than exogenous unit costs (b0) to generate positive output. But by introducing
transaction costs this viability condition is amended. In the short-run (but not the long-run as
considered below) positive output can be generated with a0 < b0 as long as CT is sufficiently
24
large, an observation that allows us to create links, suggested below, between this model and
life-cycle analysis.
To solve the system defined by [3b] and [3c] we substitute [4a] into [3c] and hence define
optimal CT:
2a1 a0  b0
CT   [4b]
a2  b1 
2
a2  b1
The system defined by [4a] and [4b] presents a unique solution. Substituting [4b] into [4a]:
1
X [4c]
a2  b1
The short-run solution implied by [4a]-[4c] can be analysed in the context of the life-cycle
literature introduced above. Early in a life-cycle small firm entry and exit tends to be high.
For successful firms profitability is high. Firm success, in terms of the current model, requires
large a0 – b0 i.e. a large difference between maximum price and exogenous unit cost. From
[4b], large a0 – b0 implies small CT (ceteris paribus). So, early in a life-cycle, when profit
opportunities are large, we can expect small organisational size. Another way of interpreting
this result is that with a0 > b0 a firm is viable in the traditional economic sense and this
reduces the requirement for organisational effort. But as a life-cycle proceeds market growth
slows down. In terms of the current model this slowing can be interpreted as falling a0 – b0. In
turn from [4b] this maturing life-cycle implies larger CT (ceteris paribus) and so larger
organisational size. Furthermore, equation [4b] says more than this. Markets that are unviable
in the traditional sense, i.e. with a0 < b0, are short-run viable in our model as they generate
large organisational effort and size. Short-run non-viability in our model is exogenous and
produced by the organisational capacity constraint [2b]. If the large C T predicted in [4b],
because of possibly negative a0 – b0, is greater than the constraint defined in [4b] a firm may
25
experience short-run non-viability. In short the simple model developed here can predict an
evolution of organisational size that is apparently consistent with life-cycle analysis.
One peculiarity of this model can be identified. While organisational size (CT) varies with a0 –
b0 in a way that is understandable, from [4c] it is clear that physical output (X) does not vary
with a0 – b0. Actual output is determined by the interaction between CT and revenue and cost
determination, i.e. a2 and b1, but not directly by CT. To some extent this is an interesting
property of the model: physical output is determined by the interaction terms in the model and
so indirectly by transaction cost rather than simply by profit potential. Intuitively, any profit
potential requires appropriate organisational effort. But equally, one reason for this result is
the linearity of the basic relationships in the model. With increasing organisational
effectiveness as CT increases, or with increasing physical returns to scale, we would not
expect this result to hold.
The long-run solution to the model presented here to some extent, but not completely,
qualifies the conclusions just drawn. Long-run firm viability requires non-negative profits.
Re-writing [3a] and imposing this constraint:
π = (a0 – b0)X – a1X2 + [(a2 + b1)X – 1]CT > 0 [3a’]
Using [4c], i.e. the condition for profit maximising output, it is clear that [a2 + b1]X is always
unity if we impose profit maximisation. Hence the non-negativity of profit in [3a’] depends
on (a0 – b0)X – a1X2. It follows that long-run firm viability requires a0 > b0, as we would
expect in a non transaction cost model. An implication here is that in our simple model
transaction costs have a short-run but not long-run impact on firm viability and activity. But
once non-negative profits are earned the organisational size effects discussed above are
relevant.
26
One final point is appropriate in this discussion. We have interpreted the single firm model in
terms of possible life-cycle effects. But an alternative, and perhaps more standard,
interpretation is possible. Competitive market analysis suggests that firm entry occurs with
positive profitability, in the absence of entry and exit barriers. In this context our model can
be viewed as a developed monopolistically competitive firm. Successful firm entry will
reduce the market shares of existing firms. In terms of our simple model successful firm entry
reduces a0. Firm entry will therefore eventually impose a non-negative profit constraint as in
[3a’]. The possible effects here are illustrated in Table 1.1 that shows the impact of changing
a0 for particular parameter values.
Table 1.1 here
Impact of changing a0
As we move from left to right across the columns of Table 1.1 we see the impact of declining
a0 interpreted as either a maturing life cycle or greater competition from firm entry. We can
see the unchanged physical output, a feature already discussed. More importantly we see
increasing organisational size (CT) and declining profitability. If we interpret changing a0 as a
response to firm entry the change in CT warrants discussion. With traditional monopolistic
competition a movement to long-run equilibrium resulting from firm entry produces excess
capacity. The latter, in turn, may introduce an incentive for larger firm size, perhaps via
merger, to eliminate the excess capacity. In the model developed here we see larger
organisational size emerging with greater competition but this is not because of excess
capacity. It is due to the interaction between transaction costs and firm revenue and costs.
Intuitively, greater competition generates greater profit seeking incentives that require larger
27
transaction costs and hence organisational size. In the comparative static model developed
here this process has a long-run equilibrium with zero profits being earned. This long-run
solution is clear in Table 1.1. This long-run constraint on firm size occurs even though we
have exogenous constant returns to scale. Hence the constraint is produced by the interaction
between the economics and theory of the firm.
4.2. A duopoly model of real firms
In this section the discussion of the firm just presented is further developed in terms of a
Cournot based duopoly analysis. The objectives here are twofold. First we further explore
linkages between the economics and theory of the firm. Secondly we develop the idea that
transaction cost economics may gain particular relevance in later life cycle stages that are
characterised by relative knowledge stability and strategic interaction.
The basic structure of the analysis is the same as that used above except that we have two
firms. The inverse demand functions are:
p1 = a0 – a1X1 – a2X2 + a3CT1 [5a]
p2 = a0 – a1X2 – a2X1 + a3CT2 [5b]
Note the following features here. The two demand functions have identical parameters. In
principle this is unnecessary but simplifies technical detail. The two firms have individual
prices because of individual organisational efforts (CT1 and CT2) and because of potential
product differentiation when a1 and a2 are not equal. The issue of potential product
differentiation is important in this model and will be discussed further below. But even
though there are individual prices in [5a] and [5b] in a Cournot equilibrium prices will be the
same because of identical parameters and cost functions (as detailed below). X2 has an impact
on p1, in turn CT2 impacts on X2 hence there is an indirect effect of CT2 on p1 but in [5a] there
28
is no direct effect. Similarly there is an indirect impact of C T1 on p2 but no direct impact.
Using [5a] and [5b] we can define firm total revenues:
TR1 = p1X1 = a0X1 – a1X12 – a2X1X2 + a3CT1X1 [5c]
TR2 = p2X2 = a0X2 – a1X22 – a2X1X2 + a3CT2X2 [5c]
Firm costs are structured in the same way as in the previous section. Average production costs
are:
ACP1 = b0 – b1CT1 > 0 [6a]
ACP2 = b0 – b1CT2 > 0 [6b]
There is the same requirement for organisational capacity constraints:
CT1, CT2 < b0/b1 [6c]
Total costs are:
TC1 = b0X1 – b1CT1X1 + CT1 [6d]
TC2 = b0X2 – b1CT2X2 + CT2 [6e]
Firm profits are:
π1 = a0X1 – a1X12 – a2X1X2 + a3CT1X1 – [b0X1 – b1CT1X1 + CT1] [7a]
π2 = a0X2 – a1X22 – a2X1X2 + a3CT2X2 – [b0X2 – b1CT2X2 + CT2] [7b]
As above we have two choice variables for each firm (output and transaction costs) but in
addition we have the added complexity of the strategic interaction of the firms. The relevant
first order conditions are:
 1  X 1  a0  2a1 X 1  a2 X 2  a3CT 1  b0  b1CT 1  0 [8a]
 1 CT 1  a3  b1 X 1  1  0 [8b]
 2  X 2  a0  2a1 X 2  a2 X 1  a3CT 2  b0  b1CT 2  0 [8c]
 2 CT 2  a3  b1 X 2  1  0 [8d]
29
[8a]-[8d] can be solved in an equivalent manner to that used above but the strategic
interaction renders the solution more complex. We use [8a] and [8c] to define profit
maximising outputs:
a0  b0 a3  b1 a
X1   CT 1  2 X 2 [9a]
2a1 2a1 2a1
a0  b0 a3  b1 a
X2   CT 2  2 X 1 [9b]
2a1 2a1 2a1
[9a] and [9b] define output reaction functions for the two firms but with the addition of own
firm transaction cost effects on output. Solving [9a] and [9b] simultaneously defines
equilibrium firm outputs in terms of both firm transaction costs:
X1 
2a1  a2 a0  b0   2a1 a3  b1  C  a2 a3  b1  C
[9c]
2a1 2  a2 2 2a1 2  a2 2 T 1 2a1 2  a2 2 T 2
X2 
2a1  a2 a0  b0   2a1 a3  b1  C  a2 a3  b1  C
[9d]
2a1 2  a2 2 2a1 2  a2 2 T 2 2a1 2  a2 2 T 1
Substituting [9c] into [8b] and [9d] into [8d] defines transaction cost reaction functions for the
two firms:
CT 1 
2a1 2  a2 2  a3  b1 2a1  a2 a0  b0   a2 C [9e]
2a1 a3  b1 
2 T2
2a1
CT 2 
2a1 2  a2 2  a3  b1 2a1  a2 a0  b0   a2 C
2a1 a3  b1 
2 T1
2a1
[9f]
Discussion of [9e] and [9f] is undertaken in the context of Figure 1.1. In both the left and right
hand parts of the diagram RF1 and RF2 are the two reaction functions that refer to respectively
[9e] and [9f]. The first point to note about the reaction functions is their positive slope defined
by a2/2a1. We will comment shortly on possible implications here. If we assume, for the
moment, a follower-follower analysis equilibrium transaction costs exist where the reaction
function intersect at some positive transaction costs for both firms. In the left hand diagram
30
the positive intercept implies that firms can exist. In the right hand diagram the non-positive
intercept implies there is no equilibrium with positive firm size and so the two firms cannot
exist.
Figure 1.1 here
Transaction Cost Reaction Functions
The difference between the two parts of Figure 1.1 is summarised in terms of the relative
sizes of a1 and a2. To see the logic here we can observe from [9e] and [9f] that the
denominator of the intercept must be positive. It follows that the intercept difference shown in
the two sides of Figure 1.1 depends on the numerator. Using [9e] or [9f] the left hand diagram
requires:
2a1 2  a2 2  a  b a  b  [9g]

2a1  a2
3 1 0 0
To understand the implications of [9g] we can first use earlier discussion and observe that
long-run firm viability requires a0 > b0. We will not reproduce here the discussion of short-run
viability with large transaction costs and a0 < b0 and instead assume long-run non-negative
profits. It follows that a necessary condition for the relevance of the left hand diagram, and
hence the possible existence of firms, is that the left hand side of [9g] is positive. This latter
condition is only possible with a1 > a2 as stated in the diagram.
We can offer an intuitive explanation of the existence of firms requiring a1 > a2 in the
following way. Referring back to the demand functions [5a] and [5b] a1 > a2 implies that
product differentiation exists. With product homogeneity a1 = a2 hence the left hand side of
[9g] is zero with the implication that the existence of firms requires that the right hand side of
[9g] is negative. The latter is not possible if we assume non-negative long-run profits. This
31
importance of product differentiation can be explained in the following terms. The benefits of
transaction cost expenditures on demand must be realisable as increased profitability. With
product homogeneity such expenditures can be viewed as public goods with the benefits
accruing to all firms rather than the individual firms undertaking the expenditures.
This reasoning suggests a strategic motive for the existence of firms. It is perhaps relevant to
cite earlier discussion of Williamson’s view that strategizing is unimportant for the firm. But
the discussion here, by linking the economics of the firm and the theory of the firm comes to a
somewhat different conclusion. The interpretation offered here of the left hand side of Figure
1.1 is more consistent with the neo-Austrian dynamic transaction cost literature or the
dynamic competence literature. The organisational expenditures required to promote long-run
progress must promote long-run profitability. In these literatures the link between
expenditures and profits is based on such factors as first mover advantages, tacit knowledge
etc. Given the formal logic used here an equivalent link requires product differentiation. But a
strict equivalence between dynamic approaches to the firm and the strategic perspective
offered here cannot be taken too far. There are two obvious differences: (a) a comparative
static equilibrium analysis rather than process reasoning and (b) the assumption here of a
follower-follower model that is not obviously consistent with entrepreneurship and dynamic
firm leadership. Difference (a) is a fundamental characteristic of the methodologies but
difference (b) can be accommodated, to some extent, by moving beyond a follower-follower
framework as suggested below.
Before considering a transaction cost leader-follower framework a few remaining issues can
be taken up. First, as with earlier discussion we can create a link between the analysis
presented here and earlier discussion of life-cycle models. Earlier discussion emphasised that
32
as a life cycle matures there is a shift from process to product innovation. This reasoning
therefore implies increased product differentiation as life cycles mature. In terms of [9e] and
[9f] and the left hand side of Figure 1.1 increased product differentiation implies increased
intercept and slope of the reaction functions. In turn these changes suggest an increase in
equilibrium transaction costs i.e. an increase in firm size. Intuitively, increased product
differentiation increases returns to transaction cost expenditures. The resulting change in firm
size is also emphasised in life cycle analysis. Hence the strategic transaction cost model
presented here has an important connection with the empirically based life cycle analysis.
The second issue that can be briefly explored concerns the notion of transaction cost
economising, an important principle of conventional (non-strategic) transaction cost analysis
(Williamson, 1985). The problems here can be considered in the context of the left hand side
of Figure 1.1. If, for example, the second firm does not exist i.e. CT2=0 we have a single firm
analysis as considered earlier. In the diagram setting CT2=0 suggests that profit maximising
CT1 is where RF1 cuts the horizontal X axis; this is the single firm (non-strategic) solution.
The addition of the second firm increases firm and industry transaction costs. In short we
cannot assume that competition automatically reduces transaction costs when we take account
of the links between the economics of the firm and the theory of the firm.
The third issue concerns the final part of the strategic solution. The details of the algebra are
unnecessary here given the nature of the current discussion. But intuitively the solution is
straightforward. From the left hand side of Figure 1.1 profit maximising equilibrium
transaction costs are defined for both firms where RF1 and RF2 intersect. These CT1 and CT2
can be substituted into [9c] and [9d] to define firm output levels. Hence the system can be
solved. For illustrative purposes we can use an equivalent parameterisation to that used above:
33
a0=5, a1=0.5, a2=0.1, a3=0.1, b0=1, b1=0.1. Given these values we can specify the transaction
cost reaction functions. Using [9e] and [9f]:
CT1 = 6.75 + 0.1CT2 [9e’]
CT2 = 6.75 + 0.1CT1 [9f’]
Solving the simultaneous equations: CT1 = CT2 = 7.5. Using these equilibrium transaction
costs in [9c] and [9d]:
X1 = X2 = 3.636 + 0.202*7.5 – 0.020*7.5 = 5 [9c’]
Hence, using [7a] and [7b], firm profits are: π1 = π2 = 5.
This solution can be used as a stepping stone to one final aspect of the discussion. Earlier the
strategic perspective suggested here was linked, with qualifications, to competence and
entrepreneurial approaches to the firm. One qualification involved the follower-follower
framework underlying Figure 1.1. While this framework has facilitated the development of
useful insights it is straightforward to extend it to cover the possibility of firm organisational
leadership. Intuitively a leader firm can use its transaction cost decisions to influence a
follower firm. It is most straightforward to do this using the parameterisation just adopted. In
addition we will assume firm one is the leader. We can solve the leader-follower model in a
somewhat standard manner. In terms of abstract theory firm one uses firm two transaction
cost and output reaction functions to predict responses to firm one behaviour. This is solved in
the standard way by substituting the reaction functions into firm one’s profit function. Using
parameter values we can re-write the profit function [7a]
π1 = 5X1 – 0.5X12 – 0.1X1X2 + 0.1CT1X1 – [X1 – 0.1CT1X1 + CT1] [7a’]
Using parameter values along with [9d] we substitute for X2 in [7a’]. In addition we use [9f’]
to substitute for CT2. After simplification the leader’s profit function is then:
π1 = 3.65X1 – 0.5X12 + 0.2CT1X1 – CT1 [7a’’]
34
Formulation [7a’’] is solved as a single firm model using the method discussed above.
 1
 3.65  X 1  0.2CT 1  0 [10a]
X 1
 1
 0.2 X 1  1  0 [10b]
TC1
The solution suggests that CT1 = 6.75 and using firm two’s reaction function [9f’] CT2 = 7.45.
These transaction cost levels are compared to 7.5 in the follower-follower version of the
model. Because of the parameterisation used here the leader firm sets transaction costs as if it
is a monopolist, at a level that would occur if CT2 = 0: see [9e’]. This leader-follower solution
is depicted in Figure 1.2. Although it is based on a specific parameterisation the resulting
order of change shown in the diagram is a generalisable result. The strategic leadership
involves a reduction in transaction costs for both firms but particularly for the leader firm.
The leader firm can economise on transaction costs knowing that the follower firm will
simply react to this. The leader firm basically exploits the reactions of the follower firm, an
aspect of transaction cost economics that is apparently lacking in the literature. The leader-
follower analysis suggested here is closer to the internalisation transaction cost literature (as
surveyed in chapter X of this volume) used to analyse multinational companies. The
internalisation decision can be viewed as an act of strategic leadership, to exploit unique firm
advantages, that economises on organisational costs.
Figure 1.2 here
Transaction Cost Leader –Follower Solution
Continuing with the leader-follower solution, using the output reaction functions we find that
X1 = X2 = 5. This invariance of firm outputs is based on the characteristics of the model and
35
parameterisation used here as discussed earlier. The profit for firm one is (using [7a’’]) 5.75
i.e. as we would expect strategic leadership increases profits. For the follower firm we use
firm two’s profit function with the assumed parameter values and find π2 = 5 i.e. the follower
is no worse off. This latter result is a consequence of the parameterisation and the assumed
linearity of the model. Hence it is not a generalisable result.
5. OUTLINE OF THE VOLUME
The rest of this volume is organised as follows. In Part II there are a number of shorter
“background” essays. The intention here is to present brief surveys of key founding writers on
the firm. The writers covered are not intended to present an exhaustive historical survey, as
this would involve a Handbook in its own right, instead the intention is to link the work of
founding writers on the firm to modern understanding. The essays in the other six parts are
intended to cover longer surveys of important topics on the theory and economics of the firm.
Part III considers equilibrium and new institutional theories. Note that the topics covered here
are guided by already existing Handbooks, or equivalent, published by Edward Elgar. These
already existing volumes cover in a comprehensive manner transaction cost and more
generally new institutional theory. But in many of the chapters in the current volume the
obvious importance of transaction costs is reflected in the discussion in a more applied way.
For the same reasons there is no single chapter on entrepreneurship. The essay on agency
theory and firm governance (chapter 11) could have equally appeared in part IV as a “modern
issue” but the balance of the contents suggested the current position. The same logic applies
to chapter 12 on hybrid governance. While this is usually considered a topic in transaction
cost economics, as reflected in the current chapter, it is also a key “modern issues” topic that
36
reflects the overall emphasis here of bridge building between the economics and theory of the
firm. Finally in part III, chapter 13 is included because it reflects a gap in many discussions of
the economics of the firm. Consideration of the transaction cost empirical work recognises the
importance of the bridge building suggested here.
Part IV of the volume includes four essays on the multinational firm. This reflects the
importance of this topic as a key modern issue. But the balance of the volume suggests a
separate section on this topic rather than an overly long part VI. In addition to a contextual
discussion (chapter 14) there is a review of internalisation theory (chapter 15) and also
consideration of how the institutional contexts of Japan and Europe have affected the firm
(chapter 16 and 17). Part V surveys various topics under the general heading of dynamic
approaches to the firm: Edith Penrose and George Richardson (chapter 18); Nelson and
Winter revisited (chapter 19); modern resource-based theory(ies) (chapter 20); and the
cognitive theory of the firm (chapter 21). The way in which these chapters are linked into the
overall philosophy of this volume should be clear from earlier discussion in this introductory
chapter.
Parts IV and VII cover twelve chapters on what are called “modern issues” and “firm
strategies”. These two parts reflect the earlier suggestion that that the potential complexity of
real firms, involving the interaction between the economics and theory of the firm, can be
rendered tractable by considering particular issues and strategies. In part IV there are
discussions that revisit Chandler (chapter 22); consider the topic of financialisation and the
firm (chapter 23); the analysis of firm growth (chapter 24); corporate governance again
(chapter 25) but this time in the particular context of innovation and executive pay; innovation
platforms and the knowledge intensive firm (chapter 26); and small firms (chapter 27). In part
37
VII the various firm strategies covered are mergers and acquisitions (chapter 28); R&D and
the firm (chapter 29); vertical relationships in the context of novelty (chapter 30); product
innovation (chapter 31); modularity (chapter 32); and innovation networks (chapter 33).
The final section of the volume reflects the view suggested above that real firms do not
constitute a closed system. The chapters in part VIII open the analysis of real firms to the
topic of economic policy. Here the five essays cover cartel and monopoly policy (chapter 34);
R&D and industrial policy (chapter 35); entrepreneurship and policy (chapter 36); regulation
and networks (chapter 37); and venture capitalism (chapter 38). To reiterate earlier discussion,
the various chapters are collectively intended to create bridges between the economics and
theory of the firm and so reflect an important development in firm analysis.
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See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/314152232
Organizations As Polities: An Open Systems Perspective
Article in The Academy of Management Annals · August 2017

DOI: 10.5465/annals.2015.0152
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ORGANIZATIONS AS POLITIES: AN OPEN SYSTEMS

PERSPECTIVE
KLAUS WEBER
Kellogg School of Management, Northwestern University
DANIEL WAEGER
Lazaridis School of Business & Economics, Wilfrid Laurier University,
Amsterdam Business School, University of Amsterdam
We review recent research that employs an open polities perspective on organizations.

Open polities research combines an open systems conception of organizations as in-
timately linked to their external environment with scholarship that treats organizations
as polities—associations of groups with evolving interests and resources that operate
within the constraints and opportunities afforded by a formal organizational system. In
this perspective, external political environments seep into the internal political dy-
namics of organizations in various ways, and those internal politics in turn mediate
organization-level outcomes in relation to external pressures. We use the framework of
the open polity perspective to 1) connect largely parallel literatures at a meta-theoretical
level and thus point to ways in which they can inform each other, 2) identify key
processes through which internal and external polities are linked and single out orga-
nizational dimensions for the comparative analysis of organizations as polities, and
3) identify open questions and opportunities for future research in this perspective.
Internal interest groups form naturally in large-scale contributions during the emergence of modern or-
organizations, since the total enterprise is in one sense ganization theory. Mid-century organization theo-
a polity composed of a number of sub-organizations. rists, including Selznick (1949, 1957), Roy (1952),
The struggle of competing interests always has a high Gouldner (1954), Dalton (1959), March (Cyert &
claim on the attention of leadership. This is because the March, 1963; March, 1962), Zald (Zald & Denton,
direction of the enterprise as a whole may be seriously
1963), and Crozier (1964) were concerned with un-
influenced by changes in the internal balance of power.
derstanding how power structures and political
(Selznick, Leadership in Administration, 1957: 63)
processes in organizations lead to various outcomes.
Basically, we assume that a business firm is a political In this perspective, conflict is not resolved by con-
coalition and that the executive in the firm is a polit- sensus or formal rationality but by negotiated com-
ical broker. The composition of the firm is not given; it promise or the dominance of some groups over
is negotiated. The goals of the firm are not given; they others. With the rise of open system models of orga-
are bargained. (March, The Business Firm as a Politi- nizations during the same period (Scott & Davis,
cal Coalition, Journal of Politics, 1962: 672)
2007), the political perspective of organizations was
updated to more explicitly study the influence of the
INTRODUCTION external environment on organizational polities. In
The conception of organizations as polities— North America, this effort resulted in several at-
collectives where groups with diverse views pursue tempts to formulate statements about the systematic
various goals within the constraints of formal and relationship between internal and external political
informal systems of authority—informed foundational structures and processes, including Stinchcombe’s
influential essay on social structure and organizations
(Stinchcombe, 1965), Thompson’s contingency syn-
We thank Adam Cobb, Jerry Davis, Kate Kellogg, Brayden
King, Michael Lounsbury, Willie Ocasio, and Maxim thesis in Organizations in Action (Thompson, 1967),
Voronov for their comments and suggestions; Mayer Zald and Zald’s political economy framework (Zald, 1970a).
and Huggy Rao for intellectual inspiration; and Sim Sitkin Given the common goals and basic framework of these
and Forrest Briscoe for their editorial guidance. contributions, we refer to them as representing the
886
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written permission. Users may print, download, or email articles for individual use only.
2017 Weber and Waeger 887
open polity perspective on organizations, since they studied by O’Mahoney and Bechky (2008), appear to
combine a conception of organizations as polities with be more open and with less centralized authority
an open systems framework. than those studied in large bureaucracies, giving rise
The open polity perspective continued to spur to different forms of political processes than those
important contributions in the study of organizations already established by earlier research.
and their environment in the 1970s (e.g., Benson, Organization theorists also pointed to conceptual
1975; Dornbusch & Scott, 1975; March & Olsen, 1976; shortcomings that arose from the lack of dialogue
Pettigrew, 1973; Zald & Berger, 1978). However, the between different strands of open polity-based re-
promise of this research program had faded by the search. Institutional theorists lamented the “missing
1980s, with a turn toward analyses of organizations organization” and the overly cognitive orientation of
at the aggregate levels of populations, fields and ex- new institutional theory (Greenwood & Hinings,
change networks (DiMaggio & Powell, 1983; Hannan 1993, 1996; Hirsch & Lounsbury, 1997; Thornton &
& Freeman, 1977; Meyer & Rowan, 1977; Pfeffer & Ocasio, 1999). Social movement scholars became
Salancik, 1978), and a growing emphasis on cultural- increasingly interested in how societal conflicts
cognitive over political dynamics (see Daft & Weick, were carried out inside organizations and examined
1984; Pondy & Mitroff, 1979, for influential critiques possible syntheses between external and internal
at the time). These trends favored analyses that politics (Davis, McAdam, Scott, & Zald, 2005; Scully
treated organizations as actors, natural and strategic & Segal, 2002; Zald, Morrill, & Rao, 2005). Scholars
units within a larger environment, rather than as working in the tradition of resource dependence and
complex and fluid polities (see, e.g., Oliver, 1991). stakeholder theory expanded their analyses beyond
New approaches continued the concern of open direct exchange relationships, and began to take into
system models with the environment of organi- account intraorganizational decision processes (Basu &
zations and arguably expanded the conception of Palazzo, 2008; Frooman, 1999; Kassinis & Vafeas, 2006).
politics in organizations’ environment to include And critical management scholars revived earlier work
additional stakeholders and cultural forms of con- on how control and resistance in organizations relate to
trol, but they also led to a decline in research on societal and elite ideologies (Alvesson & Deetz, 1996;
intraorganizational political processes. Importantly, Fleming & Spicer, 2003; Khan, Munir, & Willmott, 2007;
research on intraorganizational politics became in- Thomas & Davies, 2005).
creasingly disconnected from research on external These critiques on theoretical and empirical
political contestation and power structures (see, e.g., grounds have spurred fast growing bodies of re-
Weber & King, 2014, for a review). And the growing search, which over the past two decades have re-
specialization in either intraorganizational political vitalized, refined, and updated the open polity
processes or environmental contestation prevented dia- perspective. Yet, they also have, for the most part,
logue between various parallel research streams. developed in parallel literatures and without a com-
Beginning in the late 1990s, organizational and mon reference point in earlier work. As a conse-
management researchers increasingly pointed to quence, cross-fertilization has been limited and
both empirical and conceptual deficits that arose advances in addressing shared questions, such as
from these divisions. For one, the relative simplicity how to understand new organizational forms, are not
and boundedness of organizations as portrayed in easily accessible to researchers across the literatures.
theoretical models seemed ironic in light of the The purpose of this review is to redress these limi-
parallel observation that contemporary organiza- tations by systematically reviewing and categorizing
tions had become more diverse and complex, and contemporary insights into open polity dynamics
their boundaries and hierarchies increasingly po- across several literatures, identify contributions to
rous, fleeting, and ambiguous, than in the archetypal common questions, and offer directions for a shared
large integrated bureaucracies studied by early or- research agenda. Greater dialogue and an acknowl-
ganization theorists (see, e.g., O’Mahoney & Bechky, edgment of shared concerns and foundations in open
2008; Powell, 1990; Sabel, 1991). If organizations polity concepts will help develop, sharpen, and up-
increasingly resemble networks, projects, hybrids, date the political perspective of organizations in
movements, or crowds, their polities—and hence contrast to technical and economic analyses, and
their internal dynamics and relationship with their help reintegrate intraorganizational dynamics in
environments—are likely to take on a different na- macro-organizational theory.
ture, too. For example, many new organizational The common key premise of the open polity model
forms, such as the open-source software projects is that internal political processes are intertwined
888 Academy of Management Annals June
with external conditions, so that organizational re- term refers to the social unit of political analysis and
sponses to their environment are mediated and its organization. The concept of polity stands in
shaped by boundary processes and organizational contrast to politics (the pursuit of interests by mem-
coalition dynamics. We use this framework for put- bers of a polity) and policy (the rules, plans, and goals
ting into perspective studies that are embedded in pursued by members) in describing the elements
different theoretical traditions and for recognizing of political systems (Vowe, 2008).
ways in which they can inform each other. In the next The second insight comes from treating organiza-
section, we review the central tenets and concerns of tions as open systems. As Scott and Davis (2007: 31)
the traditional open polity perspective as a way to aptly put it, “from an open systems perspective, en-
define the scope of our review of recent work aligned vironments shape, support, and infiltrate organiza-
with the perspective. We then take stock of recent tions.” Connections with “external” elements can be
articles that have addressed the two central concerns more critical than those among “internal” compo-
in recent open polity scholarship: the boundary nents.” Open polity perspectives conceive of orga-
processes that couple organizations’ internal polities nizations as political entities that interact with an
to their external political environments; and com- equally political environment. The power dynamics
parative analyses of polities to understand diversity in organizational polities are shaped by boundary
in internal processes and organization–environment processes and external factors, and organizations’
relationships. Based on this review of existing re- responses to their environment are mediated by in-
search, we then suggest directions for research that ternal political interests. This highlights a double
seeks to advance scholarship in this area. Our goal is contingency in how organizations respond to envi-
not to absorb existing research into a new theoretical ronmental conditions: external dynamics are first
framework, but to use the open polity perspective as translated into internal politics, which in turn me-
a lens to organize and interrelate a family of currently diate organization-level responses to these external
largely disconnected research streams. pressures.
Systematic early statements of the open polity
framework by Thompson (1967) and Zald (1970a)
THE OPEN POLITY PERSPECTIVE
specify three elements in the analysis of organiza-
The open polity model of organizations combines tions: 1) an organizational polity that is characterized
two basic insights. First, that formal organizations by the extent of unity among members, the distri-
can be understood as collectives of groups and in- bution of power and formal authority, and forms of
dividuals that pursue varied and independent goals control and conflict resolution; b) a corresponding
and interests. Put differently, the actions of organi- external polity that consists of diverse agents for the
zational members are not fully determined by their social control of organizational conduct, and their
organizational roles and the formal goals of the or- relative power and interests; and c) a set of boundary
ganization. In fact, the goals, roles, and routines that processes, through which the external environment
make up the organization are themselves an outcome is inserted into organizational decision-making. Ex-
of negotiations, compromise, and coalition dynam- amples of such processes are organizational mem-
ics among members. To the extent that organizations bers’ external identifications with demographic,
“make decisions,” such decisions are the outcome professional, national, or ideological communities,
not of formal rationality and organization-level self- and formal governance through channels such as
interest, but of a struggle among the diverse ratio- boards of directors. Early open polity work was
nalities and interests of the various groups within the organization-centric, in line with cybernetic models
organization. Open polity research thus falls in the of system regulation. Thus, although when and how
tradition of the social conflict variety of the “natural internal dynamics shape organizations’ influence
systems” conception of organizations (Scott & Davis, over their political environment is a logical part of
2007), and is often cast in opposition to overly ra- the perspective, most authors dedicated little direct
tional or economic conceptions of organizations. attention to these questions.
The term “polity” was introduced by Selznick (1948, Open polity scholarship is distinct from other lit-
1949, 1957) and used extensively by Zald (1970a, eratures because of its political conception of orga-
1970b), with a parallel expression in the view of or- nizations and the commitment to examine internal
ganizations as “political coalitions” (Cyert & March, and external dynamics conjointly. For example, we
1963; March 1962). The concept of “polity” lever- exclude from this review research on intraorganiza-
ages an analogy from political science, where the tional conflict and politics that does not explicitly
theorize or empirically investigate external in- rationality (e.g., Donaldson, 2001). This does not
fluences on organizational processes (e.g., Kacmar & mean that those perspectives cannot be employed to
Baron, 1999; Morrill, 1995; Morrill, Zald, & Rao, study similar phenomena, but simply that their an-
2003). Similarly, we exclude work, for example, in alytic apparatus is different from open polity re-
institutional theory or social movement research, search. Table 1 summarizes central concepts that
that looks at the response by organizations to exter- form the shared theoretical basis of the open polity
nal contestation but assumes an organization-level perspective.
calculus of responding to external demands—in the Although we have grounded our review in classic
form of performance, reputation, legitimacy, or sta- formulations of open polity research, we limit our
tus concerns—(e.g., King, 2007; Oliver, 1991) and review to the contemporary work that has revisited
thereby de-emphasizes the role of internal hetero- and extended this research over the past two de-
geneity and dynamics. We also exclude research cades, and only to those studies that develop insights
that is grounded in a rational systems perspective, regarding the interactions between the external and
where organizational action arises from economic internal political environments of organizations.
efficiency concerns or the imperatives of formal Most of this recent research is positioned in what
TABLE 1
Definitions of Central Concepts
Concept Definition Key References Examples
Polity Collective, organized entity governing an area of social Selznick (1948) Nation states
life, at any level. Composed of groups with interests Kingdon (1995) Corporations
and power, and a political system of rules and Vowe (2008) Voluntary and membership
structures organizations
Politics Political processes, practices, and tactics involved in Selznick (1948) Negotiation
managing a polity. Shaped by the polity, performed Kingdon (1995) Deliberation
by the members of a polity Vowe (2008) Contestation
Policy A formal or informal plan, goal or stance regarding an Selznick (1948) Business strategy
issue, adopted by a polity or a group, either derived Kingdon (1995) Employment policy
from or rationalized based on some principles, Vowe (2008) CSR commitments
ideologies, or goals Investment goals
Organization A bounded social entity with some form of internal Scott and Davis (2007) Corporations
structuring. Pursues goal(s) and is composed of Non-governmental Organizations
organizational members. Member goals may or may Cooperatives
not align with the stated organization goal(s). Movement groups
Formal-legal or informal Contract networks
Coalition Arrangement between groups to pursue their interests March (1962) Supporters of social/commercial
in a polity. Interests can be shared or reciprocal. Can logics in hybrids
be more or less durable, more or less formal, and Gamson (1961) Professionals
more or less issue-specific
Organizational What is external to an organization (“outside its Scott and Davis (2007) Competitors
environment boundaries”). Comprehensive context, often Consumers
divided into dimensions, such as economic, Institutional logics
technical, institutional, political. Includes other National culture
actors, such as other organizations, groups, Corporate networks
individuals, and aggregate properties, such as Governments
competition, culture, uncertainty, density Uncertainty
Open system Organization is conceived of as a system that interacts Scott and Davis (2007) Legal regulation of businesses
with and is somehow influenced by signals from its Boulding (1956) Cultural influence on organizing
environment. Sees organization as a processing unit Luhmann (1995) Response to competition
that maintains boundary. Grounded in cybernetics
and communicative systems theory
Boundary Process through which an organizational polity Scott and Davis (2007) Market research
process interacts with and is thus coupled to its external Luhmann (1995) Identification with societal groups
environment. By definition, interaction between Pressure from state or activists
organization as system and the environment occurs
at the organization’s boundaries
may be described as successor theories to the mid- (Kellogg, 2009, 2012) showed that the successful
century foundational period. Specifically, we see implementation of new regulation aimed at im-
open polity questions addressed in recent work in proving the work situation of subordinate employees
the traditions of resource dependence and political in hospitals was contingent on the possibility
stakeholder theories, institutional theory, social for these subordinate employees to form pro-
movement research, behavioral theory-based stake- implementation coalitions with middle managers,
holder and upper echelons research, and critical which would otherwise mobilize to dilute the regu-
management studies. Our review could therefore be lation. Relatedly, Weber, Rao, and Thomas (2009)
described as metatheoretical, but only if one ignored investigated German pharmaceutical companies
the historical genesis of the included literatures. facing external pressure and found that companies
Resource dependence theory (Casciaro & Piskorski, with unified organizational elites were able to resist
2005; Wry, Cobb, & Aldrich, 2013) grew out of open external pressure, whereas companies with divided
systems research but focused on the mechanism of elites were not. Delmas and Toffel (2008) link re-
dependence created through exchange relationships sponsiveness to market and government demands
and conceives of the environment as composed of for environmental management programs to the re-
discrete other organizations. Many stakeholder theo- spective influence of marketing and legal affairs de-
ries built on the notion of dependence to identify partments. And Briscoe, Chin, and Hambrick (2014)
stakeholders and boundary processes (Mitchell, Agle, find external contestation to increase depending on
& Wood, 1997) although recent work on political the political ideology of members of the organiza-
stakeholder theory (Scherer & Palazzo, 2007) intro- tion’s dominant coalition.
duces a broader conception of political environments. Our survey of the recent research suggests that two
Institutional theory cast the relationship between or- questions are central to contemporary open systems
ganizations and their institutional environment as work. One is an interest in unpacking the processes
primarily isomorphic, focusing on legitimacy-seeking that link internal and external politics. Although
processes in the face of environments of diffuse cog- classical formulations often implied a contingency
nitive, normative, and coercive standards. Of partic- perspective to highlight the interdependence of in-
ular interest for this review is the recent work on ternal and external polities, these formulations were
institutional logics and complexity, which brings rudimentary in their elaboration of how and when
conflict to the forefront of analysis (Greenwood, external factors surface in intraorganizational pro-
Raynard, Kodeih, Micoletta, & Lounsbury, 2011; cesses. Contemporary research offers a broader array
Thornton, Ocasio, & Lounsbury, 2012). Social move- of processes that reflect different conceptions of
ment research (Briscoe & Gupta, 2016; Davis et al., organizational boundaries. The second theme in
2005; Davis, Morrill, Rao, & Soule, 2008) focused on contemporary research seeks to identify important
stakeholder campaigns and internal activists with dimensions of variation in internal and external
a core process being the ability to mobilize action polities. This research builds on the comparative
based on interests, resources, and identities. Political approach of earlier work, but with an extended view
behavioral theory research focused on corporate of organizational variation. We use these themes to
elites’ beliefs and biases as linkages to external organize our taking stock of contemporary open
ideologies and organizations (Chin, Hambrick, & systems approaches in the next sections.
Treviño, 2013) as well as on attentional effects of an
organizational polity’s structure (Crilly & Sloan, 2012;
BOUNDARY PROCESSES
Ocasio, 1997). And critical management studies,
based as much on Marxists and poststructuralist A key element of the open polity perspective is an
thought as on mid-century organization and indus- understanding of the processes through which the
trial relations theory have emphasized struggles over external political environment permeates organiza-
identities and subjectivities in organizations as a crit- tions. In the present section, we review these
ical path through which organizational struggles are boundary processes. The boundary processes iden-
linked to societal ones (Alvesson & Willmott, 2002; tified in contemporary research align on a contin-
Fleming & Spicer, 2003). uum that reflects different notions of the nature of
Recent years have seen a resurgence in research organizational boundaries and their permeability, in
that puts intraorganizational politics at the center of other words, on the extent and nature of the “open-
analyzing the relationship between organizations ness” of organizational polities. On one end is
and their environments. For example, Kellogg research that treats organizations and their
environment as clearly distinct, and the interests of but increase their potential power to reach these
groups inside organizations as independent of the goals. Organizations are thus seen as generally rela-
external environment. Herein, the influence of the tively settled internally and closed to outside influ-
external environment on intraorganizational politi- ence, with opportunity structures allowing for
cal dynamics is indirectly induced, taking the form windows for change due to a shift in the power of
of opportunities for groups to pursue their interests, different groups.
or coercive demands that enter the instrumental One strand of this research has identified organi-
decision calculus of internal groups without altering zational factors that increase the openness of orga-
their goals. Other research focuses on formal and nizational polities to particular outside influences.
informal channels through which external environ- In more open organizations, external groups can
ments can enter an otherwise closed polity system, more easily gain access to decision-making in the
such as actors with privileged access to organiza- organizational polity. For example, Brickson (2007)
tional decisions, network ties, and formal boundary argues that organizations can have an individualis-
spanning units and roles. A third line of research sees tic, a relational, or a collectivistic organizational
a true interpenetration of internal and external pol- identity orientation. Organizations with relational
ities, in the form of externally induced belief systems and collectivistic identity orientations are more
of people inside organizations, and identifications of willing to engage with demands from internal and
organizational members with external groups and external stakeholders than organizations with in-
ideas. On the other end of this spectrum is research dividualistic identity orientations. Corporate gover-
that sees organizations’ and their members’ sub- nance scholars have similarly noted that minority
jectivities and interests as constituted by larger so- shareholders have access to board governance
cietal forces, so that organizations are simply arenas channels more readily in some contexts than others.
for general societal politics. Each of those processes Firms’ relative (lack of) openness to minority share-
suggests a different way in which external environ- holders is not only determined by opportunity
ments affect either the goals and motivations or the structures at the level of the country of origin, but
relative power of organizational groups. Table 2 of- also by the corporate bylaws and articles of associa-
fers an overview of representative studies reviewed tion of individual firms (Aguilera, Desender, Bednar,
in this section. & Lee, 2015; Cziraki, Renneboog, & Szilagyi, 2010).
Other researchers have classified organizations with
respect to the dominant political ideology (liberal
Boundary Processes when Organization and
versus conservative) of their workforce and argued
Environment Are Independent
that liberal companies offer better opportunity
Political opportunity structure. The concept of structures for engaging in corporate social responsi-
opportunity structure is especially prominent in bility (CSR) than conservative ones (Chin et al., 2013;
political stakeholder and social movement scholar- Gupta, Briscoe, & Hambrick, forthcoming). It should
ship. Opportunity structures designate structural be noted that these studies evoke the mobilization
conditions that create a favorable context for politi- and interests of organizational members as an im-
cal mobilization in pursuit of a group’s goals, but that portant process but do not directly investigate them.
do not generate political outcomes without mobili- Other studies have, however, offered more direct
zation (Kriesi, 2004; Soule, 2012; Tarrow, 1998). evidence of internal polity dynamics (see the review
Traditional social movement scholarship focused by Briscoe & Gupta, 2016). For example, Briscoe
on opportunities arising for movement groups due and Safford (2008) show that field-level adoption
to policies of government and regulatory agencies events create political opportunities for internal
(McAdam, Tarrow, & Tilly, 2001). The political op- groups to mobilize in support of domestic partner
portunity construct has more recently been applied benefits in the early stages of diffusion. Along with
to the level of firms (Briscoe et al., 2014; King, 2008) other studies, such as King (2008), this research
and private regulatory initiatives (Mena & Waeger, points to the often temporary and cyclical nature of
2014). The basic idea is that conditions at the orga- opportunities in the form of declines in performance,
nizational or environmental level help or hinder new leadership, or acquisitions, for peripheral in-
the interest-based mobilization of coalitions inside ternal and external groups (Hallett, 2010; Raeburn,
or outside organizations, and their effectiveness of 2004).
reaching particular goals. Structures of opportunity Another strand of research focuses directly on
leave internal and external groups’ goals unchanged, political opportunities that allow existing groups
TABLE 2
Boundary Processes
Environment–Organization Illustrative Studies and Concepts of
Relationship Type of Boundary Processes Process Description Boundary Bridging
Organizations separate External influence is translated Environments offer political King (2008), Raeburn (2004)
from the environment into existing organizational opportunity structures for (performance decline); Basu and
interests mobilization Palazzo (2008) (stakeholder
orientation); Gupta, et al. (forthcoming)
(political ideology); Kellogg (2009),
Weber et al. (2009) (preexisting
routines)
Environments change the Weber, Rao, and Thomas (2009), Kellogg
interest-based decision (2012) (status threat); Edelman,
calculus of internal groups Abraham, and Erlanger (1992) (risk of
litigation); Gehman, Trevino, and
Garud (2013) (risk of scandal)
Selective coupling between External actors with Huising (2014) (governmental agency);
organization and privileged formal Gilbert, Rasche, and Waddock (2011)
environment organizational access (private regulation initiatives);
McDonnell, King, and Soule (2015)
(shareholders); Soule (1997) (students)
Organizational members’ ties Davis (1991), Westphal & Zajac (1997)
to external groups (board interlocks); Briscoe, Gupta, and
Anner (2015), Briscoe and Safford
(2008), Bundy, Shropshire, and
Buchholtz (2013) (peers); Waldron,
Navis, and Fisher (2013) (industry)
Boundary spanning units, Treviño et al. (2014) (ethics and
processes, and routines compliance officer); Rao and
Sivakumar (1999) (investor relations
departments); Kelly and Dobbin (1998)
(AA specialists); McDonnell et al.
(2015); Plambeck, Lee, and Yatsko
(2012), Wickert and de Bakker (2015)
(CSR departments); Crane et al. (2015)
(accounting); Kellogg (2014)
(community health workers)
Interpenetration at the level of External identities of Briscoe and Safford (2008), Raeburn
individual organizational organizational members (2004) (sexual identity); Tracey et al.
members (2011), Battilana and Dorado (2010),
Pache and Santos (2010), Smets et al.
(2012) (professional identity); Post
et al. (2011, 2015) (gender); Briscoe,
Chin, and Hambrick (2014) (political
affiliation)
Organizational members’ Bundy, Shropshire, and Buchholtz
internalization of external (2013) (salience); Palazzo, Krings, and
beliefs and interpretations Hoffrage (2012) (blindspots); Kaplan
(2008) (frames); Weick (1995)
(“minimal sensible structures”);
Cornelissen and Werner, 2014)
(framing)
Organizations permeated by Organizations as externally Organizational interests of Sitkin & Bies (1994) (legalistic internal
the environment constituted members are shaped structures for conflict management);
externally Banerjee (2008), Khan, Munir, and
Willmott (2007) (CSR); Thomas and
Davies (2005) (new public
management)
inside organizational polities to gain power to pur- salient to decision-makers and serve a group’s in-
sue their goals. For example, Kellogg (2009, 2011a), terests (Dobbin & Kelly, 2007; Dobbin & Sutton, 1998;
in a study of reforms to surgical practice, shows how Gehman, Trevino, & Garud, 2013; Kaplan, 2008).
external opportunities, in the form of regulatory For example, human resource specialists, benefit
mandates were insufficient to empower and moti- accountants, tax lawyers, safety engineers, and equal
vate residents to implement shorter work hours, but employment managers saw in employment legisla-
that structures of the informal organization within tion new possibilities for professional growth
hospitals could. Similarly, Weber, Rao, and Thomas (Dobbin, 2009). They insisted to top managers that
(2009) showed that external contestation of bio- new offices could ensure legal compliance, exag-
technology in the 1980s interacted with the preex- gerating the risk of litigation to win organizational
isting distribution of power in German biochemical resources (Edelman, Abraham, & Erlanger, 1992). In
firms to shape the emerging political coalitions for recasting these departments in terms of efficiency,
and against investing in biotechnology, and ulti- middle managers played to top managers’ pre-
mately the corporate commitment to the technology. occupation with the bottom line and desire to avoid
The study of opportunity structures at multiple costs associated with legal compliance.
levels remains a particularly promising area of
research.
Selective Coupling of Organization and
Interest-based decision calculus. Although op-
Environment
portunity structures alter the relative power of polity
participants but not their goals and interests, other Although the processes reviewed in the previous
research has examined situations in which relative section maintain a relatively clear boundary between
power remains unchanged, but mobilization for an organizational polity and its environment, others
a cause comes about when external factors alter the suggest that organizations and their external envi-
interest-based calculus of internal groups in the op- ronment are linked more directly, through paths
portunistic pursuit of their goals. As noted earlier, along which the external political environment is
this process does not rest on a reformulation of goals directly imported into the organization. This re-
and interests (as, e.g., in identity-based processes search depicts the interests and power of organiza-
discussed below). Instead of altering goals, an or- tional members as directly coupled to external
ganization’s environment induces political mobi- factors, but only at selective entry points. In this
lization via the incentives it offers. Organizational subsection, we discuss several varieties of such se-
members may import an external issue into the or- lective coupling.
ganizational polity simply because it serves their External actors with privileged access to the
preexisting interests. The study of Weber et al. (2009) internal polity. Although open systems research
illustrates this case. They investigate how the anti- emphasizes that organizational boundaries are per-
biotech movement in Germany impacted on German meable to external influences, some external actors
pharmaceutical companies’ decisions to invest are in a more privileged position than others to inject
in biotechnology. But the decision-makers inside their goals into the decision-making processes of the
pharmaceutical companies did not agree or identify organizational polity. This privilege is often tied to
with the arguments of the anti-genetics movement. the legitimate authority over an organization and
Nevertheless, some organizational members had an corresponding channels for gaining attention and
instrumental interest in preventing investments in influencing polity dynamics (Ocasio, 1997).
biotechnology, for instance, because it would divert One category of privileged actors examined in the
capital from their own business unit or because their literature is regulatory bodies and agencies. Regula-
occupational status as inorganic chemists was tory bodies are authorized to routinely oversee,
threatened by the advent of biotechnology. For these control, and inspect organizations. For instance,
internal groups, the external movement offered ar- Huising (2014) describes an organizational change
guments about the sociopolitical risks of the new process triggered by the Environmental Protection
technology and thus altered their decision calculus Agency’s (EPA) inspection of compliance manage-
and position toward the technology without affect- ment regarding environmental regulations in a large
ing their goals, relative power, or the routine research university in the United States. During the
decision-making procedures of the organization. inspection, the EPA did not find any major violations
Calculations of benefits and risks are oftentimes of regulations, but was alarmed by the fact that
framed strategically or exaggerated to make them organizational members could not articulate the
structures and processes through which the uni- regarding, for example, applying sanctions to com-
versity’s compliance was achieved. As a reaction to panies producing college apparel by violating labor
the inspection results, the university leadership rights (Briscoe, Gupta, & Anner, 2015) or instituting
agreed with the EPA to create a management system recycling programs (Lounsbury, 2001).
with codified methods and processes, which would Relational ties to external groups. Another form
ensure that these methods and processes could be of selective coupling occurs through formal and in-
widely shared throughout the organization. The formal networks across organizational boundaries
creation of this management system subsequently that serve as pipes through which information and
became a locus of political struggles, as internal influence flows. One of the most prominent and
compliance experts were put under pressure to long-standing areas of research on these ties con-
codify their implicit expertise, over time changing cerns national elite business networks the top man-
the internal political constellation and wresting agers of large companies oftentimes are part of
control from internal experts. (Mizruchi, 1996; Palmer, Friedland, & Singh, 1986).
Private regulatory and certification bodies may also Personal networks are especially important under
obtain privileged access to organizations that volun- conditions of uncertainty when organizational
tarily subscribe to these bodies (Mena & Palazzo, leaders give priority to information coming from
2012). This is the case for companies that seek certi- these networks because they trust the source that
fication of, for instance, sustainable sourcing prac- provides the information (Davis, 1991; Davis &
tices (Levy, Reinecke, & Manning, 2015) or labor Greve, 1997). Empirically, this argument has been
protection efforts in their supply chain (Bartley, investigated in multiple studies looking at how new
2007). A less voluntary form of private certification ideas in an institutional environment spread among
concerns the auditing of organizations’ financial organizations. These studies typically look at how
accounts by accounting experts (Greenwood & board interlocks, that is, directors sitting on the
Suddaby, 2006), which is mandatory for publicly board of multiple firms, can explain how new ex-
listed companies in many countries. Such private ternal elements permeate organizations. Indeed, or-
experts ensure that externally developed standards ganizations are generally more likely to adopt a new
are implemented internally, thereby representing an organizational practice or idea, when they share
important channel through which new external re- board interlocks with organizations that have adop-
quirements can enter focal organizations (Gilbert, ted that idea previously. Among the practices and
Rasche, & Waddock, 2011). Consultants with author- ideas researchers have focused on are practices that
ity based on expertise and experience play a similar are contested inside and outside organizations, such
role in certain politically charged and organization- as poison pills (Davis, 1991) or golden parachutes
ally relevant issue domains, for instance with regard (Fiss, Kennedy, & Davis, 2012), suggesting that ex-
to work–life balance (Whittle, 2008) or environmental ecutive networks influence not only executives’ in-
management systems (Marimon Viadiu, Casadesús terest formation, but also the legitimacy of practices
Fa, & Heras Saizarbitoria, 2006). in the eyes of other polity groups.
Other actors with privileged access to the focal Beyond such more formalized and visible re-
organization are partial or temporary organizational lationships, organizational members are also linked
members (Briscoe & Gupta, 2016). Such semi- more informally to outside groups and other orga-
external actors include dispersed shareholders in nizations. For instance, the influence of organiza-
publicly listed firms (McDonnell, King, & Soule, tions in a field or industry is often attributed to
2015) or students in colleges or universities (Rojas, the resulting density of interactions and to refer-
2007; Soule, 1997). Hence, although shareholders ence group effects (Briscoe et al., 2015; Bundy,
have a very light bearing on the day-to-day activities Shropshire, & Buchholtz, 2013; DiMaggio & Powell,
of corporations, they have the right to bring to the 1983; Waldron, Navis, & Fisher, 2013). It is in-
attention of the board issues related to corporate teresting to note that the belonging to an organiza-
governance and social or environmental topics. And tional field or industry is not necessarily stable
while students are only formally part of colleges and across time or issue area. For instance, Briscoe and
universities for a limited amount of time and with Safford (2008) asked human resource managers of
limited formal resources and standing, they have Fortune 500 companies about their perceptions
oftentimes preferential access to more permanent of who their peers were and analyzed whether
organizational members (Gehman et al., 2013), such these perceived meta-level connections impacted on
as senior faculty who may support their demands whether these organizations subsequently adopted
a contentious organizational practice. Other in- department takes a proactive approach to sensing
formal relationships with external actors include and reacting to newly emerging issues in its in-
those with former organizational members, such as stitutional environment (Plambeck, Lee, & Yatsko,
alumni in the case of universities. For instance, 2012).
Gehman et al. (2013) report a case where the ac- Over time, however, boundary-spanning units
counting alumna of an American university comes may take on a political life of their own and—rather
back to campus with the intention of hiring students than protecting the organization from external in-
nearing graduation for her employer, only to discover fluences and demands—become internal allies to
that these students have virtually no knowledge about such demands (Wickert & de Bakker, 2015). This is in
issues of ethics and integrity. As a consequence, she line with Selznick’s (1957) rendition of institutional
became an important external advocate for the de- theory, which postulates that organizational struc-
velopment of an honors code at the university and tures develop internal organizational constituencies
lobbied organizational members she had access to as that have an interest in perpetuating these structures,
an alumna to support the adoption of such an internal even when the external conditions that gave rise to
honors code. their original constitution are not there anymore.
Boundary-spanning units, processes, and routines. Once separate structures are created, they provide
Another way through which organizations are selecti- not only a power base but also a free space for new
vely coupled to the external environment is via dedi- internal constituencies to develop localized sub-
cated organizational structures and processes with cultures insulated from other parts of the organiza-
the explicit purpose of linking the organization tion and they are thus difficult to fully control via
routinely to select external audiences. Examples of hierarchical means (Heinze & Weber, 2016; Kellogg,
boundary spanning units include ethics and compli- 2009). For instance, AA and EEO law became a cor-
ance officers in companies (Chandler, 2014; Treviño, nerstone of the civil rights and labor relations legis-
den Nieuwenboer, & Kish-Gephart, 2014), investor relation enacted by the U.S. federal government in the
lations departments (Rao & Sivakumar, 1999), labor 1960s and 1970s. In order to manage compliance
relations units that deal with collective bargaining and with these regulations, many American companies
union representation (Jacoby, 2005); equal employ- established formal EEO/AA offices. Yet, in the 1980s,
ment opportunity (EEO) and affirmative action (AA) EEO/AA was heavily deemphasized under the new
officers (Kalev, Dobbin, & Kelly, 2006), marketing and Reagan administration. But, rather than leading to
legal affairs (Delmas & Toffel, 2008), and CSR de- the demise of EEO/AA offices in American organi-
partments (McDonnell et al., 2015). In many cases, such zations during the Reagan administration, EEO/AA
internal capability-building for linking up with exter- specialists and human resource managers started
nal constituents was the result of previous conten- advocating for EEO/AA practices on the basis of
tious interactions with the external environment a new set of arguments—shifting from legal compli-
(McDonnell et al., 2015). For instance, the intense ance to business case justifications—thereby ensur-
scrutiny from activist groups many sportswear manu- ing the survival of both EEO/AA offices and practices
facturers underwent from the beginning of the 1990s (Kelly & Dobbin, 1998).
on with respect to labor and human rights issues in Boundary-spanning, however, is not only accom-
their supply chains led to the development of internal plished via specific organizational structures, such
structures, processes, and expertise regarding the im- as staff-level departments. There are also organiza-
proved management of these topics (Bartley, 2007; tional routines and everyday practices that ensure
Baumann-Pauly, Scherer, & Palazzo, 2016). Some of the organization is linked or develops new linkages
these companies have subsequently become recog- to selective external audiences. Hence, organiza-
nized as champions of social and environmental issues tions produce a variety of reports and consolidate
and the internal structures and processes previously a multitude of metrics reflecting their linkages to is-
developed play an important role in altering the sues relevant in the external polity, thereby putting
internal polity dynamics accordingly. In the case of the issues reported on regularly on the agenda of
Nike, the company now is considered comparatively internal managers. This is the case, for instance, for
responsive not only in terms of the labor and human health and safety indicators (Jayasinghe, 2016) or
rights issues it has been strongly criticized for in the environmental accounting metrics (Ball, 2007;
1990s, but also for more general issues of corporate Delmas, Etzion, & Nairn-Birch, 2013). Although
responsibility, including those related to environ- such accounting exercises are often described
mental aspects, because its corporate responsibility as functional communication devices targeted at
both internal and external audiences (Cho, Guidry, Interpenetration of Organizations and their
Hageman, & Patten, 2012) they also constitute a key Environment
technology through which organizations translate
So far, we have reviewed literature, in which or-
the complexity in their environment into a language
ganizations and their environment are linked to each
allowing them to make sense of which stakeholder
other in ways that still allow for a clear identification
demands matter and to what extent (Crane, Graham,
of a boundary between the external and the internal
& Himick, 2015). But boundary-spanning routines
polity. However, contemporary open polity research
are not limited to accounting. For instance, the ad-
emphasizes that organizational members are not
visory board of the university that is the focus of the
only organizational members, but they also occupy
study of Gehman et al. (2013) started to get interested
multiple other roles in their lives, as wives, parents,
in the adoption of an honor code when it learned
members of voluntary associations, sports clubs,
about a cheating scandal at another nearby univer-
sity. And the companies in Briscoe and Safford’s representatives of a profession or social group,
(2008) paper were more likely to import the idea of alumni of a school, and others (Creed, Dejordy, &
domestic partner benefits into their organizations Lok, 2010; Dutton & Dukerich, 1991; Meyerson &
when their human resource managers included Scully, 1995). From an open polity perspective, this
in their benchmarking universe companies who aspect is crucial, because it exemplifies the openness
had previously adopted such domestic partner of organizational polities in particularly strong terms
benefits. (Zald et al., 2005), as intimately interwoven at the
Finally, there are also less conscious or planned level of personal experience. Societal beliefs and
boundary-spanning activities of organizational struggles are not left behind at the organizational
members that lead them to absorb external demands border, but are brought inside the internal polity
into the organizational polity. Hence, employees, via organizational members’ prior socialization,
middle managers, or executives in organizations identification, and stance toward aspects of extra-
may come to pursue new opportunities by entering organizational life. In fact, societal changes are at
new organizational fields with their concomitant times also preceded by organizational changes. For
value regimes. For instance, Greenwood and instance, the widespread adoption of domestic part-
Suddaby (2006) observe how the big accounting ner benefits for lesbian, gay, bisexual, and transgender
firms started venturing into new business areas, such (LGBT) employees by Fortune 500 companies from
as strategic consulting, because some of their exis- the 1990s onward preceded society-level changes in
ting clients asked them to provide services beyond LGBT rights in more recent years (Briscoe & Safford,
traditional accounting. Although this provided an 2008; Creed, Scully, & Austin, 2002; Raeburn, 2004).
opportunity to revitalize an essentially slowing Importantly from an open polity perspective, the
growth-model for the big accounting firms, it also led adoption of domestic partner benefits was influenced
them to drift away from the normative grounding in by LGBT advocates inside Fortune 500 companies
the accounting profession that had conventionally who were also members of the more general extra-
governed much of the firms’ organizational life, organizational LGBT community.
thereby leading these firms’ boundaries to be per- Organizational members’ salient social identities in
meated by alternative logics of organizing, a process, terms of, for instance, gender, class, age and genera-
Greenwood and Suddaby (2006:42) refer to as tion, nationality, ethnicity, political ideology, family
“boundary-bridging.” Conversely, Kellogg (2014) role, or membership in religious and other extra-
shows how community health workers became organizational communities form a direct link to the
a brokerage profession between doctors working in external environment that is not selective but, in
their inner city health centers and external legal aid fact, pervasive throughout the entire polity (Piore &
lawyers seeking to implement a reform designed to Safford, 2006). In addition, professional and occu-
address the social determinants of health for low- pational backgrounds shape not only identities but
income patients. Doctors and lawyers each wanted to also the knowledge and normative commitments of
avoid tasks unrelated to their professional expertise, members of an organizational polity. For instance, the
tasks that conflicted with their professional identity, professional role identities of nurses (Reay, Golden-
and impure or low-value tasks that threatened their Biddle, & Germann, 2006), lawyers (Faulconbridge &
professional interests. Community health workers Muzio, 2016), accountants (Greenwood & Suddaby,
then took on a buffering role in the interstices be- 2006), or surgeons (Kellogg, 2011a), to name but a few,
tween these existing professional jurisdictions. are to an important extent independent from the
norms and values of particular organizations. And in are more likely to respond positively to external de-
a similar vein, the educational background and past mands that emphasize other-regarding motives and
experience of organizational members shape both value judgments (Post, Rahman, & McQuillen, 2015;
normative values and interpretive lenses of individ- Post et al., 2011).
uals in organizations (Hambrick & Mason, 1984). Internalized beliefs and interpretations. In
Below, we discuss two main processes of organization- addition to external identities, the past and outside
environment interpenetration that feature promi- experiences of organizational members also impact
nently in the existing literature, acknowledging that the way they make sense of organizational and ex-
they in reality often overlap: external identifications ternal demands, by equipping them with beliefs and
as well as internalized beliefs and interpretations. normative commitments. Whether and how issues
Identification with external demands. An obvi- are taken up by polity members depend on their in-
ous way through which organizational members terpretive frames (Kaplan, 2008; Leonardi, 2011;
import external demands into their organization is Morrill & Rudes, 2010; Palazzo, Krings, & Hoffrage,
by way of identification with these demands. The 2012). This insight goes back to the notion of boun-
above-cited example of domestic partner benefits ded rationality and earlier work on upper echelons
and internal activism by members of the LGBT (Cornelissen & Werner, 2014; Hambrick, Cho, &
community (Briscoe & Safford, 2008) is a good ex- Chen, 1996; Walsh, 1995). Heuristics, frames, and
ample. Much of the recent work on socioeconomic biases are grounded in “past moments of socializa-
hybrids also emphasizes the fact that in such hybrids tion” (Weick, 1995: 111), and thus in individuals’ life
different organizational members have backgrounds experiences inside and outside organizations. In
in very different sectors (Tracey, Phillips, & Jarvis, other words, the cognitive structures that organiza-
2011). Specifically, although some members are tional members apply to external issues determine
grounded in a commercial logic, others have back- whether these issues are noticed, deemed important,
grounds and experiences in social welfare logics and how they are interpreted. Conflict in organiza-
(Battilana & Dorado, 2010). Both bring their idio- tional polities often arises as a result of such differ-
syncratic socio-professional identities into the orga- ences and organizational action is influenced by
nizations which, by relating to different external whether and how they are reconciled (Morrill, 1995;
audiences, lead to a representation of these different Ocasio & Joseph, 2005). A now classical illustration
external audiences inside the organizational polity of this argument is how engineers at Ford in the
(Pache & Santos, 2010, 2013). And even in organi- 1970s decided to handle safety problems with the
zations composed of members with occupational Ford Pinto (Gioia, 1992). The Pinto suffered from
identities grounded in the same profession, there a very important design flaw that led its tank to fre-
may be varying interpretations of this occupational quently explode in collisions. Pinto drivers suffered
identity depending on the country in which the dif- serious injuries or even died. In this situation, man-
ferent members have received their professional agers at Ford could either recall all Pintos and im-
training, providing the ground for polity-internal prove the safety of the cars, or continue to pay
struggles around what constitutes an acceptable damages for drivers involved in an accident. Calcu-
definition of professional conduct (Smets, Morris, & lating and comparing the costs of these two options,
Greenwood, 2012). Other indicators of social iden- the managers concluded that it would be costlier to
tity, such as organizational members’ gender, are recall the cars, and they therefore decided to not
also oftentimes studied. Indeed, researchers have improve the safety of the car’s design. The managers
argued that men and women differ in variety aspects, at Ford interpreted the safety issue of the Pinto
for instance in terms of their values (Post, Rahman, & through the managerial frame of cost-benefit analysis
Rubow, 2011). Of particular relevance from the and profitability. Had managers interpreted it as
vantage point of identification-based open polity a safety issue, they would likely have instead aimed
research, Biggins (1999) argues that women are more at minimizing the risk for further fatal accidents
inclined to build strong relationships with multiple by Ford Pinto drivers (Palazzo, Krings, & Hoffrage,
stakeholders and Groysberg & Bell (2013) argue that 2012). As Fourcade-Gourinchas (2011) shows in the
they are more likely than men to appreciate self- evaluation of harm from oil spills, the economic cost-
transcendent values and are hence more likely to benefit interpretation of risk in the Pinto case is
identify philanthropy and community service as broadly enshrined in North American managerial
personal interests outside of work. As a consequence, and legal communities, but it is by no means uni-
existing research suggests, female decision-makers versal, as shown by the counterexample of French
public engineers’ understanding of harm from oil affected by the new production process and often-
spills. times could not continue to work as stitchers. The
measures taken were in line with a dominant dis-
course around the rights of children and were effec-
Organizations as Subjects of Macro-Level
tive both in eliminating child labor from the soccer
Discourses and Institutions
ball stitching industry and at reestablishing trust in
A final process through which the external envi- the involved companies—the interests of organiza-
ronment permeates organizations is yet more un- tional and external elites. Yet, they left the most
obtrusive but most encompassing. Organizations vulnerable actors—the stitching families—in a more
and the roles their members take are shaped by precarious state than before.
macro-level discourses and institutions that regulate Organizational polities thus can be seen as venues
organizational members’ sense of self and of others for societal struggles in a more comprehensive way
as the institutions are woven into the very consti- than acknowledged in research that maintains a dis-
tution of individual and organizational subjectivi- tinction between organizational goals and roles, and
ties and identities (Fleming & Spicer, 2003, 2007; personal social identities and backgrounds (Alvesson
Thomas & Davies, 2005; Vaara & Tienari, 2011; & Willmott, 1996; Willmott, 1993). If the organization
Voronov & Weber, 2015). As organizations and their itself is constituted as an instrument of domination,
members internalize discourses and institutions and the notion of an open polity begins to break down in
accept them as quasi-natural social facts, they re- favor of models that see organizations as fully absor-
enact them more or less automatically and without bed into societal systems and struggles.
active deliberation. From this perspective, which is
most clearly articulated in critical management
COMPARATIVE ANALYSES OF POLITIES
studies, the interests of organizational groups and
the organizational polity’s authority structures are Despite early calls for a systematic comparative
themselves reflections of more general regimes that analysis of organizational polities and environment
map social stratification and hierarchical orderings and the development of partial typologies (Perrow,
into organizational polities. Examples include class 1967; Thompson, 1967; Zald, 1970a), research that
structures (Burawoy, 1979; Willis, 1977), gender roles takes an explicitly comparative approach to studying
(Abrams, 1989), racial inequalities (Tomaskovic-Devey, organizational polities has until very recently remained
1993; Vallas, 2003), and North–South relations limited. Nevertheless, several studies make implicit
(Banerjee, 2008). or explicit claims about the role of particular config-
These institutional power structures are ingrained urations for observed outcomes. In this section, we
in organizations such that even instruments de- review work addressing three dimensions of variation
ployed to rectify part of the societal hierarchies within an open polity framework: variations in po-
reproduced within organizations are often subverted litical processes that generate organizational actions,
toward reproducing and even strengthening them, as dimensions of variation in the structure of organiza-
is the case with activities in the area of CSR aimed at tional polities, and dimensions of variation in orga-
improving working conditions in developing coun- nizational environments.
tries (Banerjee, 2008). For instance, Khan, Munir,
and Willmott (2007) report about an initiative aimed
Variations in Political Process
at eliminating child labor in the manufacturing of
soccer balls in Pakistan. The occurrence of child Contemporary open polity work points to differ-
labor in the stitching of soccer balls in Sialkot, ences in how external influences are processed in
Pakistan, became internationally scrutinized for organizations to produce organization-level out-
benefitting from child labor in their operations. Such comes. Since the open polity model takes neither
criticism was based on the dominant normative a deterministic view of environmental influence nor
discourse that the proper activity for children is go- a view of organizations as calculating actors, varia-
ing to school. However, those most affected by this tion in organizational political process is conse-
decision—the stitching families—were in a marginal quential. Given the political nature of organizational
position in the polities of the manufacturing firms, processes it is perhaps not surprising that distinc-
and were granted no voice in the process of designing tions revolve around hierarchy and the distribution
the project devised to remedy the issue (see also of power in organizations—whether external in-
Boje, 1995). Many of these families were adversely fluences are promoted by organizational elites with
formal authority and access to formal control sys- emphasize tactics aimed at increasing structural
tems, by those at the lower ranks without similar power in a confined domain and then deploying
bases of power, or in the form of lateral influence processes associated with top-down influence from
among individuals and groups with similar power. this power base. Nuanced combinations of political
These variations are closely related to questions of processes can be expected to be more prevalent the
access points and channels (discussed in the section more ambiguous and fluid a polity’s power structure
on boundary processes), especially if one does not is. We return to the issue of the alignment of con-
assume that all organizational members are equally ceptual process categories with organizational posi-
influenced by the same elements of the external en- tions in our discussion of future direction at the end
vironment. Differences in preexisting power and of this review. Table 3 provides an overview of rep-
authority affect the channels, tactics, and forms of resentative studies on the different internal pro-
opposition through which conflict is negotiated, as cesses we review below.
well as likely settlements. Top-down processes. Much extant research has
Although explicitly comparative research is still focused on organizational elites as the primary con-
relatively rare, studies of internal political processes duits for internalizing elements of the environment.
is presently a very active area of research that has Elites include members of the upper echelon in high
added substantial depth and nuance to the founda- hierarchical positions, but also groups with juris-
tional work from the 1960s, not least because con- dictional authority and influence based on knowl-
temporary researchers encounter a range of new edge and expertise, including members of the
organizational forms and thus discover a variety of professions (e.g., medical doctors in hospitals, in-
processes that were less salient in the large bureau- house lawyers and finance professionals in corpo-
cracies studied in the 1950s and 1960s. This research rations, or research scientists in biotechnology
can be understood as responding to Zald & Berger’s companies). The recurrent framing in studies of top-
(1978) call for studying different forms of political down political process is one of the limits of control
contestation in organizations, a call that arguably fell and resistance after goals have been set by members
on deaf ears for two decades (Zald, 2005). of the elite. (Note that we review conflict over goals
We have classified the internal processes that are within elites below as a lateral process.) Contempo-
most salient in the literature based on assumptions rary research therefore focuses on elites’ ability to
about the balance of power in the process, a di- deploy authority, the formalization of a dominant
mension central to the open polity perspective. coalition’s power in routine operating procedures,
Thus, we emphasize analytic distinctions rather and their role as enablers of behaviors and change
than empirical ones. It is thus quite possible to ob- at lower hierarchical levels.
serve the same process in a different balance of Exerting authority. Open polity research points to
power situation. Although existing research does the limits of classic chain-of-command accounts that
tend to emphasize top-down processes in analyses of assume implementation of decisions made by cor-
hierarchical influence, lateral processes in condi- porate elites to be relatively unproblematic. One
tions of relative power balance and bottom-up pro- limitation on authority is an organization’s formal
cesses when studying organizational members with system of authority, derived from organization-and
peripheral or low hierarchical standing, it has also field-level rules, which can be seen as akin to a pol-
added substantial nuance. For example, several ity’s constitution. Rules and procedures put checks
studies have examined how people in subordinate on elite actors in many organizations and limit
positions may evoke more circumscribed authority their discretion in decision-making (Hambrick &
and power or recruit authority from external sources. Finkelstein, 1987). This includes cultural, pro-
This is the case in Heinze & Weber’s (2016) study of fessional, and institutional norms (Fiss & Zajac,
integrative medicine practitioners, who drew on 2004), as well as formal governance and oversight
status in their profession to assert authority over structures (Aguilera et al., 2015) that effectively limit
clinics and training within hospitals dominated the authority of elites to certain domains and actions.
by conventional medicine logics, and similarly in For instance, corporate governance researchers have
Kellogg’s (Kellogg, 2012; Truelove & Kellogg, 2016) shown that some boards of directors are able to better
studies of coalition formation by insurgent groups control top management teams by decreasing in-
across status hierarchies. Interestingly, both studies formation asymmetries. The presence of external
found not only different influence tactics than auditors, legal provisions in company bylaws and
one might expect in a clear hierarchy. Both also charters, and the external institutional environment
TABLE 3
Internal Political Processes
Power Balance Process Description Key Studies and Concepts of Polity Interpenetration
Top-down Authority (evoke or contest positional or other status Hambrick and Finkelstein (1987) (CEO and top
or domain jurisdiction to influence) executive team), Aguilera et al. (2015) (board);
Kellogg (2011a) (professional status); Fleming and
Spicer (2003) (domination-resistance)
Formalization (depersonalize and enshrine decision Rao and Sivakumar (1999) (investor relations
rules in structures, policies, and routines) departments); Etzion and Ferraro (2010) (Corporate
Social Responsibility departments and reporting);
Dobbin (2009) (equal opportunity/Human Resource
Management)
Enablement (delegate power, set democratic rules, Mayer et al. (2013) (culture); Gehman et al. (2013)
refrain from using power) (public endorsement); Rao and Dutta (2012) (free
spaces)
Lateral Negotiation (interest and exchange based bargaining Cohen and March (1986) (multiple agendas); Weber
over decisions or coalition alignment) et al. (2009) (willingness to spend political capital);
Truelove and Kellogg (2016) (radical flank effect);
Canales, (2013), Kraatz and Block (2008), Pache and
Santos (2010) (conflicting logics)
Framing (representational and rhetorical tactics to Suddaby and Greenwood (2005) (rhetorical devices);
persuade others) Battilana and Casciaro (2012), Maguire, Hardy, and
Lawrence, (2004) (social position, skill, and
credibility)
Bottom-up Mobilization (get others to act collectively, Briscoe and Gupta (2016); Kellogg (2009), Gehman
confrontationally, or as reformers) et al. (2013) (cross-level mobilization); Kellogg
(2011b) (political toolkits), Meyerson (2003) (social
identities, such as race, gender, or sexual
orientation)
Issue Selling (presenting specific issues and causes Bansal (2003), Dutton et al. (2001), Howard-Grenville
favorably to more powerful actors) (2007) (tactical skill/moves); Wickert and de Bakker
(2015) (extra-organizational motivation); Raeburn
(2004), Treviño et al. (2014) (resonance), Heinze and
Weber (2016) (existing routines)
can provide boards with information to counteract organizational elites that accept these demands may
managers’ discretion (Abbott, Parker, Peters, & develop solutions that routinize external influence,
Raghunandan, 2003; Aguilera et al., 2015; Desender, thus taking decisions out of potentially more con-
Aguilera, Lópezpuertas‐Lamy, & Crespi, 2014; Marcel tested discretionary processes and into more settled
& Cowen, 2014). A second constraint arises from organizational solutions. This transition is well
resistance—the ability of less powerful members to documented in industrial and labor relationship re-
impede or dilute decisions taken at the top, for in- search that traces the institutionalization of class-
stance, because lower level organizational members based conflict into organizational arrangements,
control information or expertise necessary for imple- such as collective bargaining routines or worker
mentation (Fleming & Spicer, 2003; Jermier, Knights, & councils (Kochan, Katz, & McKersie, 1986; Piore &
Nord, 1994; Kellogg, 2011a; Wijen, 2014). Resistance Safford, 2006). Dobbin & Kelly (2007), for instance,
from lower powered members of the organization is argue that top managers are wary of reputational
sometimes counteracted with the help of organiza- threats and legal liability due to noncompliance and
tional outsiders, such as professionals with jurisdic- thus prefer establishing durable solutions to manage
tional control over a narrow area. specific classes of external demands and stake-
Formalization. Research on employee rights in holders. Such durable solutions usually take the
the United States and on CSR has observed that form of bureaucratic agencies and procedures. For
government agencies and civil society organizations instance, regulation in equal opportunity employ-
try to expand the range of issues on the agenda of ment, occupational health, and safety and fringe
private companies (Baron, 2003; Dobbin & Sutton, benefits led to the creation of organizational de-
1998; Soule, 2009). Under such circumstances, partments with specific jurisdiction to deal with
these issues (Dobbin & Sutton, 1998). The increas- negotiation, or persuasive framing. Interestingly,
ing engagement of shareholders with the top there is limited research on nonsymbolic dimensions
management team of publicly listed corporations of lateral processes, such as structural dependencies
from the 1980s onward (Davis & Thompson, 1994) or resource scarcity.
led to the creation of investor relations departments Negotiation. Negotiation processes leave group
(Rao & Sivakumar, 1999), whereas CSR departments interests unchanged, with conflict becoming re-
and reports started to spread from the mid-1990s solved at least temporarily through negotiated ex-
onward (Etzion & Ferraro, 2010; McDonnell et al., change. Negotiations take place at any hierarchical
2015). However, and in line with foundational open level within organizations, but, following earlier re-
polity work (e.g., Selznick, 1949), such staff-level search (e.g., Cyert & March 1963; March 1962), most
departments can take on a political life of their own attention has been paid to conflict and negotiations
and create issues to justify their own existence (Kelly among holders of senior positions (Morrill, 1995).
& Dobbin, 1998). Organization-level actions that result from negotia-
Leaders as enablers. Organizational elites not tion processes have been shown to not least depend
only promote organizational goals directly. They on the political capital negotiating partners are
also use their authority in more indirect ways, as willing to invest in a given issue (Cohen & March,
enablers and sponsors of the interest of other polity 1986). This insight is important, because it takes into
members. For instance, as leaders, they can attempt account that in organizations, multiple agenda goals
to create a culture of ethics, by leading by exam- and repeated interactions are the norm. Organiza-
ple (Mayer, Nurmohamed, Treviño, Shapiro, & tional members may refrain from negotiating hard on
Schminke, 2013). Members of a polity’s elite can an issue, even if their internal status would allow
also lend support to initiatives developed elsewhere them to do so. For instance, in the study of German
in the organization, signaling the importance of these pharmaceutical companies of Weber et al. (2009),
initiatives to the entire polity. For instance, Treviño some executives who were in principle in favor of
et al. (2014), in a study of legitimating the ethics and biotechnology investments were not willing to
compliance officer position, find that very public spend political capital in a coalition with advocates
support from CEOs or other members of the top on this issue, because the decision was not central to
management team was important for overcoming their interest. Conversely, Truelove and Kellogg
line managers’ opposition. Mentorship is another (2016) report that the willingness to join a coalition
way of transferring power to other polity members. with potential opponents is enhanced by the pres-
For instance, in the study of Gehman et al. (2013), an ence of more radical demands, the radical flank ef-
undergraduate student pushed for the adoption of fect. The role of external demands in organizational
the honor code. Although she was inexperienced negotiations has also received substantial attention
in interacting with an academic administration to in the recent literature on socioeconomic hybrids
push for this issue, she was assisted by the un- (e.g., Battilana & Lee, 2014; Canales & Greenberg,
dergraduate dean, who mentored her in “navigating 2015; Pache & Santos, 2010). Socioeconomic hybrids
[the university’s] bureaucracy” (p. 96). Several recent are organizations with both commercial and social
studies suggest that organizational change efforts at goals, and these goals are anchored in external sec-
lower levels depend on such cross-level coalitions toral logics that are often in conflict and can only be
and sponsorship because they create free spaces, in fully resolved at the field rather than the organization
which coalition partners can organize and unify level (Tracey et al., 2011). Many researchers of or-
without immediate opposition (Bridwell-Mitchell, ganizational hybrids emphasize the importance of
2016; Heinze & Weber, 2016; Kellogg, 2011a; Rao & internal negotiation processes (Canales, 2013; Kraatz
Dutta, 2012). & Block, 2008; Pache & Santos, 2010), with some
Lateral processes. In situations where organiza- scholars even seeing negotiation capabilities as cru-
tional groups hold similar power but divergent goals, cial to sustaining organizational hybridity not only
beliefs and interests, authority, and power differen- for high-level strategic decisions, but also for every-
tials cannot easily be used to solve conflict. Instead, day issues at the operational level (Battilana, Sengul,
different groups must form temporary coalitions or Pache, & Model, 2015).
longer term alliances to pursue their goals. Contem- Framing and persuasion. In contrast to negotia-
porary research has begun to study the influence of tion, persuasion entails a change or convergence of
external environments on resulting lateral political goals and interests by potential coalition partners.
processes, especially coalition formation through Such convergence can be achieved through rhetorical
skill as well as effective framing (Cornelissen & Werner, members across different hierarchical levels and units
2014; Gamson, 1992; Suddaby & Greenwood, 2005). (Kellogg, 2009; Gehman et al., 2013). One advantage
Recent research has elaborated on a variety of concepts of such coalitions in favor of a specific cause is that
from rhetorical theory and framing research in social they provide access to higher level decision-making
movement studies to identify when persuasion venues, and tap into expanded “political toolkits,”
attempts are likely to be successful. For instance, such as staffing systems, accountability systems,
Battilana and Casciaro (2012) show the importance of or evaluation systems (Kellogg, 2011b:482). Kellogg
change agents’ social position (its ethos in rhetorical (2009), in a comparative case study of two hospitals
terms) in the network of relationships inside of or- implementing a new regulation regarding working
ganizations (similarly, Maguire, Hardy, & Lawrence, hours, finds that attempts at coalition building
2004). They find that occupying a social position that for implementation only succeeded in the hospital
connects internal change agents to a multitude of other where cross-level mobilization was possible. Al-
internal actors all the while these internal actors have though mobilization across different levels is diffi-
relatively few connections among themselves, gives cult to achieve, shared identities of the mobilizing
change agents informational advantages to appeal to group appears to assist the process. For example,
the interests of a wide variety of potential coalition extra-organizational social identities, such as race,
partners in order to align them with their goals. For gender, or sexual orientation (Meyerson, 2003), or
coalitions in complex organizational polities, robust functional and professional backgrounds (Weber
positions are thus perhaps as advantageous as in the et al., 2009) can serve as the basis for mobilizing
city polities studied by Padgett and Ansell (1993). internal groups across hierarchical levels.
Bottom-up processes. Compared to early open Issue selling. The issue-selling literature is focused
polity work, contemporary research pays more at- less on recruiting a broad-based coalition to take on
tention to influence efforts by low-powered mem- vested interests, but on direct and often less organized
bers of organizations. This is particularly salient in engagement with higher level decision–makers. This
research influenced by social movement and critical body of research has identified a variety of tactics—“
management studies, which bring a long tradition moves”—that lower level managers rely on (Bansal,
of examining political processes initiated by relati- 2003; Dutton, Ashford, O’Neill, & Lawrence, 2001;
vely resource-poor outsiders. It also reflects the re- Howard-Grenville, 2007). The motivation for issue
alization that, regardless of their success, many selling is commonly portrayed to arise from extra-
external influences penetrate organizations not at organizational concerns internalized by the issue
their apex, but further down in the hierarchy—see, sellers, such as justice and equality, although only part
for example, the work on boundary processes of so- of issue selling scholarship explicitly incorporates
cial identities and subjectivities reviewed earlier. A external source of these concerns (Wickert & de
variety of internal processes that are discussed in the Bakker, 2015). However, the unique challenge of
literature (Morrill et al., 2003) are closely inter- selling issues that are not enshrined in organizational
twined with external polities and internal power goals to organizational elites meant to guard organi-
structures. These include collective mobilization zational goals reflect the basic premise of the open
inside organizations and issue-selling campaigns at polity perspective. Like with lateral influence pro-
the individual level. We review important contri- cesses, framing and rhetorical tactics are seen as cen-
butions to both in turn. tral to successful political influence. For example,
Mobilization. Mobilization of collective action is Treviño et al. (2014) report that, in order to gain in-
seen as one of the most promising ways for lower- and ternal legitimacy for their position, ethics and com-
middle-level organizational members to advance pliance officers in corporations sold their activities
their goals. Mobilization processes describe the tran- in terms of monetary benefits, a task greatly facilitated
sition from goals or grievances to taking action in by repeated ethical scandals and wrongdoing and
support of confrontational, reformist, and pragmatic the concomitant reputational damage among U.S.
goals. Importantly, mobilization is a collective pro- corporations in the 2000s. Similarly, Raeburn (2004)
cess, focused primarily on broadening support. shows that LGBT activists framed the adoption of
Briscoe and Gupta (2016) provide a comprehensive domestic partner benefits in terms of companies’
review of activist mobilization in organizations. ability to attract and retain an attractive pool of em-
One important factor of successful mobiliza- ployees. Many scholars also suggest that financial
tion in organization that is especially aligned benefits and risks are not objectively given, but are
with open polity approaches is the mobilization of oftentimes exaggerated to make them particularly
salient (Dobbin & Sutton, 1998; Dobbin & Kelly, 2007; whereas firms with a more divided elite considered
Gehman et al., 2013). Other ways through which grass- other alternatives and opted out of such investments.
roots efforts influence decision-makers is by tapping Researchers employing an open systems perspec-
into existing decision-making routines, evoking ex- tive have developed middle-range theories (Merton,
ternal in lieu of organizational status, and pursuing 1957) of particular types of organizations that can be
low stakes incremental concessions from organiza- viewed as embodying varying degrees of unity. For
tional elites (Heinze & Weber, 2016). example, research on socioeconomic hybrid organi-
Gaining the attention of decision-makers is a cen- zations (Battilana & Lee, 2014; Pache & Santos, 2010)
tral challenge for grass-roots issue selling. The scar- has examined processes through which goal conflict
city of top management attention to lower level is addressed among the organizational elite as well as
organizational members requires opportunistic tac- at lower levels of daily practice. Work on conflict in
tics (Cohen & March 1986). For instance, Gehman upper echelons of organizations has similarly em-
et al. (2013) describe an advisory board meeting phasized divergent backgrounds and beliefs as the
during which an internal advocate for a university- source of goal conflict (Hambrick & D’Aveni, 1992;
wide honors code presented the reasons. The Hambrick et al., 1996; Morrill, 1995). By contrast,
president and the provost of the university were studies of organizations’ responses to institutional
unexpectedly present to discuss another issue on contingencies and social demands often employ
the agenda and became supportive of the issue. a model of organizations as relatively unified and thus
And Soderstrom and Weber (2016) describe the role responding in a coherent and even strategic fashion
of repeated successful informal interactions as (Baron, 2001; Davis & Cobb, 2010; Ingram & Rao, 2004;
a precursor to access to formal decision-making King, 2007). These differences point to a need to take
channels in the development of a corporate sustain- into account the polity structure of organizations in
ability program. As discussed before, such efforts explaining their responses to environmental pres-
can be expected to be more successful when they sures, and to greater care in articulating the scope
involve cross-level relationships (see, e.g., Kellogg, conditions of theories of observed dynamics.
2009). A second dimension emphasized by open polity
scholars is the degree of central control, or the con-
centration of power in the hands of a small elite
Variation in the Structure of Organizational
(Briscoe & Gupta, 2016; Weber et al., 2009; Zald et al.,
Polities
2005). When decision-making authority is concen-
Contemporary research that treats organizations as trated at the top, top-down political processes can be
political coalitions emphasizes two dimensions of expected to dominate, and external influences are
how power is distributed as consequential. The first negotiated at the organizational apex. The scope
dimension is the extent of goal alignment, the degree for societal influences on organizational actions
to which members of the polity are unified or frag- through other entry points is then limited. Much of
mented in their goals, interests, and beliefs. Unity the research on upper echelons and resource de-
and fragmentation can arise from selective coupling pendence assumes a high degree of centralization
of organizational members to external groups and and hence focuses on organizational leaders and
ideas, including, for example, divergent institutional boards (Burris, 2005; Chin et al., 2013; Wry et al.,
logics (Almandoz, 2014; Oakes, Townley, & Cooper, 2013). Yet, this same approach is unlikely to be
1998; Heinze & Weber, 2016; Stryker, 2000), pro- fruitful for studying decentralized organizations, such
fessional and occupational groups (Bechky, 2011; as professional service firms, MNEs (multinational
DiBenigno & Kellogg, 2014), or social class and enterprises) or franchise-based businesses (Kostova &
gender-based identities (Gray & Kish-Gephart, 2013; Roth, 2002; Smets et al., 2012). In centralized polities,
Ibarra, 1996; Kanter, 1978; Van Maanen & Barley, coordinating within elite groups is a key political
1984). Greater alignment helps or impedes several of process, whereas in decentralized ones, challenges of
the political processes discussed earlier, including implementation and resistance are more prominent.
the ability to form coalitions, mobilize around envi-
ronmental demands, and manage conflict. For ex-
Variation in the Structure of Organizational
ample, Weber et al. (2009) found that firms whose
Environments
elites were unified in their support of biotechnology
experienced little internal conflict and continued Organizations’ external polities can also be orga-
investing in in the face of contestation by activists, nized in parallel to the dimensions of variations of
internal polities, namely as varying on the extent to opposed to a more decentralized distribution of
which external constituents and expectations are power. Scholars in the varieties of capitalism school,
fragmented or homogenous, and the extent to which for example, distinguish between economic systems
power over the organization is concentrated in the that are closely controlled by the state, coordinated
hands of few actors, such as the state or shareholders, forms of capitalism with a greater dispersion of
or more diffusely dispersed. Despite the shift to field- power between governments, civil society organi-
and industry-level analyses since the 1980s de- zations and economic actors, and liberal market
scribed in the introduction section, these differences economies in which the central authority of the state
have until recently not been extensively theorized. is constrained (Hall & Soskice, 2001; Jackson & Deeg,
More recent research has begun to address the 2006). A parallel argument applies to historical
question of fragmentation, especially in the form of changes to the political economies of countries, to-
institutional logics and complexity, and to some ward greater liberalization and decentralization of
extent through international-comparative analyses power in market processes (Boltanski & Chiapello,
of capitalist systems. 2005; Davis, 2009; Henisz, Zelner, & Holburn, 2009).
Contemporary institutional theory conceptualizes At the industry level, concentration of the product
environmental fragmentation and its opposite, ho- market power has been a long-standing policy con-
mogeneity, in terms of multiple logics that offer cern in industrial organization research (Demsetz,
distinct and internally coherent prescriptions for 1973), and the concentration of power in labor mar-
practice (Thornton et al., 2012). Developed in direct kets through unions has been a central topic in in-
contrast to previous neo-institutional theory, which dustrial and labor relations research (Kelly, 2012;
saw organizational environments as generally ho- Kochan et al., 1986; Piore & Safford, 2006). And at the
mogenizing and aligned to the extent that they level of institutional fields, researchers have ob-
constitute an iron cage of collective rationality served differences in the political structure of more
(DiMaggio & Powell, 1983), research on institutional and less regulated industries, the extent to which
logics has generally emphasized the complexity, interests of regulators at different levels are aligned
plurality, and conflict that results from the simulta- (Luo, Wang, & Zhang, 2016), and also the rise of
neous presence of multiple institutional orders in an private regulatory actors (Bartley, 2007; Campbell,
organization’s environment (Besharov & Smith, 2007; Hoffman, 1999). However, these contributions
2014; Greenwood et al., 2011; Kraatz & Block, have had very little to say about the implications of
2008). Research on institutional complexity sup- these differences and changes for political processes
plements earlier comparative research in the varie- inside organizations. One may, for example, expect
ties of capitalism school, which identified variations that a transition from a more centralized state-
in the political economy faced by organizations at the oriented environment toward a more dispersed one
national rather than the field level (Guillén, 2001; unsettles organizations’ internal polities, and that
Hall & Soskice, 2001). Such fragmented institutional organizational responses to such changes are con-
environments not only pose competing demands on tingent on existing polity structures and processes.
organizations, but are also likely to induce internal
fragmentation in an organization’s polity (Besharov
DIRECTIONS FOR FUTURE RESEARCH
& Smith, 2014; Heinze & Weber, 2016; Kostova, Roth,
& Dacin, 2008; Kraatz & Block, 2008; Pache & Santos, Building on our review of the literature, we see
2010). From a comparative perspective, however, several directions for contributing to the develop-
the extent to which some organizations are exposed ment of open polity research. Some research oppor-
to complexity more than others is an empirical tunities reflect emergent and sparsely researched
question, and studying variation empirically prom- themes and gaps that became visible by reviewing
ises to shed light on what systematic differences arise partially parallel streams of research within a com-
for organizations that operate in different environ- mon framework. These gaps include boundary pro-
ments. Although the extant literature has made cesses, like social networks, material devices, and
progress in identifying different environmental con- boundary objects that promise to enrich our un-
figurations, explicitly comparative approaches have derstanding of how internal and external polities are
thus far been lacking. coupled. It also includes opportunities for in-
A second dimension of variation in the political tegration and cross-fertilization that take several
structure of organizations’ environments is the con- forms, from examining the interplay of differ-
centration of power in the hands of few actors as ent boundary processes to studies that create
connections between specialized insights by directly processes, and the role of formal boundary spanning
examining how components of the polity framework units and formal access channels for selective actors
are connected, such as interdependencies between in organizations’ environment, such as directors. We
the internalization through particular boundary were on the other hand surprised by the scarcity of
processes to internal political processes. Seeking studies that directly address how people’s social
such integrative insights also has methodological network ties with outsiders influence their political
implications. behavior in organization. Although identities and
It is also fair to say that most contemporary re- internalized cognitive orientations operate at the
search focuses on organizational responses that have level of individuals, social ties influence through
a natural endpoint of compliance, adaptation, or re- fundamentally interactional processes that create
jection of external political influence. It is important, “pipes” for the ongoing flow of information, trust,
however, to not fall into the trap of implicit equilib- and emotional support (Podolny, 2001), all of which
rium models and instead study unintended and are important for engaging in political conflict. Al-
second-order generative dynamics that result from though such network dynamics are often implicit in
the penetration of processes in organizational poli- accounts of professional affiliations and social
ties by environmental factors. Such dynamics are identities, more fine-grained analyses may point to
triggered by environmental influence, but take on network positions, types of egocentric networks, and
a life of their own. Our review also revealed a dearth other qualities that affect people’s motivation and
of comparative work that uses dimensions of orga- ability to mobilize, negotiate, or enable decisions in
nizational polities and their environments to iden- organizations. It is well established that network
tify contingencies and boundary conditions of positions affect political outcomes both inside orga-
empirical and theoretical insights. We see this as nizations (Battilana & Casciaro, 2012; Ibarra, 1993;
a major area for conceptual and methodological Krackhardt, 1990) and outside (Burt, 1992). Yet, the
development. open polity perspective suggests that network mea-
We also observe that contemporary open polity sures that include only intra- or extra-organizational
research still predominantly employs static analyses ties may mask important assets and deficits.
and examined contemporaneous influence. Given We also suspect that instrumental interest-based
the historical legacy of open polity work that studied reasoning plays a bigger role in organizational poli-
historical and unfolding processes, it would be nat- ties than the relatively sparse body of research on this
ural to take the temporal dimension of polities more process suggests. Existing research appears to favor
seriously, for example, in the form of imprinting and more “genuine” engagement with external environ-
layering processes, and transitions between polity ments in the form of identification and ideologies,
types. Finally, we were somehow surprised to see the and more permanent structural linkages, over pro-
vast majority of research focused on environmental cesses that may seem more opportunistic, calcu-
influences on organizations and relatively little to lated, and dispassionate. “Passionate politics” are
the reverse directions of how dimensions and dy- no doubt important, and perhaps even more so for
namics of organizations’ polities affect organizations’ bottom-up influence attempts in hierarchical orga-
ability to influence their external environments. We nizations (Goodwin, Jasper, & Polletta, 2001). Yet, it
now discuss each point in greater detail, though is also likely that organizational members pursue
necessarily at a surface level of sketching out general their self-interests because none of their multiple
directions rather than through fine-grained theory roles and identities is all encompassing, and their
development. engagement in work organizations is in fact primar-
ily instrumental for making a livelihood or realizing
purely professional aspirations (Bidwell, 2012). Yet,
Understudied Boundary Processes
they still participate in political processes. If this is
Recent research from an open polity perspective the case, then studies that unpack people’s decision
has created a robust body of insights in the diverse calculus and heuristics, processes of interest forma-
processes at organizational boundaries that couple tion and self-understandings as whole persons are
the actions of members of the organizational polity worth further study. External environments not only
to elements in the organization’s external political offer opportunity structures for social movement-
environment. Vibrant literatures exist especially like activism, but also alter the incentive for polity
around the role of externally constituted identities members that take a more instrumental (though
and knowledge structures in organizations’ political not necessarily rational) approach to supporting or
opposing particular causes. Motivations and de- to manage organizational boundaries does. Some of
cision criteria are of course difficult to distinguish those technologies are also likely to substantially
empirically, since they often produce similar pat- change the power of experts and professional groups
terns of observable action, and because people are in organizations.
not necessarily accurate in describing their reasoning, In addition to revealing underexplored areas of
especially when reported retrospectively. Methodo- research, our review also allowed us to point to many
logically, it may therefore be beneficial to combine opportunities for intellectual brokerage, by combin-
field studies that demonstrate particular forms of po- ing insights from multiple theoretical strands within
litical engagement with experimental designs in the open polity perspective. It is inviting to think
which motivations and decision framings can to some through, for example, the interplay between resource
extent be manipulated. Such mixed methods design dependence and social identity-based boundary
would enhance the internal validity of conclusions processes. Do identities increase or decrease per-
from observational data. ceived or actual dependence on particular external
A final gap in understanding processes at organi- parties, especially those that are identity-defining?
zational boundaries is the relative neglect of tech- Does resource dependence moderate the strength of
nological and material boundary objects. The bulk of external identifications of organizational members
research emphasizes boundary processes either and if so, which ones? Exercises like this are valu-
grounded in individual psychology or formal orga- able, because the pathways of influence suggested by
nizational structures. Yet, work on boundary orga- various theories may moderate, amplify, or neutral-
nizations and objects (Bechky, 2003; O’Mahoney & ize each other, providing a more complete picture of
Bechky, 2008; Star & Griesemer, 1989), as well as external influences on organizational politics.
technological and material devices (Callon, 1990; Another form of combination refers to the different
Leonardi & Barley, 2008; Orlikowski & Scott, 2008), elements of the open polity framework. Most studies
suggests that omitting technological and material we reviewed addressed one of the main components
dimensions of organizations and politics risks of the framework—boundary processes, internal
painting a rather incomplete picture of what hap- process, or the structures of organizational and ex-
pens at organizational boundaries and of the forms of ternal polities. What the open polity perspective
power in organizations. For one, the boundaries of enables when used as a general framework, and what
organizations are often technologically and physi- is in fact needed to advance the perspective, are
cally mediated, in the form of corporate websites that studies that directly examine, for example, boundary
constitute the public face of organizations, and in the processes and variations of organizational polities in
form of building architecture and material products the same study. The empirical design of such studies
that demarcate where the organization ends and would necessarily be broader than more common
what it stands for. If protestors like to march on cor- tests of a particular aspect, and their contribution
porate headquarters or local plants, where do they go would be a more empirically grounded understand-
if the organization is incorporated in the Bermudas ing of the full arc of connections between internal
and its headquarter address consists of a small office and external polities. It is perhaps no coincidence
in a high-rise office building? Work in the open polity that the earlier research on the open polity perspec-
perspective also needs updating based on recent tive often took the form of expansive and longitudi-
advances in the study of technology in particular. nal field studies that were published as monographs.
Materiality, especially in its technological form, may We do believe that ethnographic and case research
become a more important aspect in political pro- will continue to play important roles in advancing
cesses if information and communication technolo- open polity research, because they allow researchers
gies increasingly take on (and automate) boundary to build process models that tie together different
spanning roles that have traditionally been performed subprocesses as reviewed earlier. The most impact-
by organizational units or individuals. Examples ful field research, though, will require data collected
are machine-learning-based market analytics, algo- not only within organizations and on organizational
rithmic decision-making in online markets, and members (as is most often the case), but also on ex-
automated reporting interfaces. Although these tech- ternal constituents and conflicts, and on organiza-
nologies may look innocuous or unpolitical, their tional members’ nonwork life. It would appear
design and use embeds particular power relations, difficult, for example, to understand the role of
assumptions about environments, moralities, and de- external identifications in organizational politics
cision logics, just like allowing particular professionals without a thorough examination of external identity
communities and employees’ involvement in them. nuisances that get in the way of generalizing from
The same criteria apply to larger sample quantitative cases, industries, or countries. To illustrate the util-
designs. Network analyses of political coalition or ity of comparative analyses, we combine the two
influence ideally include external as well as intra- dimensions of variance of organizational polity
organizational ties, and statistical techniques, such structures we identified in our review of extant re-
as structural equation modeling, allow tests of me- search: unity and central control, to develop a ty-
diators and multistep paths that connect internal and pology of organizational polities similar to the one
external factors. proposed by Zald (1970a) almost 50 years ago. Note
that the same exercise could be done for dimensions
of the external political environment, or for internal
Comparative Analyses of Polities and
and external unity, or internal and external central-
Environments
ization of control, or by dimensionalizing the envi-
We also see a great need to utilize the open polity ronment according to institutional logics or regimes.
framework for one of the main purposes its early Figure 1 depicts the resulting polity types in a two-
proponents envisioned, namely for comparative by-two format.
analyses of polities and environments. Contempo- Figure 1 identifies four distinct polity types:
rary research has studied polity processes in a wide Quadrant I describes organizations with high goal
range of organizations, from schools and universities alignment among members where power is concen-
(Gehman et al., 2013), to drug courts (McPherson trated in the hands of a small elite. This type may be
& Sauder, 2013), to professional service firms descriptive of small privately held firms or religious
(Greenwood & Hinings, 1996; Smets et al., 2012), and cults. It resembles the “unitary actor” model of or-
socioeconomic hybrids (Battilana & Lee, 2014) and ganizations implicit in many organizational theo-
MNEs (Kostova et al., 2008). Although these organi- ries. Quadrant II describes organizations where
zations undoubtedly have much in common, they authority is centralized but the goals of the elites in
also differ in the distribution of power, make up of power are heterogeneous. One may expect this con-
their elites, the complexity of their environments, stellation to give rise to the conflicts observed in the
and their openness to different forms of external in- leadership teams of smaller socioeconomic hybrids
fluence. This raises on the one hand questions of between those aligned with a social service and
boundary conditions and moderating factors in the- others aligned with a commercial logic. Quadrant III
oretical insights obtained from these studies. It describes decentralized organizations with a high
also invites questions of whether such differences degree of goal alignment, such as perhaps many pro-
can be theorized and incorporated in systematic fessional service partnership organizations where
understandings of organizational diversity and di- partners have great autonomy but are socialized by
versity in organizational politics that make differ- the same professional training. Quadrant IV describes
ences part of theories rather than idiosyncratic more complex organizations with heterogeneous
FIGURE 1
Classification of Organizational Polities
Centralization of Control
High Low
I II
High (unitary) (coordinated)
e.g. small start-up e.g., professional partnership
Unity / Goal Alignment

III IV
Low (diversified) (fragmented)
e.g. socio-economic hybrid e.g., university
members and limited central control. The cases of and unanticipated consequences. Compliance with
universities, hospitals, or some multinational cor- external demands can, for example, affect the in-
porations come to mind. ternal distribution of power and attention channels,
With this typology in hand, it would be possible to which can become important contingencies in future
examine if and how political processes, like negoti- interactions with the external environment. In this
ation, the exercise of authority and coalition dy- regard, external influence is generative, in that it
namics, differ depending on the distribution of creates opportunities for subsequent changes that are
power. This approach can also inform research de- only loosely connected to the initial concern. For
signs for comparative case studies, by providing instance, McDonnell, King, and Soule (2015) show
dimensions for theoretical sampling of variance that firms that are pressured by social movement
(Eisenhardt, 1989). One likely difference would be activists to engage in social and environmental ini-
the location of organizational access points for ex- tiatives react by creating internal staff position to
ternal influences—for example, through central manage CSR-related issues. In turn, companies that
boundary spanning departments and top manage- have created such positions are in subsequent in-
ment teams in the case of centralized organizations teractions more likely to concede to activist de-
and through more grass-roots channels in decen- mands. Similarly, Dobbin and Sutton (1998) show
tralized organizations. One might then expect dif- that the introduction of legislation to improve work-
ferent blends of top-down, lateral, and bottom-up ing conditions for employees in the United States
political processes for formulating organizational in the 1960s and 1970s led to a rise of human re-
goals and policies. We see comparative work as source management departments. When the threat
critical for further advancing the open polity of sanctions for noncompliance with these legisla-
perspective. tions waned under the Reagan administration of the
The comparative approach can also be taken an- 1980s, however, these human resource management
other step further, and applied to more circum- departments did not disappear. Rather, human re-
scribed situations and arenas within organizations. source managers continued to apply the legislation,
The polity of most organizations is composed of but they changed the justification for compliance
a more or less tightly coupled subsystems that may from a legalistic to a more economic one. Future re-
exhibit different dynamics, so that the extent of search could further investigate, how compliance
coupling of political subsystems within organiza- with or defiance of external demands affects the in-
tions becomes a research question in its own right. ternal make up of organizational polities, as well as
These subsystems may be based on different do- long-term effects of such internal changes.
mains of activity, and even be contingent on situa- This research direction would in all likelihood
tional influences. There has thus far been little work require more historical research designs that allow
that has applied the polity framework in a nested researchers to understand the temporal dynamics of
way to analyze intraorganizational variation. This influence and consequence. Organizational im-
approach would seem particularly relevant for printing research (Marquis & Tilcsik, 2013), for ex-
studying structural solutions to intraorganizational ample, can be seen as a temporal version of the
conflict that rely on creating separate systems that selective coupling processes of environmental in-
may have internal autonomy even though they are fluence. During periods of openness, external in-
centrally controlled. It may also be necessary for fluences enter organizational polities, but such
studying organizations with fluid or ambiguous windows are only temporary and are followed by
polity structures. periods of relative closedness. The resulting sedi-
mentation and layering of sequential outside in-
fluences over polity processes and structures were
Unintended Consequences and Temporal
already acknowledged by Selznick (1949) and
Dimensions
Thompson (1967), and it is important to note that
The core concern and natural endpoint of much organizational polities may not remain unchanged
recent open polity scholarship is whether and how during times of relative closure, due to delayed
organizations comply or fail to comply with external generative effects of past imprints. More generally,
political demands. Yet, oftentimes the consequences when and how the political system of organizational
of external influence extend beyond the narrow issue polities changes in relation to changes in the political
at hand to changes of the structure of an organiza- environment is an important question for developing
tional polity that may in turn generate unintended the open polity perspective toward a more dynamic
model of organizations. It is intriguing to think, for how different motives drive adoption during early
example, that a more complex and volatile political and late stages of the diffusion process (Tolbert &
environment would shift the distribution of polity Zucker, 1983). But, they typically conceive of the
forms in a field or economy toward ones that are organizational context to which an idea travels as
themselves less stable and centralized. static rather than dynamically evolving over time.
An open polity perspective could shed light on such
internal processes and reinvigorate research that
Diffusion and Translation
does not only compare adoption patterns between
An open polity perspective can also contribute multiple organizations, but also within individual
to recent suggested new ways of studying diffusion organizations across time.
processes within and across organizational fields
(Djelic, 2008; Djelic & Quack, 2007). Diffusion as
Reverse Influence from Organization to
a topic is core to many organizationally relevant
Environment
topics, such as innovation (Rogers, 2010), manage-
ment fashions (Abrahamson & Fairchild, 1999), or Contemporary open polity research generally
corporate governance (Davis, 1991). It is also central emphasizes an outside-in approach to studying
to some of the most prominent organization theories, organization–environment relationships, where the
such as neo-institutionalism (DiMaggio & Powell, focal interest is on how external pressures impact
1983) or network theory (Valente, 1995). Many tra- on organizations. This is perhaps in part due to
ditional diffusion studies argue that new ideas a changed conception of an organization’s environ-
adopted widely across organizations because of ment from the immediate environment studied, for
the very qualities of these ideas. In particular, example, by Selznick (1949) or Zald and Denton
adopting a new idea may have positive economic (1963), to larger and much more aggregate environ-
(i.e., performance-enhancing) or social (i.e., legitimacy- ments where the influence of single organization is
enhancing) benefits for the adopting organization less visible. Yet, future research could look at how
(Tolbert & Zucker, 1983). Research by Scandinavian organizations can have effects on the external envi-
institutionalists, on the other hand, has tended to focus ronment, either individually or as a type of organi-
not so much on the qualities of the idea itself, but on the zation (Barley, 2010; Funk & Hirschman, 2015;
features of the adopting organization and how organi- Smets et al., 2012; Walker & Rea, 2014). For in-
zations adapt features of diffusing ideas so as for these stance, Dobbin & Kelly (2007) look at how it was
diffusing ideas to fit with organizational characteristics professional groups working inside of organizations
(Czarniawska-Joerges & Sevón, 2005; Sahlin & Wedlin, that elaborated standard procedures for dealing with
2008). sexual harassment within organizations in order to
An open polity perspective could inform this re- comply with harassment law. These procedures
search. First, the majority of accounts emphasizing were later sanctioned by the Supreme Court. Hence,
the role of adaptation focuses on how diffusing ideas it was professional groups that derived their au-
are adapted to organizations (Ansari, Fiss, & Zajac, thority from executive support within organizations,
2010). From an open polity perspective, alternative rather from the state, that defined what compliance
investigations are conceivable. For instance, orga- with harassment law means in the United States. As
nizational factions interested in adopting a new idea Funk and Hirschman (2015) argue, organizations’
could try to alter the internal political environment implementation and innovation efforts often have
in such a way that the adoption of a controversial indirect influence on regulators interpretations and
new idea becomes possible. These factions could policies. The few exemplars of studies that follow
pressure for changes in company bylaws, recruiting this approach (e.g., also Edelman, 1992) could easily
practices or internal standards that would allow for be extended to examine the mostly neglected influ-
adopting a new idea that—at the outset—could not ence of intraorganizational politics and political
be adopted because of internal hindrances. In such structures on the extent and form of organizational
accounts, it would be not so much the diffusing idea political action and influence.
that is adapted to the organization, but rather the
other way around: organizations would adapt to an
CONCLUSION
idea. Second, existing diffusion research has a rela-
tively embryonic understanding of how time affects Open polity perspectives of organizations came to
diffusion processes. True, scholars have looked at prominence in the 1950s and 1960s, faded by the
1980s, and have experienced a more recent revival in Alvesson, M., & Willmott, H. 1996. Making sense of man-
organization theory. The revival, however, has oc- agement: A critical introduction. London, United
curred in a number of by now only loosely related Kingdom: Sage.
literatures, without strong integration. This review Alvesson, M., & Willmott, H. 2002. Identity regulation as
has been an attempt to exploit the substantial bene- organizational control: Producing the appropriate
fits from examining the variety of contemporary lit- individual. Journal of Management Studies, 39:
eratures that follow this model within a common 619–644.
framework. Seeing commonalities and differences Ansari, S., Fiss, P. C., & Zajac, E. J. 2010. Made to fit: How
across theories and phenomena allows the dialogue practices vary as they diffuse. Academy of Manage-
necessary to develop more complete and sophisti- ment Review, 35: 67–92.
cated explanations. One may wonder whether the Ball, A. 2007. Environmental accounting as workplace
more integrated view of open polity scholarship that activism. Critical Perspectives on Accounting, 18:
we offered in this review is more important for some 759–778.
of the literatures we reviewed than for others. We are Banerjee, S. B. 2008. Corporate social responsibility: The
agnostic about the answer to this question. We rather good, the bad and the ugly. Critical Sociology, 34: 51–79.
believe that greater dialogue will be most beneficial
Bansal, P. 2003. From issues to actions: The importance of
for particular types or styles of research, namely re- individual concerns and organizational values in
search that is phenomena oriented and interested in responding to natural environmental issues. Organi-
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Actor–Network Theory
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Actor-Network Theory 1
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Bencherki, N. 2017. Actor–Network Theory. In Craig Scott & Laurie Lewis (eds.),
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NY: Wiley. http://doi.org/10.1002/9781118955567.wbieoc002
Actor–Network Theory
Nicolas Bencherki
University at Albany, State University of New York, USA
Abstract
Actor–network theory (ANT) began at the end of the 1970s as an attempt to
account for scientific activity without distinguishing a priori between its so-called
social and technical aspects. The concept of actor–network captures the idea that
for any actor to act, many others must act as well. In other words, action is shared
with a multitude of people and things – for, indeed, things play a part in our
collective lives. Actors, whether individual or collective, whether human or not,
are therefore a mystery whose constitution must be explained; they are not at all
the obvious starting point of action. Those few premises have had a significant
impact on some organizational communication scholars, in particular those
interested in interorganizational networks and partnerships, in questions of
agency, or in the ability of communication to constitute organizations.
Keywords: agency; communication theory; interdisciplinarity; materiality; science

and technology studies
Organizational communication has been influenced by many theoretical

perspectives and research traditions. Many of them were not initially intended for
the study of organizations, communication, or their relationship. In the same way,
actor–network theory (ANT), which has been gaining traction in particular among
scholars interested in the constitutive power of communication, began as a theory
for the study of science and the work of scientists. In fact, as discussed below, it is
only recently that actor–network scholars have acknowledged the importance of

communication, and the organizational relevance of their own theory. However,
this lack of explicit attention to communication processes has not stopped
organizational communication researchers from borrowing insights from ANT.
For instance, some of them are exploring ANT’s suggestion that social entities do
not pre-exist the joint work of a multitude of beings that brings them into
existence and the ways in which that opens up new directions for organizational
communication research. This idea, along with its reliance on a meticulous
ethnographic methodology, has made ANT a powerful lens for the study of
communication’s role in the constitution of organizations and other phenomena
within and around organizations.
After an overview of ANT’s core ideas, this entry will review some of the
uses of the theory in communication studies more broadly, before focusing on
three particular applications of ANT in organizational communication: networks,
nonhuman agency, and the link between communication and organizations. The
entry concludes with a discussion of some of the most common critiques of ANT
and future research directions in this area.
Central tenets of ANT

Offering an outline to actor–network theory is difficult, as it has taken several
forms throughout the decades. Although it is now commonly used as an
alternative sociological theory, ANT initially emerged as an approach to the study
of science and scientific activity in Latour and Woolgar’s Laboratory Life (1979)
and then in Latour’s Science in Action (1987). Since then, ANT has been
associated with a critique of conventional sociology, with works in the sociology
of economics, in environmental theory, and in the philosophy of knowledge. A
common thread through all of ANT’s incarnations is its insistence that any
apparently single actor is already a network of many others that act as well. ANT
borrows from French narrative theorist A. J. Greimas the term actant, by which it
highlights the fact that the ability to act is not a feature of one’s nature (i.e., being
a human, an object, or anything else), but rather a relational feature; said
otherwise, an actant is anything that makes a difference in a situation. Although
many misinterpret actor–network theory as a theory of actors or actants embedded

in a network, in fact it is a theory of actants as networks.
The development of actor–network theory was influenced by British
sociologist of knowledge David Bloor’s call for a “strong programme” in the
study of science and knowledge, according to which failure and success should be
studied in the same terms, rather than supposing that scientific success is
attributable to intrinsic scientific progress while failure is explained by “social”
factors. For ANT scholars, this was interpreted as a call to refrain from taking
shortcuts through social explanations; if any such things played a part in the
success or failure of a scientific project, then that impact should be witnessed
concretely in the work of the scientists and engineers. Latour’s colleague at the
Paris Mines School, Michel Callon, first introduced the notion of actor–network
while he was studying a 1980s project to create the first French electric car. The
project was eventually abandoned, and Callon used the term actor–network to
account for the plethora of heterogeneous elements (oil prices, political concerns,
technical issues, etc.) that failed to align in favor of the project. The electric car, in
that sense, could be an actant in its own right only inasmuch as it brought together
and stabilized the many different actions and interests that allowed it to come into
being. The notion of actor–network, hence, draws attention on the fact that a
seemingly unitary and coherent actant is in fact the always-provisional
stabilization of heterogeneous others that make it up. Action, in other words, is
always mediated: one actant’s ability to act lies in the action of others. As Latour’s
(1996) famous maxim goes: “when one acts, others proceed to action” (p. 237).
A key feature of actor–network theory is its agnosticism to the nature of
the things, people, principles, etc., that contribute to the actant’s makeup and
agency. ANT authors regularly resort to the word “heterogeneity” to point out that
researchers must be careful not to hold assumptions about the nature and identity
of the people and things that may play a part in any given action or situation, or
about their alleged “intentionality.” Indeed, nonhumans (probably the theory’s
signature notion) also make a difference, and ANT gives credit to any being,
irrespective of its nature, that has an effect in the situation under study. ANT’s
agnosticism is an extension of the notion of symmetry, in the sense that what is
technical and natural should be explained in the same terms as what is social or
cultural. In practical terms, this means that researchers should refrain from
switching theories according to what aspects of reality they describe; rather, they
should “follow the actors,” whose reality consists in a ceaseless hybridization of
so-called social, technical, natural, and other elements. Said otherwise, the work
of “purifying” reality into neat categories is that of (some) researchers, not that of
the people who actually deal with the world on a daily basis.
Yet, actor–networks, in most cases, seem to be simple and unitary; or,
following the theory’s jargon, they are black boxed. This expression captures the
idea that we experience many of the objects – but also people – we interact with
only to the extent that they provide us with some expected output. For instance,
the computer screen displays my word processor file; the woman at the grocery
store scans the item I want to buy; the street light turns green after a short while.
Otherwise, they are opaque to us: it is only when there are breakdowns that we
become aware of the vast network of electronic pieces, wires, lightbulbs, training,
emotions, etc., that is involved in the smooth running of each of those seemingly
simple “things.” ANT stresses that this apparent seamlessness and smoothness is
the outcome of complex interactions and much labor, rather than the natural state
of facts. For ANT, the process of reopening black boxes is not only a practical
issue facing actors – for instance when minority employees attempt to resist well
established managerial practices and tools – but also a methodological challenge
for researchers. ANT studies look for ways of revealing the generative intricacies
that constitute and stabilize technical and social reality. One common strategy, for
instance, is to focus on moments of sociotechnical controversy, when networks are
interrupted and when their composition becomes problematic again. For instance,
in Acting in an Uncertain World, Callon, Lascoumes, and Barthe (2009) studied
the controversy over mad cow disease to show the limits of delegative democracy,
which makes assumptions about the way our societies are constituted and
excludes the technical and scientific aspects of our collective lives. Another way
of opening up the black box of actor–networks consists in following ongoing
projects, either in real time or after the fact through historical and documentary
evidence. It is in that sense that actor–network theory has proved powerful to
analyze the construction not only of scientific facts or technology, but also of
collectives, organizations, and other social groupings. This foray of ANT into
social theory is justified given that, through the notion of actor–network, it has
always acknowledged action’s collective character. An innovation of ANT’s social
theory is, precisely, its refusal to speak of an already present society, or of pre-
existing structures. For ANT, for instance, there is “no group, only group
formation” (Latour, 2005, p. 27). Collectives, structures, and organizations must
be accounted for from the perspective of the “flat land” of interactions, that is,
from observable actions and encounters. Otherwise, if already structured
institutions and social entities are invoked to explain collectives, those accounts
run the risk of being tautological.
Of particular interest to communication scholars is actor–network theory’s
insistence on a series of semiotic notions, which have led it to be either applauded
or, on the contrary, criticized. For instance, one of the key concepts of actor–
network theory is that of “translation.” In fact, ANT is sometimes referred to as
the sociology of translation. Translation consists in one particular actor (or a black
boxed actor–network) being able to act as the spokesperson for the many others it
manages to enroll in a particular program of action. The action of others, in other
words, is carried out or expressed through the spokesperson who acts as the
visible face or audible voice of the actor–network. Translation allows making the
action of actor–network equivalent in other places or times, or at different orders
of magnitude, for instance when a graph translates the action of invisible bacteria,
or when an ethnographer writes about geographically or culturally faraway places.
Translation, of course, is never perfect, and always includes an element of
betrayal. This is why, for researchers, actor–networks need to be unfolded and
revealed: the noisy and messy multitude is disciplined and kept tidy as long as its
actions are translated into a neat and smooth running program of action. That
being said, the spokesperson may be contested, and cracks may appear in the
apparent unity of the actor–network.
Relatedly, ANT literature has insisted on the idea that a material artifact –
for instance a piece of technology – is “inscribed” with a “script,” which means
that the said artifact carries the more or less explicit intention of the engineers or
designers that conceived it. For instance, a seatbelt that automatically positions
itself over the driver’s chest is inscribed with a certain sense of morality, that is,
that drivers cannot be trusted with their own safety. There is a certain amount of
controversy over whether notions such as inscription – but also related concepts,
such as “circulation,” “mediators,” or “scripts,” as well as ANT’s reliance on A. J.
Greimas’s narrative theory – are to be taken metaphorically, or literally. In other
words, is ANT a theory of the action of humans and nonhumans, or rather a theory
of the way that action may be described, written, and textually circulated? For
example, although Latour conducted work on the rhetoric and semiotics of
academic writing, and even though he has insisted on the need for a theory of
enunciation, which may suggest that he is indeed interested in a more linguistic
version of ANT, his British colleague John Law suggests “material-semiotic
relationality” as the name for ANT’s underpinning assumptions about reality;
here, however, “semiotic” should be understood to refer to the mutual definition
and shaping of a given network’s elements, rather than a study of signs and
meaning. Beyond hair splitting, how ANT uses this “semiotic” vocabulary
matters, precisely, for the status it gives to materiality and its ability to have
agency. It can therefore be said that ANT and communication seem to have a
natural affinity, at least in sharing a common vocabulary, but the actual
correspondence may be different depending on the role ANT gives to those terms,
and to what version of material agency one is willing to admit.
The apparent alignment between ANT and communication is further
complicated by the fact that the theory has not been explicitly looking at the
specific role of communication, whether as a way of actualizing its many concepts
(translation, inscription, mediation, etc.) in the negotiation of sociotechnical
controversies, or in the construction of social entities. For instance, it was only in
2008 that Latour first entered a dialogue with communication scholars as part of
an International Communication Association preconference on organizational
communication (see Latour, 2013), followed by a piece in the International
Journal of Communication (Latour, 2011). If it took a little while for ANT to
engage with communication, communication scholars, for their part, have shown
interest in actor–network theory since the mid-1990s, and this is also true of
organizational communication researchers. In the next sections, we will take a

look at the way communication studies more generally has borrowed from actor–
network theory before looking at the ways in which ANT has influenced more
specifically the field of organizational communication.
ANT and communication studies

Given ANT’s origins in the study of science and technology, it is natural to find in
its application to the field of communication a similar emphasis on technology,
including new media. Indeed, several communication technology and new media
researchers borrow from ANT. This is the case, for example, in the earlier work by
new media and cyberculture scholar Thierry Bardini, where he used ANT’s
notions of scripts to account for the way technology “inscribes” a particular
understanding of its end user. For Bardini, ANT allowed a different perspective on
the conception of technology, especially in the 1980s context, which was
dominated by economic perspectives, including Marxism. The theory allowed a
vision of the work of engineers that extended beyond considerations of progress,
scientific breakthroughs, or economic viability; rather, the focus was on their
actual work, including the concrete ways in which they could envision the usage
of the technology they were designing. Interestingly, Bardini diverted from ANT
in later writing. Siles and Boczkowski (2012), in a similar way, draw from ANT
and similar theories to propose that the user generated content of new media plays
a part in shaping the technology itself. Drawing on the notion of assemblage
(which could be roughly equated to that of actor–network, even though it has a
history of its own), they show that the technology, as a whole, extends beyond its
materiality proper and includes its uses and the content that is created in those
uses. What they call a “texto-material” approach allows fully acknowledging the
user’s engagement with technology, rather than separating the technological
conception of new media devices and platforms from their use. The object of
study, here new media, is seen to be in the making – to be evolving as users and
software change.
In parallel with a focus on technology proper, some researchers have
concentrated on sociotechnical controversies from communicational perspectives.
This is the case, for example, of Benoit-Barné (2009), who studied “material
recalcitrance” through the example of a hydroelectric dam – along with its various
technical features that measure water levels – that would not let itself be defined
by a power company’s official discourse (about an alleged imminent drought),
thus contradicting it. Her study constitutes a potent example of nonhuman agency
in sociotechnical controversies, as it shows that human discourse may be
contradicted by nonhuman action. Besel (2011), for his part, showed how a
particular graph in a controversy regarding climate change became “black boxed”
by some, that is, perceived as nonproblematic and natural, while others – climate
change skeptics – attempted to reopen that black box. Besel’s account of the
events illustrates ANT’s argument over the need for important resources to reopen
black boxed facts and technologies, and reveal again the intricacies of the actor–
network.
ANT has also found its way into studies of journalism, where it has been
useful in accounting for journalists’ changing work practices, in particular with
respect to technology. The theory allows embracing the heterogeneity of
journalistic work and recognizing the many things that make a difference in that
field. For instance, Rodgers (2015) has studied the way the technical details of a
piece of software – a Toronto, Canada newspaper’s content management system –
play an important part in the work of newsroom personnel and in their ability to
deliver timely news. Rodgers argued that, contrary to official accounts and to
studies that limit their scope to the “effects” of technology, the system’s
development is ongoing and is intertwined with organizational logics, as the
system, rather than being unitary, is an actor–network comprising different
components as well as their different uses in various portions of the corporation.
ANT allows the author to delve into the system’s “messy” history, rather than
sticking to coherent after-the-fact narratives. Actor–network theory, indeed, allows
stressing that boundaries are blurry and the result of the stabilization of an actor–
network.
ANT and organizational communication

Although communication theory more broadly has mostly borrowed from ANT’s
discussions of technology and of the heterogeneity of action, organizational
communication has embraced a wider array of the theory’s notions, and it has
done so in more varied ways. In particular, it has appropriated ANT’s original
treatment of the concept of networks. Organizational communication has also
more exhaustively showed the diverse spectrum of nonhumans that may be at play
in organizations, in addition to technology. More importantly, some studies have
relied on ANT to bridge the gap between communication and organization, and
show how interaction and communication “scale up” to constitute the collectives
that we call organizations. In doing so, they have revealed the power of actor–
network theory for the study of the communicative constitution of organizations
(CCO): how documents, notes, emails, whiteboards, slide presentations, and other
“technologies” contribute to organizing processes in their ability to carry speech
(and the deeds that are accomplished through speech) through time and space,
which allows communication to act beyond the specific situation of its production.
The work of adapting ANT to organizational communication, and in particular to
CCO, was helped by the fact that actor–network theories had already pointed out
that social entities are not just floating out there, but require their very existence to
be explained from the minutiae of everyday (inter)actions. Many organizational
communication scholars therefore found in ANT not only a theory of nonhuman
agency, but also a theory of the social that could, to some extent at least, serve as a
basis for their theorizing.
Networks
As mentioned earlier, the notion of “network” in ANT takes on a particular
meaning: it is not a theory of people or things connected in networks (say,
telecommunication networks, or social networks), but rather a theory of actants as
networks. In other words, it puts the emphasis on the fact that any action is
already shared with others. However, that sharing may (but does not have to) take
the form of a concrete network, in the more conventional sense of the word. The
presence of the word “network” in the theory’s name has led some to privilege
studying this sharing of action within such conventional networks, including

interorganizational networks. For instance, LaVigne (2003) used actor–network
theory to document the creation of a homeless information management system in
New York State and its correlative constitution of a network of hitherto weakly
linked organizations and agencies. The system not only described existing
relationships between funding agencies, nonprofit organizations, shelters,
childcare services, and many others, but also created new relations among them
(for instance, in establishing a duty to report on their activities) and with the
state’s homeless population. The unique ANT flavor of LaVigne’s study lies in the
fact that the computer system creates the network that it claims to describe: in
other words, technology has organizing properties in its ability to relate people,
shelters, agencies, and programs together. Similar studies have been conducted,
for example in studying the constitution of interorganizational networks that exist
to provide health services to various clienteles or to exchange strategic data
between businesses and institutions, or in establishing research and development
partnerships. Actor–network theory is particularly resorted to when the network
under study is constituted through technological means: for instance, online
advertisers are united in a formal association, but also through the sharing of
online behavior tracking technologies (Beck, 2015). To a large extent, the actor–
network theory literature proper also provides examples of interorganizational
networks and their communication practices surrounding technological
challenges: this is the case with Callon and Law’s (1992) study of the many
organizations and government agencies involved in the (aborted) project of
designing a British military aircraft.
Nonhuman agency
One of the concepts from actor–network theory that organizational
communication has put to the greatest use is that of nonhuman agency. This has
been done through an acknowledgement of the role of technology in
organizational settings, but also through a broader recognition that agency is not
limited to human beings, but is shared with, among others, documents and
numbers. On the technological front Taylor and Van Every (1993) used Callon and
Latour’s discussion of translation to account for the way technology and

materiality provided durability and visibility to the organizational “macro-actor.”
The macro-actor is not of a different “level” than other beings; it is not “larger” or
more encompassing than so-called individuals. Rather, it is a horizontal
assemblage of these individuals, with a spokesperson who provides them with the
ability to act and speak collectively. More recently scholars have recognized ANT
as a candidate theory to account for technological change and its contribution to
the constitution of organizations, as well as the role in coordination practices of
technology’s and humans’ shared agency (see, e.g., the work of Paul Leonardi). In
other words, ANT allows accounting for the way the heterogeneity of information
technology grants its homogeneity to organizations.
In addition to technology, organizational communication scholars have
also acknowledged the contribution of other forms of nonhuman agency. In
particular, there has been a focus on what has been named “textual agency,” that
is, the ability of texts of all kinds – documents, contracts, procedures, flyers – to
make a difference in situations. For instance, Cooren (2004) gives the example of
a note: a worker can say that she reminded herself of something with a note, but it
is equally true to say that it is the note that reminded her of something. Deciding
which part of the worker–note hybrid really acts is a matter of debate, rather than
an intrinsic property of action. A similar argument was made in Brummans’s
(2007) poignant work regarding a euthanasia declaration and its contribution to
decisions regarding end-of-life treatments.
Though not involving documents as such, other examples of nonhuman
agencies include the various ways in which things are measured in organizations.
Accounting and various budgeting practices, when looked at with an ANT
friendly lens, prove to be not only quantitative descriptions of organizational
processes, but also constitutive of those processes. Accounting, by ensuring that
equivalence is maintained throughout temporal and spatial chains of inscriptions,
also allows organizational constitution and (tele-)action. The work of Bertrand
Fauré and that of Paolo Quattrone are examples of ANT inspired research on
numbers in organizations. Besides accounting, literature has also identified how
ANT allows recognizing other effects of numbers in organizations: for instance, a
measuring stick that decides which children receive nutritional care in a Doctors
Without Borders (Médecins Sans Frontières) camp (Cooren & Matte, 2010) or a
table drawn on a blackboard that indicates whether children are sick (Cooren &
Bencherki, 2010).
The link between communication and organization

Actor–network theory is central to a certain number of perspectives in
organizational communication that claim that communication is constitutive of
organizations. ANT, indeed, allows stressing the way materiality (including
technology, documents, etc.) allows the passage from singular and ephemeral
episodes of communication to apparently larger and stable organizations – what
the organizational communication literature refers to as “scaling up.” Thanks to
the contribution of material things in organization, communication can leave its
context of production and act elsewhere and at another time, and thus weave
together space and time.
An original import from ANT into organizational communication is a
focus on action, rather than people, as the unit of analysis. Indeed, as Barbara
Czarniawska (2004) suggests, organizations may be better understood as action
nets that are woven together through narratives. In particular, Latour draws on
Greimas’s concept of “programs of action” to account for the way different
actants may pursue aims that translate each other into a common collective action.
In our field, this has led to the suggestion that the imbrication of programs of
action corresponds to the incorporation of individual narratives into an
organizational metanarrative or into an authoritative text (Kuhn, 2008).
ANT inspired approaches have also explored the ways in which material
entities, including texts, have organizing – but also disorganizing – effects. This
idea is based on earlier work by Taylor and colleagues on the idea that
organizations are constituted through an interplay of text and conversation. Text,
the argument goes, stabilizes conversations, which in turn allow giving a voice to
texts in the current situation. Although Taylor and others suggested the idea as
early as 1996, its influence is still felt today. More recently, Latour’s notion of
“matters of concern” has been used in organizational communication to account
for the way things – issues, objects, documents, etc. – may become active again in
the current interactional scene (see, e.g., Cooren et al., 2015). Indeed, the notion
highlights the idea that one of the ways in which “facts” – for instance a particular
strategic threat – act is by being expressed as concerns and picked up by others as
such in conversation.
Even though it is always delicate to sort researchers into schools and
traditions, it is probably accurate to describe many of the people who have been
mentioned so far as (loosely) belonging to what has been called the Montreal
School of organizational communication, which shares with other approaches the
view that communication is constitutive of organizations. The originality of the
Montreal School lies in part in borrowing from ANT its focus on the role of
materiality in the constitution of the social, meaning that documents, technologies
and other “things” – including meeting minutes, sticky notes, whiteboards, emails,
and many others – help our conversations endure and carry them to other places
and other times. This means that material things of all kinds allow our decisions,
plans, judgments, forecasts, and other language acts to have effects in other places
and at other times. Recognizing the role of material things in the constitution of
our organizations has led Montreal School researchers to refer to the latter as
“plenums of agencies.”
ANT critiques and future research directions

It is interesting and perhaps indicative of actor–network theory’s fit with
organizational communication that very few critiques of ANT come from within
our discipline. Critiques that have been formulated elsewhere, however, may be
relevant for organizational communication scholars and hint at possible future
directions for students and researchers.
A first, classical critique of ANT is that it is unable to think critically about
the realities it describes. Said otherwise, it is not interested in power related
issues, or in the historical conditions of power. For instance, ANT has been
accused of accounting for the formation of networks, but failing to explain their
dynamics once they are formed and their effect on the distribution of power. ANT
friendly perspectives, it is said, omit reflection on the consequences of technology,
as well as on the structural and cultural contexts where it is constructed. This

omission of power issues may come from ANT’s theory of agency, which ascribes
agency to people and things essentially, without questioning that capacity to act –
even though, the critique goes, agency is made possible by all sorts of social
factors that ANT disregards. Interestingly, although many have raised concerns
over ANT’s lack of attention to issues of power, others have accused it of the
exact opposite: science, knowledge, and pretty much anything else become the
battleground of opposing agencies, with no real truth to be found, as
Amsterdamska pointed out in a widely cited article unambiguously titled “Surely
You Are Joking, Monsieur Latour!” (1990). Rather than regretting such a
“political ontology,” Alcadipani and Hassard (2010) point out that ANT’s
explanation of the way things are “assembled into being” (p. 423) provides the
potential to “de-naturalize” the organizations and collectives that we take for
granted. In other words, ANT warns against the trap of assuming that the way we
organize our shared lives and labor is the only possible way. Latour himself notes
that for ANT, power is not something that serves to explain reality; on the
contrary, the theory is interested in understanding how power is done, without
presuming who or what has power. In other words, for ANT, power should be
studied in actu, that is, in its actual performance.
Other critics have taken issue with the role ANT gives to nonhuman
“actors” in the name of the “general symmetry” it calls for. This is connected to
the issue of intentionality, as well as to related questions of human dignity and of
what should deserve to be called an “action.” ANT, it is said, denies the fact that
only humans can transform society, that only such acts deserve to be called
actions. It may be correct that humans interact with nonhumans, but both types of
agency cannot be analyzed in the same terms. More vehement attacks include
accusations of a return to hylozoism (the belief that inanimate objects are alive).
The argument against ANT revolves around the notion of intentionality, that is,
whether action should be willful; answering yes to the question amounts to
limiting agency to humans. This argument also comes from within organizational
communication; in particular, questions arise regarding whether nonhuman
agency can be meaningful (McPhee & Seibold, 1999). McPhee, and more
generally the “four flows” tradition of CCO, follow Giddens’s structuration

theory, where agency supposes not only intentionality but also reflexivity and
contextual knowledge, which prevent the attribution of action to nonhumans.
Furthermore, agency for Giddens (1993) is not only to have acted in some way,
but also to possess the capacity to “have acted otherwise” (p. 81), which implies a
form of decision or choice, which has no correspondence in ANT.
Another issue that has been raised with respect to ANT, as reported in
Bardini (2007), is that of its ambiguous relation with reflexivity. Indeed, ANT’s
program to show that science and technology are practical achievements is
imperfectly applied to ANT scholars’ own descriptions of their observations. How
that could be achieved without a sort of infinite regression is not yet settled and
deserved further consideration. Although some scholars find a solution in
adopting writing practices that highlight their own uncertainties and limitations,
others straightforwardly reject the need for them to be reflexive about their own
research.
A last critique concerns the “semiotic” character of ANT, as has already
been described above (see Bardini, 2007). Indeed, by using – whether
metaphorically or otherwise – a language borrowed from semiotics, and in
particular from Greimas’s narrative theory, ANT runs the risk of reducing
everything to text and to “scripts.” Rather than studying materiality and the role of
technology, for instance, the theory may very well be studying their description in
talk, or the written procedures that are inscribed in/on them. This critique is of
particular relevance to us here, as it has been extended to include the Montreal
School of CCO, whose members, the argument goes, by drawing on the notion of
matters of concern, have been studying materiality only to the extent it is
“textualized” through its evocation as a concern to participants in meetings and
interactions.
Finally, with some exceptions, the relationship between ANT and
organizational communication has been mostly one way. However, there are many
avenues for organizational communication, and perhaps CCO in particular, to
contribute to ANT in return. For instance, CCO, as an alternative take on
organizations, is in a good position to formulate just the kind of critical insight
that could feed back into ANT and serve as a response to those who believe the
theory lacks the ability to tackle issues of power. Indeed, by viewing
organizations, factories, and other workplaces as continuous achievements, rather
than stable and fixed entities, CCO scholars may provide ANT with the means to
show its ability to question the taken-for-granted character of work relations,
including power relations, especially to the extent that materiality may play a part
in constituting and stabilizing those relations. As organizational communication
continues to borrow from ANT, it will need to provide answers to the critiques
with which the latter has had to deal. For instance, should our discussions of
organizations give privilege to human intentionality and dignity? How can we
reconcile our interest for the role of technology with an original treatment of
power issues? These, and many other questions, are not only deterrents to but also
exciting opportunities for creative organizational communication research moving
forward. Recent work in organizational communication is already suggestive of an
engagement with materiality beyond its “textualization” (see Putnam, 2015, on the
discourse–materiality relationship). In the same vein, continuing our engagement
with ANT and related theories may also lead us to reconsider what we mean by
communication: attempting to include nonhumans in the equation may be an
opportunity to devise a theory of (organizational) communication that is not
limited to human language. Furthermore, organizational communication research
may want to consider ANT not only in terms of technology or materiality, but also
– and perhaps more importantly – as a theory of shared agency, as its very name
suggests. Indeed, ANT scholars have been insisting that the human/nonhuman
divide does not hold, and yet in our interpretation of the theory, we have reified
the divide more than ever. Approaching ANT from the idea that agency is shared
may help us reconsider issues of organizational action, membership, belonging,
and other situations where the locus of agency is contested or confused, without
splitting the world into any given categories in advance.
References
Alcadipani, R., & Hassard, J. (2010). Actor–network theory, organizations and

critique: Towards a politics of organizing. Organization, 17(4), 419–435.
doi:10.1177/1350508410364441
Amsterdamska, O. (1990). Book review: Surely you are joking, Monsieur Latour!
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Bardini, T. (2007). Retour sur une (d)ébauche: Une problématique
communicationnelle du changement technique. tic & société, 1(1).
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Beck, E. N. (2015). The invisible digital identity: Assemblages in digital
networks. Computers and Composition, 35, 125–140.
doi:10.1016/j.compcom.2015.01.005
Benoit-Barné, C. (2009). Reflections on science and technology controversies,
material recalcitrance and empty reservoirs that suddenly become full. In
S. Jacobs (Ed.), Concerning argument. Washington, DC: National
Communication Association.
Brummans, B. H. J. M. (2007). Death by document: Tracing the agency of a text.
Qualitative Inquiry, 13(5), 711–727.
Besel, R. D. (2011). Opening the “black box” of climate change science: Actor–
network theory and rhetorical practice in scientific controversies. Southern
Communication Journal, 76(2), 120–136.
doi:10.1080/10417941003642403
Callon, M., Lascoumes, P., & Barthe, Y. (2009). Acting in an uncertain world: An
essay on technical democracy. Cambridge, MA: MIT Press.
Czarniawska, B. (2004). On Time, Space, and Action Nets. Organization, 11(6),
773–791. http://doi.org/10.1177/1350508404047251
Law, J., & Callon, M. (1992). The Life and Death of an Aircraft: A Network
Analysis of Technical Change. In W. E. Bijker & J. Law (Eds.), Shaping
Technology/Building Society: Studies in Sociotechnical Change (pp. 21–
52). Cambridge, MA: MIT Press.
Cooren, F. (2004). Textual agency: How texts do things in organizational settings.
Organization, 11(373–393). doi:10.1177/1350508404041998
Cooren, F., & Bencherki, N. (2010). How things do things with words:
Ventriloquism, passion and technology. Encyclopaideia, Journal of
Phenomenology and Education, 14(28), 35–61.
Cooren, F., & Matte, F. (2010). For a constitutive pragmatics: Obama, Médecins
Sans Frontières and the measuring stick. Pragmatics and Society, 1(1), 9–
31. doi:10.1075/ps.1.1.02coo
Cooren, F., Bencherki, N., Chaput, M., & Vásquez, C. (2015). The communicative
constitution of strategy-making: Exploring fleeting moments of strategy. In
D. Golsorkhi, L. Rouleau, D. Seidl, & E. Vaara (Eds.), The Cambridge
handbook of strategy as practice (pp. 365–388). Cambridge, UK:
Cambridge University Press.
Giddens, A. (1993). New rules of sociological method: A positive critique of
interpretative sociologies. Stanford, CA: Stanford University Press.
Kuhn, T. (2008). A communicative theory of the firm: Developing an alternative
perspective on intra-organizational power and stakeholder relationships.
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Latour, B. (1987). Science in action: How to follow scientists and engineers
through society. Cambridge, MA: Harvard University Press.
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Latour, B. (2005). Reassembling the social: An introduction to actor–network
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Robichaud & F. Cooren (Eds.), Organization and organizing: Materiality,
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actor-network theory approach. State University of New York at Albany,
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discourse–materiality relationship. Journal of Management Studies, 52(5),
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journalistic cultures and the ontology of software. Journalism, 16(1), 10–
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A texto-material perspective on the use of media technologies.
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2885.2012.01408.x
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organization and management in the information age. Toronto, Canada:
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communicational basis of organization: Between the conversation and the
text. Communication Theory, 6(1), 1–39.
Further reading
Contractor, N., Monge, P., & Leonardi, P. M. (2011). Multidimensional networks
and the dynamics of sociomateriality: Bringing technology inside the
network. Network theory (special section), International Journal of
Communication, 5, 39.
Czarniawska, B., & Hernes, T. (Eds.) (2005). Actor–network theory and
organizing. Malmö, Sweden: Liber and Copenhagen Business School
Press.
Fauré, B., Brummans, B. H. J. M., Giroux, H., & Taylor, J. R. (2010). The
calculation of business, or the business of calculation? Accounting as
organizing through everyday communication. Human Relations, 63(8),
1249–1273. doi:10.1177/0018726709355658
Latour, B. (1986). The powers of association. In J. Law (Ed.), Power, action and
belief: A new sociology of knowledge? (pp. 264–280). London, UK:
Routledge.
Lenoir, T. (1994). Was the last turn the right turn? The semiotic turn and A. J.
Greimas. Configurations, 2(1), 119–136. doi:10.1353/con.1994.0014
Leonardi, P. M. (2011). When flexible routines meet flexible technologies:
Affordance, constraint, and the imbrication of human and material
agencies. MIS Quarterly, 35(1), 147–168.
Plesner, U. (2009). An actor–network perspective on changing work practices:
Communication technologies as actants in newswork. Journalism, 10(5),
604–626. doi:10.1177/1464884909106535
Quattrone, P. (2004). Accounting for God: Accounting and accountability
practices in the Society of Jesus (Italy, XVI–XVII centuries). Accounting,
Organizations and Society, 29(7), 647–683. doi:10.1016/j.aos.2004.03.001
Nicolas Bencherki is an assistant professor of communication at the University at

Albany, State University of New York. He holds a PhD in communication from
the Université de Montréal and in sociology of action from Sciences Po, Paris. His
research focuses mainly on organizational communication in the setting of
community and nonprofit organizations. His latest work has attempted to show the
intersecting roles of communication and materiality in the concrete constitution of
membership, strategy, and other conventional organizational issues.
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11/24/21, 11:39 AM Actor-Network Theory (ANT) | Diggit Magazine
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For example: Digital culture, Digital ethnography or Choreography of assembly
Actor-Network Theory (ANT)
Actor-Network Theory is a theoretical and methodological approach that sees all social phenomena as the
product of network interactions. It is unique in that it recognizes both objects and technologies as network
nodes equal with human actants.
Actor-Network Theory
Actor-Network Theory (ANT) is a theoretical and methodological approach that recognizes the embeddedness
of objects in our ‘social’ lives. Pioneered in the 1980s by John Law, Michel Callon, and Bruno Latour, it emerged
primarily from Science and Technology Studies. While the scope of its analysis is somewhat limited, it is
uniquely well suited to disassembling our relationships and interactions with new technologies. Indeed, even
writing prior to the widespread use of the internet and social media technologies, Law (1992) writes that “almost
all of our interactions with other people are mediated through objects of one kind or another” (p. 381-2).
ANT takes technology as equal interlocutor to humans, and thus provides a lens through which to analyze
where a user and a technology sit in relation to each other but also in relation to a larger network of materials
and people. It discourages essentialism with regards to larger social constructs, and instead encourages the
deconstruction of "black-boxed" networks and examination of how technologies are changed by their
context (Law 2006). It is a material-semiotic approach in that it acknowledges and seeks to map how objects
and meaning are intertwined.
References
Law, J. (1992). Notes on the theory of the actor-network: Ordering, strategy, and heterogeneity. Systems
practice, 5(4), 379-393.
Law, J. (2006). Traduction/trahison: Notes on ANT. Convergencia, 13(42), 47-72.
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RCB 711

RESEARCH FOR COMMUNICATION

TOPIC 1: THE BUSINESS AS A

Inputs Process Output

100 101 102 103 104 Output

• At least one factor fixed

• All factors variable

To cite this version:

HAL Id: halshs-00742302

HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est

Michael Dietrich and Jackie Krafft

statement of this separation is provided, for example, by Penrose (1980/1959)

And to reinforce the same point

theory’. (ibid, p. 14)

Without wishing to undermine the fundamental contributions of either Edith Penrose or

will be sufficient to illustrate this potentially partial analysis. First, an industry or

playground of the economics of the firm.

characteristic supposed to generate motivation problems in a context of bounded rationality

increasing costs in terms of managerial and complementary assets.

toolbox rather than the object of study:

we earn and spend our incomes. (ibid., p. 73).

pure theory of mainstream analysis (Coase, 1991):

imaginary world which they should be capable of handling. (ibid, p. 52).

existence an economic theory which is solidly based (ibid, p. 97).

fundamental issue in Coase’s work, leading to possible propositions on what is a theory to

understand how economic systems work.

various kinds, the forms of industrial organization. (ibid, p. 60).

The work he considers as important in guiding a realistic theory of the organization of

the organization of industry:

‘Diversification and integration in American industry’:

underlying industrial structure (ibid, pp. 72-73).

Schumpeterian in nature. Although Schumpeter originally suggested that innovation covers

adopted by Austrian views of entrepreneurship in which firm orientation is viewed as

policies and the firm.

complementarity here is, of course, fundamentally methodological: on the one hand an

3. THE FIRM IN INDUSTRY LIFE CYCLES

entrepreneur in the development of innovation, as well as the evolution of industry in a

the firm. This is what we intend to do here.

3.1. Development of technology, development of knowledge: possible sources of

phenomenon, and attempted to clarify what occurs in pre-shakeout versus post-shakeout

external technological shock to more endogenous arguments related to the development of

knowledge at the level of the firm .

For Jovanovic and Mc Donald (1994), shakeout is generated by an external technological

production. Since uncertainty decreases, the shakeout appears as an endogenous phenomenon.

progressive emergence of a dominant design involves higher barriers to entry which

less efficient incumbent firms exit the industry.

entry is thus a major determinant in the formation of a competitive advantage over

alternative explanation of the shakeout.

competitiveness, but that network effects have a rather decisive effect.

delimited by the purchases and sales of an homogenous product. On some occasions,

the accumulation of complementary competencies, as well as an effective coordination

with non-shakeout phenomena. In some industries the emergence of specialized suppliers

created by an initial inventor or an academic researcher who decided to set up a firm to

complementary competencies related to production and distribution on the other hand,

(Bresnahan and Raff, 1991; Mitchell, 1995; Klepper, 1997).

complementary competences tend to appear as a major issue in industrial dynamics. About

path-dependency characteristics, the depth and scope of technological opportunities in the

Krafft, Quatraro, Saviotti, 2011).