Redefining the Boundaries of the Firm

SINCE economists opened up the 'black box' of the firm and found, apparently somewhat to their surprise, that there were people inside, a considerable number of management and behavioural theories have been developed. One of the main criticisms of these theories, however, is that they generally add little to understanding the firm's behaviour in the market place. The great debates that have raged have been over the primacy of particular objectives of the enterprise such as profit maximization or growth maximization, or concerning the constituent elements of managerial utility or organizational slack, rather than on how managers actually behave in the market as buyers or sellers. The tendency of behavioural or managerial economists has been to rely upon relatively traditional oligopoly theory for an understanding of interorganizational behaviour in industrial markets. Yet the theory of oligopoly is in no sense unified, being, rather, a collection of insights developed over several decades, deriving from observations of behaviour in very different circumstances. The works of Andrews [I] and Hague [I o], for example, are notable in that, although they focus on pricing and marketing behaviour, they mainly concentrate on one side of the market place, that of the seller. There has been hardly any serious research into the behaviour of buyers in managerially complex firms. Secondly, most studies tend to take an overall corporate viewpoint, yet we know from writers such as Baumol [3] and Cyert and March [7], not to mention the whole schools of industrial sociology and organization behaviour, that there may be conflicts in the firm between managers in different functions, so that the resulting behaviour may be very different from the original policy. The factors explaining behaviour may not lie entirely in the motivation of top management, but may also depend on how managers in different functions interact, both within the firm and with managers in outside organizations. Organization theorists such as Cyert and March have suggested that for a managerially complex organization to be viable there must be some kind of 'organizational coalition' across different sub-functions. What the authors wish to suggest in this paper is that viability may be enhanced in industrial markets by the creation of closer vertical relationships between buyers and sellers. It would appear that there are real benefits to be gained on both sides from this 'collaborative dealing', whilst some of the disadvantages of more formal integration seem to be avoided. Indeed, since the first draft of this paper, it is encouraging to note that at least one sector working party of