Ulrich Witt - The Origin of The Firm and Cognitive Leadership Theory

The Origin of The Firm and Cognitive Leadership Theory

The evolutionary theory of the firm by Witt (1998) puts the role of the entrepreneur at center stage in explaining why firms come into existence in the first place and how firms evolve subsequently. Markets and firms are not substitutes: In addition to transaction cost considerations the organizational form of the firm is preferred over ordinary market transactions as it allows for benefits which are not realizable via market contracts (Witt, 2007). In particular, the entrepreneurial input in creating a new venture is mainly cognitive in nature as the entrepreneur conceives a business opportunity and provides a business conception of how to organize resources for a certain purpose (Witt, 1998). A business conception in this respect “consists of subjective, sometimes highly idiosyncratic imaginings in the mind of (potential) entrepreneurs of what business is to be created, and how to do it” (Witt, 2007, p. 1127).

Based on this business conception and its implied division of labor, employment contracts do not specify a predetermined performance as in ordinary market transactions, but rather contract a “commitment to perform, on a reasonable level of effort, whatever turns out to be necessary when time comes” (Witt, 2007, p. 1127). This contractual framing allows for a high degree of flexibility to deal with unpredictable challenges and difficulties in the organization’s future. But the lower degree of specificity, in turn, requires the entrepreneur to coordinate and motivate the employees to adhere to the business conception. Such a coordination mode implies that the employees use the entrepreneur’s business conception as their own cognitive framework for their firm-related actions to interpret and assess incoming information (Witt, 1998, 1999, 2000, 2007). If the business conception is conveyed convincingly, the entrepreneur can rely on the governance regime of cognitive leadership as opposed to monitoring her employees. Consequently, the cognitive coherence among firm members opens up the possibility of a high level of creative, self-determined problem-solving initiatives from the employees which are nonetheless coordinated by the business conception and are intrinsically motivated (Witt, 2007). This governance regime of cognitive leadership is challenged over time when the firm grows (Witt, 2000). Coordination and communication of the business conception becomes more difficult as direct face-to-face interactions between the entrepreneur and employees become less frequent and rivaling social models might emerge based on informal communication processes among the employees. Therefore, the leader has to provide a convincing, appealing and sound business conception that can shape the informal communication beyond his personal interactions. One way to counteract the risk of rivaling behavior to become dominant is to implement a structure of subdivided entrepreneurship, in which division managers act as cognitive leaders themselves to ensure the cognitive coherence (Witt, 2000). Distinct developmental pattern of firm growth emerge as a result of specific transformative paths from the initial entrepreneurial firm to a larger company with several managerial layers.