The Pragmatic Theory of the Firm

Four key ideas provide the foundation for pragmatic theory of firm, which is expecially useful managements and boards in developing an understanding how companies create long-term value benefit all stakeholders. First, a necessary point departure, clarity about purpose firm. Maximizing shareholder viewed not as social but consequence company's effectiveness carrying out that recognizes benefits success to corporate Second, knowledge-building proficiency, relation its competitors, primary determinant performance. Nurturing sustaining culture facilitates discovery obsolete assumptions early adaptation changing environment. Third, avoids “compartmentalizing” activities into silos by treating firm holistic system. A component quantifies performance life-cycle framework economic returns exhibit “competitive fade” over long term. This way thinking provides insights intangible assets other sources excess returns. Fourth, managing risk should focus on identifying removing major obstacles achieving firm's purpose. Such can lead destruction through, example, unethical behavior forms shortsighted failure recognize make most opportunities increase long-run productivity value. sense it aims produce (or business unit's) improve management's decisions, especially allocating capital resources. The author uses John Deere's track record past 60 years illustrate successful application theory.