In an award winning article Ferraro, Pfeffer and Sutton (2005) show how the ideas of economics affected our view of social reality. More specifically, they show how the underlying assumptions of self-interest and market mechanism become part of the language and institutional design, and shape the beliefs about what is appropriate. As a result, language, institutions and values work together to create a social reality, which corresponds to the initial assumptions and ideas of economics. Thus, the theories become true, rather than explain social reality as it is observed.
We discuss this topic here because – as the article demonstrates – the same mechanisms that make theories self-fulfilling permeates managerial decisions and behaviour, business practices and employer-employee relationships. We draw two lessons from Ferraro and colleagues’ article. First, organisational management can recognise these mechanisms and influence the social structures of their business to adopt a different worldview. The way an organisation views the world around it affects its ability to innovate and, hence, compete. Second lesson parallels the blue ocean strategy by Chan Kim and Renée Mauborgne (2005), that suggests that companies can create market space for their offerings rather than compete in the existing markets. In other words, the same mechanisms that are not recognised in self-fulfilling theories, when understood, can be used to advance the competitive position. That said, it should be mentioned that such mechanisms are not easily recognised and are difficult to manage because of their emergent nature. But the exploration of such processes is part of management research.
Ferraro et al. illustrates when the self-fulfilling mechanisms take root.
- ‘To successfully diffuse in a society or an organization, the assumptions and language of economics need to resonate with at least some of the existing norms’ (p.17). When ideas resonate with some critical elements of the culture they engage with the existing cultural and social norms. With time the correspondence between assumptions and existing beliefs will begin to contribute to the definition of the norms.
- Although different cultures will have different rate of acceptance of the assumptions of economics their affect is global. This is because ‘contemporary organizations all over the world are increasingly characterized by practices that embody the dominant behavioral assumptions of economics and its language, creating the conditions for the operation of the self-fulfilling process… at a global level’ (p.17). In other worlds, organisations borrow managerial practices from each other thereby defusing them globally.
- The existence of explicit or implicit processes of accountability fosters the sense that assumptions are natural and intuitive. ‘Accountability is the implicit or explicit expectation that one may be called on to justify one’s beliefs, feelings and actions to others’ (ibidem). Accountability creates conditions for social actors to personify the behaviour, which is assumed to be legitimate.
Why is this important for service or experience? When organisation sets out to provide a service or create an experience it acts on its assumptions about human nature. For example, an assumption that customers are motivated by self-interest is to design a business model that offers value in accordance with this reality. As a result a company engages customers in the behaviour that corresponds to the prior assumption. Because service and experience exist only while provider produces and customer consumes (Ng and Smith, 2012) ‘motives are learned… from those in the immediate situation’ (Ferraro et al., p.20).
Imperial studies will show how well spread these mechanisms are. But one final point seems to follow from the article. Namely, customer value and motivation is not exclusively exogenous to the organisation but is also endogenous to the organisational activities.
Source: Fabrizio Ferrano, Jeffrey Pfeffer, Robert I. Sutton, 2005: Economics Language and assumptions: How theories can become self-fulfilling. Academy of Management Review, Vol. 30, Issue 1, pp. 9-24.
Kim, W.C. and Mauborgne, R., 2005: Blue ocean strategy: How to create uncontested market space and make the competition irrelevant. Harvard Business School Press.
Ng., I.C.L. and Smith, L.A., 2012: An Integrative Framework of Value, In Stephen L. Vargo, Robert F. Lusch (ed.) Special Issue – Toward a Better Understanding of the Role of Value in Markets and Marketing (Review of Marketing Research, Volume 9), Emerald Group Publishing Limited, pp.207-243. doi: 10.1108/S1548-6435(2012)0000009011.