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those of the firm, however, which decreases the chance for serious agency problems. Even so, the interests of owners and managers almost never coincide.

One would think that controls could be designed to integrate individual behaviors into unified organizational action. As we have observed in Chapters 12 and 13, however, this is difficult. The goals pursued by different actors may be grossly divergent and not amenable to compromise. Managers may need to coordinate among themselves over matters that may be much more important to some of them than to others. The firm can address the resulting agency problems using an array of incentives, such as pay for performance or efficiency wages, but these tools often have limited effectiveness. Finally, because of the limitations of formal structures and controls, many activities within and between organizations must occur outside of their boundaries. Managers from different units may need to cooperate but are not required to do so. In such situations of goal conflict, differential motivation, and incomplete authority, formal controls are inadequate, and cost-effective contracts are hard to fashion. As a result, power and culture become important as alternative means for accomplishing goals.

POWER

Because “power” and related terms like “influence” or “authority” are so widely used, the meanings associated with them are often confusing. We take power to be an individual actor’s ability to accomplish his or her goals by using resources obtained through noncontractual exchange relationships. By this we mean exchanges of goods, services, or promises on terms that take place outside of traditional economic markets and that are not enforceable in court. For example, someone in need of emergency assistance may receive help from an individual and have little to offer that particular individual in return immediately. The individual providing assistance may never have need of reciprocation in kind. Nevertheless, there may still be an implied promise that the favor would be returned if needed. The terms of the agreement are not specified, since it is not known in advance when or how the favor can be best returned. A failure to provide future assistance when requested would not give cause to legal action either, because there was no contract. Still, one can consider such an arrangement as an exchange whose obligations many people would fulfill out of a felt need to reciprocate. There are, of course, limits to these obligations. For example, it is unlikely that many would agree to provide assistance that was illegal, put one’s employment at risk, or entailed significant extended commitments.

Power is different from authority, which stems from the explicit contractual decision-making and dispute-resolution rights that a firm (or another source) grants to an individual. A manager exercises power by redirecting the activities of other actors away from their immediate goals and toward accomplishing the manager’s own goals. Others follow, not because they are contractually or morally obligated to do so, but because they perceive it is in their best interest to do so. In this sense, power is the ability to get things done in the absence of contracts. Influence, a related term, refers to the use of power in a given situation by an individual. The influence a person has over others is thus an effect of his or her broader power.

Power exists at many levels in a firm. Individual managers, such as the CEO, may be powerful relative to others on the management team. It is also common to discuss the power of units or subgroups of an organization. In universities, academic departments continually vie with each other for budgetary resources and view their success in obtaining such resources as evidence of their power, which stems from their popularity

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with students, the research productivity of their faculty, or their success in securing government and foundation grants. Firms also exercise power in their product markets, factor markets (such as for raw materials or labor), or in relations with suppliers, competitors, or other actors in the firm’s environment. For example, Disney’s Pixar Animation Studios may obtain a more favorable distribution of a new animated film than would a rival studio. It would also have power in negotiations with toy companies seeking to develop products based on Pixar characters.

The Sources of Power

Power is often exerted in an economic market, as when a firm with a patent for a popular new drug uses its market power to set a high price–cost margin. Not surprisingly, this is often referred to as pricing power. Our interest here is in power that cannot be exerted in the market; that is, power that cannot be easily priced. Individuals attain this power when they possess resources that others value but are not readily bought and sold in a market. This includes the power to control the allocation of resources within firms or other administrative domains, where internal markets for such resources are virtually nonexistent, often by design.

One way to look at sources of power is in terms of power bases—by which we mean attributes of the individual that convey resources that help an individual gain power. Power can stem from an individual’s position within a hierarchy. This is known as legitimate power or formal power. An individual who possesses formal power has reason to expect compliance, at least on those matters that are of moderate or little importance to others. Chester Barnard uses the term zone of indifference to define the set of issues over which the powerful individual with formal authority usually prevails. For example, an individual hired to teach classes at a professional school would be unlikely to question the right of a superior to assign the individual to teach particular classes at particular times. The employee, however, would cease being indifferent to the actions of the superior if they went beyond expectations for what the job entailed, such as by scheduling the individual to teach on holidays or on Saturday nights. The employee would also likely take issue with demands that were not related to the general nature of the work that was agreed to at the time of employment—for example, if the new instructor was assigned to bring coffee and doughnuts for the other instructors. Because this view of compliance involves managers acting within agreed-on boundaries, it is sometimes discussed in terms of a “psychological contract” with employees.6

Power can also stem from an ability to grant rewards or administer punishments, or from the possession of specialized knowledge valued by other actors. In academic and research bureaucracies, examples of individuals possessing this power are the key editors of top journals, such as the Journal of the American Medical Association, or the grants officers of major funding agencies, such as the National Institutes of Health. The decisions of these individuals can make or break careers, and as a result, these individuals wield considerable power in their professions.

Power can be based on one’s position in a social order, due to status, image, or reputation. For example, an individual with a well-known history of winning in prior conflicts will have reputation-based power that could lead potential adversaries to comply with future demands. This last type of power is rooted not only in individuals and their attributes, but also in the relationships that develop among individuals as they participate in networks of tasks, exchange, or information sharing. For example, the successes of ascendant executives in a business community are regularly announced by corporate press releases, reported on by the business press, and enshrined in various listings of “up and

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coming” executives by the business press and local institutions. Reputations may also be put at risk by significant or poorly timed failures. An example of this is seen in the ups and downs of the career and reputation of Jon Corzine, from his leadership of Goldman Sachs, to his election to the U.S. Senate in 2000, to his election as governor of New Jersey in 2005, to his leadership of the failed firm MF Global in 2011.

Relational views of power are often based on social exchange. Social exchange is a transfer between two or more parties of resources, or rights to control resources, that occurs outside of a market.7 Power arises in future social exchanges as a result of persistent inequalities in past social exchanges. To illustrate how power might arise out of social exchanges, suppose that Amy and Beth are exchange partners. If an acceptable exchange occurs between them, their transaction is complete. Suppose, however, that they cannot complete an exchange in a mutually acceptable manner, and as a result, Amy provides more of value to Beth than Beth can provide to Amy. In effect, Beth “owes” Amy the deficit of the exchange. Unless it is explicitly considered as such, this is not a formal debt, and Amy cannot sue Beth to recover the deficit. If Beth’s deficit to Amy increases over successive exchanges, Beth is said to be increasingly dependent on Amy. Conversely, Amy is said to have power over Beth to the extent that Beth is dependent on Amy. The dependence of Beth on Amy would be mitigated to the extent that Amy depends on Beth for some other matter or in some other set of exchanges.

Such a pattern could develop in the workplace if a junior employee asked a senior colleague for advice on some matter that is unimportant to the senior. How does the junior repay the senior colleague for providing assistance? Sometimes deference and respect from the recipient might suffice. When deference and respect do not suffice, it might lead to inappropriate demands on the junior or to the estrangement of the senior colleague or even the creation of an enemy. That is why such informal exchanges are constrained in many organizational settings. Informal exchanges can pose significant costs to the firm if they become too involved, time consuming, or distracting. It is even possible that individuals will arrange personally favorable exchanges that detract from the work of the firm. (This would be an example of influence activities that we described in Chapter 3.) As a result, in settings where such exchanges are often necessary, firms may promote strong norms among employees that both encourage cooperative exchanges across the organization and impose sanctions for individuals who refuse requests for assistance. Firms often supplement these norms with individual incentives, knowledge databases (for example, the collected work product of professional colleagues that others could consult), and increased formal training, development, and recognition for consultants who excel at both knowledge generation and knowledge sharing.8

In an economic exchange, contracts and the rule of law dictate the transfer of resources and dollars between trading partners. Voluntary exchanges resulting from power relationships seem harder to explain. Why would Beth choose to become dependent on Amy and presumably commit future resources to Amy’s discretion? Why would Amy provide resources in the present in return for the uncertain future obligations of Beth? After all, despite Beth’s “debt,” Amy cannot use formal means, such as the courts, to force compensation from Beth. Several explanations come to mind. An individual actor choosing a dependence relation may lack a better alternative. The resources controlled by the other actor may be important, with no clear substitutes or alternative sources. Finally, it just may be too costly to write a formal contract. This is the resource dependence view of power, expressed by Jeffrey Pfeffer. Individuals and firms seek to gain power by reducing their dependence on other actors, while increasing the dependence of others on them. This is