All Things Great and Small: Organizational Size, Boundaries of the Firm, and a Changing Environment

Abstract

Research findings have established a relationship between organizational size and a substantial set of organizational outcomes, resulting in size's distinction as “perhaps the most powerful explanatory organizational covariate in strategic analysis”. We draw on the theory of the firm to provide a theory-driven definition of firm size and as a framework to organize the diverse research on firm size. We examine studies over the last 20 plus years since the last review of research on organizational size that have expanded our understanding of the advantages and disadvantages of larger firms, the environmental factors that have changed the merits of firms relative to markets, the managerial bias to pursue growth, and the most recent findings on the performance implications of organizational size. In doing so, the review provides extensions to our understanding of the theory of the firm, by integrating contingency theory, the resource-based theory of the firm, leadership theories, and the knowledge-based view of the firm. In addition, based on an extensive review of the measurement methodologies for the most common control variable employed by strategy scholars, this review outlines a rich and robust set of opportunities for future research to explore the nature of organizational size and its effects.

Managerial implications:

The governing coalition of the firm may be overly biased toward growth – potentially increasing the risk of firm failure/discipline by the market – and creating opportunities for greater efficiency by returning to ‘optimal’ firm size. In some sense, size is a barometer of the relative merits of markets versus firm hierarchy. Extremely large firms suggest inefficiencies in the market have rewarded firms for keeping transactions within firm boundaries.

Keywords: Firm Size, Organizational Size, Boundaries of the Firm, Bureaucracy, Complexity, Environment, Hierarchy, Contingency Theory, Legitimacy, Status, Inertia, Scrutiny, Resource-Based, Knowledge-Based View, Economies of Scale, Economies of Scope

JEL Classification: L11, L25, M13, L1, L2, L22, L4, L41, L42