Take a Step Back and Remember Context Matters

Guest post by Todd M. Inouye, Assistant Professor of Management at Niagara University. 

Photo of someone holding a small globe

It is well known that individual- or firm-level strategies are the main drivers of firm performance. However, I want to remind the reader that context, in many ways, is just as important if not more so. Firms do not operate in a vacuum and even if managers and founders tend to attribute the reasons for success to themselves and their firms (the illusion of control), we all recognize that those decisions are based not only on internal resources (originating within-firm) but also external resources. It would be prudent for academics and practitioners alike to remember just how small a firm is within the larger context in which it operates.

The firm’s context consists of an infinite number of factors (industry effects, policy, competition, suppliers, consumers, etc.), some more important than others. So while many take an individual- or firm-level perspective, I prefer a more balanced perspective and attribute an equal emphasis to the context. A popular line of thought considers contextual influences as indirect effects on firm performance. I mostly agree, but I also believe that this inherently leads people to consider the context as less important because it is not a direct effect. Let me clarify with an example.

Amol Joshi, Jeffrey Robinson and I recently published a study which found that small technology businesses that were awarded grants from the Federal government had a higher likelihood to receive follow-on R&D funding from those agencies which had higher levels of workforce diversity. From a firm-level perspective one might argue that agency diversity indirectly affects the likelihood of securing follow-on funding. This is a logical statement but the reader might mistakenly conclude that because it has an indirect effect, it is less important than the actions of the small businesses in securing the funds. On the contrary, Federal agency diversity has been a strong initiative for many years (Executive Order 13583 in 2011 established a government-wide initiative to increase diversity in the Federal workforce). I argue that initiatives like Executive Order 13583 have just as much real impact as firm behavior on resulting performance.

At first it might be difficult to rationalize just how workforce diversity would increase the chances of follow-on funding, especially when the agencies go to great lengths to provide unbiased proposal evaluation. Upon further research into the grant programs, we found significant variation across Federal agencies in how each provided grantee services. It became clear that a diverse workforce would have trickle-down effects which promoted grantee education or better outreach efforts to secure grantees which were more prepared for successful innovation. Who is to say that these agency behaviors are any less critical for success than the behaviors of the firms? I would argue that they are equally important.

Our study included over 10,000 unique small firms. Of course the firms’ behaviors led them to enter our sample and to eventually secure follow-on R&D funding (or fail to do so). That said, our research suggests that Federal diversity initiatives like Executive Order 13583 are positively impacting R&D funding for grantees in a real way, yet on the micro-level, these firms likely do not realize that they are being affected. So while many managers and founders suffer from the illusion of control bias (overestimation of a person’s influence), I would remind them that there are other contextual influences at play here. If agencies were not as diverse, some firms may never have been identified through outreach efforts, or they may not have been as well prepared to submit a strong grant proposal. This leads to one of the main contributions of our study. Diverse, as opposed to homogenous groups have been associated with positive outcomes. Our findings support this relationship and goes further to show how contextual diversity can span boundaries and have real positive effects outside the focal organization(s).

So while I do agree that individual- and firm-level strategy are key drivers of performance. I believe that contextual factors, in some cases, can be absolutely critical to success (or failure). To consider these factors as secondary to individual- and firm-level strategy is a mistake. The illusion of control is only real if academics and practitioners continue to overestimate the influences of the firm and the people within it. Take a step back and consider the context, in doing so the reader will realize that the illusion of control is just that, an illusion.