The firm as a function of deals

Abstract

Purpose

The purpose of this paper is to attempt a justification as to why a profit-making firm may be viewed as a function of its nucleus expertise and a risky portfolio of deals.

Design/methodology/approach

This is a theoretical paper relying on mathematics, graphs and verbal arguments to describe concepts.

Findings

A profit-making firm can gain even more if it reduces the risk of its portfolio of deals. In its effort to reduce such a risk, the firm needs to know each deal’s profit share and be able to estimate each dealing partner’s reliability (a random variable).

Research limitations/implications

The proposed hypotheses are not empirically tested, an exercise left to future work.

Practical implications

Pragmatically, a profit-making firm may be viewed as a function of its strategic nucleus and its strategic federation. The firm may increase its gains by minimizing deals’ risk through a portfolio of deals diversification. The more the firm considers factors such as mediation, optimal commitments and the like, the more effective and efficient becomes the management of the portfolio of deals.

Social implications

As explained through examples and illustrations, viewing the firm as a function of deals benefits the parties in such deals as well as other stakeholders (community, region, nation, etc), e.g. less costly deals contribute to more profit and more growth.

Originality/value

A profit-making firm is viewed as an entity that manages a risky portfolio of promisor- and promisee-type deals. The ideas in this paper may be of value to today’s global, knowledge-based, outsourcing/insourcing firms which may find it increasingly difficult to rely on conventional contracts.

Citation

Kantarelis, D. (2014), "The firm as a function of deals", International Journal of Law and Management, Vol. 56 No. 4, pp. 311-332. https://doi.org/10.1108/IJLMA-10-2012-0036