Their Majesty, Exchange

The social exchange theory and business strategy

Imagine you’re working on an important report. Or you’re cycling in a park with your children. Or you’re drinking coffee in the morning. Or you’re sleeping, driving a car, or reading a book.

What do all these and all the rest activities you engage in throughout your lifetime have in common? They all involve exchange.

You exchange some assets you have for values you would like to have.

When you sleep or eat, you exchange your time (asset) for energy (value). 

When you learn or read books, you ‘sell’ your time and energy (assets) for knowledge (value). 

When you work, you trade your time and energy for money, satisfaction, and career opportunities – if you’re lucky. 

And when you chat with your friends, watch a movie, or spend time with your loved ones, you also exchange your time for emotions, the feeling of acceptance, love, warmth, and many other things. 

Picture by Kar-Tr on iStock

There is a scientific concept behind this idea, it’s called Social exchange theory. It, among other things, argues that “…social behavior is the result of an exchange process. According to this theory, people weigh the potential benefits and risks of their social relationships. When the risks outweigh the rewards, they will terminate or abandon the relationship. The purpose of this exchange is to maximize benefits and minimize costs.”

The whole world is a giant system where people are involved in constant, continuous exchange.

This tremendous ecosystem consists of multiple subsystems, such as countries, states, cities, organizations, families, clubs, football fan and stamp collector communities, and other small or big groups of people. Every single person on this planet is a part of many systems. 

These systems interact with many other groups, and their members communicate with one another. Or, simply put, all of them exchange – daily, hourly, minutely. These numerous interactions are intricate and complex, but they remain relatively stable and steady until both sides of every transaction believe they get approximately the same as they give. 

But if they don’t think so, the respective systems become unstable. That’s how divorces, breakups, strikes, bankruptcies, and even revolutions occur. 

So, any system’s strength, resilience, and prosperity directly depend on the quality of the relations (exchanges) between it and other systems and within it itself. 

And any business also works this way. But we tend to forget about that.  

Some excerpts from system theory

Scientists study how systems work. For instance, Talcott Parsons held that “a single social action doesn’t exist in isolation. Each action is a response to some previous action. Thus, social reality is an interconnected chain of social actions.” Source. 

Homeostasis is another term from the system theory. It describes the tendency of any system to maintain the balance between the internal environment of the system and its surroundings. When the world outside changes, a system adjusts itself to find a new equilibrium. 

In other words, self-preservation and self-protection are core traits of any system, and business enterprises are no exception.

An organization and its purpose

Any organization is created for a purpose. 

The police exist to protect people. 

A community of football fans gives its members the opportunity to lose their voices together, cheering for their favorite club. 

A family appears as a result of the belief that two particular people will be able to bear the sight of each other for many years.

Many people believe that the sole purpose of any business is to make profits. I see many fundamental problems here, and two of them are the following:

1. If a company hasn’t been created for a particular short-term mission (such as an Olympic Games organizing committee, for instance), it would be reasonable to task it to live and develop for many years. Since self-preservation is a natural trait for any system, it has some natural features that will help it address the challenge. 

2. When a founder or a CEO claims that their company’s primary purpose is to earn long-term profit – and nothing else – they express the interests of only one group of the people, shareholders. But any system’s strength, resilience, and prosperity directly depend on the quality of all the relations (exchanges) between it and other systems and also within it itself. After all, when we label something as “primary,” everything else naturally becomes at least “secondary.” 

We’ll talk more about net profit as a purpose in the following chapters. But here, I would like to emphasize that the essence of any organization and its primary activity is exchange. 

The employees and founders of any company interact with customers, suppliers, banks, investors, subcontractors, and each other. And if the efficiency of any of these transactions declines, it may destroy it. 

Therefore, we may assume that:

A business company’s long-term purpose is efficient self-reproduction. Here are some examples of such self-reproductions:

• Samsung started as a grocery business.

• Nokia was a paper mill.

• American Express delivered mail.

• Western Union offered telegrams.

• Shell sold decorative seashells.

An enterprise can implement this strategy by constantly maintaining and developing the efficiency of numerous exchange transactions, both within the organization itself and with other companies and institutions.

What does the company exchange with its customers?

A company performs hundreds of exchange interactions daily, but some are special. First and foremost, a business enterprise is created and works for the customers because they are the only source of its income. 

If a business loses its customers, it loses itself. The quality of internal communications can’t save an organization if its external interactions degrade.

There is a common belief that a company exchanges value for money. And though I don’t think it is incorrect, I believe it is incomplete. Clients and an organization want more from each other. 

We will discuss it in some subsequent chapters. But for now, I would like to make a couple of conclusions:

1. As Peter Drucker said many years ago, “The purpose of a business is to create a customer.” Since a commercial enterprise needs to exchange the value it creates for something meaningful to it (money, but not only money), it needs to convince enough people to start believing they are its customers. 

2. Founders and executives of any for-profit organization have to build a team, and not in the sense used in leadership theories. A team isn’t a bunch of highly motivated people. A team is a group of people willing, able, and motivated to participate in an efficient exchange. 

We will delve into the details of these ideas in the next chapters. 

---

This article is an excerpt from my upcoming book on strategic thinking. All my subscribers will get it for free. Stay tuned!