1. No category

Why Do Firms Differ, and How Does it Matter?
Author(s): Richard R. Nelson
Source: Strategic Management Journal, Vol. 12, Special Issue: Fundamental Research Issues in
Strategy and Economics, (Winter, 1991), pp. 61-74
Published by: John Wiley & Sons
Stable URL: http://www.jstor.org/stable/2486434
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Strategic Managernemnt Journlall, Vol. 12, 61-74 (199.1)
WHY DO FIRMSDIFFER,AND HOW DOES IT
MATTER?
RICHARD R. NELSON
School of International and Public Affairs, Columbia University, New York,U.S.A.
Ini virtu?allv
all economnicanalyses, differences amiongfirmnsitnthlesam7Zelinie of business are
repressed, or assumzedto reflect differeices in the mtiarketenvironments that t-le face. In
contrast, for stludenits of biusitness management an(d strategy, firn dlifferences are at hle hleart
of thteir inquiry. This paper explores the reasvonis behlinid this stlark difference in viewpoint.
It argues thzat economnists Leall', oluglt to recognize firm differenices explicitly.
INTRODUCTION
This paper is concerned with the sources aind
siginificance of interfirm differences. from the
viewpoiint of an economist. How might an
econonmist'sperspective on this differ, say, from
that of a student of business management'? I
would argue that the most important differeince
is that economists tend to see firms as players in
a multi actor economic game, and their interest
is in the game and its outcomes, rather thain in
the particular play or performance of individual
firms. That is, economists are interested in
how the automobile industry works, and its
performanice in various diimensioins, and not in
General Motors or Toyota per se, but only insofar
as the particuLlaritiesof these firms influence the
industry more broadlly. This perspective is qLuite
different, it seems to me, thcanthat of a student
of management who is concerned with the
behavicorand perfornance of individual firms in
their own right.
My objective in this essay is to make a strong
case for the econonmic sitnificance, in the sense
above, of discretioinary firm differences. My
Key wiords: Firms,innovation,evoluition,competition
4$07.00
01.43-2(095/91./100061-1
? 1991 by John Wiley & SoIns,Lti.
position certainly has been influenced by the
work of scholars of firm managemenit who have
persuasively documented significant differences
among, firms in anl industry in behavior and
perform-lance,and proposed that these differences
largelv reflect differenit choices made by firms.
However, because the interests of those authors
have differed from the interests of economists,
almost no attention has been paid to the industry
or economy wide implications of such different
choices. Thus while the managemenit literature
provides a start for myvargument, there is much
that I need to build myself, in cooperation with
like thinking friends.
It should be recognized that. in trying to
make a case for the economic significance of
discretionary firm differences, I and my coarguers are fighting against a strong tide in
economics, particularly in theoretical economics,
that downplays or even denies the importanice of
such differences. The argument in economics is
not that firms are all alike; economists recogniize
that computer firnmsdiffer from textile firms, and
in both industries, German firms almost certainly
differ from Taiwanese firms. Rather, the positioni
is that the differenices aren't discretionary, but
rather reflect differenices in the contexts in which
firms operate: computei designi an(d productioin
62
R. R. Nelsonl
techniology and the computer market differ from
the situation in textiles. Factor prices and
availalbilities anid product markets in Germany
differ from those in Taiwani. Thus, firms are
forced to be different.
The tendency to ignore discretionary firm
differences in part reflects that economists are
not interested in behavior and performanice
at the level of firms, but rather in broader
aggregates-industry or econiomy wide performance. It reflects, as well, somie strong theoretical
views held by most main line economists about
what economic activity is all about, and about
the role and nature of firms in economic activity.
My argument that discretionary firm differences
within an industry exist and do matter significantly
is plart and parcel of my broader argumenit that
neoclassical economic theory is badly limited.
Let me flag here, for future elaboration, what
I do and don't mean by the term 'discretionary'.
I do mean to imply a certain looseness of
constraints, both in the short and long run, that
gives room so that firms that differ in certain
important respects can be viable in the same
economic environment. I do mean that to some
extent these differences are the result of different
strategies that are used to guide decision making
at various levels in firms. On the other hand. I
do not meani thalt what a firm is and does is
under the tight control of high level decision
makers. And I certainly do not mean that what
makes a firm strong or weak at any time is well
understood, even within the firms themselves,
although there well may be an articulated point
of view on this. More on these matters later.
The remainder of this essay is structuled as
follows. In the following section I shall flesh out
my above remarks about the very significant
differences in perspective between scholars
trained or inclined to see discretionary firm level
variiables as importaint, and econiomists who see
firm differenices as determinied largely by more
aggregative econlomic forces. Then I focus on the
basic theoretical preconceptions of neoclassical
economic theory that lead to this positioin, and
which make it very difficult to move any
distaince fIromit. I follow with anI exploratioIn of
evolutionary economic theory which provides a
very different view of what economic activity is
all about and within which firm differences are
central. and go on to consider the role of firm
dlifferenlces inl the evolutionlof technlologyanId
modles of organizing economic activity. Finally,
a reprise.
THE DIVERGENT LITERATURES
'COMPETITIVENESS'
ON
The differences in perspective can be seen clearly
in the divergent literatures concerned with what
now popularly is called the 'competitiveness'
issue-the recent weakness of Americani firms,
particularly i'is-i-vis Japanese ones, in industries
where not so loing ago U.S. firms were doing
very well. There is a sharp split between studies
that focus on the differences between American
and Japanese firms, and studies by ecoinomists
that are focused oIn more aggregated variablbles.
Madclein America. a publication put out in the
summer of 1989 by the MIT Commission on
Industrial Productivity, is a good example, and
summary, of the former line of research. While
the staff of the Commission uncdertookconisiderable research on its own, the multifaceted
diagnosis it presenlts is quite consistent with that
presented in a number of prior studies concerned
with why Americaln firms have been losing out.
American firms are hooked oIn old style mass
productioin methods. in an era where flexible
miianufacturinghas become a(more effective mode
of operation. Similarly, our hierarchical mode
of organization aind custom of specifying job
assignments narrowly. while perhaps appropriate
in an earlier era, now are sources of weakiness.
Research and product design and development
stand too distant from manufacturing and production engineering; thus it takes American
companiies much longer than the Japanese to
go from conception to production, and our
production costs aind quality often are inferior.
American firms are myopic, both in the sense of
their failure to look at world rather than national
markets, and in the sense that time horizons are
short. The latter partly has to do with the high
cost of capital in the United States, but also with
the way our managers think and the tools of
analysis they are taught in business schlools.
Compared xxith the Japanese aind Germains, our
blue collar work force comes to the work place
poorly trained by the public education system.
This is compoundciedby a weaknless of in-conmpaiy
traininig aind retrainiing programs. Together, this
pUts Americain firms at a significanitdisadvaniitage
WhlyxDo Firmns DitTr?
regarding labor skills. Americain firms are Icss
willii-ngto cooperate with each other on matters
where cooperation would yield pay-off, partly
because of the attitudes of managers, but also
partly because governmeint looks on cooperation
with suspicioIn or hostility. More genercally,
busiiness aind government seldom work together
and often are at odds.
Others might summarize the central argumeints
somewhat differently, but I believe the above
does represent fairly the kinds of propositions
abouLt firm differences made in the report. The
arguLmentsare plausible and provocative, and
may provide important guidance to American
managemeint, and for public policy.
However, there are two important issues oine
of the study.
can raise about the COInCluSiOnIS
First, oine cainquestioin the coinfideinceone shIould
plAce in the cauLsalcoininectioinsasserted ill studies
like Made in Amner-ica. Second, oine also cain
quLestionwhether the variables treated there as
basic really are so, as contrasted with themselves
being determined by broader forces.
At this stage I want only to flag the former
issuLe. However, there really is a big quLestion
abouLtjulSt what Japainese firImisin the aultomobile
induLstry, or the semiconduLctor induLstry, are
doing that lies behiind their evideint stroinger
performaince, in varioUs dimensioins, than American or EuLropeanfirms. Later in this essay I
shall focuLs On1this uincertaiinty,aind somiieof its
implications.
For the present I want to focuLs On1the latter
questioin, becaulse it gets sharply into view the
contrast betweeni analyses like Madlein Amiericta
and the standard views of economiiistsabouLt the
determiiinaintsof 'competitiveiness'. There is soimie
of miiacro or
diSCuISSiOnl inl Maide in America
natioinal level variiables. like the exchainge rate.
the cost of capital. or more generally the system
of corporate finance, the effectiveness of the
public education system, government policies,
etc. However,
this is Inot where the focuIs is. It
is firImilevel variables that receive the top billinig,
and it is presuImiedthat these are discretioinarv
to a coinsiderable degree. In coIntrast, the
incliinatioin of ecoinomists
iS to fOCLISOn1im1acro,
or enviroinImlenitallevel variables, aind to play
dowIn or ignore the role of firm discretioin.
The saimie year that Mtade in Amner-icawals
puLblished,three ecoinoImiists,BaL,Il1 , Blackmain,
aind Wolff, puLblished their interpretatioii aind
63
diagnosis of lagging American productivity growth
rates, and the convergeince of productivity and
liviing staindards among the major industrial
natiois. The focuLsof Pr-OdUCtil'itV (11(1 Atnerijcan
LeadershIijp:The Lonig View (1989) is usually at
the level of the natioinaleconomy, and sometimes
at the level of the sector or industry. The
variables considered are niatioinal savings and
investmeint rates, investmeints in educatioin, processes through which techiology
flows from
creators to followers, and the like. There is
scarcely a word about discretionary behavior at
the level of firms.
It is stroingly temptiing, aind I thliink right
headed, to propose that each of the studies has
described part of the elephaint. The argumeint in
the MIl' study, that mainy of the difficulties
American firms are haviing are self inflicted, is
quite persuLasive.At the same time the economist's propositioni that to a considerable extent
firms are molded by the broader economic
coinditioinssLrroulindiing
tlhem, is compelliig. Whlat
seeImls sorely ineeded is aii ainalysis that sees both
of these matters, in a cohereint way.
While the aulthors of MAlidein Amnericanever
qLlite got inlto seriOLus analyses of enviroinimlenital
variables, it does not seem difficuLlt to auLgment
an anialysisthat starts at the firm level to consider
the eniviroinmileints
that firms are in. Two new
books are exemplary
in that they do juISt
this. Both recoginize explicitly that natioinal or
variables strongly inflLeince firm
enviroinimleintal
strategy and struLctuLre,
aind that firms have
considerable range of choice about these variables. Chandler's Scale and S(cop)e( 1990) describes
in coinsiderable depth how the differeint ecoinoImlic
coinditioins,inlStitUtiOlnS,aindcultures olf the U.S.,
Great Britain, and Germany. molded the nature
of the moderin manlulfactuLriing
firms that grew LIp
in these diffeIeint COLulntriesin the first decade
of the twentieth cenltury, and inflLeniced the
iiidustries in which the natioins developed special
streingth. I-lowever, there is inothiiig deteriminiistic
abouLtChanidler'sdescription of how the einviroinmiienitshapes firmiisanid iinfluenicestheir performaiice.
Porter's T1ueConipetitii'e Ad antage of Ntatio,is
(1990) presents a similar perspective in which
environmental inflLenices matter greatly, buLtthe
firms halve a consideralble rainge of freedoimi
regzardinigwhether. or julSt hOW. they will take
advaintage
of' the opportuLnities
the einviroinmlleInt
64
R. R. Nelsoni
affords. Iiideed both aulthors see the firms as to
some extent imioldiing,
their own environmenit as,
foi- exampile, in calling forth significanit pLublic
in educationi in the U.S. andt Gerinivestimienits
many.
Chandler is ani historiani bv trainina. Porter's
formal trainiing is in econoinics, but his career
hias bcci at a Businicss School and his research
focus has beeni onl management. It should be
recognized tilat thc orientation of these autthors
to 'firms' is quite differient thlainthat in Imlost of
econioinics. Indeed it is appareint th(lt for bothi
authors the center of aItten1tioinis the firms, aind
the cenltral qluestionls are 'how are they doinig'
and 'what makes themi strony or weak'. Thev
arie drawn to wider economic mechanisms aind
institUtion1sin the search for ansIwcrs to thesc
qUCStiOlS.
Now firm performance clearly is
related to broader econlomic performance,
buLt I
hlave argucd above they are Inotthe same thing.
Since ncithier Chandler nor Porter presents at
widceproblem,
coherent statemeint of the econ(omyllv
their analyses stop considerably short of providing
ain answer that would satisfy econlomllists to the
qucstion of 'why do firms differ aind how does
it matter'?'
FIRMS IN NEOCLASSICAL ECONOMIC
THEORY
To get at that qucstion fromian cconiomnist's
perspective, onle nlecds to start withi a biroad
understanding of wvhat economic activity is all
about, aind what constitUtes
good economic
performance or poor. Neoclassical theory, Nwhich
provides the cuL-rrietconventional wisdom on
these matters for econ-omiiists,militates against
paying attention to firml difftereices as an
important variable affecting economiiic plerformamicefor sevcral reasons.
The first is the perception o.f what econlomilic
activity is all about. Sinice the formlulationi of
genieral equilibriutmtheory almost a cenlturI ago,
the focus has largely tbcen on how well an
ecoinomyivallocates resources, giveni preferences
aind technologics. This position is far from
un11iversal.Empirically oricented econlomilistshiavc
been interested in things likc techinical chilaigc
aiid, recenltly, theIe has beeni a rash of work on
pLut forth a strong genieral theoretical challenige
to the effect that iniovation ought to be the
ceniter of econiomiiicainalysis. But it is hard to
overestimate the degree to which economists
continue to see the central economic problem as
thiat of meetinig preferences as Nwellas possible.
givcie r-esourccs, and prevailing tcchnilologies aiid
institutionis. Thlis perspective implies a rather
limiiitedview of whlat firms are about.
SccoInd, partly rctlcctinig thiis gencral oricietation, but nlot the only possible formulation of
firmils' dccisioIn
conlsistcnlt
proCesses
with
it,
to a theory of firm
behavior that posited that firimlsface givenI anid
knownvchoice sets (constrained for examplle by
aivailable techlnologies) aind hlave no difficulty in
choosingythe action within thosc sets that is the
best *forthen, givenI their objectives (genierally
assumed to be as much profit as possible). Thus
the 'cconomliicproblemt-'is basically about getting
private incentives right, nlot about identifying the
best things to be doing, wllich is assuieieCdto be
no problem.
The perspective on the economnicproblem aind
the theory of firmnbelhavior described above do
nlot invite atcareful inquiry inlto wNihat
goes onl ill
firms. However, the traditioni in economnics of
treatina firimisas black boxes.' was not inevitable
either. The fact that until recenitly at least, this
has becen the normiicleserves recoginitioni in its
own right.
The overall rcsult is a vicew?
that wNhatfirms do
is dcteriniiied bv the coniditionlsthcy face, aiid
(possibly) by certain1 uniique attributes (sa y a
choice location, or a proprietary techniologv) they
possess. Firms facingl diffcrcnt markets will
behave and perform differenitly, but if the market
conditionis were revcrsed so would be firm
behlaviors. Whcere the theory admilits )roduct
differenitiatioin,cdifferenitfirms will produce differCent prodlucts buti in the thcoreticail literature,
any firm can clloose alny nliche. Tlhus there
aeC fiirImldiffcrentccs bLut therc is n1o cssential
econlomnists becamiie
wCiedded
alutoinomoius
quaIlity
to them.
The theoreticail oricntation
in economics
thus
leans stroniglv against the proposition that dlismaittcr. Of coursc
crctionary firm differlccs
economiiistsstudyinigempilricalor policy questions
haivc
a proclivity
to wander
aNwaiyfroim the tethers
of theory wheni the facts of the maltter compel
ecoInoImlic itnstitutiOIlS and hlow aiid why these
themn to do so. ThuLISill doinig indLustry StLidics,
chainge over time. SchlumpeItersomel timel algo economists often hlave beeni forced to recoanize,
WIix' Do Firnm.s DifJer?
evenI highliglt, firm differenices, anld diifferenices
that
matter.
Onie
cannot
studv
the
COml1)Uter
iiidustry senIsitively without paying attenItioInto
the peculiarities of IBM. The recenit history of
the alutoImnobile iniduStryV cainiiot be understood
without understandinig Tovoto anid G.M. But as
the B[aunol, Blackman, aind Wolff book testifies,
the theoretical preconceptions shared by most
econiomuistslead themnto ignore firm differenices,
unlCss compelled to attend to them.
Several recenit developments in theoretical
woulcd appear to bc changing this
CcoInoImlics
somcwhat. Thlus the saime summlnerthat Mad(e
anid Prol uct1iti(itl 1
A1etrica.
Americ.an
Leadlersh-ii) werc puLiblislhed,the long awaited
Handlbook of In(lustrial Organiz-ation (1'989) was
ill
also. Included in the chapters were several that
survey theoretical wxorkthat docs recog,nize firm
differenices.
There are, first of all, the essays by Ordovcr
aindSalonier, and by Gilbert, which aiecexprcssly
concerined wvith theoretical wvork that aimnsto
explain firm differeinces, or at least some coInsequelnCces of firml diffciernces. In the mocdels
in the
reported, therc usually is ani inicuml?bent
indLustry,
or in the
prodLuCtioll
of
a
plarticular
product, wlho has ccrtaini advantages over firms
who might thintk of joininig the actionl. Tlie
prcscncc of thcsc advaintatges,or threats of actioin
should a ncwcomicr try to encroach, is enough
to miiakethe advantages durable. Gilbeit deals
more generally wvithmodcls wvhercthere are costs
to firms of changing their mrarket positionis.
However, with few exceptions the models sLirveved in these chapters do not consider in much
depth or detail original sources of firm differ-enices.
Reinganumi's chapter, which surveys modern
ncoclassical models of tcchlniological inniovation,
is focused on Nwhat certainly is ain important
souLrce of suclh differienices-industrial R&D aind
the innovation R&D makes possible. In the
models she surveys, a firm's teclhniology may
diffcr from a riival's because of the lulck of an
R&D draw, witlh thc advantages made durable
crve
bv patent protection or sLbscelucentIearningU
advantages. Givein an initial differencc, firms
may face dlifferenit inlccntives and thluLSfinid
differenit courscs of actioin Imlost profitalble.
Howevcr, while thcsc miiodels may rationalize
the observaltioin that firimls pOSSCSSdiffcrciet
tecChiologics, the aIIswers as to why certainily
arein't vcry deelp. And one comiecs awvay from
65
thCm, or at least I c(o1 with very little theoretical
insitght iiito whiy IBM is different, or Fovota. and
so wlhat.
Tlecrc has bcenI a certaini amiount of reccint
theoretical wvork bv cconiomiiists that looks insidc
of firms, at their structure, aini thus seemiis to
give promiise of a thcorctical windowv for a deeper
look inlto why firms diffcr. T'he chaptcrs by
Holmstromni and Tirole, aind by Williamsoni, report
w ork. The questionis explored in the
on1 SuLChI
suLrvcved work incluidc what determ-inles, througl
mlake or buLydecisioIs, thlie boundarics ot a firm,
how it is organized, the relative bargaining power
of owniers, managers, aind workers. Ctc. 3ut.
again, the ultimate reason lfor why firms diffcr
is rather superficial. Implicitly they dliffer beCalLuSC
SOineCchiance evenIt, oI soI1e initial coInditioIn
made dliffer-ent choices lprofitable.
In my view, recent theoretical developments
in nleoclassical thcory have looseniedc two of the
thcoretical conlstrainlts making it ditficult if not
impossible to see firm clifferences as important.
Econiomiiists are t ettiiig away from the thcoretical
tethers of static gcieeral cquilibriumin thecory and
are treiatinig techiologyv as a variable Inot a given.
And they are tryinig to look inlsidle the blatck box
of the firm. Hoevcer,
for the most part thlerc
has beeC failure
to get away froimi the third
at firim's choice sets as obviotis to
tether-takinig
it and the best choicc similarly clear and obv ious.
And because of that, the reasonis for firm
diftCrenIces, in techinology or organiizatioin, are
ultimiately cIriveni back to differenices in initial
conditions, or to the luck of a drlaw, which mly
make clhoicc sets differenit. Given the samiC
conditionis. all firis will do the saiic thing.
As I inidicated abIove, I ccrtainily do( not want
to play dowin the role of environment
in
and molding wvhat firms do. And I
constraining
do not waiit to play down the role of chlaince in
aniid (luLrable SUbseqlUent ditfercences
firmis. BLut ill my view the modiels inost
caLlSillng large
among
economists keelp playing with do nlot efiectively
come to grips wvithl what lics bchlinid the firill
differcnces highllighlted in Madle in A1inierict, or
the implications of those ditferences.
The reason. I waint to airgue. is thait whlile the
surveyed work purports to be conceriied with
'ininiovaitionl', wvith the introdLuctioll of som1lethling
niew to the econlomilyin the form-iof newvtechniiology
or a new way of organizing at firm, the} models
in
(lueStiOll
complctcly
miiiss what
is
inlvolved
66
R. R. Nelson
in ininovation. ThuIs nowhlerc in the models
describes is theC fulindamiienltalLlnccrRcingalnlulim
taintv, the diffcrcices of opinion, the diffcrcices
inl perceptions aboLut thlC fcasible paths, that tend
to stand oLut in ainy detailed stuLdy of techniical
movcd to adapt a vcry diffcrenit view of the
cconomiic problem. Withlinl this view, whlichl I
will call CvoluLtionary,firm differences play ani
essential rolc.
advance, even recognized, mutchless analyzed in
aIIy detail. Williaimlsonl'sowIn work on the INNOVATION AND FIRMS IN
determiniiats of firm organizationi hias beenI muLChl EVOLUTIONARY THEORY
illuLenlced by Chlanidlcr, aiid hiC dedicatcs a
certaiii space inlhis chapter to a transactions cost The models of techniological ininovationi suirveyed
intcrprctation of Chliandler's accoLunt of the rise by ReinganullmIslihow econlomilists initcrcstcd in the
theory of the firm struLggling to brcak away from
of the moderin corporation. BuLt nowhlere docs
he recognize explicitly the hlaltirig, trial aind the orientationi of gencral equlilibriulm theory.
feedback, ofteni reactive rather thlia thoLughlt- whlichlsees the economuic problem as allocatinlg
resoLurcesefficienitly, given techniologics. So too
throLughl, process that led to the new waxs of
the new literatuLre on organizationial ininovationi.
organizinig that Chliadler describes.
PuLtcompactly, the treatmeet otf techniological Here economuistssecim to bc basically interested
aindorganizationial ininovationi'described in these in hiow new ways of doing things-technologics,
chapters simply takes the given 'choice set' aid and ways of organizinig aindgoverninig work-arc
mlaximiiizinlg over it' prcsuLmption1s of staindard introduLced,winnowed, aindwhere provell ulseful,
neoclassical theory aind applies themn to 'ininio- spread, as contrasted with hiow familiar tcchniolvation.' That is, ininovationiis treated as basically ogies aind organizationial modes are employed.
costs may need Maniy years ago ScuILImpeterinsisted that the
like ainyother choice. Inivestimienit
to be incuirred bcfore the new prodLlct or focuLs of general equlilibriulm theory was oni
organizational design is ready to be employed, quLestions thlat, over the lonig ruIn, were of minior
buLtinl neoclassical thcory this is truLeof other importance compared with the quLestion of hIOW
calpital goods likc a bridge or a miacline. Thlere Capitalist economuies develop, screen, aind sclecmay be highl risks involved in doing somethinig tivelv adopt niew aindbetter ways of doing thlinigs.
nlCw,in a forimlalsCensCof that tcrm., buLtthliSis Many of the writcrs suirvcyed by RcingaullmLcall
thciemselvCs'IICO SClILImpctcrians'.
trcatcd as statistical Llnccrtainity with the correct
However, the dynaimlicprocesscs SchuLIIIpetcr
probability distribuLtion knowin to all as is standard
by the nlCwnicoclassical
in micro cconoimic thcory. The ininovation miav described arc not captuLred
yicld a nlCw latenit or mailifest puLblic good, aind models. As hiCpLItit 'in dcalinig with Capitalism,
this raiscs theorctical problemns of 'market faliluLrc yoLu arc dcaling with aln CVolItioniaryprocess'.
Hc clcarly hladin minid a conitcxt in whlichlpcoplc,
buLtthliS is ino diffcrcit thlia invcstimncit in, sav
aind organizationis, hlad q4litc diffcrenit views about
whlat kinds of ininlovationls woLld bec possiblc, aind
dcsirablc, aind woLld lax their bets diffcrcitly.
away fromn the assuImption1s of clear aind obviOLuS Thlerc arc winniers aind losers in SchILumpetcrIs
choice sets aind correct uLnderstaindinig of the
'process of crcativc destrLction, aind thlCsC arc
not detcrmincd mainily in cx-antc calcuIlationi, buLt
variOLuS choices?
Docs
conlscqueCnlCCS of making
it rclaly makc sCensCto work with a imodel that
largely in cx-post actuLal conltCst.
In hlis 1911 Theony of Economic Dev eloptnent,
prcsLII`1s that the transistor, or the M form of
organizatioii, werc always possible ChlOiCCSoLut Schumpctcr saw the key ininiovativc actors as
.cntreprcnelCrs. His 'firms' werc basically the
therc aind kinowin to all rclevaint pIartiCs, aind that
thex simply were choseni aind thuIs camiec inlto vessCls ulsed by cntrepreneuLrs, aind other decision
makers forced to adapt to the chnliagcswrOLughlt
existceicc aiid Llse wlhCI coniditionls miladc profitunder. By
Lli
able the rclevaint investmiienlts? Docs the asSuLImp- by entreprcncurial ininovators or to
the timc (1942) hlCwrotc Capitalism, Socialismti,
tion that 'actors maximuizc' help onC to ainalyzc
antidDemoctacy, Schumlpetcr'sview of thc SOurces
SitUationls wherc some actors arc not even awarc
of ininovationihad chliaged, or rather it mighltbe
of a possibility beinig considered by others'?
pLiblic haclthl.
BuLt whlat if cffcctivc trcatmncit of ininovationi
(aind perhapls other activitics) requlires brcakinig
If one
reflects
on
thcse
iSSuLCS, OnIC may
be
bcttcr to say that therc hladbeen a transformation
Why Do Firms Differ?
67
of the principal sources of ininlovatioin froImiani
ThC coIncCptof stratcgy in this theory of the
earlier era, aindScilumilpeter'sviews reflected this firm is basically what b)usiness histori'anis and
transformation.
Moderni firms. equipped With
scholars of management mrean,as contrastedi Nwith
research aind developmenit laboratories, became gyamic thiCorists. It coniniotes a set of broad
the cenitral innovative actors in Schumpetcr's commlalitmilenits
made by a firmi that dcfinle and
theory. The chiapter by Coheln and Lcvini in the rationalize its objcntives and how it intenids to
Handblbook admirably surveys the wide rainge of pursue thern. SomCeof this maxybe writteni cowi,
empirical research that hlas been inspired by soIm1emav n1otbe but is in the managyemient
SChlumpeter,partiCuIlailvy
the r-esearchlconicer-necd CUItUrCOf the firmn.Many ecoInomiistswVouldbc
withlthe relationlshlipsam1lon1g
inntlovatioin,firm sizC wonit to propose thai1tthe strategy reprcsenits a
and other characteristics, aind market structure. firmlssolution of its profit maximization problem,
In our book. An Ev olutionllarv Theory of but this seems misconiceived to me. In the first
Econzomiiic Chliange (1982), Winter aind I spent place, the commitmiienitscontained in a strategy
quite a bit of space presentiilg a 'thleoIryof the ofteni are as miuclh a miatter of faith of top
firm' whiclh is consistenit wvith,and motivates, a management, aiId comilpaiy tradition, as they are
Schlilupeteriain or evolutionary theoretic view of of cailculationi. Seconid, firim strategies scldoimi
econoimic process aind econiomic change. Our detet-rminiethe details of firmiactions. buIt USual1ly
fOrIlalUltion drew significaiitly on Simoni (1957),
at most the broad contours. Ihird. and of vital
on Cvert anid March (1963). ainidon Penirose importance, there is no reason to argue a priori
('1959), as well aIsoni Sclhunipeter. With the ViSiOil that these commitimienitsare in fact optimal or
of hinidsigit, it is clear that OLurwritinigtheiniwas even not self destructive. Ift it is pIroposed
handicapped by inisufficient study of the writinigs that competitioni and selectioni force suIrvivii1g
of Chandler, particularly hiis Scale (iaid Scope strategics to be relatively profitable, this should
(1966).
bc a thCeorcimInot an. assuimlptioin.
Sincc the time we wrote, there hlave beei a
Tlec coIncCptof firm structulC in this literature
nuilmberof theoretical papers oni firm calpabilities also is in the spirit of Chandler, as is the
aind behavior thait draw botlih on Chandler preSuLImptionl
that strategy teinds to definie a
andi on our carly formulationi. and which add desired firmnstructure in a general way. bLutnot
significantly
to the picture.
Papers
bvy Teccc
(1980, 1982), Rulmnelt(1984), Cohen aind ILevinlthall (1989), Dosi, Teece and Winter (1989),
Prahlaladaind Hamiiel(1990). Pavitt (1987. 199().
Cantwvell(1989. 1990). Kogut (1987). Henderson
(1990), Burgelman aind Rosenibloom ( 1989),
Langlois (1991), and Lazonick (1990), aillpresent
a simlilar or at least a conformable theoretical
the details.
Structure
involves
how a firmi is
orgainiized anid governed, and how decisions
actually are iadce anid carried out, anid thus
largely determines what it actually does, given
the broad stratcgy. A firm whose strategy calls
for beinig a techniological leader that docs not
hiave a sizeable R&D OperatiOn,or whose R&D
director has little iniputinltofirm decisioni making,
vtiew\, alithough withl differenlces
in stress. The
clearl h, las a structure out of tuine with its
Irecenit paper by Teece. Pisano. and Shuen (1990)
stratecv. However, the highi level strate \ maN
provides ain overview of milany of these works,
be mUte about links betweeni its R&D lab anid
aind I believe correctly states that the commnoni universities, whethier to have a special biotech
eleiiiemet is a focus oll firm specific dyilamic
group. etc.
capabilities.
Chalnigein strategy may requii-e a chanige in
as well as a change in articulaitioin;
This emerging theorv of dynamic firm capabiliimlanlagemenit
ties can be presenited in differenit ways. Herc it indleed for the latter to be serious may re(Luire
is convenienit to focus on three different if the former. However, withini this theory of the
stronglyv relatec features of a firm that must be firm structure is far moi-e difficult to chancre
recognizecd if one is to dlescribe it adequately: its effectively thlanis strategy. Wlhilechanglinaf'ormal
organization, or at least the orgalnizationiclhart,
strategy, its structure, and its core capabilities.
While each has a certaiin imalleability, major
is easy, and selloffs anid buyups are possible,
in at least
the latter
two
involve
changes
significantly changing the way a fiirm actually
considerable cost. Thus they define a relatively
goes about makinigoperating level decisionis and
and costly to
ctarriesthem out is time coinsunLiming
stable firm-lcharacter.
68
R. R. Nelsoni
clo. OI- riathiei-rwhile it maly not be too clifficult of the clecisioni making pi-ocesses, the liniks
to clesti-oy
van o01 structui-e or its effectiveness, between R&D a(ici pI-ocICtioIna(ici mai-ketinig,
it is a major task to get ai new structui-e in shaipe etc. This meains that at ainy time thei-e will be
anic opei-atinig smoothly. TLus to the exteint that certain kincis of R&D pI-Ojectsthat a fii-irm
caii
a majoi- chalinge in sti-ategy calls for a major cai-i-yout with some conficleincea(iic success, a(ic
chalingein structure, effecting the neecdecdchalinges a wicle rianigeof othei- pi-ojects thait, while otheimay take a long time.
fii-ms might to able to clo them, this pai-ticutlaiThe i-easoin for- clhaniginigstrIctUre, of couir-se. fii-m caii Inot, with iny reail conficleince.
the thiigs a
is to chanige, possibly to atugimieint.
R&D capabilities may be the leac1 ones in
firm is capable of cloinig well. Whiclhbi-inigsthe clefininig the clynamic capabilities of a fii-irm.
CliSCUSSiOnlto the concept of core capabilities.
Hlowever, in a well tuniecdfirm, its pi-ociuctioin,
Sti-ategy aiici sti-uctui-e call foi-th alnii molcd pI-ocuI-emeint,mairketiniganicdlegal oi-ganiizatioins
oi-ganiizatioinal capabilities, btut whait ainoi-gaiiiz- must haive built inito them the capabilities to
ation caiiclo well hlas somethilng of a life of its sUppoI-t a(iic complemeint the new pI-OCIUct a(ic
owni.
pI-ocess techiniologies emaniatiingfI-om R&D. In
Wintei- a(iic I haive pi-oposec( that well woi-king Teece's terms, the fii-m's capabilities must inclule
fii-irms
caii be uticlei-stooc( in terms of aI hiei-ai-chiy conti-ol over or access to the compleimieintai-y
of pi-acticec(oi-ganiizatioinali-outiles, whichiclefinie assets ai(ic activities neecdecdto einable it to pI-ofit
loweI- ordcleioi-ganiizatioinalskills, a(iic how these from ininovatioi. AnCIin aii envii-oiinmeint of
ai-e cooi-ciiniatecd,aiici higlhei- oi-crei- clecisioin Schumpetei-ianicompetitioin, this imieansthe capaprocecluI-es foi- choosiing whalt is to be cloine at bilitv to ininovate, ai(ic to make that ininovatioi
loweI- levels. The notioin of aI hiei-ai-chiy of pi-ofitable, again aiici
a agaill.
The concept of oi-ganiizatioinalcapabilities, ainc
oi-ganiizatioinali-outiniesis the key btuilclinigblock
oUIundileiconcept of core oi-ganiizatioinal capabili- the thieorYthat Wiintei-a(ici I pI-oposeCIas to what
ties. At ainy time the pi-acticec(routinies that aire cletei-minies aindclimits them, cloes Inot clii-ectlv
btuilt inito an oi-ganiizatioin clefiine a set of thiings imply ainy cohei-eincy to the set of thiniigsa fii-irm
the oi-ganiizatioinis capable of cloinigconficleintly. canl do. Hlowever, Dosi et ail. (1989) airgue thlat
If the loweI- orclei- routinies aire Inot thei-e for in effective fii-ms, thei-e is a certaini cohei-eicy.
cloinig vai-ioustasks, or if they aire btut thei-e is Tlhei-ewoulcl appeai- to be severail reasois. The
Ino priacticec(higlhei- oi-clei- routinie foi- inivokinig ones sti-essec(by Dosi et al. basically aireassociatec(
them in the pai-ticutlai-combinaitioin neeclecl to with localizeci leai-inig in a (Ilynamiccointext, aniic
accomplishi a pai-ticutlai-job, thein the capability follow oInthe ai-gumeintsthat Winitei-aiici I malde
a
to clo that job lies outsicle the oi-ganiizatioi'ns some time ago thait, to be uiclei- cotol,
routinie neecis to be pi-acticecl. Fii-ms neecl to
extant coi-e capabilities.
The clevelopinigtheoi-y of clyniamicfii-mcapabili- leai-into get goocd at certain kincis of ininovatioin,
aiici at the thinigs ineeciecito take advantage of
ties I am CliSCLSSillg hei-e startsftiromi the premise
that, in the inctlusti-iesof initerest to the authors, these, a(iic this requii-es conceinti-atioinor at least
oI- evolutiOIaII-y colhei-eircyv rather than i-aniclom spi-eacinig of
fii-ms ai-e in a SChuIlmpetei-eani
context. Simply pi-ociticig a givein set of pi-ociucts effoi-ts. Fui-thiei-rin many technlologies oine ininiowith a given set of pI-ocesses well will Inoteniiable vation poinits moi-e or less clii-ectly to a set of
a firm to sui-vive foi- loing. To be successful foi- followinig oines, aniidthe leai-inig aiici complemenainy leingtlhof time a fii-m must ininovate. The tary sti-eingths clevelopecd in the foi-mei- effoi-t
capabilities oInwhiichithis gi-oup of schiolairsfocus pI-ovide a base for the next i-outil.
aire capabilities foi- ininovatioin ai(ic to take
But I thiniik it also is the case that to be
econoimiica(clvantageof ininovatioi.
effective a fii-m neecis a reaisoinably cohei-eint
IIninClusti-ies whei-e technlological innovation is sti-ategy, that definies aindclegitimatizes, at least
impoi-tanit, a firimineeCIsa set of coi-e capabilities
loosely, the way the fii-m is oi-gaiiizeci aiici
in R&D. These capabilities will be clefiinec goverined, einables it to see organizatiolial gaps
anici coinsti-ainieciby the skills, experieince, aiici or ainolalies given the straitegy, aindcsets the
kinowleclgeof the persoiiinel in the R&D clepairt- gi-orii)c for bai-gaininigabout the resoui-ce neecis
meint, the niatui-e of the extanit teams aindc for the coi-e capabilities a fii-m must haive to take
proce(lur-es for- forminlg new ones, the chara-cter- its next step foi-wari-c. Abseint a reaisoinably
WI4lzx
1)o Firms Dilkr.):
69
cohei-enitailci accepted strategy, decisioii making rTI-HEEVOLUTIO710N
OF TECHNOLOGY
albout rivialclaims on1reSOUrceshas Inolegitimate
basis. Decisioins fioimiabove hlave Inosupportivle In real capitalist econiomliies,in contI-ast with the
riationalc, anidctiheie is Ino wav to hold back lok neoclassical modlels. technical advance procee(ds
with new
rollinig bargaining among claimants otlher than thrlouIghi 1an Cevolutionary
pi-ocess,
lArbitraryhighi level (lecisionis. lThei-e is nlo real pr-oducts an(lc processes competing with each
in real time.
with prevailine1techniiologT,y
ineedls othler anctd
gylicldiaceregardin g the capabilities a fir-imi
to pIrotect, einhalince, oI adl in oIrdel to be raithieithan solely in ex-ante caIlcuIlation.Sonme
in the nlext IrOLuInCI of innovative
of the innovations will be wNinners.other losers.
effective
\With the visioIn of hindsight the whole process
CollipetitioI.
I thilnk I simply am restaltiin what looks messv and wasteful. and a miiorecohei-enlt
But
Lazonick, Williamson. and other schol- planning approach to teclihological advance
Chlianidleri
cotpoIratioIn have beeni saving appears attractive.
ais of the modlerin
However. it is strikine' how iniefficienit ancld
tfor someic tinme. To be suLccessfuLl in a world that
eftoits to plan and cointrol signitica.nt
IreqiLes that tiims innovate and change, a fitirim imiisguiidccl
Imllisthave a coliheieintstiategy that enables it to technical advance have lbeeIn. Where. foI onie
(lecicde what niew ventures to go into andi what reason or anothel, societv has bleenldeiniecdthe
adivanitagesof multiple independent approaches
to stavy oUt of. AndCit ineecls astrutlutLre, in the
sciese ot imlode of Organization anid governiiaince. to advance technologv, which oloNws naturally
a basis of incdlepenilenitrivalrous fiirIml;s.
that
guides and suLpports the builclinig andlc fi-om *
to cairIy almost always the approach choseIl hslS tuLrIleCd
of the coice capabilities nieedledt
SuLlstaininig
OUt, altcr the fact, to haive malor limitationis.
OUt thalt strategy
eft'cctively.
If oIne thinks within the traimileof evolutiollary Anldisinlce alterinatives had nlot been clevelopecd
to presutimethat a firimican to a point where they couldct be tr-iecd in
theory, it is nloInsenise
CalculateainactuLal'best' straltegy. A basicprenmise coimlpar-isoIn,thlere has been lock in. A number
of' evolUtionlri- theorv is that the world is too ot U.S. military R&D eftorts since 196f) are
alSre
complicated for a firImlto comprehend, in the strikiiig examples. Nuclearl power programs
its woIrIcl in another. The fact is that ill virtually everv field
senlse that a firm tundcter-stanliis
iare certain character- where wvehave had rapid technical advance that
Ineoclassical theory. TFherle
istics of' a firn-is strategy, aind of its associated has met a market test oIrits eCLuivalent, we haive
of neCXw
h1adCl
sOLuIceCs
techInIoloev.
StruCtUre-, that manalcement cani have conlfidenlce
IUltiple riVallrOLs
m1l o(lellecdcollmllpany
Wlil'e Winlter-and I forlmlly
will enhance the chances that it \Nill develop the
capabilities it nleecis to SucceeCl. TIlere are other
chaliracteristics that seemil a prescription for failuLre.
R&D proIrams as generating
random dlraxv. in tact in the
IresuIltS thirOugLh a1
indCILuStr'iCSthlt
I
lowever. there is a lot of r-ooImiin between., know well thcicIe his teincidedto be a ceritaill
where atfirm (or its management.) simplk has to consistenicv in thLe R&-D effor-ts otf partiCIlar
lay its bets kniowini1ethat it cloes nlot kilnowhlow\Nscompilainiies.Th is consistencvy rellects a basically
Stable Companll Sti'atet(!v'.and the coIre R& )
they xwill trtnil oIt.
ainldothcri dyniimic caipabilities it halS puLItin pllace
Thus cliversity otf firimls iS juFSt what o1e w oUld
to carry it oLIt \\heIe company stratecies anidt
theory. It is virtuaIlly
expect unlider evolutiollarv
laissociatecfcaplatilities clifftcr1siglnificantlIy tlhic
inlevitabtle that fiIrImlswill clhoose somewhat
dliffeirenlt stratecuies. Thiese, ill turtnl,will lead to patterns of innovation are likely to clifftc-siunllifias wvell.
and clifferenitcorte ca.intlNv
havine,dlif'fer-enlt
struLCtuires
firirms
I
capabilities, iclCliLl
Inevitably
tlil
R&,D caicpabilities.
firm-is wvill pursueI somewhat
diffei-elnt
This
llas
all
ilillportant
COnISCCuILelnCC OftCel
ov?erlooked in the litercatuLreoni technoloieTical
cmc L'S
\p withi
a
011C
oeOIfi fiIll
paths. Somiie will prove profitable, given whllit ilmlitatiOn. llWhnI
itS COnI1petitolS
nI1av cliffcr
are cloinig andl the way mark-ets SLICCceSt'Lsl iIIII0VatiOI.
otlhei firimFis
themselves in thirlil ability
evolve, otheIs not. Firms that systematically lose sihTnificaitly aL-moniue
money will have to chanue their strateuyvand effectively to imitate o' (fevelop Somethingl
economic models.
struICtUre and dievelop inew corei capabilities. ori coIlparable. C'onlltrarto Illmanxv
imitatiOnll very often
o)peir-atethe ones they have more effectively, or et'fective technoloical
requirestIlh imiiitatinlte firm to ygo thl-OLI
hrough
1h man
Ciroplout of thle conitest.
l'CCttUili'S
70
R. R. Nelson
of the same clesiginand dlevelopmenitactivities its owIn i-ighit. FoI-ainecoiionioistwhat mattei-s is that
dlicl the ininovatoi, and to implemenit similair pharmaceutical R&D take adlvantage of the new
possibilities opene(cl by inew biotechnology, ancd
procluction aind othei- supporting activities. Thus
firimlswith similar str-ategies and core capabilities Inot wlhethiei-the old pharmaceutical fii-ms clo it,
are in a mulch bettei positioIn to imitate or learn oI- whethier-they fail, so loing as new onles take
and btuilclfrom each otlhers work thainifirms with LIp the toI-cl.
clifferenitstrategies andctcapabilities.
However, the fact that the leaciinii ecige
ThLuS to ani extenit the miairket is selectiitg
companies in a fielcl oftenl clhanigeis a fasciniatiing
on1 striategies and companies, as well as new matter. It is coInsistenlt with the theory of focuse(d
techilologies. This SuiggeStS that in some circuIml- andlconstrained coi-e capabilities presentecl above.
stances strategic diversity may get extinguishied. AnCIit is a ceinti-alreason why, for ain ecoInoimlist
Ther-eis somethilng to this argument. A number- iintei-esteclin technological advance, firm differof anialysts, some working in the ti-aditioni of einces matter importantly.
econiomic research, some in a business school
research traditioni halve suggested that ther-e is
a naturLal indlulstrylife cycle. Wheni ain indLustr-
or a broad technology is niew, a wide variety THE EVOLUTION OF FIRM
of approaches to tecllological
inniovationORGANIZATION
strategies-is takeni by differenit firimis.As experience grows, certain of the approaches begin to Thlere has been fai- more stuLdy of the way
look siginificaintlybetter than others. Fir-mswhio techiniologyadvainces than there has been of the
have made the riglht bets do well. Those who way fii-m oi-gainizatioInchanges. By orgainizatioin
have not, need to switch over, or drop out. A I mieani what I thiink Chandler (1966) means by
of stuidieshlaveslhownitlhat, as aniindustr-y strategy aiid structure, those aspects of a firm
numniberor technology matures, ther-e is a significaint that are wider aind more duirable thain the
reductioni in the numiber of firms aind in soiime Plarticular technologies and otiher routiines it
cases the emergence o.f a 'dominant design' withi cinplovs at anly monmenit,or eveni its extenit coie
all suivivinig firImlsp-oduLCinlgsome va-iety of that capabilities, anidwhiclhin effect guidcethe initerinal
tuined to the nichie thev have founid.
evolutioii of these. It is apparent that chanige in
One fascinaitinigquestioin is what haippenisin a organiizatioin in this broad seInse, as well as
relatively matur-e industrly when a niew and advance in technlology, has beein ain esseintial
potenitially stiperioi- teciihnologycomes into exist- feature of the enoi-mous ecoinomic pi-ogi-ess that
enice. The evidenlce stiggests that it matters hais beein exper-ienicedover the last cenltury anld
whiethierthe new technioloev is conformable with a half.
the core capabilities of extant firms. or requlires
Some writers clearly would like to give
very clifferent kindclsof capabilities. TuIshmian organizational chanige separate and equal billing
and Andersoni (1986) call these two kindls with techlnical advance as a source of economnic
of clevelopimlenits'comipetence enhancing' and progress. I wouldc like to argue here, however,
'competence clestroyinig'.Undcerthe latter circtim- that one neecds to understand organizational
stainces, new firms are likely to be the innovators, change as usually a handmaiden to technological
and olcd firms ofteni atre uinable to responIc advance, andcl not a separate force behind
and Andctersoni note that a economic progress.
effectivelv. Ttishmalniia
change in maniagemenlt,and presumably a major
him correctlyv this wouldc be
If I uniderstandcl
change in strategy, often is niecessary if the old Chandler's positioI. The new technology of the
firm is to sUrvive in the new environment. BLu1t railroads requiredc for its effective implemenit miav not be suLfticient. Structure anic core
tation, the developmient otf organiizationialcapacapabilities are far more (lifficult to chliage than
bilities far beyond that possessecd by traditional
management anIctarticullated strategies.
owner maniagecdfirms. Line andclstaff organiizFor a stuclenit of businiess mainagement the ational forimi, aloing with the developmenit of the
questioni of what enables a firm to chlange positioin of hirecdmanager, enabled the railroacds
clirectioniseffectively, and be a viable competitor to be effectively 'governcdl', to uise Williamson's
inl the new! regime. is of cenitrailiniterest inl its terml. Later, new techinologies which promised
WhiyDo Firins Differ?
economies of scale aniclscope in maniufacturinig
called for large firms operatinigin several differenit
product fields, or market ai-eas. The M foi-m of
manlagei-ialstructui-e evolved to goverineffectively
this kind of business operatioi.
Over the long run what has matter-edmost has
been orgainizatioinalchainges needed to enhaince
dyinamic ininovative capabilities. Reich (1985).
Hounislhell aind Smith (1988). aind other writei-s
have desci-ibed how the orgainizational device
of the industrial reseai-clh aind developmeint
laboratory came into existence, to permit firms
to shield a portion of their scientific aind technlical
personinel from the pressures of day by day
pi-oblem solving so that they could woi-k on the
clevelopment of new pi-oducts aincd
pi-ocesses. This
developInent was precoilditioiled by the rise of
a inew 'techinology' for product aind process
developmenlt, one employing the unldei-stalndiilgs
anlcdtechniques of the sciences aincdengiineeriilg
clisciplinies in a systeimiatic way. Oine cain i-eaci
aincdLazoinick's account of the rise of
Chaincdlei-rs
other aspects of the moderil corporatioil in terms
of Teece's argumeints about neecdecdcomplementary assets or capabilities.
As I read the case study evideince, devisiing
aild learniilg to use effectively a significanltlynew
organiizatioinal form involves muclh the same
kind of uncei-taiilty, experimeintal gropiing aiic1
leai-iiilng by makinig mistakes anid coi-i-ectinig
themn, that imnarksteclhlnological inlveintioniaind
innilovatioi. New modes of organiizationi areiift
simply 'choseii' whenl circumstanlces make them
appropriate. They, like technologies, evolve in a
mannier that is foreseen only dimly. And even
when a firimimakes a conscious decision to chanige
organiizationi, it may take a long time before it
is comfortable and effective in its new suit of
clothes.
I wanit to returnihere to a point I made at the
start of this paper. I suspect that the unlcertainities
about new organiizationi are even greatei thalni
those surroundinigtechnological innovations. This
is especially so regardinig organiizationi which
molds effective dyniamiiicinniovative capabilities
anid the abilities to profit from inniovation. At
the present time there is little in the way of
tested and proved theory (let me use the
less pretentious word-kinowledge) that eniables
confidenit prediction of the best way of organiizinig
a particular activity, or whalt will be the consequences of adoptinig a different mode of oirgainiz-
atiOil.
logical
If the 'rationally choosinig'
a(clvance is misguidecl,
71
view of techniothe 'rationally
choosinig' view of organiizationialchanige is even
more so.
Just as impoi-tanit,it is commoin, Inotinifrequeint.
for a pal-ticLlai- mode of oi-ganiizatioin put in place
for oine reason to turn out to have advanitages.
or disadvantages, in arenias that were not
conisidei-ed at the time the originial move was
cointemplated aiid made. It also is commioin,inot
infi-equeint, that there be coinsiderable dispute
abLout just whalt feaLtures of a firm's organiizatioi
are respoinsible for certaini successes ot- failures.
ThLuS,as I unIlcerstanic(it, large Japaniese firms
acdapted 'life time employmeint for theii- skillecd
workei-s in the eairly post wai- eria to tI-y to cleal
with a problem of skill shortages aind labor
unirest. It is quite unclear how many Japanese
malnager-s foi-esaw advantages associated with
woi-kei- loyalty, aiid ability of a firm to clo
in-lhouse ti-aininig without feair of losinig the
investmeint through worker- clefectioin. JUst in
timiie was, I unlderstanld, largely aI respoilse to
scarce space, higlh inveintory costs, a(iic iniput
shortages. It is Inot cleai- how maivy saw that it
would facilitate quality coniti-ol.
Amer-icalncompainies lookinlg at their Japanlese
competitors
oftein halve been
unicertaini about just
why the Japaniese are bettei- in some i-espects.
and just whalt they canI effectively ti-ansplanit.
Tlhey only will be able to learil by ti-ying somne
thinigs, seeinig what happenis, aindhaivinigthe good
luck to see it right.
The evidenice
is very limiiited, but
there
is
reason to believe that firms have greater ability
to replicate themiiselves in ainotlhersetting in a
way that preserves their strength, thani to
comiiprelhenidaind adopt what gives their rivals
sti-enigth. Thus as Womiack, Jones. and Roos
(1991) aindClark a,nd FujilIloto (1991) docu-imient
coinvinlcinigly, Americani automoobile iallnulfacturers still are strugglillg to catch Up with the
Japainese in terimlsof productivity aind quiality of
production. Where they are coming close it seems
to be in cases where the Japainese are servinig as
partners. This does not look accidental. Florida
aind Kenniey (1991) report that Japainese owned
aUtOimnobile
assemibly plants in the United St'ates
halve r,atlhei- quickly been able to establish
practices-str,ategies aind structures-similiar- to
theii- homle operations, anid with coimipai-able
outcomes.
72
R. ?. N elson
I Walilt to puit forth thle arlgUmnent
that it iS
to dliffereincesin basic interests-the
stuLdenltof
organizational differences, especially differenices firimimanagement conicerinecdwith the faite of
in abilities to genlerate alid Gainfroim innovation. intlividlualfirms, aind the economiiistinterested in
iatlhet than differences in commaiiiindovcr particuLlar technlologies, that are the Source of durIa-ble,
gyeneral economlilc performance
centrtiles, with organizationail chanae a ha.indmaideni. BLut fro m another pei-spectiv cwe we Lould
reg.arding issues that traditionallv
have beeni the
central conicer n of economiiists.
Comiipetitioni cain
be seeni as iot
merely
about
iniceintives
aL-nd
to keep prices in line with minimal
pressures
feasible costs, a,nd to keep f-irms operating at loN
of an industry or
nationi. But I haive argued that the lack of initerest
not easily imitable. differenices amiong firms. by econoilmists in discretionary firmndiffer-enices
PartiCular-techlinologiesare muclheasier to ulnider- stemiisas well fromia particular theoreticaIl view
stain. atnd imilitate. thani bro,aLderfirm
idyi1LInamicof econoillic activity aindlthe role atnd behiavior
capabilities.
of firimls.
FIromi1
onie poinlt of view it is techiological
If one takes ain evolutionary ratheI thian a
advaince that has beeni the kex force that has ncoclassical view' of what econiomic activity is
drivenl ecoinoImiicgrOwth ovei the past two about, theni firmn differenlces matter importantly
niot haive got that technological advaxce without
developimlen1tof new ways of organization thait
can gluidleandl SuLppoItR&D and en,able firms to
costs.
bUt. ImUChI mor01e ilmlportatIt.
abOut explorilLn
profit from these investments.
I hai1ve
beeniconcenitratin1g onifirimOrganiizationi. nlew potentially better ways of doing things.
However, it is clear that the organizational Long ago Schutimipeter remiarked that the forimier
chaiiges thiat have eniabled nlatiotns to SuppOIt thC
moderniR&D
the technological
svstemiand
funCtionl was triviail compared
w!ith the latter. if
the mileasur
e was contribution to the econiomiiic
advance it generaites go far beyond those of firmii well-beinig of hulimiankinid.
U,niversities llhad to clihance. New
Fromii the perspective
of evolutionary
theory.
scienltific disciplines aiid societies had to comlie firim diveersitv is an essenitial aspect of the
into being. 11 miany cases new bodies of law processes that create econcomilic priogress. Mowere neecdedl.Somie tecihiiologies requlired major nopoly. or tight oligopolyc w;itl stI-oig
s to
btr
iiotnz
eNew public
infrastructure for thleit effective
entry.
canl be seeni as a serious
CCOIlomiC pIoblemi.
development.
nlOt SO ImluCIh because
SuChI strUCtUres
peirimiit a
The coevolution of technology andtinstittutionis .large gap between price aLndi cost. but bec,ause
is a fascinatinig subject. Chllalndler,and a few they are ulllikely to generiate the variety of new
other scholars such as H-uLgLhes (1983) and roLutinies. atnd the attendant
slhifts in resoturce
Freemiian(1989), have becrunto address it. ThIer allocation on which economic pIogress depe nds.
clearly hiave beeni major national differenices in OnIe iS SuSpiCiOuS of argumllenits to 'rationalize
hiow the institutions nleeded to Support partiCular proCLuctionl aind iniovationi
for the same
reasons.
evolvincTtechiologies themselves evolved. Per- pairtiCLularly when the windis of chainige are b lowing
haps in the stuLdyof the coevolution of technology froml unlcertaini anarles.
organization.
aiid
institutiols
We
will begin to develop
taseriOlus
theory of hiow nitional. comparative advantage
comes inlto being, or is lost. But I niow ami far
beyondl the scopc of this paper.
viewv of firms
Thuis, the 'dynamic capabilities'
beingt dlevelopedl bv schohlaIrs in the strateev field
niot onily as a guide
cain be seeni to i)e important
to management,
but also as the basis for a selioLus
thieory
REPRISE
Differ,
Studtients of firm maniagemeiut. in particular
the
firmii in
econ0om01ics. It.
when
in Viewpoints
a-nld 1-low Does
it Matter?'
those
workiingyin the strategy fiel treat discretionary
firm dlifferenices as theit bread and bLutter.
EcoInoimiistslhave tenided to play down these
diffeienccs. or to ar(gue that they ar-e the Iestilt
nlot thle catuse of general economic dlifferenices.
In gooci part the difference
of
embedded in ani eV0olutionary theory of econiomiiic
change, intstruCtS Us regarding 'Why do Firms
is dLue
ACKNOWLEDGEMENTS
The author is indebted to the Sloan FouniidCation.
of the C'onsortiulll
oll
througIL its fundinig
and Cooperation.
and to the
Comiipetitiveniess
Do Fir-imsDiffer?
WMay
Conferenice oni FunldamiienitalIssues anid Stirategy
for whiom11this essay was written, for support in
its unldeitakiing. Maniy people halve commilenited
helpfully on ani earliei draft. I especially wanit to
thanik Alfred Chalnidler,Wesley Coheni Rebecca
Henidersoni,Richard Laniglois, William Lazonick,
Richard Rosenibloomi Doniald Sextoni David
Teece, and Michael Tushmani.
73
In R. Schnialensee
incLlllbellcV.
and R. WilliT
(ects.), Halnldlb(ookot Indullwstriall
O)rganization, North
Holland, New York, 1989. pp. 475-535.
Hlenlcldersoil R. 'Unlclderilnvestimienlt and inlcoimpietenlce
'IS respolises
to radical innovation:
Evidence
fl-rom1 tlle photolithOg1-raphic aIlignlmllelnteClUpillelit
' MIT Sloafn School Discussioll
indCustLyS
pa.pel.r
1990.
FIoIunSllhell,D. and J. Smiiitlh. S(ciece anditiCorporate
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H-Lighes, T. Netwvorks of Powver: Electrical SupplA
Systems in thlicLI.S., England, arndGermain! Jolhnis
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