Learning and knowledge caution on the essential contributions of the firm to the post-industrial economy. In this chapter, a theory of the firm has advanced that goes beyond traditional industrial views of the enterprise. It is a perspective that views the generation, transfer, utilization, and protection of know-how as the essence of the enterprise. Learning in this perspective involves both learning inside the enterprise and learning about the changing needs of customers. Such learning, if accomplished continuously, undergirds dynamic capabilities, and these in turn undergird the competitive advantage of the business enterprise.
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aI’d like to thank the editors for many helpful comments. Greg Linden also provided substantial help with this chapter.
1While the industrial workforce has always contained individuals with high education and/or exceptional talent, the economic significance of such literati and numerati has become more important as the traditional sources of firm profitability have been undermined (Albert and Bradley, 1997: 4). The nature and management of the firm’s ‘expert talent’ are discussed later.
2Organizational competences have their roots in the work of Simon (1947), Nelson and Winter (1982), Winter (1988), Teece et al. (1994), and Dosi et al. (2000).
3Evidence is mixed as to whether rules or heuristics are more desirable for firm performance. See Bingham et al. (2007) for an empirical study that supports heuristics and Zollo and Singh (2004) for an example of beneficial codification.
4Co-specialization has strong implications for organization and strategy (Teece, 2007a).
5The entrepreneurial creation and co-creation of markets is often required to ensure the generation and appropriability of returns from innovation (Pitelis and Teece, 2009). The Internet keeps generating a myriad of such requirements every day.
6Entrepreneurial activity, inside or outside an enterprise, is by its nature non-routine.
7The market for opportunities is imperfect due both to problems of conveying the merits of ideas and also because of opportunism, which can lead to the ‘lemons’ problem identified by Akerlof (1970). In general, entrepreneurs will be reluctant to ‘sell’ or simply license ideas they believe are undervalued. The outcome thus tends towards internalization. For an early statement of some of these issues, see Teece (1981).
8The enablement of open innovation by new technologies is in some ways the mirror image of the ‘Second Industrial Revolution,’ when earlier improvements to communications (telegraph) and transportation (railroad) induced a period of vertical integration on a continental scale with an emphasis on in-house research and development (Chandler, 1990).
9The literature on cumulative innovation, with its emphasis on optimal patent policies (e.g. Scotchmer 1991), captures some of the larger context for innovation, as does that on learning from customers (e.g. von Hippel, 1998).
10‘For example, IBM developed the first commercial router but Cisco dominated that market. As early as 1996, IBM had developed technologies to accelerate the performance of the web, but Akamai, a second-mover, had the product vision to capture this market. Early on, IBM developed speech recognition software but was eclipsed by Nuance. Technologies in RFID, Business Intelligence, e-Sourcing, and Pervasive Computing all represented disturbing examples of missed opportunities for the company. In each instance, the conclusion was that IBM had the potential to win in these markets but had failed to take advantage of the opportunity.’ (O’Reilly et al., 2009: 85).
11IBM’s internal analysis of why the company had missed past emerging market opportunities yielded six major reasons: (1) ‘The existing management system rewards execution directed at short-term results and does not value strategic business building;’ (2) ‘The company is preoccupied with current served markets and existing offerings;’ (3) ‘The business model emphasizes sustained profit and EPS improvement rather than actions oriented towards higher price/earnings;’ (4) ‘The firm’s approach to gathering and using market insight is inadequate for embryonic markets;’ (5) ‘The company lacks established disciplines for selecting, experimenting, funding, and terminating new growth businesses;’ and (6) ‘Once selected, many new ventures fail in execution.’ (O’Reilly et al., 2009: 85).
12Economics has for the most part not investigated business models. Some specific cases have been analyzed, especially the ‘bundling’ or ‘tying’ of goods for joint sale, typically discussed in an antitrust context (e.g. Adams and Yellen, 1976), and the provision of public goods (e.g. Demsetz, 1970). Even business studies have been slow to say what a business model is and why it matters.
13Features of markets that can produce winner-take-all outcomes include those in which network externalities (Katz and Shapiro, 1986), switching costs (Klemperer, 1987), or learning economies (Krugman, 1987) confer a substantial incumbent advantage.
14David and Greenstein (1990) provide a review of the extensive literature on the economics and competitive consequences of compatibility standards.
15The core paper in the profiting from innovation (PFI) framework is Teece (1986). The intellectual origins of the framework can be traced to Williamson (for his work on contracting), to Abernathy and Utterback (for their work on the innovation life cycle), to economic historians like Nathan Rosenberg and Alfred Chandler (for their work on complementary technologies), to Nelson and Winter (for their work on the nature of knowledge), and to Schumpeter (for his focus on the need for value capture). See Winter (2006) for a review of PFI’s intellectual origins.
16There is a long literature on the role of new entrants in dislodging established firms. See for instance, Anderson and Tushman (1990), Clark (1985), Henderson and Clark (1990), and Christensen (1997).
17Mansfield, Schwartz, and Wagner (1981) found that about sixty percent of the patented innovations in their sample were imitated within four years. In a later study, Mansfield (1985) found that information concerning product and process development decisions was generally in the hands of at least several rivals within twelve to eighteen months, on average, after that decision was made. Process development decisions tend to leak out more than product development decisions in practically all industries, but the difference on average was found to be less than six months.
18Langlois defines dynamic transaction costs as ‘the costs of persuading, negotiating, coordinating and teaching outside suppliers’ (1992: 113).
19One could ‘license’ such technology by buying the entire enterprise, which would most likely involve paying a change-of-control premium.
20Accordingly, Coca-Cola is unlikely to license its secret formula, and W.L.Gore is unlikely to license the technology behind Gore-Tex fabrics to anyone other than its wholly or partially owned subsidiaries. TSMC will likewise be reluctant to license its key semiconductor processes to competitors, except with severe restrictions and circumstances of high trust. Brands that signal particular values (e.g. Lexus, Tiffany) are likewise rarely licensed, partly for contractual reasons, partly for other reasons.
21Rambus, a supplier of specialty technology for memory chips, has had to finance years of litigation with memory chip manufacturers that have led to mixed results, including the invalidation of some patents in whole or in part (see, e.g. Cummings, 2010).
22This article is often cited as reflecting empirical support for transaction cost economics, which indeed it does. But the variable for systems effects has more explanatory power and is consistent with the capabilities perspective advanced here.
23The Profiting From Innovation framework (Teece, 1986) illustrates how a contracting framework is useful as a tool for building a (dynamic) capabilities-based theory of the firm (see also Winter, 2006).
24The notion of complements has gained mathematical tractability through the concept of supermodularity (Topkis, 1978, 1987; Milgrom and Roberts, 1994). For an excellent review of the literature, see Ennen and Richter (2009).
25Arrow acknowledged that in some cases markets might simply not exist. Williamson (1971), in his best-known statement on market failure, which he still endorsed 28 years later (Williamson, 1999b), restricted his attention to those that were ‘failures only in the limited sense that they involve transaction costs that can be attenuated by substituting internal organization for market exchange’ (1971: 114).
26See Teece (2000) for discussion of the fuzzy boundaries associated with intellectual property rights.