Further Economy Stability

Technological change does not feature prominently in most analysis of the boundaries of the firm. This argument may seem puzzling in that, in neoclassical economics, the boundaries of the firm are technologically determined by the relevant production function, but the approach taken both by the neo-classicists and later writers generally ignores the effects of subsequent major changes.

Thus, the dynamics in Chandler’s story are based on particular characteristics common to many technologies of the first half of the twentieth century the presence of substantial economies of scale and capital-intensive production methods but he generally treats technology as a given and pays little attention to the effects of technological change on firm boundaries because he believes that later incremental changes did not undermine the importance of these characteristics.

As a matter of analytical convenience, we begin with a discussion of these stable scenarios, in which technological change is incremental and occurs only within what may be considered the ‘life cycle’ of a particular technology. Our intention is to show how inclusive a firm’s boundaries might be expected to be at a particular point in time.

While many firms tend tohave few distinctive competences, this does not mean that they have tight limits onthe range of resources they possess or that they tend to reduce this range. Distinctive competences are the basis of the process of firm diversification in related products and markets, and therefore may lead to increases in the number of additional (or ‘ancillary’) activities that a firm undertakes as it enters related markets.

Distinctive competences may first of all be described in relation to a firm’s technology. They tend to be embodied in core products, which represent the interface between the firm’s technical and distinctive knowledge and the products it delivers to the market. More broadly, competences can be described in relation to a firm’s value chain.

How do distinctive competences affect organizational boundaries? While the empirical evidence on this issue is ambiguous, it is clear that due to the complexity of resource-based management, managers often find it strategically desirable to internalize competences that are:
(a) key to the present creation of industry value
(b) consistent with the strategy of related diversification they want to put into practice.
(c) useful to build new avenues of value creation for the firm’s competitive future.

Therefore, because a firm needs to protect the integrity of its core competences, and in particular of its distinctive competences, these will be included within the firm’s boundaries.