Chapter 7: Conclusions
The conclusions of this book, in the form of answers to the questions posed in the introductory chapter, are collected below. CHAPTER 3 Question 1: Why do firms exist? What is the basis for organizational capability? Answer: Organizations in general and firms in particular exist to limit cognitive distance, with a cognitive focus for coordination between complementary capabilities, with sufficient mutual understanding and motivation to collaborate. Question 2: What is the (dis)advantage of firms relative to markets? Answer: Firms exist to provide more cohesion (focus) for the sake of exploitation, while markets provide more variety for the sake of exploration. Organizational focus yields a constraint of myopia that can be compensated by outside collaboration. The duality of market and firm yields a solution, on the level of an economic system, to the problem of combining exploitation and exploration. Question 3: What, if any, are limits to size of the firm? Answers: Apart from familiar arguments of scale or scope, are the following. The general argument is that there is a trade-off between coordination for efficiency and variety for innovation. As firm size increases by expansion of the portfolio of activities or capabilities, one can maintain coordination at the expense of room for variety, or one can maintain room for variety at the expense of coordination. In the first case there will be a decrease of innovation, and in the second case a decrease of the rationale for combining activities in one firm. In more detail, the argument is as...
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