The Multiple Boundaries of the Firm*

Abstract

 The notion of firm boundaries has received considerable attention in theories of the firm that address the problems of investment incentives and mitigation of hold-up problems. In this paper we attempt to develop a different approach to the problem of vertical firm boundaries, based on recent advances in the capabilities view of the firm. Our arguments rely on the pioneering insights of Penrose, Richardson and Loasby to elaborate a view of the boundaries determined by the interaction of the firm's direct and indirect capabilities with other actors. We develop the notion of indirect capabilities to highlight how firm boundaries respond to the distribution of capabilities in the economy as well as the modes of access to complementary and external capabilities. We conclude that the evolution of firm boundaries must be understood in the context of decisions on how the firm relates to other actors in its environment.

Inside Out: Organizations as Service Systems Equipped with Relational Boundaries

“…However, even this vision presents a weak point [49]: it does not take into consideration the circumstances in which an organization engages informal relationships, not based on the conclusion of contracts but on purely social characteristics, such as trust, esteem, respect, etc. [50]. The interpretive formalism featuring the aforementioned approaches also characterizes the "ownership criterion" [51], according to which a resource can be considered as internal only if it is owned by organization or is linked to it by a legal relationship comparable to the property right.…”

“…The criticisms attached to the above-discussed approaches has led scholars to shift their focus from organization as such to its elements and, more specifically, to the sharing of organizational processes [50]. This shift has allowed hypothesizing two further criteria for identifying boundaries of organizations: the "interest-sharing criterion" and the "job-sharing criterion".…”

“…In light of this consideration, the "specific competences criterion" suggests considering as internal to the organization only its distinctive resources (core competences) and assuming as external those ones not connected to its specific know-how [59]. However, according to Araujo et al [50], this approach appears weak, since it does not take into consideration that although organization's know-how spins mainly around distinctive skills, it includes not only them, but also indirect competences, definable as the capabilities required to organize access to complementary and dissimilar capacities held by third parties [60].…”

“…To this end, the authors envisage the use of a new interpretive logic to address the definition of organizational boundaries, interpreted as an interactive and changeable process capable of pushing organizations towards a greater awareness of their strategic dimension [50]. Specifically, the adoption of this approach originates a new type of criterion for defining organizational boundaries, defined as "relational" and described in the next paragraph.…”

Managing Value Co-Creation Through Interfaces with Suppliers

“…Indirect capabilities allow firms to specialize while accessing the complementary capabilities detained by their suppliers (Araújo et al, 1999). Furthermore, Araújo et al (2003) state that suppliers' capabilities can be 'merely' accessed, explored or even developed in combination with the customers' capabilities. As such, inter-firm relations may be used not only to access capabilities that firms do not control but also to influence them (Handfield et al, 1999;Mota & Castro, 2005).…”