The Business Enterprise in the Wealth of Nations

We are accustomed to thinking of competitive advantage as resid- ing with nation states. Ricardo argued that it was differences in soil and climate that anchored differences in endowments as between England and Portugal. It was understandable that Ricardo might take this view since firms as we know them today simply did not exist; and even when economists started focusing on firms and not farms, firms were viewed in a rather undifferentiated fashion. Moreover, (perfect) market competition left little room for discretionary behavior by managers.

However, we all know better now, thanks in part to the ency- clopedic work of business historian Alfred Chandler from Harvard University. As I note elsewhere, there is a large body of scholarship supporting the notion that the competitiveness of nations depends in an important way upon the organizational and financial capabil- ities of firms and their supporting institutions.3 Professor Chandler recounts the history of how managers in the USA, Britain, and Germany built the organizations and took the risks of investment necessary to capture the economies of scale and scope opened up by the technological innovations of the second Industrial Revolu- tion. His thesis is not that markets shape business organization, as is commonly supposed in economic theorizing; rather, it is that business organizations shape markets.4 More recently, the same themes have been restated.

Most essential to the successful maintenance of the long term health and growth of the enterprise are the learned capabilities of top management. These managers make the critical decisions in allocating personnel and financial resources that determine the fate of the enterprise and often of the entire industry of the country on which it operates.


The competitive strength of national industries depends on the abilities of the core firms to function effectively and to maintain and enhance their integrated learning bases.5

The scholarly work of business historians suggests that what firms are able to accomplish depends on what they do themselves as much as what the broader institutional environment permits and encourages. Moreover, the success of business enterprises located at home and abroad helps drive the fortunes of nations; yet the business enterprise does not feature in textbook theories about economic growth. This is clearly a deficiency, and it is only now being remedied.

One cannot overemphasize the importance of top management. If top management makes strategic errors, companies suffer and the nation states where the firm is located are likely to suffer too, at least to the extent resources are not quickly and effi- ciently redeployed. Commenting on RCA’s (Radio Corporation of America) demise in the 1960s, 1970s, and 1980s, Alfred Chandler writes: “If RCA had resisted the computer and avoided the curse of the conglomerate, if it had continued to concentrate, as did its Japanese competitors, on the consumer electronics market, the one it knew best, then it might have remained the industry path definer.”6

Conversely, if top management is able to assemble resources and orchestrate them wisely, significant wealth creation opportunities are possible, so long as the economic fundamentals are in place. This is what Alfred Chandler teaches in Scale and Scope.7 Tom Watson’s leadership in getting IBM into the computer industry with the IBM 360 is now legendary. So are Bill Hewlett and David Packard, first in scientific and industrial instruments, later in computers and computer peripherals. Bob Noyce and Gordon Moore guided Intel into a pioneering role with the microprocessor. Michael Dell pioneered a new way of organizing the personal computer business. Steve Jobs  at  Apple  launched  the  iPod  and the iTunes music store, playing a catalytic role in the emergence of a legal market for digital downloads of music. Of course, these successes were aided by business friendly environments, flexible labor markets, and global access to skills, capital, and markets.

Many studies have emphasized that it is not only firms but net- works amongst them that are important. Alliances, joint ventures, and other interorganizational arrangements enable firms to access and align critical complementary assets, intellectual property, and scarce talent.8 In rapidly changing environments, the presence of networks turns out to be very important. Strategic alliances, joint ventures, cross-licensing deals, and other arrangements which enable firms to access complementary assets, vertically, laterally, and horizontally help firms prosper. The full vertical integration model is generally no longer viable in markets where there is rapid change; alliances and joint ventures support the ability of firms to assemble, disassemble, and, as necessary, reassemble elements of the value chain as dictated by economic circumstance, or as encouraged by opportunity.

Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.

Leave a Reply

Your email address will not be published. Required fields are marked *