The Origin and Evolution of New Businesses Part 2

103 Pages·1999·0.38 MB·English

by  Amar Bhide

©
ramA Bhidé
January 15, 1999
The Origin and Evolution
of New Businesses
Part 2
ehT d ryotfixsOrevinU Press (expected pub. Date: Nov. 1999)
st nee ltfbnoaoTC
stnemegdelwonkcA
ecaferP
1. Introduction
Part 1: The Nature of Promising Startups .
2. Endowments and Opportunities
3. Planning versus Opportunistic Adaptation
secru ogsneiRr u.c4eS
5. Distinctive Qualities
6. Corporate Initiatives
.7 CV dekcabspu-tratS
ser uytrnaenVoitu l.o8veR
Part 1: Summary and Generalizations
traP :2 eh TnoitulovE fo gnsielsgsdeenliFsuB .
9. Missing Attributes
10. Existing Theories and Models
11. Critical tasks
12. Exceptional qualities
Part 3. Societal Implications
13. Reexamining Schumpeter.
14. Facilitating conditions
15. Taking Stock
secner esdfenecaRidneppA
Copyrighted mateial. Do not reproduce, republish, broadcast or otherwise distribute.
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©A. Bhid ,é
Jan 15, 1999
PART 2: THE EVOLUTION OF FLEDGLING BUSINESSES.
In Part 1 we compared promising startups with initiatives undertaken by large corporations. The next four
sretpahc enimaxe woh sessenisub egnahc – woh emos gnilgde lsfessenisub evlove otni ,egral devil.-sgnnooiltaroproc
we iev drni eavwv ooosrlnpeobi techeTs fo eseht .sretpahc I lliw ezirammus eht hcaorppa dna ,epocs eht atad ,desu
the propositions developed, and the structure of the chapters.
M ts ospu-trats od ton evlove otni egral d ndaevil -.gsnmorlif ecurB Phillip’s and Bruce
s es s tsm ’slaeoa t’lmnrt tnfaiifaeesef mtsDhs emotSs uta.gnhaetBBSgrchu.uerto Usvib%oKa0G6fo
start-ups fail in the first six years and over 70% in the first eight. 1 tsafthoste gegcunse d,eirhvetevo eroM
the start-ups that survive, most remain small. Inc y sr seomf ri go oeener– hnatf0tnpa0imc5woc
promising startups—appear to have higher survival and growth rates. In 1995, Inc. dkec kancbolelhac
eht 005 seinapmoc ni eht ssalc“ fo ”5891 dna dnuof taht ylno %91 erew on regnol ni ssenisub ro dluocton
eb .detacol rehtonA %72 dah neeb dlos ot wen ,srenwo dna %6 dah enog .cilbup %84 dah devivrusnet
sraey rednu eht emas ylraen—pihsrenwo eciwt eht ,noitroporp gnidroccaot Inc. wleanci p,efyhott
.ssenisub ,revoeroM eht srovivrus dah deunitnoc ot .worg nI ,4891 lla 005 seinapmoc no eht Inc. list
.ssrro ev k i0 rtv05n y eosr89wdB3hwuu,9oe3tjs41ny2 6ko nl do psn id mearle4felolt.oafin7sbu$occa
.se ed y erns0o de oe 0lnrv9i ud0pe oo2lnnn,mv,c $liea7eEoeyeiv2srlebe1nr rohfto e h5t891 Inc. 500
seinap m, ot–lcfeossiorr ecdMinMa TechData – made enutroF magazine’s list of the 500 largest
corporations in America. 2
ehT noitulove fo gnuoy sessenisub sah erom cimonoce ecnacifingis naht taht eht llamsrebmun
that eventually nioj eht sknar fo dehsilb antosiet-alrloepwroc thgim .tseggus gnidliuB a ssenisubsevlovni
emos Schumeperterian innovation; rather than capitalize on se cdievzr iea msieor dtbrisiovulocirupqesid
to a few customers, entrepreneurs create new combinations and shape the structures of their industries and
markets. dnA sa ew evah ydaerla ,nees eht wef sessenisub taht niatta tnacifingisezis yyatliapv e gdnnoal
distinctive economic role: they can undertake much larger initiatives than individual entrepreneurs; their
accumulated reputations and perceived staying power have a significant influence on the nature of their
spihsnoitaler htiw ,sremotsuc ,seeyolpme srednel dna rehto hcus ecruoser.sredivorp
hg unooh mtmmlooAdcsi w d cnhiacm reradueacscne aortcaht ylno a wsepf uetvrlaotvsoetni
d,esvnioli-tganroolp reohct gniylr esdrnoutcaf evah ton neeb ll e.wdeifitnedi eW nac dneilfbaredisnoc
, cs e ietll fsut aatiabtyc tuccib inaoeelyrod bp vaoirasnsiw tto imvfsafyarro inhtiulhawrfs alearpcexneeg
and grow. My analysis suggests that most new businesses aren’t just large businesses in miniature and
that their trajectories do not point to noteworthy size and longevity. Extrapolation of the initial approach
ssdeaseslenis uobt liaf ro teg kcuts ni a tur – tahw retsl Edluow llac y rnaan oliatcuollo“ve maxima”.
Building a long-lived firm requires comprehensive changes. Instead of relying on opportunistic
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© A. Bhid é
Jan 15, 1999
adaptation to exploit niche opportunities, they have to formulate and implement ambitious long-term
strategies.
Only exceptional entrepreneurs have the capacity and the will to make such changes. The
egassap morf a gnilgdelf ssenisub ot a egral noitaroproc seriuqer sruenerpertne ot poleved wen slliksdna
perform new roles. Entrepreneurs must also have unusual ambition and tolerance for loss. Starting a
heads-I-win tails-I-don’t-lose-much has a compelling financial logic. Once an entrepreneur has navigated
a venture through its uncertain initial period, however, selling out to a competitor or large corporation
netfo sedivorp r edtettesbujd as-nkrsuitrer naht stroffe ot worg eht .ssenisub sruenerpert noEhwogrof
eseh tt isxneoitpo may ylla ustsnaemva eyrev e,gsreanlut rtoufb yeht nac osla esol ti .lla rieh Tevirdot
build a large corporation transcends goals of maximizing risk-adjusted financial returns.
hcaorppA dnaepocS
snoitar odpervo icnl o -sifge tonrf uo uoell nthog oatvnemeeihmfyto fcmie t lfneboehodTrip
primarily derives from the lack of a general framework or theory rather than a lack of data. We can find
ample information on the growth of most large corporations in the U.S. in memoirs, popular biographies
dna ylral o.hscesirotsih hcuS sgnitirw dnet ot sucof revewoh no cificeps stneve ni raluci tsreaipnapmoc–
how and why HP entered the printer business for instance – rather than on a general theory of firm
.noitulov e gni kssoseooiLrrcoat s dsifee hovisinllaa-pegmvnoe ocrwg;lensfinrrreutct eanrpo ehtecafrus
at least their evolution seems highly idiosyncratic. In order to provide any general explanation for the
,atad ew dee nemos yaw o tretl ie sfhntton memm moole rcal.f ueeetshxit eogtnnn io tcecreolmaltoaCd
no devil- gsnnoolitaroproc ro( no a dehctam elpmas fo devil-t r)oshesssenisub tuohtiw hcus a retliftonnac
provide much additional insight.
The approach I will use extends th e comparative analysis of Part 1. In Part 1, we identified the
features common to an otherwise heterogeneous set of promising startups through a comparison with the
.sno it awro o Ns depsplew reulh neort i s foscursweieou taehlh eatrtbte fnesuadnoofdttiwnassoaeenfk
established companies on the other to frame our inquiry of the transition between the two states. In other
,sdrow ruo egdelwonk fo eht snigiro dsnnaoitanits efdo eht la cd ienpvoyiitlt-agrnoop lrlolciw plehsu
yfitnedi eht tnatropmi nommoc stnemele fo rieht.noitulove
As in Part 1, this analysis emphasizes the contribution of individual entrepreneurs. We will
tsartnoc eht elor yeht yalp dna eht smelborp yeht ecaf ni gnidliub a ssenisub htiw esoht fo gnitrats awen
,erut ndenva htiw eht selor dsnmaelb os refpv oi.tn uo ocidhete wxaheersgoia plnrbaoamctse eW lliwosla
examine the qualities that affect an entrepreneur’s willingness and capacity to build a long-lived
corporation. The focus on the roles and qualities of individual entrepreneurs represents a departure from
.se scyi lmgaonnniaotcseixe sA e wsle l i ,ni erneow fmoeesi touetsetmashfiurhstorl itatosfsvauedni
d s sehesr ncgeoy oiurit bstfmsem cs aorvorare ennefoha t oobtt,erccm iedeeuetr bnheufmtptoumanomc
scale, and that chance determines which firms survive. I will argue that the ambition and capability of
individual entrepreneurs has a significant impact on firm longevity and growth and by extension on the
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Jan 15, 1999
nur-gn oelrutcurts fo .stekr asmdlanoDcM ylekil sfrawd racsO reyaM eht( gnidael rodnev fo toh sgodni
ysfaeoRitil iebuaq i eenfhsuotua c)e.b Se.hUt se eicflmoo aorr cn Ke–soygclrel a aIlwcoi nsfkno iorntni
in making or selling hamburgers versus hot dogs. Industries do not naturally converge to a predetermined
structure, nor is their evolution a matter of pure chance. The entrepreneur’s efforts shape the structures of
.seirtsudni I od ton naem ot tseggus taht suonegoxe srotcaf hcus sa ygolonhcet ro tcudorspcitsiretcarahc
do not play any role. My emphasis on the entrepreneurial factor is to redress its prior neglect.
In contrast to the earlier chapters however, I will no longer use the term ‘entrepreneurs’
y l sshlu tao’ ium sowd yerhitn huwvro.tei ansn dItyseensser h inpltyielBsri utwwbn oern‘efe rot ehtpot
yllacipyt—srekam-noisiced eno ro owt ohw—slaudividni lortnoc eht esirpretne dna evah atnacifingis
cim oenkoactes ni .ssteinutro f yehT deen ton eb e hlstarietdinnu iorfo neve dloh elhati ceilftfiot foOEC
or President of the company. For instance, George Eastman, who started and built Eastman Kodak,
d yerlv e lrsr .aea ufyisseso ncehaea iut ehp nrdfgtrgtmieef aaT novwgooreeicrorwelhlaButdltiMloaocf
not g& n. io,lCyle esWniKcM to join him to start McKinsey & Co. in 1939 and was the principal architect
nfooit a omt trnsnoetifuis qn.eaes rsbeatiudrsipwrdel trnoew rewoB did t,orn eevmeuwsosh aenhotitisop
of Managing Partner until 1950; from 1939 to 1950, he served as the deputy to a much older co-founder,
yuG .ttekcorC
eh Tepocs fo syirhituq nsiil imited to the transition from the fledgling to the mature enterprise
dn oeyveib vsr m u e r .symeiyylonfhtn siw io m lltaelaoxWitn ewre o ufsmesosmhseit i r stddeodnonaad
eht edaced-itlu mefil naps fo eht enutroF .ynap meopcyt-005 * rlu a Ono sigwi aoolh tpaxweef
entrepreneurs like Sam Walton turn a small chain of franchised discount stores in Arkansas into the
multi-billion dollar retailing enterprise, Wal-Mart. An analysis of the problems that the executives of
traM-laW won ecaf fo gniniatsus na ydaerla dehsilbatse-lle wnoitaroproc si tnaveler ot sihtnoissucsid
mainly because it helps us identify the different challenges that Walton faced in the transitional phase.
ehT lamron sisahpme fo ssenisub hcraeser no eht smelborp fo ,egral dehsilbatsearoproc tions
makes it particularly important to keep in my mind my focus on transitional businesses. For instance,
hc r rs amd aeeeonn lbcsd aesuineseteprarih f iocmwtfornpsr ooaaoo opftrpmrio eeckphctal f osucodfna
emos reevbimtuacrt s.isneirmuddaecorp dnA deedni a nosirapmoc fo egral seinapmoc yam wohstaht
firms with more diverse lines of business and greater administrative overhead earn lower returns.
:e vedtiwnatihcfte pts nrseeerpd e iaf,vfroierd vp,esweoshse ngins iun lbo ggifnd toiet uklaelofhootvLe
the transition to a large enterprise requires greater heterogeneity of assets and functions and investment in
administrative infrastructure.

* eirA ed Gues reports that the typical large company in North America, Europe, and Japan that survives
s sry a a lnhttee aralufyfa puoioe.4scbl sia oefe tdf hai5tcded eD :reve wsonhoitpe cex mesoes tsoenuG
the Japanese conglomerate, Sumitomo started as a copper casting shop in 1590. Stora, a major paper pulp
and chemicals company based in Sweden had its roots in a copper mining operation more than seven
se i.rougta n te ssc eeelg spgoemuthasTx eed seuG taht eht“ larutan efil naps fo a noitaro pdrloucoc ebowt
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© A. Bhid é
Jan 15, 1999
Data
nI gnitalumrof sesehtopyh no mrif lavivrus dna htworg I evah deiler no a tahwemos tnereffidtes
fo atad dna serutnev naht I desu rof gniward secnerefni no eht snigiro fo wen .sessenisub yra myiMrp
nsertute iny rebs dwrele pisusls ne rtfiaey oreonsrccmfithtespirotnts demtuaeifucoiomhotccrsrsucosfni
(as described in the introduction); detailed case studies that I wrote on some prominent, long-lived
sei nsaap (mlolcew sa em o tsdaeh lt;i ) aseofkv tois o ved b;rlnstucae fsi i,notendosrkanoaiparlmcoicM
the memoirs of entrepreneurs like Walton. I relied somewhat less on the Inc. 500 interviews. I had
deweivre tenhit Inc. sre dnsne euhri owinefear hpettmwu ooncbe avsersae ydlo dn sar tiecerehupttsuofrp
were far from assured. In contrast, the critical histories (listed in Appendix 2) and case studies (listed in
the References) covered over a hundred ‘tried and tested’ companies that had survived and grown through
at least a decade, and in many cases for much longer. These companies were also significantly larger than
the Inc. ventures with revenues in the hundreds of millions or billions of dollars compared to the $20
million median in some of the Inc. .seinapmoc
The varied fields from which I drew my companies (for instance Wal-Mart in discount retailing;
McKinsey & Co. in management consulting; Sun Microsystems in engineering workstations; and
snaicisyhP selaS dna ecivreS )SSP( ni lacidem stcudorp ,)noitubirtsid dna eht ytisrevid forieht
experiences limits the number of generalizations we can draw. The many stories do not, for instance,
efc onywaeeerkfru cdceot a.e lpe, e ehtdertuolBmcy c h -scte aupfasi i rel mclorsp tomafinsoc
patterns—particularly with respect to the role of the entrepreneur—across such a varied sample offers
reassurance about the robustness of the generalizations. Virtually all the data that I used, incidentally, are
ni eht cilbup niamod os eht sesehtopyh I evah nward era nepo ot noitacifirev dna egnellahc yb.srehto
snoitisoporP
y wcoontreg dln ae ertsv ueaatshasnen i tstaushbet gsglu es’deolmcyc-e f ei ,mls leo‘Aeleswisw
and mature, provided that the entrepreneur is willing to ‘let go’. Evolutionary theories, in contrast,
assume that random events lead to differences in the growth of firms. I argue that the long-term growth
and survival of a business is not simply a matter of preordination or luck; rather, I suggest that:
• A substantial gap exists between improvised startups and well-established firms in terms of their
assets, coordinating mechanisms and capacity for growth.
• Closing the gap requires entrepreneurs to make larger, longer term investments than are required to
start a promising business: in other words they have to undertake initiatives in the middle region of
the investment-uncertainty-profit diagram. And, in order to achieve ystsiorractanemelpmoc
initiatives, entrepreneurs have to formulate and implement long-term strategies instead of relying on
opportunistic adaptation.

ro seeeirrhuttn e–c ro ”.erom yB ed Gues’s standard, most commercial corporations are “underachievers”
taht tsixe“ ta na ylrae egats fo.”noitulove
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©A. Bhid ,é
Jan 15, 1999
• The willingness and capacity to pursue a strategic rather than opportunistic approach requires traits
and skills that do not play a significant role in the start-up stage and which very few entrepreneurs
have.
erutcurtS
Chapters 9 and 10 lay the groundwork. Chapter 9 examines the requirements for longevity and
growth slypin l fls ee i yiey;ehswsplchlyw t uialeaftosh gapnsedettusaibsostsnuae snginsiulb gtdaehltf
gnilgdelf sessenisub dna dehsilbatse .snoitaroproc retpahC 01 sweiver gnitsixe seiroeht dna sledomno
yalp rye ld,snsu u toeldtypiwlna eeriihlhcew f tutnseefodm ec io.shyvsnugeoouhri otpth utmllroAivfe
the entrepreneur’s contribution to bridging the gap between fledgling and long-lived business. * Chapters
11 and 12 connect the transition from a fledgling to well established enterprise to the entrepreneurs’
ability and willingness to pursue a strategic rather than opportunistic approach. Chapter 11 examines
three crucial tasks entrepreneurs must undertake in order to build a long-lived business. First, they have
to adopt and articulate an ambitious long-term goal or ‘purpose’ for the enterprise that goes beyond
lavivrus dna gnitareneg evitisop hsac .swolf ,dnoceS yeht evah ot etalumrof a ygetarts rof gniniattaeht
long-term goal. Finally, they have to implement the strategy – i.e. translate the general rules and
sevitcej btoaht esirpmoc eh t’ygetart so‘tni cif iscneopissiced dna .snoitca retpahC 21 seifitnedieht
qualities and skills that affect an entrepreneur’s predisposition and capacity to undertake these tasks.

* After they have looked at the introduction to this chapter, readers who are already familiar with the
saedi I enilt uyoa mesoohc ot miks eht tser fo e.hrtetpahc
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© A. Bhid é
Jan 15, 1999
CHAPTER 9: MISSING ATTRIBUTES
sihT retpahc seifitnedi eht cisab secnereffid neewteb gnilgdelf sessenisub dna egral .snoitaroproc noitceS1
provides the necessary definitions. Section 2 discusses why large and long-lived businesses comprise a broad
oiloftrop fo .stessa noitceS 3 neht sevom no ot enimaxe eht smsinahcem yrassecen ot etanidrooc eseht.stessa
noitceS 4s e pn yiinthme isaeevnxwheoe ttgide ntnb.oaahlltewrorg noitce S s5edul ce nhrotectpah cy bgniwohwsoh
most fledgling firms don’t satisfy the requirements for longevity and growth.
The transition of a fledgling business into a large, well-established corporation requires a fundamental
transformation rather than a simple scaling up, because of some basic differences in their attributes (see Figure 9.1).
ehT stiforp fo gn islegsdseelnf iesvuibred morf a wef dna( ne t)ftone i.ssnraorttcaf gn islegsdseelnFis uobslaecaf
st ns i uhaeotruiwtdrosern sgoosctro thccaufs sa eh tlla meszis fo eshtte ky re.ahemtv dr,ee t vsnseiIaglrr-tagnlnoocl
wo h ,d-rsn wepsahohitcntheukosssnsoa io,tisalt loc dfefuseor tdnterooavorinapptihad rradooapo orcdro-nbclalew
t ashwto lmleah t yel tboeatptmi ofncoir pg.ensgitrdealklir uaaBme rneoogfi retdarae lervdhointplar-ogcnol
seriuqer a elbaredisno cgninedaorb fo eht gnilgdelf s’mrif ,stessa gnihsilbatse evitceffe smsinahcem ot etanidrooceht
stes sg andinpao l eeyhvtteidcap aoc tetepmo cni e.gsrtaelkram
D IFFEAFRTIETRINRMNCI EBSU TES
1. 9er u g i F
FLEDGLING BUSINESSES CORPOLRAARTGIEO NS
•srotcaf wef a no desab ytilibatiforP
•stekraM ehciN
•stessA elpitluM
•smsinahceM noitanidrooC deddebmE
•stekra Mssa M
e hnToissuc slildiw eriuqer su ot elpparg hti w :esvniosiutlieni foetd e z,yyltainvaegno lew tsumtsrif
yfi cteaphsw ew naem yb eht efil fo . sasen iys lurba l sinimasiySl a f nsohaetrwiou rqsgeur o tenif eedht ezisdna
seiradnuob fo .smrif ehT yriuqni lliw osla dael su ot etaula vneoemrmo csfeileb tuoba eht elanoitarrof
,n oliattancoizfiirsor hedvniad l ancoiittraervget ndina .htworg ,tuB hguohtla ew tnorfno ccisab seussi tuobaeht
eruta n, sfeosseni sIub od to ntpmetta ot poleved a we nyroeht‘ fo eht .’mrif eW eni msatx neeehmterrioufqer
ytiveg ndonla htwor g tsgaenhsitsl egtnd’ie nslyouffdbsitas ni redro o tyfitn ee d veisihmtteclnbiottrsapihdt
entrepreneurs face in building a large and long-lived business.
SNOITIN I.F1ED
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©A. Bhid ,é
Jan 15, 1999
gninifeD eht ’ytivegnol‘ dna ’ezis‘ dna fo a ssenisub ro( ot esu eht nommoc lacinhcet,mret
‘firm’) is not straightforward. Unlike a living being which has a tangible physical form, a ‘firm’ is an
cimonoce dna lagel noitcartsba esohw seiradnuob dna efil ,naps yb ,noisnetxe osla tneserperelbignatni
.stcurtsn ot cnseerier fosgfe nnihetoiDtsniduetnrieenp fienffdoiedd e hstmelb oyrepht kees ot.ezylana
roF ,ecnatsni drad ncaitmsonoceo rsciismylana fo yltcef reevpititepmo cstekram semussa taht llasmrif
competing in a market transform the same inputs – capital and labor – using the same technology or
noitcud o.rnpoitcnuf ehT yroeht sekam snoitseuq tuoba eht htworg ro lavivrus fo laudividni smrif.toom
)V BwR e(dieV seacBruo sdeeRllac - eodhsettp oed vaIah sftoro fem fhodetrefvl ostvaaehht
setmsoismon ooct epoleved a yroeh ttaht dlu otwimrep l ausfigsnyilnaan eafmo mr i.fhtworg nI,9591
Edith Penrose proposed a model that treated the firm as an “administrative unit” that wasn’t tied to a
particular market or technology; it could, given appropriate resources, “produce anything for which a
demand can be found or created”. Different firms had different administrative attributes, expanded into
tnereffid stekram dna suht depoleved tcnitsid .seititnedi sA ew lliw ees ni noitceS ,4 l esd’oemsorneP
helped explain the tendency of firms to grow i.e., to expand the boundaries that delineated their “area of
coordination”. Other theorists, such as Nelson and ,retniW evah detpoda dna dednetxe eht weiv fo amrif
sa na ytitne htiw evitcnits i.dsetubirtta riehT krow sah del ot a ecruoser‘ desab ’weiv fo smrif htiwtcnitsid
decision making routines, memories, reputations and other such intangible, and almost human, attributes.
,gh n ceie a hwnIoVtoirBlifpRlfepodaF smr sa gnisirpmoc a evitcnitsi deldnub fo .stessa Iesu
the term assets in a broad fashion: they encompass a firm’s properties (for example, its plants or patents),
reputations (for fair dealing and reliability, for instance), relationships with customers and providers of
inputs, and competencies or capabilities (for example, marketing know how). * ,ec nIe liln ierwvonFoc
re,f s eor’r t e s shgd’ rytcnlsnel e uoo’edl a seyslhmhiasosceekrwvuatarhbci otutofsrcot‘tpassier‘
sr e,is lerpeopy uo nsl y ep.rsvmsar eedteeondhoe it gmfvh eooglruppom hottc illsAamreue tsoa tnknihtfo
a firm as an integrated living entity, we should remember that the firm merely uses the assets that one or
s lenll nai b sicksa heo stu.tej nnlyiye weaoword,ouvl lonet pfypmaci eoamn tsdmearstetonirsFonci
rehtona mrif ro esrow tey wardhtiw rieht secivres elihw gniyats no eht .lloryap ,ylralismrieSdlohkcots
can (acting through the board of directors) cause the sale of all or part of the “firm’s” assets.
Defining a firm as a dis s nfsootiitacifi cgenpisw os l doelsatho tetfe ellfs dosenavuibtcnit
ytiv edgnnao.lezis
.ytivegnoL s et as eiis’hcsietoyhfslTisa lanf‘ao a mr i hfyttii wue nhfitotn. oosci tltioefstsraop
s.ts en esoym s stoefara eSgooes in frdaorasn tahteov cetifslosoa f nt sorf’ioo mtpariisfo pemhoTc
e msosceelbhtro wr:ora essptppn iae,hstesiarnd pioh pitsxtireawelmeo rt,sruucos dna desueleayvolpme
eriter ro .evael tA eht emas ,emit eht tiusrup fo wen sevitaitini setaerc wen .stessa ehT ecnacifingisfo

* nredoM VB Rstsiroe hetkam , srneo ninitefcenwittesbid , s ce,icstreau ctodnscsneieatmreapnmyodc
seitilibapac dna os .no yM tnemugra seod ton eriuqer eseht ,snoitcnitsid os I lliw kcits htiw ehtdaorb
’.stess afy‘orogetac
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© A. Bhid é
Jan 15, 1999
myrtiifve gtnaohlt edwessucs indi traP 1 r oefc(nats nei hytticapa cot edreurc uetcsiedsenru cmorfsknab
and irreversible commitments from customers) derives from its continuity rather than sameness. A long
d .e me verl hi sipy glde fm a luenseym aorat trmeihapioeabbt patv erlsmJeebeAaonhvhcetoerbp
decalp errevo e,hst esiereutton velecldit sdrager ti sa eht emas elp meestuaceb eht segnah cevahneeb
gradual. As Penrose wrote “the name of a firm may change, its managing personnel may change, its
cihpargoeg noitacol yam ,egnahc sti lagel mrof yam ,egnahc dna llits ni eht yranidro esruoc fo stneveew
r eddliu sotnwioc ot eb eh tem amsri fd nda leutoic rew hytrot sfo s t.iefil ryethi tueesnhhaitWwtnoc
deniatniam yb sreknab ni semit fo sisirc ro yb eht ytiunegni fo a revelc retomorp si ,tnavelerrignidivorp
that the firm neither suffered such complete disruption that it lost the ‘hard core’ of its operating
personnel, nor lost its identity in that of another firm” 3
dwetaicos syaleso lsycitivegn omlriF hti sti yticapac ot edivorp sti sredlohkcots ro( rehtolaudiser
claimants) a satisfactory return. Chronic losses will lead stockholders to shut down or liquidate a firm.
sredlohk coostlSa evah na evitnecni ot etadiuqil fi eht ecirp yeht nac ezilaer rof eht stess asdeecxeeht
snruter yeht tcepxe ot eviecer yb gniniatniam ti sa a gniog .nrecnoc nA sisylana fo mrif ytivegnolsi
therefore virtually indistinguishable from an analysis of long run profitability. (This does not mean
however that building a large, long-lived firm necessarily provides attractive returns; a firm may be worth
less than the costs incurred to create it, but more than the liquidation value.)
Size. I lliw taert eht ezis fo eht mrif sa eht aera fo ecneulfni fo sti euqinu .stessa nIcimonoce
terms, this corresponds to the markets where the firm affects prices. This definition is somewhat broader
than Penrose’s, who delineated firms by the area of their direct administrative control. It contrasts even
more sharply with theories that use the criteria of ownership or employment as the basis for setting firm
s edi er – ya d y to dyenb ’e le nnnomesrphd uawsrd somt n .ooriieaesatebefshisdpnt eiis rs‘ituoyM
definition corresponds to constructs in the management literature that refer to a firm’s ‘business system’,
‘value chain’ and ‘differentiated network’: any asset, regardless of its legal ownership, that is partially or
yl lduefzilaicep srof eht esu fo a ,mrif si trap fo taht.mrif
sih Tnoiti nsiefve ld.osvfnfioedart tI sekam mrif ezis tluciffid ot .erusaem tI sdael ogtnippalrevo
boundaries when firms share assets (such as a close supplier customer relationship). And readers who are
desu ot gninifed smrif ni smret fo rieht stessa ro seeyolpme yam terpretnisim emos fo eht stnemugrataht
ytive gs mnnfroooilifti dlnaocci t eiymrfocis t p n llsenleudoihiiwt i .new i voy f, elmet lilduIlloBiefwb
and growth that the sharper ownership and employment approach to delineating firms may obscure.
.E2SSRTEEVSISDA
sdmerohicsfilbatse -elglreawL esirpm a erom suoenegoreteh eldnub fo stessa dna seitivitcanaht
tso mg n.islegsdseelnfisub sA ttelweH dna drakcaP deton ni rieht yrev tsrif raey ni ,ssenisub a“elgnis
”.yn alpum fo]scss e eykac lactemucr[suadrorp 4 s ef ynorni ealyfmlfloac ispnyotitaro perro uctaM
stcudorp dna ,secivres netfo hguorht suomonotua ssenisub .stinu s mdreivfil - ygwlneeofvli t naeelhvetEr
that stick to narrow product lines such as )dea onndoiinwfhae(cgdeW )s eytyvrenals ahesrmwaeeijt(raC
9
©A. Bhid ,é
Jan 15, 1999
including brand names, distributor relationships, skilled craftsmanship and design, and marketing
capabilities. This is not to suggest yl inrwa o sds semae v r cyidie erlafgtne-o nav grsahfnbtrtooelsrsoa
ysneasmsapm omce ntsessyesn ilslua brr eitt;veassohhunttjoit cymnnr uao sfmfoerheewypo lepvmaeh
. setvniet mcte nflioetsso irsdciiM a ex reyoltmpimt onwceon naht ti saw ni eh ts07 9he1tsoubacsetbi
,s e ,i dsss g,nl ets osal eec nm lnesryuowre oosdaoodhooreninhmlowforhtaprrmoccmpemeneptuf
depol eesvveeac dhi s vddyrnoreaoa sglsl rifecoi nl sapdrpnouatscartnoc -,bsursemo teesrsuoucmaceb
.met styfsosor cde oiehstMitetcruoser
se ssyawl eolnyrlaitclrino uei fetnehaem tngudole rosfevaoteerh c.n sI asse’nmir siufb sAsmrif
, ws on ,r oysgsi e ert,hdeeast ny icrtaodloealdplmhpapotm uteessruac ot . te nmeeoersregf efdid dnAerom
volume permits the specialization that increases the heterogeneity of their activities: for instance, larger
smrif nac droffa ot etarape skoob gnipeek morf ri elhatic nlaon ri.tfnnooictcnuf y tienego rneatceHosla
etu beni lirsttybnauo wscot.la vsai’vmrruisf ytiveg nsorlet s,otf x eelen ls,seisawwte sefs soada ab oArb
“f oesuaceb .st ce ec fn)e yfa ”etreerdsmae huneoevoTsai sredng”cwir soerehnoiy(tsi“ratnemelpmoc
,gsn m ideh telcetvb ireioshislrmwuf-prqfgi.eonfsro mlnosotiin ta eahevncviieatdmhcreofofce
ytiratnemelpmoC
The distinctive assets that give a firm its identity (such as its unique products, know-how, and
relationships) have limited value on their own. Their optimal use requires other distinctive assets to
sre ddl no r.sahtene knhogr cetiaisomotrettecu hn slnoetep ucrmmefnueovel l ciippotaomtcFloeecfvfeed
ecruoser sredivorp ot wardhtiw eht tessa morf eht.mrif
To illustrate, consider a pharmaceutical company that owns a patented drug . Unlike the
d eytt airidetoc nmudemderoomecrufpsfsiadn uni sledom f o, ntociletaficrt ieeetpphumteoccamrahp
company cannot sell its unique product in an anonymous auction market. In order to realize the value of
its patent, the pharmaceutical company must secure the use of a complementary sales and marketing
capability; through its own personnel, a joint venture, or third party distributors, it must persuade doctors
to prescribe the drug. Failure to train and deploy knowledgeable sales and marketing staff limits profits
from the drug and encourages stockholders to liquidate the firm to realize the value of the patent i.e.
redeploy the asset in a higher valued use. * yratnemelpm omCaertsnwod selas seitilibapac osla pleheht
firm retain valuable upstream research personnel: a researcher cannot derive much psychic or financial
.po l sef stvfDtc ea&iu tdtRdee sohkyrtrlpa e mgvrnioit fkcd stmarertearofaoohiwfwndtfeer The
tnemugra nac eb dednetxe ot yna tessa taht setaitnereffid a s’mrif stcudorp ro :secivres ot eht tnetxeeht
s ’tmurpitfu o s,ieuq isntu ieul alv ldinwepe dno e h sty’tmirliif b oas treetma ocotohslwu cl leivwireedht

* I ma ton gnitseggus taht snruter ot gnitsevni ni eht yratnemelpmoc tessa lliw syawla eb ,evitisopylerem
that once the investment has been made, on-going profits will be greater and that the incentives to
eltla. idrewiebuwqoill
10