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• Who innovates? (L1)
• How to turn ideas into profitable products? (L2, L3)
• How to capture value from innovations? (L4)
• How to organize the ability to keep innovating? (L5, L6)
• How to combine innovation with sustainability goals? (L7)
• How to market innovation? (L8)
Innovation is essential for the competitive position of companies.
Firm theories:
• Transaction cost theory
• Behavioral theory of the firm
• Organizational learning
• Appropriability mechanisms (IP, specialized assets)
• Resource-based view and Dynamic capabilities view
• Inter-firm partnerships and open innovation
• (Sustainable) business model innovation
,LECTURE 1 - Innovation and Innovators
Why do firms exist?
→ Transaction costs theory (Williamson, 1981)
Who innovates?
→ Incumbent curse (Chandy & Tellis, 2000)
→ Disruptive Innovations (Christensen et al., 2015)
Why do firms exist?
Neoclassical economists:
Firms as production functions that efficiently transform land, labor & capital inputs into
goods & services.
In competitive markets, the interaction between buyers and sellers is organized through
information provided by prices (price signals).
Transaction Cost Theory
Firms → organizations that bring together various resources, employees,
and activities under one management structure. They conduct transactions
and economic activities internally.
They can make their own production factors or get them from outside.
Open market → transactions are carried out between independent parties in the broader
economy: buying goods from suppliers, selling products to customers, contracting with
external suppliers.
★ Firms exist because: costs of organizing transactions within a firm
(internally) are lower than the costs of conducting them in the
open market → firms are more efficient and cost-effective way to
coordinate economic activities and resources.
Firms exist to economize (reduce) on transaction costs.
Nature of Transactions → economic activities involve various transactions (buying and
selling goods, contracting services, forming partnerships etc)
Transaction costs → costs involved in finding, negotiating with, and managing trading
partners, as well as resolving problems. These costs can include time, effort, legal fees, and
gathering information.
Market vs. Hierarchy vs. Ally: The theory compares two ways of organizing economic
transactions: through the market (external transactions) and within a firm (internal
,transactions). It suggests that firms exist because they can reduce transaction costs
compared to using the market for every transaction.
Make or Buy Decision: → whether to make goods/services in-house or buy them from
external suppliers. TCT helps in making this "make or buy" decision by considering which
approach minimizes transaction costs.
Asset Specificity → how specialized and unique an asset is. High asset specificity can lead
to a preference for hierarchical (in-house) organization within a firm to protect investments
and ensure reliability.
3 Ways to Organize Transactions (Transaction Governance):
Hierarchy ("Make"): Transactions happen within a single organization, and disputes are
resolved by the owner (firm).
Market ("Buy"): Transactions occur independently in the open market, guided by supply and
demand prices.
Hybrid ("Ally"): Parties engage in long-term contracts that maintain their independence but
offer extra safeguards compared to the market.
Behavioural assumptions related to TCT
Agreements (for transactions) can't predict every possible future
situation → Incomplete Contracting. Transactors act under:
1. Bounded Rationality
People have limits in how much information they can process efficiently. They can't think
everything through perfectly.
, 2. Opportunism
Some might act in their self-interest, trying to deceive or take advantage of others (lying,
cheating).
Make vs. Buy - each approach comes with trade-offs (that are moderated by “asset
specificality”)
Reasons to make: Reasons to buy:
→ Minimizing motivations (of suppliers) for → Suppliers can aggregate market
achieving less-than-optimal outcomes demands (scale and scope efficiencies)
(better performance) → Usually cheaper/better (es lohnt sich)
→ Full control → Suppliers can spread risks
→ More access to information → Firm remains flexible
→ Owning know-how → Firm requires less capital (stocks,
→ Ownership brings economies of scale smaller financial risk)
→ Governance costs go down → Firms carry less responsibility
→ reduced dependency on ES (lower → Firms can diversify risk
transaction costs) → it’s a strategy; you do minimum, focus
→ Good for R&D, worse for low-cost on core business and outsource the rest
production
Make or buy decisions
Consider backward/forward/lateral integration
options: Forward and backward integrations
are two integration strategies that are adopted
by organizations to gain competitive
advantages in the market and to gain control
over the value chain of the industry under
which they are operating.
These strategies are one of the major
considerations when developing future plans
for an organization. Together these two
strategies are known as vertical integration.
Oliver E. Williamson (TCT reading)
Asset specificity influences the choice between market transactions and
transactions within firms → When assets are highly specific, firms are better
because they offer better protection against the risks associated with those assets, as
opposed to relying on the open market where the assets might not be as well protected.
→ high specificity of assets = firms (benefit)
→ (low) non-specific assets = market enjoys the advantages (the more general the
product, the more economies of scale and scope)
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