Dynamic Capabilities: Implications for Firm Boundaries and Organizational Design

Among various theories of the firm, the dynamic capabilities approach has not fully drawn its implications for firm boundary and organizational design. Firm boundary and structural design are abstracted away when strategy scholars study capabilities and firm-level heterogeneity. This chapter corrects for this deficiency by developing a coevolutionary model, with variations in combinations of entrepreneurial management and organizational routines as primitives of coevolution. Firms choose their boundary and structure as they select and replicate different combinations of knowledge domains and organizational routines to develop ordinary capabilities. Distinct from ordinary capabilities, dynamic capabilities embodied in top management teams enable firms to break or redefine their evolutionary paths, creating heterogeneous firm choices in boundary and structure. The model demonstrates the importance of looking at dynamic capabilities, alongside transactional and contractual characteristics, to provide a robust theory of the firm.