Complementarities among Capability, Transaction and Scale-Scope Considerations in Determining Organizational Boundaries

The purpose of this paper is to discuss the conditions under which capability, transaction and scale considerations interact in determining organizational boundaries. It is argued that this interaction contributes to explaining the individual firm's performance and growth whenever cognitive competence is limited, radical uncertainty is present, some inputs and processes are indivisible and complementary, and some relevant knowledge is tacit, non-transmittable and characterized by set-up processes with high fixed costs. Under the above conditions, which are becoming increasingly important with the spread of the knowledge-based economy, the growth of the firm can be regarded as a consequence of managerial ability to set a strategy that exploits the mutually reinforcing advantages provided by the organizational coordination of capabilities, transactions and scale of processes, while limiting counteracting forces deriving from errors of strategy that are due to cognitive inertia and myopia, unclear allocation of rights and responsibilities, errors in identifying aims, imprecision in performance measuring, difficulty in focusing incentives, influence activities and problems of internal communication.