OrganizationScienceArticles in Advance, pp. 1–10

ISSN 1047-7039 (print) � ISSN 1526-5455 (online) http://dx.doi.org/10.1287/orsc.2015.1022

©2015 INFORMS

Strategy, Problems, and a Theory for the Firm

Teppo FelinSaïd Business School, University of Oxford, Oxford OX1 1HP, United Kingdom, teppo.felin@sbs.ox.ac.uk

Todd R. ZengerDavid Eccles School of Business, University of Utah, Salt Lake City, Utah 84112, todd.zenger@utah.edu

In this paper we develop the outlines of a theory for the firm—a theory that guides a firm’s path to value creation,in response to the critique by von Hippel and von Krogh [von Hippel E, von Krogh G (2016) Identifying viable

“need–solution pairs”: Problem solving without problem formulation. Organ. Sci. 27:207–221; henceforth Hippel–Krogh]of the problem-solving perspective as a theory of value creation. Hippel–Krogh argue (a) that problems and solutionscannot always be separated because they often emerge as problem–solution or need–solution pairs that are discoveredserendipitously, and (b) that deliberately formulating or choosing a single, fixed problem restricts the firm from accessingthe vast array of external problem solvers and restricts the firm from valuable reformulations of the problem and “richlandscape search.” Although Hippel–Krogh raise interesting and important arguments, we claim that they miss what is mostcentral about the problem-solving approach: the comparative, organizational, and strategic aspects of the theory. However,their critique is also important because it draws attention to a critical void in the problem-solving perspective, namely, theneed for firms to possess a theory to guide their efforts at value creation.

We argue that this theory for the firm links problem solving with a broader theory of value creation, thus respondingto the concerns raised by Hippel–Krogh. We discuss how firms theorize the process of value creation by articulating anoverall architecture and bundle of problems around which each firm uniquely organizes and governs as a path to valuecreation. We provide two brief, informal examples (Starbucks and Apple) to illustrate our points, linking these examplesto the need–solution landscape proposed by Hippel–Krogh. In all, we provide a broad sketch and outline of a theory ofvalue creation as it relates to problem finding and problem solving while concurrently responding to points raised byHippel–Krogh.

Keywords : strategy; innovation; problem solving; governanceHistory : Published online in Articles in Advance.

1. IntroductionThe problem-finding and problem-solving perspective—as a lens through which to understand strategy, innova-tion, and entrepreneurship—has recently received muchattention (e.g., Baer et al. 2012, Felin and Zenger 2014,Lakhani et al. 2013, Leiblein and Macher 2009, Macherand Boerner 2012, Nickerson and Zenger 2004, Binghamand Spradlin 2011). This perspective argues that firms cre-ate value as they formulate, identify, and solve problems.The perspective is particularly useful in offering theoret-ical guidance for how to organize and govern problemsolving and associated innovation (Nickerson and Zenger2004). The problem-solving perspective has specificallysought to develop a firm-centric, comparative, and nor-mative theory of the organization and governance ofvalue creation, and it thus can be seen as a counterpointto the recent emphasis placed on serendipity and luck

in strategy (e.g., Denrell and Liu 2012, Winter 2012).Although serendipity undoubtedly matters for firm per-formance, the problem-solving perspective assumes thatfirms also make consequential organizational and gov-ernance decisions that impact their performance. Thesefirm-centric choices focus on what problems the firmought to solve, and how, and when and where to let oth-ers find and solve problems or perhaps even defer toserendipitous discovery.von Hippel and von Krogh (2016; henceforth Hippel–

Krogh) provide a critique of the basic framing thatunderlies the problem-finding and problem-solving per-spective. They make two central points: (a) problems andsolutions cannot always be separated because they oftenemerge as problem–solution or need–solution pairs thatare discovered serendipitously, and (b) deliberately for-mulating or choosing a single, fixed problem restricts the

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firm from accessing the vast array of external problemsolvers and restricts the firm from valuable reformula-tions of the problem itself that facilitate “rich landscapesearch.” Overall, they argue that sequential problem for-mulation and solving are excessively costly, delimiting,and unrealistic, compared to the opportunities providedby the identification of what they call “need–solutionpairs.”Their critique raises important points, highlighting a

potentially important path to value creation and revealingdeficiencies in the problem-finding and problem-solvingapproach. We concur that narrow problem formulation islimiting and that some value creation may indeed occuras need–solution pairs are searched or (serendipitously)discovered. However, we argue that these need–solutionpairs are likely the result of problem finding and prob-lem solving by other firms, and importantly, they arrivewith a price tag. The need–solution pairs discussed (andadvocated) by Hippel–Krogh are the equivalent of extantproducts, marketed and sold by other firms and marketactors. Thus, Hippel–Krogh miss what is perhaps mostcentral about the problem solving approach: the compar-ative and strategic insights that it offers to focal firms forhow to govern value creation. More importantly, they failto provide a normative (or descriptive) theory of when afirm should defer to the serendipitous discovery offeredin need–solution pairs and when a focal firm shouldtake up problem finding and problem solving itself. Thisadmittedly is not their aim, though this issue, as we willhighlight, is intimately linked to their critique. Our efforthere, then, is as much remedy and enhancement as cri-tique. We contend that the power of the problem-solvingapproach lies in the strategic and comparative guidanceit provides to a focal firm seeking to create value, recog-nizing that serendipity certainly may play a role in thisprocess.Hippel–Krogh’s arguments do, however, highlight an

important void in the problem-finding and problem-solving perspective. Their critique reveals a need toplace the microanalytics of problem finding and problemsolving as vehicles of value creation (e.g., as delineatedby Nickerson et al. 2007) within a wider strategic con-text in which firms actively orchestrate the process ofwhat problems to address and solve, when and where toproblem find and problem solve, and when and whereto defer to others’ problem finding and problem-solvingefforts. To remedy this void and to address the concernsraised by Hippel–Krogh, we articulate how a theory forthe firm is needed to place problem finding and problemsolving within a broader theory of value creation. Weargue that the primary path to value creation for a givenfocal firm reflects its capacity to compose an overarch-ing and unique, firm-specific theory of value creation,one that reveals an architecture and bundle of specificproblems that deserve attention. This theory guides theexpectations, governance, and strategic direction of the

firm. It also reveals a potential comparative advantagein problem finding and problem solving within specificdomains, which then directs decisions about which prob-lems the focal firm needs to solve, and which not, andhow to organize and govern this activity. The theory alsoserves a vital role in directing the firm as it attends toand filters the vast array of need–solution pairs that itconfronts, ideally revealing those problem–solution pairsthat fit within its architecture of problems needing res-olution. At the same time this theory leaves unattendedvast residual domains of problems that are neither iden-tified nor more effectively solved with the aid of the the-ory and which are perhaps better explored, if at all, byothers (partners, users, or suppliers) or through serendip-itous discovery. Hence, a central strategic activity forfocal firms is the composition of a theory for the firmthat illuminates when and where to problem find andproblem solve and when and where to outsource theseactivities.

2. Value Creation: Serendipity,Markets or Organization

Most scholars would agree that a central concern ofstrategic management is the creation of value. Histori-cally, strategy scholars have looked at various firm andhigher-level antecedents and factors related to value cre-ation. At the firm level, scholars have looked at theorigins of value held in resources (e.g., Barney 1991),accumulating experience (Dierickx and Cool 1989), anddeveloping capabilities (e.g., Coff 2010, Teece 2007), aswell as in a firm’s governance (e.g., Argyres et al. 2012).Some have argued that the “locus” of value creationexists at higher levels and thus have placed emphasis onfactors such as the evolution of industries (e.g., Jacobideset al. 2006, Jacobides and Winter 2012) or interorgani-zational relations and networks (Dyer and Singh 1996,Kogut 2000). In fact, one of the central trends to emergefrom recent research is a diminished focus on the firmitself as a central unit and source of value (see Felin andZenger 2014) and an increased focus on value creationthat originates from linkages with disparate environmen-tal constituents (e.g., users, customers, suppliers, and uni-versities). Accordingly, the “open innovation” literatureemphasizes the importance of value-creating interactionswith suppliers, universities, customers, and others outsidethe boundary of a focal organization (for a recent review,see West et al. 2014).To put our response to Hippel–Krogh in perspective,

it is worth highlighting that both von Krogh and vonHippel, along with many others, have independently andjointly made important contributions to this broader lit-erature that emphasizes the need to move conversationsabout strategy and innovation beyond the boundaries ofthe firm itself, emphasizing the power of users and moreopen forms of collaboration and interaction (e.g., Baldwin

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and von Hippel 2012, Benkler 2002, Chatterji and Fab-rizio 2013, Cohen et al. 2002, Fey and Birkinshaw 2005,Garriga et al. 2013, von Hippel and von Krogh 2003, vonKrogh et al. 2003, Laursen and Salter 2006, Love et al.2013, Roper et al. 2013). Hippel–Krogh’s critique of theproblem-solving perspective builds on this precise theme,focusing on the knowledge, information, and solutionsthat are available to firms outside their boundaries. Thegeneral tenor and assumption of this research is that firm-centric innovation is unnecessarily delimiting, and thusthere are significant opportunities in opening up innova-tion by incorporating users, customers, and various exter-nal constituents (e.g., universities and partners) in the pro-cess of innovation.This theme is carried through in the target paper.

Hippel–Krogh specifically discuss how innovationemerges through serendipitous interactions with externalstakeholders and the environment, rather than deliber-ate problem finding and problem solving on the part offocal firms. They argue that problem solving often hap-pens when firms inadvertently discover fully developedsolutions to problems that were unforeseen to them. Forexample, they discuss how an employee of a firm, walk-ing through a trade show, might find solutions to prob-lems that she did not even recognize her firm had (e.g., aproblem associated with payroll processing). Problemsolutions thus emerge without problem formulation inthe form of what Hippel–Krogh label “need–solutionpairs.” Furthermore they argue that restricting prob-lem formulation to a specific focal firm unnecessarilyrestricts the firm from a vast array of alternative formu-lations and solutions accessible through “rich landscapesearch.” That is, external actors not only might providefeasible solutions to problems, but they might even rede-fine the problem (e.g., going from “where do I sourcechemical x?” to “how could we produce without chem-ical x?”). Throughout their discussion they emphasizeboth the “value of rich landscape search” and the roleof serendipity in this process, thus linking their argu-ments with a broader conversation about the importanceof both openness and the role of luck in strategy.We certainly recognize the value of “broader” and

more open search (see Leiponen and Helfat 2010), aswell as the need to maximize the value that serendip-ity offers, for instance, by being open to external prob-lem formulations and need–solution pairs. However, aswe have discussed elsewhere (Felin and Zenger 2014),the central questions are when, why, and how shouldfirms search more broadly or rely on serendipity, andwhat governance forms are best suited for such activity?The goal of the problem-finding and problem-solvingperspective is to develop a comparative, strategic, andnormative theory of value creation that is analytic andactionable for a focal firm in its efforts to create value.Thus, innovation, from our perspective, is not merely“rich landscape search” for extant need–solution pairs,

though this might be a part of it. Rather, innovationrequires purposeful governance and a focus on questionssuch as knowledge sharing and ownership and incen-tives. Users, for example, might effectively tackle cer-tain types of innovation problems, whereas other typesof problems might require careful coordination withinthe firm. Thus, the central questions are which problem-finding and problem solving activities should the focalfirm engage in; when and why and how should it orga-nize to do this; and which problem-finding and problem-solving activities might be better left to other actors?Paradoxically, we might contend that the Hippel–

Krogh critique is actually overly focused on focal firmsin that it interprets seemingly serendipitous discover-ies as evidence of the absence of deliberate problemfinding and problem solving. However, the economyis not merely filled with need–solution pairs, but alsowith hosts of deliberate problem finders and problemsolvers who in fact generate the need–solution pairsthat focal firms discover. In other words, need–solutionpairs do not emerge ex nihilo. More often than not,need–solution pairs are the hard-earned work of otherfirms (or “markets”) and thus are sold for a price. Whatmay appear to be a purely serendipitous solution dis-covery by a focal firm is likely to be the outcome ofa highly deliberate, possibly costly problem formula-tion and problem-solving process by another firm. Thus,solutions to many problems—often the most valuableproblems—don’t emerge out of nothing. Their realiza-tion requires production and governance. Hence, the cen-tral question for the focal firm is not merely when topursue serendipity and when to pursue deliberate prob-lem finding and problem solving, but rather when to relyon the problem finding and problem solving of others,and when to rely on their own efforts.The examples provided by Hippel–Krogh (e.g., of

stumbling on a software solution at a trade show orof finding a supplier of lumber in Helsinki) are primeexamples of how individuals or firms may stumble onsolutions to their problems, in markets. These solutionsare captured in the many products that are available forsale. Other firms seek to market and sell their solu-tions to problems, problems that in fact are frequentlyunforeseen by the focal firm. Of course, the fact thatthe economy is full of actors deliberately seeking solu-tions to others’ problems only highlights the importanceof serendipitous discovery and need–solution pairs thatHippel–Krogh highlight.However, there is a clear limitation in relying on

serendipity as a source of value creation; namely, need–solution pairs arrive with a price tag. Hippel–Kroghignore this issue. They argue that “a great advantageof a need–solution pair problem-solving process is thatthe potentially relevant need and potentially useful solu-tion come packaged together” (p. 214). However, anyprepackaged need–solution pair is likely to be priced and

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readily observable by others. Importantly, whether thatneed–solution pair is somehow value creating for thefocal firm hinges on an assessment of value in use relativeto price. (Below we discuss the possibility of identifyingnovel “affordances” for extant need–solution pairs.)Value creation only occurs when a focal firm some-

how discovers a bargain, namely, a solution with valuethat exceeds the price paid. Moreover, even such valuecreation may be short lived if competitors can accessthese same solutions at similar prices. Thus, discoveringfirm-specific bargains among solutions demands somekind of firm specific filter, a filter that enables the firm tosift through the abundance of possible and ready-madesolutions, to discover those that might offer the firmunique value. Firms need some kind of mechanism orprocess that reveals a domain where the firm is compar-atively advantaged in finding and/or solving problemsor a domain of problems that, if solved, generate valueunique to the firm.1

Hippel–Krogh seem to implicitly acknowledge a needfor this type of filter by offering advice for how toimprove the “conditions for effective need–solution pairsearch” (p. 215). They discuss such factors as the role ofprior experience, cognition and biases, individual charac-teristics, and techniques for improving one’s luck. Over-all the search for need–solution pairs, they argue, shouldbe “guided by broad and flexible problem formulation” orby an entrepreneur’s answer to such questions as “Whatcan the basis for a profitable business be for me? Letme search widely for what others are doing successfully”(p. 217).Although these questions and Hippel–Krogh’s general

advice about serendipity and search are intriguing, theydon’t offer any firm-specific guidance for how or whya search (e.g., for what) should be initiated in the firstplace. Admittedly the problem-solving and formulationliterature itself is relatively silent on this question aswell (focusing instead on what types of problems shouldbe governed by what types of forms; Felin and Zenger2014). The Hippel–Krogh critique of problem solvingthus implicitly highlights the need for this firm-specifictheory. We view it as central to building a robust, norma-tive theory of value creation. We thus contend that thecritical, firm-specific guide for initiating innovation, anda set of problems that might be solved, rests in a firm’stheory of value creation: a theory for the firm, a theorythat both reveals an architecture of problems to solve andguides a firm in filtering abundant need–solution pairsin the market.

3. Composing a Theory for the FirmHippel–Krogh provide little guidance regarding howfirms should optimally search across problem–solutionor need–solution landscapes beyond offering advice onhow to increase serendipitous interactions (by searchingmore broadly or defining problems more broadly). As

mentioned above, admittedly the current problem-findingand problem-solving perspective is rather vague abouthow actors should select problems in the first place,focusing instead on how solution discovery is optimallygoverned once a problem is identified (see Baer et al.2012). We next discuss the outlines of a more strategictheory of problem finding and problem solving, a theoryfor the firm. We also provide some practical examplesto briefly illustrate our point, linking our arguments withHippel–Krogh’s notion of need–solution pairs.Vital to a firm’s capacity for value creation is its abil-

ity to generate value for customers or offer commonvalue at a uniquely low cost (Brandenburger and Stuart1996). Uniqueness is the discriminator between creat-ing value that flows solely to customers and creatingvalue that is at least partially captured by the focal firm.Value creation for the focal firm therefore demands thatfirms discover or solve unique problems, namely, prob-lems or solutions unseen by or inaccessible to others.Identifying common problems and discovering commonsolutions are unlikely paths to value creation, becausethese common problems and solutions are accessible todirect competitors as well. Many of the examples dis-cussed by Hippel–Krogh fall into this category: solu-tions to unforeseen problems that are offered for salein markets. Thus, discovering and purchasing a softwareproduct (one of the examples of Hippel–Krogh), even ifnovel to the purchasing firm, is an unlikely source of afocal firm’s value creation (i.e., its captured value) if itis also readily accessible to competitors.2

Such solutions are sold in markets where any value-bestowing capacity is either already priced in or is com-peted away as competitors make similar adoptions. Thekey exception to this logic is if the focal firms possessother assets or solutions that are uniquely complemen-tary to this commonly accessible need–solution pair.We contend that, for a given focal firm, the path to

value creation typically originates with a cognitive effortto compose and develop a unique and firm-specific the-ory of value creation (Felin and Zenger 2009), in otherwords, a theory of and for a specific firm (see Zenger2013). This theory may reveal assumptions about the evo-lution of consumer tastes, define an unmet customer needor unaddressed problem, offer insights into the under- orovervaluation of assets in markets, or highlight a prob-lem in the production of a product or service. The theoryessentially defines a set of problems for which resolutionis hypothesized to create the value foreseen. For somesubset of problems, solutions may indeed already exist,whereas for others they may not. However, the theoryframes an architecture of problems to solve and there-fore may also reveal potential sources of value in solutionmarkets. The theory may also highlight promising pathsto internal solution discovery, where solutions are likelyto be found, and how this search activity should be gov-erned. The theory then represents a forward-looking (seeGavetti and Levinthal 2000) perspective that guides the

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problem-formulation and problem-solving efforts of thefirm. The central vehicle for value creation, then, lies incomposing and updating the firm’s theory and using it toformulate problems, organize solution search, and selectfrom among available need–solution pairs.The concept of theorizing links to a very particu-

lar view of cognition and has its roots in psychology.As Felin and Zenger (2009) discuss, humans, includ-ing managers and entrepreneurs, have a unique capacityto engage in forward-looking theorizing about possi-bilities beyond extant realities, theorizing that uniquelyguides attention and observations. We argue that theo-rizing, then, isn’t the unique domain of scientists butin fact a universal human capacity that shapes humanperceptions and behavior more generally (see Gopnik1996). Importantly, theorizing is not simply the processof environmental observation or representation, learningor information processing, which suggests a rather pas-sive conception of rationality and mind (see Felin andFoss 2011, Winter 2011). Rather, theorizing is an activeeffort to project into the future and to imagine possibil-ities beyond what might readily be observed. We thusbuild on a very particular view of the human mind, onethat does not rely solely on stimuli but instead focuses onthe unique expectations, guesses, hypotheses, and the-ories that the mind constructs as it interacts with theenvironment (e.g., Peirce 1957, Spelke et al. 1992).3

Our view of strategic choices guided by a theory is notwithout precedent in the strategy literature. For exam-ple, Gavetti et al. (2005) have argued that strategic nov-elty emerges as solutions or products or processes fromone context are applied to another context via analogy.Others have highlighted how novelty emerges throughthe recombination of different (and distant) products orsolutions (e.g., Ahuja and Lampert 2001, Rosenkopfand Nerkar 2001, Fleming and Sorenson 2001). Beyondsearch, other scholars have emphasized the importanceof “mental representations” (e.g., Csaszar and Levinthal2015, Gavetti 2011, Helfat and Peteraf 2015, Levinthal2011). These studies provide valuable insights into cog-nition, strategy making, and the origins of novelty andvalue. We build on this work by arguing that individu-als and firms compose theories that reveal problems tosolve and then guide the selection and governance ofvaluable trials and experiments to test them. The firm-specific theory thus prompts strategic choices that gen-erate value that might be captured by an entrepreneur orfocal firm (Felin and Zenger 2009, Benner and Zenger2014). Furthermore, the theory becomes a central driverof governance and the organization of innovation (seeFelin and Zenger 2014).This intuition is powerful for the context of strategy

as well, because it moves us from behavioral, input-oriented theories of association or learning to the gen-eration and bootstrapping of guesses, questions, andhypotheses about new domains, a central issue for the

field of strategy. In economic settings, an individual’scapacity to recognize valuable problems and solutionsdepends on beliefs and attention, which are in turnshaped by the unique theories actors hold. Scholarsin organizational economics have also highlighted therole that beliefs and vision play in strategic and orga-nizational activity (e.g., Van den Steen 2005). Theo-ries reveal unique problems and solutions, previouslyunanticipated by others. The role that theories play inshaping our attention and observation is well illustratedby the example of Newton and his theory of gravity.Although others had long observed falling apples (andany number of other falling items) before Newton, nonehad observed the phenomenon of falling with Newton’squestion and theory in mind. Our observations and per-ceptions of our surroundings (and of value), then, aremind and theory-laden and dependent (see Popper 1972).Although the Sun indeed appears to orbit the Earth, onlysound theoretical intuition sheds a different light on theactual reality. Similarly, theories that guide value cre-ation and value capture direct our attention and help toreveal new ways of seeing and potential value in solu-tions (their alternative uses and affordances) that othersmay fail to see.To return to Hippel–Krogh, note that a few of their

examples indeed also touch on the need to identify“new-to-the-world need–solution pairs”—solutions thataddress truly new-to-the-world needs. It is this domainof novel problems, or novel uses of old solutions toaddress new problems, that represents the most intrigu-ing ground for the field of strategy. However, a largebulk of Hippel–Krogh’s examples (sourcing lumber fromHelsinki, figuring out why a car does not run, etc.) seemto represent rather mundane examples of how individu-als or firms serendipitously encounter extant solutions torather generic problems.If the aim is value creation, the distinction between

known versus novel uses for solutions and products isquite important. Existing markets or need–solution land-scapes, absent theories, are relatively static, where com-mon needs and common solutions generate commonvalue. Firms offering solutions may generally know theircommon value and price accordingly. However, theo-ries about potentially novel problems or novel uses forproducts and solutions can animate markets of problem–solution pairs, generating value-creating possibilities andrecombinations unforeseen by others.The notion of the set of possible “affordances” (i.e.,

uses and functions) of a solution or a product usefullyillustrates theory’s role (Felin et al. 2014). Existing prod-ucts or solutions that might be for sale in factor markets(Barney 1986, Leiblein 2011) are commonly categorizedaround specific functions and uses broadly known tosellers and buyers. These categories render markets quiteefficient, but there is a vast array of possible (alterna-tive) uses for any solution or factor, unseen or unspec-ified, yet to be imagined or produced. This indeed is

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the domain of strategy. The vast set of possible uses, or“affordances,” for a given solution or product is likelyto far outstrip the value offered in simply solving a spe-cific, envisaged problem. Although intended uses of asolution or product, as foreseen by those actors engagedin providing and selling the solution, may be effectivelypriced, alternative uses may provide vast avenues forvalue creation. The mechanisms behind the emergenceof these new uses and functions need to be identified.Interestingly, Hippel–Krogh’s discussion of the cogni-tive bias of “functional fixedness” (i.e., the tendency toview objects only in terms of their common uses, ratherthan novel ones) comes closest to highlighting this prob-lem. Assessing all the alternative or possible uses forany asset or product is beyond the calculus of any eco-nomic agent, or even the market as a whole. The prob-lem becomes even more severe once we account for thepossibility of combining solutions, but we view the the-ory for the firm as the central filter through which noveluses for extant solutions are discovered.Again, Hippel–Krogh in many ways implicitly assume

that firms possess a theory for their firm. They arguethat ‘‘one may simply scan 0 0 0 the environment for theneed–solution pairs that might fit one’s own context.”However, this environmental scanning and contextualfitting also need to be defined and directed somehow.What is the firm scanning for or fitting to? Scanningand fitting presupposes some kind of problem. We arguethat a firm’s theory can provide a central logic throughwhich the vast array of possible uses for a given solu-tion are cognitively composed and not merely serendip-itously discovered by scanning a static need–solutionlandscape. Search and scanning inherently need to bedirected in some fashion, by something, an aspect miss-ing from Hippel–Krogh’s arguments. Research in per-ception supports the point that observation is alwaysmind and theory-laden (see Felin and Zenger 2009).Even seemingly accidental or serendipitious encounterswith solutions, as our examples will illustrate, requiresome kind of impetus or recognition on the part of thescanning actors. We contend that it is the possession of atheory that enables value creation to be more than a pro-cess of serendipitous interaction or random recombina-tion. Theories reveal an architecture of problems needingresolution.Before proceeding with some stylized examples of

this theorizing process, we need to recognize that afirm’s theory is not a “rule for riches.” That is, theorizingoccurs in strategic, innovative, and entrepreneurial con-texts that are inherently uncertain. Thus theorizing maynaturally also lead to poor outcomes or biased thinking.Future work certainly is needed on the variance associ-ated with this activity, when (and why) it might lead tobiased thinking versus when it might not. For example,the internal structures and social processes (e.g., how

information is aggregated or decision rights are allo-cated) of a firm are likely to play a central role in howeffectively these theories guide strategic and innovativeactivity (e.g., Burgelman 1983, Felin and Zenger 2011).Overall our focus on theorizing emphasizes the delib-

erate processes associated with strategy and innova-tive activity, as a counterbalance to recent work thatemphasizes serendipity in strategy (e.g., Denrell et al.2003, Winter 2012). However, we certainly recognizethat serendipity also plays a central role. For example,solutions to problems may emerge from serendipitousencounters (Cohen et al. 1972). Even the recognition ofsomething as a solution, particularly as a novel solu-tion, requires some kind of a priori theoretical intuitionthat guides attention and recognition. Thus we prefer toemphasize those aspects of strategy and innovation overwhich focal firms have (at least some) control and thetheorizing that drives decisions about which problems toaddress, solutions to search (or recognize), and how togovern these activities.

3.1. A Theory for the Firm: Some Informal

Examples

To make our arguments more tangible, we provide two(admittedly stylized) examples of the role that theoryplays in navigating problems and solutions. First, con-sider Howard Schultz’s frequently discussed efforts tocreate and capture value through what would eventuallybecome Starbucks Corporation (Koehn 2005; also seeSchultz 1998). In 1982 Howard Schultz was employedby a small Seattle coffee company and was sent bythe company to Milan to attend an international house-wares trade show. There he observed and became enam-ored with Italian coffee bars and recognized a solutionand potential need, akin to the need–solution pairingsdiscussed by Hippel–Krogh. Schultz indeed decided to“re-create in America the authentic Italian coffee barculture” (Schultz 1998, p. 52).The founders of the company, however, did not buy

into his vision and he thus started his own firm. In 1987Schultz bought Starbucks and operated nine Seattle loca-tions. However, he had aggressive plans to expand. Hesought to convince “investors to believe in [his] visionfor the company,” specifically of a large-scale rolloutof the Italian coffee experience. In retrospect, the pos-sibilities and opportunity associated with creating theproducts and experience associated with a Europeancafé might seem obvious, perhaps even representing astraightforward application of the type of need–solutionpair that Hippel–Krogh discuss.However, the key to the success of Starbucks was

not simply observing Italian coffee bars. Schultz wascertainly not the first American with a passion for andinterest in coffee to observe them. Schultz in effect com-posed a theory and overall framework for value cre-ation, one that admittedly evolved as experiments were

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conducted and feedback received. However, this theory,guided by a belief in an unmet need, revealed a sequenceof subsidiary problems to which he successfully soughtsolutions. Thus Starbucks was not a simple one-to-oneimportation of the Italian café into the United States(an existing need–solution pairing), it was far more:the actual full-scale realization of this vision and the-ory included a host of ancillary problems that neededsolutions. The realization of Schultz’s theory requiredproblem solving related to a host of issues, includingthe sourcing of the product, store format, merchandisingmix, store ownership (franchising versus wholly owned),incentives and control, customer education, and verticalintegration. Markets of course provided a menu of solu-tions from which Starbucks could draw, but the uniquearchitecture and compilation of all of these activities,as a whole (which problems should be solved by thefirm itself, which by others, where might solutions besought, etc.) was driven by the firm’s overall theoryabout how it would create value. In short, a compre-hensive need–solution pair that could generate Starbuckssimply did not exist at the outset. The revelation ofa bundle of problems needing resolution was required,and each problem required a decision regarding gover-nance, and a clear understanding of how to orchestratethe resulting solutions into a customer experience anddelivery system that created value for Starbucks. TheItalian and European café experience, although repli-cated by Starbucks in terms of the customer interaction,nonetheless differed radically. The theory behind Star-bucks implied a completely different architecture andbundle of problems, with cascading implications for thegovernance and organization of Starbucks. The companynaturally learned as it grew, and the theory was revised,but the overall theory of value creation was implicitlyin place early on. Similar theoretical activity can befound in the history of other companies, such as Disney(Argyres and Zenger 2012, Zenger 2013).Thus a firm is not just a piecemeal compilation of

individual transactions or even a bundle of problems andsolutions governed in a certain manner. Nor is value cre-ation simply the act of scanning for need–solution pairs.Rather, a firm also represents a perspective and point ofview, a theory for the firm, about how value might beorchestrated on the whole, and the set of problems andsolutions that need to be solved and governed to cre-ate that value. However, a firm’s theory can also revealunique value in extant solutions that become availablein the market.The history of Apple provides another illustrative ex-

ample. Steve Jobs stumbled, seemingly serendipitously,on the graphical user interface, bit-mapping technology,and the mouse. All were central components behindthe eventual release of Apple’s revolutionary Macintosh(Isaacson 2012). Their discovery by Jobs may seem tobe examples of serendipity and the power of scanning

need–solution pairs in the environment, as discussed byHippel–Krogh. However, note that this scanning andsearch still required unique knowledge and informa-tion, and a theory of sorts, providing a capacity to rec-ognize the potential uses of the solutions discovered.Although some inside Xerox were clearly well aware ofthe value of these technologies (Isaacson 2012), it wasJobs’s unique theory of value creation, and the comple-mentary bundle of problems needing solutions therebyrevealed, that enabled Apple to unlock the eventual com-mercialization of these solutions and products, bundledin the overall architecture of Apple’s Macintosh. Notethat Apple’s scanning of and serendipitous encounterwith the technology solutions involved a market transac-tion, where Xerox’s venture capital division was giventhe opportunity to invest $1 million in Apple (in its sec-ond round of financing) in return for the opportunity tolook at potential technologies and solutions. Althoughthis may have been the market price for this technol-ogy (Xerox’s $1 million investment in Apple was worth$17.6 million the subsequent year), the real value toApple was a reflection of the theory that Apple pos-sessed. In other words, Jobs’s eureka moment, (just likeanyone else’s) was revealed by a theory.4

Our two informal examples, of Starbucks and Apple,are admittedly stylized, but they illustrate the contoursof how any value realized from (extant) need–solutionpairs is dependent on the unique theories possessed byfocal actors and firms. Off-the-shelf solutions to wellidentified needs (Hippel–Krogh’s need–solution pairs),even if unknown initially to a focal firm, are unlikely togenerate sustained value for the focal firm. Of course,if others have already effectively solved particular prob-lems, then there is no value for the focal firm in inter-nalizing the costs of recomposing the solution, unlessthe firm’s theory reveals an alternative, potentially morevaluable solution. Firms, however, as informally illus-trated by the above discussion of Starbucks and Apple,can create and recognize real value as they generate the-ories about how extant problems and solutions mightbe bundled into valuable products and customer experi-ences. The firm, then, has a comparative advantage insolving problems in some domains and in recognizinghow extant solutions might be utilized and realized inthe theory of the focal firm.

4. Discussion and ConclusionOur goal in this response has been to put Hippel–Krogh’s criticisms of the problem-solving perspectiveinto a wider strategic and comparative context. Weconcur with them that markets feature many solutions toproblems, solutions that firms may serendipitously stum-ble upon and solutions they may not have anticipated oreven formulated. However, these solutions are the resultof the problem-finding and problem-solving efforts of

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other firms and thus can typically only be purchasedby the focal firm at a price. The problem-solving per-spective seeks to be comparative in providing guidanceon which problems a focal firm should itself seek solu-tions for, and which should be left to others and markets(Nickerson and Zenger 2004). Thus, many of the exam-ples provided by Hippel–Krogh (again, finding usefulsoftware at a trade show, identifying a lumber supplier,and serendipitously encountering various need–solutionpairs) are the result of previous problem solving by otherfirms in markets.However, Hippel–Krogh’s arguments raise a more

fundamental issue. That is, what is latent in the problem-solving logic, though it hasn’t fully been vetted, is theidea that focal firms have an advantage in formulating,identifying, and addressing problems unique to them.Furthermore, firms may also possess advantages in rec-ognizing the potential alternative uses of existing solu-tions. In our response we have sought to highlight howthis, a theory for the firm, guides the bundle and archi-tecture of problems and solutions associated with a focalorganization. The theory for the firm provides the under-lying mechanism for the search processes postulated byHippel–Krogh. Our central point is that the firm’s the-ory represents its unique, forward-looking projection ofhow to meet a particular customer demand, one that cur-rently is not being filled. Although the theory of the firmestablishes boundaries, our broad effort with the theoryfor the firm is to establish how the firm makes decisionsabout the full bundle of problems and solutions that itneeds to engage with in the first place as it seeks tocreate value.Admittedly our sketch here of how a theory for the

firm links with problem solving is relatively brief andbroad, but making these links is important becauseHippel–Krogh’s arguments have raised ambiguities in theproblem-solving perspective (e.g., about who addresseswhich problems and why), as well as higher-level strate-gic questions about how (and by whom) value is cre-ated and appropriated. Although solutions to problems,as Hippel–Krogh emphasize, may emerge from otheractors (users, suppliers, or simply serendipitous interac-tions with the environment), it is the firm-specific the-ory that should guide the set of problems and solutionsit decides to address. There indeed is an opportunity tobegin linking firm-specific factors with the broader openinnovation and related literatures to which Hippel–Kroghhave contributed (e.g., Baldwin and von Hippel 2012,von Hippel and von Krogh 2003, von Krogh et al. 2003,Garriga et al. 2013).Our effort here has been to rearticulate and fur-

ther delineate a more firm-centric and specific approachto value creation, where firms make consequential,forward-looking decisions, recognizing that luck (andvarious external constituents) of course also plays a role.Deferring to luck may make sense in some cases, where

firms may not possess the right knowledge. However, atheory that reveals critical problems and thereby guidessolution search, including scans of the need–solutionlandscape, is a more likely source of breakthroughs invalue creation. We hope that future work begins to lookat these comparative linkages between firms, their the-ories, and the mix of organizational and governancechoices utilized in the creation of value.

AcknowledgmentsThe authors give special thanks to Organization Science edi-tors Zur Shapira and Paul Adler for their support and feedback.The feedback of two anonymous peer reviewers also helped toimprove the paper.

Endnotes1A long literature on creativity and incubation as it relatesto problem solving and the generation of novelty (see Wallas1926) may provide additional insights. Maggitti et al. (2013;see Fernandes and Simon 1999) offer an excellent discussion,building on Wallas’s research, highlighting the nonlinear fac-tors associated with invention and search. Others have high-lighted the role of “affect” in exploratory search (Adler andObstfeld 2007).2As discussed by an anonymous reviewer, the business modelliterature might also be linked with this conversation aboutvalue creation. Definitions of the business model conceptvary significantly (for a review, see Zott et al. 2011), withsome emphasizing the “architecture of the product,” others the“sources of revenues,” “heuristic logics,” “the governance oftransactions,” “customer value proposition,” or “realized strat-egy,” and so forth. However, as a start, we view a given busi-ness model as a strategic experiment revealed by a theory.Fully engaging with this literature is beyond the scope of thispaper. We hope that future work further explores the linkages.3As succinctly put by Charles Peirce, “man’s mind has a natu-ral adaptation to imagining correct theories of some kinds 0 0 0 0If man had not the gift of mind adapted to his requirements,he could not have acquired any knowledge” (1957, p. 71).The notion of theories guiding human activity can be found inmany strands of psychology. For example, Tenenbaum et al.(2006) discuss the role of theory-based Bayesian models andByrne (2005) discusses the role of imagination and counter-factual thinking as humans create and consider alternatives.4One of the coauthors of this paper was privileged to takea nearly contemporaneous tour of Xerox PARC and observemuch of the same technology as Jobs. However, absent Job’stheory, this author, while appreciating the technology’s nov-elty, was unable to see the remarkable value Jobs’ emergingtheory recognized.

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Teppo Felin is professor of strategy and Academic AreaHead at Saïd Business School, University of Oxford. Hereceived his Ph.D. from the David Eccles School of Busi-ness, University of Utah. His research interests include strat-egy, entrepreneurship, theory of the firm, organization design,and interdisciplinary approaches to heterogeneity.

Todd R. Zenger is the N. Eldon Tanner Professor of Strat-egy and Strategic Leadership at Eccles School of Business,University of Utah. He received his Ph.D. from University ofCalifornia, Los Angeles. His research interests include corpo-rate strategy, theories of the firm, entrepreneurship and valuecreation, and organization design.

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