Strategic Management Journal, Vol. 18 (Summer Special Issue), 5–14 (1997)

THE INTERACTIONS OF ORGANIZATIONAL AND

COMPETITIVE INFLUENCES ON STRATEGY AND

PERFORMANCE

REBECCA HENDERSON1 AND WILL MITCHELL2*1Sloan School of Management, Massachusetts Institute of Technology, Cambridge,Massachusetts, U.S.A.2University of Michigan Business School, Ann Arbor, Michigan, U.S.A.

Despite much debate in the strategy literatures, there is little consensus as to whetherorganizational capabilities or market competition are more important in shaping firms’ actionsand performance. We suspect that simply comparing firm-level and industry-level influenceswill continue to prove fruitless for two reasons. In the first place, both organization andcompetition are clearly important in shaping strategy and performance. In the second place,we suspect that the inconclusive nature of much of the existing research reflects the fact thatorganizational capabilities, competition, strategy, and performance are fundamentally endogen-ous. That is, reciprocal interactions at multiple levels of analysis between the environment andthe firm shape business strategy and performance, while interactions between strategy andperformance, in turn, shape both organizational capabilities and competitive environments. Thisspecial issue of theStrategic Management Journalincludes papers that focus attention onseveral dimensions of these interactions.

A common theme emerges from the work concerning the sequential nature of the inter-relationships. The papers suggest that firms develop organizational capabilities as they act incompetitive, institutional, and cognitive environments, where capabilities arise both by designand as the unexpected by-products of firm actions. The capabilities, managers’ understandingof the capabilities, and the historical context that surrounds them then condition firms’ reactionsto changes in their environment. The reactions and firm performance in turn affect the structureof the industry, and all these changes generate new information which in turn creates newlearning opportunities. Thus, the papers view strategy and performance as an ongoing sequenceof capabilities-conditioned adaptations by firms which in turn become exogenous events in theenvironments of the managers of other firms. For strategy researchers, the important questionis not that of which disciplinary perspective or mode of explanation is a more appropriateone, but rather that of the conditions under which a given mode of explanation is mostappropriate. 1997 by John Wiley & Sons, Ltd.

INTRODUCTION zational capabilities and industry competitionaffect business strategy and performance. Therehas been much debate in the strategy literaturesThis special issue of theStrategic Management

Journal includes papers that focus attention on as to whether organizational capabilities or marketcompetition are more important in shaping firms’ways in which the interactions between organi-actions and outcomes but this debate has gener-ated surprisingly little consensus.1 We suspectKey words: firm and environment, reciprocal relation-

ship*Correspondence to: Will Mitchell, University of MichiganBusiness School, 701 Tappan Street, Ann Arbor, MI 48109-1 Traditional economic research focuses on industry structure

as the primary cause of strategy and performance, while the1234, U.S.A.

CCC 0143–2095/97/S10005–10 $17.50 1997 by John Wiley & Sons, Ltd.

6 R. Henderson and W. Mitchell

that simply comparing firm-level and industry- premise that businesses are neither simply collec-tions of individual actors operating within marketlevel influences will continue to prove fruitless

for two reasons. In the first place, both organi- environments nor simply social organizationsoperating in cultural environments. Since this iszation and competition are clearly important in

shaping strategy and performance. In the second a premise that is already quite well establishedwithin the strategic field, we believe thatplace, we suspect that the inconclusive nature of

much of the existing research reflects the fact researchers working within the tradition of stra-tegic management may be uniquely positionedthat organizational capabilities, competition, strat-

egy, and performance are fundamentally endogen- to undertake systematic research concerning theinteractions among organizations and environ-ous. That is, reciprocal interactions at multiple

levels of analysis between the market environ- ments. In pulling together this set of papers, wehope to alert researchers both to the progress thatment and firm capabilities shape business strategy

and performance, while interactions between strat- has been made and to the enormous distance thatthere is still to go in building a full understandingegy and performance, in turn, shape both organi-

zational capabilities and competitive environ- of this problem. Between them, the papers sketchout an area of inquiry that is full of promisements.

Of course, researchers in both strategic man- and offer tantalizing insights into possible waysforward. We believe that the careful study ofagement and in the disciplinary traditions that

study business organizations have in principle how capabilities and competition mutually influ-ence each other could be one of the next greatlong recognized this endogeneity. But for a mix-

ture of reasons our understanding of these opportunities for the field of strategy research.relationships is still at a very rudimentary stage.In general, research in the disciplinary traditionsthat study business organizations has been funda-THE RELATIVE IMPACT OF FIRM-

AND INDUSTRY-LEVEL FACTORS ONmentally unbalanced: researchers interested incharacterizing the environment have typicallyPERFORMANCEbeen content with very simple models of thefirm while researchers interested in the internal A well-established stream of research in the strat-

egy literature examines the relative impact ofdynamics of firms have usually been content withvery simple models of the environment. firm- and industry-level factors on firm perform-

ance. Two papers in this volume develop thisResearchers in the strategic management literaturehave faced fewer constraints, but within the strat- tradition, while also offering insights concerning

how the interaction of firm and industry factorsegy literature it is often difficult to generalizebeyond the bounds of a single research study or may influence performance.

Anita McGahan and Michael Porter, in ‘Howa small set of studies. Throughout the literature,moreover, most researchers have relied on models Much Does Industry Matter, Really?’, build on

Richard Rumelt’s extensively cited research toin which the direction of causality is unidirec-tional. We have very little work that explicitly focus on the differential influences of firm, corpo-

rate, and industry factors on financial performancecharacterizes the continual, reciprocal nature ofthe interaction between the environment and the (Rumelt, 1991). McGahan and Porter bring a

robust statistical technique and a data set thatfirms within it.We suspect that making progress will require includes both manufacturing and service sector

businesses. Their overall results are in line withthe adoption of a perspective that builds on theRumelt’s results and confirm that both industryand firm effects are important in shaping prof-

perspective that is becoming known as the resource-baseditability. Perhaps most interestingly andview of the firm tends to emphasize the importance of firm-importantly, McGahan and Porter show that thisspecific capabilities (e.g., Lippman and Rumelt, 1982; Werner-

partitioning differs dramatically across sectors offelt, 1984; Barney, 1991; Conner, 1991; Amit and Schoe-maker, 1993; Peteraf, 1993). Although researchers use manythe economy. In service sectors such as theterms for both ’capabilities’, including competencies,wholesale/retail, lodging/entertainment, and gen-resources, and characteristics, and ‘competition’, including

eral service sectors, industry effects are muchindustry structure, competitive markets, and social institutions,the basic theme of comparing the levels of effects is similar.more important than business segment effects in

Organizational and Competitive Interactions 7

explaining variance in profitability. In the manu- and vertical integration in the long-distance truck-ing industry. This work draws on ecologicalfacturing sector, in contrast, business segment

effects are much more important than industry theory, as well as neoclassical and transactioncost economics (e.g., Williamson, 1975; Teece,effects. These results highlight our need to under-

stand more about the interaction between organi- 1981; Tirole, 1988; Hannan and Freeman, 1989).The authors find that both firm- and industry-zational capability and industry structure, as they

suggest that this interaction may be quite different level factors affect mortality. They include age,profitability, sales, and leverage as relevant firm-across sectors of the economy.

A possible explanation of the intersector differ- level factors and competitive density, regulatorychange, and market growth as relevant industry-ences that McGahan and Porter report lies in a

distinction between individual and organizational level factors.Business capabilities have an indirect inter-capabilities. The market environments in which

some types of service-related businesses operate action with environmental change in the Sil-vermanet al. study, through the medium of busi-may primarily require that business rely on the

capabilities of individual employees, while manu- ness age. The study finds that mortality increaseswith business age, both at the time of industryfacturing sector environments may require many

businesses to develop more complex sets of tacit deregulation and throughout the study period. Apossible explanation for this outcome is that firmsorganizational capabilities that interweave the

activities of individuals. Firms that begin to develop capabilities that become increasingly outof step with the environment as they age, whichachieve particularly high profitability through the

efforts of particular employees will need either make it particularly difficult to adapt quickly tosudden environmental changes.to pay those employees greater wages or lose

them to competitors. If so, then industry factors These two papers demonstrate the importantinfluence of both competition and capabilities onwill have strong influences on the profitability of

many service-related businesses, while manufac- several dimensions of performance. The researchalso begins to hint at reciprocal relationshipsturing sector profitability often will involve a

large component of firm-level differences. An among competition and capabilities.intriguing extension of this line of thought isthat firms that develop extensive organizationalcapabilities find it more difficult to adapt to majorCOMPETITION SHAPES

CAPABILITIES, WHICH IN TURNchanges in an industry’s environment than firmsthat rely on the capabilities of individuals. Thus,SHAPE COMPETITIONthe relative influence of environmental factors onmanufacturing and service sector businesses might The idea that the rigor of competition shapes firm

strategy and capabilities is well established withinreverse if one examined environmental change.Environmental change might force many manu- the economics, ecological, and strategy traditions.

The economic perspective (e.g., Mason, 1939;facturing sector firms from the industry whileleaving service sector firms relatively unscathed. Bain, 1956; Tirole, 1988) often frames the issue

as one in which harsh competitive regimes, thatFollowing this line of thinking further, it may bethe case that environmental change has a differen- is, those in which price approaches marginal cost,

force firms to either adopt best-practice tech-tial influence on businesses within an industrydepending on the degree to which they have niques or exit the industry, so that at equilibrium

all the firms in an industry have identical capabili-developed complex organizational capabilities. Ingeneral, in this view, organizational factors inter- ties. Equilibrium may arise either through the

adaptation of inefficient individual firms oract with the nature of environmental change toinfluence strategy and performance. through the exit of firms with inefficient capabili-

ties; neoclassical models are typically not inter-Brian Silverman, Jack Nickerson, and JohnFreeman, in ‘Profitability, transactional alignment, ested in the difference between the two mecha-

nisms and assume that both operate. A range ofand organizational mortality in the U.S. truckingindustry’, focus on how firm- and industry-level firm capabilities may characterize mild competi-

tive regimes, by contrast, but only in the relativelyfactors affect mortality. The paper explores therelationship between organizational capabilities uninteresting sense that some firms may have

8 R. Henderson and W. Mitchell

less efficient production technologies than their value of larger markets being especially pro-nounced for activities that rely on product-specificcompetitors. Ecological work (e.g., Hannan and

Freeman, 1977; Aldrich, 1979; Carroll and Han- capabilities. They show that this deceptively sim-ple theory is surprisingly accurate at predictingnan, 1992) takes a stronger view than most eco-

nomic theory concerning the source of the distri- relative efficiency in the international market forconstruction and licensing engineering services inbution of capabilities that exists at equilibrium,

arguing that individual firms face strong inertial the oil and petrochemical industries.The basic interactive premise of Arora andconstraints on their ability to adapt successfully

to environmental change. A central premise of Gambardella’s work is both straightforward andinsightful. Market environments that favor firmsecological theory is that competition shapes capa-

bilities primarily through forcing the exit of firms with general capabilities (e.g., constructionservices) will give rise to diversified firms, whilethat do not fit the environment. Nonetheless, eco-

logical theory recognizes that most individual market environments that favor firms withspecialist capabilities (e.g., licensing services)firms will attempt to adapt to environmental

changes and that some of those firms will do will give rise to specialized firms. The degree towhich the leading firms in an industry approachso successfully. Traditional strategy research, in

contrast, has taken primarily an adaptive view of a fit with the environment will increase withmarket size, so that specialist firms will be moreorganizational and environmental change, arguing

that many firms can adapt their strategies and specialized in larger specialist environments andgeneralist firms will be more diversified in largercapabilities as competitive environments change.

Thus, in this view, the distribution of capabilities generalist environments. Firms based in largermarkets will then tend to outperform firms basedin any given industry reflects purposive mana-

gerial action (e.g., Barnard, 1938; Ansoff, 1965; in smaller markets when they compete in commonlocations. Specialist firms in larger markets willAndrews, 1971; Hofer and Schendel, 1978; Miles

and Snow, 1978; Porter, 1980). Adaptive views gain particularly great advantages owing to theincreased sales opportunities for their goods andin organizational theory reflect similar views (e.g.,

Child, 1972). Recent evolutionary economic and services in their base markets. In this view, there-fore, strategy arises as a result of the nature ofecological work exploring the strategic evolution

of capability in different environments is a prom- market demand. In turn, strategy interacts withthe market size and segmentation to influenceising first step in exploring the interactions

amongst these perspectives (e.g., Barnett and Bur- business performance. Thus, the market environ-ment both influences firm strategy and interactsgelman, 1996).

In this volume, two papers build from an inter- with the outcome of firm strategy to affect busi-ness performance.est in how competitive environments shape

organizational capabilities and performance, one Paul Ingram and Joel Baum, in ‘Opportunityand constraint: Organizations’ learning from theby economists and one by ecologists. Both papers

argue that competitive environments will influ- operating and competitive experience of indus-tries’, suggest that changes in the environmentence how capabilities develop and that, in turn,

these capabilities will affect business perform- shape organizational capabilities through theinformation that they provide to firms operatingance.

Ashish Arora and Alfonso Gambardella, in in the environment. The paper builds on ecologi-cal and organizational learning arguments con-‘Domestic markets and international competi-

tiveness’, explore the impact of the structure of cerning how organizational characteristics bothassist and inhibit firms’ ability to learn (e.g.,market demand on the distribution of capabilities

among firms and, in turn, how differences in Levinthal and March, 1993; Miner and Haunsch-ild, 1995). Ingram and Baum suggest that firmscapability affect firm performance in markets with

different structures. Their research builds on basic learn both from their own operating experienceand from the operating and competitive experi-ideas concerning tensions between economies of

scale and specialization economies (e.g., Rosen- ence of their industry. Operating experience,which the authors define as the cumulative experi-berg, 1963). The authors argue that the theory of

order statistics suggests that larger markets will ence of other firms in the industry, providesinformation about successful ways of doing busi-be characterized by more efficient firms, with the

Organizational and Competitive Interactions 9

ness. Competitive experience, which they define 1960s and 1970s to focus competition aroundissues of styling shaped in a competitive regimein terms of business exits, provides information

about unsuccessful ways of doing business. that was extremely profitable in the short termbut ultimately quite destructive. By contrast, theTherefore, at the environmental level, the entry

and exit of other firms provide information to a Japanese firms’ actions while competing on thebasis of cost and reliability resulted in the cre-focal firm. At the firm level, a firm’s cumulative

experience provides it with knowledge that will ation of capabilities that ultimately gave them atremendous advantage worldwide. Within eco-influence its operations. The authors test their

predictions in the context of U.S. hotel chains. nomics, researchers have long recognized thatasymmetries in firm endowments can have a dra-Ingram and Baum also identify two interactive

influences on business performance, the first as matic effect on competition (Shepard, 1987).More recently, work in the new industrial organi-an interaction of firm-level factors and the second

as an interaction of organizational capabilities and zation tradition stresses the importance of theformation of beliefs in shaping competitive inter-environmental change. First, the interaction of

firm-level factors arises for firms with greater or action, providing a theoretical basis for believingthat historical capabilities may shape competitionlesser ranges of capabilities. They argue that firms

with a narrow range of capabilities will gain although providing little specific insight into theprecise mechanisms whereby this happensgreater value and face more severe constraints

from own operating experience than firms with (Tirole, 1988).In this volume, three papers develop ideasmore general sets of capabilities. The differences

arise both because generalists’ greater scope may concerning how capabilities affect competition.Jaideep Anand and Harbir Singh, in ‘Assetprovide competitive buffers that weaken their

incentives to pursue learning opportunities and redeployment, acquisitions and corporate strategyin declining industries’, explore the relationshipbecause the greater complexity of generalists may

inhibit their ability to learn. Second, Ingram and between firm capabilities and acquisition strategy.Their research builds on the diversification litera-Baum also propose that own experience will

eventually inhibit firms, as past experience creates ture (e.g., Rumelt, 1974). They contrast the long-standing argument that firms can sometimes groworganizational rigidities that increasingly become

out of step with a changing competitive environ- by applying excess resources in new uses (e.g.,Penrose, 1959), with arguments that firms facement. Thus, organizational capabilities condition

the impact of the industry environment in two substantial difficulties in adapting resources tonew uses (e.g., Nelson and Winter, 1982). Theways in this study, by buffering generalist firms

from learning opportunities and by constraining study suggests that firms’ existing capabilitiesplay a very different role in different marketfirms in any attempts that they make to adapt to

a changing environment. environments, contingent on whether the marketis growing or contracting. The authors show thatThus, as these two papers remind us, compe-

tition shapes capabilities. These authors model in the defense sector unrelated acquisitions haveperformed well when the industry was growing,the process as one in which firms undertake

strategic actions in response to their environments but that when the industry has been in declineconsolidation-oriented acquisitions haveand, as a result of those actions, develop parti-

cular capabilities. In turn, though, the capabilities outperformed diversification-oriented acquisitionsin terms of bothex antestock market reactionthat the firms develop also shape competition.

The idea that capabilities shape competition andex postoperating performance measures.Anand and Singh’s work thus raises anarises frequently in strategy research, although

the idea is not always framed in such terms. intriguing interaction between environment con-ditions and business capabilities. One inter-Work in strategic management and organizational

theory suggests that differences in organizational pretation of their results is that diversification isa valuable method of applying excess resourcescapability shape organizational response and,

hence, in principle, the nature of the environment to new uses when an industry is growing, pos-sibly because the growth provides a slack enough(e.g., Chandler, 1962; Thompson, 1967; Scott,

1981). For example Clark (1987) speculated that environment that managers can devote sufficienttime to the new activities. Once faced with athe U.S. automotive industry’s decision in the

10 R. Henderson and W. Mitchell

contracting environment, though, attempts to interfirm relationships, Sakakibara focuses insteadon the factors that lead firms to enter cost-sharingdiversify may distract attention from the need to

adapt to the difficult environment. Thus, valuable rather than skill-sharing relationships. She showsthat collaborative relationships formed betweendiversification strategies during growth periods

may leave a firm with a legacy that detracts from firms from different industries are likely to placemore importance on skill sharing as a motive forvalue during a decline period.

Mary Tripsas’ study of the typesetter industry,collaboration than are firms from the same indus-try. She interprets this as suggesting that the‘Unraveling the process of creative destruction:

Complementary assets and incumbent survival in heterogeneity of the capabilities of the parti-cipants will shape the goals of collaborativethe typesetter industry’, also illustrates how the

capabilities that a firm develops in earlier environ- relationships. Because the goals of collaborativerelationships may well shape later competition inments may influence current performance. The pa-

per builds on studies of how existing competences an industry, her work opens intriguing questionsabout the relationship between collaboration andshape responses to technological change (e.g.,

Abernathy and Clark, 1985; Tushman and Ander-competition.Two common points within these five papersson, 1986). Tripsas shows that in the typesetter

industry incumbent investments in unique typefacesspeak to the ongoing interaction between compe-tition and capabilities. First, the papers suggestprotected them from the impact of competence-

destroying technological change. Such competence-that firms can shape their strategies in responseto the demands of competitive environments and,destroying change destroyed many of the incum-

bents’ core technological skills, but the firms were in the process, develop capabilities that suit thecompetitive environment. At the same time,often able to survive because of the continuing

value of their supporting skills. By contrast, incum-though, several of the papers suggest that theprocess of adaptation may create constraints thatbent firms were much less successful in attempting

to adapt to changes that created the need for new make it difficult to react quickly and effectivelyto changes in the competitive environment. Firmssupporting skills. A simple interpretation of her

observations is that incumbents were sometimes may prosper when environmental changes areconsistent with their existing capabilities, but willprotected by barriers to entry. Tripsas, though,

shows that these barriers are the result of historical suffer if changes are inconsistent with their capa-bilities and if other firms can adapt more quicklycapabilities in the field, thus making concrete the

idea that early capabilities can shape later compe- or if new firms can enter the industry with capa-bilities that better suit the new environment. Thus,tition dramatically.

Tripsas’ paper is particularly intriguing because current performance stems from historical capa-bilities and the historic environments, as well asshe measures several dimensions of firm capa-

bility, based on the technical and marketing from current capabilities and environments.Unfortunately there is relatively little researchresources of the firms in her study, rather than

inferring that capabilities arise as the result of that explicitly considers how capabilities andenvironments jointly shape each other. Most stud-the firms’ strategies. Most of the papers in this

volume take the latter approach as, indeed, is ies that attempt a more general understandingrely on either overly simple models of the firm,common in much of the research tradition. While

large sample studies often require the inference in the case of research into the way in whichthe environment shapes capabilities, or on overlyapproach, Tripsas work offers insight about ways

to measure capabilities even in studies involving simple models of the environment, in the case ofresearch into the way in which capabilities shaperetrospective data collection.

Mariko Sakakibara, in ‘Heterogeneity of firm the environment. Much of the relevant researchis also overtly static or one-dimensional, in thecapabilities and cooperative research and develop-

ment: An empirical examination of motives’, sense that there is little focus on the continuingdynamics of the interaction between capabilitiesexplores the relationship between the capabilities

of firms and the goals of the interfirm alliances and environments. We need equally rich modelsof the firm and the environment that take boththat they create. While there is extensive research

in both neoclassical and transaction cost eco- organizational and economic modes of expla-nation seriously.nomics exploring the determinants of the form of

Organizational and Competitive Interactions 11

THE RECIPROCAL RELATIONSHIP ways in which the competitive environment bothshapes and is shaped by the regulation of atten-BETWEEN COMPETITION AND

CAPABILITIES tion within the firm.One of the reasons that we suspect that this

line of attack may be particularly important isTwo theoretical papers in this volume begin tospeak to the need to examine the reciprocal that Ocasio’s model, like that which Peteraf and

Shanley develop, is potentially compatible withrelationships between capabilities and competitiveenvironments. Margaret Peteraf and Mark Shanley models of the firm and the environment framed

in ecological or economic terms. Neither paperin ‘Getting to know you: A theory of strategicgroup identity’, argue that strategic groups of claims that the social/cognitive modes of expla-

nation dominate all others and both papers, wefirms arise from social learning and identification.This research builds on work that argues that believe, provide potentially fruitful openings for

researchers interested in exploring the interactiongroupings within industry shape competition andperformance (e.g., Caves and Porter, 1977), but between capabilities and the environment in

more detail.which most often defines strategic groups in termsof differences in firm characteristics. In contrast, Both papers serve to remind us of how danger-

ous it can be to equate all environmental factorsPeteraf and Shanley begin to develop a theory ofthe formation of strategic groups that is cogni- to competition and all organizational factors to

capabilities. One interpretation of Peteraf andtively based. Their work thus attempts to uniteboth a more complex model of the firm, as Shanley’s work, for example, is that market

environments are not just about competition butconsisting of boundedly rational managers work-ing with constantly evolving mental models, with that they are also, in a fundamental way, about

strategic group identity, which involves both com-a more complex notion of the environment. Theirwork is also exciting since in principle it is quite petition and support. Similarly, Ocasio’s attention-

based perspective suggests that existing organi-consistent with economic modes of explanation,and one can imagine building on it to develop a zational capabilities do not fully determine the

deployment and development of new capabilities.theory of strategic groups that recognizes boththe role of social learning and of more traditional Instead, the development of new capabilities is

the complex result of interactions between firmeconomic forces in shaping competition.William Ocasio, in ‘Towards an attention-based structures and administrative processes that man-

agers often only partially understand and influ-view of the firm’, also offers a thoughtful firstcut at a possible way forward through the inter- ence.woven issues of competition and capabilities.Ocasio builds on an underdeveloped insight inSimon’s (1947) early work on administrativeIMPLICATIONS FOR FURTHER

RESEARCHbehavior to frame a theory of the firm as astructure for the focusing of attention. Ocasioargues that firm behavior is the result of the ways Clearly, far more work remains to explore the

reciprocal relationship between capabilities andin which the firm distributes and regulates theattention of its decision-makers. In exploring the competition. Part of this work will undoubtedly

occur within the bounds of disciplines, such asregulation of attention he builds on three prem-ises: one at the level of individual cognition, one economics and organization theory, that study

business organizations. As we noted earlier,at the level of social cognition, and one at theorganizational level. His work argues that multi- though, we believe that researchers working

within the tradition of strategic management mayple levels of analysis are critically importantdeterminants of firm actions. He focuses on the be uniquely positioned to undertake this research.

We believe that this collection of papers raisesjoint role of formal procedures and structuresand informal processes of individual and social two important implications for further strategy

research. The first is that the debate as to whichcognition as factors in shaping managerial atten-tion. While Ocasio focuses less on the ways in of the resource-based or the industry structure

perspectives on firm strategy and performance iswhich managerial attention shapes the environ-ment, his model allows a rich discussion of the the more valid is not a particularly useful one.

12 R. Henderson and W. Mitchell

This collection of papers underlines the fact that questions of strategy research, concerning whybusinesses act and how those actions affect busi-both organizational capabilities and the firm’s

environment drive strategy and performance. ness performance, involve multiple causes. Thecauses are often idiosyncratic to particular busi-Moreover, these papers argue that key dimensions

at the firm and environmental levels have recipro- nesses, and they often involve many levels ofanalysis. At the core, a grounding in strategiccal relationships, so that firms develop capabili-

ties, either through choice or selection, that then management research is a reflection of the ideathat one needs something other than extensionsshape the environment which, in turn, further

shapes capabilities. Thus, firm strategy and per- of traditional theories of market and socialenvironments, organizations, or individualformance fundamentally arise from interactions

between organizational and competitive factors at behaviors to understand the determinants of firmperformance. Instead, one needs perspectives thatseveral levels of analysis.

A common theme emerges from the work con- focus on how the intersections among individual,organizational, and environmental incentives pro-cerning the sequential nature of the inter-

relationships. The papers suggest that firms duce the entities that we recognize as businessorganizations and the activities and performancedevelop organizational capabilities as they act in

competitive, institutional, and cognitive environ- that we recognize as business strategy. Strategyresearchers are particularly well positioned toments, where capabilities arise both by design

and as the unexpected by-products of firm actions. conduct the complex, multidimensional, multi-level longitudinal studies that we suspect areThe capabilities, managers’ understanding of the

capabilities, and the historical context that sur- necessary if we are to fully understand the inter-actions between competence and competition.rounds them then condition firms’ reactions to

changes in their environment. The reactions and The second major implication of these papersis to suggest that, for strategy researchers, thefirm performance in turn affect the structure of

the industry, and all these changes generate new important question is not that of which discipli-nary perspective or mode of explanation is ainformation which in turn creates new learning

opportunities. Thus, the papers view strategy and more appropriate one, but rather that of the con-ditions under which a given mode of explanationperformance as an ongoing sequence of capabili-

ties-conditioned adaptations by firms which in is most appropriate. The papers in this volume,for example, characterize the environment in sev-turn become exogenous events in the environ-

ments of the managers of other firms. eral ways, from simple metrics such as densityor growth to more complex concepts such asThis sequence is intriguing because it high-

lights the fact that constraints on firm action arise social enactment. As these papers demonstrate,all these modes of explanation are potentiallyfrom both individual and organizational factors.

The bounded rationality of individual decision- valuable. We need, perhaps, contingent theoriesof explanation. It might be the case, for example,makers and the pursuit of subgroup goals are

relatively well known as constraints on a firm’s in environments that are highly competitive, suchas environments characterized by rapid techno-ability to adapt to environmental change success-

fully. In addition, the degree to which firms can logical change, no economies of scale and mini-mal intellectual property protection, that neo-manage their organizational capabilities and their

complex interactions with the competitive classical economic or purely ecological modelsof the environment are more useful than the typesenvironment also shape their actions. We suspect

that longitudinal studies that explicitly focus on of model that Peteraf and Shanley propose. Inmore complex environments characterized bythe nature of these organizational and environ-

mental interactions as they evolve over time, and much more slack and uncertainty, by contrast,institutional or social psychological modes ofthat pay particular attention to the ways in which

capabilities and environmental conditions shape explanation might be more useful. We suspectthat interdisciplinary conversation about parti-each other, are thus likely to be particularly

fruitful for both theory and practice. cular, concrete research settings might be oneway in which to develop such contingent theories.Fortunately, strategy researchers have always

been willing to study subjects that cut across For example, a team of researchers studying anindustry or market from a variety of perspectivesexisting conceptual boundaries. The fundamental

Organizational and Competitive Interactions 13

Child, J. (1972). ‘Organizational structure, environment,might help to develop a sense for which theo-and performance: The role of strategic choice’,Soci-retical lenses best describe which aspects of theology, 6, pp. 1–22.

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ment in response to foreign entry’. In M. Spencesuch efforts, because such a unified explanationand H. Hazard (eds.),International Competitiveness.is clearly a long way off, even if it is a desirableBallinger, Cambridge, MA, pp. 27–74.goal, but we would expect it to produce fruitful

Conner, K. R. (1991). ‘A historical comparison ofand novel generalizations. resource-based theory and five schools of thought

We believe that this is a particularly exciting within industrial organization economics: Do wehave a new theory of the firm?’,Journal of Manage-time to be a strategy researcher. Strategy is onement, 17, pp. 121–154.of the few fields where researchers working with

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Hofer, C. W. and D. Schendel (1978).Strategy Formu-research seminars and the journals of strategiclation: Analytical Concepts. West, St. Paul, MN.

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