The Firm as an Institution for Product Design and Value Web Orchestration

Institutional theory of the firm focuses on firm boundaries and the activities firms internalize within their hierarchies. However, an examination of disintegrated firms that influences activities beyond the scope of their hierarchies suggests that firms also perform other economic functions. By analysing these functions, the aim of this paper is to suggest a theory of the firm that goes beyond internalization. Sometimes firms specialize in the economic functions of product design and value web orchestration. With large markets, complex and composite goods and complementarities among producers, firms reap advantages of skill and scale by pooling demand and realizing complementary positive externalities. Hence, firms are able to make products that customers never knew they would demand and that suppliers never knew they would be part of supplying, and that is more efficient than if customers and individual suppliers performed these functions. Case material from Nike, a large and highly disintegrated firm, illustrates the analysis.