Interdependence and Adaptability in the Evolution of Workstation Manufacturers, 1980-1996

Abstract:     
Organizations trade off between short-run operational advantages and long-run adaptive ability. They vary along this dimension through the degree of interdependence created by the structure of production. This study focuses on one structural characteristic - vertical integration - that creates this interdependence. Integrating vertically can allow the organization to benefit contemporaneously from efficiencies in production, market power, and synergy. Nevertheless, vertical integration severely limits the organization's ability to adapt because boundedly rational managers find the optimization of operations difficult when making highly interdependent choices. As the volatility of the environment increases though, the returns to learning decrease. Thus, firms that organize for efficiency suffer less from inertia in these environments. Tests of these hypotheses on the growth rates and exit rates of computer workstation manufacturers from 1980 to 1996 support this thesis.

Keywords: vertical integration, computer industry, complementarity, organizational learning

JEL Classifications: L22, L63, M1

Working Paper Series