Entrepreneurship and Firm Boundaries: The Theory of a Firm

29 Pages Posted: 9 Nov 2007

See all articles by Michael G. Jacobides

Michael G. Jacobides

London Business School

Sidney G. Winter

University of Pennsylvania - Management Department

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Abstract

In this paper, we consider how a better understanding of entrepreneurial activities can help explain how firm and industry boundaries change over time and how a more comprehensive understanding of boundary setting can explain where entrepreneurial activities are directed. We start from the premise that while entrepreneurs believe themselves to have superior ideas in one or multiple parts of the value chain, they are characteristically short of cash, and of the ability to convince others to provide it. This premise motivates a simple model in which the entrepreneur has a value-adding set of ideas for upstream and downstream parts of a value chain, as well as for the ways to make these two parts of the value chain work better when joined under unitary control. Assuming that the entrepreneur's objective is to maximize her wealth, we observe that even in the presence of transactional risks or other factors that might make integration preferable to specialization, initial scope depends also on relatively unexplored factors such as (a) how severe the entrepreneur's cash constraint is, and (b) how much value the entrepreneur's ideas add at each part of the value chain. Entrepreneurs will focus on the areas that provide the maximum profit yield per available cash a criterion which implies that scope choices depend on cash availability and the depth of the demand for the new idea along the value chain. We also note that entrepreneurs make money not only from the operating profits of their firms, but also from the appreciation of the assets the firm has accumulated. This consideration can change the optimal choice of the firms boundaries, as entrepreneurs must be sensitive to choosing the segment that will enable them to benefit not only in terms of profit, but also in terms of asset appreciation. We propose that, in the entrepreneurial context especially, it is helpful to focus on the multiple considerations affecting the choice of boundaries for a firm the context faced by an individual entrepreneur rather than on generic considerations affecting the (representative) firm. Scope choices reflect the entrepreneur's own theory of how to make money.

Suggested Citation

Jacobides, Michael G. and Winter, Sidney G., Entrepreneurship and Firm Boundaries: The Theory of a Firm. Journal of Management Studies, Vol. 44, No. 7, pp. 1213-1241, November 2007, Available at SSRN: https://ssrn.com/abstract=1028405 or http://dx.doi.org/10.1111/j.1467-6486.2007.00726.x

Michael G. Jacobides (Contact Author)

London Business School ( email )

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Sidney G. Winter

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

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