The Theory of the Innovative Organization
An excerpt from William Lazonick’s terrific work “Business Organization and the Myth of the Market Economy”, a book that offers a critique of what a ‘market economy’ is purported to be, through an evaluation of the strategies and economic histories of businesses within what can be called “actually existing capitalism”.
Here, at the risk of a small amount of repetition, I shall supplement that discussion by focusing on the nature of fixed costs, the different sources of uncertainty the innovative organization faces, and the relation between organizational capability and technological change. Through its investment activities, a business organization commits financial resources to specific processes to make particular products with the expectation of reaping financial returns. Once they are committed, the productive assets of the organization represent fixed costs that must then be recouped by the production and sale of output. If, through the sale of sufficient output, investments could generate expected financial returns instantaneously, fixed costs would not represent an economic problem to the organization. But then, we would probably not call the “assets” underlying these costs “investments.” Indeed, we might not even deem it appropriate to call these costs “fixed” or the entity that incurs them a firm. The problem of fixed costs occurs because the production and sale of the enterprise’s output occur neither instantaneously nor with certainty. The basic economic problem that confronts the capitalist enterprise is to transform fixed costs into revenue-generating products to realize financial returns. An analysis of how and with what success the business organization manages this transformation is the key to understanding technological change, value creation, and economic growth.