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BY AMY MULLER AND LIISA VALIKANGAS
Toward the Extended Corporation
he nature of the firm as a unit of value creation is changing. This change is partly a result of reduced transaction costs in intercompany activities, recognition of the value of intangible assets, and other aforementioned factors (see Drivers of extended innovation).
More fundamentally though, we believe that the change is attributable to the fact that innovation opportunities exist increasingly outside corporate boundaries—opportunities that cannot be effectively pursued by a single, lone corporation. Rather, exploitation of these opportunities requires:
- Alliances between firms to recombine assets and competencies in mature industries
- Explorative collaborations in emerging industries.
Within mature industries, might recombinations be just as effective within a single firm as between two or more firms? They might, yet anecdotal evidence from Hewlett-Packard, for instance, suggests the difficulty of creating radical innovation in a single corporation. Hewlett-Packard's several dozen business units were perfectly placed to exploit recombinatorial opportunities, yet the company failed to mount an effective response to the disruptive technologies of the Internet. Partnering with another firm may have been just as difficult. However, the advantage of such cross-company collaboration comes from its potential to challenge the orthodoxies of each firm and thereby uncover otherwise latent opportunities.
Another question to consider: Would an outright merger or acquisition be as effective as a strategic alliance to promote innovation?
Mergers and acquisitions commonly destroy shareholder value, as reflected in the combined companies' market capitalization, which is often less than the sum of the market capitalizations of the companies immediately prior to merger.
In instances where mergers and acquisitions appear to destroy value, we contend that the post-merger company has failed to exploit the recombinatorial potential of its component assets and competencies-presuming that potential ever existed. We will monitor with interest the proposed merger of Hewlett-Packard and Compaq to see whether the merged entity can innovate by combining the assets and competencies of its constituents. [4]