Relational Contracts and Organizational Capabilities

A large literature identifies unique organizational capabilities as a potent source of competitive advantage, yet our knowledge of why capabilities fail to diffuse more rapidly—particularly in situations in which competitors apparently have strong incentives to adopt them and a well developed understanding of how they work— remains incomplete. In this paper we suggest that competitively significant capabilities often rest on managerial practices that in turn rely on relational contracts (i.e., informal agreements sustained by the shadow of the future). We argue that one of the reasons these practices may be difficult to copy is that effective relational contracts must solve the twin problems of credibility and clarity, and that while credibility might in principle be instantly acquired, clarity may take time to develop and may interact with credibility in complex ways, so that relational contracts may often be difficult to build. Acknowledgements: We would particularly like to thank our research assistants, Nancy Beaulieu and Tommy Wang, for their years of invaluable support in our research program. We are also grateful to our colleagues Nelson Repenning and John Sterman and MIT Sloan’s Program on Innovation in Organizations and Markets for their sustained intellectual and financial support. Thanks for comments on this paper are due to the editors of this special issue and to David Garvin, Ranjay Gulati, Mauro Guillen, Sim Sitkin, Birger Wernerfelt and Sid Winter, and to seminar participants at Columbia GSB, Harvard Business School, Kellogg GSM, London Business School, LSE, Sydney and Tilburg.