Paper No . 120 Change , Coordination , and Capabilities

Empirical studies on coordination of economic activities focused on the two polar cases of governance mode, namely vertical integration and market exchanges. Whether firms should be vertically integrated or lever market exchanges in the face of change is, however, debated. Two positions have emerged. Some scholars argue that the vertically integrated firm is the appropriate mode of coordination when change occurs, while market exchanges are more appropriate for dealing with stable contexts (Teece, 1996). On the other hand, Harrigan (1984, 1985) contends that firms should rely on market exchanges when technological change renders upstream capabilities obsolete. Based on two case studies of the aircraft engine industry, this paper introduces the concept of systems integration as the primary coordination mechanism in-between markets and hierarchies that firms employ to cope with change. The focus is on multitechnology settings. Multitechnology, multicomponent products intensify the coordination efforts for firms developing them and therefore provide a vantage point to study coordination modes in the face of technological change. The paper argues that systems integration, as a coordination mechanism, comprises a set of different technological and organizational skills, ranging from component assembly through the understanding and integration of the technological disciplines underlying a product, to project management. It shows that from a competitive point of view, systems integration is most appropriately understood as knowledge integration. Systems integrating firms are understood as those organizations that set up the network of actors involved in the industry and lead it from an organizational and technological viewpoint. Acknowledgements This paper draws heavily on joint research and writing with my co-authors Stefano Brusoni and Keith Pavitt. The author would like to acknowledge financial support from the European Union Directorate for Research, within the context of the Key Action ‘Improving the socio-economic knowledge base’ as a part of the project ‘Technological Knowledge and Localized Learning: What Perspectives for a European Policy?’ carried on under the research contract No. HPSE-CT200100051.