Organization Science

Vol. 27, No. 1, January–February 2016, pp. 222–231

ISSN 1047-7039 (print) — ISSN 1526-5455 (online) http://dx.doi.org/10.1287/orsc.2015.1022
© 2016 INFORMS
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Strategy, Problems, and a Theory for the Firm

Teppo Felin
Saïd Business School, University of Oxford, Oxford OX1 1HP, United Kingdom, [email protected]

Todd R. Zenger
David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112, [email protected]

n this paper we develop the outlines of a theory for the firm—a theory that guides a firm’s path to value creation,
I in response to the critique by von Hippel and von Krogh [von Hippel E, von Krogh G (2016) Identifying viable
“need–solution pairs”: Problem solving without problem formulation. Organ. Sci. 27:207–221; henceforth Hippel–Krogh]
of the problem-solving perspective as a theory of value creation. Hippel–Krogh argue (a) that problems and solutions
cannot always be separated because they often emerge as problem–solution or need–solution pairs that are discovered
serendipitously, and (b) that deliberately formulating or choosing a single, fixed problem restricts the firm from accessing
the vast array of external problem solvers and restricts the firm from valuable reformulations of the problem and “rich
landscape search.” Although Hippel–Krogh raise interesting and important arguments, we claim that they miss what is most
central about the problem-solving approach: the comparative, organizational, and strategic aspects of the theory. However,
their critique is also important because it draws attention to a critical void in the problem-solving perspective, namely, the
need for firms to possess a theory to guide their efforts at value creation.
We argue that this theory for the firm links problem solving with a broader theory of value creation, thus responding
to the concerns raised by Hippel–Krogh. We discuss how firms theorize the process of value creation by articulating an
overall architecture and bundle of problems around which each firm uniquely organizes and governs as a path to value
creation. We provide two brief, informal examples (Starbucks and Apple) to illustrate our points, linking these examples
to the need–solution landscape proposed by Hippel–Krogh. In all, we provide a broad sketch and outline of a theory of
value creation as it relates to problem finding and problem solving while concurrently responding to points raised by
Hippel–Krogh.
Keywords: strategy; innovation; problem solving; governance
History: Published online in Articles in Advance December 30, 2015.

1. Introduction in strategy (e.g., Denrell and Liu 2012, Winter 2012).

The problem-finding and problem-solving perspective— Although serendipity undoubtedly matters for firm per-
as a lens through which to understand strategy, innova- formance, the problem-solving perspective assumes that
tion, and entrepreneurship—has recently received much firms also make consequential organizational and gov-
attention (e.g., Baer et al. 2012, Felin and Zenger 2014, ernance decisions that impact their performance. These
Lakhani et al. 2013, Leiblein and Macher 2009, Macher firm-centric choices focus on what problems the firm
and Boerner 2012, Nickerson and Zenger 2004, Bingham ought to solve, and how, and when and where to let oth-
and Spradlin 2011). This perspective argues that firms cre- ers find and solve problems or perhaps even defer to
ate value as they formulate, identify, and solve problems. serendipitous discovery.
The perspective is particularly useful in offering theoret- von Hippel and von Krogh (2016; henceforth Hippel–
ical guidance for how to organize and govern problem Krogh) provide a critique of the basic framing that
solving and associated innovation (Nickerson and Zenger underlies the problem-finding and problem-solving per-
2004). The problem-solving perspective has specifically spective. They make two central points: (a) problems and
sought to develop a firm-centric, comparative, and nor- solutions cannot always be separated because they often
mative theory of the organization and governance of emerge as problem–solution or need–solution pairs that
value creation, and it thus can be seen as a counterpoint are discovered serendipitously, and (b) deliberately for-
to the recent emphasis placed on serendipity and luck mulating or choosing a single, fixed problem restricts the
222
 Felin and Zenger: Crossroads—Strategy, Problems, and a Theory for the Firm
Organization Science 27(1), pp. 222–231, © 2016 INFORMS 223

firm from accessing the vast array of external problem firm. It also reveals a potential comparative advantage
solvers and restricts the firm from valuable reformula- in problem finding and problem solving within specific
tions of the problem itself that facilitate “rich landscape domains, which then directs decisions about which prob-
search.” Overall, they argue that sequential problem for- lems the focal firm needs to solve, and which not, and
mulation and solving are excessively costly, delimiting, how to organize and govern this activity. The theory also
and unrealistic, compared to the opportunities provided serves a vital role in directing the firm as it attends to
by the identification of what they call “need–solution and filters the vast array of need–solution pairs that it
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pairs.” confronts, ideally revealing those problem–solution pairs

Their critique raises important points, highlighting a that fit within its architecture of problems needing res-
potentially important path to value creation and revealing olution. At the same time this theory leaves unattended
deficiencies in the problem-finding and problem-solving vast residual domains of problems that are neither iden-
approach. We concur that narrow problem formulation is tified nor more effectively solved with the aid of the the-
limiting and that some value creation may indeed occur ory and which are perhaps better explored, if at all, by
as need–solution pairs are searched or (serendipitously) others (partners, users, or suppliers) or through serendip-
discovered. However, we argue that these need–solution itous discovery. Hence, a central strategic activity for
pairs are likely the result of problem finding and prob- focal firms is the composition of a theory for the firm
lem solving by other firms, and importantly, they arrive that illuminates when and where to problem find and
with a price tag. The need–solution pairs discussed (and problem solve and when and where to outsource these
advocated) by Hippel–Krogh are the equivalent of extant activities.
products, marketed and sold by other firms and market
actors. Thus, Hippel–Krogh miss what is perhaps most
central about the problem solving approach: the compar- 2. Value Creation: Serendipity,
ative and strategic insights that it offers to focal firms for Markets or Organization
how to govern value creation. More importantly, they fail Most scholars would agree that a central concern of
to provide a normative (or descriptive) theory of when a strategic management is the creation of value. Histori-
firm should defer to the serendipitous discovery offered cally, strategy scholars have looked at various firm and
in need–solution pairs and when a focal firm should higher-level antecedents and factors related to value cre-
take up problem finding and problem solving itself. This ation. At the firm level, scholars have looked at the
admittedly is not their aim, though this issue, as we will origins of value held in resources (e.g., Barney 1991),
highlight, is intimately linked to their critique. Our effort accumulating experience (Dierickx and Cool 1989), and
here, then, is as much remedy and enhancement as cri- developing capabilities (e.g., Coff 2010, Teece 2007), as
tique. We contend that the power of the problem-solving well as in a firm’s governance (e.g., Argyres et al. 2012).
approach lies in the strategic and comparative guidance Some have argued that the “locus” of value creation
it provides to a focal firm seeking to create value, recog- exists at higher levels and thus have placed emphasis on
nizing that serendipity certainly may play a role in this factors such as the evolution of industries (e.g., Jacobides
process. et al. 2006, Jacobides and Winter 2012) or interorgani-
Hippel–Krogh’s arguments do, however, highlight an zational relations and networks (Dyer and Singh 1996,
important void in the problem-finding and problem- Kogut 2000). In fact, one of the central trends to emerge
solving perspective. Their critique reveals a need to from recent research is a diminished focus on the firm
place the microanalytics of problem finding and problem itself as a central unit and source of value (see Felin and
solving as vehicles of value creation (e.g., as delineated Zenger 2014) and an increased focus on value creation
by Nickerson et al. 2007) within a wider strategic con- that originates from linkages with disparate environmen-
text in which firms actively orchestrate the process of tal constituents (e.g., users, customers, suppliers, and uni-
what problems to address and solve, when and where to versities). Accordingly, the “open innovation” literature
problem find and problem solve, and when and where emphasizes the importance of value-creating interactions
to defer to others’ problem finding and problem-solving with suppliers, universities, customers, and others outside
efforts. To remedy this void and to address the concerns the boundary of a focal organization (for a recent review,
raised by Hippel–Krogh, we articulate how a theory for see West et al. 2014).
the firm is needed to place problem finding and problem To put our response to Hippel–Krogh in perspective,
solving within a broader theory of value creation. We it is worth highlighting that both von Krogh and von
argue that the primary path to value creation for a given Hippel, along with many others, have independently and
focal firm reflects its capacity to compose an overarch- jointly made important contributions to this broader lit-
ing and unique, firm-specific theory of value creation, erature that emphasizes the need to move conversations
one that reveals an architecture and bundle of specific about strategy and innovation beyond the boundaries of
problems that deserve attention. This theory guides the the firm itself, emphasizing the power of users and more
expectations, governance, and strategic direction of the open forms of collaboration and interaction (e.g., Baldwin
 Felin and Zenger: Crossroads—Strategy, Problems, and a Theory for the Firm
224 Organization Science 27(1), pp. 222–231, © 2016 INFORMS

and von Hippel 2012, Benkler 2002, Chatterji and Fab- though this might be a part of it. Rather, innovation
rizio 2013, Cohen et al. 2002, Fey and Birkinshaw 2005, requires purposeful governance and a focus on questions
Garriga et al. 2013, von Hippel and von Krogh 2003, von such as knowledge sharing and ownership and incen-
Krogh et al. 2003, Laursen and Salter 2006, Love et al. tives. Users, for example, might effectively tackle cer-
2013, Roper et al. 2013). Hippel–Krogh’s critique of the tain types of innovation problems, whereas other types
problem-solving perspective builds on this precise theme, of problems might require careful coordination within
focusing on the knowledge, information, and solutions the firm. Thus, the central questions are which problem-
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that are available to firms outside their boundaries. The finding and problem solving activities should the focal
general tenor and assumption of this research is that firm- firm engage in; when and why and how should it orga-
centric innovation is unnecessarily delimiting, and thus nize to do this; and which problem-finding and problem-
there are significant opportunities in opening up innova- solving activities might be better left to other actors?
tion by incorporating users, customers, and various exter- Paradoxically, we might contend that the Hippel–
nal constituents (e.g., universities and partners) in the pro- Krogh critique is actually overly focused on focal firms
cess of innovation. in that it interprets seemingly serendipitous discover-
This theme is carried through in the target paper. ies as evidence of the absence of deliberate problem
Hippel–Krogh specifically discuss how innovation finding and problem solving. However, the economy
emerges through serendipitous interactions with external is not merely filled with need–solution pairs, but also
stakeholders and the environment, rather than deliber- with hosts of deliberate problem finders and problem
ate problem finding and problem solving on the part of solvers who in fact generate the need–solution pairs
focal firms. They argue that problem solving often hap- that focal firms discover. In other words, need–solution
pens when firms inadvertently discover fully developed pairs do not emerge ex nihilo. More often than not,
solutions to problems that were unforeseen to them. For need–solution pairs are the hard-earned work of other
example, they discuss how an employee of a firm, walk- firms (or “markets”) and thus are sold for a price. What
ing through a trade show, might find solutions to prob- may appear to be a purely serendipitous solution dis-
lems that she did not even recognize her firm had (e.g., a covery by a focal firm is likely to be the outcome of
problem associated with payroll processing). Problem a highly deliberate, possibly costly problem formula-
solutions thus emerge without problem formulation in tion and problem-solving process by another firm. Thus,
the form of what Hippel–Krogh label “need–solution solutions to many problems—often the most valuable
pairs.” Furthermore they argue that restricting prob- problems—don’t emerge out of nothing. Their realiza-
lem formulation to a specific focal firm unnecessarily tion requires production and governance. Hence, the cen-
restricts the firm from a vast array of alternative formu- tral question for the focal firm is not merely when to
lations and solutions accessible through “rich landscape pursue serendipity and when to pursue deliberate prob-
search.” That is, external actors not only might provide lem finding and problem solving, but rather when to rely
feasible solutions to problems, but they might even rede- on the problem finding and problem solving of others,
fine the problem (e.g., going from “where do I source and when to rely on their own efforts.
chemical x?” to “how could we produce without chem- The examples provided by Hippel–Krogh (e.g., of
ical x?”). Throughout their discussion they emphasize stumbling on a software solution at a trade show or
both the “value of rich landscape search” and the role of finding a supplier of lumber in Helsinki) are prime
of serendipity in this process, thus linking their argu- examples of how individuals or firms may stumble on
ments with a broader conversation about the importance solutions to their problems, in markets. These solutions
of both openness and the role of luck in strategy. are captured in the many products that are available for
We certainly recognize the value of “broader” and sale. Other firms seek to market and sell their solu-
more open search (see Leiponen and Helfat 2010), as tions to problems, problems that in fact are frequently
well as the need to maximize the value that serendip- unforeseen by the focal firm. Of course, the fact that
ity offers, for instance, by being open to external prob- the economy is full of actors deliberately seeking solu-
lem formulations and need–solution pairs. However, as tions to others’ problems only highlights the importance
we have discussed elsewhere (Felin and Zenger 2014), of serendipitous discovery and need–solution pairs that
the central questions are when, why, and how should Hippel–Krogh highlight.
firms search more broadly or rely on serendipity, and However, there is a clear limitation in relying on
what governance forms are best suited for such activity? serendipity as a source of value creation; namely, need–
The goal of the problem-finding and problem-solving solution pairs arrive with a price tag. Hippel–Krogh
perspective is to develop a comparative, strategic, and ignore this issue. They argue that “a great advantage
normative theory of value creation that is analytic and of a need–solution pair problem-solving process is that
actionable for a focal firm in its efforts to create value. the potentially relevant need and potentially useful solu-
Thus, innovation, from our perspective, is not merely tion come packaged together” (p. 214). However, any
“rich landscape search” for extant need–solution pairs, prepackaged need–solution pair is likely to be priced and
 Felin and Zenger: Crossroads—Strategy, Problems, and a Theory for the Firm
Organization Science 27(1), pp. 222–231, © 2016 INFORMS 225

readily observable by others. Importantly, whether that mentioned above, admittedly the current problem-finding
need–solution pair is somehow value creating for the and problem-solving perspective is rather vague about
focal firm hinges on an assessment of value in use relative how actors should select problems in the first place,
to price. (Below we discuss the possibility of identifying focusing instead on how solution discovery is optimally
novel “affordances” for extant need–solution pairs.) governed once a problem is identified (see Baer et al.
Value creation only occurs when a focal firm some- 2012). We next discuss the outlines of a more strategic
how discovers a bargain, namely, a solution with value theory of problem finding and problem solving, a theory
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that exceeds the price paid. Moreover, even such value for the firm. We also provide some practical examples
creation may be short lived if competitors can access to briefly illustrate our point, linking our arguments with
these same solutions at similar prices. Thus, discovering Hippel–Krogh’s notion of need–solution pairs.
firm-specific bargains among solutions demands some Vital to a firm’s capacity for value creation is its abil-
kind of firm specific filter, a filter that enables the firm to ity to generate value for customers or offer common
sift through the abundance of possible and ready-made value at a uniquely low cost (Brandenburger and Stuart
solutions, to discover those that might offer the firm 1996). Uniqueness is the discriminator between creat-
unique value. Firms need some kind of mechanism or ing value that flows solely to customers and creating
process that reveals a domain where the firm is compar- value that is at least partially captured by the focal firm.
atively advantaged in finding and/or solving problems Value creation for the focal firm therefore demands that
or a domain of problems that, if solved, generate value firms discover or solve unique problems, namely, prob-
unique to the firm.1 lems or solutions unseen by or inaccessible to others.
Hippel–Krogh seem to implicitly acknowledge a need Identifying common problems and discovering common
for this type of filter by offering advice for how to solutions are unlikely paths to value creation, because
improve the “conditions for effective need–solution pair these common problems and solutions are accessible to
search” (p. 215). They discuss such factors as the role of direct competitors as well. Many of the examples dis-
prior experience, cognition and biases, individual charac- cussed by Hippel–Krogh fall into this category: solu-
teristics, and techniques for improving one’s luck. Over- tions to unforeseen problems that are offered for sale
all the search for need–solution pairs, they argue, should in markets. Thus, discovering and purchasing a software
be “guided by broad and flexible problem formulation” or product (one of the examples of Hippel–Krogh), even if
by an entrepreneur’s answer to such questions as “What novel to the purchasing firm, is an unlikely source of a
can the basis for a profitable business be for me? Let focal firm’s value creation (i.e., its captured value) if it
me search widely for what others are doing successfully” is also readily accessible to competitors.2
(p. 217). Such solutions are sold in markets where any value-
Although these questions and Hippel–Krogh’s general bestowing capacity is either already priced in or is com-
advice about serendipity and search are intriguing, they peted away as competitors make similar adoptions. The
don’t offer any firm-specific guidance for how or why key exception to this logic is if the focal firms possess
a search (e.g., for what) should be initiated in the first other assets or solutions that are uniquely complemen-
place. Admittedly the problem-solving and formulation tary to this commonly accessible need–solution pair.
literature itself is relatively silent on this question as We contend that, for a given focal firm, the path to
well (focusing instead on what types of problems should value creation typically originates with a cognitive effort
be governed by what types of forms; Felin and Zenger to compose and develop a unique and firm-specific the-
2014). The Hippel–Krogh critique of problem solving ory of value creation (Felin and Zenger 2009), in other
thus implicitly highlights the need for this firm-specific words, a theory of and for a specific firm (see Zenger
theory. We view it as central to building a robust, norma- 2013). This theory may reveal assumptions about the evo-
tive theory of value creation. We thus contend that the lution of consumer tastes, define an unmet customer need
critical, firm-specific guide for initiating innovation, and or unaddressed problem, offer insights into the under- or
a set of problems that might be solved, rests in a firm’s overvaluation of assets in markets, or highlight a prob-
theory of value creation: a theory for the firm, a theory lem in the production of a product or service. The theory
that both reveals an architecture of problems to solve and essentially defines a set of problems for which resolution
guides a firm in filtering abundant need–solution pairs is hypothesized to create the value foreseen. For some
in the market. subset of problems, solutions may indeed already exist,
whereas for others they may not. However, the theory
frames an architecture of problems to solve and there-
3. Composing a Theory for the Firm fore may also reveal potential sources of value in solution
Hippel–Krogh provide little guidance regarding how markets. The theory may also highlight promising paths
firms should optimally search across problem–solution to internal solution discovery, where solutions are likely
or need–solution landscapes beyond offering advice on to be found, and how this search activity should be gov-
how to increase serendipitous interactions (by searching erned. The theory then represents a forward-looking (see
more broadly or defining problems more broadly). As Gavetti and Levinthal 2000) perspective that guides the
 Felin and Zenger: Crossroads—Strategy, Problems, and a Theory for the Firm
226 Organization Science 27(1), pp. 222–231, © 2016 INFORMS

problem-formulation and problem-solving efforts of the field of strategy. In economic settings, an individual’s
firm. The central vehicle for value creation, then, lies in capacity to recognize valuable problems and solutions
composing and updating the firm’s theory and using it to depends on beliefs and attention, which are in turn
formulate problems, organize solution search, and select shaped by the unique theories actors hold. Scholars
from among available need–solution pairs. in organizational economics have also highlighted the
The concept of theorizing links to a very particu- role that beliefs and vision play in strategic and orga-
lar view of cognition and has its roots in psychology. nizational activity (e.g., Van den Steen 2005). Theo-
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As Felin and Zenger (2009) discuss, humans, includ- ries reveal unique problems and solutions, previously
ing managers and entrepreneurs, have a unique capacity unanticipated by others. The role that theories play in
to engage in forward-looking theorizing about possi- shaping our attention and observation is well illustrated
bilities beyond extant realities, theorizing that uniquely by the example of Newton and his theory of gravity.
guides attention and observations. We argue that theo- Although others had long observed falling apples (and
rizing, then, isn’t the unique domain of scientists but any number of other falling items) before Newton, none
in fact a universal human capacity that shapes human had observed the phenomenon of falling with Newton’s
perceptions and behavior more generally (see Gopnik question and theory in mind. Our observations and per-
1996). Importantly, theorizing is not simply the process ceptions of our surroundings (and of value), then, are
of environmental observation or representation, learning mind and theory-laden and dependent (see Popper 1972).
or information processing, which suggests a rather pas- Although the Sun indeed appears to orbit the Earth, only
sive conception of rationality and mind (see Felin and sound theoretical intuition sheds a different light on the
Foss 2011, Winter 2011). Rather, theorizing is an active actual reality. Similarly, theories that guide value cre-
effort to project into the future and to imagine possibil- ation and value capture direct our attention and help to
ities beyond what might readily be observed. We thus reveal new ways of seeing and potential value in solu-
build on a very particular view of the human mind, one tions (their alternative uses and affordances) that others
that does not rely solely on stimuli but instead focuses on may fail to see.
the unique expectations, guesses, hypotheses, and the- To return to Hippel–Krogh, note that a few of their
examples indeed also touch on the need to identify
ories that the mind constructs as it interacts with the
“new-to-the-world need–solution pairs”—solutions that
environment (e.g., Peirce 1957, Spelke et al. 1992).3
address truly new-to-the-world needs. It is this domain
Our view of strategic choices guided by a theory is not
of novel problems, or novel uses of old solutions to
without precedent in the strategy literature. For exam-
address new problems, that represents the most intrigu-
ple, Gavetti et al. (2005) have argued that strategic nov-
ing ground for the field of strategy. However, a large
elty emerges as solutions or products or processes from
bulk of Hippel–Krogh’s examples (sourcing lumber from
one context are applied to another context via analogy. Helsinki, figuring out why a car does not run, etc.) seem
Others have highlighted how novelty emerges through to represent rather mundane examples of how individu-
the recombination of different (and distant) products or als or firms serendipitously encounter extant solutions to
solutions (e.g., Ahuja and Lampert 2001, Rosenkopf rather generic problems.
and Nerkar 2001, Fleming and Sorenson 2001). Beyond If the aim is value creation, the distinction between
search, other scholars have emphasized the importance known versus novel uses for solutions and products is
of “mental representations” (e.g., Csaszar and Levinthal quite important. Existing markets or need–solution land-
2015, Gavetti 2011, Helfat and Peteraf 2015, Levinthal scapes, absent theories, are relatively static, where com-
2011). These studies provide valuable insights into cog- mon needs and common solutions generate common
nition, strategy making, and the origins of novelty and value. Firms offering solutions may generally know their
value. We build on this work by arguing that individu- common value and price accordingly. However, theo-
als and firms compose theories that reveal problems to ries about potentially novel problems or novel uses for
solve and then guide the selection and governance of products and solutions can animate markets of problem–
valuable trials and experiments to test them. The firm- solution pairs, generating value-creating possibilities and
specific theory thus prompts strategic choices that gen- recombinations unforeseen by others.
erate value that might be captured by an entrepreneur or The notion of the set of possible “affordances” (i.e.,
focal firm (Felin and Zenger 2009, Benner and Zenger uses and functions) of a solution or a product usefully
2014). Furthermore, the theory becomes a central driver illustrates theory’s role (Felin et al. 2014). Existing prod-
of governance and the organization of innovation (see ucts or solutions that might be for sale in factor markets
Felin and Zenger 2014). (Barney 1986, Leiblein 2011) are commonly categorized
This intuition is powerful for the context of strategy around specific functions and uses broadly known to
as well, because it moves us from behavioral, input- sellers and buyers. These categories render markets quite
oriented theories of association or learning to the gen- efficient, but there is a vast array of possible (alterna-
eration and bootstrapping of guesses, questions, and tive) uses for any solution or factor, unseen or unspec-
hypotheses about new domains, a central issue for the ified, yet to be imagined or produced. This indeed is
 Felin and Zenger: Crossroads—Strategy, Problems, and a Theory for the Firm
Organization Science 27(1), pp. 222–231, © 2016 INFORMS 227

the domain of strategy. The vast set of possible uses, or information is aggregated or decision rights are allo-
“affordances,” for a given solution or product is likely cated) of a firm are likely to play a central role in how
to far outstrip the value offered in simply solving a spe- effectively these theories guide strategic and innovative
cific, envisaged problem. Although intended uses of a activity (e.g., Burgelman 1983, Felin and Zenger 2011).
solution or product, as foreseen by those actors engaged Overall our focus on theorizing emphasizes the delib-
in providing and selling the solution, may be effectively erate processes associated with strategy and innova-
priced, alternative uses may provide vast avenues for tive activity, as a counterbalance to recent work that
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value creation. The mechanisms behind the emergence emphasizes serendipity in strategy (e.g., Denrell et al.
of these new uses and functions need to be identified. 2003, Winter 2012). However, we certainly recognize
Interestingly, Hippel–Krogh’s discussion of the cogni- that serendipity also plays a central role. For example,
tive bias of “functional fixedness” (i.e., the tendency to solutions to problems may emerge from serendipitous
view objects only in terms of their common uses, rather encounters (Cohen et al. 1972). Even the recognition of
than novel ones) comes closest to highlighting this prob- something as a solution, particularly as a novel solu-
lem. Assessing all the alternative or possible uses for tion, requires some kind of a priori theoretical intuition
any asset or product is beyond the calculus of any eco- that guides attention and recognition. Thus we prefer to
nomic agent, or even the market as a whole. The prob- emphasize those aspects of strategy and innovation over
lem becomes even more severe once we account for the which focal firms have (at least some) control and the
possibility of combining solutions, but we view the the- theorizing that drives decisions about which problems to
ory for the firm as the central filter through which novel address, solutions to search (or recognize), and how to
uses for extant solutions are discovered. govern these activities.
Again, Hippel–Krogh in many ways implicitly assume
that firms possess a theory for their firm. They argue 3.1. A Theory for the Firm: Some Informal
that ‘‘one may simply scan 0 0 0 the environment for the Examples
need–solution pairs that might fit one’s own context.” To make our arguments more tangible, we provide two
(admittedly stylized) examples of the role that theory
However, this environmental scanning and contextual
plays in navigating problems and solutions. First, con-
fitting also need to be defined and directed somehow.
sider Howard Schultz’s frequently discussed efforts to
What is the firm scanning for or fitting to? Scanning
create and capture value through what would eventually
and fitting presupposes some kind of problem. We argue
become Starbucks Corporation (Koehn 2005; also see
that a firm’s theory can provide a central logic through
Schultz 1998). In 1982 Howard Schultz was employed
which the vast array of possible uses for a given solu-
by a small Seattle coffee company and was sent by
tion are cognitively composed and not merely serendip-
the company to Milan to attend an international house-
itously discovered by scanning a static need–solution wares trade show. There he observed and became enam-
landscape. Search and scanning inherently need to be ored with Italian coffee bars and recognized a solution
directed in some fashion, by something, an aspect miss- and potential need, akin to the need–solution pairings
ing from Hippel–Krogh’s arguments. Research in per- discussed by Hippel–Krogh. Schultz indeed decided to
ception supports the point that observation is always “re-create in America the authentic Italian coffee bar
mind and theory-laden (see Felin and Zenger 2009). culture” (Schultz 1998, p. 52).
Even seemingly accidental or serendipitious encounters The founders of the company, however, did not buy
with solutions, as our examples will illustrate, require into his vision and he thus started his own firm. In 1987
some kind of impetus or recognition on the part of the Schultz bought Starbucks and operated nine Seattle loca-
scanning actors. We contend that it is the possession of a tions. However, he had aggressive plans to expand. He
theory that enables value creation to be more than a pro- sought to convince “investors to believe in [his] vision
cess of serendipitous interaction or random recombina- for the company,” specifically of a large-scale rollout
tion. Theories reveal an architecture of problems needing of the Italian coffee experience. In retrospect, the pos-
resolution. sibilities and opportunity associated with creating the
Before proceeding with some stylized examples of products and experience associated with a European
this theorizing process, we need to recognize that a café might seem obvious, perhaps even representing a
firm’s theory is not a “rule for riches.” That is, theorizing straightforward application of the type of need–solution
occurs in strategic, innovative, and entrepreneurial con- pair that Hippel–Krogh discuss.
texts that are inherently uncertain. Thus theorizing may However, the key to the success of Starbucks was
naturally also lead to poor outcomes or biased thinking. not simply observing Italian coffee bars. Schultz was
Future work certainly is needed on the variance associ- certainly not the first American with a passion for and
ated with this activity, when (and why) it might lead to interest in coffee to observe them. Schultz in effect com-
biased thinking versus when it might not. For example, posed a theory and overall framework for value cre-
the internal structures and social processes (e.g., how ation, one that admittedly evolved as experiments were
 Felin and Zenger: Crossroads—Strategy, Problems, and a Theory for the Firm
228 Organization Science 27(1), pp. 222–231, © 2016 INFORMS

conducted and feedback received. However, this theory, need–solution pairs in the environment, as discussed by
guided by a belief in an unmet need, revealed a sequence Hippel–Krogh. However, note that this scanning and
of subsidiary problems to which he successfully sought search still required unique knowledge and informa-
solutions. Thus Starbucks was not a simple one-to-one tion, and a theory of sorts, providing a capacity to rec-
importation of the Italian café into the United States ognize the potential uses of the solutions discovered.
(an existing need–solution pairing), it was far more: Although some inside Xerox were clearly well aware of
the actual full-scale realization of this vision and the- the value of these technologies (Isaacson 2012), it was
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ory included a host of ancillary problems that needed Jobs’s unique theory of value creation, and the comple-
solutions. The realization of Schultz’s theory required mentary bundle of problems needing solutions thereby
problem solving related to a host of issues, including revealed, that enabled Apple to unlock the eventual com-
the sourcing of the product, store format, merchandising mercialization of these solutions and products, bundled
mix, store ownership (franchising versus wholly owned), in the overall architecture of Apple’s Macintosh. Note
incentives and control, customer education, and vertical that Apple’s scanning of and serendipitous encounter
integration. Markets of course provided a menu of solu- with the technology solutions involved a market transac-
tions from which Starbucks could draw, but the unique tion, where Xerox’s venture capital division was given
architecture and compilation of all of these activities, the opportunity to invest $1 million in Apple (in its sec-
as a whole (which problems should be solved by the ond round of financing) in return for the opportunity to
firm itself, which by others, where might solutions be look at potential technologies and solutions. Although
sought, etc.) was driven by the firm’s overall theory this may have been the market price for this technol-
about how it would create value. In short, a compre- ogy (Xerox’s $1 million investment in Apple was worth
hensive need–solution pair that could generate Starbucks $17.6 million the subsequent year), the real value to
simply did not exist at the outset. The revelation of Apple was a reflection of the theory that Apple pos-
a bundle of problems needing resolution was required, sessed. In other words, Jobs’s eureka moment, (just like
and each problem required a decision regarding gover- anyone else’s) was revealed by a theory.4
nance, and a clear understanding of how to orchestrate Our two informal examples, of Starbucks and Apple,
the resulting solutions into a customer experience and are admittedly stylized, but they illustrate the contours
delivery system that created value for Starbucks. The of how any value realized from (extant) need–solution
Italian and European café experience, although repli- pairs is dependent on the unique theories possessed by
cated by Starbucks in terms of the customer interaction, focal actors and firms. Off-the-shelf solutions to well
nonetheless differed radically. The theory behind Star- identified needs (Hippel–Krogh’s need–solution pairs),
bucks implied a completely different architecture and even if unknown initially to a focal firm, are unlikely to
bundle of problems, with cascading implications for the generate sustained value for the focal firm. Of course,
governance and organization of Starbucks. The company if others have already effectively solved particular prob-
naturally learned as it grew, and the theory was revised, lems, then there is no value for the focal firm in inter-
but the overall theory of value creation was implicitly nalizing the costs of recomposing the solution, unless
in place early on. Similar theoretical activity can be the firm’s theory reveals an alternative, potentially more
found in the history of other companies, such as Disney valuable solution. Firms, however, as informally illus-
(Argyres and Zenger 2012, Zenger 2013). trated by the above discussion of Starbucks and Apple,
Thus a firm is not just a piecemeal compilation of can create and recognize real value as they generate the-
individual transactions or even a bundle of problems and ories about how extant problems and solutions might
solutions governed in a certain manner. Nor is value cre- be bundled into valuable products and customer experi-
ation simply the act of scanning for need–solution pairs. ences. The firm, then, has a comparative advantage in
Rather, a firm also represents a perspective and point of solving problems in some domains and in recognizing
view, a theory for the firm, about how value might be how extant solutions might be utilized and realized in
orchestrated on the whole, and the set of problems and the theory of the focal firm.
solutions that need to be solved and governed to cre-
ate that value. However, a firm’s theory can also reveal
unique value in extant solutions that become available 4. Discussion and Conclusion
in the market. Our goal in this response has been to put Hippel–
The history of Apple provides another illustrative ex- Krogh’s criticisms of the problem-solving perspective
ample. Steve Jobs stumbled, seemingly serendipitously, into a wider strategic and comparative context. We
on the graphical user interface, bit-mapping technology, concur with them that markets feature many solutions to
and the mouse. All were central components behind problems, solutions that firms may serendipitously stum-
the eventual release of Apple’s revolutionary Macintosh ble upon and solutions they may not have anticipated or
(Isaacson 2012). Their discovery by Jobs may seem to even formulated. However, these solutions are the result
be examples of serendipity and the power of scanning of the problem-finding and problem-solving efforts of
 Felin and Zenger: Crossroads—Strategy, Problems, and a Theory for the Firm
Organization Science 27(1), pp. 222–231, © 2016 INFORMS 229

other firms and thus can typically only be purchased firms may not possess the right knowledge. However, a
by the focal firm at a price. The problem-solving per- theory that reveals critical problems and thereby guides
spective seeks to be comparative in providing guidance solution search, including scans of the need–solution
on which problems a focal firm should itself seek solu- landscape, is a more likely source of breakthroughs in
tions for, and which should be left to others and markets value creation. We hope that future work begins to look
(Nickerson and Zenger 2004). Thus, many of the exam- at these comparative linkages between firms, their the-
ples provided by Hippel–Krogh (again, finding useful ories, and the mix of organizational and governance
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software at a trade show, identifying a lumber supplier, choices utilized in the creation of value.
and serendipitously encountering various need–solution
pairs) are the result of previous problem solving by other Acknowledgments
firms in markets. The authors give special thanks to Organization Science edi-
However, Hippel–Krogh’s arguments raise a more tors Zur Shapira and Paul Adler for their support and feedback.
fundamental issue. That is, what is latent in the problem- The feedback of two anonymous peer reviewers also helped to
improve the paper.
solving logic, though it hasn’t fully been vetted, is the
idea that focal firms have an advantage in formulating,
Endnotes
identifying, and addressing problems unique to them. 1
A long literature on creativity and incubation as it relates
Furthermore, firms may also possess advantages in rec- to problem solving and the generation of novelty (see Wallas
ognizing the potential alternative uses of existing solu- 1926) may provide additional insights. Maggitti et al. (2013;
tions. In our response we have sought to highlight how see Fernandes and Simon 1999) offer an excellent discussion,
this, a theory for the firm, guides the bundle and archi- building on Wallas’s research, highlighting the nonlinear fac-
tecture of problems and solutions associated with a focal tors associated with invention and search. Others have high-
organization. The theory for the firm provides the under- lighted the role of “affect” in exploratory search (Adler and
lying mechanism for the search processes postulated by Obstfeld 2007).
2
Hippel–Krogh. Our central point is that the firm’s the- As discussed by an anonymous reviewer, the business model
ory represents its unique, forward-looking projection of literature might also be linked with this conversation about
value creation. Definitions of the business model concept
how to meet a particular customer demand, one that cur-
vary significantly (for a review, see Zott et al. 2011), with
rently is not being filled. Although the theory of the firm some emphasizing the “architecture of the product,” others the
establishes boundaries, our broad effort with the theory “sources of revenues,” “heuristic logics,” “the governance of
for the firm is to establish how the firm makes decisions transactions,” “customer value proposition,” or “realized strat-
about the full bundle of problems and solutions that it egy,” and so forth. However, as a start, we view a given busi-
needs to engage with in the first place as it seeks to ness model as a strategic experiment revealed by a theory.
create value. Fully engaging with this literature is beyond the scope of this
Admittedly our sketch here of how a theory for the paper. We hope that future work further explores the linkages.
3
firm links with problem solving is relatively brief and As succinctly put by Charles Peirce, “man’s mind has a natu-
broad, but making these links is important because ral adaptation to imagining correct theories of some kinds 0 0 0 0
Hippel–Krogh’s arguments have raised ambiguities in the If man had not the gift of mind adapted to his requirements,
he could not have acquired any knowledge” (1957, p. 71).
problem-solving perspective (e.g., about who addresses
The notion of theories guiding human activity can be found in
which problems and why), as well as higher-level strate- many strands of psychology. For example, Tenenbaum et al.
gic questions about how (and by whom) value is cre- (2006) discuss the role of theory-based Bayesian models and
ated and appropriated. Although solutions to problems, Byrne (2005) discusses the role of imagination and counter-
as Hippel–Krogh emphasize, may emerge from other factual thinking as humans create and consider alternatives.
4
actors (users, suppliers, or simply serendipitous interac- One of the coauthors of this paper was privileged to take
tions with the environment), it is the firm-specific the- a nearly contemporaneous tour of Xerox PARC and observe
ory that should guide the set of problems and solutions much of the same technology as Jobs. However, absent Job’s
it decides to address. There indeed is an opportunity to theory, this author, while appreciating the technology’s nov-
begin linking firm-specific factors with the broader open elty, was unable to see the remarkable value Jobs’ emerging
theory recognized.
innovation and related literatures to which Hippel–Krogh
have contributed (e.g., Baldwin and von Hippel 2012,
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at Saïd Business School, University of Oxford. He received his
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models of inductive learning and reasoning. Trends Cognitive
Utah. His research interests include strategy, entrepreneurship,
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theory of the firm, organization design, and interdisciplinary
Van den Steen E (2005) Organizational beliefs and managerial vision.
J. Law, Econom., Organ. 21:256–283.
approaches to heterogeneity.
Todd R. Zenger is the N. Eldon Tanner Professor of Strat-
von Hippel E, von Krogh E (2003) Open source software and the
“private-collective” innovation model: Issues for organization
egy and Strategic Leadership at Eccles School of Business,
science. Organ. Sci. 14:208–223. University of Utah. He received his Ph.D. from University of
von Hippel E, von Krogh G (2016) Identifying viable “need–solution California, Los Angeles. His research interests include corpo-
pairs”: Problem solving without problem formulation. Organ. rate strategy, theories of the firm, entrepreneurship and value
Sci. 27:207–221. creation, and organization design.
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