Organization Science

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Articles in Advance, pp. 110

ISSN 1047-7039 (print) ISSN 1526-5455 (online)

http://dx.doi.org/10.1287/orsc.2015.1022
2015 INFORMS

Strategy, Problems, and a Theory for the Firm

Teppo Felin
Sad Business School, University of Oxford, Oxford OX1 1HP, United Kingdom, teppo.felin@sbs.ox.ac.uk

Todd R. Zenger
David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112, todd.zenger@utah.edu

n this paper we develop the outlines of a theory for the firma theory that guides a firms path to value creation,
in response to the critique by von Hippel and von Krogh [von Hippel E, von Krogh G (2016) Identifying viable
needsolution pairs: Problem solving without problem formulation. Organ. Sci. 27:207221; henceforth HippelKrogh]
of the problem-solving perspective as a theory of value creation. HippelKrogh argue (a) that problems and solutions
cannot always be separated because they often emerge as problemsolution or needsolution 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 HippelKrogh 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 HippelKrogh. 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 needsolution landscape proposed by HippelKrogh. 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
HippelKrogh.
Keywords: strategy; innovation; problem solving; governance
History: Published online in Articles in Advance.

1.

Introduction

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

Although serendipity undoubtedly matters for firm performance, the problem-solving perspective assumes that
firms also make consequential organizational and governance decisions that impact their performance. These
firm-centric choices focus on what problems the firm
ought to solve, and how, and when and where to let others find and solve problems or perhaps even defer to
serendipitous discovery.
von Hippel and von Krogh (2016; henceforth Hippel
Krogh) provide a critique of the basic framing that
underlies the problem-finding and problem-solving perspective. They make two central points: (a) problems and
solutions cannot always be separated because they often
emerge as problemsolution or needsolution pairs that
are discovered serendipitously, and (b) deliberately formulating or choosing a single, fixed problem restricts the

The problem-finding and problem-solving perspective

as a lens through which to understand strategy, innovation, and entrepreneurshiphas recently received much
attention (e.g., Baer et al. 2012, Felin and Zenger 2014,
Lakhani et al. 2013, Leiblein and Macher 2009, Macher
and Boerner 2012, Nickerson and Zenger 2004, Bingham
and Spradlin 2011). This perspective argues that firms create value as they formulate, identify, and solve problems.
The perspective is particularly useful in offering theoretical guidance for how to organize and govern problem
solving and associated innovation (Nickerson and Zenger
2004). The problem-solving perspective has specifically
sought to develop a firm-centric, comparative, and normative theory of the organization and governance of
value creation, and it thus can be seen as a counterpoint
to the recent emphasis placed on serendipity and luck
1

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firm from accessing the vast array of external problem

solvers and restricts the firm from valuable reformulations of the problem itself that facilitate rich landscape
search. Overall, they argue that sequential problem formulation and solving are excessively costly, delimiting,
and unrealistic, compared to the opportunities provided
by the identification of what they call needsolution
pairs.
Their critique raises important points, highlighting a
potentially important path to value creation and revealing
deficiencies in the problem-finding and problem-solving
approach. We concur that narrow problem formulation is
limiting and that some value creation may indeed occur
as needsolution pairs are searched or (serendipitously)
discovered. However, we argue that these needsolution
pairs are likely the result of problem finding and problem solving by other firms, and importantly, they arrive
with a price tag. The needsolution pairs discussed (and
advocated) by HippelKrogh are the equivalent of extant
products, marketed and sold by other firms and market
actors. Thus, HippelKrogh miss what is perhaps most
central about the problem solving approach: the comparative and strategic insights that it offers to focal firms for
how to govern value creation. More importantly, they fail
to provide a normative (or descriptive) theory of when a
firm should defer to the serendipitous discovery offered
in needsolution pairs and when a focal firm should
take up problem finding and problem solving itself. This
admittedly is not their aim, though this issue, as we will
highlight, is intimately linked to their critique. Our effort
here, then, is as much remedy and enhancement as critique. We contend that the power of the problem-solving
approach lies in the strategic and comparative guidance
it provides to a focal firm seeking to create value, recognizing that serendipity certainly may play a role in this
process.
HippelKroghs arguments do, however, highlight an
important void in the problem-finding and problemsolving perspective. Their critique reveals a need to
place the microanalytics of problem finding and problem
solving as vehicles of value creation (e.g., as delineated
by Nickerson et al. 2007) within a wider strategic context in which firms actively orchestrate the process of
what problems to address and solve, when and where to
problem find and problem solve, and when and where
to defer to others problem finding and problem-solving
efforts. To remedy this void and to address the concerns
raised by HippelKrogh, we articulate how a theory for
the firm is needed to place problem finding and problem
solving within a broader theory of value creation. We
argue that the primary path to value creation for a given
focal firm reflects its capacity to compose an overarching and unique, firm-specific theory of value creation,
one that reveals an architecture and bundle of specific
problems that deserve attention. This theory guides the
expectations, governance, and strategic direction of the

Organization Science, Articles in Advance, pp. 110, 2015 INFORMS

firm. It also reveals a potential comparative advantage

in problem finding and problem solving within specific
domains, which then directs decisions about which problems the focal firm needs to solve, and which not, and
how to organize and govern this activity. The theory also
serves a vital role in directing the firm as it attends to
and filters the vast array of needsolution pairs that it
confronts, ideally revealing those problemsolution pairs
that fit within its architecture of problems needing resolution. At the same time this theory leaves unattended
vast residual domains of problems that are neither identified nor more effectively solved with the aid of the theory and which are perhaps better explored, if at all, by
others (partners, users, or suppliers) or through serendipitous discovery. Hence, a central strategic activity for
focal firms is the composition of a theory for the firm
that illuminates when and where to problem find and
problem solve and when and where to outsource these
activities.

2.

Value Creation: Serendipity,

Markets or Organization

Most scholars would agree that a central concern of

strategic management is the creation of value. Historically, strategy scholars have looked at various firm and
higher-level antecedents and factors related to value creation. At the firm level, scholars have looked at the
origins of value held in resources (e.g., Barney 1991),
accumulating experience (Dierickx and Cool 1989), and
developing capabilities (e.g., Coff 2010, Teece 2007), as
well as in a firms governance (e.g., Argyres et al. 2012).
Some have argued that the locus of value creation
exists at higher levels and thus have placed emphasis on
factors such as the evolution of industries (e.g., Jacobides
et al. 2006, Jacobides and Winter 2012) or interorganizational relations and networks (Dyer and Singh 1996,
Kogut 2000). In fact, one of the central trends to emerge
from recent research is a diminished focus on the firm
itself as a central unit and source of value (see Felin and
Zenger 2014) and an increased focus on value creation
that originates from linkages with disparate environmental constituents (e.g., users, customers, suppliers, and universities). Accordingly, the open innovation literature
emphasizes the importance of value-creating interactions
with suppliers, universities, customers, and others outside
the boundary of a focal organization (for a recent review,
see West et al. 2014).
To put our response to HippelKrogh in perspective,
it is worth highlighting that both von Krogh and von
Hippel, along with many others, have independently and
jointly made important contributions to this broader literature that emphasizes the need to move conversations
about strategy and innovation beyond the boundaries of
the firm itself, emphasizing the power of users and more
open forms of collaboration and interaction (e.g., Baldwin

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and von Hippel 2012, Benkler 2002, Chatterji and Fabrizio 2013, Cohen et al. 2002, Fey and Birkinshaw 2005,
Garriga et al. 2013, von Hippel and von Krogh 2003, von
Krogh et al. 2003, Laursen and Salter 2006, Love et al.
2013, Roper et al. 2013). HippelKroghs critique of the
problem-solving perspective builds on this precise theme,
focusing on the knowledge, information, and solutions
that are available to firms outside their boundaries. The
general tenor and assumption of this research is that firmcentric innovation is unnecessarily delimiting, and thus
there are significant opportunities in opening up innovation by incorporating users, customers, and various external constituents (e.g., universities and partners) in the process of innovation.
This theme is carried through in the target paper.
HippelKrogh specifically discuss how innovation
emerges through serendipitous interactions with external
stakeholders and the environment, rather than deliberate problem finding and problem solving on the part of
focal firms. They argue that problem solving often happens when firms inadvertently discover fully developed
solutions to problems that were unforeseen to them. For
example, they discuss how an employee of a firm, walking through a trade show, might find solutions to problems that she did not even recognize her firm had (e.g., a
problem associated with payroll processing). Problem
solutions thus emerge without problem formulation in
the form of what HippelKrogh label needsolution
pairs. Furthermore they argue that restricting problem formulation to a specific focal firm unnecessarily
restricts the firm from a vast array of alternative formulations and solutions accessible through rich landscape
search. That is, external actors not only might provide
feasible solutions to problems, but they might even redefine the problem (e.g., going from where do I source
chemical x? to how could we produce without chemical x?). Throughout their discussion they emphasize
both the value of rich landscape search and the role
of serendipity in this process, thus linking their arguments with a broader conversation about the importance
of both openness and the role of luck in strategy.
We certainly recognize the value of broader and
more open search (see Leiponen and Helfat 2010), as
well as the need to maximize the value that serendipity offers, for instance, by being open to external problem formulations and needsolution pairs. However, as
we have discussed elsewhere (Felin and Zenger 2014),
the central questions are when, why, and how should
firms search more broadly or rely on serendipity, and
what governance forms are best suited for such activity?
The goal of the problem-finding and problem-solving
perspective is to develop a comparative, strategic, and
normative theory of value creation that is analytic and
actionable for a focal firm in its efforts to create value.
Thus, innovation, from our perspective, is not merely
rich landscape search for extant needsolution pairs,

though this might be a part of it. Rather, innovation

requires purposeful governance and a focus on questions
such as knowledge sharing and ownership and incentives. Users, for example, might effectively tackle certain types of innovation problems, whereas other types
of problems might require careful coordination within
the firm. Thus, the central questions are which problemfinding and problem solving activities should the focal
firm engage in; when and why and how should it organize to do this; and which problem-finding and problemsolving activities might be better left to other actors?
Paradoxically, we might contend that the Hippel
Krogh critique is actually overly focused on focal firms
in that it interprets seemingly serendipitous discoveries as evidence of the absence of deliberate problem
finding and problem solving. However, the economy
is not merely filled with needsolution pairs, but also
with hosts of deliberate problem finders and problem
solvers who in fact generate the needsolution pairs
that focal firms discover. In other words, needsolution
pairs do not emerge ex nihilo. More often than not,
needsolution pairs are the hard-earned work of other
firms (or markets) and thus are sold for a price. What
may appear to be a purely serendipitous solution discovery by a focal firm is likely to be the outcome of
a highly deliberate, possibly costly problem formulation and problem-solving process by another firm. Thus,
solutions to many problemsoften the most valuable
problemsdont emerge out of nothing. Their realization requires production and governance. Hence, the central question for the focal firm is not merely when to
pursue serendipity and when to pursue deliberate problem finding and problem solving, but rather when to rely
on the problem finding and problem solving of others,
and when to rely on their own efforts.
The examples provided by HippelKrogh (e.g., of
stumbling on a software solution at a trade show or
of finding a supplier of lumber in Helsinki) are prime
examples of how individuals or firms may stumble on
solutions to their problems, in markets. These solutions
are captured in the many products that are available for
sale. Other firms seek to market and sell their solutions to problems, problems that in fact are frequently
unforeseen by the focal firm. Of course, the fact that
the economy is full of actors deliberately seeking solutions to others problems only highlights the importance
of serendipitous discovery and needsolution pairs that
HippelKrogh highlight.
However, there is a clear limitation in relying on
serendipity as a source of value creation; namely, need
solution pairs arrive with a price tag. HippelKrogh
ignore this issue. They argue that a great advantage
of a needsolution pair problem-solving process is that
the potentially relevant need and potentially useful solution come packaged together (p. 214). However, any
prepackaged needsolution pair is likely to be priced and

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Organization Science, Articles in Advance, pp. 110, 2015 INFORMS

readily observable by others. Importantly, whether that

needsolution pair is somehow value creating for the
focal firm hinges on an assessment of value in use relative
to price. (Below we discuss the possibility of identifying
novel affordances for extant needsolution pairs.)
Value creation only occurs when a focal firm somehow discovers a bargain, namely, a solution with value
that exceeds the price paid. Moreover, even such value
creation may be short lived if competitors can access
these same solutions at similar prices. Thus, discovering
firm-specific bargains among solutions demands some
kind of firm specific filter, a filter that enables the firm to
sift through the abundance of possible and ready-made
solutions, to discover those that might offer the firm
unique value. Firms need some kind of mechanism or
process that reveals a domain where the firm is comparatively advantaged in finding and/or solving problems
or a domain of problems that, if solved, generate value
unique to the firm.1
HippelKrogh seem to implicitly acknowledge a need
for this type of filter by offering advice for how to
improve the conditions for effective needsolution pair
search (p. 215). They discuss such factors as the role of
prior experience, cognition and biases, individual characteristics, and techniques for improving ones luck. Overall the search for needsolution pairs, they argue, should
be guided by broad and flexible problem formulation or
by an entrepreneurs answer to such questions as What
can the basis for a profitable business be for me? Let
me search widely for what others are doing successfully
(p. 217).
Although these questions and HippelKroghs general
advice about serendipity and search are intriguing, they
dont offer any firm-specific guidance for how or why
a search (e.g., for what) should be initiated in the first
place. Admittedly the problem-solving and formulation
literature itself is relatively silent on this question as
well (focusing instead on what types of problems should
be governed by what types of forms; Felin and Zenger
2014). The HippelKrogh critique of problem solving
thus implicitly highlights the need for this firm-specific
theory. We view it as central to building a robust, normative theory of value creation. We thus contend that the
critical, firm-specific guide for initiating innovation, and
a set of problems that might be solved, rests in a firms
theory of value creation: a theory for the firm, a theory
that both reveals an architecture of problems to solve and
guides a firm in filtering abundant needsolution pairs
in the market.

3.

Composing a Theory for the Firm

HippelKrogh provide little guidance regarding how

firms should optimally search across problemsolution
or needsolution landscapes beyond offering advice on
how to increase serendipitous interactions (by searching
more broadly or defining problems more broadly). As

mentioned above, admittedly the current problem-finding

and problem-solving perspective is rather vague about
how actors should select problems in the first place,
focusing instead on how solution discovery is optimally
governed once a problem is identified (see Baer et al.
2012). We next discuss the outlines of a more strategic
theory of problem finding and problem solving, a theory
for the firm. We also provide some practical examples
to briefly illustrate our point, linking our arguments with
HippelKroghs notion of needsolution pairs.
Vital to a firms capacity for value creation is its ability to generate value for customers or offer common
value at a uniquely low cost (Brandenburger and Stuart
1996). Uniqueness is the discriminator between creating value that flows solely to customers and creating
value that is at least partially captured by the focal firm.
Value creation for the focal firm therefore demands that
firms discover or solve unique problems, namely, problems or solutions unseen by or inaccessible to others.
Identifying common problems and discovering common
solutions are unlikely paths to value creation, because
these common problems and solutions are accessible to
direct competitors as well. Many of the examples discussed by HippelKrogh fall into this category: solutions to unforeseen problems that are offered for sale
in markets. Thus, discovering and purchasing a software
product (one of the examples of HippelKrogh), even if
novel to the purchasing firm, is an unlikely source of a
focal firms value creation (i.e., its captured value) if it
is also readily accessible to competitors.2
Such solutions are sold in markets where any valuebestowing capacity is either already priced in or is competed away as competitors make similar adoptions. The
key exception to this logic is if the focal firms possess
other assets or solutions that are uniquely complementary to this commonly accessible needsolution pair.
We contend that, for a given focal firm, the path to
value creation typically originates with a cognitive effort
to compose and develop a unique and firm-specific theory of value creation (Felin and Zenger 2009), in other
words, a theory of and for a specific firm (see Zenger
2013). This theory may reveal assumptions about the evolution of consumer tastes, define an unmet customer need
or unaddressed problem, offer insights into the under- or
overvaluation of assets in markets, or highlight a problem in the production of a product or service. The theory
essentially defines a set of problems for which resolution
is hypothesized to create the value foreseen. For some
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 therefore may also reveal potential sources of value in solution
markets. The theory may also highlight promising paths
to internal solution discovery, where solutions are likely
to be found, and how this search activity should be governed. The theory then represents a forward-looking (see
Gavetti and Levinthal 2000) perspective that guides the

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problem-formulation and problem-solving efforts of the

firm. The central vehicle for value creation, then, lies in
composing and updating the firms theory and using it to
formulate problems, organize solution search, and select
from among available needsolution pairs.
The concept of theorizing links to a very particular view of cognition and has its roots in psychology.
As Felin and Zenger (2009) discuss, humans, including managers and entrepreneurs, have a unique capacity
to engage in forward-looking theorizing about possibilities beyond extant realities, theorizing that uniquely
guides attention and observations. We argue that theorizing, then, isnt the unique domain of scientists but
in fact a universal human capacity that shapes human
perceptions and behavior more generally (see Gopnik
1996). Importantly, theorizing is not simply the process
of environmental observation or representation, learning
or information processing, which suggests a rather passive conception of rationality and mind (see Felin and
Foss 2011, Winter 2011). Rather, theorizing is an active
effort to project into the future and to imagine possibilities beyond what might readily be observed. We thus
build on a very particular view of the human mind, one
that does not rely solely on stimuli but instead focuses on
the unique expectations, guesses, hypotheses, and theories that the mind constructs as it interacts with the
environment (e.g., Peirce 1957, Spelke et al. 1992).3
Our view of strategic choices guided by a theory is not
without precedent in the strategy literature. For example, Gavetti et al. (2005) have argued that strategic novelty emerges as solutions or products or processes from
one context are applied to another context via analogy.
Others have highlighted how novelty emerges through
the recombination of different (and distant) products or
solutions (e.g., Ahuja and Lampert 2001, Rosenkopf
and Nerkar 2001, Fleming and Sorenson 2001). Beyond
search, other scholars have emphasized the importance
of mental representations (e.g., Csaszar and Levinthal
2015, Gavetti 2011, Helfat and Peteraf 2015, Levinthal
2011). These studies provide valuable insights into cognition, strategy making, and the origins of novelty and
value. We build on this work by arguing that individuals and firms compose theories that reveal problems to
solve and then guide the selection and governance of
valuable trials and experiments to test them. The firmspecific theory thus prompts strategic choices that generate value that might be captured by an entrepreneur or
focal firm (Felin and Zenger 2009, Benner and Zenger
2014). Furthermore, the theory becomes a central driver
of governance and the organization of innovation (see
Felin and Zenger 2014).
This intuition is powerful for the context of strategy
as well, because it moves us from behavioral, inputoriented theories of association or learning to the generation and bootstrapping of guesses, questions, and
hypotheses about new domains, a central issue for the

field of strategy. In economic settings, an individuals

capacity to recognize valuable problems and solutions
depends on beliefs and attention, which are in turn
shaped by the unique theories actors hold. Scholars
in organizational economics have also highlighted the
role that beliefs and vision play in strategic and organizational activity (e.g., Van den Steen 2005). Theories reveal unique problems and solutions, previously
unanticipated by others. The role that theories play in
shaping our attention and observation is well illustrated
by the example of Newton and his theory of gravity.
Although others had long observed falling apples (and
any number of other falling items) before Newton, none
had observed the phenomenon of falling with Newtons
question and theory in mind. Our observations and perceptions of our surroundings (and of value), then, are
mind and theory-laden and dependent (see Popper 1972).
Although the Sun indeed appears to orbit the Earth, only
sound theoretical intuition sheds a different light on the
actual reality. Similarly, theories that guide value creation and value capture direct our attention and help to
reveal new ways of seeing and potential value in solutions (their alternative uses and affordances) that others
may fail to see.
To return to HippelKrogh, note that a few of their
examples indeed also touch on the need to identify
new-to-the-world needsolution pairssolutions that
address truly new-to-the-world needs. It is this domain
of novel problems, or novel uses of old solutions to
address new problems, that represents the most intriguing ground for the field of strategy. However, a large
bulk of HippelKroghs examples (sourcing lumber from
Helsinki, figuring out why a car does not run, etc.) seem
to represent rather mundane examples of how individuals or firms serendipitously encounter extant solutions to
rather generic problems.
If the aim is value creation, the distinction between
known versus novel uses for solutions and products is
quite important. Existing markets or needsolution landscapes, absent theories, are relatively static, where common needs and common solutions generate common
value. Firms offering solutions may generally know their
common value and price accordingly. However, theories about potentially novel problems or novel uses for
products and solutions can animate markets of problem
solution pairs, generating value-creating possibilities and
recombinations unforeseen by others.
The notion of the set of possible affordances (i.e.,
uses and functions) of a solution or a product usefully
illustrates theorys role (Felin et al. 2014). Existing products or solutions that might be for sale in factor markets
(Barney 1986, Leiblein 2011) are commonly categorized
around specific functions and uses broadly known to
sellers and buyers. These categories render markets quite
efficient, but there is a vast array of possible (alternative) uses for any solution or factor, unseen or unspecified, yet to be imagined or produced. This indeed is

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the domain of strategy. The vast set of possible uses, or

affordances, for a given solution or product is likely
to far outstrip the value offered in simply solving a specific, envisaged problem. Although intended uses of a
solution or product, as foreseen by those actors engaged
in providing and selling the solution, may be effectively
priced, alternative uses may provide vast avenues for
value creation. The mechanisms behind the emergence
of these new uses and functions need to be identified.
Interestingly, HippelKroghs discussion of the cognitive bias of functional fixedness (i.e., the tendency to
view objects only in terms of their common uses, rather
than novel ones) comes closest to highlighting this problem. Assessing all the alternative or possible uses for
any asset or product is beyond the calculus of any economic agent, or even the market as a whole. The problem becomes even more severe once we account for the
possibility of combining solutions, but we view the theory for the firm as the central filter through which novel
uses for extant solutions are discovered.
Again, HippelKrogh in many ways implicitly assume
that firms possess a theory for their firm. They argue
that one may simply scan 0 0 0 the environment for the
needsolution pairs that might fit ones own context.
However, this environmental scanning and contextual
fitting also need to be defined and directed somehow.
What is the firm scanning for or fitting to? Scanning
and fitting presupposes some kind of problem. We argue
that a firms theory can provide a central logic through
which the vast array of possible uses for a given solution are cognitively composed and not merely serendipitously discovered by scanning a static needsolution
landscape. Search and scanning inherently need to be
directed in some fashion, by something, an aspect missing from HippelKroghs arguments. Research in perception supports the point that observation is always
mind and theory-laden (see Felin and Zenger 2009).
Even seemingly accidental or serendipitious encounters
with solutions, as our examples will illustrate, require
some kind of impetus or recognition on the part of the
scanning actors. We contend that it is the possession of a
theory that enables value creation to be more than a process of serendipitous interaction or random recombination. Theories reveal an architecture of problems needing
resolution.
Before proceeding with some stylized examples of
this theorizing process, we need to recognize that a
firms theory is not a rule for riches. That is, theorizing
occurs in strategic, innovative, and entrepreneurial contexts that are inherently uncertain. Thus theorizing may
naturally also lead to poor outcomes or biased thinking.
Future work certainly is needed on the variance associated with this activity, when (and why) it might lead to
biased thinking versus when it might not. For example,
the internal structures and social processes (e.g., how

Organization Science, Articles in Advance, pp. 110, 2015 INFORMS

information is aggregated or decision rights are allocated) of a firm are likely to play a central role in how
effectively these theories guide strategic and innovative
activity (e.g., Burgelman 1983, Felin and Zenger 2011).
Overall our focus on theorizing emphasizes the deliberate processes associated with strategy and innovative activity, as a counterbalance to recent work that
emphasizes serendipity in strategy (e.g., Denrell et al.
2003, Winter 2012). However, we certainly recognize
that serendipity also plays a central role. For example,
solutions to problems may emerge from serendipitous
encounters (Cohen et al. 1972). Even the recognition of
something as a solution, particularly as a novel solution, requires some kind of a priori theoretical intuition
that guides attention and recognition. Thus we prefer to
emphasize those aspects of strategy and innovation over
which focal firms have (at least some) control and the
theorizing that drives decisions about which problems to
address, solutions to search (or recognize), and how to
govern these activities.
3.1.

A Theory for the Firm: Some Informal

Examples
To make our arguments more tangible, we provide two
(admittedly stylized) examples of the role that theory
plays in navigating problems and solutions. First, consider Howard Schultzs frequently discussed efforts to
create and capture value through what would eventually
become Starbucks Corporation (Koehn 2005; also see
Schultz 1998). In 1982 Howard Schultz was employed
by a small Seattle coffee company and was sent by
the company to Milan to attend an international housewares trade show. There he observed and became enamored with Italian coffee bars and recognized a solution
and potential need, akin to the needsolution pairings
discussed by HippelKrogh. Schultz indeed decided to
re-create in America the authentic Italian coffee bar
culture (Schultz 1998, p. 52).
The founders of the company, however, did not buy
into his vision and he thus started his own firm. In 1987
Schultz bought Starbucks and operated nine Seattle locations. However, he had aggressive plans to expand. He
sought to convince investors to believe in [his] vision
for the company, specifically of a large-scale rollout
of the Italian coffee experience. In retrospect, the possibilities and opportunity associated with creating the
products and experience associated with a European
caf might seem obvious, perhaps even representing a
straightforward application of the type of needsolution
pair that HippelKrogh discuss.
However, the key to the success of Starbucks was
not simply observing Italian coffee bars. Schultz was
certainly not the first American with a passion for and
interest in coffee to observe them. Schultz in effect composed a theory and overall framework for value creation, one that admittedly evolved as experiments were

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conducted and feedback received. However, this theory,

guided by a belief in an unmet need, revealed a sequence
of subsidiary problems to which he successfully sought
solutions. Thus Starbucks was not a simple one-to-one
importation of the Italian caf into the United States
(an existing needsolution pairing), it was far more:
the actual full-scale realization of this vision and theory included a host of ancillary problems that needed
solutions. The realization of Schultzs theory required
problem solving related to a host of issues, including
the sourcing of the product, store format, merchandising
mix, store ownership (franchising versus wholly owned),
incentives and control, customer education, and vertical
integration. Markets of course provided a menu of solutions from which Starbucks could draw, but the unique
architecture and compilation of all of these activities,
as a whole (which problems should be solved by the
firm itself, which by others, where might solutions be
sought, etc.) was driven by the firms overall theory
about how it would create value. In short, a comprehensive needsolution pair that could generate Starbucks
simply did not exist at the outset. The revelation of
a bundle of problems needing resolution was required,
and each problem required a decision regarding governance, and a clear understanding of how to orchestrate
the resulting solutions into a customer experience and
delivery system that created value for Starbucks. The
Italian and European caf experience, although replicated by Starbucks in terms of the customer interaction,
nonetheless differed radically. The theory behind Starbucks implied a completely different architecture and
bundle of problems, with cascading implications for the
governance and organization of Starbucks. The company
naturally learned as it grew, and the theory was revised,
but the overall theory of value creation was implicitly
in place early on. Similar theoretical activity can be
found in the history of other companies, such as Disney
(Argyres and Zenger 2012, Zenger 2013).
Thus a firm is not just a piecemeal compilation of
individual transactions or even a bundle of problems and
solutions governed in a certain manner. Nor is value creation simply the act of scanning for needsolution pairs.
Rather, a firm also represents a perspective and point of
view, a theory for the firm, about how value might be
orchestrated on the whole, and the set of problems and
solutions that need to be solved and governed to create that value. However, a firms theory can also reveal
unique value in extant solutions that become available
in the market.
The history of Apple provides another illustrative example. Steve Jobs stumbled, seemingly serendipitously,
on the graphical user interface, bit-mapping technology,
and the mouse. All were central components behind
the eventual release of Apples revolutionary Macintosh
(Isaacson 2012). Their discovery by Jobs may seem to
be examples of serendipity and the power of scanning

needsolution pairs in the environment, as discussed by

HippelKrogh. However, note that this scanning and
search still required unique knowledge and information, and a theory of sorts, providing a capacity to recognize the potential uses of the solutions discovered.
Although some inside Xerox were clearly well aware of
the value of these technologies (Isaacson 2012), it was
Jobss unique theory of value creation, and the complementary bundle of problems needing solutions thereby
revealed, that enabled Apple to unlock the eventual commercialization of these solutions and products, bundled
in the overall architecture of Apples Macintosh. Note
that Apples scanning of and serendipitous encounter
with the technology solutions involved a market transaction, where Xeroxs venture capital division was given
the opportunity to invest $1 million in Apple (in its second round of financing) in return for the opportunity to
look at potential technologies and solutions. Although
this may have been the market price for this technology (Xeroxs $1 million investment in Apple was worth
$17.6 million the subsequent year), the real value to
Apple was a reflection of the theory that Apple possessed. In other words, Jobss eureka moment, (just like
anyone elses) was revealed by a theory.4
Our two informal examples, of Starbucks and Apple,
are admittedly stylized, but they illustrate the contours
of how any value realized from (extant) needsolution
pairs is dependent on the unique theories possessed by
focal actors and firms. Off-the-shelf solutions to well
identified needs (HippelKroghs needsolution pairs),
even if unknown initially to a focal firm, are unlikely to
generate sustained value for the focal firm. Of course,
if others have already effectively solved particular problems, then there is no value for the focal firm in internalizing the costs of recomposing the solution, unless
the firms theory reveals an alternative, potentially more
valuable solution. Firms, however, as informally illustrated by the above discussion of Starbucks and Apple,
can create and recognize real value as they generate theories about how extant problems and solutions might
be bundled into valuable products and customer experiences. The firm, then, has a comparative advantage in
solving problems in some domains and in recognizing
how extant solutions might be utilized and realized in
the theory of the focal firm.

4.

Discussion and Conclusion

Our goal in this response has been to put Hippel

Kroghs criticisms of the problem-solving perspective
into a wider strategic and comparative context. We
concur with them that markets feature many solutions to
problems, solutions that firms may serendipitously stumble upon and solutions they may not have anticipated or
even formulated. However, these solutions are the result
of the problem-finding and problem-solving efforts of

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other firms and thus can typically only be purchased

by the focal firm at a price. The problem-solving perspective seeks to be comparative in providing guidance
on which problems a focal firm should itself seek solutions for, and which should be left to others and markets
(Nickerson and Zenger 2004). Thus, many of the examples provided by HippelKrogh (again, finding useful
software at a trade show, identifying a lumber supplier,
and serendipitously encountering various needsolution
pairs) are the result of previous problem solving by other
firms in markets.
However, HippelKroghs arguments raise a more
fundamental issue. That is, what is latent in the problemsolving logic, though it hasnt fully been vetted, is the
idea that focal firms have an advantage in formulating,
identifying, and addressing problems unique to them.
Furthermore, firms may also possess advantages in recognizing the potential alternative uses of existing solutions. In our response we have sought to highlight how
this, a theory for the firm, guides the bundle and architecture of problems and solutions associated with a focal
organization. The theory for the firm provides the underlying mechanism for the search processes postulated by
HippelKrogh. Our central point is that the firms theory represents its unique, forward-looking projection of
how to meet a particular customer demand, one that currently is not being filled. Although the theory of the firm
establishes boundaries, our broad effort with the theory
for the firm is to establish how the firm makes decisions
about the full bundle of problems and solutions that it
needs to engage with in the first place as it seeks to
create value.
Admittedly our sketch here of how a theory for the
firm links with problem solving is relatively brief and
broad, but making these links is important because
HippelKroghs arguments have raised ambiguities in the
problem-solving perspective (e.g., about who addresses
which problems and why), as well as higher-level strategic questions about how (and by whom) value is created and appropriated. Although solutions to problems,
as HippelKrogh emphasize, may emerge from other
actors (users, suppliers, or simply serendipitous interactions with the environment), it is the firm-specific theory that should guide the set of problems and solutions
it decides to address. There indeed is an opportunity to
begin linking firm-specific factors with the broader open
innovation and related literatures to which HippelKrogh
have contributed (e.g., Baldwin and von Hippel 2012,
von Hippel and von Krogh 2003, von Krogh et al. 2003,
Garriga et al. 2013).
Our effort here has been to rearticulate and further delineate a more firm-centric and specific approach
to value creation, where firms make consequential,
forward-looking decisions, recognizing that luck (and
various external constituents) of course also plays a role.
Deferring to luck may make sense in some cases, where

Organization Science, Articles in Advance, pp. 110, 2015 INFORMS

firms may not possess the right knowledge. However, a

theory that reveals critical problems and thereby guides
solution search, including scans of the needsolution
landscape, is a more likely source of breakthroughs in
value creation. We hope that future work begins to look
at these comparative linkages between firms, their theories, and the mix of organizational and governance
choices utilized in the creation of value.
Acknowledgments
The authors give special thanks to Organization Science editors Zur Shapira and Paul Adler for their support and feedback.
The feedback of two anonymous peer reviewers also helped to
improve the paper.

Endnotes
1

A long literature on creativity and incubation as it relates

to problem solving and the generation of novelty (see Wallas
1926) may provide additional insights. Maggitti et al. (2013;
see Fernandes and Simon 1999) offer an excellent discussion,
building on Wallass research, highlighting the nonlinear factors associated with invention and search. Others have highlighted the role of affect in exploratory search (Adler and
Obstfeld 2007).
2
As discussed by an anonymous reviewer, the business model
literature might also be linked with this conversation about
value creation. Definitions of the business model concept
vary significantly (for a review, see Zott et al. 2011), with
some emphasizing the architecture of the product, others the
sources of revenues, heuristic logics, the governance of
transactions, customer value proposition, or realized strategy, and so forth. However, as a start, we view a given business model as a strategic experiment revealed by a theory.
Fully engaging with this literature is beyond the scope of this
paper. We hope that future work further explores the linkages.
3
As succinctly put by Charles Peirce, mans mind has a natural adaptation to imagining correct theories of some kinds 0 0 0 0
If man had not the gift of mind adapted to his requirements,
he could not have acquired any knowledge (1957, p. 71).
The notion of theories guiding human activity can be found in
many strands of psychology. For example, Tenenbaum et al.
(2006) discuss the role of theory-based Bayesian models and
Byrne (2005) discusses the role of imagination and counterfactual thinking as humans create and consider alternatives.
4
One of the coauthors of this paper was privileged to take
a nearly contemporaneous tour of Xerox PARC and observe
much of the same technology as Jobs. However, absent Jobs
theory, this author, while appreciating the technologys novelty, was unable to see the remarkable value Jobs emerging
theory recognized.

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Teppo Felin is professor of strategy and Academic Area

Head at Sad Business School, University of Oxford. He
received his Ph.D. from the David Eccles School of Business, University of Utah. His research interests include strategy, entrepreneurship, theory of the firm, organization design,
and interdisciplinary approaches to heterogeneity.
Todd R. Zenger is the N. Eldon Tanner Professor of Strategy and Strategic Leadership at Eccles School of Business,
University of Utah. He received his Ph.D. from University of
California, Los Angeles. His research interests include corporate strategy, theories of the firm, entrepreneurship and value
creation, and organization design.