Working Paper | HBS Working Paper Series | 2012

Relational Contracts and Organizational Capabilities

by R. Gibbons and R. Henderson

Abstract

A large literature identifies unique organizational capabilities as a potent source of competitive advantage, yet our knowledge of why capabilities fail to diffuse more rapidly-particularly in situations in which competitors apparently have strong incentives to adopt them and a well developed understanding of how they work-remains incomplete. In this paper we suggest that competitively significant capabilities often rest on managerial practices that in turn rely on relational contracts (i.e., informal agreements sustained by the shadow of the future). We argue that one of the reasons these practices may be difficult to copy is that effective relational contracts must solve the twin problems of credibility and clarity, and that while credibility might in principle be instantly acquired, clarity may take time to develop and may interact with credibility in complex ways, so that relational contracts may often be difficult to build.

Keywords: Competitive Advantage; Motivation and Incentives; Management Practices and Processes; Contracts; Competency and Skills; Relationships; Complexity;

Citation:

Gibbons, R., and R. Henderson. "Relational Contracts and Organizational Capabilities." Harvard Business School Working Paper, No. 12-061, January 2012.