The biggest barriers to strategic renewal are almost always top management's unexamined beliefs.

—Gary Hamel1

A manager argued that he could either increase his business unit's margins or its sales, but not both. His chief executive reminded him of the time when people lived in mud huts and faced the stark choice between light and heat: punch a hole in the side of your hut and you let the daylight in but also the cold, or block up all the openings and you stay warm but sit in darkness. The invention of glass made it possible to overcome the dilemma—to let in the light but not the cold. How then, he asked his manager, will you resolve your dilemma between no sales or no margin improvement? Where is the glass?

—Dominic Dodd and Ken Favaro2

Illustration highlighting three components of a pragmatic theory of a firm—work, innovation, and resource allocation, connected to one another and deeply rooted in a firm’s knowledge-building proficiency.

FIGURE 3.1 Work, innovation, and resource allocation

Figure 3.1 highlights three components of a pragmatic theory of the firm—work, innovation, and resource allocation—that will be analyzed in this chapter. Much of this chapter focuses on work because innovation and resource allocation are recurrent topics in other chapters. These three components are connected to one another and deeply rooted in a firm's knowledge-building proficiency.

In Figure 3.1, the firm's purpose is the beginning point because the other components are either managerial tasks to achieve the firm's purpose or related performance ...

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