Cognitive Theory of the Firm: A Historical Analysis of Ford and GM

Abstract

A theory of the firm not only needs to explain firm boundaries and their existence but also explain differences in performance and structure. A knowledge or cognitive theory of the firm can explain differences in firm performance and structure by identifying the knowledge of the entrepreneur and the coordinated knowledge of the firm members to develop capabilities. We have applied this theory to Ford Motors Company (FMC) and General Motors Corporation (GM) from time of inception until World War II (WWII) to explain differences in performance, structure, technological innovation and responses to changing markets. Our analysis begins with the early development of capabilities and then continues to explain the dynamic capabilities each had developed. The limitations of each capability set are analyzed by comparing responses of each to external events, in our case the Financial Crisis of 1920/21 and the Great Depression.