From transaction to transformation costs: The case of Polaroid's SX-70 camera

Abstract

Innovation in a product's design can have significant implications for the organization of competencies across a production network. Currently, discussions on product designs and the distribution of competencies across production networks are based on transaction costs considerations. However, such a view does not consider the transformation costs that arise when competencies across a production network are reorganized because of design changes. We explore the nature of these costs by examining the dynamics associated with Polaroid Corporation's greatest innovation, the SX-70 camera. Our longitudinal study suggests that it is not costless to redraw the boundaries of a firm. In the SX-70 camera case, Polaroid's relationships with its important stakeholders were adversely affected resulting in a deterioration of its competitive position. From this study, we suggest that it is critical to consider the transformation costs involved with radical innovations in order to gain a more complete picture of change in systemic industries.