In classical microeconomic theory, a company is a "black box," a purposeful entity whose inner workings cannot be observed and whose behavior is determined almost entirely by the markets in which it competes. Executives and management practitioners, on the other hand, tend to behave as though changing the internal design and operation of a company can profoundly affect its performance.

Can the views of economists and managers be reconciled? Which innovations in corporate design are likely to succeed in the business environment of the next decade? We undertook a two-year research program to find out.

First, we analyzed the advantages and problems of today’s largest corporations. Second, we examined the strategies and organizational designs of innovative and successful firms. These are few in number, and many of them are small. For that reason, they cannot act as a ready source of best practices for giant corporations to adopt. Yet they do offer a landscape attractive to executives for whom innovation and entrepreneurialism are aspirations rather than everyday realities.

Since the grounds for future competitive success cannot be understood solely on the basis of current practice, we also drew on the discipline of organizational economics, which analyzes organizational actions as...