Toward a Knowledge-Based Theory of the Firm

Robert M. Grant School of Business, Georgetown University, Strategic Management Journal, Vol. 17

Part of Advanced Manufacturing System Course Lectured by: Dr. S. Modi Presentation Prepared by: Vafa Saboorideilami R00773716

Terminology
 Theories of the firm: Models of firms which predict

their structure and behaviors  Knowledge: That which is known



Knowledge Characteristics to create value:  Transferability: Tacit vs. Explicit knowledge  Capacity of Aggregation  Appropriability: The ability of the owner to receive a return
equal to the value created by resource

 Coordination: Integration of activities to ensure that

the resources are used most efficiently in pursuit of the specified objectives.

Assumptions
 Firms apply knowledge to the production of good and

services.  Knowledge is the most strategically important of a firm's resources.  Knowledge is created and held by individuals, not organizations.  Firms exist because markets are incapable of coordinating the knowledge of individual specialists.
This is the primary reason for existence of firms and role of the management within a firm.

Cooperation - Coordination
 Coordination of Specialized Knowledge


Organizational theory focuses on Cooperation



Difficulties of achieving cooperation

 Differing goals of organizational members  Divergence of employee and owner goals

Grant: even with cooperation, coordination of specialized knowledge is quite difficult. Focus on cooperation resulted in an emphasis on hierarchical and authority relations where cooperation is imposed by bureaucracy.

Coordination of Knowledge
 Specialized knowledge can be coordinated (integrated) using

the following mechanisms :  Rules and directives: These include etiquette, social norms, and procedures which facilitate human interaction.  Sequencing: Each specialist's input occurs independently in own separate time slot.  Routines: Also called coordination by mutual adjustment, can support complex patterns of interaction between individuals performing their own specialized tasks.  Group problem solving and decision making: Unlike 1-3 which seek efficiency through minimizing communication and direct learning, some tasks with high complexity and uncertainty require more personal communication.

Role of common Knowledge

 Importance of Common Knowledge


While the above mechanisms are ways to coordinate the specialized knowledge of employees, coordination also depends on the existence of common knowledge among organizational members. Common Knowledge permits individuals to share and integrate aspects of knowledge which are not common between them.

Common Knowledge
 Types of common knowledge
 

Language and other forms of symbolic communication literacy, numeracy, software, statistics Commonality of specialized knowledge: The purpose of the communication is to share the specialized knowledge so if two people have the same specialized knowledge, there's no benefit from integration but if they have entirely separate knowledge bases, then integration can't occur except at a very basic level. Shared meaning: Common mental frameworks allow for the transfer of tacit information. Metaphors, analogies, and stories are vehicles for reconciling different individual experiences. Recognition of knowledge domains: One needs to know what others know in order to coordinate with them.

Organizational Capability
 The ability of a firm to integrate knowledge

held by individuals within the organization creates its competitive advantage.  When employees are mobile, the organizational capability depends more on the integration mechanism than on the specialist knowledge that employees possess.  This leads to organizational practices such as cross training, job rotation, etc.

Organizational Structure
 Implications for Organizational Structure


Conceptualization of a firm as a knowledge integrating institution has two main implications for the internal structure of the firm:
 

Implications on the Role of Hierarchy Implications on the location of Decision Making

Organizational Structure


The Role of Hierarchy:



Hierarchy is more useful for processing than integrating information. When knowledge is held at all levels of an organization and when "higher level decision are dependent on "lower level knowledge", hierarchy will cause problems. Perhaps some of the recent pushes toward team based, participative organizational structure are due to knowledge requirements of the task, not just motivational, considerations.

Organizational Structure


The location of Decision Making:



Linkage Between decision Rights and Ownership: In knowledge-based firms, decision rights are granted to employees (knowledge resources) and the firms resources are jointly owned by stockholders and employees. Co-location of decision making and knowledge: Decisions based on tacit knowledge should be decentralized while decisions requiring statistical knowledge should be centralized.

Conclusion
 The primary task of the management is

establishing the coordination necessary for the knowledge integration.  Knowledge based approach offers theoretical basis for some of the recent organizational trends like de-layering, empowerment, and team based structures.  A more comprehensive knowledge based theory of the firm will embrace both knowledge creation and application.