The Firm in a Knowledge Perspective

1. The Firm in a Knowledge Perspective Sidney G. Winter The Wharton School ESNIE Cargèse 15 May 2006

2. A “Knowledge Perspective” ??? • There is a “Knowledge-based View” in the literature of strategic management – it is a subset of the “Resource-based View,” arguing that knowledge is the key resource of the firm conferring competitive advantage. • Some speak of a ‘competence’ view or a ‘capabilities’ view or even a ‘dynamic capabilities’ view – all to roughly the same, fairly vague, effect.

3. Historical perspective on the “knowledge perspective” • The “firm as production function” (or set) treatment in “textbook orthodoxy” is a “knowledge-based view.” • In that view, firms are where productive knowledge lives, the only place it lives, and knowledge does not travel among them. • When firms are “a nexus of contracts” or have boundaries determined only by transaction costs, this traditional perspective tends to fade from view.

4. Knowledge and the firm: A neo-traditionalist view (?) • More recent treatments reaffirm the merit of the traditional perspective – while seeking to avoid overstatements and pursue extensions. • On this view , firms are central to the social arrangements for storing productive knowledge for extending its application, and for advancing it – three very closely related economic functions. • Of course, there are also other players – other types of institutions, organizations and individual roles complement the firm role.

5. Objective for today • Explain what has been added to the traditional understanding of knowledge and the firm. • Point out some specifically “institutional” aspects of the current view. • Take note of recent and potential research topics in this area. but first ….

6. Knowledge and the firm: a family of related topics • Organizational learning • Creativity and innovation, and diffusion • Knowledge transfer -- transfer of practices, replication (broad scope), imitation (from afar) • Industrial and technological evolution • Knowledge management. • Communities of practice, networks • Routines, capabilities, dynamic capabilities. • Others?

7. Outline • What is “knowledge”? • Is it meaningful to speak of firms, or other organizations, as having knowledge?

8. What is “knowledge”? • Actually, it is less important to answer this question precisely than it is to achieve some understanding of how society’s work gets done. Let a definition emerge! (If needed.) • What has emerged in recent decades is a broad and deep critique of any knowledge concept that is centered on individual minds and/or symbolic media (books, computer files) – as traditional conceptions clearly are.

9. The nature of “productive knowledge” that guides work. It is increasingly, and broadly, recognized that productive knowledge is • situated, context dependent, • embedded – in physical, temporal and social contexts at various levels, • partly tacit – skills, pattern recognition, not facts This general view is strongly supported by research in psychology, sociology, computer science, evolutionary economics, management, etc.

10. Therefore, • We must put aside, probably forever, any ambition of drawing a sharp conceptual line between productive knowledge and the context in which such knowledge is operative. • All three of the named considerations point to the infeasibility of that; it is a futile exercise. • The good news: dropping that idea may be the main key to understanding knowledge.

11. Do firms have knowledge? • An important question! Herbert Simon, Robert Grant suggested otherwise. • Meaning, “firms as such”, not individuals. • Meaning, “beyond the easy yes answer from the fact that a firm may be a legal person, hence an owner of patents, software, etc.” • A strong yes answer is based on the simple point that firms are creators of stable context for knowledge processes (store, extend, advance.) • But you can’t see that in a static model.

12. Reductionism rears its head(s):Simon and Grant on knowledge. • Simon (1995) stated “All learning takes place inside individual human heads; an organization learns in only two ways: (a) by the learning of its members, or (b) may ingesting new members who have knowledge that the organization didn’t previously have.” (1991, p. 176). He then goes on to qualify this substantially (though inadequately) by noting the relationships among the contents of the heads. But see Grant , who gives this quotation without the qualification, and says he is “dispensing with the concept of organizational knowledge.” ((Grant 1996), pp. 112-113).

13. Personnel turnover and firm knowledge. • When a new individual joins a firm, the firm provides a “training program” via the context, whether there is an official program or not. • It there is 100% turnover over some period of time, one person at a time, does that mean that the “training” investment amounts to the same thing as creating the whole thing from scratch? • No, it is typically (massively) smaller.

14. Consider a combination lock(temporal rep. of lock-opening) • Three dials, 0 to 9 on each, one specific 3-digit number opens the lock. • Suppose we know two dials are set right, but dial three may not be. 10 tries surely opens the lock. • Now we lose track of dial one – but again, 10 tries are needed at most. • Finding the combination in the first place by random search requires up to 1000 searches, 500 expected. • Holding onto the combination by rediscovery, one dial at a time, requires up to 30 searches. 33.3/1

15. From a simple lock to a fab: Intel’s “Copy EXACTLY!” Policy “Everything which might affect the process or how it is run is to be copied down to the finest detail, unless it is either physically impossible to do so, or there is an overwhelming competitive benefit to introducing a change.” (McDonald 1998), emphasis in original.

16. The basis of “Copy Exactly”: • The embedded knowledge at the “template site,” the original fab, is complex and valuable. • The process is very delicate but well isolated, even from the employees who operate it. • The high control makes “exactly” feasible; high stakes and complexity make it desirable.

17. The logic of Copy EXACTLY! • This is a massive effort to reproduce context in the interest of re-creating complex, highly situated knowledge. • The point is not that “exactly” can be achieved. In fact, it can only be attempted. • But the effect of attempting it is to dramatically shrink the search space for solutions when the attempt fails. • Just like the combination lock!

18. Traditionalism resurrected • Along this line, there is emerging a very convincing restoration of firms to their traditionally focal theoretical role as the economy’s principal repositories of productive knowledge. • Not requiring entrepreneurs, production functions, homogeneous commodities, permanent firm boundaries, etc. • Offering fundamental explanation of persistent heterogeneity in sophisticated capabilities, hence division of labor. • Offering consistency rather than conflict with understanding of learning, knowledge transfer,etc.

19. Implications: firm boundaries • Most of the discussion of firm boundaries in the Coase-Williamson tradition has focused on the boundary in product space: “make or buy,” vertical integration. • The knowledge perspective has important implications for that focus. (Jacobides and Winter, SMJ 2005). In particular, recognition of the “adding up problem” makes clear that the “buy” option wouldn’t typically exist without heterogeneous capabilities.

20. Other boundaries • The knowledge perspective highlights the importance of the physical (security), career system,and social boundaries of the firm. • Physical boundaries matter because secrecy is a key method by which firms seek to protect knowledge assets. (Levin et al. 1987, Cohen et. al, 1999). Trade secret laws requires efforts to prevent theft. • Social boundaries matter to all knowledge processes. (Kogut and Zander, 1992)

21. Career and social boundaries(within and among firms) A number of authors have pointed to these considerations as having major effects on knowledge processes in the firm. • Von Hippel, 1987. Know-how trading. • Brown and Duguid, 1991. CoP • Kogut and Zander, 1992, Recombination. • Adler,1993. Status, class, trust. • Orr, 1996. Group problem-solving.. • Bechky, 2001. Internal transfer.

22. Effective labeling of skills, expertise, capabilities • Standard production theory hides this question behind homogeneous commodities of known attributes. • Where something approximating the “neoclassical” condition exists, it is largely because institutions function to provide effective labeling. How • You can’t follow a recipe if you can’t recognize “ingredients” for what they are.

23. Knowledge, labeling, institutions • There are striking examples of fungibility of inputs within labeled categories in what might be thought to be clear routine/ team production situations. • These seem to be institutionally supported in, in various relatively elaborate ways. (Hutchins 1988, Bechky 2006). • “The master gun-maker – the entrepreneur … (first words of Langlois slide # 1)