The Firm in a
Knowledge Perspective
Sidney G. Winter
The Wharton School
ESNIE Cargèse 15 May 2006
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.
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.
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.
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 ….
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?
Outline


What is “knowledge”?
Is it meaningful to speak of firms, or other
organizations, as having knowledge?
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.
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.
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.
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.
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).
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.
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
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.
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.
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!
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.
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.
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)
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.
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.
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)