Organization of the Modern Firm
The principles of organization got
more attention among us than they
did then in universities.
Alfred Sloan
What Organizations Do?
Organizations exist to motivate their
members and coordinate their activities.
Chief Challenge
– entrepreneurialism
– knowledge
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Successful Organizational Designs
Must solve the challenges of entrepreneurialism and knowledge in tandem
The Disaggregation imperative
• Internal disaggregation
• External disaggregation
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Internal or External?
• Internal disagg. may not sufficient
– how to solve “imperfect commitment”
• External disagg. may be the more
straightforward choice
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Forms of Organization
Personal
initiative
(motivation)
Market
forms
Hierarchical
forms (firms)
Enforced cooperation
(coordination)
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Personal
initiative
(motivation)
Impact of Disaggregation
Market
forms
External
disaggregation
Internal
disaggregation
Hierarchical
forms (firms)
Enforced cooperation
(coordination)
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Relational Forms of Organization
The relational forms of organization,
allow companies to make market-based
relationships more like the coordinated
interactions within a firm.
–
–
–
–
Alliances
joint ventures
long-term supplier relationships
licensing arrangements
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Personal
initiative
(motivation)
Innovative Relational Forms
Market
forms
Relational
forms
Hierarchical
forms (firms)
Enforced cooperation
(coordination)
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Managing Relational Forms
The Key to capturing value within a
relational form is ownership of an asset
that is both scarce and complementary.
– complementarity also operates within a firm
– call for carefully planning and continuous
monitoring
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The Difficulty of Knowledge
Management
• Knowledge has complex
characteristics
• disaggregation may put up barriers to
the generation of knowledge.
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Complex Characteristics of
Knowledge
• extraordinary leverage and increasing
returns
• tendency toward fragmentation and
leakage
• need for refreshment
• uncertainty to value creation and value
sharing
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The Shape of the Modern Firm
No single form will prevail.
Organizations will adopt a variety of
shapes, and change them as new strategic
challenge emerge.
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Case in Point
• The ABB Group
– successful internal disaggregation
• British Airways
– relational form of organization
• North West Company
– established in 1779
– with the shape of the “modern” firm
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How does a firm integrate and
thereby benefit from the
decentralised tacit competences
dispersed on multiple sites?
Theory of the Firm
Firm as a processor of information
– a firm is a nexus of bilateral contracts
Firm as a process of knowledge
– a firm is an evolving, knowledge-based
organization
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Firm as a Processor of Information
•
•
•
•
bounded rationality
principal-agent problem
the theory of teams
imperfect information problems
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Firm as a Processor of Knowledge
• Evolutionary theory of Firm
– cognitive mechanisms of individual agents
• The creation and management of
knowledge
– firm is a locus where competences are
continuously built, managed, combined,
transformed, tested and selected.
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What Matters Is Not
Information per se
• Information -> knowledge ->competence
• What may most hamper the firm’s
dynamics is the risk of lock-in to
inefficient routines rather than the
problem of a limited capacity to deal
with information.
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The Elusive Notion of Competence
As Andreu and Ciborra (1996) suggest, there
are three levels of learning process allow the
emergence of new competences
– routinization learning loop
– capability learning loop
– strategic loop
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Competitive Environment
Core Competences
Competences
Strategic loop
Capability
learning loop
Work Practice
Resources
Routinization
learning loop
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The Notion of Distributed
Competences
Granstrand et al (1997, CMS) suggested
that, in the multi-technology corporations
competences are distributed
– across a large and increasing number of
technical field
– in different parts of the organization
– among different strategic objectives of the
corporation
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The Organizational KnowledgeCreation Process
• Individual or collective learning
activities
• Tacit knowledge vs. codified knowledge
• The interaction of tacit and codified
knowledge forms the basis for creation
of organizational knowledge
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Modes of Knowledge Conversion
(Nonaka, 1994)
To
Explicit
Explicit
From
Tacit
Tacit
Combination
Internalization
Externalization
Socialization
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Knowledge Transfer and Creation
According to Nonaka & Takeuchi (1995),
dialogue between bodies of tacit and
explicit knowledge forms the basis of a
dynamic spiral of creation of new
knowledge.
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Things Are Different Now
Synergy and continuous innovation are
increasingly required to cope with a
rapidly changing environment, while the
multi-divisionalized structure centralizes
competences, in inter-product allocation
and diversification, but decentralizes
competences in inter-functional
coordination.
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