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Knowledge Base Theory

This document summarizes Robert Grant's 1996 paper on developing a knowledge-based theory of the firm. It discusses how firms exist to coordinate specialized individual knowledge for production. Knowledge is created by individuals, not organizations, and firms integrate knowledge by coordinating specialists. The boundaries of firms are determined by how efficiently knowledge in different production stages can be transferred and coordinated.

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Ashraf Khan
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30 views12 pages

Knowledge Base Theory

This document summarizes Robert Grant's 1996 paper on developing a knowledge-based theory of the firm. It discusses how firms exist to coordinate specialized individual knowledge for production. Knowledge is created by individuals, not organizations, and firms integrate knowledge by coordinating specialists. The boundaries of firms are determined by how efficiently knowledge in different production stages can be transferred and coordinated.

Uploaded by

Ashraf Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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For Subject: Theory of the Firm

Ashraf Khan
Cycle XXXII
PhD Candidate in Managerial & Actuarial Sciences
Department of Economics & Statistics

Grant, Robert M. "Toward a knowledgebased theory of the firm." Strategic management


journal 17.S2 (1996): 109-122.
DOI: 10.1002/smj.4250171110
Published Online: Winter 1996
Introduction
Foundations for the knowledge-base theory of the firm
The Existence of firm and Coordination within the firm
Organization Structure
Boundaries of the firm
Conclusion
Theories of the firm are conceptualizations and models of business enterprises which explain and predict their structure and
behaviors.
Economic theories of the firm
Predicting the behavior of firms in external markets.

Organization theory of the firm


Addresses the aspects of the firm ignored by neoclassical economics.
Analyzing the internal structure and relationship b/w its constituent units and departments.

Transaction cost theory of the firm


Focus on relative efficiency of authority-based organization with contract-based organization.

Strategic Management theories of the firm


Primary goals are to explain firm performance and the determinants of strategic choice
Characteristics of Knowledge
The foundation for any theory of the firm is a set of initial premises which form the basis for the logical development of
propositions concerning the structure, behavior, performance and, indeed, the very existence of firms.

Transferability
Knowing how (Tacit knowledge) and knowing about (explicit knowledge)
The critical distinction between the two lies in transferability and the mechanisms for transfer across individuals, across space, and
across time.

Capacity for Aggregation


The efficiency with which knowledge can be transferred depends, in part, upon knowledge's potential for aggregation.
Efficiency of knowledge aggregation is greatly enhanced when knowledge can be expressed in terms of common language

Appropriability
It refers to the ability of the owner of a resource to receive a return equal to the value created by that resource (Teece, 1987; Levin
et al., 1987)
Knowledge is a resource which is subject to uniquely complex problems of appropriability.
Tacit knowledge can be appropriated only through its application to productive activity
Specialization in knowledge acquisition
Human brain has limited capacity to acquire, store and process knowledge.
Experts are (almost) invariably specialists, while jacks-of-all-trades are master of none.

The knowledge requirements of production


Production involves the transformation of inputs into outputs but primary source of value is knowledge.
The only defensible approach would be a knowledge-based theory of value, on the grounds that all human productivity is
knowledge dependent, and machines are simply embodiments of knowledge.
The existence of the firm represents a response to a fundamental asymmetry in the economics
of knowledge: knowledge acquisition requires greater specialization than is needed for its
utilization.
Most research into organizational learning and the knowledge-based view of the firm focuses
upon the acquisition and creation of organizational knowledge. Spender (1989: 185) defines the
organization as a body of knowledge about the organization's circumstances, resources, causal
mechanisms, objectives, attitudes, policies, and so forth.
Grant distinguish on the basis of two assumption:
1. Knowledge is created and held by the individuals, not organizations.
2. Firms apply knowledge to the production of good and services.
Firm as an institution for knowledge application. If production creation requires the integration
of each person's knowledge with that of others, even if knowledge acquisition is individualistic,
the firm provides necessary incentives and direction
Given the efficiency gains of specialization, the fundamental task of organization is to coordinate the
efforts of many specialist.

The knowledge-based literature has, so far, had only limited impact on the analysis of coordination. If
the knowledge is tacit, its very hard to transfer the knowledge and create effective coordination.

Coordination is determined by the type of interdependence within a task in a firm. i.e. Pooled,
Sequential , reciprocal and team interdependence. (Thompson, 1967; Van de Ven et al, 1976)

R.M Grant pointed out four mechanism for effective coordination and integrating specialized
knowledge. i.e. Rules and directives, Sequencing, Routines, Group problem solving and decision
making

The higher the level and sophistication of common knowledge among the team, whether in the form
of language, shared meaning, or mutual recognition of knowledge domains, the more efficient is
integration likely to be
Firm as a knowledge- integrating institution have two main implications for the internal structure of the firm.

Implications for hierarchy:


Hierarchy is the solution to both pure coordination and cooperation problem. Example of US and Japanese Corporations.
(Aoki, 1990)
Within organization theory, analysis of hierarchy has concentrated upon the problem of cooperation.
The analysis of hierarchy as a coordination mechanism has been associated with cybernetics and systems theory.
Hierarchy as a coordination mechanism has problem solving advantages. Hierarchy is an efficient mechanism for
coordinating a complex system comprising multiple specialized units.(Simon, 1981)
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.
Only compatible integration mechanism with hierarchy; Integration through rules and directives.
Bureaucratic system: rules and directives are vehicles for the exercise of authority while in knowledge-based firms, they
are used to facilitate knowledge integration.
Implications for the distribution of decision-making authority in the firm
decision-making authority in the firm is directly connected with hierarchical structures in integrating knowledge.
The conventional basis for the analysis of decision making is delegation.

The knowledge-based view of the firm has two principal implications for the distribution of decision
making.
1. Linkage between decision rights and ownership.
Decision rights of the firm in relation to employees' knowledge are severely constrained
2. Co-location of decision making and knowledge.
The principle of co-location requires that decisions based upon such tacit and idiosyncratic knowledge are decentralized, while decisions
requiring statistical knowledge are centralized.
what determines the boundaries of the firm?

Vertical Boundaries
If markets transfer products efficiently but transfer knowledge inefficiently , vertically adjacent stages of production A and B will be
integrated within the same firm if production at stage B requires access to the knowledge utilized in Stage A.

Horizontal Boundaries
The horizontal boundaries between firms are also Likely to occur at gaps occurring between constellations of products and knowledge.
Firms may be characterized both as product domains and knowledge domains. Efficient knowledge utilization requires congruence
between the knowledge domain of the firm and its product domain. (Grant & Baden-Fuller; 1995)
An input-output matrix of knowledge inputs and product outputs for the economy would display broad product-knowledge clusters which
correspond to industries within which smaller clusters correspond to individual firms
This paper has attempted to counterbalance the emphasis of the earlier literature on knowledge
creation and organizational knowledge by placing emphasis upon knowledge application and the role
of the individual.

Firms exist because markets are incapable of coordinating the knowledge of individual specialists. This
is the role of the management within a firm.

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

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