a knowledge-based theory of the firm- the problem-solving

8/6/2019 A Knowledge-Based Theory of the Firm- The Problem-Solving

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Group-VIIAbhinav Jha

AnuAnupamRam Kumar

Umesh Kumar

A Knowledge-based Theory of the Firm-The Problem-solving Perspective


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Introductiony Ex isting Literature:

y Boundaries of the firm encompass valuable competencies and coreknowledge

y Organize to efficiently generate knowledge and capabilitiesy

Knowledge: Input-output combinations achievable with all possiblemix es and levels of activities known to the firmy Problems:

y Lack of focus upon producing knowledge or capabilities in an efficientmanner.

y

Contradictory view on why hierarchies ex ist: to avoid knowledgetransfers OR to facilitate knowledge transfersy Yet to provide a theory of alignment: When hierarchies are to be

preferred to markets, or vice-versa


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Proposed Knowledge-Based Theoryy Assumptions:

y Managers knowledge-based objective is to create valuable newknowledge

y Solutions to complex problems represent unique combinations orsyntheses of ex isting knowledge

y Unit of Analysis: The problem and the profitable formation of newknowledge

y Proposed Mechanism:y A manager chooses a problem, to which the firm seeks a solution and

in the process creates valuable new knowledgey Initial choice of the problem takes into account the cost of solution

search, the presence of a high-value solution, and the ability of thefirm to appropriate value from the discovery of such a solution.


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y Modeling the problems:y Problems are assumed to be complex (made up of large number of

parts interacting in a non-simple way)y Complex ity is modeled using NK modelingy N: Number of partsy K: Degree of interaction among the parts (ranges from 0 to 1)y They combine to represent a range of landscapes from rugged

(involving high degree of interaction) to smooth (involving lowdegree of interaction)y Model for Solution Space:

y We have a solution landscapey The topology of such a landscape depends upon the value associated

with each combination of relevant ex isting knowledge, i.e. eachsolution

y Peaks on solution landscapes represent valuable solutions, whilevalleys represent low-value solutions.


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Types of Problems:y Three categories proposed:

y Low Interaction/Decomposable Problems: Where the variousparts dont interact too much with each other, i.e. the value of K is low. The problem can be broken down into sub-parts and

each sub-part can be individually solved to arrive at a solutiony High Interaction Problems: The value of K is high resulting in

a rugged solution landscape, where the global max imum is high, but the average height of the peaks is lower. The solution has to be looked for in a holistic manner.

y Moderate Interaction Problems: They are nearly decomposable,i.e. they can be broken into sub-problems such that interactionsamong knowledge sets within sub-problems is much greaterthan between sub-problems.


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Types of Solution Search Mechanismsy Solutions to a problem may be arrived at in three ways:

y Random Trials: Almost useless in arriving at a valuable solutionto a complex problems

y Directional/Local Search: A search guided solely by feedback orex perience from prior trials. Well suited to low interactionproblems, as trials are conducted by changing one designelement at a time.

y Heuristic/Cognitive Search: A search mechanism where

individuals cognitively evaluate the probable consequences of design choices rather than relying solely on prior feedback. Wellsuited to high-interaction problems.


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R elative Benefit of Trial Ordering andSelection by Problem Type


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H azards in Knowledge Formationy Knowledge Appropriation

y The value of Knowledge can only be determined once it isrevealed at which point the acquirer doesnt need to pay for itanymore. Hence we require a strong set of property laws toensure knowledge is revealed to the mutual benefit of all.

y Strategic Knowledge Accumulationy Actors have incentives to strategically influence the pattern of

trials in a way that enhances their specialized knowledge orcomplements knowledge they already possess. This enhancestheir value within the organization and enables them toappropriate a greater share of the value of the solution.

y Hence the requirement for governance mechanisms


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C omparative Analysis of AlternativeGovernance Mechanisms


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Markets:y Markets dispense with the need of conscious controly According to Hayek, markets provide inducements which make

the individuals do the desirable things without anyone having totell them what to do

y

Individual participants need to know little about other actorsy Markets also offer powerful incentives for individual actors to

make optimal use of their knowledgey In markets, prices provide incentives and motivation to actors to

search for the solutions that enhance their specialized knowledgeor sale of products and services based on the knowledgey Markets are suited to governing directional searchy Markets avoid knowledge ex change hazards by severely restricting

knowledge ex change


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Markets:y Limitations:

y Markets discourage knowledge sharing and instead promote knowledgehoarding

y Provide little protection against knowledge appropriationy Provide no clear disincentives against strategic manipulation of search

heuristicsy Provide weak incentives to invest in the formation of common language

required for knowledge sharing and heuristic searchy Provide cumbersome and costly mechanism for searching complex solution

landscapesy Inferences:

y Markets are poorly suited to governing the process of solution search forcomplex and non-decomposable problem

y Necessary knowledge sharing is undermined because of appropriateincentive and the absence of shared languagey Markets are efficient in finding directional search for solutions to

decomposable problemsy Markets fail in solving more complex problems and demand heuristic search


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Authority-based hierarchy:y

In ABH centralization of decision making takes palcey Key figure A central figure who invests in understanding

critical knowledge interactions and composes suitableheuristics to guide search

y Advantages:y Transfer of knowledge takes placey E conomizes on the ex tensive and costly knowledge sharing and

educationy Resolves knowledge based ex change hazards that arises in

markets when problems are complex more efficientlyy Supports heuristic search


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y

Limitations:y Does not promote horizontal communication channels that wouldsupport broad knowledge sharing among peers

y Limited capacity, incentive and motivation to individuals actors tostrategically manipulate the path of search

y Authority does not imply ex pertisey When authority is ex ercised in the absence of knowledge search is

contaminated rather than acceleratedy Inferences:

y ABH is superior to markets in heuristic search while inferior in

directional search due to incentive damagey More costly than markets due to costs of paying and supporting thecentral authority

y The effectiveness of ABH relative to market-based control diminishesrapidly as problems become more disposable

Authority-based hierarchy:


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C onsensus-based hierarchyy

This form of hierarchy achieves ex tensive knowledge transfer by enhancing the efficiency with which knowledge transferoccurs among actors within the boundaries of the firm.

y Ex tensive information sharing potentially permits actorswithin the firm to collectively agree on a path of search thatis consensus reflection of the specialized knowledge setshoused within the firm.

y It is a potential solution to the failure of authority ingoverning heuristic search as problem increase in complex ity.

y E ach agent within the firm perceives the correct decision based on his/her knowledge and interests.

y Since interests and knowledge are commonly shared,consensus is spontaneous.


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C onsensus-based hierarchy (cont)y Very low powered incentives are essential to consensus, because

such incentives encourage knowledge sharing.y Dispute resolution involves individual actors collectively deciding

the path.y Consensus fails in comparison to authority as problems diminish in

complex ity.y The organizational cost of generating consensus are high. Hence,

consensus based hierarchy should only be adopted when the benefits of consumers are high.

y Ex ample: Sometimes for diagnosing and curing a complex disease,a panel consisting of 3-4 doctors is set-up. Thus the treatment of the patient is decided in a consensus based process.


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D iscriminating Alignment Between Governance Alternatives and ProblemC

omplexity

y Markets- High cost and low degree of knowledge set interactiony ABH-Authority Based Hierarchyy CBH- Consensus Based Hierarchy

Discriminating Alignment


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a knowledge-based theory of the firm- the problem-solving

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