Governance Choices and Knowledge Formation Hazards

If differing problems demand differing search processes, then the manager’s task is to identify relevant knowledge sets and to craft a mechanism of governance that supports or enhances the method of search appropriate for the chosen problem. For simple, decomposable problems involving limited interaction among design choices, directional search based on feedback is desired. For nondecomposable problems involving extensive interactions among design choices, heuristic search is desired. However, as noted, heuristic search involving several specialized knowledge sets demands that individuals share the knowledge they possess to develop common cognitive maps. Two conditions, however, impede such knowledge sharing: (1) humans are cognitively constrained in the speed with which they can learn (i.e., assimilate, accumulate, and apply knowledge) and (2) they are prone to self-interest, which may include opportunistic forms of self-interest. The former ensures that knowledge relevant to exploring complex problems is widely distributed among individuals. No one individual has all the knowledge relevant to crafting an effective heuristics or cognitive map to guide search on a complex solution landscape. In and of itself, this wide dissemination of knowledge does not constrain the efficient organization of search because individuals could willingly share knowledge when heuristic search is demanded and collectively agree on an optimal path of search. However, the wide distribution of knowledge in conjunction with self- interest, in particular an individual’s desire to capture value from the knowledge he or she accumulates, leads to two knowledge- related exchange hazards. These hazards plague efforts to support knowledge sharing necessary for heuristic search.

Hazard 1: Knowledge Appropriation

Incentives alter an individual’s willingness to share knowledge. Unfortunately, with independent actors, incentives for knowledge sharing are plagued by a rather simple paradox: The value of knowledge to its potential acquirer is not known until after the knowledge is revealed; however, once that value is revealed, the potential acquirer has no need to pay for it and can resell it at near zero marginal cost (Arrow 1973, p. 171). Thus, the incentives to simply assimilate others’ knowledge and thereby extract its value without payment plague efforts to sell knowledge. While property rights and contracts provide some however, the value of an actor’s knowledge is revealed only through recombination with other actors’ knowledge, then knowledge sharing is necessary, which—absent a means of protection—may simply not happen.

The knowledge-appropriation hazard therefore has clear implications for organizing search. While directional search is unaffected because knowledge sharing is not required for this form of search, heuristic search is clearly damaged by this disincentive to share knowledge. Heuristic search requires extensive knowledge sharing, and hence a remedy for the knowledge-appropriation hazard is required.

Hazard 2: Strategic Knowledge Accumulation

Individuals not only possess incentives to hoard knowledge; they also possess incentives to shape its development. Individuals possess incentives to strategically alter the path of search and the shape of the heuristic that guides search. In particular, individual actors may prefer to shape the search heuristic in ways that optimize the value of the knowledge that they personally accumulate as solutions are explored. The search process itself yields new knowledge that may be useful in a host of different applications. The value of knowledge that actors derive through solution search will depend on the complementary knowledge that they already possess. Actors prefer to see solutions explored that draw heavily from their own knowledge base because such solutions heighten the potential value that they can extract personally. If the organization is more dependent on the knowledge possessed by an actor, then that actor is in a stronger position to bargain for a large portion of the value generated by a solution.

Thus, actors have incentives to strategically influence the pattern of trials in ways that enhance their specialized knowledge or complement knowledge that they already possess, while avoiding efforts that require knowledge sharing. Consequently, absent governance remedies, efforts to explore problems requiring heuristic search are likely to lead to attempts to distort cognitive maps, to conflicts regarding the proper ordering of trials, and more generally to an underinvestment in knowledgesharing activities that facilitate the development of common heuristics.

We assert that both hazards are essentially irrelevant when problems are decomposable. When problems are decomposable, searching for solutions does not benefit from knowledge transfer and heuristic search. However, nondecomposable, high-interaction problems require knowledge transfer to enable heuristic search. Consequently, as problems become more complex and nondecomposable, efficient search demands mechanisms that mitigate knowledge-exchange hazards.

Source: Nickerson Jack A., Zenger Todd R. (2004), “A Knowledge-Based Theory of the Firm: The Problem-Solving Perspective”, Organization Science, Vol. 15, No. 6 (Nov. – Dec., 2004), pp. 617-632,

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