Knowledge-based theory: Coordination within the firm

The assumptions that there are gains from special-ization in knowledge acquisition and storage, and that production requires the input of a wide range of specialized knowledge, restates a premise which, either explicitly or implicitly, is fundamental to all theories of the firm. Without benefits from specialization there is no need for organizations comprising multiple individuals. Given the efficiency gains of specialization, the fundamental task of organization is to coordinate the efforts of many specialists. Although widely addressed, organization theory lacks a rigorous integrated, well-developed and widely agreed theory of coordination.

Comparative neglect of the mechanisms through which individuals integrate their productive activities reflects organization theory’s preoccupation, not with coordination per se, but with the problems of cooperation which arise from reconciling and subordinating the disparate goals of organizational members. Thus, Lawrence and Lorsch (1967), building upon the ideas of March and Simon (1958) and Selznick (1948), viewed coordination as the resolution of intraorganizational goal conflict, while the institutional economics literature has been dominated by the problems of the divergence of employee and owner goals causing problems of agency (Jensen and Meckling, 1976), shirking (Leibenstein, 1966; Alchian and Demsetz, 1972) and opportunism (Williamson, 1975).

Consistent with this emphasis, organization theory’s focus upon hierarchy as the basic structure for organizing complex social activity has concentrated upon authority relations where cooperation is achieved through vertically imposed bureaucratic processes. Later writers identified multiple mechanisms for coordination within organizations. Ouchi (1979) identified three types of coordination mechanism: market mechanisms, bureaucratic mechanisms, and clan mechanisms.

The knowledge-based literature has, so far, had only limited impact on the analysis of coordination. Research into organizational learning and management of technology has explored the transfer and diffusion of knowledge within organizations (e.g., Kay, 1979; Levitt and March, 1988; Boisot, 1995), but has made only limited progress in addressing the fact that, if most of the knowledge relevant to production is tacit, then transfer of knowledge between organizational members is exceptionally difficult. Nonaka (1994) emphasizes the conversion of tacit into explicit knowledge (and vice versa), while Brown and Duguid (1991) stress the role of communities-of- practice in providing common structure and meaning for the transfer of experience.

But transferring knowledge is not an efficient approach to integrating knowledge. If production requires the integration of many people’s specialist knowledge, the key to efficiency is to achieve effective integration while minimizing knowledge transfer through cross-learning by organizational members. If Grant and Spender wish to write a joint paper together, efficiency is maximized not by Grant learning everything that Spender knows (and vice versa), but by establishing a mode of interaction such that Grant’s knowledge of economics is integrated with Spender’s knowledge of philosophy, psychology and technology, while minimizing the time spent transferring knowledge between them.

Viewing the firm’s primary task as integrating the specialized knowledge of multiple individuals suggests that, even with goal congruence, achieving effective coordination is problematic for organizations. The literature addressing integration across specialized organizational units has viewed coordination as dependent upon the characteristics of the process technology deployed. Thus, Thompson identified three types of interdependence, pooled, sequential, and reciprocal, to which Van de Ven, Delbecq, and Koenig (1976) added a fourth, team interdependence. The type of interdependence within a task determines the mode of coordination deployed. Pooled interdependence calls for coordination by rules, sequential interdependence can be effectively coordinated by plans, reciprocal interdependence is associated with mutual adjustment, while team interdependence requires group coordination, through scheduled and unscheduled meetings (Thompson, 1967; Van de Ven et al, 1976).

A knowledge-based view of the firm encourages us to perceive interdependence as an element of organizational design and the subject of managerial choice rather than exogenously driven by the prevailing production technology. The general issue is devising mechanisms for integrating individuals’ specialized knowledge. While process technology defines the technical aspects of production and the types of specialized knowledge required for the process, the division of tasks between individuals and departments and the specification of the interfaces between them lies within the domain of organizational design.

Integrating the literature on formal and explicit coordination mechanisms with that on informal and implicit coordination processes, and relating this to characteristics and role of knowledge, points to four mechanisms for integrating specialized knowledge:

  1. Rules and directives. ‘Impersonal’: approaches to coordination involve ‘plans, schedules, forecasts, rules, policies and procedures, and standardized information and communication systems’ (Van de Ven et al., 1976: 323). Rules may be viewed as standards which regulate the interactions between Thus, in society at large, rules in the form of etiquette, politeness and social norms are essential to facilitating human interaction. The efficiency of these mechanisms in achieving coordination extends beyond their ability to minimize communication (Galbraith, 1973). As recognized by Demsetz (1991) direction is a ‘low cost method of communicating between specialists and the large number of persons who either are non-specialists or who are specialists in other fields’ (Demsetz, 1991: 172). Such rules are directives provide a means by which tacit knowledge can be converted into readily com- prehensible explicit knowledge. Thus, it is highly inefficient for a quality engineer to teach every production worker all that he knows about quality control. A more efficient means of integrating his knowledge into the production process is for him to establish a set of procedures and rules for quality control.
  2. Sequencing. Probably the simplest means by which individuals can integrate their specialist knowledge while minimizing communication and continuous coordination is to organize production activities in a time-patterned sequence such that each specialist’s input occurs independently through being assigned a separate time slot. Thompson viewed sequential interdependence as technologically determined. Certainly, the characteristics of the product, its physical inputs, and its production technology strongly influence the potential for sequencing: a product comprised of multiple components facilitates sequencing much more than a commodity produced by continuous processes. However, in most production activities there is discretion over the extent of sequencing. For example, new product design can be fully sequential, overlapping sequences, or concurrent (Nonaka, 1990; Clark and Fujimoto, 1992).
  3. Routines. An organizational routine is a ‘relatively complex pattern of behavior … triggered by a relatively small number of initiating signals or choices and functioning as recognizable unit in a relatively automatic fashion’ (Winter, 1986: 165). While routines may be simple sequences, their interesting feature is their ability to support complex patterns of interactions between individuals in the absence of rules, directives, or even significant verbal communication. To this extent, routines embody Thompson’s notion of coordination by mutual adjustment. There are two main dimensions to this complexity. First, routines are capable of supporting a high level of simultaneity of individuals’ performance of their particular tasks—examples include navigation of a ship (Hutchins, 1991), surgical operating teams and auto racing pit crews (Grant, 1996), and the operations of fast food restaurants (Leidner, 1993). Second, routines can permit highly varied sequences of interaction. While Nelson and Winter (1982) and Gersick and Hackman (1990) have emphasized the automatic nature of routines, Pentland and Rueter (1994) have shown that a routine can be a varied repertoire of responses in which individuals’ moves are patterned as ‘grammars of action.’
  1. Group problem solving and decision making. While all the above mechanisms seek efficiency of integration through avoiding the costs of communication and learning, some tasks may require more personal and communication- intensive forms of integration. Galbraith (1973) points to the need for ‘impersonal’ coordination through rules and plans to be supplemented by ‘personal’ and ‘group’ coordination modes, the last taking the form of meetings. Reliance upon high-interaction, nonstandardized coordination mechanisms increases with task complexity (Perrow, 1967) and task uncertainty (Galbraith, 1973: Van de Ven et al., 1976). Hutchins (1991) documents the switch from routine-mode to group problem-solving mode in a crisis. The main contri- bution of the knowledge-based view to this discussion is recognition of the high costs of consensus decision making given the difficulties of communicating tacit knowledge. Hence, efficiency in organizations tends to be associated with maximizing the use of rules, routines and other integration mechanisms that economize on communication and knowledge transfer, and reserve problem solving and decision making by teams to unusual, complex, and important tasks.

1. The role of common knowledge

While these mechanisms for knowledge integration are necessitated by the differentiation of individuals’ stocks of knowledge, all depend upon the existence of common knowledge for their operation. At its most simple, common knowledge comprises those elements of knowledge common to all organizational members: the intersection of their individual knowledge sets. The importance of common knowledge is that it permits individuals to share and integrate aspects of knowledge which are not common between them. Common knowledge has some similarities with Nonaka and Takeuchi’s redundancy, ‘information that goes beyond the operational requirements of organiza- tional members,’ which permits ‘individuals to invade one another’s functional boundaries’ and provides ‘individuals … loosely coupled with each other … a self-control mechanism’ (Nonaka and Takeuchi, 1995: 80-81). Different types of common knowledge fulfill different roles in knowledge integration:

  • Language. The existence of a common language is fundamental to integration mechanisms which rely upon verbal communication between individuals, namely, integration through rules and directives, and integration through group problem solving and decision making. The lack of a common language among workers in many U.S. plants and other polyglot organizations is a significant barrier to the introduction of integration-intensive manufacturing techniques.
  • Other forms of symbolic communication. A single tongue is but one aspect of commonality of If language is defined to embody all forms of symbolic communication then literacy, numeracy, and familiarity with the same computer software are all aspects of common language which enhance the efficiency and intensity of communication. Companies such as Motorola and Texas Instruments show that investments in literacy, numeracy and basic statistics which raise the level of employees’ common knowledge increase the effectiveness of rules, directives, and meetings in implementing sophisticated levels of TQM.
  • Commonality of specialized While language provides a common platform for com- munication-based modes of knowledge, the level of sophistication which communication- based modes of knowledge integration achieve depends upon the extent of commonality in their specialized knowledge. There is something of a paradox in this. The benefit of knowledge integration is in meshing the different specialized knowledge of different individuals—if two people have identical knowledge there is no gain from integration—yet, if the individuals have entirely separate knowledge bases, then integration cannot occur beyond the most primitive level.
  • Shared meaning. The problem of communication- based modes of knowledge integration is that they require the conversion of tacit knowledge into explicit Such conversion typically involves substantial knowledge loss. However, tacit knowledge can be communicated through the establishment of shared understanding between individuals. Polanyi (1966: 61) notes that ‘a teaching which appears meaningless to start with has in fact a meaning which can be discovered by hitting on the same kind of indwelling as the teacher is practicing’ (emphasis added). The organizational learning literature points to the role of common cognitive schema and frameworks (Weick, 1979; Spender, 1989), metaphor and analogy (Nonaka and Takeuchi, 1995: 64-67), and stories (Brown and Duguid, 1991) as vehicles for molding, integrating and reconciling different individual experiences and understandings. More generally, Leudar (1992) explores the role of mutual cognitions in coordinating social actions.
  • Recognition of individual knowledge Shared understanding facilitates coordinated activity, but effective knowledge integration also requires that each individual is aware of everyone else’s knowledge repertoire. ‘Reciprocal’ or ‘group’ interdependence, such as that occurring within a soccer or debating team, necessitates coordination by mutual adjustment (Thompson, 1967: 56). Achieving this without explicit communication requires that each team member recognizes the abilities of other team members. Such mutual recognition permits successful coordination even in novel situations.

2. Organizational capability

This analysis of the firm as an integrator is especially helpful to the analysis of organizational capabilities. Grant (1996) views organizational capability as the outcome of knowledge integration: complex, team- based productive activities such as American Express’s customer billing system, Chrysler’s automobile design process, and Shell’s deep-sea oil exploration, are dependent upon these firms’ ability to harness and integrate the knowledge of many individual specialists.

This analysis of organizational capability offers insight into the linkage between organizational capability and competitive advantage. The extent to which a capability is ‘distinctive’ depends upon the firm accessing and integrating the specialized knowledge of its employees. If employees are mobile, organizational capability depends more upon the firm’s mechanisms of integration rather than the extent of specialist knowledge which employees possess. 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. The shift in employee training from deepening of specialist skills towards increased crosstraining and job rotation is based on the belief that trading off increased common knowledge against decreased specialist knowledge will enhance organizational capabilities.

Longevity of competitive advantage depends upon the inimitability of the capabilities which underlie that advantage. The broader the scope of the knowledge integrated within a capability, then the more difficult limitation becomes. The complexity of ‘broad-scale’ integration creates greater causal ambiguity and greater barriers to replication. The dilemma for managers is that organizational capabilities which require greater breadth of knowledge will show lower levels of common knowledge between team members. Current interest in cross-functional capabilities such as new product development (Clark and Fujimoto, 1992), fast response capability (Stalk, 1988), ‘architectural innovation’ (Henderson and Clark, 1990) reflects the strategic importance and managerial challenge of capabilities which require effective integration of many disparate specialists.

Source: Grant Robert M. (1996), “Toward a Knowledge-Based Theory of the Firm”, Strategic Management Journal,

Vol. 17, Special Issue: Knowledge and the Firm (Winter, 1996), pp. 109-122.

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