resources, and the directives that they express reflect management's skills and cogni ..... Mahoney, J. and Pandian, R. 1992: The resource-based view within the ...
Industry and Innovation, Volume 8, Number 3, 309–323, December 2001
MICROFOUNDATIONS OF KNOWLEDGE DYNAMICS WITHIN THE FIRM MARGHERITA TURVANI To understand the true nature of the knowledge creating rm, viewing a rm as black box, a set of transactions or a collection of resources is not enough. (Nonaka et al. 2000: 8)
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distinctive feature of human activity is the creation of knowledge, and the rm is one of the many places in which knowledge is created. This paper deals with some aspects of creating knowledge in the rm: its dynamics, underlying cognitive models, dependence on context, and the effects of renewing human resources in the rm. To focus on these issues a knowledge-based view of the rm is required. Following up on Nonaka’s idea that ‘‘the raison d’eˆtre of a rm is to continuously create knowledge’’ (Nonaka et al. 2000: 2), I suggest that the creation and utilization of knowledge is a core source of a rm’s sustainable competitive advantage. Indeed, at any given time the knowledge that rms hold provides the future opportunities to innovate. Such knowledge depends on the skills of human resources and the productive services that they provide. Obviously rms differ in knowledge management and development. These differences persist through time and they build up a rm’s specic strength or weakness. Differences are lasting and self-renewing because knowledge and skills are accumulated through learning, and learning ‘‘happens’’ in specic time and space (Nonaka and Takeuchi 1995). Organizational learning (March and Simon 1958; Senge 1990; Argyris and Schon 1996) explains why knowledge and skills are not easy to imitate, transfer and trade, and learning is not simply a process of internalization but is better understood as an interactive process implying participation in communities of practice (Lave and Wenger 1991). These features of learning explain why the rm’s knowledge determines the path-dependent evolution of its capability to innovate (Drucker 1993; Spender 1996; Prahalad and Hamel 1990; Kogut and Zander 1996). Starting from a knowledge-based view of the rm, I will attempt to integrate it with the resource-based view of the rm (Penrose 1959; Teece 1986; Mahoney and Pandian 1992; Foss 1996; Montgomery 1995). This is possible if knowledge is not seen as simply being one of the many resources the rm owns, but rather as an organizational process that builds on individuals’ cognitive capabilities. Recent ndings in cognitive sciences describing how the cognitive capabilities of individuals co-evolve within specic contexts offer the possibility to understand in greater depth the knowledgecreating process within organizations (Rizzello and Turvani 2000). We look therefore at the rm as a specic context in which individuals create knowledge through interaction. The rm may be seen as a community capable of generating stable cognitive models shared by its constituent human resources. But what kind of adjustments and adaptations become necessary if the use of 1366-271 6 print/1469-839 0 online/01/030309-1 5 © 2001 Taylor & Francis Ltd DOI: 10.1080/1366271012010460 0
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human resources is reorganized or if new resources join the rm? In this paper I suggest the idea—and discuss the implications—that novelty may occur and the knowledge-creating process may be fostered by bringing new human resources into the rm and through their reorganization. This aspect of the innovative process was highlighted by Penrose (1959), who focused on the renewal and integration of managerial resources as a tool to trigger the growth process of the rm. The growth process is a dynamic process implying innovation and the corresponding development of the rm’s knowledge base (Turvani 2001). Penrose (1959) neatly described the coexistence of persistence and change within the rm when she pointed out how initial mismatch in the managerial team opens up new opportunities for action. Today a better understanding of the workings of the mind provides tools helping us understand why the knowledge that rms hold changes with the introduction of new human resources or with their reorganization. Cognition mechanisms describe how new opportunities for action emerge with the generation of new knowledge and how persistence and change coexist in the knowledge-creating process in the individual mind and in the organization. The reason for this must be sought in the social dimension of individuals’ cognitive activity, which simultaneously open up opportunities for change and innovation but also preserves a degree of inertia, safeguarding the rm’s specic culture. By introducing the cognitive dimension, the resource-based view and the knowledge-based view of the rm may be aligned. This paper briey outlines the dynamics of individual cognitive processes and describes their relation with the institutional context in which they take place. The individual cognitive mechanisms reveal the social dimension of knowing and they open up the possibility to re-discuss the ‘‘nature’’ of the rm, supporting a knowledgebased view. Having described the rm as an institution which governs communication processes and the production of knowledge, the paper sets out to analyze the role of human resources and the way in which their skills change over time, modifying the knowledge base of the rm. The evolution of the individual cognitive models supports those changes, and skills are shaped by the social and organizational context of the rm. They develop with local and specic features, and the rm develops distinct capabilities to use its own resources. A Penrosian perspective is introduced to discuss the processes of human resources reorganization and renewal. Managerial activities throughout the organization govern these processes by means of directives orienting action. By communicating new visions and spreading new cognitive models, directives trigger skills changes. Knowledge evolves along with the modication of the cognitive models of individuals. Concluding remarks follow.
KNOWLEDGE AND INSTITUTIONS Individual cognition The cognitive sciences tell us that individuals and their social context co-evolve because cognitive capabilities develop in interactive contexts.1 These ndings support 1
This theme was developed by Rizzello and Turvani (2000) who discuss the importance of the cognitive sciences for institutional economics.
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a knowledge-creating view of the rm suggesting a picture of the individual as ‘‘a dynamic being and the rm as a dynamic entity that actively interacts with others and the environment’’ (Nonaka et al. 2000: 2). Interest in knowledge-creation processes has a long tradition (Smith 1795; Hayek 1952), even though the theme of individuals’ cognitive capabilities and their effects on the functioning of economics was actually rst analyzed by Simon. His work takes its departure in a critique of the paradigm of perfect rationality. He proposes an alternative model—bounded rationality—which is better able to take into account the cognitive limits typical of individuals. In his model the alternatives are formulated, compared, and assessed, while learning plays a key role in improving the cognitive performance of individuals. In this view, cognitive activities are simplied through the use of symbols, and symbolic structures are images of the setting they belong to. Following Simon’s approach, we can proceed to describe these complex structures through the decomposition method (Newell and Simon 1972): the typical mental activity of problem solving may thus be analyzed, since it is made up of a set of elementary information-handling processes. Simon’s model of bounded rationality relies on cognitivism (Piaget 1969), where perception is the path connecting individual to environment. The analysis of cognitive processes has seen the development of ‘‘connectionism’’, focusing on the study of relations that build up cognitive structures (frames and mental models) developed by interacting individuals.2 These structures are perceptive lters and, more importantly, are the links between the individual and the environment, limiting and selecting the mental activities which individuals are able to develop. A continuous regeneration of mental models takes place and the interactive features of cognitive processes build strong ties between individuals and between each individual and his or her environment. Connecting individual cognitive development to social interaction brings into play the functions of communication, imitation and comparison. Such activities encourage the development of interpretative patterns and common frames used by an individual in relating to reality and developing his or her own cognition. These, then, are the dynamics that may give rise to shared forms of behavior in a social environment and in problem-solving activities.
Cognition and institutions Despite the highly idiosyncratic nature of cognitive processes, the development of intense communication, favored by proximity (spatial and cultural) tends to lead to a shared approach in developing cognitive processes. The dependency of the process on the context produces local and idiosyncratic cognition. As Witt (1998) has observed with reference to the studies carried out by Bandura (1986), these mechanisms generate shared behavioral models. When we come to analyze the effects on decision-making activities of individuals, these models assume considerable importance. The signicance of such models lies in their vicarious nature, i.e. the fact that their rewarding or non-rewarding consequences can be grasped by observation rather than own experimentation. Within intensely communicating groups, learning by observation 2
In the study of the mind the unit of analysis is not the neuron, but the connections between neurons, and the plasticity of the system of connections becomes of major importance.
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INDUSTRY AND INNOVATION then means that the group members tend to focus on much the same model. Consequently, their individual learning processes produce correlated results which, via the prevailing social models, can intuitively be grasped by newcomers. (Witt 1998: 5)
These ‘‘convergence’’ mechanisms are important because they offer a vicarious method (i.e. using other people’s experience) to appraise success and failures of atypical behavior, i.e. behavior diverging from that commonly established in specic contexts. In this way individuals may receive information to evaluate their own behavior in alternative situations, previously not contemplated. A re-framing of choices may take place allowing the smooth transition from older social models to more innovative ones (Witt 1998: 6). Denzau and North (1994) share the same approach while proposing a generalization: institutions help individuals and groups in their cognitive activity, supplying frames, which facilitate the decision-making activity and provide support for experimentation of novelty and change. They see the action of competing agents as the driving force of change, but that action depends on the individuals’ perception of the outcomes of their moves. Perception depends critically on the information available and the way this information is processed. With limited cognitive abilities, information is often incomplete and is elaborated on the basis of past experience. Cognitive activity is therefore modeled by the institutional context and inherited rules, precisely because individual agents perceive the environment as a function of the mental constructs they use to interpret the world. Thus, working in a given context contributes to limiting and modeling the possibilities of perception and choice for agents. Subjective interpretation may play a major role in the agents’ capacity to understand a problem and to develop knowledge from a set of information and consequently to make decisions and to take actions. Just as institutions limit possible alternatives, so, too, mental constructs limit perception and the set of decisions (Denzau and North 1994). A deeper understanding of the workings of the mind thus helps us grasp why institutions are environments in which individual knowledge is shaped through social interaction. While context works as a constraint, limiting the ways in which given forms of knowledge and skills may be deployed, the occurrence of new contexts gives rise to the possibility of utilizing idiosyncratic knowledge in innovative ways.
KNOWLEDGE AND THE NATURE OF THE FIRM Information and knowledge The knowledge-based view of the rm describes knowledge as ‘‘a dynamic human process of justifying personal belief toward the truth’’ (Nonaka and Takeuchi 1995). It emphasizes that rms are organizations which are built on and build knowledge, i.e. shared beliefs are used to interpret incomplete information situations which individuals have to tackle. A distinction between information and knowledge is proposed by Nonaka and Takeuchi (1995): information is a ‘‘good capable of producing knowledge’’ (Dretske 1981). Knowledge is not obtained by summing up information and there is no necessary consequential linear process connecting information and knowledge; knowledge is
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open-ended and knowing involves processes of discovery and creation (Dewey 1958; Loasby 1991). There is no deterministic a priori relation in the ways in which information give rise to knowledge. Kusunoki et al. (1998) thus explain how knowledge creation implies different kinds of capabilities and frames so that knowledge cannot simply be related to a specic nite set of data. Information and knowledge are not tightly coupled, hence there is room for interpretative ambiguity. Taking action always involves judgment (Knight 1921). The creation of interpretative frames guides the process of validation at both the individual and the social level. Validation, revision, and comparison will require the active participation of human agents and these processes will take place in specic contexts, giving knowledge an unfolding, open-ended, incomplete and local nature.3 The interactive dimension of the knowledge-creating process requires activities and capabilities to develop individual and social communication channels. Knowledge does not pile up: its development greatly depends on the ‘‘media’’ through which information ows requiring a process of semantic selection and the interpretation of signs. A knowledge-creating perspective, then, implies a critical re-appraisal of theories of the rm. On the one hand, contractual theories with their emphasis on handling information problems connected to completing transactions (both within the rm and with the market) are unsatisfactory. On the other hand, resource- and competencebased theories, assuming the rm to be a collection of resources, fail to provide a satisfactory explanation of how the elaboration and use of knowledge within and between rms really takes place.
Knowledge and the rm Firms ‘‘are social communities specialized in speed and efciency in the creation and transfer of knowledge’’ (Kogut and Zander 1996: 503). Specialization in the creation of knowledge means that labor is divided, and knowledge is partly codied in routines or competencies, making up the skeleton of organizations, and partly remaining tacit and embedded in individuals. The rm may then be described as a pool of forms of knowledge, a meaningful whole of technical and organizational know-how (Choo 1998). Transferring knowledge becomes itself a specialized activity with highly specic connotations, giving rise to a social community with unique characteristics. A knowledge-based view of the rm sets out to describe both how the set of local forms of knowledge is built and structured by ‘‘doing’’ as well as during the recurrent activity of problem solving, and how this set evolves and is shaped by internal and external events. The importance of knowledge as a strategic factor in the rm has been widely recognized in, for example, studies on bounded rationality and organizational learning (Cyert and March 1963). In their view, organizations learn by encoding experience 3
Nonaka et al. (2000) and Nonaka and Takeuchi (1995) use the notion of ‘‘Ba’’, which roughly means place and is dened as a shared context in which knowledge is created and utilized.
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and transforming it into routines informing behavior.4 More recent studies on situated learning (Lave and Wenger 1991; Hutchins 1995) directly address the issue of how processes of socialization, imitation, and professionalization interfere with and shape actual learning. All the daily situations in which knowing takes place shed new light on the learning process, reconnecting it to the social character of organization. Technical and managerial aspects of the overall activity taking place in the rm (production, designing, marketing, planning, etc.) are represented as more or less complex and as more or less specic forms of knowledge. This knowledge has been generated through the interplay between individual cognitive activity and the development of socially constructed forms of learning. People’s skills in the rm are a representation of the continuous, minute, detailed, idiosyncratic way of learning in organizations: knowing and the knowledge-creation process appear almost tangible. Skills become the minimal ‘‘pool’’ of knowledge, and in a certain sense a micro-analytical unit making it possible to build up and vary the knowledge available to the rm (Nelson and Winter 1982). Skills are not simply acquired, they are generated, thus involving a radical rethinking and reformulation of learning. Learning is not the reception of factual knowledge or information but has a quintessentially social character (Lave 1988; Hutchins 1995). Learning is a process of participating in communities of practice. Initially this participation is peripheral but then becomes increasingly involved and complex (Lave and Wenger 1991). We thus have an attractive idea, namely that in order to understand learning processes, several levels of investigation must be taken into account: the individual, the group, and the institution (Crossan et al. 1999). Individual cognition and learning at group level are interdependent; by changing the organization and changing the pool of participants, the generation and acquisition of the knowledge base of the rm is set in motion.
HUMAN RESOURCES AND KNOWLEDGE Human resources A rm’s sustained competitive advantage has been attributed to the existence of organizational resources that are rare, difcult to replace or imitate, and therefore of high value to the rm (Barney 1991). The resource-based view of the rm maintains that human resources generally play this role for rms. It is through the unique combination of human resources and the knowledge they embody—through the complex social relationship between humans and organization—that rms develop their own specicity. A rm’s specic culture permeates all activities taking place within it and its behavior in the market place (Wernerfelt 1984; Teece et al. 1990; Barney 1991; Foss 1993). This view of the rm has offered a theory and some evidence about the relationship between different 4
They include more or less formal rules, conventions, and procedures but also beliefs, cultural codes, and specialized and local languages. These can be transmitted, evolve, overlap or replace each other as a function of the processes taking place within the rm.
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practices in human resource management and the rm’s overall performance (Lado and Wilson 1994; Huselid 1995; Knudsen 2001).5 The knowledge-based view of the rm is more concerned with the dynamics, and the processes of the production of knowledge, focusing not only on the human resources employed in the organization structure but also on the set of procedures that mobilize these resources. Models, procedures, routines or more generally speaking ‘‘ways of using’’ knowledge are also ‘‘ways of using’’ resources, and more specically human resources. Management becomes crucial because it governs the uses of resources, affecting the knowledge creation in the rms and their performance. Human resource management is necessary because, even though there are wide areas of routinization and replication of the existing knowledge base, skills and individual knowledge may be combined in many ways according to opportunities which are shaped by the specic social community. The tacit nature of knowledge underlying skills may hinder their modication (Polanyi 1962), the transfer and exchange of knowledge may run into cognitive and motivational limits (Hinds and Pfeffer 2001). Yet, the knowledge base of the rm evolves along with different managerial practices and the changing of the participants of the community. Human capital cannot simply be seen as an input in the production process that may be perfectly re-allocated in order to optimize performance. Individual knowledge and skills develop in rms, and the services of human resources are inextricably bound up with the specic social community created by the rm. The development of individual skills in an organization distinguishes rms and is the condition for the distinctive pool of competencies that each rm owns. As knowledge is generated, areas for discretion and judgment grow, and with them the complexity of the rm as a social system. Building connections and coordination between different individuals and their knowledge is no easy matter, and suitable channels of communication will have to develop. They, too, will be specic to the rm, as will the language used for interpreting messages required to maintain their coherence or to set in motion their transformation. The governance of individual cognitive abilities and the procedures for their collective utilization produce the mechanisms of accumulation, conservation, and malleability of the pool of knowledge which the rm possesses.
Management Human resources are strategic for the development of the innovative capacities of the rm and therefore for the production of knowledge. Knowledge creation involves the continuous re-framing of the cognitive models underlying the actions of different individuals for achieving a rm’s objectives through the lter of their own idiosyncratic knowledge. As a rm’s objectives change, the rm is involved in a complex activity of creating, selecting and diffusing different cognitive models. This implies that rms engage in designing and planning (Coase 1991; Richardson 1998) and in 5
Strategic human resource management has several applications in the eld of personnel management, industrial relations, and knowledge management in rms. Extensive studies have been undertaken to outline the implications of human resource management for the performances of the organization. See Lado and Wilson (1994), Huselid (1995) and Huselid et al. (1997) for a review of these issues.
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doing so they are able to create and develop new knowledge. A similar view of the rm has been offered by Penrose (1959), who described the activity of designing and planning in terms of ‘‘directives’’ expressed by managerial resources in the rm. In her view, rms are administrative units shaping the ow of services drawn from existing and newly acquired resources over time, by means of a ow of directives. The rm is dened as a pool of resources agglomerated around a center, whose function is to coordinate them. This coordination is carried out by managerial resources, and the directives that they express reect management’s skills and cognitive models. The concept of ‘‘directive’’ becomes crucial in our understanding of how rms create knowledge and how the services of human resources change over time. Human resources are malleable and acquire distinctive specicity in the framework of the rm employing them; in other words, directives shape and build the uniqueness of each rm by dening the ow of productive services provided by human resources. Penrose reminds us that: the important distinction between resources and services is not in their relative durability; rather it lies in the fact that resources consist of a bundle of potential services and can, for the most part, be dened independently of their use, while services cannot . . . It is largely in this distinction that we nd the source of the uniqueness of each individual rm. (Penrose 1995: 24–25)
The same resources used for different purposes, in different ways, or in different combinations with other resources, give rise to different services and different sets of services.6 Directives therefore adapt the need for management activity to coordinate and orient towards specic objectives by offering a set of cognitive models for those working in the organization. Directives may be seen as generating and encouraging the construction of shared cognitive models. The construction of these models and their renewal is itself a cognitive activity in which all individuals participate in creating dense communications networks (Hutchins 1995). Managerial functions and the expression of directives, which are the outcomes of the activities of orientation, coordination and communication involved in design activity, are part of the process making the rm a social community. By expressing directives, management is able to ‘‘translate’’ dissonant mental models into new shared meanings, increasing the possibility of communication between people working in various activities and contexts in the rm (Arrow 1974). Management focuses simultaneously on various projects, and activities and the coherence of the executive team is a vital condition for being able to govern the complexity of the rm. Coherence is also a limitation, because the set of opportunities the rm is able to perceive is ltered by teamwork which favors the convergence of views. Shared experiences mold managerial services, which thus become highly idiosyncratic. 6
The fact that a set of resources in the rm can be used with different degrees of efciency was addressed in a study by Leibenstein (1966) who develops the idea of x-efciency. Here the possible indeterminacy in the combination of productive services is conceived in relation to the difculty of pushing the worker to achieve an adequate productive effort. This differs from the notion of organizational slack, introduced by March and Simon (1958) to illustrate the organizational dynamics in conditions of changing objectives and expectations. The distinction put forward by Penrose casts light on the difculty of reconstructing an unequivocal relation between input and services.
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Specialized human resources, acquired outside the rm, are not easily integrated, generating variety and potential mismatch in managerial services. This will be the more signicant the greater the need for new managerial resources and the greater their variety. At any given time, the pool of managerial services will restrict the potential of the rm for developing its own innovative projects (Penrose 1959). These limits may be overcome if new managerial services can be developed in the teamwork, and a new ow of directives will re-shape the organization. Codied and tacit personal knowledge will combine in a unique and idiosyncratic way, creating ‘‘novelty’’. Directives will help the diffusion of the knowledge generated in the teamwork together with the evolution of the existing cognitive models. Learning will take place and the uses of internal resources will be re-shaped, creating the conditions for a renewal of the rm’s knowledge. Common experiences in the organization, then, enable a collection of individuals to become a working unit and a social community. Knowledge and cognitive models spread from one context to another, according to the mechanisms of vicarious learning (Bandura 1986) enlarging the possibilities for action. Productive opportunities of a rm may change, even if no change in the environment occurs because knowledge has changed (Penrose 1959). Thus the presence of a given pool of resources does not preclude them from being managed exibly, but in a certain sense the very rigidity (cohesion through a structure) of the organization favors both the exible use of resources and new forms of internal cohesion.7
NEW FORMS OF KNOWLEDGE AND THE RENEWAL OF HUMAN RESOURCES Strategy and knowledge By implementing strategies rms develop new services from the available resources. The cognitive perspective suggests that this fact may be interpreted in terms of individual cognitive activity and sheds light on the way in which the rm’s knowhow develops out of the set of skills in the human resources within the rm. Directives, developed in the managerial teamwork, shape the use of human resources and, in turn, the possible future opportunities.8 Different structures of knowledge and distinctive sets of competencies develop out of managerial services because they largely consist of cognitive activities. The assessment, selection, and interpretation of available information are required, and these processes are performed and framed according to an interpretative model which takes into account the strategic objectives to be reached. The outcome of such decision-making processes is a ‘‘vision’’, a set of cognitive models at hand in the rm. Calculation is impossible, as Knight (1921) pointed out; decisions in rms are based on judgment, and this judgment is a constituent element of the knowledge-creation processes. 7
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I have discussed the economic signicance of long-term labor relations with the rm elsewhere (Turvani 1995). Here formal rigidity is associated with incompleteness of contractual terms, while the notion of liquidity of resources, based on Simon (1951) is applied and the labor contract analyzed. The distinctive skills of a rm inuence not only the direction of expansion (according to the criterion of similarity) but also the modality of expansion, i.e. the choice between acquisitions and internal growth. The possibility of enjoying quasi rents critically depends on the existing pool of knowledge and skills in the rm (Teece 1986; Langlois 1999).
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Managerial activities imply selecting a strategy which becomes feasible because it is articulated in partial objectives. The directives do not originate mechanically but are the outcome of a complex cognitive activity which takes place at the team level and which implies the creation of new knowledge. Behavioral and cognitive models, consolidated over time, adjust to new ones by ltering the available information, by directing conjectures, by learning vicariously. What is happening in the organization is an operation of ‘‘translation’’, through which new cognitive models are transferred and old views are re-shaped. This process allows the various functions and different human beings to ‘‘understand’’ and ‘‘read’’ the new reality and thus ‘‘identify’’ with the new strategy of which they only have partial knowledge. This process requires major investments because increasing specialization of work and jobs reduces the possibility of communication between the different forms of knowledge which are present in the rm, and this leads to a need for more specialized professional languages. Nonaka and Takeuchi (1995) describe this process as the creation of knowledge within the rm, providing an image of a spiral linking the transformation processes of knowledge from tacit to explicit and vice versa, beginning from the individual and collective processes of verication and validation of knowledge (the process of internalization in individuals and externalization between individuals). What they describe is a communication process through which a social community is built within the rm.9
New skills, new knowledge By implementing a new strategy and its translation in directives, a demand for new skills arises. Yet, this demand cannot be perfectly described ex-ante. Given that an individual’s skills depend on the cognitive models at hand and that skills change as cognitive models change, uncertainty will persist and the more, the more innovative the strategy is. Strategy needs to be understood by individuals with very different knowledge and skills. New cognitive models underlying a new strategy undergo a process of translation into the specic languages developed in the various areas in the rm. In this process of adjustment, new skills are developed and a new ow of productive services is made available by the existing human resources. Knowledge creation processes require that the existing human resources are malleable. To be capable of quickly adapting to new objectives, human resources must be able to adjust their skills according to the specic needs of the new strategy. Malleability must be preserved to make corrections due to judgment-related errors associated with the denition of new cognitive models. The burden on the cognitive capabilities of individuals may be heavy because knowledge creation within the rm may ask for rapid change of the stock of the skills at hand and the modication of their composition. These two requirements inuence 9
Nonaka and Takeuchi emphasize the importance of corporate communication through slogans unifying and summarizing at times incongruent cognitive models, and gives various examples of this phenomenon (Nonaka and Takeuchi 1995).
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human resource management in various ways, depending on the chosen strategy, such as, for example, expansion, innovation, or restructuring.10 Human resource management may imply replacing or renewing existing human resources. Labor turnover may also be an important tool for governing the transformation of skills. Labor turnover encourages the replacing of old skills as part of the generational turnover. In addition to regulating employment levels, labor turnover plays a key role in providing the assortment of skills required by the rm. Labor turnover is a tool that the rm can use to pursue the option of buying external skills on the market rather than developing them in house. In the case of large entry and exit ows, labor turnover can play a key role in attaining the desired malleability through the acquisition of new human resources. Skills renewal is a complex process that can be attained by resorting to tools such as internal training and the training and acquisition of skills on the market. The introduction of new human resources may take the form of hiring a new employee or hiring a consultant. These options do not only imply different costs but they may be subject to institutional-type constraints, such as the rules and conventions governing the labor market. Market constraints may be found on the labor market outside the rm, and these constraints may be severe when the competitiveness among rms is tight. Finally the constraint may be due to the chosen entrepreneurial strategy which may implicitly impose a certain human management style.11 By representing innovation as knowledge production the communication of cognitive models taking place in rms comes under strain. Skills sustaining the process of communication constitute the vehicle for an innovative strategy, and these skills may be scarce within rms. The rm must then search for them on the external market, and in the case of a highly innovative strategy the demand for communication skills may be quite in conict with more traditional forms of human resource management, such as in-house training and the simple introduction of new employees with higher education. An innovative strategy requires innovative human resource management. Searching innovative skills on the external market does not simply imply the assessment of the costs of hiring, compared to the costs of training. It implies a choice for the ‘‘unknown’’ and the evaluation of the effect of introducing ‘‘novelty’’. How can a rm ascertain the quality and value of new skills, given that the rm is 10 We may identify three modalities for varying the set of skills at the disposal of each rm: A—reduction in the quantity of one or several skills; B—increase in quantity of skills; and C—re-training of the existing set, or addition of new skills. By combining these modalities different possible situations may result. In general, expanding rms must adopt modalities B and C, while downsizing rms must govern processes through the A option. Innovative rms, on the other hand, may need to rely on restructuring activities, hence the A and C options may prevail. 11 The assessment of training costs depends on the quality of skills (technical, managerial), and the quality of human resources in play. Training costs will mainly vary with features such as age, education, and accumulated experience. Direct costs (training) and indirect costs (reduced production) need to be assessed. The quality of training will affect the overall costs: straightforward transmission of new information, on the one hand, and learning new models or new complex languages, on the other hand, of course, incur in different costs. The assessment of the hiring costs again implies a comparative analysis of the make or buy options. Selection may be honed very nely in order to nd those skills on the external market, or a more approximate selection of skills may be made before integrating and specializing them through internal training, according to the needs of the rm.
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attempting to reduce its ignorance by buying them? If they were already present, the rm could assess them, but in that case it would no longer need to acquire them. This is the classical paradox of knowledge acquisition on the market (Arrow 1962). What do rms do, then, to buy new innovative skills on the ‘‘market’’? The market is not an abstract entity; it is created by the operations and the strategies of other rms. Finding skills on the market means taking them away from other rms. The market then provides information for a rm which needs to buy new skills by offering a form of vicarious learning from other rms. The rm is trying to acquire the experience of the others and transfer this experience into its own context. Knowledge production is set in motion because ‘‘novelty’’ has been introduced by a process of ‘‘judgment’’. As a matter of fact, recruiting skills by taking them away from other rms means that the rm has a strategy, or an innovative model for using those skills. In short, it implies that the rm is able to ‘‘see’’ opportunities that others do not, or, in other words, that its entrepreneurial spirit is acting.
CONCLUDING REMARKS The fact that individuals possess knowledge has far-reaching implications for a theory of the rm. Individuals create knowledge and learn in contexts thanks to individual cognitive capabilities and models which they use and renew through reciprocal interaction. Humans develop skills which shape the ways through which knowledge creation takes place at the individual level, guiding their understanding of problems and their capacity to solve them. Individual and collective knowledge evolves socially, with local and specic connotations. Introducing the cognitive dimension of the individual in a theory of the rm allows a better understanding of the new role of intangibles in actual rms. Understanding the ways in which individual, and, much more importantly, collective knowledge evolves offers the opportunity to give human beings the central role they deserve in the theory of the rm. The rm must thus be seen as a knowledge-creating entity and human resources as the pivot of the organization. Within this framework, Penrose’s contribution (1959) is still valuable because it suggests a knowledge-based view of the rm and explains the social dimensions of growth and change in terms of human resources renewal. Human resource management thus becomes a core activity for rms which increasingly depend on innovative strategy to survive in competitive markets. By managing human resources, novelty and discontinuity are introduced, opening the potential space for future action. The evolution of rms is set in motion together with the evolution of individual and collective knowledge. In this process the ow of directives expressed by the managerial team is crucial. Directives are themselves a form of intangible resources; they are made up of knowledge, cognitive models, visions. Working as communication media, they develop the rm’s social community and sustain the spread of knowledge and its renewal, for the shared understanding of problems. Through directives, new cognitive models in the rm are integrated into a new vision, the uses of human resources change, the creation of knowledge is fostered. Knowledge creation in rms, thus, cannot only rely on technology and technical knowledge. Knowledge develops if the rm acts as a social community, and specic
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skills of orienting, communicating, translating, and diffusing ‘‘how to know’’ are developed. These skills, in the form of visions, cognitive models, and idiosyncratic interpretations of reality, are built up over time and they give a rm its own specic character and path of development.
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