Cohre Home   

Internet Resource Guide
Toward a Knowledge Based Theory of the Firm
by R.M. Grant

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

Coordination of Specialized Knowledge

While organizational theory has spent much time focused on the difficulties of achieving cooperation due to the differing goals of organizational members or the divergence of employee and owner goals, Grant proposes that even with cooperation, coordination of specialized knowledge is quite difficult. The past focus on cooperation resulted in an emphasis on hierarchical and authority relations where cooperation is imposed by bureaucracy.

Specialized knowledge can be coordinated using the following mechanisms

  1. Rules and directives - these include etiquette, social norms, and procedures
  2. Sequencing - each specialist's input occurs independently in own time slot
  3. Routines - also called coordination by mutual adjustment - can support a high level of simultaneity of individuals performing their own specialized tasks
  4. Group problem solving and decision making - unlike 1-3 which seek efficiency through minimizing communication, tasks high in complexity and uncertainty require more personal contact and communication.

Importance of Common Knowledge

While the above mechanisms are ways to coordinate the specialized knowledge of employees, coordination also depends on there being common knowledge among organizational members.

Types of common knowledge include:

  • Language and other forms of symbolic communication - literacy, numeracy, software, statistics
  • Commonality of specialized knowledge - this is paradoxical but the more specialized knowledge two people have in common, the more sophisticated their communication can be. Of course, the purpose of the communication is to share the specialized knowledge so if two people have the same knowledge, there's no benefit from integration but if they have entirely separate knowledge bases, then integration can't occur except at a very basic level.
  • Shared meaning - common mental frameworks allow for the transfer of tacit information. Metaphors, analogies, and stories are vehicles for reconciling different individual experiences.
  • Recognition of knowledge domains - need to know what others know in order to coordinate with them.

The ability of a firm to integrate knowledge held by individuals within the organization creates its competitive advantage. When employees are mobile, the organizational capability depends more on the integration mechanism than on the specialist knowledge that employees possess. This makes increasing common knowledge more important than deepening specialist knowledge leading to organizational practices such as cross training, job rotation, etc. The broader the scope of knowledge being integrated, the harder it is to replicate.

Implications for Organizational Structure

Hierarchy is more useful for processing than integrating information. 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. Perha some of the recent push toward team based, participative organizational structure! due to knowledge, not just motivational, considerations. Decisions based on tacit and idiosyncratic knowledge should be decentralized wh decisions requiring statistical knowledge should be centralized.

Moral:  When we focus on the cliffficulties of coordinating knowledge among instead of eliciting cooperation from the individuals within an organization, we may end up with different insights into which organizational practices and structures will work, best to create competitive advantage for the firm.

© Institute for Research on Labor and Employment, University of California, Berkeley. All rights reserved.
  Last update 2/16/99.