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  1. 1. 1 Foundations of Organization Lecture 3: Division of knowledge and coordination Jacob Lyngsie Strategic Organization Design Unit www.sod-research.com www.facebook.com/sodresearch My slides are uploaded after class. However, all slides are numbered to enable easy notation
  2. 2. 2 Lecturer Jacob Lyngsie § Econ (and law) perspective § Quantitative analysis § Abstract and very “simple” examples § (Tries to be humorous) 2
  3. 3. 3 Contact details Jacob Lyngsie: Professor, Department of Business & Management E-mail: jaly@sam.sdu.dk Office hours: By appointment 3
  4. 4. 4 3 Re-cap • the division of labor has powerful consequences • generates gains from specialization (through learning by doing) • requires coordination • how you divide labor (tasks) has an impact on what people will learn and become specialists in • the division of labor, and economies of specialization, are important drivers of the structure of organizations • there are different types of coordination mechanisms • there are different organizational configurations that rely mainly on one of the coordination mechanisms Type of interdependence Coordination mechanism Pooled interdependence Standardization Sequential interdependence Planning Reciprocal interdependence Mutual adjustment
  5. 5. 5 Twins getting a round (how to remember comp. adv)
  6. 6. 6 Only two types of problems
  7. 7. 7 4 Specialization and coordination Division of labor Specialization, learning by doing Differentiated roles (experts), high level of capabilities Interdependence Coordination mechanisms required
  8. 8. 8 5 Division of labor and division of knowledge § The division of labor creates a division of knowledge (dynamic aspect) § People develop into specialists, with distinct competences, skills, and knowledge § “Although knowledge can be learned more effectively in specialized fashion, its use to achieve high living standards requires that a specialist somehow use the knowledge of other specialists.” § “Economic organization, including the firm, must reflect the fact that knowledge is costly to produce, maintain, and use.” (Demsetz, 1988, p. 157)
  9. 9. 9 7 The transferability of knowledge § There is a long-standing distinction in the philosophy of science between knowing how and knowing about: - Explicit knowledge may be easily transferred by language - Implicit knowledge (tacit knowledge) can not be communicated by language § Knowledge can be ranked from fully explicit to fully implicit § Most useful knowledge is partially tacit
  10. 10. 10 Implicit knowledge • Similar problems arise in product markets: • Experience goods – goods where it is difficult to observe quality in advance, but these characteristics can be ascertained upon consumption. • Credence goods -- goods for which it is difficult for consumers to ascertain the quality even after they have consumed them. 1 Implicit knowledge
  11. 11. 11 MARKETS FOR EXPERIENCE GOODS • There is no legal enforcement. • Consumers don’t know product quality ex ante (but know everything else). • Goods are either high or low quality. • More costly to produce high quality than low quality. • Consumers can communicate at zero cost. • Firms have identical technology. • Markets are competitive. • Timing: Firms choose quality Consumers trade with a firm Consumers observe quality and communicate t1 t2 t3 Markets for experience goods
  12. 12. 12 X0 X1 MC High quality MC Low quality AC High quality AC Low quality P0 P1 Can (X1, P1) be sustained as a Nash?
  13. 13. 13 X0 X1 MC High quality MC Low quality AC High quality AC Low quality P0 P1 X3 No … Producing Hig quality = zero profit Any firm will gain from posing as a high quality in the first period—but offer low quality.
  14. 14. 14 8 Common and specific knowledge § Common knowledge (e.g. languages, mathematics) as a low-cost method to transfer (explicit) knowledge § Common knowledge allows for greater specialization and a deeper division of knowledge § Specific knowledge as the “knowledge of the particular circumstances of time and place” – often implicit § The problem of knowledge aggregation: Aggregating knowledge allows to transfer more general knowledge at the expense of specific knowledge.
  15. 15. 15 9 Value creation, value appropriation, and knowledge § “Knowledge does not directly convert to utility or living standards” – it must be put to use to derive and appropriate value § However, there is a fundamental problem with (explicit) knowledge - (Explicit) knowledge is a public good (Arrow, 1962): There is no rivalry in consuming knowledge and it is hard to exclude others, hence value appropriation is an issue - Knowledge often suffers from the information paradox (Arrow, 1971): a buyer only learns about the value when the information is revealed
  16. 16. 16 10 The fundamental asymmetry between knowledge acquisition and utilization § Acquiring knowledge is a costly, resource-consuming process § The mere use of knowledge does not require similar investments
  17. 17. 17 12 Knowledge integration in firms § “Firms and industries must form a pattern of economic organization that takes account of the need for acquiring knowledge in a more specialized fashion than the manner in which it will be used.” (Demsetz, 1988, p. 157) § Supervised direction as a key way to economize on the acquisition and use of knowledge
  18. 18. 18 13 Knowledge integration mechanisms Rules and directives Sequencing Routines Group problem-solving 1 2 3 4
  19. 19. 19 15 Common knowledge and knowledge integration § The existence of common knowledge among specialists facilitates the integration of different bodies of knowledge: - language - other forms of symbolic communications - commonality of specific knowledge - shared meaning - recognition of individual knowledge domains. § Points to “corporate culture” as a repository of common knowledge.
  20. 20. 20 16 Implications for organizational boundaries? § “A second way to put information to work without sacrificing specialization in knowledge is to produce and sell goods that require less information to use than is required to produce them […] A production process reaches the stage of yielding a saleable product when downstream users can work with, or can consume, the product without themselves being knowledgeable about its production.” (Demsetz, 1988, p. 158) § The key is the required access to knowledge in different vertical stages of production or horizontal markets
  21. 21. 21 17 Barriers to knowledge integration § The division of knowledge among specialists implies differences in the “thought world” of people § view and assess the future differently, have a different understanding of their tasks and roles as well as of managerial challenges § Thought worlds as well as organizational routines represent interpretative schemes to generate, evaluate, and select alternatives
  22. 22. 22 Let’s play the ”grade game” Without showing your neighbors what you are doing, write down on a form either the letter alpha or the letter beta. Think of this as a “grade bid”. I will randomly pair your form with one other form. Neither you nor your pair will ever know with whom you were paired. Here is how grades may be assigned for this class: •If you put alpha and your pair puts beta, then you will get grade 12, and your pair grade 4; •If both you and your pair put alpha, then you both will get the grade 7; •If you put beta and your pair puts alpha, then you will get the grade 4 and your pair grade 12; •If both you and your pair put beta, then you will both get grade 10 Let’s illustrate with “the grade game”
  23. 23. 23 Payoff matrix: selfish (12,4) à 3 (7,7) à 0 12 > 10 > 7 > 4 Payoff matrix: both have a selfish thought world
  24. 24. 24 Strictly dominated strategies Strictly dominated strategies
  25. 25. 25 Rational choice outcome Same (selfish) thought world outcome
  26. 26. 26 Payoff matrix: altruistic (12,4) à 3 – 4 = -1 (4,12) à -1 – 2 = -3 My ”12” – my guilt My ”4” – my indignation Payoff matrix: both have a altruistic thought world
  27. 27. 27 Payoff matrix: S vs A Payoff matrix: different thought worlds Even though your pair does not have an incentive to choose beta if you choose beta (no incentive problem)
  28. 28. 28 19 Barriers to knowledge integration Collaboration (across knowledge domains) Performance Different Thought Worlds (across knowledge domains) + -- Mutual adjustment has to be prolonged and intensive for real coordination to occur OR Routines and instructions defined such that no real knowledge integration is necessary
  29. 29. 29 23 Take-away points: Division of knowledge and coordination § The division of knowledge has powerful effects - generates deep specialist competence - requires knowledge integration § How you divide knowledge has an impact on what competences people have … but also on how they perceive and think (cognitive representations) § The division of labor and the division of knowledge are linked, but do not have to overlap § There are different types of knowledge integration mechanisms, with different features with regard to integrating knowledge