Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology
Author(s): Bruce Kogut and Udo Zander Source: Organization Science, Vol. 3, No. 3, Focused Issue: Management of Technology (Aug., 1992), pp. 383-397
Summary: Carlos Ip

Introduction:
Why firms exist? A prevailing view is that firms serve to keep in check transaction costs from self-interested motivations of individuals.

Authors said that firms do better than markets in sharing and trasnfer of knowledge of individuals and groups within an organization.
Knowledge is held by individuals, but is also expressed in regularities by which members cooperate in a social community (i.e. group, organization, network).
• Suggesting that firms learn new skills by recombining their current capabilties.
• Growth occurs by building on social relationship existed in a firm.
• Cumulative knowledge of the firm provides options to expand in new but uncertain markets in the future.

Paradox identified: firm growth efforts by replication of its technology enhances potential for imitation.

Authors view the central competitive dimension of what firms know how to do is to create and transfer knowledge efficiently within an organization content,
• Suggest that organizations are social communities in which individual and social expertise is transformed into economically useful products and services by the application of a set of higher-order organizing princples.
• Firms exist because they provide a social community of voluntaristic action structured by organizing principles that are not reduceable to individuals.
• Organizational knowledge is categorized into information and know-how based.
• Examined Personal Expertise then Social Knowledge, the capabilities of firm are argued to rest in the organizing principles by which relationships among individuals, within and between groups and among organizations are structured.

But organizations serve more than mechanisms by which social knowledge is transferred, but also by which new knowledge, or learning, is created. Thus Authors introduced Combinative Capbility concept.

Firms invest in assets that combines current capabilities and expectations regarding future opoortunities. So knowledge of a firm is a portfolio of options, or platforms, on future development.

Presumptions:
• Knowledge of the firm must be understood as socially constructed or resting in the organizing of human resources.
• Capabilities of the firm is a set of “inert” resources that are difficult to imitate and redeploy.

• Knowledge of firm = Information (costs) regarding prices and know-how (divisionalize).
• Knowledge may be combined through internal and external learning.
• There are decreasing returns to a given technology or method of organizing results in an incentive to build new but related skils.
• These investments serve as platforms on future and uncertain market opportunites.

1. Information and Know-How
• Information means knowledge which can be transmitted without loss of integrity once the syntacticla rules required for deciphering it are known.
• Includes facts, axiomatic propositions, and symbols.

• Know-how is the accumulated practical skill or expertise that allow one to do something smoothly and efficiently (von Hippel 1988).
• Knowledge imples knowing what something means.
• Know-how is a description of knowing how to do something.
• Know-how is a description of what defines current practice inside a firm.
• Is the understanding of how to organize a firm along these formal (and informal) lines.

• Content of the firm’s know-how is found in the regularity of the structring of work and of the interactions of employees cofnorming to explicit or implicit receipes.

2. The Inertness of Knwoledge
• Firms differ in their information and know-how.
• Persistence of differentials in firm performace lies in the joint problem of difficulty of transferring and imitating knowledge.
• The transferability and imitability of firms’ knowledge are influence by several characteristics (Kogut and Zander 1990).
• There are two related dimensions: condifiability and complexity.
• Codifiability refers to the ability of the firm to structure knowledge into a set of identifable rules and relationship that can be easily communicated.
• Knowledge can vary in complexity.
• An ordered system reduces the costs andnecessity of complex communication patterns.
Pringle (1951), based upon information theory, defined complexity as the number of parameters to define a system.
For a particular code, costs of transferring will vary with complexity. A change of code changes the degree of complexity.

3. Transformation of Personal to Scoail Knowledge
The distinction between knowledge of an individual and of the organization – distiinguishing between personal, group, organizational, and network knowledge.

Tacit knowledge consists of search rules, or heuristics, that identify the problem and elements consisting of the solution. ((Polanyi 1966, pp. 23-24)
• Sharing of a common stock of knwoledge, both technical and organizational, that facilitates the transfer of knowledge with groups.
• By shared coding schemes, personal knwledge can be transmitted effectively within close-knit groups (Katz and Kahn 1966).
• Personal knowledge transmitted because of a set of values are learned, permitting shared language by which to communicate (Berger and Luckman 1967).
• The problems of different professional languages are attenuated when technology transfer is horizontal.
• Leonard-Barton’s (1988) found that technology transfer success is dependent upon the mutual adaption between the two parties highlights the critical transformation of personal and group knowledge in the process of codification.
Authors called these high-order organizing principles, in vertical knowledge transfer, which facilitateg the integration of entire organizations (as represented in an organizational chart).

The Paradox of Replication
• The speed of replication of knowledge determins the rate of growth; control over its diffusion deters competitve erosion of the market position.
• The problems of growth are directly related to the issues of technology transfer and imitation.
• Once organizing principles replace individual skills, they serve as organizational instructions for future growth.
• Personal and small group knowledge is expensive to re-create, firms may desire to codify and simplify such knowledge as to be accessible to the wider organization, as well as to external users.
• There is a possibility to separate the expertise to generate the technology and the ability to use it that permits the nesting of a firm’s knowledge.
• But this separation facilitates the ease of imitation.

Combinative Capabilities
• Being able to use and being able to create software reflects a distinction commonly made the the literature on technology transfer regarding know-how and know-why.
• Creating new knowledge does not occure in abstraction from current abilities.
• New Learning, such as innovations, are products of a firm’s Combinative Capacbilities to generate new application from existing knowledge.

Authors mean that is the intersection of the capability of the firm to exploit its knowledge and the unexplored potential of the techninology.

Schumpeter (1968) argued that innovations are new combinations of existing knwledge and incremental learning.
• Firms learn in areas closely related to their exsting practice.
• The growth of knwledge is experiential, is the product of localized search as guided by a stable set of heruistics Know-how and Information (Cyert and March 1963, Nelson and Winter 1982).
• What makes the innovative search localized is that “proximate” technologies do not require a change in an organization’s recipes of organizing research.
• Knowledge advances by recombinations because a firm’s capabilities cannot be separate form how it is currently organized.

Selection Environment
• Distinction between the ability to produce a product and the capability to generate it is fundamental to broadening our perspective to the competitive conditions of imitation.
• The ability to build on current technology is instrumental in the deterrence of the imitation of a firm’s knowledge by competitors.
• Technology transfer is concerned with adapting the technology to the least capable user.
• Threat of imitation is posed by the most capable competitors.

• However, imitation is imeded by at least one bottleneck capability – the benefits of reputation among consumers, patent proteciton, or the exercise of monopoly restrictions.
• Nature of competition is characterized as a race between an innovator and the ability of the imitating firm either to reverse engineer and to decode the substantitve technology.
The growth of the firm is determined by a combination fo the speed of technology transfer and of the imitatitve efforts of rivals.
• Incumbent competitors may simply respond to new product inoovations by relying on other capabilites, such as brand labeling or distribution channels.
• Some competitors can imitate the function of the technology without necessitating reverse engineering of the substantive code.
• Many new products are only re-designs of existing components (Henderson and Clark 1990).
There is a need for critical balancing between short-erm survival and long-term development of capabilities.

The Mark Decision and Firm Capabilities
The standard argument is that markets for the exchange of technology fail because of an appeal to a poker-hand metaphor; once the cards are revealed, imitation rapidly ensues since draws from the deck are costless.
• The costliness of its transfer is reconstrued as market failure (Teece 1980).
• Because a buyer cannot ascertian its value by observation, technology cannot be priced out.
• Thus markets fail for the selling of technology since it is costly to transact.
This leads to why and when are the costs of transfer of technology lower inside the firm than alternatives in the market.
• Walker and Weber (1984) evident that transaction costs of relying on outside suppliers lead to decisions to source internally.
• The most important variable is the indicator of differentaial firm capabilities – whether the firm or the suppliers has the lower productions costs.
The decision which capabilities to maintain and develop is influenced by the current knowledge of the firm and the expectation of the ecnoomic gain from exploring the opportunities in new technologies and organizing principles as platforms into future market developemtns.
Authors propose that firms maintain those capabilities in-house that are expected to lead to recombinations of economic value.
Economic gain rests critically upon a firm’s ability to create and transfer technology more quickly than it is imitated in the market.
Path Dependence: Firms persist in making what they have made in the past.

Authors propose 3 elements.
• How good a firm is currently at doing something;
• How good it is at learning specific capabilities;
• The value of these capabilities as platforms into new markets.

Propositions
1. Firms make those components that require a production knowledge similar to their current organizing principles and information.
2. The purchasing of technologies is carried out by the market when suppliers have superior knowledge which is complex and difficult to codify; by licensing when the transferred knowledge is close to current practice.
3. Firms develop internally projects that build related capabilities leading to platforms into new markets or rely on joint ventures (or acquisitions) when the capabilities are distantly related.
4. Immediate survival pressures encourage firms towards a policy of buying. Similar propositions could be made in reference to other applications, such as acquisitions, the composition of a technology portfolio, and the sequence by which a firm invests in a foreign market

Conclusions
• Theory of firm knowledge focus on organizing principles as the primary unit of analysis for understanding the variation in firm performance and growth.
• They represent the procedures by which social relations are recrated and coordinated in an organizational context.
• Firms are a repository of capabilities, as determined by the social knowledge embedded in enduring individual relationships structred by organizing principles.
• The stability of these relationship that generates the characteristics of inertia in a firm’s capabilities.