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The Theory of a Firm Consists

The Theory of a Firm Consists

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Published by Swati Verma
Why do fir,s exists
Why do fir,s exists

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Published by: Swati Verma on Jun 13, 2013
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Knowledge of the Firm, Combinative Capabilities, and the Replication of TechnologyBruce Kogut and Udo Zander 
Organization Science
, Vol. 3, No. 3, Focused Issue:Management of Technology (Aug., 1992), pp. 383-3972.
Gupta,Anil K. (04/2000). "Knowledge flows within multinational corporations.
Strategicmanagement journal 
, 21 (4), p. 473.We have studied various theories of the firm, and also have understood the factors that help afirm attain sustainable competitive advantage. According to the resource based view of the firm,VRIN resources helps firms attain sustainable competitive advantage and hence achieve higher level of performance (Barney, 1991). Later the Dynamic capability of the firm added to the RBV by explaining that a firm can attain competitive advantage not just by having VRIN resources but by its ability to integrate, built and reconfigure these resources to address rapidly changingenvironment.
 Now this article
Knowledge of the firm, Combinative Capabilities, AndReplication of Technology
” states that a firm can attain competitive advantage by its ability to
generate new knowledge by the process of integrating or transferring information within the firmthat will help the firm to innovate, thus attaining a competitive advantage and hence leading tohigher performance.According to this article knowledge is not limited to individual, and if this was the case then inorder for the firm to change it just had to hire new workers. But as firms cannot change its skill by hiring new
workers, so the knowledge is embedded in the organization‟s principle and
culture. By understanding how firms can create knowledge they can innovate themselves intonew areas and will be able to perform better than the other organization. This article helps usunderstand why firms exist and also the effect of knowledge on the boundaries of the firm.Fig.1
Existence of thefirmEffects of knowledgeon the boundaries of the firmEffects of knowledgeon
The theory of the firm consists of a number of economic theories that describe why firms exist?The question,
why firms exist
?” has
 been answered by “transaction cost theory” (Coase, 1937;
Williamson, 1975, 1985). The traditional explanation for the existence of the firm has been thatthey help to keep in check the transaction costs arising from an exchange. According toWilliamson firms exist because they use price mechanism more efficiently than markets todiscover relevant information and to negotiate contracts. In contrast this article argues that firms
exist because of their ability to transfer and exploit knowledge more effectively and efficiently in
the intra-corporate context than through external market mechanisms.This article gives a different view to the Transac
tion cost theory‟s explanation of the firm
 boundaries. According to TCA firms decide to internalize those activities that have higher 
transaction costs if performed by the market. But according to “Knowledge based theory” firms
invest in those activities that correspond to a combination of current capabilities and expectationsregarding future opportunities.
Literature Review
The knowledge of the firm
helps us understand how firms create new knowledge. The secretingredient for a successful firm is to be able to create new knowledge by rebundling its currentcapabilities. But as it is not easy to acquire new ways of creating knowledge, firms can solve this problem by creating social relationships within the firm that helps create new knowledge by thetransfer of information and know - hows. According to this paper opportunism is not the way toexplain why information is transferred within a firm, but firms exits because they are socialcommunities structured by organizing principles and are competent in transferring knowledgewithin the firm.Knowledge can be classified into two types:Information:
information refers to knowledge which can be transmitted without loss of integrityonce the syntactical rules required for deciphering it are known. Knowledge as informationimplies knowing what something means. Information refers to a declarative type of knowledge
(e.g., monthly, financial results, data acquir 
ed by grocery store).
Know-how: Know-how refers to the accumulated practical skill or expertise that allows one todo something smoothly and efficiently. It must be learned and acquired. Knowledge as know-how implies knowing how to do something. Know-how is a kind of procedural type of knowledge (e.g., product designs, distribution knowhow, etc.)As knowledge is not easily transmitted and replicated. This difficulty in transfer and imitation of information can be analyzed in two dimensions: codifiability and complexity. Codifiability refersto the ability of the firm to structure knowledge into a set of identifiable rules and relationshipsthat can be easily communicated. Complexity can be defined as the number of operationsrequired to solve a task. For the knowledge to be transferred effectively and efficiently it has to be codified into simple terms and should be easily deciphered by the recipient.Knowledge exists at the personal level, group level and organization level. According to Katzand Kahn personal knowledge can be transmitted within close knot group by shared codingschemes and a common language.
Though common language and organization‟s culture
facilitates knowledge transfer within groups especially when the transfer is horizontal for example when a same plant identical to the first is built, but it creates problem if technologieshave to be transferred vertically that is when a product is moved from development to production.We know that transfer of knowledge is the key ingredient for innovation and a
rate of growth is determined by the speed of replication of knowledge. Now, for the firm to facilitatetransfer of knowledge it has to encourage codification of knowledge and that in turn increasesthe risk of imitation, which is the paradox of replication.Combinitive capability: According to Scherer combinative capability refers to the intersection of the capability of the firm to exploit its knowledge and the unexplored potential of the technology.
It is a local search that generates a condition commonly called „path
dependence‟, the tendency
for what a firm is currently doing to persist in the future, since proximate technologies do not
require a change in an organization‟s recipes of organizing research.
 Application of the knowledge theory: According to Gokut and Zander technology is nottransferred within the firm because of opportunism but it is the cost associated with the transfer of the firm that decides transfer of technology in the firm. Traditional theory claims that

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