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TACIT KNOWLEDGE, ARTICULATION AND COMPETITIVE ADVANTAGE

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Paper prepared for the annual LINK conference Copenhagen, September 7-8, 2001 TACIT KNOWLEDGE, ARTICULATION AND COMPETITIVE ADVANTAGE Lars Håkanson Johannes Kepler Universität Linz Center for Research
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Paper prepared for the annual LINK conference Copenhagen, September 7-8, 2001 TACIT KNOWLEDGE, ARTICULATION AND COMPETITIVE ADVANTAGE Lars Håkanson Johannes Kepler Universität Linz Center for Research in International Management A-4040 Linz/Auhof AUSTRIA Phone: +43 (0) Fax: +43 (0) INTRODUCTION Much recent literature on strategy and organization emphasizes the significance of tacit knowledge, as a factor capable of explaining a range of observed or assumed aspects of the behavior of firms. The degree of tacitness of manufacturing technologies, for example, affects the ease and cost of replication and transfer. According to Kogut and Zander (1992, 1993), tacit technologies are easier and less costly to transfer internally than to licensees or other third parties. The existence of proprietary tacit skills and knowledge may therefore determine the very existence and boundaries of firms (Kogut & Zander 1993; Grant 1996; Spender 1996; Conner & Prahalad 1996). Tacit knowledge is often assumed to be difficult to imitate (Nelson & Winter 1982, pp. 123 f.) and its possession may be a source of competitive advantage. When deciding whether or not to invest in the articulation and codification of knowledge, firms therefore face a dilemma (Winter 1987; Boisot et al. 1997). Whereas the advantages of reducing the costs of knowledge transfer encourage articulation and codification, such articulation is believed to increase the risk of involuntary transfer, imitation. In spite of empirical evidence to the contrary (Zander 1991), the idea that voluntary replication and involuntary imitation are catoptric problems has found wide acceptance and has been influential in shaping recent theoretical attempts to construct a knowledge based theory of the firm and in the development of the resource based view of strategy. As formulated by Spender and Grant (1996, p. 8), the basic proposition is that...knowledge which is embodied in individual and organizational practices cannot be readily articulated. Such knowledge is of critical strategic importance because, unlike explicit knowledge, it is both inimitable and appropriable. The present interest in the tacit components of knowledge has tended to divert attention from the economically much more obvious significance of its converse, explicit or articulated knowledge, and, by implication, the importance of articulation, the process 1 through which tacit skills and knowledge are made explicit. As argued elsewhere (Håkanson 2001), most forms of knowledge underlying the skills and capabilities of firms can be articulated. Moreover, the benefits of articulation are typically large in relation to the cost and effort required. As Gunnar Hedlund (1994, p. 76) reminds us: The current, and justified, fascination with the tacit component of knowledge must not cloud the fact that organizations to a large extent are articulation machines, built around codified practices and deriving some of their competitive advantages from clever, unique articulation. In fact, much of industrialization seems to have entailed exactly the progressive articulation of craftsmanlike skills, difficult but not impossible to codify. Similarly, as Spender (1996, p. 51) notes:...the modern trend is away from the tacit and towards the explicit, from craft to system. Thus firms increasingly use explicit objectified knowledge, whether that be science or established standards and practices, and become increasingly dependent on the conscious knowledge of their employees, and on their scientific and technical training. Thus, the historical record seems to be at odds with the role of tacit knowledge in recent theorizing. If tacit skills are indeed an important source of competitive advantage, why do firms invest time, effort and money in articulating their knowledge bases? This paper is an attempt to address this paradox: It suggests that tacit knowledge in organizations take at least three different forms, each with its own characteristics as regards possibilities and incentives for articulation, replication and imitation. These need to be distinguished when discussing the role of tacit (and articulated) knowledge in organizations. TACIT SKILLS AND KNOWLEDGE In spite of the prominent role of knowledge, tacit or otherwise, in recent literature, there seems to be little agreement as to precise definitions. As Kogut and Zander (1992, p. 383) note,... the idea of tacit knowledge has been widely evoked but rarely defined. With few exceptions (as noted below), the reader is offered little more than the obligatory reference to Polanyi s (1966, p. 4) dictum - we can know more than we can tell sometimes illustrated with reference to some basic motoric skills, such as swimming or bicycle riding. 2 The literature suffers an acute need for clear and empirically verified concepts. The most notable attempts to define and measure different aspects of tacitness and to determine their significance for the transfer and imitation of technology are those of Zander (Zander 1991; Zander & Kogut 1995), drawing on Winter s (1987) taxonomy of knowledge assets. Later empirical studies, such as that of Szulanski (1996) on best practice transfer or that of Lord and Ranft (2000) on transfer of local market knowledge also recognize that there are several dimensions to tacit knowledge, but these are offered without much compelling theoretical argument. A part of the difficulty of agreeing on a common set of concepts is the fact that in everyday usage, the word knowledge takes on a whole set of different meanings (Machlup 1980). This problem is aggravated, one suspects, by the fact that in English, knowledge and to know denote both substantial knowledge of facts and relationships ( know that or know what ) and procedural knowledge, i.e. skills and capabilities ( know how ). Substantial knowledge, in turn, encompasses both propositional knowing, i.e. statements of fact (data, information, know that ), and theoretical knowledge, cognitive systems providing structure, order and meaning to information. Since the three types of knowing have very different characteristics and economic significance they should be clearly demarcated in any discussion of the role of knowledge. THEORY Cognitive schemata, mental models, rules SKILLS Capabilities, competence, know-how INFORMATION Data, facts, records, know-that... Figure 1. The relationship between different kinds of knowledge 3 Although a person may, of course, acquire theoretical or factual knowledge out of mere curiosity or for intellectual enjoyment, such knowledge obtains economic significance only through application in the performance of an economically meaningful activity, i.e. the exercise of a skill (Figure 1). The relative importance of theory and information for the exercise of a skill can vary, but typically both are required. Examples might include the design of a marketing campaign based on a model of consumer behavior ( theory ) and actual purchasing records ( information ), or a manufacturing process utilizing a specific technology ( theory ) adapted with the aid of data on the quality of the raw materials at hand ( information ). In these terms, the degree of tactiness of a skill refers to the extent to which a skill or capability can be explained by reference to the theory and information required for its execution. Metaphorically, Figure 1 can be seen as a simple statistical model. In the case of highly articulated skills, theory and information can accurately predict the result of the skillful performance. In the case of tacit skills, a large portion of the variance in outcome is left unexplained. To conclude the metaphor, the degree of tacitness could be expressed as (1 - R 2 ) of the calibrated model. 1 As noted above, many discussions of tacit knowledge take simple motoric skills such as swimming and bicycle riding as models (Cook & Brown 1999). Typically, these types of skills although clearly useful also in many economic activities are easily learnt by trial-and-error or a short period of apprenticeship. Although, in principle, most could be articulated, the benefits are typically not high enough to justify the costs. Indeed, the fact that they remain also in very modern production plants is evidence of their relative lack of economic importance. The common use of commonplace motoric skills as an analogue to more complex, higher order capabilities and routines is unfortunate and potentially misleading. In order to reach a richer understanding of such skills and their economic significance, it seems useful to distinguish between at least three different types of tacitness: 1 Conversely, R 2 would denote the degree of articulation, the extent to which skills can be explicated in through code or language, which includes...writing, mathematics, graphs and maps, diagrams and pictures, in short, all forms of symbolic representation which are used as language. (Polanyi, 1962, p. 78.) Although linguistically awkward, it is possible, and often helpful, to regard also physical artifacts, such as machines, products or factory layouts, as forms of articulated knowledge. 4 First, certain skills and capabilities seem to be inherently inarticulable. Second, some skills and capabilities may although in principle amenable to articulation remain tacit (at least for the moment) either because appropriate codes are not available and/or because the perceived benefits of articulation are smaller than the associated costs. 2 Third, through internalization habitually performed skills can take on a tacit character. The execution of internalized skills does not require conscious awareness of underlying rules or theory. These may therefore fall into oblivion. Such routines are clearly important in both theory and organizational practice. However, the conditions and incentives governing their articulation and therefore also their replication and imitation are very different from those of hitherto uncodified skills. INARTICULABLE TACIT SKILLS Many basic human faculties such as that of speech, the use of grammar or muscular motion are not accessible to consciousness, and can therefore not be articulated. However, the analysis of these and other natural human faculties, although significant in areas such as neurology, linguistics and philosophy, would seem to fall largely outside the realm of economic enquiry. However, as noted above, some skills can be articulated but it is not useful nor economically meaningful to do so...[m]axims can serve as a guide to an art only if they can be integrated into the practical knowledge of the art. (Polanyi, 1962, p. 50) The reason is that articulation is always incomplete. In articulation, some of the richness of the original knowledge is inevitably lost. Sometimes, this loss has serious consequences. For all practical purposes, explicating the rules of bicycle riding is useless. The same applies to a whole range of personal skills, i.e. skills that can only be mastered by trial and error and where knowledge of the underlying rules does not facilitate learning. However, as note above, the economic significance of this class of skills appears distinctly limited. 3 2 The two reasons are, of course, related. The costs of articulation are clearly influenced by the suitability of available codes. 3 The fact that in order to proficiently execute a standardized, well articulated productive practice workers need some experience, some assimilation of the sequence of acts they must perform etc., or that even in maneuvering a joystick some tacit personal knowledge is involved, does not seem to merit much attention from an economic viewpoint. (Balconi 1997, p. 23) 5 The most important category of inarticulable tacit skills of economic interest comprises creative skills, skills required to conceive of and do new things. 4 This applies equally to scientific discovery as to the engineer s conception and design of a new machine. In science, there is a fundamental difference between the logic of discovery and the logic of demonstration. 5 Articulation and codification constitute the very essence of the latter; discovery, at least in the true sense of finding something totally new, cannot be codified. In engineering, many design decisions contain a fundamental element of tacit, non-verbal thought and reasoning (Ferguson 1977; Senker 1995). This element becomes greater the greater the degree of novelty or invention involved (Layton 1974). For the early Schumpeter, the creative ability to envision and realize new things ( new combinations ) without the aid of prescription and prior experience is one of the distinguishing characteristics of the entrepreneur, setting him/her apart from other economic subjects. What has been done already has the sharp-edged reality of all the things which we have seen and experienced; the new is only the figment of our imagination. Carrying out a new plan and acting according to a customary one are things as different as making a road and walking on it... Here the success of everything depends on intuition, the capacity of seeing things in a way which afterwards proves to be true, even though it cannot be established at the moment, and of grasping the essential fact, discarding the unessential, even though one can give no account of the principles by which this is done. (Schumpeter 1934/1997, p. 85) Although psychologists have developed techniques that purportedly aid creative thinking, the art of discovery cannot be prescribed and codified. However, it can be passed on from master to apprentice: the scientist must be an accomplished craftsman; he must have undergone a lengthy apprenticeship, learning how to do things without being able to appreciate why they work. (Ravetz 1971/1996, pp ) 4 At best, tacit knowledge relevant to creation can be expressed through the use of metaphor, analogy or other forms of figurative language (Nonaka & Takeuchi 1995). However, this is different form of articulation than the one discussed here. 5 This distinction is a main thrust in Polanyi s argument:...while the articulate contents of science are successfully taught all over the world in hundreds of new universities, the unspecifiable art of scientific research has not yet penetrated many of these. (Polanyi 1965, p. 53) 6 ARTICULABLE TACIT SKILLS Most economically significant skills are, at least potentially, articulable if only with cost and effort. One important class of such skills contains those where available theory is ill developed and causalities are unclear. In many industries, not only traditional ones, design principles and manufacturing process are not well, or only partly, articulated. As Rosenberg (1982, p. 143) noted Even today, much productive activity is conducted without a deep scientific knowledge of why things perform the way they do [W]e routinely fly in airplanes the optimal designs of which are achieved in fairly ad hoc, trial-anderror processes This is a major reason for the enormous development costs of modern aircraft. Tacitness and Imitation It is a common misconception that tacit skills are always difficult to imitate. As Sanchez (1997, p. 173) points out, the application of tacit skills often results in artifacts which can be analyzed to infer and articulate the tacit knowledge embodied in the artifact. In Winter s taxonomy, this aspect is captured in the concept of observability, i.e.... the extent of disclosure of underlying knowledge that is necessitated by use of the knowledge. (Winter 1987, p. 172.) A high degree of observability obtains, for example, when the principles underlying the design of a product can be deduced by means of inspection and reverse engineering. Contrary to a common assumption, the ease with which an observer can accomplish this task is not necessarily dependent of the degree of articulation of the relevant design and manufacturing skills. It is determined primarily by the extent to which the relevant community-of-practice extends beyond the boundaries of individual firms (Figure 2). 7 Private Shared Articulated Tacit Intra-company communities-of- practice Inter-company communities-of-practice Figure 2. Tacit skills and communities-of-practice Organizations that face the same or similar sets of technical and environmental conditions tend to respond in similar ways and assume similar structures (DiMaggio & Powell 1983). Through competition and selection and through various mechanisms of isomorphic change (Scott 1994), over the long run, communities of practice with essentially similar characteristics can be expected to emerge, not only within the firms of an industry, but also in other types of organizational fields. Of particular importance, especially in so called knowledge based industries employing highly educated specialists, is the effect of normative isomorphism associated with professionalization. This includes the effects of selection, socialization and training in the educational system, leading to... a pool of almost interchangeable individuals who occupy similar positions across a range of organizations and possess a similarity of orientation and disposition that may override variations in tradition and control that might otherwise shape organizational behavior. (DiMaggio & Powell 1983, p. 152.) Associated with the creation and legitimization of a common cognitive base are the emergence and growth of professional networks spanning organizational boundaries. Due to such networks and the development of communication technologies knowledge sometimes travels more easily between organizations than between them:...while the division of labor erects boundaries within firms, it also produces extended communities that lie across the external boundaries of firms. Moving knowledge among groups with similar practices and overlapping memberships can thus sometimes be relatively easy compared to the difficulty of moving it among heterogeneous groups within the firm. (Brown & Duguid 1998, p. 102). 8 Thus, in many industries, also ones characterized by highly tacit knowledge and practices, the mere demonstration that a particular product design is indeed feasible is sufficient to induce imitation. Such imitation need not imply a one-to-one correspondence in capabilities. As Zander (1994, p. 22) notes,... imitation does not require the exact copying of existing know-how... innovations can be introduced and manufactured in different ways. Articulation and Imitation Articulation and codification of tacit knowledge have several fundamental benefits, which together help to account for the technical, scientific and economic progress of human civilization (Håkanson 2001). The specific inducements for undertaking the investment necessary for articulation have differed over time and between contexts, but seem to fall in three categories. First, articulation facilitates division of labor and the many benefits associated with specialization. Second, in articulation, skills are represented as more or less elaborate theoretical models. These can be used to mentally test new modifications without actually having to try them out in practice. Therefore, articulation not only favors theoretical understanding but also facilitates innovation. Third, articulation also reduces the cost and ease of faultless replication, as in ISO 900x certification or in the training of new employees and when transferring of technology to new facilities. Articulation can also reduce a company s dependence on a few key employees when these are the sole masters of important tacit skills. Both theoretical arguments and empirical evidence 6 lend good support to the proposition that all things equal the cost and difficulty of voluntary knowledge transfer decrease with its degree of articulation. 7 However, such transfers are also dependent 6 Teece (1976, 1977) demonstrated empirically that the costs of international technology transfers are often considerable, ranging in his sample from 2-5
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