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Knowledge specialization, organizational coupling, and the boundaries of the firm: Why do firms know more than they make?

Administrative Science Quarterly, Dec, 2001 by Stefano Brusoni, Andrea Prencipe, Keith Pavitt

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Since the Industrial Revolution, the production of useful knowledge, like the production of artifacts, has become increasingly specialized and professionalized, with the continuous emergence of new and useful disciplines and subdisciplines. Knowledge specialization has profound implications for the evolution of firms' cognitive and coordination mechanisms and the relationship between firms' production and knowledge boundaries. As the number of disciplines for the design, development, and manufacturing of products increases, firms need to rely on specialized suppliers of equipment as well as knowledge, to complement their in-house research and development (R&D) efforts. It is therefore important to understand why some disciplines and components are developed and produced in house and why others are contracted out. This paper analyzes the reasons why firms maintain technological capabilities in a number of fields wider than those in which they decide to produce, and it explores the implications for firms' bound aries and vertical integration decisions. Defining the boundaries of the firm in terms of activities performed in house does not take into account that decisions to outsource production and other functions are different from those to outsource technological knowledge. Traditional explanations of firms' boundaries, particularly those that rely on transaction costs analysis, therefore, provide only a partial explanation.

To analyze the nature of the boundaries of the firm, we focus on the linkages among firms that interact to develop, design, and manufacture multitechnology products. Multitechnology products are artifacts made up of components and embody a number of technologies. Components are physically distinct portions of the product that carry out specific functions and are linked to each other through a set of interfaces defined by the product architecture (Henderson and Clark, 1990). Technologies are understood as the bodies of knowledge, or understanding and practice, that underpin product design and manufacturing (Pavitt, 1998).

Organization in this context refers to the network of firms that cooperate to design the whole product, manufacture its components, assemble, and market it. In studying the relationships between these firms, we rely on the concept of coupling (Orton and Weick, 1990) to describe how two or more firms interact with each other and how change in one firm within the network affects another. Building on the case of the development of control systems for aircraft engines over the past thirty years, we develop a theoretical framework that attempts to explain the differences and relationship between firms' production and knowledge boundaries.

MULTICOMPONENT, MULTITECHNOLOGY PRODUCTS AND THE BOUNDARIES OF THE FIRM

The notion that there are different types of innovation that call for different organizational forms was highlighted by Henderson and Clark (1990). Besides the traditional distinction between radical and incremental innovations, they introduced the notion of modular and architectural innovations. A modular innovation is a change in the core design concept of a component that does not affect its relationships with the others. An architectural innovation is defined as a change in the relationships between a product's components that leaves untouched the core design concepts of components. They argued that the product's architecture defines key intrafirm functional relationships, information processing capabilities, communication channels, and information filters and that an architectural innovation therefore represents a dangerous challenge for incumbent firms.

Henderson and Clark (1990: 10) focused their analysis on the case in which the product is "designed, engineered, and manufactured by a single product-development organization." Empirical evidence, however, showed that the design, engineering, and manufacturing of products is frequently carried out by networks of specialized designers, equipment suppliers, and manufacturers (von Hippel, 1987; Kogut, 2000). On more theoretical grounds, Richardson (1972: 895) argued, "Firms are not islands but are linked together in patterns of co-operation and affiliation. Planned co-ordination does not stop at the boundaries of the individual firm but can be effected through co-operation between firms."

The increasing specialization of useful knowledge for design, engineering, and manufacturing of products makes it difficult for firms to rely entirely on in-house learning processes. Wang and von Tunzelmann (2000) stressed that the range of disciplines relevant to firms' innovative processes is expanding in both breadth, i.e., the number of relevant disciplines increases, and depth, i.e., their sophistication and specialization increase. The emergence of multitechnology firms that deliver increasingly complex products would not be a cause for analytical concern if specific bodies of technological knowledge could be mapped tidily on to well-identified components and subsystems, but this is not found to be the case. In a number of sectors, technologies and products have been shown to follow interconnected, yet different, dynamics.

Business Services Industry

Knowledge specialization, organizational coupling, and the boundaries of the firm: Why do firms know more than they make?

Administrative Science Quarterly, Dec, 2001 by Stefano Brusoni, Andrea Prencipe, Keith Pavitt

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