Organization of Knowledge and Innovation: The Case of Finnish Business Services

Industry and Innovation, Jun 2005 by Leiponen, Aija

In Löwendahl's framework, firms with individually controlled resources are very flexible and able to apply their expertise to any relevant problem a client might have. As a result, their strategic focus is on client relations. In contrast, organizationally oriented firms are efficient due to their ability to create economies of scale by repeating the same solution or service procedure over and over again. Because of increasing returns to repetition, the growth potential of these firms is higher. Their strategic focus is on the adaptation of existing solutions (Löwendahl, 1997: 115).

A study by Hansen et al. (1999) identified similar strategies. Instead of organizational and individual control of resources these authors emphasized codification of knowledge and tacit expert skills. Arguably, these frameworks are closely related. Namely, codification renders resources more easy to control and appropriate at the organization level. In terms of Nonaka's (1994) theory of knowledge creation, codification is a prerequisite for combination, that is, integration of various components of knowledge to generate innovations.

In this paper I build on Löwendahl's and Hansen et al.'s conceptual frameworks to empirically characterize business service firms' knowledge creation strategies. Individually applied resources are suggested to be associated with local and tacit learning by individual experts, which is not conducive to major service innovations. Moreover, when knowledge resources are controlled by individual experts, the organization has weaker incentives to invest in R&D activities. This is because knowledge strengthens individual experts' bargaining power, and therefore the benefits of R&D are likely to accrue to individual employees through increases in compensation. On the contrary, when key resources are organizationally, or collectively, applied, associated learning is more likely to support socialization and combination (see Nonaka, 1994:19) which may lead to more radical new service concepts. Thus, I expect business service firms' strategic orientation in terms of individual or collective application of resources to be associated with the firm's innovation performance:

(H1a) A strategic orientation towards collective application of resources increases the likelihood of service innovation.

(H1b) A strategic orientation towards individual application of resources reduces the likelihood of service innovation.

Studies of innovation and organizational learning have identified another critical aspect of knowledge creation: whether the firm engages in a broad search for knowledge and competence, or if it relies on local and incremental learning. Risks associated with learning investments are clearly higher with the former approach, but so are the possible returns. Simulation studies of organizational learning suggest that on "rugged landscapes", discontinuous learning strategies ("long jumps") are generally required to find global optima, while local and path-dependent learning activities will only yield local optima (Kauffman, 1993; Levinthal, 1997). This difference corresponds to learning across technological trajectories as opposed to within one (Rosenkopf and Nerkar, 2001). Therefore, more radical departures from the existing knowledge base are usually required for more drastic innovations (Cohen and Malerba, 2001). Useful strategies for organizations to achieve this are cooperative innovation arrangements with external partners (Eisenhardt and Schoonhoven, 1996). Then the approach to innovation is a combination of complementary internal and external components of knowledge (Fleming and Sorensen, 2001). However, incremental improvements on services may be achieved through incremental learning by doing. These considerations lead to the following hypotheses: