Abstract
The ability to exploit internal and external knowledge is a critical component of business capability to innovate. It is not sufficient merely to have identified the areas of knowledge to be exploited and transformed them into routines, it’s also important to determine that which isn’t fully known in order to determine whether or not research and development within that region of activity should be pursued. Because there is an ambiguity of scope in the skills and strategies required to innovative, quantitative processes are required in order to ensure that the proper routines and skills are implemented and developed within the firm.
Key Words: Evolutionary Economics, Absorptive Capacity, Tacit Knowlege, Economic Change, Behavioral Theory
Introduction
Epistemology of human activity and business is a core component of innovation development and optimal functioning of a firm. By better understanding the drivers of interpersonal, cooperative behavior in business settings and how it is that knowledge is developed and operated as embodied knowledge, and how expenditures affect the long-term survivability of firms in competitive conditions it’s possible to develop a behavioral theory to guide evolutionary economic change.
Body
Karl Polyani’s Personal Knowledge: Towards a Post-Critical Philosophy is a beautiful exploration of knowledge and its application. Using Gestalt psychology methods, a form of psychoanalysis that examines the various pieces of a whole in its simplest forms and then constructs a broader picture based on the pattern, Polyani examines the history and practices of scientific knowledge and practical application in a manner that it as times quite poetic. He claims that his work is in the tradition of destructive analysis – in that he seeks to engage in a form of deconstruction of his subjects so that some of the operating presumptions that inform practices related to knowledge can be more clearly seen.
First examined is tradition, whose first formalization with the social sphere occurs via the relationships between master and apprentice. The older practitioner of the art of science, be it of agricultural or mechanical engineering, has internalized the rules of the field to such a degree as a result of their trial and errors such that they are able to embody and transmit a coherent system of conceptions. Polyani says that this diffusion of knowledge is intimately related to human interactions – despite the capacity to capture it in books, journals, and other media – and validates this claim by pointing to the fact that “the regions in Europe in which the scientific method first originated 400 years ago are scientifically still more fruitful today, in spite of their impoverishment than several overseas areas where much more money is available for scientific research.” He relates this fact to the British common law, which is founded on precedents, as it accustomed the people in those regions not to invert ever new cases in but to have a traditional worldview.
Relating this practice to approaching knowledge to connoisseurship, which is a skill that can only be obtained and then transmitted by example rather than rote memorization of precept, Polyani then claims that it becomes possible to understand the level of knowledge and skills related to that a particular person has by placing them on a form of a gradient. To use the example provided by Polyani, wine to provide an illustration of what he means would look as follows – it’s possible that a connoisseur would able to place the region of any French wine and know which goes with what food prepare with one of the five mother sauces, but not able to do the same for Spanish, Californian or Chilean wine and their foods. A different example, more suited to Colombia’s cafeteria, stems from the training I receive on becoming a Shift Supervisor at Starbucks. We spent several hours learning how the soil of coffee beans from each region impacted it’s flavor and were trained to have the proper language in which to explain the differences in taste.
This capacity to articulate is ultimately reflecting the tacit intellectual powers of humans and allows them to strive to explore new fields of knowledge. Our awareness of the lack of understanding in certain areas wherein problems are seen as needing to be solved becomes a form of psychological drive that separates us from the animal world. To see a problem which has not been but can be solved is a discovery, according to Polyani, in its own right. The value that one gets from this is both personal and often if the observation can be applied, market-based. Building on individual psychology model as well as the history of science and technological development since the beginning of the 20thcentury – the strict utilitarian model of Science policy adopted by the Socialist governments is described as inferior.
Where Polyani closes the reading selection on the relationship between scientific thinking, operational principles of technology, standards and invention Cohen and Levinthal describe this in more depth in an applied context, i.e. the operation of a firm.
The capacity to exploit external knowledge is a critical component of firm innovations and a firm’s capacity to recognize and organize in response to new information and competitive pressures is described as being a synergy that is qualitatively different from the net capacity of each individual. The authors view this learning capacity as so adjacent to problem-solving that there is little reason to differentiate their moves of development. Both represent the new-knowledge creating capacity as well as capability of applying it.
Effective absorptive capacity in this socialized setting thus requires a common language. Failures to convey the importance of a market change or how new technology can be profitably adopted for use within production means that opportunities are lost or evolution is delayed. This does not mean that diversity of knowledge is a barrier to absorptive capacity – in fact just the opposite. The capacity for novel associations and linkages to be made is one of the preconditions for innovative development. Instead what is required is a common set of concepts and patterns of behavior that allows for transmission between divergent thinkers as to how innovations can be developed or technologies transferred to improve the metrics of business operations. Absorptive capacity is not just “the acquisition or assimilation of information by an organization but also to the organization’s ability to exploit it.”
Cyert and March’s Behavioral Theory of the Firm is a major referent within professional and academic literature given its deep and practical insight into business operations. By focusing on a small number of important economic decisions made by the firm, Cyert and March develop a process-oriented model based on empirical observations that has a generality that is scalable beyond specific firms.
Describing how it is that firms and organizations manage the limited set of resources in Chapter 3, Cyert and March builds on observations that she’s made in previous chapters. Because organizations are viewed not viewed primarily as being profit-driven, there is lots of personal and emotional investment made by the various entrepreneurial leaders within it, Cyert and March states that it’s best to perceive of organizations as a coalition with moving boundaries. She states that this is not an innovative model – and that this conception of the organization can be found in the theory of teams, game theory, and the inducements-contributions schema – which all presumes that there is some manner for collectively arriving at the enunciation and action upon the goals the organization develops. While the continuation of the organization’s existence is clearly a primary factor, there are numerous other conspicuous choices that lead to a “continuous bargaining-learning process” that does not necessarily product unswerving goals but something like a business ethic approached by habit. These ambitions often make their way into foundational operations documents and one such example that has received much coverage within the business and technology press is Google’s rule to “Do no evil.” While much outside criticism has been made of this in relation to their choice to engage in contract work for China and the United States Department of Defense, the most important debates occur internally wherein the various coalitions form objectives and bargain.
One of the central processes connected to coalition formation and goal specification is the bargaining practice which delegates side payments. Side payments come in many forms such as “money, personal treatment, authority, organization policy, and so forth”. While in the political rather than the business realm the delegation of such benefits in return for policy commitments is called patronage, the same pejorative standard view is not here appropriate as this has the effect of reducing friction between workers and managers whose resentments and interpersonal conflicts can lead to various ill effects on the company. Taking on a client that is known to be overbearing rather than passing, for example,
The formulation of these are imperfectly rationalized and frequently stated in the form of commitments that are constrained by context and are aspirational and thus not-operational. Worded in a less technical manner, the objectives connected to the commitment to various side payments tend to address the emotional concerns between coalition members rather than the day to day and medium to long term operations. This is not to say that the former doesn’t have an impact on the latter, but that the commitments connected to this are of a qualitatively different nature. While these processes are punctuated by specific meetings – quarterly, yearly, or called as needed given a new business or environmental conditions – it is actually a continuing process. Another major mutual control system for the elaboration of commitments and elaboration of functions are budgets.
Budget, job descriptions, organizational charts, and elaboration of specific objectives impose much tighter constraints and the fact that “organizations have memories in the form of precedents” these are considered to be a great bind on the behavioral patterns of individuals and coalitions with the firm. Renegotiation of these are terms are done in a more formal fashion and, depending on the size and intensity of the internal conflicts within a firm, can require that external people are brought in to assist with the smoothing of the decision-making process. While both this and side payments are considered part of a larger arbitrary process to ensure organizational functioning – this aspect is much more determined by prior history.
One of the ways that organizations are able to continue despite there being conflicting goals is the inherently limited attention focus of those engaged in bargaining and organizational slack.
Attention focus refers to the fact at any normal moment there are simply too many considerations in play to let any one of them be the overarching issue-defining inter-organizational coalitions demands while slack refers to the willingness not to allow minor variations in the expectations created by agreements to define and thus destroy peaceable relationships. Another way of summarizing these two aspects is to say that people are adaptable and barring gross violations of expectations are able to adjust as needed in order to ensure the steadiness of operations. According to Cyert and March, “Slack operates to stabilize the system in two ways: (1) by absorbing excess resources, it retards upward adjustment of aspirations during relatively good times; (2) by providing a pool of emergency resources, it permits aspirations to be maintained (and achieved) during relatively bad times.”
With these considerations in mind, it becomes possible to develop predictive theory and strategy for operations that inform the construction of business goals as well as pricing and output decisions. Cyert and March claim that there are normally five different meta-goals that inform the more granular inventory, market share, profit, and production goals. While it is rational from a position in which strategy is determined to separate each of these into differentiated buckets, the truth is that all of them form a living feedback loop wherein each impacts the other. Demands by management are limited by those of the staff, and vice versa. The demands of the markets are limits by the capacities of managers to organize production in a competitive environment, and vice versa.
Nelson and Winter expand upon the research of the above authors by focus on the skills and routines of the business. Constantly facing competition from other firms that seek to extract market share via imitation or outright replication of the services they provide – the authors adopt a quasi-Marxian mode of capitalist analysis that rejects the profit-maximalization of orthodox theory. Their heterodox approach is a manner of appreciative theorizing, meaning that they are less interested in developing a series of formal theories that describe how things operate based on presuppositions as much as they are interested in examining “how things actually work”.
Because of this, they place a high value on the role of routinization within organizations. This they view as more important than skills as it is often the case that certain tasks can be completed via a variety of actions and as routines form the basis of most day to day activity. Skills are, furthermore, programmatic – that is, based on tacit knowledge – and thus of less concern than the routines – that is, based on explicit knowledge – which determines the application of skills. The capability to turn technological knowledge that problem-solves an issue into a novel routine that is one definition of an innovation that has the outcome of benefitting the company.
When an effort is made to incorporate an existing routine as a component of innovative routines, Nelson and Winter state that it is advantageous if two conditions are satisfied.
- The routine has been established as reliable – that is, fully under control and without uncertainty as to the results.
- The new application of the existing routine be as free as possible from operational and semantic ambiguities of scope, i.e. too dependent on the idiosyncratic application of individual skills.
In Chapter 12 Nelson and Winter continue their deployment of Schumpeter as a model to analyze the benefit obtained from leadership in technological innovations. The relationship between market structure and innovation is a complex one and there are no general rules which determine whether or not . Instead firms must look to their price-cost ratios, measure the short and long term effect of R&D expenditures, and analysis of a variety of other techniques that can lead to greater competitive capacity. After all, these reduce funds available for investment in other areas which can be beneficial, such as that designated for opening up markets elsewhere. As the authors themselves state: “The function of competition is to get-or help to get-the signals and incentives right. In evolutionary theory, choice sets are not given and the consequences of any choice are unknown. Although some choices may be clearly worse than others, there is no choice that is clearly best ex-ante.”
Conclusions
Economic competition is not always about short term profit maximization but a complex process of navigating a number of different factors. An evolutionary model of economics must recognize the limits inherent in human’s capacities to adapt new languages with which to describe the problems that they face in the market and adopt new technologies and methods. As covered in more depth in the Chapter 5 response, the habits of scientific thinking and practical action connected to it via investigations and firm activities aren’t so transferred and requires extensive application of the scientific method. Technical progress can lead to first-mover benefits, but the returns can also be so marginal and meaningless as not be worth it. In this context, quantitative methods are required to provide a comprehensive assessment as to whether or not the environment is appropriate for such evolutionary activity.
Recommendations
Properly understanding signals internally and externally requires a series of reflective and consultative processes in order to ensure necessary evolutionary steps are taken by firms. Developing a language for this requires conscientiousness development amongst those managers, administrators and the executive staff in order to ensure competitiveness is maintained via the proper incentives and direction of research and development.
Bibliography
Cyert, Richard Michael, and James G. March. A Behavioral Theory of the Firm. Martino Publishing, 2013.
Cohen, Wesley M., and Daniel A. Levinthal. “Absorptive Capacity: A New Perspective on Learning and Innovation.” Administrative Science Quarterly, vol. 35, no. 1, 1990, p. 128., doi:10.2307/2393553.
Polanyi, Michael. Personal Knowledge: Towards a Post-Critical Philosophy. University of Chicago Press, 1992.
Nelson, Richard R., and Sidney G. Winter. An Evolutionary Theory of Economic Change. The Belknap Press of Harvard Univ. Press, 2004.