Managing Information and Knowledge in Firms David Cayla University Of Angers

● The Firm: An Alternative Transaction System ➣ ➣ The market transaction is based on the transfer of property rights.   The transfer of property of resources helps to co-locate knowledge and abilities with means of production. If I have no use for this machine, I will sell it to someone who can efficiently use it.   For F. Hayek, this process of transferring resources creates an economic order, product of inter-individual complementarities. It is an ex post coordination device.   It is fully decentralized. There is no authority or collective plan. “Abstracts rules” emerge from habits.   Knowledge doesn’t need to be transferred. Most of it is impossible to transfer because of it’s subjectivity.

➣ ➣ The Firm is a way to substitute a hierarchy to a free market transactions.   A firm is therefore a set of “concrete rules”. General rules (ie. objectives) can be applied in many contexts (they have to be interpreted) whereas specific rules does not require interpretation (command).   The coherence of this order is realized through planning. It is an ex ante coordination device. A superior authority decides and allocates resources to employees.   But because knowledge cannot be transferred, the organization leader may take wrong decisions because of the impossibility to gather the whole information into a central brain (Hayek 1937, 1945).

● The co-location of knowledge and decision rights and its solution ➣ ➣ In a firm, if resources cannot be transferred (the capital is own by the stakeholders) can be delegated to employees.   Employees may have a better operating knowledge than the management.   However delegating too much is hazardous: employees may prefer their own personal interests to the firm interests. It increase the risk for inconsistent objectives.   In this case, it would be better to transfer knowledge to the management than decision rights to the employees

➣ ➣ For M. Jensen and W. Meckling (1992) there is two kinds of knowledge:   General knowledge which is easy and cheap to transfer (ex. data)   Specific knowledge which is difficult or expensive to transfer. ➣ ➣ So if a firm deals with more general knowledge, it is better to transfer knowledge than decision rights. On the contrary, if a firm deals mainly with specific knowledge, the best is to transfer decision right to employees. ➣ ➣ So there is a trade-off between the costs that appear because of the lack of co-location between knowledge and decision rights and costs that arise because of inconsistent objectives of employees (control costs).

Jensen and Meckiling (1995): « Specific and General Knowledge and Organizational Structure », Journal of Applied Corporate Finance.

● The Management of the Firm: from Taylor to Ohno ➣ ➣ The “Scientific Management” of F. W. Taylor and the Fordist “line production” model (early 20th century)   An extensive division of labor between operational tasks (horizontal division of labor) and between managerial tasks and operational tasks (vertical division of labor).   The front-line workers have to follow specific commands in order to achieve a specific task (specific rules).   Tacit Knowledge (know-how) is codified and every task has its own way of being made (the Method Office decide).   Information goes from the top to the bottom. It goes vertically and top-down (no horizontal circulation of information).

➣ ➣ A new management model: the Japanese firm   In the 1980’s another organizational form appears in the Western world that tries to implement a new kind of management, based on the practices of the Toyota firm, invented by Taiichi Ohno ( )   In the 1980’s Toyota was considered to be one of the greatest industrial success in modern time.   In the Toyota corporation, workers were higher educated and better paid than in General Motors. The firm produced better quality vehicles and was faster to innovate and create new models. JAPANUSA Defects for 100 vehicles4970 Labor hour spent by vehicle16,221,9 Productivity and Quality in American and Japanese firms in car manufacturers in the 1980’s

➣ ➣ The Ohno management philosophy: the “Lean Management”   The Ohno management philosophy is based on the five zero objectives: zero defect, zero breakdown, zero stock, zero delay, zero paper.   Zero defect, zero breakdown: This objective implies to listen to the frontline workers who make the product and use the machines (information must go from the bottom-up).   Zero stock, zero delay: it needs a direct and horizontal information circulation between the production unit and the marketing unit.   Zero paper: this need a less codified information system: the Kanban   Overall, the Ohno management rests on another management of information and knowledge.

● The Japanese firm for M. Aoki ( ) ➣ ➣ “the internal efficiency of the J-firm, where it exists, may be largely due to the quality of the information structure institutionalized within it”, Aoki 1988, p. 49 ➣ ➣ The four characteristics of the J-firm compared to A-firms The job classifications in the J-firm is more simple and less precise than in the A-firm. As an example, the Dictionary of Occupational Titles differentiates about 20,000 task names in the US.   The Japanese workers are less specialized, their job is less precisely codified The J-firm emphasizes team work and job rotation. For Ohno, “even if a job can be done by a single man, five or six workers have to be chosen in order to allow team work”.

  This practice helps workers to share their knowledge. But it also makes it difficult to evaluate and control individual efforts (new incentive procedures are necessary) Life employment. The J-firm does not fire its employees and does not hire qualified employees from other firms. Wage increases are calculated on a mix between oldness and individual merit.   The J-firm employee has to wait 10 to 15 years for his first promotion. He has an interest to stay in the firm No formal distinction between production and coordination activities. The management rules are more general than specific. The front line workers have the capacity to interpret the rules.  The J-firm employee is more decentralized than the A-firm

➣ ➣ The Ohno management: A New Information System Horizontal communication is facilitated   The job rotation principle allows the circulation of tacit knowledge. Workers can have a global idea on how production line works and what their colleagues do.   A common knowledge is developed within the firm. This common knowledge facilitates mutual understanding. The firm is more flexible and can adapt more easily to environmental changes:   Information circulates more easily into the production teams and between teams or departments.   Workers have the knowledge to implement changes more rapidly: they are more flexible and they can more easily take another job.

The firm can develop and keep its competencies   Workers are encouraged to learn and to invest in their work.   Team members are also encouraged to work together and to develop collective competencies since promotion are based on collective evaluations.   Workers turnover is discourage because of life employment and late promotions.

● The Japanese firm for I. Nonaka (1935-) “We make the claim that Japanese companies have been successful because of their skills and expertise at ‘organizational knowledge creation” Nonaka and Takeuchi (1995) The knowledge-Creating Company, p.3. ➣ ➣ For Nonaka, the knowledge creation occurs with the conversion of knowledge from a kind to another, and from the individual to the collective level. From… Tacit knowledgeExplicit knowledge Tacit knowledge SocializationExternalization Explicit knowledge InternalizationCombination To…

  The conversion of knowledge needs creative inventions (metaphors, analogies images…) in order to make explicit what is tacit, and some redundancy in order for the knowledge to be internalized and crystalized.   Sharing knowledge and combination and socialization of knowledge (going from the individual to the collective level).   Ex of Honda’s slogan: “maximum man, minimum machine” helped to invent the monovolume configuration in cars.

I. Nonaka (1994) “A Dynamic Theory of Organizational Knowledge Creation”, Organization Science, Vol. 5, pp

Conclusions   Management deals with how information is used and how knowledge is created.   Any change in the management of an organization has to implement a change in knowledge and information management (centralization level and allocation of decision rights, organizing teams, innovating and creating).   Because technologies (NICT) affect the management of knowledge and information… they should affect the structure of firms (come to tomorrow presentation).