Knowledge of the firm

According to Kogut and Zander (1992) firms exist because they create conditions under which individuals integrate their specialized knowledge. These conditions allow the mechanisms for both transferring and creating knowledge to work and to create social communities that can transform individual and social expertise into economically useful products and services. What firms do better than markets is sharing and transferring of the knowledge of individuals and groups within an organization.

Types of knowledge 

Kogut and Zander distinguish 2 types of knowledge:

Information – knowledge which can be transmitted without loss (e.g. blue prints)
Know how – how to do something

Cooperation


Knowledge is held by individuals but is also expressed through cooperating in social communities (group, organization, networks). That is why hiring new employees is not equivalent to changing the skills of the firm – knowledge is embedded in the organizing principles by which people cooperate within organizations.

Tacit knowledge


Tacit knowledge is the knowledge that is difficult to transfer to another person by means of writing it down or verbalising it. In other words we can say that Individuals know more than they can explain and that organizations know more than their contracts can say.

According to this theory, by creating and transferring knowledge efficiently within the firm, one can obtain competitive advantage. The knowledge of the firm owns a portfolio of options, or platforms for future development. But it is not easy to transfer the knowledge within the company.

The inertness of knowledge


Firms’ performance differs due to the difficulty of transferring and imitating knowledge. There are two major reason why does it happen. First is codifiability - an ability to structure knowledge into a set of rules and relationships that can be easily communicated. Second, complexity.

The paradox of replication


Codification and simplification of knowledge also induces the likelihood of imitation. There is a potential threat that if the company will codify and simplify the knowledge it has, the competitors might be able to simply imitate it. On the one hand, the speed of replication of knowledge determines the rate of growth of the firm. On the other, reducing costs of technology transfer encourage codification of knowledge – which runs the risk of imitation by competitors.