Adler Knowledge Economy OrgSci 2001
Summary
In this essay with a comprehensive literature review, the author posits that modern economies are becoming increasingly knowledge centered and intensive (p. 216), and that neither purely market nor hierarchy based economies and firms create the conditions to manage and share knowledge well (p. 223, 224). In order for economies to improve their knowledge management capabilities, the dominant market form must be replaced by one which combines a democratic planning process highly trusted by citizens with either a centralized hierarchy or a form of market socialism (p. 230) (see also this article). Secondly, both between firms and within firms, the use of an organizational design which includes communities based on trust is vital when the work to be done is based in knowledge creation and innovation.
Trust is defined as the "subjective probability with which an actor assesses that another actor or group of actors will perform a particular action, both before she or he can monitor such action [...]and in a context in which it affects his or her own action" (p. 217). Trust has many bases. The trust involved above is what he calls "reflective trust", and is based on the values of the modern scientific community, which rate integrity and competence highly. He contrasts this with the traditional form of trust, which is based on loyalty. Knowledge differs fundamentally from the standard goods exchanged in a market or produced by a traditional hierarchical organization: its value grows with use (p. 216), and its availability to one consumer is not limited by its use by another (p 216). Hierarchical forms, being optimized to perform routine tasks in a stable economic environment, are low performing when it comes to innovation, which is a decidedly non-routine task. Market forms, in which rely on buyers, sellers and Pareto efficiency (there is a price at which no actor's welfare can be increased without decreasing another's), fail to accurately price knowledge because it cannot traded like standard goods.
The paper proposes a third organizational form: the community form, which relies on trust in order to coordinate work. We can combine this form in varying degrees with both hierarchy and market, and the author proposes a three dimensional vector space of organizational design, the dimensions being market/price, hierarchy/authority and community/trust. A firm or economy can take on varying degrees in each of the three dimensions.
The paper goes on to hypothesize that there has been an increasing trend over the last decade towards hybrid forms which include trust based communities. First, firms recognize the important role of communities within them (particularly "communities of practice") as effective drivers of knowledge creation and strive to encourage their formation, in addition to market based incentives (stock options) and reengineered hierarchical control (accountability and reporting) (p. 220). Secondly, firms have become increasingly diversified over the last several decades in order to focus on core competencies and source non-core functions. In our increasingly knowledge intensive economy, cooperation across divisions in order to innovate has become a necessity because "competitiveness depends on bodies of expertise that are typically distributed across divisions rather than contained within them" (p. 223). Construction of divisions as profit centers which charge sister divisions for services inhibits collaboration between divisions. Firms with high levels of innovation tend to use trust based judgments rather than market or hierarchy based ones (p. 223).
Finally, between firms, "firms are increasingly infusing trust into their relations with other firms" (p. 224) because hierarchical relationships stifle innovation, and in market relationships, suppliers and customers have difficulty agreeing on a price for knowledge. The customer also cannot effectively judge knowledge for value without learning the knowledge (p. 224).
In presenting his arguments, the author raises and rebuts several critiques of community and trust as a sufficient coordinating mode for firms: free-ridership; that trust is easier to destroy than create; that it makes betrayal more attractive; that success can be a failure in that it can create a closed community with high barriers to entry; and that the dominance of price in a market economy will eventually erode the foundations of trust.
Critique
Applegate references this paper directly (1, p. 69) in the context of building collaborative community (virtual corporations and virtual business networks), and discusses the importance of trust in detail in the context of partnership in the NASDAQ (1, p. 94-95). She echoes the hypotheses of this paper using the NASDAQ example to say that trust and community cannot stand on their own, but must be used in concert with hierarchy, market or both. She doesn't refer explicitly to knowledge work, as Adler does, but knowledge creation and innovation is implied throughout the NASDAQ example. I was pleased to learn something from this paper about my own environment at Caltechthat I had not understood. IMSS, the central computing organization that I work for at Caltech, operates increasingly via chargeback due to budgetary concerns, and a lingering lack of credibility in terms of spending general budget funds wisely and delivering projects on time that meet the needs of stakeholders. In other words, there is largely a lack of trust between IT and the business ends of the university.
As an IT shop, much of our business is innovation and knowledge discovery and creation. From a business perspective, we're driven by market philosophy: we'll solve a problem once, productize it and sell it to each individual group on campus who needs it and who can afford it. However, many of the real, pressing problems that the university has could be addressed with an innovative use of IT and increase the functioning of the entire university if solutions could be distributed freely. This is very similar to the market dilemma that Adler refers to when he says "When divisions function as autonomous profit centers and charge a market-based price for sales of intellectual assets to sister divisions, the effectiveness of the corporation as a whole suffers because the optimal allocation of knowledge assets is blocked" (p. 223). Internally, IMSS is not motivated by profit: by mandate, we are not allowed to profit from our chargeback, just cover our costs. IT based innovation at the university is impeded as a result.
References
; ; ; Corporate Information Strategy and Management: Text and Cases, McGraw-Hill/Irwin (2005).
