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Foundations of Organization
Lecture 3: Division of knowledge and coordination
Jacob Lyngsie
Strategic Organization Design Unit
www.sod-research.com
www.facebook.com/sodresearch
My slides are uploaded after class.
However, all slides are numbered to
enable easy notation

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Lecturer
Jacob Lyngsie
§ Econ (and law)
perspective
§ Quantitative analysis
§ Abstract and very
“simple” examples
§ (Tries to be humorous)
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Contact details
Jacob Lyngsie:
Professor, Department
of Business &
Management
E-mail:
jaly@sam.sdu.dk
Office hours:
By appointment
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Re-cap
• the division of labor has powerful consequences
• generates gains from specialization (through learning by doing)
• requires coordination
• how you divide labor (tasks) has an impact on what people will learn and
become specialists in
• the division of labor, and economies of specialization, are important
drivers of the structure of organizations
• there are different types of coordination mechanisms
• there are different organizational configurations that rely mainly on one of
the coordination mechanisms
Type of interdependence Coordination mechanism
Pooled interdependence Standardization
Sequential interdependence Planning
Reciprocal interdependence Mutual adjustment

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Twins getting a round (how to remember comp. adv)

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Only two types of problems

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Specialization and coordination
Division of
labor
Specialization,
learning by doing
Differentiated roles
(experts), high level
of capabilities
Interdependence
Coordination
mechanisms required

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Division of labor and division of knowledge
§ The division of labor creates a division of knowledge (dynamic aspect)
§ People develop into specialists, with distinct competences, skills, and
knowledge
§ “Although knowledge can be learned more effectively in specialized
fashion, its use to achieve high living standards requires that a specialist
somehow use the knowledge of other specialists.”
§ “Economic organization, including the firm, must reflect the fact that
knowledge is costly to produce, maintain, and use.”
(Demsetz, 1988, p. 157)

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The transferability of knowledge
§ There is a long-standing distinction in the philosophy of science
between knowing how and knowing about:
- Explicit knowledge may be easily transferred by language
- Implicit knowledge (tacit knowledge) can not be communicated by language
§ Knowledge can be ranked from fully explicit to fully implicit
§ Most useful knowledge is partially tacit

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Implicit knowledge
• Similar problems arise in
product markets:
• Experience goods – goods where
it is difficult to observe quality in
advance, but these characteristics
can be ascertained upon
consumption.
• Credence goods -- goods for
which it is difficult for consumers
to ascertain the quality even after
they have consumed them.
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Implicit knowledge

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MARKETS FOR EXPERIENCE GOODS
• There is no legal enforcement.
• Consumers don’t know product quality ex ante (but know everything
else).
• Goods are either high or low quality.
• More costly to produce high quality than low quality.
• Consumers can communicate at zero cost.
• Firms have identical technology.
• Markets are competitive.
• Timing:
Firms choose
quality
Consumers trade
with a firm
Consumers observe
quality and
communicate
t1 t2 t3
Markets for experience goods

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X0 X1
MC High quality
MC Low quality
AC High quality
AC Low quality
P0
P1
Can (X1, P1) be
sustained as a Nash?

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X0 X1
MC High quality
MC Low quality
AC High quality
AC Low quality
P0
P1
X3
No …
Producing Hig quality =
zero profit
Any firm will gain from
posing as a high quality
in the first period—but
offer low quality.

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Common and specific knowledge
§ Common knowledge (e.g. languages, mathematics) as a low-cost
method to transfer (explicit) knowledge
§ Common knowledge allows for greater specialization and a deeper
division of knowledge
§ Specific knowledge as the “knowledge of the particular circumstances of
time and place” – often implicit
§ The problem of knowledge aggregation: Aggregating knowledge allows
to transfer more general knowledge at the expense of specific
knowledge.

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Value creation, value appropriation,
and knowledge
§ “Knowledge does not directly convert to utility or living standards” –
it must be put to use to derive and appropriate value
§ However, there is a fundamental problem with (explicit) knowledge
- (Explicit) knowledge is a public good (Arrow, 1962): There is no rivalry in
consuming knowledge and it is hard to exclude others, hence value
appropriation is an issue
- Knowledge often suffers from the information paradox (Arrow, 1971):
a buyer only learns about the value when the information is revealed

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The fundamental asymmetry between
knowledge acquisition and utilization
§ Acquiring knowledge is a costly, resource-consuming process
§ The mere use of knowledge does not require similar investments

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Knowledge integration in firms
§ “Firms and industries must form a pattern of economic organization that
takes account of the need for acquiring knowledge in a more specialized
fashion than the manner in which it will be used.” (Demsetz, 1988, p.
157)
§ Supervised direction as a key way to economize on the acquisition and
use of knowledge

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Knowledge integration mechanisms
Rules and directives
Sequencing
Routines
Group problem-solving
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Common knowledge and knowledge integration
§ The existence of common knowledge among specialists
facilitates the integration of different bodies of knowledge:
- language
- other forms of symbolic communications
- commonality of specific knowledge
- shared meaning
- recognition of individual knowledge domains.
§ Points to “corporate culture” as a repository of common knowledge.

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Implications for organizational boundaries?
§ “A second way to put information to work without sacrificing
specialization in knowledge is to produce and sell goods that require less
information to use than is required to produce them […] A production
process reaches the stage of yielding a saleable product when
downstream users can work with, or can consume, the product without
themselves being knowledgeable about its production.” (Demsetz, 1988,
p. 158)
§ The key is the required access to knowledge in different vertical stages
of production or horizontal markets

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Barriers to knowledge integration
§ The division of knowledge among specialists implies differences in the
“thought world” of people
§ view and assess the future differently, have a different understanding of
their tasks and roles as well as of managerial challenges
§ Thought worlds as well as organizational routines represent interpretative
schemes to generate, evaluate, and select alternatives

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Let’s play the ”grade game”
Without showing your neighbors what you are doing, write down
on a form either the letter alpha or the letter beta. Think of this
as a “grade bid”. I will randomly pair your form with one other
form. Neither you nor your pair will ever know with whom you
were paired. Here is how grades may be assigned for this class:
•If you put alpha and your pair puts beta, then you will get grade 12,
and your pair grade 4;
•If both you and your pair put alpha, then you both will get the grade
7;
•If you put beta and your pair puts alpha, then you will get the grade 4
and your pair grade 12;
•If both you and your pair put beta, then you will both get grade 10
Let’s illustrate with “the grade game”

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Payoff matrix: selfish
(12,4) à 3
(7,7) à 0
12 > 10 > 7 > 4
Payoff matrix: both have a selfish thought world

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Strictly dominated strategies
Strictly dominated strategies

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Rational choice outcome
Same (selfish) thought world outcome

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Payoff matrix: altruistic
(12,4) à 3 – 4 = -1
(4,12) à -1 – 2 = -3
My ”12” – my guilt
My ”4” – my indignation
Payoff matrix: both have a altruistic thought world

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Payoff matrix: S vs A
Payoff matrix: different thought worlds
Even though your pair does not have an incentive to choose beta if you
choose beta (no incentive problem)

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Barriers to knowledge integration
Collaboration
(across knowledge
domains)
Performance
Different Thought Worlds
(across knowledge
domains)
+
--
Mutual adjustment has to be prolonged
and intensive for real coordination to occur
OR
Routines and instructions defined such
that no real knowledge integration is
necessary

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Take-away points:
Division of knowledge and coordination
§ The division of knowledge has powerful effects
- generates deep specialist competence
- requires knowledge integration
§ How you divide knowledge has an impact on what competences people
have … but also on how they perceive and think (cognitive
representations)
§ The division of labor and the division of knowledge are linked, but do not
have to overlap
§ There are different types of knowledge integration mechanisms, with
different features with regard to integrating knowledge