THE NEW ORGANIZATION OF THE GENERATION AND EXPLOITATION OF TECHNOLOGICAL KNOWLEDGE

Industrial economics and the economics of innovation during the last century considered the vertically integrated Fordist company as the most efficient organizational model for the production of technological innovation because it could realize economies of scale,

economies of scope and take advantage of learning opportunities made possible by the vertical integration of R&D activities (Penrose, 1959; Chandler, 1990).

Following Chandler in The Visible Hand (Chandler, 1977) and subsequent works like Scale and Scope (Chandler, 1990), Langlois (2003, 2004) emphasized the discontinuities brought by the appearance, by the end of the nineteenth century, of the large, integrated corporation that replaced the previous fragmented and localized structure of produc­tion and distribution so vividly described in Adam Smith’s Wealth of Nations and in the metaphor of the invisible hand (Smith, 1776). By the end of the twentieth century a new upsurge of Smithian forces (e.g., specialization, division of labor, outsourcing of produc­tion and the rise of distributed modes of organizing economic and innovative activities) again replaced the Chandlerian ones (vertical integration of production, scale economies, managerial control and the rise of the large corporation as the locus of production and innovation). Building upon this analysis, Langlois articulates the vanishing hand hypoth­esis, according to which population and income growth together with the accompanying technological changes (including improved coordination technology) have led to a new enhanced division of labor, based upon high levels of specialization by function and coordination via markets.

This stream of literature not only questions the model of the integrated corporation but also the traditional organization of innovation. It implies that the linear and closed model, which saw innovation as a direct and almost automatic effect of the investments in R&D and learning-by-doing processes, must be replaced.

As a consequence, consensus has grown in recent times among innovation scholars around the idea that firms that are not able to develop sufficient innovation capacity on their own can implement a variety of alternative solutions. These range from the extreme of vertical integration to full reliance on the market, with a variety of hybrid strategies in between, including forms of strategic alliances and inter-organizational relations aimed at minimizing the costs of external coordination and the maximization of the creative contribution of the individual companies. This realization has opened the way to the analysis of various forms of decentralization, specialization and division of innovative labor and production that emerged following the crisis of the organizational model of the vertically integrated corporation.

On the one hand, a broad thread of studies on the organization of knowledge and technological innovation has directed its attention to modular systems, based on out­sourcing and market transactions as the coordination mechanism of the division of labor in innovative activity (Baldwin and Clark, 1997; Arora et al., 1998; Langlois, 2002). When a system is extensive and complex so that the interdependencies between the elements and subsystems become particularly numerous, coordination through an integrated structure is almost impossible. Baldwin and Clark (1997) and Langlois (2002) have upheld that the organization of production and innovation through modular strategies is the most efficient way to organize and coordinate complex technologies and production systems.

According to this approach, companies can decide to adopt an integrated or modular

Organizational innovations, ICTs and knowledge governance 329 organizational structure on the basis of the technologies and competencies that are the foundations for the introduction of innovation. The more the knowledge and technologi­cal competencies needed for innovation are varied and interconnected, the more efficient the adoption of a modular architecture and the recourse to formal contracts and market transactions will be. In contrast, the fewer the number of elements that have to interact to generate an innovation, the simpler their coordination through the vertical integration of R&D activities will be (Chesbrough and Teece, 1996).

In these models, innovative activities and production are not closely integrated and coordination between the two processes takes place through adherence to shared goals and common standards. In modular innovation, the adoption of mechanisms, such as standard interfaces, ensures the integration of several components designed and made by different and separated units, avoiding the need for specific and strict coordination mechanisms as the interface itself provides an implicit form of communication between all the different units involved in the innovation process (Schilling, 2009).

This so-called loose coupling strategy does, however, have some limits. In particular, activities that demand exchanges of complex technological knowledge, such as those in high-tech, knowledge-intensive and computer-mediated industries, require the presence of integration mechanisms that are much more rigid, frequent and long term than a modular organization usually manages to guarantee (ibid.). If the activity demands an intense form of coordination and continuity in time, the development process is con­ducted more efficiently within a more integrated and hierarchical organizational struc­ture, which maintains closer integration between the partners involved.

Moreover, it has been highlighted that innovation systems are complex in many ways and characterized by non-decomposability (Consoli and Patrucco, 2011), as opposed to the decomposability of pure modular systems. Innovation systems exhibit typical emerging properties. They are, first, inherently dynamic; indeed, the actions of individual agents and the evolution of the environment affect each other, therefore they can only be understood in historical perspective. Second, they are characterized by simultane­ous changes and reconfigurations at different stages of production that make the exist­ing know-how obsolete, requiring new skills and forcing organizations to acquire and develop new skills. Third, they are distributed, as their dynamics are based upon the integration and inclusion of a large variety of agents characterized by dedicated skills and specific competencies.

In this context, the dichotomy between markets and hierarchies needs to be bridged by the recognition and appreciation of the pervasive variety of hybrid forms of organi­zation that impinge upon different combinations among markets and hierarchies. Two dimensions are relevant for this analysis: the appreciation of the distinction between interactions and transactions⁴ and the identification and analysis of the variety of organ­izational forms that provide the coordination that is necessary to benefit from the divi­sion of labor. Coordination can be either ex ante or ex post. It can be obtained by means of managerial action ex ante, or by means of selective inclusion and exclusion, ex post.

Table 15.1 Crossing the borders between markets and hierarchies

Source: Authors’ elaboration.

Pure interactions are organized by strong hierarchies. Pure impersonal transactions take place in perfect, impersonal, spot markets.

As Table 15.1 shows, we can identify a variety of hybrid forms based upon the mix between transactions and interactions that can be placed on a continuum between pure transactions and pure interactions. The overlap between interactions and transactions identifies an interesting area of complementarity where the two forms of organizing the division of labor complement each other. Here the type of coordination, whether ex ante or ex post, plays a central analytical role. When interactions prevail, coordination is typi­cally ex ante. When transactions prevail, coordination takes place ex post. This overlap is relevant in a static context where technologies are given because of the pervasive role of information asymmetries. It is most relevant in a dynamic context where the generation of technological knowledge and the eventual introduction of technological innovations takes place and is endogenous to the system. Let us consider first the static context and the dynamic one in turn.

Within the perfect firm, characterized by strong hierarchies, coordination is achieved by means of pure interactions. Principals can trust agents if they have perfect informa­tion on the actual levels of their efforts and competence. When principals do not have access to perfect information on the matter, interactions are complemented by incentives and monitoring mechanisms based upon ex post assessment of the actual performance. Old traditional mechanisms, such as piecework and cottage industries, can be considered early forms of interactions-cum-transactions.

At the other extreme, we find transactions-cum-interactions when pure transactions in the market place are impeded by the lack of relevant information on the characteristics of the goods exchanged. Interactions complement transactions as they are the carriers of trust and loyalty.

Organizational innovations, ICTs and knowledge governance 331 sonal relations that entrust the actual quality and reliability of the goods complement it. Transactions-cum-interactions are typically found when transactions are reinforced by interactions, such as in the case of long-term contracts and ‘open’ contracts: transactions are no longer impersonal and no longer take place in spot markets. Partners in trade are personally identified and transactions are repeated over time. Here coordination, however, is left to the market place and the ensuing competitive forces: coordination is also achieved ex post by means of selection and exclusion. Partners that are no longer able to meet the requested levels of performances are sanctioned with failure and have to exit the market (Bonazzi and Antonelli, 2003).

This view is further reinforced once we note that, generally, most transactions that enable the division of labor both in product and factor markets are characterized by the idiosyncratic features of the good that are being exchanged and the complexity of their production processes. Perfect markets and perfect hierarchies are typically found when the goods are perfectly homogeneous with highly standardized characteristics and low levels of variance in their production processes. With increasing complexity, they are less and less undertaken in pure markets but take place only with the support of organization and interactions along a continuum of hybrid forms between the two extremes of pure transactions within perfect markets and pure interactions within perfect hierarchies.

When we move from a static to a dynamic context, one where technological knowledge matters, hybrid forms play an even larger role. The recent advances in the economics of knowledge have made it possible to better specify the intrinsic characteristics of the gen­eration of technological knowledge as a recombinant and cumulative process character­ized by high levels of uncertainty where existing bits of knowledge are indispensable yet sticky inputs together with competence based upon learning processes and research and development activities (Von Hippel, 1988, 2005; Weitzman, 1996, 1998).

This view has three major implications for the organization of the generation of technological knowledge:

• In order to be able to generate new knowledge, firms need to access existing bits of knowledge. Because of its irreducible tacit content, existing technological knowl­edge is sticky. High search, identification, and decodification costs are necessary in order to use it again as an input into the generation of new knowledge. Knowledge transactions are not sufficient to access, understand and reuse, as an input, the relevant bits of existing knowledge. It is necessary to rely upon knowledge transac­tions implemented with knowledge interactions. User-producer interactions are necessary to reduce absorption costs. Prospective users of existing knowledge need to interact with its inventor in a structured framework that favors bilateral coopera­tion and reciprocal participation.

• Because learning by doing and learning by using are at the origin of competence - a major input into the generation of new knowledge - principals need to stir the active participation and personal creativity of their agents. It is no longer sufficient to avoid shirking and other opportunistic behaviors of agents. It is necessary to activate the learning capabilities of employees. Interactions within hierarchical organizations must be implemented by incentive mechanisms - such as efficiency wages - based upon the actual contribution of employees to the increase of per­formances beyond their static levels. The members of an innovative organization

must be motivated to learn and accumulate competence so to feed the recombinant generation of new technological knowledge.

• Because of the high levels of serendipity and uncertainty that characterize the generation of technological knowledge not only with respect to the timing of the outcome, but also with respect to its actual content and the constraints caused by diseconomies of scope, firms have discovered the advantages of selective partner­ship to exploit new technological knowledge when its application exhibits high levels of variance with respect to the core business. The exploitation of such new technologies is implemented by the creation of joint ventures with other firms endowed with localized complementary competence that favor the introduction of innovations and their incremental variations so as to reduce coordination costs. Here, once more, ex post coordination mechanisms complement structured interactions.

Hybrid forms are necessary to generate new technological knowledge and introduce and exploit technological innovations, as interactions-cum-transactions are necessary within hierarchies to mobilize the learning capabilities of the agents and transactions­cum-interactions are necessary to access the existing bits of existing knowledge and appropriate the benefits of unexpected outcomes of the knowledge-generation process. A quote from Adam Smith is useful to grasp the vital role of interactions-cum-transactions within hierarchies:

Whoever has been much accustomed to visit such manufactures, must frequently have been shewn very pretty machines, which were the inventions of such workmen, in order to facilitate and quicken their own particular part of the work. In the first fire engines - this was the current designation for steam engines - a boy was constantly employed to open and shut alternately the communication between the boiler and the cylinder, according as the piston either ascended or descended. One of those boys, who loved to play with his companions, observed that, by tying a string from the handle of the valve which opened this communication to another part of the machine, the valve would open and shut without his assistance, and leave him at liberty to divert himself with his play-fellows. One of the greatest improvements that has been made upon this machine, since it was first invented, was in this manner the discovery of a boy who wanted to save his own labor. (Smith, 1776, p. 6)

The accumulation and valorization of competence based upon learning by doing and learning by using within a firm is limited, if not inhibited, by the lack of appropri­ate incentive mechanisms that appreciate, stir up and support the active contribution of employees (Arrow, 1974). A clear example of the relevance of transactions-cum- interactions is provided by the new understanding of the central role of the interactions that follow a transaction where a vendor provides a customer with a new product. The benefits of learning by using are faster and larger when customers after the transaction - as users - can interact with competent producers that sold them the new product, so as to improve it and at the same time make its use easier and more effective. User-producer interactions that parallel and complement vertical transactions are a major source of technological knowledge for both parties (Von Hippel, 1988, 2005).

These hybrid forms take place in contexts that are characterized by weak hierar­chies and organized markets. Particularly relevant for this chapter, interactions-cum- transactions and transactions-cum-interactions are typically found within hierarchical

Organizational innovations, ICTs and knowledge governance 333 networks and especially structured platforms. In these hybrid forms, the coordination that is necessary to achieve and integrate an efficient division of labor is defined ex ante and implemented by managers that try to implement a hierarchical control of the recombinant knowledge-generation process and of its effective exploitation. This confirms the importance for the innovative firm to build and be embedded in networks and for economics to appreciate the systemic character of the structures into which the division of innovative labor takes place (Lane et al., 2009; Antonelli, 2011).

Platforms are characterized not only by transactions-cum-interactions and interactions-cum-transactions but also their dynamic membership within a changing architecture that makes it possible to implement and operationalize the mix between ex ante and ex post coordination. Membership in platforms is not permanent; inclu­sions and exclusions do take place at all times. The actual membership in the platform is in fact the object of continual assessment, monitoring and selective renewal. The division of labor within platforms is based upon stages at the end of which the actual contribution of each member is assessed and valued critically both in terms of results and efforts. The parties agree ex ante upon the procedures that will be applied in order to monitor the results and the efforts. Exclusion takes place ex post as a result of the assessment. The architecture of the platform, moreover, is intrinsically dynamic, also with respect to the role of each member that may shift in terms of degrees of central­ity. Lazy or opportunistic members, or those that turn out to be less competent than expected, may gradually shift from high levels of centrality to marginal roles that lead to eventual exclusion. Competent members that are able to contribute more than expected may, on the contrary, move from peripheral roles into more central ones. Open contracts, where the parties agree upon the procedures rather than on actual con­tents, combining intellectual property rights with contractual law, enable the organiza­tion to change shape, structure and membership and play a central role in this context (Hagedoorn and Hesen, 2007).

The identification of the historic process that led to the introduction of platforms is most relevant to grasping their key features. Platforms can be regarded as the outcome of the evolution of the bilateral outsourcing of given inputs into the creation of a frame of multilateral cooperation for the generation and exploitation of new technologies, based upon the intensive use of ICTs and flexible, long-term contracts. One of the first platforms was introduced in the last decades of the twentieth century in the automobile industry where car manufacturers experimented with the integration of their component suppliers into the design of new models. This radically changed the traditional sequence in which suppliers manufactured components after the car company had completed the design of the model. The systematic use of large databases to which all the selected part­ners were granted access played a central role in the evolution of the new organizational procedure (Patrucco, 2014a).

According to our analysis and from an organizational viewpoint, platforms can be con­sidered a new case of a dynamic hybrid form based upon interactions-cum-transactions and transactions-cum-interactions with changing architecture and membership (Consoli and Patrucco, 2008, 2011; Patrucco, 2014b). The next section is dedicated to understand­ing the different features and processes that characterize platforms and the means by which platforms generate and manage innovation.

15.4