Analyzing Inter-firm Relationships: the Knowledge Perspective
Abstract: This paper intends to shed light on aspects of organizational design, in particular the firm’s (entrepreneur’s) choice in concomitantly making and outsourcing production. To this end, it proposes the knowledge view to help understand the persistence of the plural forms phenomenon. We describe plural forms as an organizational strategy aiming both: i. to provide tacit knowledge allowing for the experience of market opportunities; and ii. to codify and replicate the knowledge acquired through the firm’s activities in order to better control its use and maximize economies of scale. Considering the dynamic market situation, in which product and service innovation is continually required in the competitive process, the successive generation of tacit knowledge is impeded. Moreover, contingencies emerge which raise the need for decisions in environments of uncertainty. Under these conditions, the firm cannot defer its capacity to generate knowledge in order to benefit from economies of scale when there are gains to be had in maintaining the concomitant use of different governance systems with similar structures: vertical integration and outsourcing. Gaining a strategic advantage requires the integration of external activities and technologies, while the ease of transferring codified knowledge will lead to the market. In other words, the scope of the firm will result from the balance between the use of economies of scale in the outsourcing of codified activities and in the exploitation of new resources developed within it. Empirical evidence from franchising is provided in support of our theoretical arguments.