Table Of ContentFIRM OBJECTIVES, CONTROLS AND ORGANIZATION
Economies of Science, Technology and Innovation
VOLUME8
Series Editors
Cristiano Antonelli, University ofTorino, Italy
Bo Carlsson, Case Western Reserve University, U.S.A.
Editorial Board
Steven Klepper, Carnegie Mellon University, U.S.A.
Richard Langlois, University ofConnecticut, U.S.A.
J. S. Metcalfe, University of Manchester, U.K.
David Mowery, University ofCalifornia, Berkeley, U.S.A.
Pascal Petit, CEPREMAP, France
Luc Soete, University ofLimburg, The Netherlands
The titles published in this series are listed at the end oi this volume.
FIRM OBJECTIVES,
CONTROLS AND
ORGANIZATION
The U se of Information and the
Transfer of Know ledge within the Firm
by
GUNNAR ELIASSON
Royal Technical Institute (KTH), Stockholm
KLUWER ACADEMIC PUBLISHERS
DORDRECHT / BOSTON / LONDON
A C.I.P. Catalogue record for this book is available from the Library of Congress.
ISBN-13: 978-94-01 0-7218-2 e-ISBN-13: 978-94-009-1610-4
DOI: 10.1007/978-94-009-1610-4
Published by Kluwer Academic Publishers,
P.O. Box 17,3300 AA Dordrecht, The Netherlands.
Kluwer Academic Publishers incorporates
the publishing programmes of
D. Reidel, Martinus Nijhoff, Dr W. Junk and M1P Press.
Sold and distributed in the U.S.A. and Canada
by Kluwer Academic Publishers,
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In all other countries, sold and distributed
by Kluwer Academic Publishers Group,
P.O. Box 322, 3300 AR Dordrecht, The Netherlands.
Printed on acid-free paper
All Rights Reserved
© 1996 Kluwer Academic Publishers
Softcover reprint of the hardcover 1s t edition 1996
No part of the material protected by this copyright notice may be reproduced or
utilized in any form or by any means, electronic or mechanical,
including photocopying, recording or by any information storage and
retrieval system, without written permission from the copyright owner.
CONTENTS
List of Figures xi
List of Tables xii
Foreword X111
PART I THEORY
Chapter I The Economics of Innovation, Coordination, Selection,
and Knowledge Transfer 3
1.1 The Experimentally Organized Economy 3
1.2 The Business Information Problem -- Can the Mind
of the Firm be Automated? 6
1.3 The Firm as a Financial Decision U nit 7
1.4 The Firm as a Competence Organization 8
1.5 How Do Different People Look at Business? 9
1.6 How to Manage Bigness Efficiently? 11
1.7 The Accounts of the Knowledge-Based
Information Economy 12
1.8 The Necessity of Tacit Competence 14
1.9 The Limits of Reason 16
1.10 The Flora of Knowledge -- a Note on Terminology
for the Business Information System 18
1.11 Why This Study? 21
Chapter 11 The Organization of Production, Markets and Administrative
Control Systems -- A General Theory of Innovation and
Information, or the Experimentally Organized Economy 23
11.1 From the Classical to the Experimental
Organization of the Economy 24
H.2 The Large Investment Opportunity Set 26
Diminishing returns to learning prevent fully
informed decisions 27
The opportunity set grows from being
exploited -- the Särimner effect 27
The limits of learning 28
11.3 Tacit Knowledge, Free Entry and Technological
Competition 29
H.4 Optimal Social Organization in the Experimentally
Organized Economy 30
vi
11.5 The Capital Market and Dynamic Economic
Coordination -- Closing the Smith-Schumpeter-
Wicksell System 31
How to operate out of equilibrium? 31
What bounds an economy out of equilibrium?
-- the endogenous invisible hand 32
The capital market as the ultimate controller 33
Competence and competition set the limits 34
11.6 The Three Axioms of Knowledge (behavior)
-- Proving the Existence of Tacit Knowledge
-- Excursus on Theory 34
The three axioms of knowledge 35
The limits of analytical methods 35
The impact of tradition on modes
of decision making 36
11.7 Empirical Evidence on the Experimentally
Organized Economy 37
A generalized Salter curve analysis
of innovative behavior and enforced
competition 37
The very large productivity potential 41
Innovative entry is the key to macro dynamics 42
The four change mechanisms of economic
growth 44
Unpredictability in the Swedish micro-to-macro
m~cl ~
Following a sampie of firms for some 60 years 47
Not even very large firms live for ever 47
Which firms are innovative? 51
Chapter III The Firm as an Experimental Machine
-- Its Decision Problem 53
111.1 The Coml?etence Specification of a Business
OrganizatIon 54
1II.2 The Main Functions of a Business Organization 57
The hierarchy as a conduit of information
and authority 58
Efficient information transfer requires
a stable internallanguage 59
Internally disturbing, innovative
organizational change has to be decided
by teams organizationally separated
from routine management 60
1II.3 Knowledge as a Scale Factor 61
Mathematical excursus 62
lIlA The Depreciation of Knowledge 64
1II.5 The Creation of Dominant Knowledge 65
vii
III.6 Selection of the Team 67
m.7 A Stylized Career Model of the Firm 67
m.8 The Valuation and Compensation of Dominant
Industrial Competence 69
m.9 Objectives of the Market and Incentives of
the Top Competent Team 71
III.10 The Value of Ownership 75
III.11 The firm as a Locus of Financial Objectives 76
Defming the rate of return 76
The control function of the firm 78
The organization and the separable additive
targeting system 78
m.12 The Valuation of Capital 80
III.13 Profits and Productivity Change 83
m.14 Productivity Change through Organizational Change
-- interior productivity performance 83
III.15 Profit Margins and Productivity 84
A breakdown of the profit accounts 84
The virtually unlimited ways to reorganize
production for improved efficiency 85
Connecting rates of return and total factor
productivity advance 86
m.16 What Does It Mean to Be Rational? 87
m.17 The Theory and the Reality of the Firm 90
The firm and the market 91
Experiments, uncertainty and risktaking 92
Firm dynamics, competition and macro
behavior 93
The business problem as part of theory 94
Different images of a firm -- a systematic
overview 97
a) A converter of uncertainty into
computable risks -- the Knight (1921)
proposition 100
b) The firm as a manager of financial risks 102
c) Bounded rationality, financial markets
and the optimal managerial span of
control 103
d) Behavioral and managerial theories
of the firm 106
e) The firm as a competent team and
organizationallearner 108
f) The firm as an experimental machine 110
Mathematical Appendix; Proof of the relationship
between the rate of return and total factor
productivity change 114
viü
PART 11 PRACTICE
Chapter IV The Firm -- Its Control System in Practice 119
IV.1 What is Done within a Firm? 119
IV.2 Selection and the Breeding of a Competent
Corporate Culture 121
The varied career 122
The specialist 124
The internal educational and training system 125
IV.3 Creation of New Knowledge 127
IVA Co ordination 128
IV.5 Organizational Learning 130
IV.6 Representing the Flows of Activity through
the Cost Accounts 131
Information access vs. control 132
The cost accounts 138
The cost and profit control hierarchy 138
IV.7 Four Common Information Systems Biases 141
Rate of return requirements on invisible
capital -- missing items 141
The illusory profit boom of 1974
-- biased measures 144
Excessive caution in discounting 146
Wrong measures 147
Chapter V The Universal Information System -- a Fantasy or
a Feasible New Product? 149
V.1 Introduction 149
V.2 The nature of the universal information product 151
V.3 Artificial intelligence versus organizational control
-- the purpose of information designs 154
VA Conc1usions on the Universal Business Information
System (UBIS) 159
Chapter VI The Experimental Evolution of a New Information Product 161
VI.1 The practical features of the information product 162
Monitoring and overview 162
Monitoring and automation 164
The access feature 165
Organizing people 166
VI.2 The production of information services 167
VI.3 Electronically distributed services and
outsourcing 169
VIA The experimental emergence of a new, universal
business information systems (UBIS) product 172
IX
a) The IBM-story -- trying it all 175
b) The Xerox-story -- beginning too early 191
c) The DEC-story -- good, but not good enough 192
d) The ERICSSON story -- the high ambitions,
the early rise and the final collapse of
the Swedish computer industry 194
VI.5 The new information product -- summing up 199
VI.6 The many technololPes that have to be merged
in the universal busmess information product 204
The product idea -- the e~erimental evolution
of a new technology combmation 204
The management task -- integrating at least
nine fundamentally different technologies 206
VI.7 The emergence of the elements of the new
information product 207
How should a business information system
designed for the experimentally organized
economy look? 213
The access feature 214
Receiver competence 216
Making users of the business information
system hostages of the systems developer's
knowledge 217
Revealing proprietary user knowledge to
the information systems supplier 218
VI.8 Summary conclusions about the new information
product 219
PART 111 A CHRONICLE OF EVENTS THAT MARK
THE EXPERIMENTAL EVOLUTION OF A NEW
INFORMATION PRODUCT
Chapter VII Systems Components and the New Information
Product Defined 225
Introduction 225
Sources of the Chronicle 228
Classification of technologies 229
From hardware, via software to netware and the lap top 232
Deregulation saved the U.S. IT industry 232
The core technologies upon which most UBIS's attempts
have been based 233
Enormous technological variety .... 234
.... turns conventional truths upside down 234
Technology Wars 235
Standardization and "commodization" 236
Technological Locking-in 236
x
The three dominant structural changes 237
The access feature 238
Lessons for policy makers 239
Supplement 1 Office automation and business information systems
market -- announcement of entry 243
Supplement 2 Spin-off, start-up and major innovations chronology 245
Supplement 3 Interviewed firms 251
Subject index 253
Bibliography 257
Appended as diskette
A Chronicle of Events that Mark the Experimental Evolution
of a New Information Product
Systems Components and the New Information Product Defined
The Content of the Business Information System
-- A Classification of Technologies
A Representation of the Business
B Analysis, Data Processing
C Communications
D User Contacts
E Applications
