A Knowledge-Based Theory of the Firm - the Problem-Solving Perspective

We develop in this paper a knowledge-based theory of the firm. While existing knowledge-based theory focuses on the efficiency of hierarchy in economizing on knowledge exchange, we develop a theory of the firm which focuses on the efficiency of alternative organizational forms in generating knowledge or capability. Our theory begins with the problem as the basic unit of analysis, arguing that a problem's complexity influences the optimal method of solution search and the optimal means of organizing that search. The distinguishing feature that differentiates among organizational alternatives is the different way in which each resolves conflict over the selection of solution trials, i.e., the way it chooses the path of search. Our theory predicts that efficiency demands these governance alternatives be matched in a discriminating way to problems based on their associated benefits and costs in governing solution search. In doing so, our theory is among the first to treat simultaneously both the boundary choice (i.e., internal vs. external) and the choice among alternative internal approaches to organizing