Managing Know-How

We use an economic model to study the optimal management of know-how, defined here as employee-generated information about the performance of specific methods or solutions to problems that may or will recur in the future. We derive three main results. First, information about successes is typically more useful than information about failures since successful methods can be replicated while failures can only be avoided. This may explain firms' focus on "best practice." Second, recording mediocre know-how can be counter-productive since such mediocre know-how may inefficiently reduce employees' incentives to experiment. This is a strong-form competency trap. Third, the firms that gain most from a formal knowledge system are also the ones that should be most selective when encoding information (i.e., the ones that are most at risk from the competency trap); namely, large firms that repeatedly face problems about which there is little general knowledge and that have high turnover among their employees. Beyond these main principles, we also show that it may be optimal to disseminate know-how on a plant-level but not on a firm-level and that storing back-up solutions is most valuable at medium levels of environmental change