A Stakeholder Perspective of Business Strategy: Knowledge versus Goods

Mateus T. S. Cozer, Marcos C. Campomar


Stephen Vargo and Robert Lusch (2004) enlightening marketing evolution towards a new
dominant logic. “Briefly, the academi...
of business strategy to the stakeholders of the firm (ZADEK, 2001; GRAYSON and HODGES,
2001; AUGIER and MARCH, 2002; HARRI...
Using the standard established by Williamson (1996), the mechanisms of governance used by this
paper over that secular deb...
capitals are heavily interlinked           and    there   is   some     overlap    between     them
Economy and Governance: Corporate Social Responsibility

“Capitalism at the beginning of the twenty-first century is a var...
eco-taxes, social subsidies and green accounting (Global Reporting Initiative). But these would
be manifestations of deep ...
“Because early marketing thought was concerned with agricultural products and then with other
physical goods, it was compa...
take place in order to make it possible for their customers to manage their own processes in a
value-creating manner (valu...
acted     on    to     create    exchanges and co-production.
                 transactions with resources.
Source        ...
(ALTER, 2006). Finally, “information infrastructure is a shared, evolving, heterogeneous
installed base of IT capabilities...
having adopted it, so the value of the technology as such increases as more users adopt it (Arthur
1996; Shapiro and Varia...
How do real individuals live together in real societies in the real world? Jeffrey Alexander's
masterful work, The Civil S...
ALDERSON, W. Marketing Behavior and Executive Action – A Functionalist Approach to Marketing Theory.
Homewood, ...
Dyer, J. Singh, H. The Relational View: Cooperative Strategy and Sources of Interorganizational Competitive
Advantage. The...
Parrino, R. Weisbach, M. Measuring investment distortions arising from stockholder. Journal of Financial
Economics, 1999

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A stakeholder theory of the firm

  1. 1. A Stakeholder Perspective of Business Strategy: Knowledge versus Goods Mateus T. S. Cozer, Marcos C. Campomar 10/2007 Abstract The fundamental question in the field of strategic management is how firms achieve and sustain competitive advantage. This paper is an essay and develops a stakeholder perspective of business strategy. Its thesis is that the organizational mode through which individuals cooperate affects the knowledge they apply to business activity. Our aim is to develop an empirically relevant perspective of why firms are formed: a perspective based on knowledge differences between individuals rather than the threat of consuming the earth’s resource beyond its sustainable capacity of renewal. The work dual-core is based, first on new institutional economics and second transaction-cost approach. A principal point is that knowledge-based considerations can outweigh traditional goods-centered dominant logic. The paper considers knowledge as a network. (Keywords: Theory of the Firm; Strategic Management; Stakeholder Engagement; Transaction Cost) Introduction This paper develops a stakeholder perspective of business strategy. Its thesis is that the mechanisms of governance through which individuals cooperate affect the knowledge they apply to business activity. For example, Y and Z might face a choice between working together as employees in a firm or completing the same task as independent contractors. There will be a difference in knowledge that is brought to bear, and hence in their join productivity, under the two options. This conclusion depends on the straightforward assumption that Y and Z each possess experience, insights or skills, which are to some extent different from those of the other. Tacit knowledge, which can be learned only through personal experience (NELSON 1982), is an example of know-how that is difficult to transfer ex ante. The difference in the knowledge that is brought to bear, once anticipated, affects the choice of the mechanisms of governance. Thus, as compared with resource-based perspective, we advance a separate (yet complementary) answer to the question: why do firms exist? As the literature makes clear, a knowledge-based view is the essence of stakeholder perspective. Transparency about the sustainability of organizational activities is of interest to a diverse range of stakeholders, including business, labor, non-governmental organizations, investors, accountancy, and others. “Transparency can be defined as the complete disclosure of information on the topics and indicators required to reflect impacts and enable stakeholders to make decisions, and the processes, procedures, and assumptions used to prepare those disclosures” (Sustainability Reporting Guidelines, 2006). The insightful article by Vargo and Lusch (2004) argues that, because marketing has historically been informed by static-equilibrium economics, it has had a goods-centered dominant logic. 1
  2. 2. Stephen Vargo and Robert Lusch (2004) enlightening marketing evolution towards a new dominant logic. “Briefly, the academic focus is shifting from the thing being exchanged to one on the process of exchange. Science has moved from a focus on mechanics to one on dynamics, evolutionary development, and the emergence of complex adaptive systems. The service-centered model of exchange rests on the joint propositions that (1) service provision is the fundamental unit of exchange; (2) knowledge is the fundamental source of competitive advantage; (3) all economic eras are fundamentally characterized as service economies; (4) indirect, monetized exchange masks the services nature of the exchange process; (5) goods are appliances that serve as a distribution mechanism for services; (6) the consumer is always a co producer of value; (7) the enterprise can only make value propositions; and (8) a service-centered model of exchange is inherently customer oriented and relational” (Vargo and Lusch, 2004). This paper begins defining who a stakeholder is. We then identify key concepts used in this study. These concern the nature of firm organization and individual behavior. We define the firm in a way consistent with Coase (1937) and Williamson (1975, 1985a), among others. “Firms are distinguished from markets based on an authority (employer-employee) relationship in the former, as compared to autonomous parties contracting in the latter” (CONNER and PRAHALAD, 1996). As to individual behavior, we assume bounded rationality (Simon 1957) and the good business of happiness (CSIKSZENTMIHALYI, 2003). Individuals additionally are taken to behave truthfully. This insures that we avoid opportunism-related reasons for the firm, allowing us to focus on other, knowledge based considerations. This paper considers knowledge as a network (BENKLER, 2006; BEINHOCKER, 2006). The Civil Sphere, addresses a world of values and institutions that generates the capacity for social criticism and democratic integration at the same time, such a sphere relies on solidarity (ALEXANDER, 2006). Concluding remarks follows and the text ends with a possible research agenda. Who is a Stakeholder? Even though the stakeholder perspective is now well established and has received considerable academic attention (Jones and Wicks, 1999; DONALDSON, 1995; HARRISON, 1999, 2005; Clarke, 1998; Kaler, 2006), the nature of stakeholders continues to be debated. There are numerous definitions of stakeholders in the governance literature, based in part on the economic salience of these stakeholders (Aoki, 1984; Jones and Wicks, 1999; MAHONEY, 2006). The current paper defines stakeholders broadly as those persons and groups who contribute to the wealth-creating potential of the firm and are its potential beneficiaries and/or those who voluntarily or involuntarily become exposed to risk from the activities of a firm (Clarkson, 1995). Thus, stakeholders include shareholders (preferred and common), holders of options issued by the firm, debt holders (Parrino and Weisbach, 1999), (banks, secured debt holders, unsecured debt holders), employees (especially those investing firm-specific human capital) (Blair, 1996), local communities (e.g., charities) (GRAYSON and HODGES, 2001), environment as “latent” stakeholders (e.g., pollution) (Buysse and Verbeke, 2003), regulatory authorities (GRAYSON and HODGES, 2001), the government (as tax collector) (MAHONEY, 2006), inter- organizational alliance partners (Dyer and Singh, 1998; NOOTEBOOM, 2004), customers and suppliers (GUMMESSON, 1999). The main case of this paper is that high management of multi-national corporations must encompass the five types of capital in their strategic decision making process and accountability 2
  3. 3. of business strategy to the stakeholders of the firm (ZADEK, 2001; GRAYSON and HODGES, 2001; AUGIER and MARCH, 2002; HARRISON, 2005; TEECE, 2002; ALLEN and GALE, 2002; MAHONEY, 2006; JENSEN, 2000; DUNNING, 1997; RUGMAN and VERBEKE, 2001; IETTO-GILLES, 2005). The Mechanisms of Governance: Societal Risk Using the standard established by Coase (1937) and concerned with the problem of social cost (COASE, 1960), the main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism. The most obvious cost of “organizing” production through the price mechanism is that of discovering what the relevant prices are. This cost may be reduced but it will not be eliminated by the emergence of specialists who will sell this information. There are negotiations to be undertaken, contracts have to be drawn up, inspections have to be made, arrangements have to be made to settle disputes, and so on. A firm, therefore, consists of the system of relationships, which comes into existence when the direction of resources is dependent on an entrepreneur (Schumpeter, 1939; WIGGINS and RUEFLI, 2005; Jacobides and Winter, 2007). Transaction cost economics subscribes to and work out the combination of a “rational spirit” with a “systems” perspective. If we move from a regime of zero transaction costs to one of positive transaction costs, what becomes immediately clear is the crucial importance of the legal system in this new world. Coase (1960) explained in The Problem of Social Cost that what are traded on the market are not, as is often supposed by economists, physical entities but the rights to perform certain actions and the rights which individuals possess are established by the legal system. Otherwise, the question of uncertainty is one, which is often considered to be very relevant to the study of the equilibrium and existence of the firm (KNIGHT, 1921). It seems improbable that a firm would emerge without the existence of uncertainty. The threat of consuming the earth’s resource beyond its sustainable capacity of renewal (global warming, water) is a great factor of uncertainty. There are growing pressures on organizations to take greater responsibility for their social, environmental and economic performance. Recognition of knowledge-based transaction costs leads to a fuller realization of Coase's (1937) original insights as to the reasons for firm organization (CONNER and PRAHALAD, 1996). Finally, in transaction cost economics (COASE, 1937), the unit of analysis is the transaction. “The stakeholder view requires that the entire economic value of the firm be considered and it is not only shareholders who extract economic value from the firm beyond their opportunity costs. In the case of collective action or small-numbers bargaining, the balance of bargaining power to extract economic value may reside in suppliers, customers, (unionized) labor or other stakeholders, whose benefits beyond their opportunity costs must be taken into account to capture fully the firm’s entire economic value creation” (MAHONEY, 2006). While this advocated approach for strategic management is undeniably economically sensible, it is noted here that this stakeholder perspective is clearly at odds with the traditional shareholder wealth approach used in most finance textbooks, which identifies the economic value of the firm as the value of all market claims outstanding. “The shareholder vs. stakeholder debate has been ongoing for at least the last nine decades” (MAHONEY, 2006). 3
  4. 4. Using the standard established by Williamson (1996), the mechanisms of governance used by this paper over that secular debate are those from the new institutional economics (NORTH, 1991). Institutions matter and are susceptible to analysis. Institutional economics is different but not hostile to orthodoxy (FRIEDMAN, 1962). It is an interdisciplinary combination of law, economics, and organization in which economics is the first among equals (Williamson, 1996). According to Douglass North, Institutions are “the humanly devised constraints that structure political, economic, and social interactions. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights)”. In consequence they structure incentives in human exchange, whether political, social or economic (COASE, 1960). Bowles and Gintis (1993) calls Walras´ fiction the notion that interaction among economic agents are might be represent as if they were relationships among inputs and outputs. Perez (2002) and Benkler (2006) detail the kuhnian process which evolved to the age of information and telecommunications (KUHN, 1962). Governance is also an exercise in assessing the efficacy of alternative modes (means) of organization (Williamson, 1996). Masahiko Aoki (1984) views the firm as a coalition of the stockholders (financial resources suppliers) and the workers (firm-specific human resources suppliers) and specifies conditions under which a cooperative Nash solution may, or may not, become a self-binding agreement. In the corporate governance debate only four types of governance mechanisms are typically considered (GRANDORI, 2004): • Pricing and exit mechanisms and voting mechanisms (KOTLER e KELLER, 2006; GUMESSON, 2005); • Hierarchical control (Eggerstsson, 1990); • Formal regulation (BENKLER, 2002); and • Property right allocation (BARZEL, 1997; Demsetz, 1967) Let’s assume the holistic management of five different types of capital that reflect an organization’s overall impact and wealth. The five capitals are: • Natural capital – the environment (Cleveland, 1981); • Social capital – social relationships and structures (GRANOVETTER, 1973, 1985, 1995, 2005); • Human capital – people (FLEURY, 1996; BECKER, 1964; FREY, 2001); • Manufactured capital – fixed assets (BENKLER, 2002; Eggertsson, 1990; BEINHOCKER, 2006) • Financial capital – profit and loss, sales, shares, cash (JENSEN, 2000); Natural capital encompasses the other capitals as natural resources and ecological systems form the basis of life, on which all organizations (and wider society) depend. Social, human and manufactured capitals are critical components of an organization and its activities. High levels of these capitals deliver value to both organizations and society, not to mention improving the quality of life of stakeholders. Financial capital is crucial to the ongoing survival of an organization, and is simply derived from the value that the other four capitals provide. All of the 4
  5. 5. capitals are heavily interlinked and there is some overlap between them (www.projectsigma.co.uk). Risk analysis is broadly defined to include risk assessment, risk characterization, risk communication, risk management, and risk policy. It may concern individuals, public and private organizations, and society at a local, regional, national or global level (www.sra.org). Risk assessment provides a formalized process to evaluate human, animal, and ecological responses associated with exposure to environmental agents (ANDERSON, 2004). In the Risk Analysis debate this paper considers only three types of risks: • Risk identification, quantification and mitigation • Communication within and between organisations • Societal risk Therefore, the stakeholder perspective of business strategy accountability and performance is based through the five different types of capital. Scandal and the Negation of Accountability: “The Spirit of Enron and the Capitalist Ethic” “In the last century, democratic governments and large corporations commanded respect and were regarded as leaders of society. But in recent years, they have lost their gloss” (GRAYSON and HODGES, 2001). Strategic risk management is an increasing concern for both boards and senior executives. Many recent business failures are due to senior level misjudgement and mismanagement of risk, the consequences of which can range from embarrassment to serious setback to bankruptcy. The changing role of business in society has come to mean many things. Corporate sustainability, corporate social responsibility, and corporate citizenship are but a few of the new terms that have emerged to describe this period and process of challenge and change. There is, however, an emerging consensus that the scope of the challenge is not confined to philanthropic activities, and moreover extends beyond the more obvious legal responsibilities to include for example labour standards in supplier factories, the accessibility by poor people to life-saving drugs, and the basis by which and transparency of how management decisions are made. The Global Reporting Initiative Guidelines illustrate just how broad the scope has become (www.globalreporting.org). The Global Reporting Initiative’s (GRI) vision is that reporting on economic, environmental, and social performance by all organizations becomes as routine and comparable as financial reporting. “The shifting role of business in society does, however, have a complex relationship to the matter of law. At the same time, it is equally clear that the matter of what constitutes appropriate law governing business behaviour is within the scope of the field of corporate responsibility” (ZADEK, 2002). This paper has adopted the more general term ‘corporate responsibility’ to cover the topic of why, when and how business can, should and does consciously address social, environmental and economic (including financial) dimensions of its performance and impact (ZADEK, 2001). 5
  6. 6. Economy and Governance: Corporate Social Responsibility “Capitalism at the beginning of the twenty-first century is a variegated collection of economic systems. Different countries’ economies are organized in very different ways, and corporate governance – that is, decisions about how capital is allocated, both across and within firms – is entrusted to very different sorts of people and constrained by very different institutions” (MORCK, 2005). There is a significant trend toward democratization and decentralization of authority. On an individual level, there is increased emphasis on “rights,” such as women’s rights, indigenous rights and human rights broadly conceived. In the private sector, it is reflected in “flatter” corporate structures and decentralized decision-making. Some entities, such as the Internet or NGO networks, have no formal authority structure. The emergence of civil society as an important voice in decision-making is a notable development. “A Great Transition would see the emergence of a nested governance structure from the local to the global that balances the need to sustain global social and environmental values with the desire for diversity in cultures and strategies” (RASKIN, BANURI, GALLOPIN, GUTMAN, HAMOND, KATES, SWART, 2002). With global reach, powerful brands, and a mission to hunt out corporate malpractice, NGOs can powerfully influence the marketplace and climate for business – either as high profile challengers or partners in finding new solutions. Figure 1: Great Transition (RASKIN, 2002) “Since the Berlim Wall came tumbling down an additional three billion people live in economies that operate on market principles, spurring a globalization of capital, knowledge, and ideas” (GRAYSON and HODGES, 2001). The economic transition means moving towards a system of production, distribution and decisionmaking that is harmonized with equity, sustainability and human fulfillment, the good business of happiness (CSIKSZENTMIHALYI, 2003). Assuming limited cognitive abilities on the part of individuals (bounded rationality) and behavioral assumptions (Mowen and Minor, 2003). It is a challenge to balance multiple objectives: eradicating human deprivation, reducing inequality, staying within environmental carrying capacity, and maintaining innovation. This would certainly include such policy instruments as 6
  7. 7. eco-taxes, social subsidies and green accounting (Global Reporting Initiative). But these would be manifestations of deep processes that reorient the way the economy functions. The economy becomes a means of serving people (stakeholders) and preserving nature, rather than an end in itself. The transition would be expressed in altered behaviors and practices of people, firms, governments and international governance systems. “Philosophers have long held that happiness is the ultimate goal of existence. It may seen counterintuitive to argue that happiness and business have anything to do with each other, since for most people work is at best a necessary evil, and at worst, a burden. Yet the two are inextricably linked. Strong relationships – a stable marriage, many friends – are correlated with happiness” (CSIKSZENTMIHALYI, 2003; FREY, 2001). As the psychologist Abraham Maslow has argued, the most basic needs are those that ensure survival – food, clothing, and housing. Many people around the world are uncertain where their next meal is going to come from; for them, the satisfaction of hunger brings a measure of happiness. “Another important connection between happiness and business is that one cannot engage in production and distribution alone: there is always a group of people involved, whether concern a small grocery store or a huge conglomerate employing tens of thousand of people. A business organization whose employees are happy is more productive, has a higher morale, and has a lower turnover” (CSIKSZENTMIHALYI, 2003). The governance transition is about building institutions to advance the sustainability paradigm through partnerships between diverse stakeholders and polities at local, national and global levels (DALY, 1996; NORTH, 1990). While specific structures will remain a matter of adaptation and debate, a proliferation of new forms of participation can be expected to complement and challenge the traditional governmental system. The market is a social institution to be harnessed by society for ecology and equity, not simply wealth generation. The stakeholder perspective of the firm defines wealth through the five different types of capital in a Service-Based World. Goods versus Services: Market Driven Viewed in traditional sense, marketing focuses largely on operand resources, primarily goods, as the unit of exchange. In its most rudimentary form, the goods centered view postulates the following (VARGO and LUSCH, 2004): 1. The purpose of economic activity is to make and distribute things that can be sold. 2. To be sold, these things must be embedded with utility and value during the production and distribution process and must offer to the consumer superior value in relation to competitor’s offerings. 3. The firm should set all decision variables at a level that enables it to maximize the profit from the sale of output. 4. For both maximum production control and efficient, the good should be standardizes and produced away from the market. 5. The good can be inventoried until it demanded and then delivered to the consumer at a profit. 7
  8. 8. “Because early marketing thought was concerned with agricultural products and then with other physical goods, it was compatible with this rudimentary view” (VARGO and LUSCH, 2004). Marketing inherit the view that value (utility) was embedded in a product from economics. Alderson (1957) advised, “What is needed is not an interpretation of the utility created by marketing, but a marketing interpretation of the role process of creating utility”. The service- centered view of marketing implies that marketing is a continuous series of social and economic processes that is largely focused on operant resources with which the firm is constantly striving to make better value propositions than its competitors. The service-centered view can be stated as follows (VARGO and LUSCH, 2004): 1. Identify or develop core competences, the fundamental knowledge and skills of an economic entity that represent potential competitive advantage. 2. Identify other entities (potential customers) that could benefit from these competencies. 3. Cultivate relationships that involve the customers in developing customized, competitively compelling value propositions to meet specific needs. 4. Gauge marketplace feedback by analyzing financial performance from exchange to learn how to improve the firm’s offering to customers and improve firm performance. This view is largely consistent resource advantage theory (CONNER and PRAHALAD, 1996; HUNT, 2000) and core competency theory (DAY, 1994; PRAHALAD and HAMEL, 1990). Core competences are not physical assets but intangible processes; they are bundles of skill and technology (HAMEL and PRAHALAD, 1990). The focus of marketing on core competences inherently places marketing at the center of the integration of business functions and disciplines. Finally, the stakeholder perspective of the firm is service oriented. “When a firm sees itself primarily as a manufacturer with an implied purpose of selling what it makes, it sees the key to making more money as selling more and more goods. There is little or no logic in selling fewer goods. In contrast, the service-dominant logic suggests that since these goods are actually mechanisms for service provision, the customer is always buying a service flow rather than a tangible thing, and thus the firm should perhaps reconsider the nature of its offering. Stated alternatively, service-dominant logic offers an opportunity for the organization to focus on selling a flow of service. This would encourage it to determine the optimal configuration of goods, if any, for a level of service, the optimal organization or network configuration to maintain the service, and the optimal payment mechanism in exchange for providing the service. That is, the organization is encouraged to think about the service system” (VARGO, LUSCH and MALTER, 2006). “In service marketing the concept of interaction between the consumer and various resources and systems of the service firm was introduced as a core phenomenon. In relationship marketing this was extended to relationships over time, where a set of interactions 8
  9. 9. take place in order to make it possible for their customers to manage their own processes in a value-creating manner (value-in-use)” (GRÖNROOS, 2006). Six differences between the goods- and service-centered dominant logic, all centered in the on the distinction between operand and operant resources, are presented in Table 1. Constantin and Lusch (1994) define operand resource as resources on which an operation or act is performed to produce an effect, and they compare operand resources with operant resources, which are employed to act on operand resources (and other operant resources). “A firm had factors of production (largely operand resources) and a technology (an operant resource), which had value to the extent that the firm could convert its operand resource into outputs at a low cost” (VARGO and LUSCH, 2004). Finally, the traditional goods-centered dominant logic has drawn buying and consuming apart. Operand and Operant resource Help Distinguish the Logic of the Goods- and Service- Centered Views Traditional goods-centered Emerging service-centered dominant logic dominant logic Primary unit of People exchange for goods. People exchange to acquire the benefits of exchange These goods serve primarily specialized competences (knowledge and as operand resources. skills), or services. Knowledge and skills are operant resources. Role of Goods Goods are operand Goods are transmitters of operant resources resources and end products. (embedded knowledge); they are intermediate Marketers take matter and “products” that are used by other operant change its form, place, time, resources (customers) as appliances in value- and possession. creation processes. Role of customer The customer is the The customer is a co-producer of service. recipient goods. Marketers Marketing is a process of doing things do things to customers; they interaction with the customer. The customer is segment them, penetrate primarily an operand resource, functioning only them, distribute to them, occasionally as operand resource. and promote to them. The customer is an operand resource. Determination Value is determined by the Value is perceived and determined by the and meaning of producer. It is embedded in consumer on the basis of “value in use”. Value value the operand resource results from the beneficial application of (goods) and is defined in operant resource sometimes transmitted through terms of “exchange value.” operand resources. Firms can only make value propositions. Firm-customer The customer is an operand The customer is primarily an operant resource. interaction resource. Customers are Customers are active participants in relational 9
  10. 10. acted on to create exchanges and co-production. transactions with resources. Source of Wealth is obtained from Wealth is obtained through the application and economic growth surplus tangible resources exchange of specialized knowledge and skills. It and goods. Wealth consists represents the right to the future use of operant of owning, controlling, and resources. The stakeholder perspective of the producing operand firm defines wealth through the five different resources. types of capital. Table 1: Service-centered view of marketing (VARGO and LUSCH, 2004). Dominant logics and disruptive technologies apparently evolve the same way. There is a convergence of a stream of contributing technologies, methods, concepts and theories that crystallize to form something new (DAY 2006; PEREZ, 2002; BENKLER, 2002; BEINHOCKER, 2006). A service dominant logic implies that firms will increasingly compete with customized solutions, realized through interactions and relationships, and involving the customer as co-producer of the relational value that is created (URBAN, 1999; VENKATRAMAN, 1998; COZER, 2006; DEIGHTON, 1996). “Sources of advantage are the operant resources the firm deploys, comprising the assets such as network, patents, and facilities that can be valued and traded, and capabilities that enable these assets to be deployed advantageously” (DAY 2006). Knowledge and Information Infrastructure People exchange to acquire the benefits of specialized competences (knowledge and skills), or services. Knowledge is an operant resource. It is the foundation of competitive advantage and economic growth and the key to source of wealth (VARGO and LUSCH, 2004). “The convergence of telecommunications and information technologies has created unprecedented levels of connectivity – within companies, between businesses and supply chains, between businesses and customers, and among consumers” (GRAYSON and HODGES, 2001). We are witnessing a transition from an economy based on tangible goods to an economy driven by information and service. It is the ability to generate, transform and distribute information that ultimately enables firms to provide services to customers (RUST and THOMPSON, 2006). There is an endless debate about the difference between data, information and knowledge (ALTER, 2002). Connecting People, Processes, and IT (information technology) for Business Results is a more important issue than that controversy. Information includes codified and non-codified information used and created as participants perform their work. Either type of information may or may not be captured on a computer. Essentially, anything that can be digitized – encoded as a stream of bits- is information. Information is costly to produce but cheap to reproduce. Nobel prize-winning economist Herbert Simon spoke for us when he said, “a wealth of information creates a poverty of attention.” This paper defines knowledge management as a conscious activity of making and implementing decisions related to the acquisition, refinement, maintenance, and use of information and knowledge. This definition bypasses the endless debate about the difference between information and knowledge. Following Wilson (2002), it assumes that anything that is made explicit enough to be managed must be expressed as some form of information such as facts, concepts, beliefs, images, messages, formulas, and procedures 10
  11. 11. (ALTER, 2006). Finally, “information infrastructure is a shared, evolving, heterogeneous installed base of IT capabilities among a set of user communities based on open and/or standardized interfaces” (HANSETH and LYYTINEN, 2005). One of the most important business impacts of such IT developments is the ability to provide service over electronic networks (including Internet, wireless networks, ATMs, smart card network). According to the service logic (enabled by information technology), the key unit of analysis is the value of relationships between the firm and each individual customer (RUST, 2006). Economists say that production of an information good involves high fixed costs but low marginal costs. But the costliness of information reproduction is the key to the costs of transacting, which consists of the costs of measuring the valuable attributes of what is being exchanged and the costs of protecting rights and policing and enforcing agreement. These measurements and enforcement costs are the sources of social, political and economic institutions (NORTH, 1990). Finally, customer equity is the total of discounted customer lifetime values summed over all the firms current and potential customers (RUST, LEMON, ZEITHAML, 2004). “The service dominant logic is customer centric” (RUST, 2006). Although knowledge has many aspects, and different communities interested in issues related to organizational learning, innovation, or knowledge management focus on different aspects. The simplest perspective of knowledge is found among members of Artificial Intelligence and Knowledge Management communities, who see knowledge as being built up of different elements that we can store in our brain or our computer (RUSSEL and NORVIG, 1995). Others, still seeing knowledge as a cognitive material, describe this kind of knowledge as ‘explicit’ and contrast it with ‘implicit’ or ‘tacit’ knowledge. Yet others, adopting a more phenomenological perspective, see knowledge as deeply embodied and embedded into our body and our practices. Further, knowledge may be seen as embedded into institutions and material structures like houses and information systems. Knowledge is also shared by members of communities, such as communities-of-practice or other social units (HANSETH, 2006). Knowledge is highly systemic. Individual pieces are linked together in various ways into complex structures. These structural characteristics play important roles in knowledge processes, such as knowledge construction, diffusion, adoption- or whatever we call them. This paper will address the systemic/complexity aspects of knowledge by looking at it as a network. This is underpinned by two fundamental assumptions: (a) Individual ‘pieces’ of knowledge are related and interdependent. (b) Different individuals adopt the same ‘piece’ of knowledge, and that piece of knowledge is embedded into routines and practices; accordingly, these individuals, routines, and practices are linked together and become interdependent. Considering knowledge as a network also implies that theories of ‘network economics’, also known as ‘information economics’, should apply. Key concepts in these disciplines are: positive feedback, network externalities, increasing returns, path-dependence, switching costs, and lock-in (Shapiro and Varian 1999; BENKLER, 2002; BEINHOCKER, 2006; STIGLITZ, 2002). The value of connecting to a network depends on the number of other people already connected to it. When two or more firms compete for a market where there is strong positive feedback, only one may emerge as the winner. Network externalities like this also leads to ‘increasing returns’: one user’s adoption of a specific technology increases the value of that technology for those already 11
  12. 12. having adopted it, so the value of the technology as such increases as more users adopt it (Arthur 1996; Shapiro and Varian 1999). Externalities arise when one market participant affects others without compensation being paid. The value of a network goes up as the square of the number of users (Shapiro and Varian, 1999). To the extent that knowledge can be considered as a network, knowledge creation and diffusion are also subject to path-dependent processes and lock-in situations (HAX and WILDE II, 1999; COZER, 2006). For example, consider a cluster of entrepreneurial firms as observed in Silicon Valley (GRANOVETTER, 2005). Each firm is engaged in the development of a module product that that is expected to constitute a part of a complex innovative product system like Google.com or iPod. Aoki (2004) considers that example as a new mode for corporate governance. Peter Drucker (1988) argues that the knowledge will be primarily at the bottom of the information-based organization, in the mind of the specialists who do different work and direct themselves. Being critical to the current state of marketing theory, Evert Gummesson advocates that three variables – relationships, networks and interaction – should form the basis for future marketing theory (GUMMESSON, 2006). “Relationships are important to everybody and ubiquitous in private, professional, and commercial life. There is an affluence of synonyms – contacts, ties, links, bonds, friends, acquaintances – that are part of everyday language. They link people or organizations; they might be temporaring or sustaining. When relationships embrace more than two people or organizations, complex patterns, and contextual dimensions will emerge – networks. What happens between parties in the relationships is called interaction” (GUMMESSON, 2006). Measuring, developing and implementing marketing programs can be very complicated in a Service-Based World. It is important for managers to consider the impact of their marketing decisions on brand value. Three models of branding presented by Kevin Keller help guide managerial efforts (KELLER, 2003): 1) Brand Positioning: Describes how to guide integrated marketing to maximize competitive advantages. 2) Brand Resonance: Describes how to create intense, actively loyal relationships with customers. 3) Brand Value Chain: Describes how to trace the value creation process to better understand the financial impact of marketing expenditures and investments. Excellence in marketing requires the organization to implement holistic marketing practices (KOTLER and KELLER, 2005). Leading global brand consultancy, Interbrand, publish their annual ranking of the Best Global Brands by brand value, report identifies the TOP 3 global brands, Coca-Cola, Microsoft and IBM, with 2006 combined brand value of US$ 180 billions. Intensive Culture: Dilemmas of Institutionalization Software and hardware are inexorably linked. Indeed, they are a leading example of complements (Brandenburger AND NALEBUFF, 1996). Neither software nor hardware is of much value without each other; they are only valuable because they work together as a system. 12
  13. 13. How do real individuals live together in real societies in the real world? Jeffrey Alexander's masterful work, The Civil Sphere, addresses this central paradox of modern life (ALEXANDER, 2006). Feelings for others--the solidarity that is ignored or underplayed by theories of power or self-interest--Poverty is both a cause and a consequence of the failure to respect human rights: both economic, social and cultural as well as political and civil. Muhammad Yunus and Grameem Bank, 2006 Nobel Peace Prize, have shown that the poor and the marginalized are not victims and survivors but agents of change (YUNUS, 1999). Alexander (2006) wish to develop an approach to democratic social life that acknowledge the role of solidarity and moral ideals, it must start from a more realistic conception of difficulties and challenges faced by complex societies. “Self-interest and conflict will never give way before some all-embracing republican or communal ideal. Indeed, the more democratic a society, the more it allows groups to define their own specific ways to of life and legitimates the inevitable conflicts of interests that arise among them” (ALEXANDER, 2006). Particular goals and even the most strategic of actions are framed and sometimes bound by commitments to cultural codes and corporate governance codes. Such references do inform foundational documents like the American Declaration of Independence; French Declaration of the Rights of Man; and the UN Earth Charter. The Earth Charter is now increasingly recognized as a global consensus statement on the meaning of sustainability, the challenge and vision of sustainable development, and the principles by which sustainable development is to be achieved. Suggestions for Possible Research Agenda Accordingly to Max Feffer, founder of Suzano Papel e Celulose, “in a world where everything changes, good relations are the only enduring things. Good relations are those that do not break because of any mistake of the parts or due to changes on the circumstances”. “Demographic change, and its connection with the process of development, has a crucial bearing on business operations, future growth, and profitability” (GRAYSON and HODGES, 2001). Profit maximization is not in the vocabulary of service-dominant logic (VARGO, LUSCH and MALTER, 2006). Service-dominant logic views marketing as an ongoing stream of social and economic processes in which firms continually generate and test hypotheses. Firms learn from financial outcomes as they attempt to better serve customers and obtain cash flows for the firm. Service-dominant logic embraces market and customer orientation and a learning orientation (DAY, 2006). It implies that just as individual and firm wellbeing are tied to societal wellbeing, national wealth is tied to global wealth. Environmental (water services) and marketing governance (markets, hybrids, hierarchies, bureaus, networks) are some suggestions for future research. Changes in the atmospheric abundance of greenhouse gases and aerosols, in solar radiation and in land surface properties alter the energy balance of the climate system. These changes are expressed in terms of radiative forcing, which is used to compare how a range of human (bounded rationality), and natural factors drive warming or cooling influences on global climate. Beyond Growth: the economy as an open subsystem of the ecosystem (DALY, 1996), The Management of Sustainable Growth (CLEVELAND, 1981), The Economics of Governance (WILLIAMSON, 2005), Common Wealth: Economics for a Crowded Planet (SACHS, 2008) and Capitalism at Crossroads (HART, 2005) appears to be a good starting point for a possible research agenda. “But the interrelationships which govern the mix of market and hierarchy, to use Williamson's terms, are extremely complex and in our present state of ignorance it will not be easy to discover what these factors are” (COASE, 1991). 13
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