Knowledge Specialization, Organizational Coupling, and the Boundaries of the Firm: Why Do Firms Know More than They Make?

This paper uses an analysis of developments in aircraft engine control systems to explore the implications of specialization in knowledge production for the organization and the boundaries of the firm. We argue that the definition of boundaries of the firm in terms of the activities performed in house does not take into account that decisions to outsource production and other functions are different from decisions to outsource technological knowledge. We show that multitechnology firms need to have knowledge in excess of what they need for what they make, to cope with imbalances caused by uneven rates of development in the technologies on which they rely and with unpredictable product-level interdependences. By knowing more, multitechnology firms can coordinate loosely coupled networks of suppliers of equipment, components, and specialized knowledge and maintain a capability for systems integration. Networks enable them to benefit from the advantages of both integration and specialization. Examples from other industries extend to other contexts the model we develop.