Dispersed Knowledge in Markets and Companies

Subject: Economics
Pages: 8
Words: 2257
Reading time:
9 min
Study level: PhD

Introduction

Market equilibrium mechanism functions best when all suppliers in the market are aware of other suppliers’ price offering. In addition to that, all buyers know the market price at any given time, and are able to make informed decisions regarding their choice of seller. Market equilibrium prices are a result of a complex calculus calculation that considers tangible factors of supply and demand as well as the tacit knowledge of individual sellers and buyers. The summation of the intelligence of the market in offering the best price at any given moment is a product of the dispersed knowledge existing in the market (Canter & Cox, 2009).

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Companies undergo periods of organizational learning, and the company’s staffs collectively contribute total knowledge that exists in a company in terms of production, supply, demand, and technology. Several departments with specific roles in a company rely on information from other departments for their optimal performance. Autonomous functioning of each company department or subsidiary gives rise to a dispersed knowledge foundation in the company. Each subsidiary obtains market intelligence within their jurisdiction and tacitly avail the knowledge to the company through its operations (Scott & Gibbons, 2001). This essay examines the harnessing of dispersed knowledge and offers its advantages, disadvantages and implications in markets and companies.

The concept of dispersed knowledge appeared first among the Austrian economic school whose notable contributions were that of Hayek. Hayek explained how dispersed subjects choosing independently what price upon which they buy ultimately created a meshwork of the market intelligence such that the prevailing price information was available to all. However, Hayek also noted that the degree of information availability among market subjects varies. Hayek’s works argue that dispersed knowledge prevents the hoarding and creation of artificial shortages in the market. His insights into dispersed knowledge discredit the notion of a social competence system and subsequently argue against the intelligence of economic welfare. Hayek studied economic problems and found out their major cause to be the lack of economic knowledge because such knowledge rests in fragmented bits among individuals. The only way to tap into the dispersed knowledge is by availing structures that enable all individuals to participate while tacitly sharing their fragmented information to make out the economic knowledge (Hayek, 2008).

Harnessing and Utilization of Dispersed Knowledge

The economy of the world is knowledge based. The faster the speed of knowledge among different economies, the more efficient the world market becomes. In the global economy, companies supply goods to other geographical regions other than their own (Shibata & Takeuchi, 2006). Additionally, they receive raw materials, labor and capital from both their geographical regions and other regions. Global market liberalization, championed by world bodies such as the World Trade Organization force specialization on companies to remain competitive.

Global market liberalization has also given rise to amalgamation, mergers and accusations across the horizontal and vertical production chains. The amalgamation creates global companies and a global market place. Companies on the other hand gain in having several knowledge centers across the globe. The phenomenon of dispersed knowledge in companies therefore arises from the distribution of company departments or subsidiaries over a geographical region such that each department acts semi-autonomously in the company. For effective coordination of their subsidiaries, companies use complex management information systems to relay information. The systems function optimally when staffs fully participate in decision-making and evaluation. Staffs contribute their knowhow of operations and markets tacitly and directly to the information system through daily systematic operations (Scott & Gibbons, 2001).

The dispersed nature of knowledge in a market ensures that no player has a monopoly of market information. However is also creates a problem of harnessing the knowledge that is not placed on a market player or a group of market players. The level of knowledge that market players have differentiates them and dictates their competitiveness. For example, in the global economy, developed countries and newly developed countries differ from the least developed countries by their level of knowledge. As the world goes deeper into an information-based society, development entails closing the knowledge gap in addition to the classical accumulation of physical and human capital (Stiglitz 1998). In looking at how markets harness the dispersed knowledge, it is best to refer to how players access the market. The cumulative actions of players make up the market intelligence. It is also paramount to factor in both the demand and supply forces that player’s decisions exert on the market equilibrium.

While all markets deal with commodities, the tangibility of the commodities dealt with makes markets different. Security and stock markets deal with capital, money markets work with currencies and traditional commodity markets deal with tangible goods. Within the broad categories of markets offered above, are intertwinements that result in specialized markets for specific factors of production. Classification of markets also depends upon their geographical reach. In this case, there are domestic markets serving individual countries, regional markets serving several countries and global markets serving the whole world. Individuals, companies and country governments form the market demand or supply. They act as both because of their intertwined levels of production (Blinder & Baumol, 2010).

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As consumers, market players possess different factors of demand in varying proportions from other consumers. For example, a county government’s policy on importation shapes up its tastes and preferences in the international market. Secondly, the varying cost of production in countries will form the availability of substitute’s factor for companies when they source for production inputs in regional or international markets. The influence of non-market variables in shaping demand is not limited to commodity markets. Stocks and security markets’ demand depends on the political environment of the market host countries (Blinder & Baumol, 2010).

The availability of channels to pass information within and across markets is a prerequisite for harnessing the dispersed knowledge of markets. As the examples above depict, it is impossible for markets to come up with effective equilibrium prices when there are no clear channels that will allow exchange of knowledge among market players. Other than channels, structures put in place support the market function of linking sellers and buyers and facilitate exchange.

These structures hold knowledge deposits filled and used every time a player interacts in the market. Structures supporting markets are in form of regulations, policies and laws that bind each market player while availing equal chances of participation. An example of such a structure is the regional trade block agreements that regulate trade among countries falling in to the regional block. The European Union falls under this category and ensures that all member countries follow the same rules when engaging in foreign trade. The rules and regulations cover tariffs, standardizations and quotas. By binding member countries, they extend their jurisdiction to all companies trading into and out-of the region. The union provides the knowledge repositories for individual companies and harvests additional knowledge with every single member transaction in the market. In each market, the authority or body regulating the market makes the rules of engagement for all players and ensures that other players can tap the bare minimal knowledge existing in no particular player. The larger the knowledge pool created, the more accurate the market price becomes (Blinder & Baumol, 2010).

Both companies and markets rely on the speed that knowledge passes within their communication channels do define their efficacy and competitiveness (Oliver & Murray, 1999). Furthermore, the extended reach of these channels affect how company staff or market players interact. The overall goal of companies and markets in harnessing and handling dispersed knowledge is to have equipped environments that break all barriers of interaction. High-speed information systems break geographical barriers of travel distance. Such systems ensure that staffs interact regularly and in real time. They also ensure that companies timely respond to market demands. The organizational learning in companies occurs when individuals pass their knowledge to their colleagues. The faster the transfer, the easier it is for the company leadership to obtain feedback and issue commands (Schleimer & Riege, 2009).

Just like markets, companies also have structures for utilizing dispersed knowledge. However, unlike markets, companies’ structures do not rely on the core principle of regulation. Their basis is on execution of the company’s strategies. Therefore, while market authorities serve as knowledge repositories for all players, company organization structures facilitate hierarchical strategy execution and feedback submission (Blinder & Baumol, 2010),

Implications of Dispersed Knowledge

The phenomenon of dispersed knowledge has created new kinds of companies. Doz, Santos and William (2001) refer to the new kinds of companies as ‘metanationals’ in their description of how companies stay competitive in the knowledge based global economy. They further explain that metanationals differ from multinational companies because they do not spread globally through continuous practice of business strategies of their original countries. Instead, metanationals companies note that all over the globe are pockets of technology, market demands, capital and capabilities. Their expansion drives on the need to tap into this specialist knowledge to boost their competiveness (Crowley, 2005).

A common characteristic among metanationals is that they do not impose the learned advantages of their source countries and subsidiaries into new units. On the contrary, new units leverage on the advantages found in their localities. Consequently, metanationals instead of crossing borders to expand transcend the borders hence the prefix Meta meaning beyond borders. Realization of the dispersed knowledge phenomena has also created a modus operandi of doing business. It has given rise to outsourcing as companies strategically put their operations in locations that can centrally cover their markets. When the initial capital and the running capital for new subsidiaries are higher than can be afforded by the company, hiring of the means of production has proved as a viable solution (Comeliau, 2002).

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In this arrangement, a company offers its specifications to another company specialized in the given area of operation as well as the local business environment. Companies opting to outsource do so not only because of the cost implication, but also for the benefit of taping into the localized knowledge pool without having to have a full presence (Doz, Santos & William, 2001).

Advantages of Dispersed Knowledge

When dispersed knowledge utilization is efficient, then it serves as a hindrance to monopolistic forces of price determination. Additionally, it offers equal chances to both large companies and small companies to tap into the market, by eliminating competitive advantages linked to geographical spread. It also allows companies otherwise limited by their geographical presence to transcend national boundaries and gain economic advantages.

The realization of dispersed knowledge has majorly contributed to the creation of a new economic environment driven by knowledge. This environment is vital in the innovation of new products for the global market. For example, mobilization of the knowledge packets around the world is the reason behind the powerful innovation of Hewlett-Packard printers. Dispersed knowledge buffers markets from demand shocks that arise when superior innovative products are availed. Without the check of monopoly on the available knowledge, other suppliers would be unable to counter the market with formidable substitutes or ones that are more superior (Doz, Santos & William, 2001).

Disadvantages of Dispersed Knowledge

As companies adopt a metanationals strategy and become knowledge centered, they face problems of information overlap that causes redundancy. Such redundancy causes ineffectiveness and makes it problematic to adopt new knowledge. These problems arise because the companies while increasing the role of dispersed teams in conducting various tasks, lack the necessary capacity of coordinating the dispersed teams effectively (Gressgard, 2010).

The distance between collaborating team in a company reduces the speed of member trust buildup and counteracts the benefits obtained by fast communication channels. Even though authorities serve as structures to manage information flow in their markets, players possessing critical knowledge may bypass the market equilibrium mechanism to obtain or offers commodities in their own favorable prices (Klein, 2010). Dispersed knowledge therefore increased the chance of market sabotage despite its advantages of creating price equilibrium. A breakdown of channels of communications has devastating effects on companies whose competitive advantage rests on their innovative speed served by the communication channels. Such a company escapes from the devastation if it has a mirror channel to fall to as backup (Hulsmann & Pfeffermann, 2011).

Conclusion

The concept of dispersed knowledge is that no single player or institution possesses all the knowledge; instead, all participants in the market possess knowledge fragments in variable proportions (Hayek 2008). Proper harnessing and dispersion of dispersed knowledge is mandatory for the proper fractioning of market equilibrium mechanism. Perfect execution of this requirement is nonexistent currently; however, markets depend on structures and channels that establish them to function properly as amalgamation centers for dispersed knowledge.

Authorities and governing bodies make up the structures, while communication systems form the channels. Authorities ensure that all players have access to equal number of channels when they need to (Blinder & Baumol, 2010). Additionally they serve as knowledge repositories for market players to tap. The authorities and governing bodies obtain the knowledge explicitly or tacitly from the interaction of players in the market. In companies, management of dispersed knowledge is hierarchical, formed to ensure that senior management get timely feedback while allowing rapid execution of strategies. The realization of dispersed knowledge has broken the expansion barriers previously erected by national regional boundaries. It has also created a new economic environment where competitive advantage arises out of being effective at utilizing knowledge pockets that exist all over the world. Furthermore, it has led to the development of metanationals that are not restricted to operations in the traditional capitals of their respective industries (Maskell, 2001).

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