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 interdependencies. 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.0

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This paper studies the cognitive processes that enable decision makers to switch between exploitation and exploration. We use functional magnetic resonance imaging (fMRI) in a sample of expert decision makers to make two main contributions. First, we identify and contrast the specific brain regions and cognitive processes associated with exploitation and exploration decisions. Exploitation activates regions associated with reward seeking, which track and evaluate the value of current choices, while exploration relies on regions associated with attentional control, tracking the value of alternative choices. Second, we propose and test the idea that stronger activation of the brain circuits related to attentional control allows individuals to achieve better decision‐making performance as a result. We discuss the implications of these results for strategic management research and practice. Copyright © 2013 John Wiley & Sons, Ltd

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Research Summary: How can strategic decision makers overcome inertia when dealing with change? In this article we argue that cognitive flexibility (i.e., the ability to match the type of cognitive processing with the type of problem at hand) enables decision makers to achieve significantly higher decision‐making performance. We show that superior decision‐making performance is associated with using semiautomatic Type 1 cognitive processes when faced with well‐structured problems, and more deliberative Type 2 processes when faced with ill‐structured problems. Our findings shed light on the individual‐level mechanism behind organizational adaptation and complement recent work on strategic inertia. In addition, our findings extend management studies that have stressed the relevance of cognitive flexibility for responding to the demands of increasingly open, flexible, and rapidly changing organizations. Managerial Summary: Humans are creatures of habits. We tend to prefer known courses of action over new ones. In many cases, habits are good. However, when things change in unpredictable ways, the past may not be good guidance for the future. We argue that “cognitive flexibility”—the ability of understanding when to rely on habits vs. when to explore new courses of action—enables managers to switch from a “fast” decision mode, based on habits, to a “slow,” more deliberate decision mode that facilitates the exploration of new courses of action. Managers high in cognitive flexibility reflect on the situation at hand, recognize and value diversity in viewpoints, and integrate such diversity in their own decision processes. By valuing diversity, they are more likely to overcome inertia.

This paper builds upon current research into the organizational implications of 'modularity'. Advocates of modularity argue that the 'invisible hand' of markets is reaching activities previously controlled through the visible hand of hierarchies. This paper argues that there are cognitive limits to the extent of division of labour: what kinds of problems firms solve, and how they solve them, set limits to the extent of division of labour, irrespective of the extent of the market. This paper analyses the cognitive limits to the division of labour, relying on an in-depth case study of engineering design activities. On this basis, it explains why coordinating increasingly specialized bodies of knowledge, and increasingly distributed learning processes, requires the presence of knowledge-integrating firms even in the presence of modular products. Such firms, relying on their wide in-house scientific and technological capabilities, have the 'authority' to identify, propose and implement solutions to complex problems. In so doing, they coordinate networks of suppliers of both components and specialized competencies.

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