knowledge based perspective on the internal boundaries of the firm. The case of technology grafting acquisitions.

Puranam, P (2001) knowledge based perspective on the internal boundaries of the firm. The case of technology grafting acquisitions. Working Paper. London Business School Strategic and International Management Working Paper.

Abstract

Knowledge based perspectives on the theory of the firm share the central assumption that the coordination of highly interdependent activities is easier within firms than in markets. The coordination advantages of firms are supposed to derive from the internal homogeneity of their communication systems, incentive regimes and authority structures. We argue that while this approach is appropriate for analyzing the external boundaries of the firm, recognizing that internal homogeneity is an attribute of organizational subunits provides insights on the internal boundaries of the firm. We revisit Thompson's (1967) hypothesis that knowing the nature of interdependence between activities allows us to predict if they will be organized within the same organizational subunit, or across two organizational subunits within the same firm. This hypothesis finds support in an empirical examination of postacquisition integration decisions in 207 acquisitions of small technology based firms by 48 larger technology based firms in the IT manufacturing industries. Specifically, we show that the likelihood of the target firm preserving its organizational boundaries after the acquisition is higher when its technology pertains to a standalone product, or has a well defined interface to the acquirer's technology. We conclude with a discussion of how principles of modularity can be used to extend the knowledge based perspective to create a comprehensive framework that explains not only external boundaries but also internal boundaries of the firm.