Building Routinization Model: Organizational Routines, Capabilities and Performance CHI-YU HUANG
14143 Building Routinization Model: Organizational Routines, Capabilities and Performance CHI-YU HUANG Doctoral Candidate, Graduate School of Management, I-Shou University, Taiwan CHEN-WEI YANG Assistant Professor, Department of Information Management, Fooyin University, Taiwan ABSTRACT Organizational routines and capabilities have become key constructs not only in evolutionary economics, but more recently also in business administration, specifically strategic management. The main purpose of this paper is to develop an integrative routinization model. For this purpose, we discuss organizational routines, capabilities and performance of a firm’s routionization process. We argue that a firms’ routinization capability is influenced by operational routines and learning routines. Moreover, routinization capability provide with coordination capability that can improve a firm’s routinization performance that is consist of reducing uncertainty, responsiveness and intelligence/knowledge dissemination. We further suggest the managerial implications and theoretical implications at the end of this paper. Keywords: Routinization capability; transaction cost theory; resource-based view 1 14143 Building Routinization Model: Organizational Routines, Capabilities, and Performance In little more than twenty years, the notion of routines has become a central construct in heterodox economics mainly evolutionary economics as well as subsequently in various fields in business administration, mainly organization theory and strategic management. Routines have been defined in many different ways, but the one that arguably best captures the current understanding is the one put forward by Cohen et al. (1996) who define a routine as “... an executable capability for repeated performance in some context that has been learned by an organization in response to selective pressures” (Cohen et al., 1996: 683). As the quotation suggests, routines are seen as collective (organization) level constructs that somehow embody prior learning and are somehow selected for. Indeed, in evolutionary economics, routines are seen as having paramount importance, because they provide ”the central unit of analysis,” (Becker, 2004: 643), not only in the sense of being the most “micro” unit of analysis that is conventionally applied, but also in the sense of linking directly up with the evolutionary triad of variation (i.e., variation in routines across a population of firms), selection (i.e., changes in the relative weights of routines in this population), and heredity (i.e., the notion of routines as the social equivalent to genes). In fact, the new evolutionary economics that took off after the publication of Nelson & Winter (1982) is so strongly based on the notion of routine that a “routine-less” evolutionary economics seems 2 14143 almost impossible. Even mainstream economists have made occasional use of the routine notion (e.g., Milgrom & Roberts, 1992: 273-277). While the notion of routines may not enjoy similar prominence in business administration, the strongly related (and perhaps derived) concept (cf. Dosi, Nelson & Winter 2000: 4) of organizational capabilities has increasingly become a key construct, particularly in the field of strategic management (e.g., Eisenhardt & Martin, 2000; Henderson & Cockburn, 1994; Nelson & Winter, 1982; Teece et al, 1997; Zollo & Winter, 2002). Indeed, building on resource-based logic (Barney, 1991) and the notion of organizational routines (Nelson & Winter, 1982), the organizational capabilities approach has become perhaps the dominant way of thinking about heterogeneity and performance in strategic management. On the other hand, over the past two decades in management studies, transaction costs economics has emerged as a predominant theoretical explanation of governance structure choices. While the transaction costs theory is noteworthy for its analytical rigor in explaining such governance choices, the theory is criticized by some for overemphasizing the influence of ex post contractual costs (e.g. emphasizing contractual hold-up problems in large part due to asset specificity) and for underemphasizing the influence of revenue creation on governance structure choices (e.g. Gong, 2003; Popppo & Zenger, 1998). The resource-based theory also complements the transaction costs theory by focusing on the role of resources in creating firmlevel revenue and in shaping firm-level decisions. It is not surprising, therefore, that recently researchers have increasingly been integrating both theories toward providing a more complete understanding of various corporate strategic management activities, such as vertical integration (Mahoney, 2005), equity joint ventures (Tsang, 2000), strategic alliances (Madhok, 1997), diversification (Silverman, 1999), and export performance (Peng & York, 2001). 3 14143 The current paper develops an integrative organizational economics framework to explain an important theoretical thinking in organizational theory- the routinzation capability within a firm based on the resource-based view and transaction costs theory. Routines are strategic assets that influence the likelihood of generating and sustaining competitive advantages in a firm (Barney, 1986). On the other hand, routine is as a repetitive pattern, recurring action and so on (Feldman, 2000; Cohen & Bacdayan, 1994) which can save decision time and cut down the cost and the procedure or the flow path. These are all relevance the transaction cost. Transaction cost theory assumes opportunistic behavior existed in each deals and the firm needs to take some means or mechanisms to defense these opportunistic behaviors. As time accumulated, the defense mechanisms and actions would search out right way and also form defense models repetitively. That is a kind of routines. As a result, in this paper, we consider routinzation capability contains both characters of resource-based view and transaction cost theory. Although the recent study emphasize the importance of organizational routine in strategy management study (Cohen et al., 1996; Becker, 2004), the studies about how the organizational routines are organized and what performance the routinization process is are particularly lacking. Our paper’s specific contribution, then, is to provide a theoretical framework that explains how routinzation capability build on the transaction costs and resource-based view to set the menu of available choices that firms face in an industry. This is done through the identification of the specific transaction mechanisms that determine decision making over time. The paper also highlights other important considerations that have been underemphasized to date. First, it points out that transaction costs themselves are not fully exogenous; their magnitude depends on the conscious actions undertaken by firms. If industry participants stand to benefit from transaction cost reduction, they will actively try to reduce them. Furthermore, changes in transaction involve 4 14143 a significant feedback loop in the capability development process; changing transaction changes how capabilities evolve. Therefore, we suppose two specific research questions. 1. How the firm’s organizational routines impact its routinization capability? 2. Considering the firm’s organizational routines, how does the firm’s routinization capability affect its routinization performance? THEORETICAL BACKGROUND Organizational Routines Over the last 20 years, much progress has been made in understanding what drives the governance structures observed in practice. A key figure in that development was Oliver Williamson (1975, 1985, 1999), who elaborated and, crucially, operationalized the concept of transaction costs, initially formulated by Coase (1937). That research has focused on a particular stand f the Coasean inquiry, examining the conditions under which firms choose to abandon markets in favor of integration. The potential for hold-ups and opportunistic behavior, this theory suggests, is the main determinant of transactions. Independently, another stream of literature has come to have a defining impact on strategy as come to have a defining impact on strategy as a field: the resource- and capabilitybased view of the firm. This approach, which has its roots in Penrose (1959), and more recently Wernerfelt (1984) and Barney (1991), emphasizes the importance of resources in guiding firm action, and the management of a firm’s resource and capability portolio as the central concern of strategy. Of late, this research has used principles suggested by evolutionary economists (Nelson 5 14143 & Winter, 1982) and the focus has shifted to dynamic capabilities (Teece, Pisano, & Shuen, 1997). The line of thinking would suggest that the dynamics of resource management and the selection environment affect transactions.(Teece et al., 1994). In the last few years, a convergence between these two theories has started, creating a more satisfactory account of what drives transactions. Transaction cost economists, in particular, now accepts that we cannot fully understand choices of scope without assessing the resource bases of firms. Williamson himself recognizes that the transaction cost and internal firm perspectives ‘deal with partly overlapping phenomena, often in complementary ways’ (Williamson, 1999: 1098) and points out that a firm’s history and capability endowment matter to boundary choices, a theme developed by Argyres (1996) and Argyres and Liebeskind (1999). Williamson also recommends that traditional TCE query “What is the best generic mode (market, hybrid, firm) to organize X” be replaced by the question “How should firm A- which has preexisting strengths and weaknesses (core competences and disabilities)- organize X?” (Williamson, 1999: 1103). This question has been recently pursued by Madhok (2002), who suggested that an individual firm’s choice must depend not only on the characteristics of the transactional conditions, but also on its strategic objectives, the attributes of its own capabilities, and the governance context it has created. There is by now substantial empirical support for the proposition that considerations of transaction governance trade off against capability considerations when firms choose component suppliers (Walker & Weber, 1984; Poppo & Zenger, 1998; Hoetker, 2005). These contributions consider the complementary roles of transactional and capability considerations in the microanalysis of firm decisions. Recent progress notwithstanding, important gaps remain in our understanding of how transaction costs and resource/knowledge combine to determine routinization capability. 6 14143 Routines are major drivers of competitive advantage (Teece, Pisano & Shuen, 1997; Eisenhardt & Martin, 2000). Routines and dynamic capabilities, among other internal resources, are identified as major drivers of competitive advantage. During the last decade, research has been mainly devoted to analyze the sources of variation within firms such as innovation processes, learning dynamics and knowledge management as ways of building these valuable resources. That is why categorize organizational routine by RBV. Accordingly, we categorize organizational routine from TC and R/KBV perspectives. Operational routines: A transaction cost perspective Transaction cost perspective is principally concerned with managing exchange transactions such that the sum of production and transaction costs is minimized (Williamson, 1985). Production costs are those entailed in internalizing the functions of the exchange partner and transaction costs are those entailed in establishing agreements with, monitoring the performance of, and enforcing contractual clauses against the exchange partner. These agreements and monitoring both imply rules and routines in the both intra and inter-firms. In the context of manufacturer-supplier relationships, for example, a manufacturer can manage the supplier relationship by either routinely submitting the incumbent supplier to market discipline through periodic competitive bidding (the market governance mechanism) or internalizing the functions of the supplier (the hierarchy governance mechanism). Both the market and hierarchy governance mechanisms represent trade-offs between transaction and production costs. Market governance imposes transaction costs on the manufacturer, however it does not create production costs. In contrast, hierarchical governance imposes production costs on the manufacturer and minimizes transaction costs. The firm taking market or hierarchy governance mechanism depends on the experience of firm hided in the organizational routines. 7 14143 The transaction-cost problem owes its existence to the assumption of opportunism (John, 1984). A manufacturer's investment of specific assets in a supplier gives the supplier control over the manufacturer. This power advantage, coupled with the assumption that the supplier is potentially opportunistic (or may pursue its self-interest with guile), makes the manufacturer vulnerable to the supplier (Klein, Crawford, & Alchian, 1978). Desire to avoid partner opportunism (or anticipated transaction costs) is the process explanation that connects the transaction cost perspective antecedent variables, asset specificity and uncertainty, to the outcome, type of governance. That is also a kind of routines in building a defense mechanism to resolve the opportunism problem. One party's investment of specific assets in the partner increases the risk arising from potential partner opportunism, thereby making hierarchical governance more economical. This premise has received support in prior research (Pilling, Crosby, & Jackson, 1994). Transaction cost approach, however, also makes a less wellrecognized assumption about the impact of party opportunism on that party's commitment toward, and opportunism against, the partner. It suggests (Williamson, 1985) that since specific asset investments create delayed payoffs, the investing party has to ensure relationship continuity in order to secure these payoffs. Accordingly, the invested party will display commitment to the partner and refrain from behaving opportunistically against the partner in order to ensure the necessary continuity of the exchange relationship. Organizations in order to defense the partner’s opportunism behavior, they would set up a set of routines through properties of transaction cost theory, assets specific to reduce cost and control uncertainty. Learning routines: A resource-base or knowledge base view The field of strategy is concerned with the conditions under which the microeconomic equilibrium of homogeneous firms with zero profits can be overcome. The resource based view 8 14143 (RBV) holds that the equilibrium can be overcome if and only if two conditions are satisfied: (1) firms hold superior resources and (2) those resources are supported by isolating mechanisms preventing diffusion of the resource throughout the industry (Rumelt, 1984). One such resource commonly believed to hold potential for competitive advantage is organizational routine (Hitt & Ireland, 1985; Winter, 1987; Mahoney & Pandian, 1992). Routines are the organizational equivalent of individuals’ skills in that they provide capability for a smooth sequence of coordinated behavior (Nelson & Winter, 1982). Nelson and Winter view routines as the source of sustained performance differences between firms: ‘Organizations with certain routines do better than others [in the short term], thus their relative importance in the population is augmented over time [through investment routines which are keyed to profitability]’ (Nelson & Winter, 1982: 14). Both evolutionary economics and organizational evolution predict that over time the behavior of other firms in the industry will tend to resemble that of the leader firms. This obtains either through adaptation of individual firms, or selection of the fittest firms (Hannan & Freeman, 1977; Hirschleifer, 1977), or both (Alchian, 1950; McKelvey, 1982; Nelson & Winter, 1982). Adaptation can take the purposeful form of conscious imitation or trial and error (Alchian, 1950; Nelson & Winter, 1982), or the more autonomous form of movement of employees between organizations (McKelvey, 1982). The selection process is best perceived as the crowding out of less fit firms by successful firms that expand to absorb a larger fraction of the market. This process results in an increasingly higher standard being imposed as the minimum for competitive survival (Hirschleifer, 1977). Thus without an isolating mechanism, both evolutionary economics and organizational evolution predict that routines ought to diffuse throughout a population, thereby losing their value. 9 14143 However, routines do seem to be imbued with inherent isolating mechanisms: tacitness and causal ambiguity. One of the characteristics of skills imputed to routines is that the knowledge supporting execution is tacit (Itami, 1987; Rumelt, 1987; Winter, 1987): ‘The aim of a skillful performance is achieved by the observance of a set of rules which are not known as such to the person following them’ (Polanyi, 1962: 49). Even if the knowledge of each individual’s task within the organizational routine is explicit, the complex totality of the routine is likely unknown by most participants, and is therefore effectively tacit (Winter, 1987). Further, there may be causal ambiguity (Lippman & Rumelt, 1982) regarding which set of routines is actually responsible for the success of the firm. As above, we argue that the two approaches, transaction cost theory and resource-based view, to the firm are more complementary than substitutes. We consider the firm as an organizational device that simultaneously allocates and creates resources. In this "dual" vision, the firm simultaneously manages resource/knowledge and transactions, but it does so according to a specific order of priorities. The firm ranks its activities according to a key limiting factor: the focus of attention. First, it focuses on the building of the domain of core-competences, within which the firm functions as a processor of knowledge giving full priority to the creation of resources, as learning routines (Nelso & Winter, 1982). In this domain, the governance mechanisms (learning routines) are specifically devoted to knowledge co-ordination. Then, as we move away from the core, the firm tends to allocate resources and adapt to the environment in accordance with governance mechanisms, as operational routines, that are well analyzed by the transaction cost approach. 10 14143 Routinization Capability Routinization capability mainly concept drives from resources of dynamic capabilities. Resources are at the heart of the resource-based view (RBV). They are those specific physical (e.g., specialized equipment, geographic location), human (e.g., expertise in chemistry), and organizational (e.g., superior sales force) assets that canbe used to implement value-creating strategies (Barney, 1986; Wernerfelt, 1984, 1995). They include the local abilities or ‘competencies’ that are fundamental to the competitive advantage of a firm such as skills in molecular biology for biotech firms or in advertising for consumer products firms. As such, resources form the basis of unique value-creating strategies and their related activity systems that address specific markets and customers in distinctive ways, and so lead to competitive advantage (e.g., configurations, Collis and Montgomery, 1995, 1998; Porter, 1996; core competencies, Prahalad and Hamel, 1990; lean production, Womack, Jones, and Roos, 1991). Dynamic capabilities are the antecedent organizational and strategic routines by which managers alter their resource base—acquire and shed resources, integrate them together, and recombine them—to generate new value-creating strategies (Grant, 1996; Pisano, 1994). As such, they are the drivers behind the creation, evolution, and recombination of other resources into new sources of competitive advantage (Henderson and Cockburn, 1994; Teece et al., 1997). Similar to Teece and colleagues (1997), we define dynamic capabilities as: The firm’s processes that use resources—specifically the processes to integrate, reconfigure, gain and release resources—to match and even create market change. Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die. 11 14143 This definition of dynamic capabilities is similar to the definitions given by other authors. For example, Kogut and Zander (1992) use the term ‘combinative capabilities’ to describe organizational processes by which firms synthesize and acquire knowledge resources, and generate new applications from those resources. Henderson and Cockburn (1994) similarly use the term ‘architectural competence’ while Amit and Schoemaker (1993) use ‘capabilities.’ Why are organization routines so important? If we believe in the assumption of bounded rationality, we cannot suppose that actions result from an optimization program. One alternative is that actions are based on routines (Plunket, 2005), that is, regular and predictable patterns of behavior that are repeated in similar environmental conditions and that have been learnt in response to selective pressures (Cohen et al. 1996). Therefore, there are three aspects of routines must be emphasized: 1. They are the result of knowledge accumulation and experience 2. Since they are the result of learning, they are context- (local) and path-dependent (historical). 3. They are partly tacit and the organization is partly unaware of their existence because they are embedded in organizational and individual practices. According to Nelson and Winter (1982), the cognitive aspect relates to the fact that individuals/organizations know what to do and how to do it in recurring and similar situations, and relates to the fact that individuals or group of individuals do what is “required” of them by the organization. As such, routines play a major role in coordination either between individual organizations or individual members. Routines are stable patterns of behavior that characterize organizational reactions to variegated, internal or external, stimuli. Every time an order is received from a customer, or a decision is made to upgrade a production process, for instance, a host of predictable and 12 14143 interrelated (sequential and/or simultaneous) actions are initiated, which will eventually conclude with the shipping of the ordered goods (and receipt of corresponding payment) or with the launch of the new production system. In spite of the superficial similarity between these two examples, though, the two patterns of behavior present a theoretically relevant distinction. The first type of routine involves the execution of known procedures, while the second seeks to identify the necessary changes to an existing set of production routines. Given the objectives of the present work, it will be necessary to distinguish the first type, which can be labeled operational routines, from the second type, usually known as learning, or search, routines (Nelson & Winter, 1982). Routines of the latter type are a central constituent of dynamic capability. It is also important to recognize that routines, both operational and learning ones, have different effects on the generation and appropriation of rents depending on the pace of change in the environment. Of course, effective operational routines are always a necessity, and superior operational routines are always a source of advantage. For example, all food service operations focus on common operational routines, namely purchase ordering, stock management, food production and sales control. This cycle of activities is the same whether your business is involved in high street restaurants, staff catering operations, retail outlets, food production units or any other style of catering business. This means a standardized system or procedure to save the coordination problems, decision making time, communication cost and so on. These are relevant part of transaction costs. In a relatively static environment, a single learning episode may suffice to endow an organization with operational routines that are adequate, or even a source of advantage, for an extended period. Incremental improvements are accomplished through the tacit accumulation of experience and sporadic acts of creativity. 13 14143 Learning routines are unnecessary, and if developed may prove too costly to maintain. But in a context where technological, regulatory and competitive conditions are subject to rapid change, persistence in the same operational routines quickly becomes hazardous. . . Systematic efforts at learning are needed to track the environmental change; both superiority and viability will prove transient for an organization that has no learning routines. If change is not only rapid but also unpredictable in direction, learning routines themselves will need to be updated repeatedly. Failure to do so turns core competencies into core rigidities (Henderson & Clark, 1990; March & Levinthal, 1993; Leonard Burton, 1992). It seems clear, therefore, that a theory of the development and routinization capabilities, must invoke mechanisms that go beyond semiautomatic stimulus-response processes in operations and experience-driven. Organizations must combine both learning or searching routines and operational routines to build routinization capability, even dynamic capability. Routinization Performance One of the central problems faced by management today is how to cope with the uncertainties arising from the internationalization of competition, increasing pressures to innovate, new communication technologies, and other sources of turbulence. With a few exceptions (Baumol, 2002), business scholars and economists have offered remarkably little advice in the way of helping management cope with the different forms of uncertainty that arise from alternative sources of turbulence. In an effort to fill this gap, the present article combines extant research from economics and strategy to identify uncertainty and the generic strategies that are appropriate to handle each uncertainty. In addition, in knowledge management studies, organizational knowledge represents such a resource. Its importance is increasingly recognized. Nonaka (1991) acknowledges that the one sure source of lasting competitive advantage is 14 14143 knowledge. Knowledge represents the result of a series of processes such as information generation, information dissemination and information interpretation (Sinkula 1994). Specifically, organizational routines will "hold" the knowledge. It represents the "lens" through which information is interpreted. Information will be generated based on the lessons learned when collecting previous information that, in time, has been transformed into knowledge and be stored in the organizational routines. That is organizational routines as firm’s new capability. Thus a new capability is created for the organization, the capability to identify, assimilate and exploit information (knowledge) from the environment. Specifically, a firm’s decision maker could less uncertainty and more information to do the right decision. Cohen and Levinthal (1990) refer to this capability as the organization's absorptive capacity. Leonard-Barton (1995) considered this capacity to be increasingly important in today's business environment. Categorized by the above studies of organizational routines, this study proposes that routinization capacity affects three major factors and results, a firm’s decision maker’s experience of uncertainty related to environmental issues, intra-firm knowledge dissemination, and organization responsiveness. Uncertainty. According to standard approaches in economics, the problem of choice under uncertainty may essentially be remedied by increasing the amount of information available to the decision maker (Luce & Raiffa, 1957). In the organization literature, this idea is mirrored in the understanding that organizations process information to reduce uncertainty and adapt their structures to better cope with uncertain environments (Thompson, 1967; Galbraith, 1973). In the strategy literature, related ideas surface under the terms scanning or information processing (Khandwalla, 1973; Miller, 1987) and in the marketing literature as coordinated decision making under uncertainty among marketing channel members (Achrol & Stern, 1988). 15 14143 While these streams of literature mention that situations exist in which uncertainty prevails despite organizational adaptation and despite increases in information, the situations where information-processing strategies are appropriate are usually not distinguished from the situations where alternative strategies must be used. The present article identifies a criterion that distinguishes such situations of uncertainty where increasing information will help reduce uncertainty from such situations where it will not. We use the term uncertainty to denote the situations in which uncertainty prevails because it is impossible to associate point probabilities with events. In the organization literature, the term equivocally denotes a similar condition (Weick, 1979; Daft & Lengel, 1986). As reported in the following section, our review of the economics, organization, and strategy literatures makes clear that a distinction between forms of uncertainty promises to clear up contradictory research findings. Milliken (1987, 1990) previously made a similar point and provided a useful distinction between three forms of uncertainty. In this article, we add a distinction between forms of uncertainty that is of fundamental importance as a complement to Milliken’s (1987). Whereas organizational routinization capability is a way to reduce uncertainty, it is appropriate to increase information when other, less demanding forms of uncertain situations arise. Therefore, we point out that organizational routinization capability is a way to reduce pervasive uncertainty in decision making, whereas increasing the available information is appropriate when other, less demanding forms of uncertain situations arise. Organization Responsiveness. Organizational responsiveness is the action taken in response to the relevant information generated and subsequently filtered (Kohli, Jaworski, and Kumar 1993). It is related to performance. Responsiveness reflects speed and coordination with which the actions are implemented and periodically reviewed. It also refers to evaluation of over 16 14143 - or under-fulfilling of goals and correcting accordingly and to interdepartmental cooperation and coordination (Kohli, Jaworski, and Kumar 1993). All these determine the success of entrepreneurial businesses. They are compatible with Levin's (1988) approach that examined the mechanisms used by firms to acquire technical knowledge of process and product innovations developed by a competitor. However, we extended it beyond technical information (knowledge) and considered all signals coming from the environment. Intelligence and knowledge dissemination. Once information is gathered and brought into SMEs, the next major responsibility within the company is to separate relevant market signals and transmit and disseminate them to all interested parts of the organization. Without information transfer and dissemination no response could be designed and implemented. Sinkula (1994) pointed out ways to disseminate information: interdepartmental meetings and their frequency, interdepartmental cooperation, contacts with customers and their frequency, etc. Conceptual Framework The theoretical framework regarding the relationship between organizational routines, routinization capacity and performance is presented in Figure 1. Performance included organizational responsiveness, uncertainty and intelligence dissemination which represent the dependent variable. The organizational routines, learning routine and operational routine, based on knowledge and transaction cost perspectives separately represent predictors. More specific, organizational routinization capability represents the mediator. It is hypothesized that the relationship is medicated through the organizational routinization capability. According discussed above, we bring up the theoretical framework as follows. 17 14143 -----------------------------Figure 1 about here ------------------------------ PROPOSITIONS DEVELOPMENT Organizational Routines and Routinization Capability In the emergence of dynamic capabilities, the entire process described in the model above itself becomes the subject of the collective learning (Dosi, Nelson & Winter, 2000). Mindful of the above-mentioned limitations of the existing definition of dynamic capabilities (Teece, Pisano & Shuen, 1997), and in the spirit of bridging the behavioral and cognitive approaches to the organizational learning phenomenon (Glynn, Lant & Milliken, 1994), Zollo and Winter (2002) propose the definition of dynamic capability is a learned pattern of collective activity through which the organization systematically generates and modifies its operational routines in pursuit of improved effectiveness. However, we referee Nelson and Winter (1982) to modify the definition of routinization capability is a learned pattern of collective activity through searching routines to learning, searching and comparing with exist operational routines and then the organizations systematically modifies and renews its operational routines in pursuit of improved effectiveness. What features distinguish an organization capable of systematically developing new and enhanced understanding of the causal linkages between the actions it takes and the performance outcomes it obtains? We focus the attention on the routinization process, which supports the retention and at least part of the variation mechanisms, and on the knowledge articulation and codification 18 14143 processes, which constitute the internal selection mechanism (Zollo & Winter, 2002). Of course, this is not to say that the environmental scanning activities, also part of the variation mechanism are less important. They are viewed here as inputs to the dynamic capability building process, rather than parts of the process itself. For example, a sound understanding of what competitors do and customers desire represents a crucial element of any firm’s competitive strategy, but, in and of itself, does not make it any more capable of creating and modifying its own set of operational routines. Also, an inherently tacit form of collective knowledge such as the one under study is highly unlikely to be developed or shaped simply by the observation of competitors, suppliers, customers or other external constituencies. It will have to be developed “in-house” through a set of activities and cognitive processes focused on the organization’s own routines. Finally, the replication process – the set of activities that enable an organization to replicate its own routines in novel contexts without excessive losses in performance, they are certainly an important part of the routinization capability. As mention above, the firm focuses on the building of the domain of core-competences, within which the firm functions as a processor of knowledge giving full priority to the creation of resources, as learning routines (Nelso & Winter, 1982). In this domain, the governance mechanisms (learning routines) are specifically devoted to knowledge co-ordination. As a result, we address the following relationship between learning routines from resource or knowledge based approach and routinization capability: P1: A firm’s learning routines is positively related to its routinization capabilities. Then, as we move away from the core, the firm tends to allocate resources and adapt to the environment in accordance with governance mechanisms, as operational routines, that are well analyzed by the transaction cost approach. Consequently, we propose the following 19 14143 relationship between operational routines from transaction cost approach and routinization capability: P2: A firm’s operational routine is positively related to its routinizational capability. Routinization capability as a coordination mechanism, furthermore, its coordination function can fill up transaction cost theory and resource-based view whether is intra-firms or inter-firms. Transaction cost theory focus on the reduce cost; defend opportunistic behavior and so on, and resource-based view major on building owned sustainable competitive advantage. Routinization Capability and Performance Routinization Capability and Uncertainty. Since most of the mentioned works do not clearly distinguish between uncertainty and risk, it is unclear whether the mentioned responses are viable under conditions of uncertainty. A promising starting point for progress in that direction is recent work in finance (Lien, 2000) that clearly makes a distinction between uncertainty and risk and then proceeds to outline the difference in hedging strategies between the two situations. According to the proposed solution, hedging under uncertainty must be based on inertia in behavior (Lien, 2000), which implies some form of routinization. Whereas the decision under risk is whether to hedge or not, the problem under uncertainty is to choose the right degree of hedging. The role of inertia or routinization is to limit the possible set of options that are considered and thereby enable better decisions. More generally, various literatures support the idea proposed in the present paper that routines can enable decision making in situations that are characterized by environmental turbulence (Baumol, 2002; Paswan et al., 1998; Eriksson & Sharma, 2002; March & Simon, 1958; Cyert & March, 1992; Miller, 1987; Nelson & Winter, 1982; Richardson, 1960). According to these works, decision makers would better be able to cope with uncertainty if their 20 14143 strategic responses were constrained by routinized behavior. Based on these sources, routinization must be viewed as a necessary requirement to cope with situations of uncertainty. In an influential work in economics, Heiner (1983, p. 570) has offered the important hypothesis that ‘‘greater uncertainty will cause rule-governed behavior to exhibit increasingly predictable regularities, so that uncertainty becomes the basic source of predictable behavior.’’ Arguments can be found that turn the direction of causality so increases in routinization may be viewed as an uncertainty decreasing strategy. By fixing certain parameters, firms may (1) increase predictability and at the same time (2) free limited cognitive resources. As emphasized by Baumol (2002), Hodgson (1988), and North (1990), institutions and routines are sources of regular and predictable behavior in the face of uncertainty, complexity, and information overload. The classical statement is Knight’s (1921) suggestion that firms may prefer relatively predictable lines of activity to more speculative operations. Later, Knight and Merriam (1948) suggested that the tendency to follow routines increases predictability, and Richardson (1960) suggested that various restraints introduce the necessary friction for the working of the economic system. More recently, it has been emphasized that routinization reduces systems level uncertainty associated with competition and technological risk (Shapiro & Varian, 1999). Apart from introducing predictability at the systems level, a number of authors (March & Simon, 1958; Nelson & Winter, 1982; Simon, 1947) have emphasized that routinization also greatly reduce individual level cognitive demands. Routines allow managers to cope with uncertainty under the constraint of bounded rationality because they can be used to save on mental efforts and thus preserve limited capacity required to deal with nonroutine events (March & Simon, 1958). Because routines introduce predictability by fixing certain parameters and by freeing cognitive resources, we propose the following relationship between routinization and uncertainty: 21 14143 P3: A firm’s routinization capability is negative relative to its decision maker’s experience of uncertainty related to environmental issues. Routinization Capability and Intelligence/Knowledge Dissemination. In the case of an illstructured environment, it will be impossible to derive a function that can support the ordering of outcomes (Simon, 1955). Therefore, a countermeasure has to be designed that will simplify and structure the decision problem so it can be handled within the decision maker’s cognitive limitations. Earlier studies have indicated that organizational routines affect what information decision makers collect (McNamara & Bromiley, 1997; Eriksson & Sharma, 2002). As argued in the previous section, routinization provides a general solution to this problem. Routines greatly reduce the cognitive demands on individuals and thus preserve limited decision-making capacity (March & Simon, 1958). Routinization serves the further purpose of supporting increases in the level of the organization’s intelligence and knowledge dissemination by reducing the time cost of choosing among possible receivers. Routinization leads to a more effective channeling of information throughout the organization. As the level of intelligence dissemination increases, more aspects of intelligence and knowledge dissemination therefore must be routinized to obtain the same level of effectiveness of dissemination of information. Hence, we propose the following relationship between routinization capability and intelligence and knowledge dissemination: P4: A firm’s routinization capability is positive relative to its intelligence and knowledge dissemination. Routinization Capability and Responsiveness. According to the definition given earlier, responsiveness refers to actions taken in response to intelligence that is generated and disseminated throughout the organization. This definition was based on the marketing literature (Kohli et al., 1993). A literature survey of the strategy literature uncovers a similar definition of 22 14143 responsiveness as the organization-wide ability to react to changes (Milliken, 1987). The strategy literature emphasizes three aspects of the responsiveness construct: (1) the willingness and the readiness in reacting to changes (Guiso, 1998), (2) reaction speed (Zaheer & Zaheer, 1997), and (3) responsiveness to local signals as opposed to global integration (Taggart, 1997). We now argue that routinization capability increases the organization-wide ability to react to changes. As indicated earlier, routinization capability increases the potential for focused attention by preserving limited information processing and decision-making capacity (Simon, 1947; Postrel & Rumelt, 1992; March & Shapira, 1987). In order to better use limited capacity, attention is usually focused on nonroutine events whereas recurring events are dealt with semiconsciously (Postrel & Rumelt, 1992; Simon, 1947). Since the semiconscious processing of repetitive events requires less or almost no cognitive resources, this procedure, when established, leads to an increase in the available cognitive potential that may be used to attend to nonroutine events (Reason, 1990). This argument holds only if one or more domains are characterized by uncertainty whereas at least one domain is not (Milliken, 1987). In this case, routinization must be used in the domains characterized by uncertainty, and the free attention must be risk. That is to say, if the decision maker lives in a sea of uncertainty, everything should be routinized and the free attention should solely be used to devise new routines. Routinization frees cognitive resources, but these resources must be used to deal with such problems that can be solved, i.e., problems in the realm of risk but not uncertainty. In the case of change, events are always novel in some sense and thus require nonroutine response. Routinization introduces a division of labor where trivial, frequently occurring events are handled with very limited resources. The resources, which would otherwise be employed in the absence of routinized behavior, are then free to respond to nonroutine events. The firm’s 23 14143 responsiveness, its ability to react to changes, should therefore increase as the degree of routinization is increased. As a result, we propose the following relationship between routinization capability and responsiveness: P5: A firm’s Increasing routinization capability leads to an increase in responsiveness. DISCUSSION There are two specific research questions in this paper: (1) How the firm’s organizational routines impact its routinization capability? And (2) Considering the firm’s organizational routines, how does the firm’s routinization capability affect its routinization performance? We discuss these questions by providing an integrative organizational economics framework to the study of the building of routinization capability within organization. It does so by drawing on arguments derived from both the transaction cost theory and resource/knowledge based view. Starting from a complementary relationship of transaction cost theory and resource based view that highlights the role of systematic patterns of organizational activity aimed at the generation of new, and the adaptation of existing, operational routines, we have proposed that they are likely to emerge from the co-evolution of both mechanisms: learning routines and operational routines. One of the most intriguing implications of the inference, for theoretists and practitioners alike, is the somewhat counterintuitive notion that interaction between learning routines and operational routines activities become superior mechanisms with respect to the accumulation of expertise as the frequency and the homogeneity of the tasks are reduced. The result is in fact quite the opposite of what organizations typically do. A bank would copiously codify its branch operations (how to open an account, execute a wire transfer etc.), a manufacturer would do the 24 14143 same with its standard operating procedures, but neither would typically be prepared to do the same when it comes to managing a re-engineering process. In our view, this is just one example of the potential benefits for theory building and management development purposes that may be derived from an inquiry into how routinization capability is generated and evolves within an organization. The present article discusses implications in a number of ways to the body of knowledge in cope with uncertainty. First, on the basis of the strategy and economics literature, we have identified uncertainty and risk. Whereas organizational routines are a way to reduce uncertainty in decision-making, we pointed out that the second generic strategy of increasing the available information is appropriate when risk situations arise. We propose the proposition that organizational routinization capability is a way to reduce uncertainty. This result provides an important basis for future empirical research that aims to uncover in more detail how organizational routines mitigate uncertainty. A second advantage of the present analysis is that such future empirical research can be designed to include treatments that take the distinct differences in uncertain situations into account. A third advantage is that prescriptive studies as well as practitioners can take heed of the argument that distinct uncertain situations require distinct remedies. It is clearly important for management to distinguish between risk that can be reduced and uncertainty that cannot be influenced in any way. In the latter case, we have argued that routinization capability is a viable strategy that enables decision makers to direct limited cognitive resources at problems that can actually be solved. In consequence, the decision maker will experience less uncertainty, and the quality of the decisions that get made increases because the ineffective use of limited cognitive resources has been diminished. 25 14143 The practical value of our argument lies in providing a theoretically sound basis for distinguishing two very different situations of uncertainty. The distinction between risk and uncertainty is important in evaluating the recent effects of the internationalization of competition, increasing pressures to innovate, new communication technologies, and other sources of turbulence. Distinguishing situations of risk from situations of uncertainty provides managers with a much more fine-grained understanding of the problems they are facing. Our argument not only supports the idea that different strategies are appropriate in each situation. It also identifies a strategy not usually considered for coping with risk, namely, routinizing decision making. In consequence, managers are provided with a basis for choosing the most appropriate generic strategy: In situations of risk, increase the information available. In situations of uncertainty, increase the routinization of decision-making. This study proposes the theoretical argument that routines help managers cope with uncertainty by freeing cognitive resources. Fixing the recurring and relatively unimportant parameters in a decision problem by routinization seems to be a viable strategy in coping with uncertainty. It also implies that semiconscious mechanisms deal with recurring problems so attention can be freed to focus on the problems that can be solved. Our results build on and extend recent research that questions this opposition of routine and change. Rather than having to break routines in order to be flexible, Feldman (2000) argues that endogenous change is comprised in routines. Accordingly, in order to better understand organizational change, a better understanding of routines, both operational routines and learning routines, is required. The present article provides the argument that routinization and change are not necessarily in contradiction. However, the identification of these semiconscious mechanisms and 26 14143 understanding the interaction between a semiconscious mode of operation and information processing deserve much more attention in future research. We know little, for example, of how the characteristics of the organizational structure and culture interact with the features of the task to be mastered in determining the relative effectiveness of the various learning behaviors. Under what conditions does that enable, as opposed to inhibit, performance? To what extent is intentionality necessary to produce adaptive adjustments in existing routines? 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