ECONOMICS OF CORPORATE STRATEGY

Economics of Corporate Strategy

Economics of Corporate Strategy

ANSWER # 1

Part 1

(a) Tacit Knowledge

Tacit knowledge is a concept developed by Michael Polanyi in 1958. The term tacit knowledge is used in the field of disciplines that study the functioning of organizations which includes the sociology of work in organizations, business theory, business economics, management science, etc. It is linked to the understanding of the contexts of action, intuitions, feelings that can hardly be understood by those who do not share that experience. Tacit knowledge is integrated in individuals and is strongly embedded in organizations. Most knowledge resides in the heads of people in the form of practical knowledge of general rules based on intuition and personal experience. This type of tacit knowledge is less structured and can be difficult to convey, but this knowledge is essential to make judgments and to act (Hubbard, 2006).

Tacit knowledge is not easily formalized. It is difficult to transfer within the company or between companies. Experienced workers may transfer tacit knowledge to novices through direct contact and dialogue, for example, through mentoring or tutoring. Tacit knowledge is often the result of personal experience, but it can also be drawn from the experience of others.

(b) Idiosyncratic Knowledge

Humans' posses numerous personality traits and features and idiosyncrasy is one of them. Idiosyncrasy can be simply defined as having "Odd Habits". The word is generally used to express odd behaviour or strange behaviour. The Portfolio Theory explains numerous risks related to price changes over time and the exclusive conditions of a precise security can be termed as "Idiosyncratic Risk". This risk can be easily reduced from a portfolio through various diversification methods and models. These methods possess large number of security concerns for the society and organizations. These risks can also be called as disorganized or specific risk.

In majority of the developing and business sectors, there are virtually no or little re-compensations for idiosyncratic related risk. For example, in a developed and stable business market in which the capital asset pricing model holds, systematic risk determines the price related securities. In the field of econometrics, idiosyncratic error is generally used to explain those errors which originate from numerous panel data across units (Besanko, 2005).

(c) Path Dependence

Path dependence is an analytical concept in the social sciences. Traditionally, the economics tend to focus on finding the equilibrium points. This gives, for example in the neoclassical theory by the interplay of supply and demand. Their viewpoints lead to a model of the economy that is predictable and efficient. Each step away from equilibrium, the system will trigger negative feedback effects that push back the system to the equilibrium state. The balance can be described as the best and most efficient allocation of resources under the given circumstances.

The special feature of path-dependent processes is that they are at the intersections of non deterministic, but chaotic behaviour. A small disturbance leads through positive feedback to a very different outcome. Other hand, since the transition to a stable phase takes place ...