Drawing on an empirical study on automakers? management of supplierinvolvement in product development in Japan, this paper shows that when the design ofa component is outsourced to a supplier, how much and what automakers know aboutthe component matters for them to gain a better outcome. While the actual tasks ofdesigning and manufacturing components could be outsourced, automakers shouldretain the relevant knowledge to obtain better component design quality. The paperargues that knowledge partitioning should be distinguished from task partitioning, andprovides some implications for the knowledge-based theory of the firm.The results indicate that effective pattern of knowledge partitioning differs bythe nature of component development project in terms of technological newness. Forregular projects, it is more important for the automaker to have a higher level ofarchitectural knowledge (how to coordinate various components for a vehicle) than ofcomponent-specific knowledge, which is supposed to be provided by the supplier.However, when the project involves new technology for the supplier, it is important forthe automaker to have a higher level of component-specific knowledge to solveunexplored engineering problems together with the supplier. In innovative projects,effective knowledge partitioning seems to demand some overlap between an automakerand a supplier, rather than efficient and clear-cut boundaries, which are optimal forregular projects. Such ?fluid? nature of knowledge boundaries contingent on the projecttypes poses a challenge for firms seeking both technological leadership as well asefficiency in established products.Developing and maintaining knowledge about an outsourced component is byno means easy. When the actual design tasks are outsourced, automakers misssubstantial opportunities to gain relevant knowledge through learning by doing. Also,obtained knowledge may be diffused among competitors through shared suppliers.Another problem for automakers is that component-specific knowledge is important foronly limited cases (innovative projects). Even worse, component-specific knowledgehas a trade-off relationship with architectural knowledge.Such an inherent dilemma of managing knowledge, however, may providesome automakers with the opportunity to achieve sustainable competitive advantage.Additional analysis shows that one automaker managed both types of knowledge betterthan others in a manner that deals effectively with the dilemma. Its organizationalmechanisms include career development policies, extensive documentation oftechnological information, internal training programs, and incentive schemes. Thedifficulty in implementing those mechanisms in a consistent and complementarymanner seems to explain why there was a significant variance among automakers inknowledge level, even when the actual tasks were carried out by a shared supplier.(414 words)
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