The Knowledge-based Firm:
Strategies for growth and competitive advantage
by Alan Burton-Jones
strategies frequently reflect an outmoded vision of the firm, based
on industrial era concepts of production factors and associated
competitive dynamics. Viewed through such traditional lenses, knowledge
is typically viewed as a commodity like
labour, materials or money to
be organized and managed using traditional methods. As a result,
critical differentiating features of knowledge are overlooked, links
between knowledge and business strategy are misperceived, and knowledge
management strategies either never get off the ground or produce
In contrast to this traditional
view of the role of knowledge in the the firm, knowledge-based theory
of the firm (KBT) sees the creation, protection and and integration
of knowledge as the firm's principal function. A firms competitive
advantage thus fundamentally derives from how well it performs this
function Knowledge can only be developed and tacit knowledge only
stored in the human brain, thus knowledge is inherently a human
attribute, but it may be reflected or symbolically represented in
organizational structures, products and other intangible/ intellectual
resources which typically form both the inputs to knowledge acquisition/creation
and the outputs from knowledge use.The radically differing characteristics
of knowledge in people and knowledge as represented in other intellectual
resources, combined with the increasing interdependence between
people and these other resources implies firms' competitive success
in the new economy will depend on how well they manage not only
individual intellectual assets such as people or information
systems, but importantly asset interdependencies e.g between
people and systems, people and corporate brands, etc
The central tenet of this paper
is that to survive and succeed in an increasingly knowledge-intensive
economy firms' stakeholders need to envision the firm as as a knowledge
centred enterprise. Key strategies required to implement this vision
may involve radically different approaches to those used previously
in key areas including resource acquisition, innovation and integration
and new strategies to achieve sustainable competitive advantage
from an increasingly intangible/ intellectual resource base.
Firms as knowledge integrators
require a constant supply of knowledge inputs. Key issues for firms
include selection and management of human knowledge resources, balancing
knowledge demand and supply, and acquiring the knowledge of other
Selection and Management of Knowledge Resources.
The characteristics of knowledge required by firms determine the relative
economic efficiency of maintaining such resources internally or sourcing
them externally., Critical determinants include: level
of supplier knowledge, firm specificity of knowledge and the value
of knowledge to the firm. Knowledge which is tacit or highly specialised,
firm specific, and mission critical can be efficiently internalised.
Knowledge which is explicit, commonly available, non specific and
of low strategic value will be more efficiently sourced externally.
While not in control of these determinants, firms will benefit from
recognising their implications for restructuring internal organization,
designing internal incentive schemes, identifying the most appropriate
sources of supply and managing supply arrangements.
Balancing Knowledge Demand and Supply.
Achieving the optimum balance between what the firm knows and what
it needs to know at any one time is the knowledge equivalent of cashflow
management. Too much and the knowledge is sitting idle, not earning
a return. Too little and the firm has a knowledge flow
problem. In practice perfect congruence is rarely if ever achieved.
A firms knowledge at any point in time will inevitably represent
a state of simultaneous oversupply and under supply.
Factors causing this situation are typically uncertainty regarding
future events and difficulties estimating timing, such as time to
market, or timing of product adoption. Strategies to mitigate the
effects of uncertainty and timing include market contracting, knowledge
trading and inter firm collaboration. Market contracting can be improved
by optimising the balance of internal and external resources as noted
above. Access to externalised resources directly or via intermediaries
such as staffing or outsourcing services can assist this process.
Collaboration and knowledge trading can be assisted by firms forging
links with other firms in the same geographic area or industry. The
biotechnology industry for example, has benefited from a continuous
and mutually beneficial exchange of knowledge, involving academic
institutions, specialist biotech firms and large pharmaceutical companies.
Similarly regional clusters of firms such as those in the Prato region
of Italy benefit from frequent and informal knowledge exchange. The
development of electronic networking is facilitating collaboration
by removing the limitations of time and place.
Acquiring the Knowledge of Other Firms.
Knowledge-based acquisitions will be designed to increase the depth
of firms existing knowledge or to extend the breadth of knowledge
under their control. Increasing depth of knowledge will involve firms
merging with or acquiring other firms in the same industries (knowledge
domains) as themselves, for example, to improve geographic coverage,
increase market share, or improve the efficiency of their vertical
value chains. Increasing breadth of knowledge will typically involve
acquisition or collaboration with firms in different industries/knowledge
domains. Typical motivations for such moves will be to gain productive
efficiencies or to improve innovative capabilities. Flow on benefits
may include increased market/geographic coverage and greater market
power. Examples of both knowledge deepening and broadening
can be seen from a cursory reading of the daily press. Accountancy
and legal firms for example are busily deepening their knowledge bases
by acquiring other accountancy and legal firms. Broadcasting, publishing,
telecommunications and computing companies are busily broadening their
knowledge bases through mergers. Similarly, banking, insurance and
financial services are linking with travel firms, and suppliers of
gas, water and electricity are becoming utility companies.
Issues surrounding knowledge acquisitions typically include culture
clashes and problems transferring knowledge between disparate knowledge
domains. Understanding corporate culture essentially implies acquiring
knowledge of how a firm or its workers behave in certain contexts.
Most information exchanged before a corporate merger or acquisition
however is typically decontextualised facts and figures, providing
little insight into corporate values and still less insight into actual
norms of behaviour. A knowledge-based approach, which emphasises the
importance of early exchange of contextual information regarding culture,
values and behaviour, could prevent many a corporate marriage ending
up on the rocks.
Issues associated with knowledge transfer include stickiness and absorptive
capacity. Stickiness refers to the difficulty often associated with
codifying knowledge i.e. turning it into explicit, transmittable information.
Whereas stickiness slows down the transmission of knowledge, absorptive
capacity affects how easily recipients can understand it. Prior knowledge
of a domain tends to make it easier for recipients to understand new
information related to that domain. The converse is also true, as
many firms have found to their cost when venturing into unfamiliar
product markets or seeking to acquire other firms in different industries.
Understanding the objectives of knowledge centred growth should enable
firms to improve their evaluation of acquisition options, guard against
the risks involved in entering disparate knowledge domains and ensure
that acquisitions result in improvements in their knowledge bases.
Knowledge creation in
the firm has been shown to depend upon a series of repeated interactions
between tacit and explicit knowledge which involves four possible
permutations: tacit to explicit: explicit to explicit; explicit to
tacit and tacit to tacit. Firms have to date tended to focus on the
first two of these permutations. On the tacit to explicit dimension,
firms have concentrated on developing systems that would enable them
to dispense with the idiosyncratic and often tacit knowledge of particular
workers. Where such knowledge has been deemed potentially valuable,
efforts have been made to convert it into explicit rules based systems.
On the explicit to explicit dimension, firms have found the capabilities
of IT ideal for accurately recording and managing large volumes of
IT has however, not been used to the same extent to date, to help
address the second two knowledge permutations explicit
to tacit and tacit to tacit. This appears to be partly because the
available technologies have been ill-suited to the task and partly
because of firms preoccupation with controlling and providing
access to information, rather than acquiring and building knowledge.
As Bipin Junnarkar, former head of Monsantos Knowledge Management
initiative says, "
. nowadays its not content that people
lack, but context. Firms have emphasised completeness of information
rather than clarity of understanding
Firms are now beginning to address the explicit to tacit dimension
through case based systems, which provide a richer array of contextual
information. By studying the details of previous corporate experience
in a situation analogous to one in which they find themselves, endusers
are often able to absorb more information than by simply reading a
set of prescribed rules or procedures. Tacit to tacit transfer may
also be assisted by a context sensitive approach to providing information.
The lessons of experience tend to be encapsulated in the story rather
than spelt out explicitly. In this sense, some of the tacit knowledge
of the originator may be more effectively transferred to the recipient.
According to KBT, knowledge is acquired by and in the case of tacit
knowledge, stored by individuals. Due to time and cognitive limitations,
individuals need to specialise in the knowledge they acquire. Production
(value creation through translation of inputs to outputs) requires
the integration of multiple disparate types of specialised knowledge
from individuals and other sources.
Mechanisms to achieve knowledge integration in the firm include routines
and directives. Organizational routines allow co-workers to exchange
information on an as needed basis. Directives include the provision
of information in policies, procedures and guidelines which workers
can use without needing to understand the prior knowledge which gave
rise to them. Embedding knowledge in routines and directives may thus
not only assist its integration but also offer protection against
its unauthorised use.
To date firms have mainly focused on standardising and commoditizing
knowledge, rather than creating or acquiring it. As firms look for
new ways to gain a competitive edge, they may be expected to switch
their focus towards the provision of case-based as well as rule-based
information, improving informational clarity, and assisting the processes
of creating and sharing tacit knowledge.
The organisation of the
firm in the late nineteenth and early twentieth century was machine-like.
Formal hierarchies of individuals, worked on defined tasks in a prespecified
and sequential manner. This model worked well enough in the days of
large, highly specialised labour forces engaged in mass production,
but has lost much of its relevance in todays highly service
oriented and knowledge-based economy. Since, the modern firm is essentially
an integrator of knowledge, the model of how best to organise such
an activity is clearly the human brain, hence the value of a cognitive
model of the firm.
Traditional theories of how the human brain worked, envisioned some
central processor into which streams of data were fed and subsequently
processed. Present theories based on cognitive science suggest that
instead, the human brain may work by configuring many small processors
(neural circuits) into large scale neural networks, with each processor
able to communicate to any other. This peer to peer networking concept
provides a metaphor for the networked organisation, in which functions
and resources are dynamically organized. Key features of this networked
concept of the firm, include the capability of individuals to achieve
and if necessary question objectives (learning to learn) to manage
themselves (self-organisation) and to undertake different tasks (multi-skilling).
The cognitive model of the firm can be useful to firms in helping
them to design organizational structures which facilitate knowledge
sharing, integration and creation, both internally and with external
knowledge suppliers. Maintenance of high cohesion (team unity) and
minimum coupling (knowledge transfer) will be essential. Learning
on the job will need to be accompanied by a continuous program of
knowledge acquisition designed to facilitate multi-skilling and absorption
of knowledge from other domains. Autonomous teams and decentralised
organisational control, as proposed in Total Quality Management (TQM)
and Business Process Reengineering (BPR) methodologies both reflect
aspects of the cognitive model of corporate organisation. Designing
effective organizational structures should help firms to better identify
the value to be gained from using such methodologies.
Three broad avenues for
development of knowledge-based competitive strategies include: leveraging
existing knowledge to improve profitability, knowledge sharing to
assist productivity and innovation, and reusing knowledge to generate
business growth. The first approach is largely dependent on defining
measuring and valuing knowledge. The second approach focuses on acquisition,
sharing and development of knowledge. The third approach entails deriving
precisely codified routines and directives from (largely) tacit knowledge.
Leveraging Existing Knowledge.
Dow Chemical provides a relevant example of leveraging knowledge to
improve profitability. In 1993, Dow Chemical appointed one of its
global business managers, Gordon Petrash, to lead an initiative aimed
at evaluating one of its major intellectual assets, its 29,000 strong
patents base. The resultant investigation showed that 30 percent of
the patents were rarely if every used, leading to Dow cutting its
patent tax maintenance bill by US$40M and reducing its administrative
costs by US$10M over 10 years. Based on the success of this initiative,
Petrash and his team moved on to explore new avenues for Dow to capitalise
on its patents. This exercise enabled Dow to increase patent licensing
income from US$25M in 1994 to a projected US$125M by the year 2000.
Today Dow Chemical continues to gain from leveraging the value of
its patents, having recently signed a number of joint ventures over
US$1Bn in value, in which Dows contribution has been solely
via its knowledge base of patents.
According to Petrash, successfully managing both codified knowledge
such as patents, as well as the broader range of knowledge involved
in human, organisational and customer capital, implies acceptance
of some key principles regarding measurement. These include that "
can be measured; that measurements should only be made to the degree
of accuracy required, and that appropriateness of measurement is critical.
Buckman Laboratories are an example of the second approach, which
emphasises knowledge sharing and organisational learning, rather than
measurement and valuation. Based in Memphis Tennessee, Buckman is
a speciality chemical company, serving the pulp and paper industry
and related industries. The company specialises in solving customer
problems through creative chemical treatment technologies and technical
service, which implies that there is rarely a standard solution to
a customer problem. The companys 1200 associates, 40 percent
of whom are involved in sales, are spread across 80 countries worldwide.
According to Melissie Rumizen, internal Knowledge Management Consultant,
some associates may never see anyone from Buckman for up to 12 months.
The company started to address the need to improve internal communications
in 1987 with the introduction of a corporate email network. Today
Buckmans global knowledge network KNetix and its
Bulab Learning Centre provide a platform for communications, distance
based learning, knowledge sharing and access to case based and other
corporate information to assist associates in the field. According
to Rumizen, Buckman does not focus on measuring its knowledge capital
as such, preferring to use other performance indicators such as new
product sales and levels of productivity. Following the inception
of Buckmans knowledge management program in the late 80s,
sales of new products more than doubled, with productivity similarly
Franchising provides a relevant example of reusing knowledge for growth.
Tacit knowledge once incorporated in a product, process or system,
can be transferred and used without the user needing to understand
it fully. Thus procedures for operating a management consultancy practice,
bottling soft drinks, or operating a restaurant do not need to convey
the knowledge which was used to develop the procedures. In this way,
the core knowledge of the franchisor can be protected just
enough knowledge is transferred and no more.
The first major requirement of a franchise is that it must involve
processes that are replicable. The second major requirement is that
sufficient knowledge about the product, process or business format
is capable of being defined, transferred to and properly absorbed
(i.e. understood) by another party who may lack any specific knowledge
related to the subject matter. The third prerequisite for a viable
franchise is that it must involve processes, procedures or products
which have been proven to be commercially successful in a similar
Dow and Buckman exemplify some pioneering approaches to dealing with
knowledge as a key asset and as a means of leveraging business performance.
In Dows case, its initial business focus was more towards improving
how it managed its explicit, codified knowledge. In the case of Buckman
the focus has been on knowledge sharing and learning. In both cases
however, the payback has already been significant.
Franchising provides an illustration of a major industry which has
grown through developing effective formulae for knowledge transfer
and reuse in the market, while protecting originators property
rights to the secret/tacit elements involved. Franchising is big
business. Some commentators believe it could become the single
largest form of organised business in the 21st Century.
By 1994, franchising employed over 8 million workers in the USA and
was forecast to secure 50 percent of all retail sales by the year
Firms planning knowledge-based competitive strategies should find
it useful to consider knowledge leveraging, sharing and reuse as strategic
options. Firms with knowledge assets which are both unique and codified
may benefit from using knowledge valuation and measurement techniques.
Firms specialising in providing unique solutions to particular business
problems, or who depend upon rapid product innovation are likely to
gain more from knowledge sharing. Firms with proven success
formulae would benefit more from knowledge reuse strategies.
AND COMPETITIVE NECESSITY.
In the 1980s, economists
began to notice that knowledge investments in the form of investments
in IT did not seem to improve firms productivity. They noted
that IT appears everywhere except in the productivity statistics.
This phenomenon was subsequently labelled the productivity paradox.
Recent evidence shows that in fact IT has had a substantial positive
effect on productivity, but that for many firms increased productivity
has not meant increased profitability. The reason for this second
apparent paradox can be explained by the theory of consumer surplus.
Consumer surplus arises where the cost of a given good or service
falls below what a consumer would otherwise be prepared to pay for
it. Where technology is used to improve productivity then the resultant
benefit may flow either to the producer by way of increased profit,
or the consumer by way of reduced price. Where barriers to competition
are weak, there will be a tendency for firms to compete by driving
down production costs and then pass a proportion of the resultant
benefit to the consumer in order to attract demand. In the ensuing
price wars between producers, the consumer is likely to be the winner.
The current use of electronic commerce over the Internet provides
an interesting illustration of consumer surplus. Here consumers have
rushed to use the worlds first truly public global network service,
attracted by low access prices, user friendly access tools and massive
amounts of largely free information. Sensing an opportunity, service
providers have rushed in after them. Apart from a few entrepreneurs,
whose stocks have soared for the most part the main beneficiary has
been the consumer. The reason for this effect is that firms are heavily
competing with each other. Business mortality rates among providers
of Internet services are steadily rising, but then so are the numbers
of such providers. In the ensuing turbulence there are more business
losers than winners, but the big winner is the consumer.
The moral of the story for firms who are seeking to compete on the
basis of a knowledge advantage is to ensure they have properly evaluated
that advantage. Where it is based on explicit knowledge, such as licensed
technologies (thus available to other firms) any advantages gained
can only be short run. In such cases, time to market and speed of
diffusion will be vital. Where the advantage is based on knowledge
which other firms cannot readily emulate (tacit knowledge) the firm
with that knowledge may be able to retain most of the benefits from
These aspects of knowledge as a competitive weapon tend to underline
the fact that in the long run knowledge which is explicit will only
be of value to firms insofar as it acts as raw material for development
of tacit knowledge. On the other hand it also underlines the importance
of investment in explicit knowledge as a competitive necessity. When
one bank offers an ATM service for example, all other banks must follow
suit or lose customers. Likewise when electronic shopping really starts
climbing up the growth curve, those retailers who dont climb
on board quickly will face declining profits.
As firms come to grips
with the implications of the emerging knowledge economy, knowledge
management is frequently superimposed on existing organizational structures
and cultures which are inimical to its success. To be effective knowledge
management requires a corporate vision which places knowledge centre
stage. Such a vision normally requires to be imparted from the top
of the organization as successful knowledge centred firms like Buckman
Laboratories found. A vision on its own however cannot suffice. Firms
organizational structures, systems and strategies all need to be bent
to a common purpose the achievement of the firms knowledge
goals. Resourcing and acquisition strategies need to help achieve
the requisite quality, quantity and diversity of knowledge needed
to sustain and grow firms operations. Systems and technologies
used to standardise and commoditize idiosyncratic knowledge and transfer
explicit knowledge need to move up the scale to address sharing of
tacit knowledge. Human resource management needs to move to knowledge
resource management and similarly IT to KT. Examples of successful
approaches to knowledge management are a reminder that there is no
single right way to approach the subject. Leveraging,
sharing and reusing knowledge are all valid strategies which may be
applied successfully in varying business situations. While only tacit
knowledge can deliver sustainable competitive advantage, firms will
have to continue to invest in explicit and non proprietary knowledge
in order to survive. First mover advantages however are likely to
go to those firms who can recognise the advantage of getting ahead
and staying ahead in the knowledge race.
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