The Knowledge-based Firm:

Strategies for growth and competitive advantage

by Alan Burton-Jones

THE PROBLEM

Contemporary business 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 suboptimal results.

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 firm’s 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.

KNOWLEDGE ACQUISITION

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 firms.

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 firm’s 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 AND INTEGRATION.

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 data.
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 Monsanto’s 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.

KNOWLEDGE-BASED ORGANISATION

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 today’s 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.

KNOWLEDGE BASED COMPETITIVE STRATEGIES

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 Dow’s 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 "…everything can be measured; that measurements should only be made to the degree of accuracy required, and that appropriateness of measurement is critical.

Knowledge Sharing.
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 company’s 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 Buckman’s global knowledge network K’Netix™ 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 Buckman’s knowledge management program in the late 80’s, sales of new products more than doubled, with productivity similarly improving.

Reusing Knowledge.
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 commercial setting.
Dow and Buckman exemplify some pioneering approaches to dealing with knowledge as a key asset and as a means of leveraging business performance. In Dow’s 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 21^st 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 2000.
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.

COMPETITIVE ADVANTAGE 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 world’s 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 productivity gains.
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 don’t climb on board quickly will face declining profits.

CONCLUSION

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 firm’s 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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