Knowledge Management as a strategic resource - an analysis of theoretical principles and managerial implications for creating and transferring knowledge to gain sustainable competitive advantage

PART I: RESEARCH METHODOLOGY

1. Executive Summary

‘Knowledge has become the key economic resource and the dominant – and perhaps even the only – source of competitive advantage.’ – P. Drucker, 1991

For many years, the concept of knowledge management (henceforth KM) never received substantial or precise notice within the vast, extensive area of strategic management. On the contrary, today’s business environment is determined and shaped by the awareness of its significance and corporate strategies without the contemplation of KM are virtually unthinkable.

‘The realization that knowledge is the new competitive resource has hit the West like lightning.’ (Nonaka/Takeuchi, 1995) Nonaka and Takeuchi flawlessly underline the magnitude of KM in a globally increasing economy. There is a perception that we are moving into an epoch in which conventional pillars of economic strength – capital, land, plant, and labour – are no longer the overarching forces behind market success. Technical progress indicates that an expanding number of organisations are valued by their competency in the development, employment and distribution of knowledge or information. KPMG predicts the total transformation of the industrial economy to a Knowledge Economy. (Parlby, 1999)

Given the importance of such an expansion, it is by no means surprising that organisations everywhere are paying attention to the opportunity of creating, transferring, and employing knowledge efficiently. Companies are starting to realise that ‘… inside their own organizations lies, unknown and untapped, a vast treasure house of knowledge, know-how, and best practices. If tapped, this information could drop millions to the bottom line and yield huge gains in speed, customer satisfaction, and organizational competence.’ (O’Dell, 1998, p.154)

Nevertheless, knowledge is unlikely to deliver its full potential if it remains within the organisation. Likewise, managing knowledge in an entire, sophisticated strategic manner is now seen as a crucial part of a company’s success.

2. Aims of the Research

The overall aim of the subsequent master dissertation is to determine how KM must be organised in order to achieve benefits, respectively competitive advantage.

In other words, understanding the foundations of knowledge and KM in conjunction with outlining how companies can transform into a knowledge-creating organisation through an efficient management of their intangible assets.

3. Research Questions and Objectives of the Study

The principal focus of the study will be on managerial implications of effective, value-adding KM within organisations; therefore I will address three relevant research questions:

(1) What are general principles of knowledge, KM, and learning organisations in a firm’s overall strategy?

(2) How do companies identify and evaluate essential knowledge?

(3) What are managerial implications for applying a knowledge strategy?

The following hypothesis should further underline the proposed research:

‘KM adds substantial benefits and could influence a company’s performance significantly when implemented thoroughly and managed in an entire, comprehensive, and sophisticated strategic approach.’

Increasingly, the creation of new organisational knowledge is becoming a managerial priority. New knowledge provides the basis for organisational renewal and sustainable competitive advantage. (Ruggles, 1998) The basis for this research is drawn from recent work on KM, which explores how firms classify and manage knowledge.

Consequently, the following research objectives shall be addressed:

- To provide an introduction into learning, knowledge, and KM. That is to say, outlining basic ideas and conceptual frameworks as well as to demonstrate the utmost significance these issues have on the business agenda.
- To identify the importance of strategic aspects with reference to KM.
- To evaluate organisational conditions and presuppositions that favour KM and transfer in order to reinforce the organisation’s performance and enhance their capabilities.
- To demonstrate theoretical implications by providing practical examples.

As mentioned earlier, the dominant objective of the dissertation shall be the demonstration of a theoretical KM concept that could also be applied, to a certain degree, in practice.

4. General methodological Approach and proposed Method of Research

Methodology is the overall approach to the research process. The research process itself can be divided into respective stages: Identification of the research topic; definition of the research problem; determination of the general methodological approach; collection of research data (both primary and secondary); analysis and interpretation of the research data; writing the paper itself. (Saunders, 2000)

Within the following, I shall explain the research approach that I intend to adopt. The approach is clearly related to the suggested content of the dissertation.

Generally speaking, literature on academic research identifies two approaches or research paradigms, positivist and phenomenological. That is to say, quantitative and qualitative. Quantitative (positivist) is based on the natural sciences. It seeks the facts or causes of social phenomena, with little regards to the subjective state of the individual. Qualitative (phenomenological) stresses the subjective aspects of human activity by focussing on the meaning, rather than the measurement of social phenomena. (Saunders, 2000)

It is intended that the dissertation will be based on literature research. There appears to be no merit in undertaking any questionnaire survey work. However, as mentioned in my objectives, I shall illustrate theoretical arguments and conclusions with practical examples. Specifically, an outline or case study will be provided where a company was successful in managing knowledge in terms of competitive advantage to demonstrate the investigated theoretical implications.

In general, the topic demands qualitative consideration supplemented conceivably by some numerical work to generate a comparison or draw a conclusion of performance in companies.

All the literature referred to summarises the essence of KM into some key issues or considerations. These are all of a fundamental and comprehensible nature.

Due to the fact that the study intends to observe the managerial implications of KM programs and processes, it shall highlight the interplay of the issues singled out within the literature. Therefore, the research is primarily comparative (in that it searches for similarities and/or differences between the issues highlighted by the current literature), descriptive (in that it focuses on the description of relationships between variables) as well as qualitative (in that it is concerned with qualities and non-numerical form). Furthermore, it intends to describe a relative world where there are no absolute truths.

To conclude, the expected research paradigm is mostly determined by the nature of the research problem to be investigated, as we have seen. In this particular research study, the research problem concerns ‘KM as a strategic resource’ and is of a qualitative rather than quantitative nature. Consequently, the underlying paradigm is phenomenological.

5. Data Collection and Analysis

In both research approaches, the intention is to collect data regarding significant variables. There are two main sources of data, primary and secondary data. Primary data is original data; secondary data is data that already exists. Data can also be described in terms of the type, as qualitative or quantitative. Qualitative data is concerned with qualities and non-numerical characteristics, whilst quantitative data is all data that is collected in numerical form. (Saunders, 2000)

The initial research was carried out via conventional academic methods. Keyword searches for books or journals were undertaken extensively. Furthermore, as the subject is particularly contemporary and of principal interest within the business community, academic journals were investigated broadly. The next avenue of research was the Internet and major consulting companies in order to achieve pragmatic insights into the research topic.

The primary, mainly qualitative, collected data will be analysed and assimilated. One possible approach is to quantify the data, either formally or informally. The other possibility employs non-quantifying methods. In the case of a phenomenological paradigm, the analysis should follow the informal, quantifying method.

Problems in terms of analysing data will occur regarding reliability and validity due to the fact that both issues are overwhelmed within the credibility of the research findings.

Furthermore, generalisations made by previous research might be a limiting factor. (Saunders, 2000)

The subsequent master dissertation about ‘Knowledge as a strategic resource’ shall employ the approach of quantifying data and will address research limitations within the conclusion.

Due to the relatively focused, qualitative, in depth analysis, the results are substantially valid but less reliable. However, as long as the hypothesis can be verified as true and absolutely consistent, the findings can be generalised.

The anticipated research process is summarised in figure one.

Figure 1: Summary of the research process

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Source: Own illustration

PART II: LITERATURE REVIEW

6. Introduction

The problem practically all researchers always have to solve is how to cope with the vast quantity of potentially relevant literature.

The literature review lays out the conceptual/analytical basis for the arguments, through a ‘state of the art’ evaluation and analysis of the literature, which will identify the gap(s) the research paper is supposed to fill. (Smith, 1991)

7. Strategic Management – the underlying Concepts

7.1 From Competitive Advantage to Core Competencies

During the past decades the area of strategic management received increasing recognition in academic literature. Various research papers, articles, and books have appeared and the number is virtually impossible to count. Due to the fact that the concept of strategy is the central point in management and the field of KM is a small but imperative element of the entirety it is indispensable to start with a brief introduction. Moreover, I shall superficially outline the basic ideas of two concepts that are of profound significance for KM.

Generally speaking, it seems to be impracticable to reduce the concept of strategy to a single definition because it is commonly used in different ways. But for straightforwardness, Mintzbergs’ five formal classifications shall be therefore proposed. He refers to strategy as an interrelationship of plan, ploy, pattern, position, and perspective. That is to say, strategies are both plans for the future and patterns from the past based on internal and external perspectives. (Mintzberg, 1989)

Early writers on strategic management suggested that companies, which operate in a competitive environment, need an advantage in order to survive and flourish. To be precise, the firm’s relative position in its industry is crucial. Porter emphasised the significance of a competitive strategy and therefore formulated the strategic concept of sustainable competitive advantage. He argues that an organisation can choose between two generic strategies for achieving above-average performance: either cost leadership or differentiation (respectively focus, depending on the competitive scope). Porter also pointed out that a company who tries to pursue both targets simultaneously has no competitive advantage and could be described as ‘stuck in the middle’. (Porter, 1985)

Although this conceptual framework was widely accepted and taught for many years, Porter’s claim is now principally invalid because many companies managed to differentiate their products whilst selling them at a relatively inexpensive price. Consequently, many new approaches to demonstrate competitive advantage emerged. A more pragmatic and influential view is the theory of Prahalad/Hamel, which is also from superior importance concerning KM.

Prahalad/Hamel consider competencies as the roots for competitiveness: ‘The real source of advantage are to be found in management’s ability to consolidate corporate wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities.’ (Prahalad/Hamel, 1990, p.81) They indicated that identification and development of a firm’s core competencies are fundamental issues for organisational success. This procedure depends on a company’s ‘ strategic architecture’ defined as a ‘road map of the future’. (Prahalad/Hamel, 1990)

Although this concept is still of enormous importance for the business community it also has its weaknesses.

Tidd (2000) criticised the difficulty of an organisation to predict correctly. Specifically, how does an organisation know and therefore identify which competencies will be relevant in the future? According to Tidd, the competence-based approach to strategic management suggests three questions, which will be demonstrated in figure 2.

Figure 2: The competence cycle

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Source: Tidd, 2000

7.2 Towards a new Paradigm in Management Theory: Knut Bleicher

As mentioned before, the central problem of the competence based approach to strategy or maybe strategy as a whole is the unpredictability of the future since we live in a world characterised by uncertainty, complexity, and discontinuity.

Bleicher pointed out that the world is in a process of continuous change and transformation. Today’s organisations must deal with numerous influences, such as increasing awareness of ecological issues, internationalisation of markets and competition, declining growth rates, and technological progress, to name only a few. The key word is ‘Wendezeit’, the changing era. (Bleicher, 1999)

John Naisbitt already illustrated in 1982, ten significant so-called ‘Megatrends’ that are supposed to shape the environment which will challenge the management of the future. (Table 1)

Table 1: Megatrends

(1) A shift from an industrial society to an information society.
(2) From forced technology to high tech/high touch (a counterbalancing human response whenever new technologies are introduced).
(3) From a national economy to a world economy that is characterised by global interdependencies.
(4) From short-term planning to long-term orientation.
(5) From centralised structures to decentralisation in terms of politics, business, and culture.
(6) A shift from macroeconomic institutional help (e.g. government, medical establishment, school system) towards the microeconomics of the information self-help society.
(7) From representative democracy to participatory democracy.
(8) From conservative hierarchies to a restructure organisational form; the network.
(9) Geographical transformation from the north (maturing industries) to the south (America’s ‘new economy’).
(10)Increasing personal choices: from either/or to multiple option

Source: Naisbitt, 1982

The environmental transformation and the increasing complexity and uncertainty, which characterise the status quo, requires innovative, new, refined management approaches. Bleicher indicated that complexity itself must be rethought and examined, emphasising that the treatment of complexity ought to be in the centre of management practices. Additionally, the dynamics of change require openness and flexibility because not only management itself is altering; equally the management of coping with modification has emerged as a main problem. (Bleicher, 1999)

In search of a new approach, Bleicher introduced the conceptual framework of ‘integrated management’ with a ‘comprehensive, all-embracing philosophy’ as a general principle. The new paradigm is based on the ‘St.Gallen management-concept’ developed by Ulrich/Krieg approximately two decades ago. Bleicher’s theory concentrates principally on corporate philosophy and vision as fundamental elements with an interdependent relation of normative, strategic, and operational management dimensions. (Bleicher, 1999)

Figure 3: Dimensions of integrated management

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Source: Bleicher, 1999, p.77

The model demonstrates that integration is reached by focusing on every element comprehensively and viewing the concept as one unit as well as the networking relationship between normative, strategic, and operational management. The foundation for efficient interaction between these elements is the management philosophy.

8. Organisational Learning, Knowledge and Knowledge Management

8.1 The Concept of Organisational Learning

‘There are times, when you need a radically new idea to win in the market place.’ (Bleicher, 1999, p.112) The previously described way towards a new management paradigm is profoundly supported by knowledge and based on managing the intangible assets of an organisation. Yet, what is meant by knowledge ? What is learning ? How are knowledge and learning interrelated conceptually and organisationally?

These fundamental questions have occupied researchers in cognitive as well as management studies for many years. By now, the concept of KM is one of the most important sources of sustainable competitive advantage (Nonaka, 1991/Drucker, 1991/Nonaka/Takeuchi, 1995/Davenport/Prusak, 1998/Sanchez, 1998/O’Dell, 1998/Holden, 2002) However, in order to understand the theory of KM it is essential to place it in the context of organisational learning.

8.1.1 Organisational Learning – the theoretical Foundation

The definition of and the approach to organisational learning provided in 1978 by Argys/Schön are sceptical and visionary, descriptive and prescriptive and considered to be a pioneering work. They used the term ‘organisational learning’ as a metaphor for processes in which ‘… members of the organisation act as learning agents for the organisation by detecting and correcting errors in organisational theory-in-use and embedding the results of their inquiry in private images and shared maps or the organisation.’ (Argys/Schön, 1978, p.29)

In the literature on organisational learning, one finds three basic concepts: behavioural learning theories, social learning, and the memory/information-processing approach. (Huber, 1991) He stated that ‘An entity learns if, through its processing of information, the range of its potential behaviours is changed […] the individual always showed the target behaviour and either learned the pairing with the formerly unconditioned stimulus or experienced the consequences of his or her behaviour.’ (Huber, 1991, p.91)

For Child/Faulkner (1998), organisational learning consists of both cognitive and behavioural elements. They apply a definition from Villinger (1996) that suggests organisational learning as ‘…the process of developing a potential to improve actions (behaviours) through better knowledge and understanding (cognition).’ (In: Child/Faulkner, 1998, p.283)

Levitt (1988) considered the implications of the various concepts on individual learning for organisational learning:

(1) Learning is not always intentional
(2) Individuals learn from models
(3) Previous knowledge is always important and sometimes hazardous
(4) Learning results from making causal inferences
(5) Learning is motivated behaviour

He emphasised the importance individuals have in organisations. That is to say, knowledge acquisition by individuals is an indispensable, but usually insufficient component of organisational learning. Then again, learning is evidently and without a doubt a process; but the outcome must be preferably what Senge (1990) called the ‘learning organisation’. That is, an organisation that has the capacity for both passive, adaptive learning and active, generative learning as sustainable competitive advantage. It is a system in which you ‘cannot not learn’ because learning is so implied into the fabric of life. (Senge, 1990)

However, organisational learning has a long history in academic research and scholars from psychological and sociological sciences as well as historians, anthropologists, and management authorities introduced different, revolutionary approaches. Due to the fact that a thorough examination of the topic is far beyond the scope of this paper I only introduced the concepts, which are from greater relevance for the subsequent consideration.

Table 2: The development of organisational learning as a field of inquiry

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Source: (Dierks et al., 2001, p.926-927)

8.1.2 Levels of Organisational Learning

As summarised by Dierks et al. (2001), there are three different levels of organisational learning: TypeI/TypeII/TypeIII. Child/Faulkner (1998) refer to the different levels as routine/reframing/learning. However, the terms most widely used to characterise the three types are those introduced by Argys/Schön (1978): single-loop learning/double-loop learning/deutero-learning.

Single-loop learning takes place within the existing framework of the organisation. It is based on a process of error detection and correction aimed at improving or modifying the strategies and behaviours within the existing organisation. Double-loop learning recognises environmental changes that cannot be responded to adequately within the organisation or its proven strategies and behaviours. That is to say, drastic environmental changes require thoughtful, profound changes within the organisation.

Deutero-learning means changing not only the behaviour of the organisation, but questioning the process of learning itself. Such learning comes from the realisation that it is not enough to respond to a particular change in the environment. Moreover, it is important to learn from previous contexts of learning. Argys/Schön (1978) refer to this process as ‘learning to learn’. They claim that in order to be successful, one must integrate this process into an organisation’s strategies and norms.

Table 3: Levels of organisational learning

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Source: (Child/Faulkner, 1998, p.285)

8.2 Knowledge – Clarification of the Terminology

8.2.1 Central Characteristics of Knowledge

‘We are drowning in information but starving for knowledge’ – J. Naisbitt, 1982

As outlined before, organisational learning can be described as the foundation, the origin of knowledge and KM. At this point it is important to understand what knowledge is in general and what organisational knowledge is in particular. Generally, definitions of knowledge range from practical to conceptual and from broad to narrow in scope. The following definitions are relevant to the subsequent research:

- Knowledge is organised information applicable to problem solving (Woolf, 1990, n.pag.)
- Knowledge is a fluid mix of framed experience, values, contextual information and expert insight that provides a framework for evaluating and incorporating new experiences and information. It originates and is applied in the minds of knowers. In organisations, it often becomes embedded not only in documents or repositories but also in organisational routines, processes, practices and norms. (Davenport/Prusak, 1998, p.5)
- Knowledge is a set of beliefs held by an individual about casual relationships among phenomena (Sanchez, 1998, p.4)
- Organisational knowledge is processed information embedded in routines and processes that enable action. It is also knowledge captured by the organisation’s systems, processes, products, rules, and culture. (Liebowitz, 1999, p.1-3)

Predominantly, the literature distinguishes between several dimensions that classify knowledge but this paper focuses mainly on the three most significant ones:

(1) Knowledge storage media

To begin with, there are a number of media in which knowledge can exist: human mind, organisation, document, and computer. Access to knowledge in the human mind is often difficult. Diffusion and distribution characterises organisational knowledge. Documented knowledge is broad in scope (from free text to well-structured charts, tables etc.). Computer knowledge on the contrary is often well structured and formalised, sharable and mostly well organised. (Liebowitz, 1999)

(2) Knowledge Hierarchy

A further dimension considers the argument that knowledge can be prearranged into a hierarchy; from data to information to knowledge. Lynch (2000) suggests that knowledge is not just data and information. To be precise, knowledge has more depth than data and information and knowledge requires profundity from a strategic point of view. (Lynch, 2000)

Davenport/De Long (1998) recommended knowledge to be seen as information combined with experience, context, interpretation, and reflection. They emphasised knowledge as a high-value form of information that is ready to be applied to decisions and performance. Consequently, knowledge is neither data nor information, despite the fact that it is related to both. Liebowitz (1999) presents an excellent demonstration of hierarchical issues regarding knowledge. The table suggests a five-level knowledge hierarchy, in which knowledge can be transformed from a lower to a more valuable higher level.

Table 4: The knowledge hierarchy

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Source: (Liebowitz, 1999, p.1-5)

(3) Levels of Knowledge

Quinn et al. (1996) organise knowledge, or professional intellect, into four main levels:

- Cognitive knowledge (know-what) is the basic understanding of clear concepts. It is essential although far away from long-term success.
- Advanced skills (know-how) are the ability to use cognitive knowledge to understand how something takes place.
- Systems’ understanding (know-why) is the capability to recognise and understand why something arises. Professionals with the ability of knowing-why are capable of solving large and complex problems.
- Self-motivated creativity (care-why) consists of desire, motivation, and adaptability for success.

The four levels could be seen as a ladder to reach a higher intellectual stage. Quinn stated that ‘ the value of intellect increases markedly as one moves up the scale from cognitive knowledge to self-motivated creativity. ’ (Quinn et al., 1996, p.72)

Companies that develop care-why awareness in their people’s mind can succeed in today’s rapidly changing environment and simultaneously and constantly renew their cognitive knowledge, advanced skills, and systems understanding. (Quinn et al., 1996)

8.2.2 Explicit versus Tacit Knowledge

After that, Liebowitz (1999) classifies knowledge according to its accessibility. Polanyi (1966) describes knowledge as tacit^[1]. Nonaka (1991) and Nonaka/Takeuchi (1995) go further and consider knowledge as a dynamic process that is characterised by two dimensions: the epistemological^[2] (theory of knowledge) and ontological (level of knowledge creating entities) dimension. They state that ‘the cornerstone of our epistemology is the distinction between tacit and explicit knowledge.’ (Nonaka/Takeuchi, 1995) As for the epistemological dimension, they draw on Polanyi’s (1966) concept of tacit knowledge. Tacit knowledge is ‘personal, context-specific, and therefore hard to formalise and communicate.’ (Nonaka/Takeuchi, 1995, p.59) To the same extent, Polanyi stated: ‘We can know more than we can tell.’ (Polanyi, 1966, p.4) Tacit knowledge consists partly of technical skills, the informal skills summarised by the designation ‘know-how’ ^[3] (Nonaka, 1991). Tacit knowledge also has a significant cognitive dimension. It consists of mental models, beliefs, and perspectives. (Polanyi, 1966) Nonaka/Takeuchi (1995) express the cognitive aspect of tacit knowledge as a reflection of our image on reality (what is) and the vision of the future (what ought to be).

On the contrary, Nonaka/Takeuchi (1995) refer to explicit knowledge as ‘codified’ knowledge, consequently, knowledge that is transmittable in formal, systematic language. Explicit knowledge is easy to process by a computer, put out electronically, or accumulated in databases.

Table 5: The knowledge dimensions according to Nonaka/Takeuchi

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Source: Own illustration

Nonaka/Takeuchi (1995) and Nonaka (1991) stressed the distinction between explicit and tacit knowledge as the key in order to understand the divergence between Western and Japanese approaches to knowledge. Nonaka (2002) pointed out that Western managers tend to emphasise the importance of explicit knowledge whereas Japanese managers put more weight on the tacit dimension. The reason could be found in the Japanese intellectual tradition, which places a strong emphasis on the personality as a whole, valuing personal, physical and intellectual experience equally. E.g. a sumo wrestler becomes a grand champion when he achieves ‘shingi-ittai’, or when the mind (shin) and technique (gi) becomes one (ittai). (Nonaka, 2002)

[...]

^[1] Polanyi´s concept is mainly based on: ‘knowledge that underlies the explicit knowledge is more fundamental; all knowledge is either tacit or rooted in tacit knowledge.’

Knowledge is thus not private but social. Socially conveyed knowledge blends with the experience of reality of the individual. New experiences are always assimilated through the concepts that the individual disposes and which the individual has inherited from other users of the language. Those concepts are tacitly based. All our knowledge therefore rests in a tacit dimension.

^[2] More precisely, the philosophical inquiry of knowledge based on rationalism and empiricism is known as ‘ epistemology’.

^[3] In contrast to Quinn (1996) Nonaka (1991) and Nonaka/Takeuchi (1995) consider know-how as an extremely high level of professional intellect (they refer to know-how as an attribute with a high degree of tacitness) whereas Quinn (1996) sees know-how as a lower stage in intellectual development.