Strategic Management of Intellectual Capital & Organizational Knowledge (per vedere altri capitoli vai a http://choo.fis.utoronto.ca/oup/)

Chapter 1. Knowledge, Intellectual Capital, and Strategy: Themes and Tensions
Chun Wei Choo/Faculty of Information Studies/University of Toronto - Nick Bontis/DeGroote School of Business/McMaster University

The conversations in this volume about the role of knowledge in strategy management may be framed by seven basic questions:

Most of the chapters in this book directly or indirectly address these questions. We searched for concepts that would increase our understanding in two iterations. First, we review the main ideas presented by contributors in each of the eight sections of the book, highlighting the ways in which they connect with or differ from each other. After these sectional reviews, we draw upon the principal themes in an attempt to answer the questions raised above. We conclude the chapter with a framework that brings together the major elements in our discussions about strategic knowledge management.

THE PAPERS

Section 1: Knowledge in Organizations

We begin with two chapters that examine at a fundamental level, the way that we look at organizations. Adler revisits the market and the hierarchy as mechanisms for coordination, and makes the observation that a third form of coordination based on trust and community will become more important in a knowledge-intensive economy. Moreover, the form of trust is new. Instead of being derived from tradition or loyalty, the new trust is built upon values of competence and integrity. This trust will be tempered by hierarchical rules to ensure stability, and by market competition to ensure flexibility. Blackler sees the creation and use of knowledge as the collective outcome of social practice that he labels organizational knowing. As a phenomenon, knowing is situated, mediated, provisional, pragmatic, and contested. A promising framework to analyze knowledge work would be the version of activity theory developed by Yrjo Engestrom, which views human activity systems as multiple mediated interactions between individuals, communities or groups, tools and concepts. Boisot maps the creation and sharing of organization in his Information Space model. His focus is on the articulation and diffusion of knowledge. The articulation of organizational knowledge requires abstraction (creating cognitive categories to make sense of events) and codification (refining the categories to simplify distinguishing between them). The more abstract and codified the knowledge, the more diffusible it is. Diffusion results in use when the new knowledge is absorbed and embedded in practice. The chapter by Choo combines elements from Blackler's concept of organizational knowing and Boisot's information-based analysis. Strategy is seen as the outcome of organizational sensemaking, knowledge creation, and decision making. The greater the interplay between these three information processes, the more effective the organizational learning and adaptation. The final paper by Despres and Chauvel makes a broad survey of the literature and identifies seven concepts that structure the discussion on knowledge management. Thus, explicitly or implicitly, the discussion is based upon notions of: time; type or forms of knowledge; social space; context; transformation or dynamics; carriers or media; and knowledge culture.

Section 2: Knowledge-Based Perspectives of the Firm

Conner and Prahalad contrast a resource-based theory of the firm with the opportunism-based model of the firm in transaction cost economics. They note that the organizational mode (market or firm) through which individuals cooperate affects the knowledge they apply to business activity. Specifically, the organizational mode affects knowledge-substitution (how present knowledge is employed) and knowledge-flexibility (how future knowledge is acquired). In the choice of organizational mode, opportunism-independent considerations can outweigh opportunism-based ones. When the possibility for opportunism is low, transaction cost economics predicts the choice of a market mode. However, the resource-based theory predicts that a firm organization would nevertheless be selected in low-opportunism conditions when it results in more valuable knowledge being applied to the business activity.

Grant points out that we do have a number of concepts that articulate a knowledge-based view of the firm: (1) Knowledge is the most important resource for generating market value and economic rent. (2) Explicit and tacit types of knowledge vary in their transferability. (3) Knowledge is subject to economies of scale and scope, and knowledge-intensive industries may experience increasing returns. (4) Knowledge is created by human beings who need to specialize to be efficient in knowledge creation and storage. (5) Producing a good or service typically requires the application of many types of knowledge. Based on these observations, Grant asserts that firms exist to create conditions in which multiple individuals can integrate their specialist knowledge. He identifies four integration mechanisms (rules and directives; sequencing; routines; group problem-solving and decision-making) that need to be supported by a base of 'common knowledge' (common language, shared meanings, overlapping knowledge).

Spender also examines the "integration" theme in his chapter. He distinguishes two domains of knowledge management. One presumes that knowledge is objectifiable as an asset, while the other sees knowledge as the response to uncertainty arising from management's lack of knowledge on how to integrate what the firm knows explicitly. The knowledge-based theory of the firm thus has a front-face that comprises knowledge about the elements of the firm's activities, and assumes that they are inherently designable; and a back-face that analyzes the uncertainties of integrating the front-face elements. As with Grant, Spender considers 'common knowledge' the key to this integration.

Von Krogh and Grand specify that a knowledge-based theory of the firm would need concepts to explain: knowledge origin; knowledge creation; how the firm establishes coherence; revolutionary versus evolutionary changes; and the link between managerial action and knowledge creation leading to success. On this last criterion, they suggest that knowledge management should focus on the management of conditions enabling knowledge creation. These enabling conditions include formulating a vision; enabling new experiences among members; structuring relationships among members; changing the relationships; changing the quality of the relationships; and creating knowledge-centered activism.

Huizing and Bouman introduce the concept of the information transaction space as the set of possible information exchanges available to an actor at a point in time: a 'market for knowledge' where information seekers, providers and brokers organize arrangements for information exchange. The object of knowledge management is then the efficient allocation of the information transaction space. Four ideal-type governance modes are presented. In the Market mode, information demand and supply shape exchange relationships. In the Organized Market, knowledge management helps solve the problem of finding reliable sources. In the Extended Organized Market, the focus is on finding sources and asking relevant questions unambiguously. Finally, in the Firm, the information space is organized to address all three problems of finding sources, asking relevant questions, and facilitating interpretation and use.

Section 3: Knowledge Strategy

Both Zack and Bierly and Daly provide definitions of knowledge strategy. Zack sees it as competitive strategy that is built around a firm's intellectual resources and capabilities. Bierly and Daly define it as the set of strategic choices addressing knowledge creation in an organization, which guide the development of intellectual capital and thus competitive advantage. Their two chapters also present typologies of knowledge strategies that share the same pair of classificatory dimensions, namely, the degree that the firm creates or applies knowledge (exploration vs. exploitation), and the degree that the firm learns or obtains knowledge internally or externally (internal vs. external). Zack suggests that aggressive knowledge strategies based on innovative knowledge that crosses boundaries would yield superior performance. Bierly and Daly describe "bimodal learners" that excel at both exploration and exploitation.

The three chapters by Winter and Szulanski, Garud and Kumaraswamy, and Sanchez all elaborate on the exploitation theme of leveraging existing knowledge to derive competitive advantage. Winter and Szulanski show that the replication of organizational routines is an effective strategy for firms to exploit their knowledge assets. Moreover, firms pursuing replication are useful 'laboratories' for studying differences in knowledge transfer and use. Garud and Kumaraswamy propose that in times of continuous and systemic change, firms need to take advantage of economies of substitution by reusing and retaining existing components when developing high-performing systems. To reduce the cost of component reuse, firms would need to simultaneously pursue elements normally viewed as antagonistic: e.g. incremental and radical learning, markets and hierarchies. Sanchez continues the discussion of knowledge reuse by focusing on the principle of modularity. Firms that systematically develop modular product and process architectures are specifying and articulating firm knowledge with the clarity needed to facilitate reuse, substitution, and reconfiguration of components. This can in turn promote strategic learning through leveraging current architectures as well as creating next-generation architectures.

Choi and Karamanos observe that it is increasingly difficult to assess the exchange value of knowledge-based goods with high certainty. Instead of trying to value goods themselves, we rely on indices or indicators in the socio-economic environment to identify certain actors and to certify their resources. Consequently, firms pursuing a knowledge strategy would need to understand what these indices are, and how they may be managed.

Section 4: Knowledge Strategy in Practice

The chapters in this section observe and analyze knowledge management in practice in a range of settings: technology-intensive Japanese companies (Sony, Canon, NEC), Toyota Motor Company, General Motors, a highly regarded US law firm, Accenture/ Andersen Consulting, a venture capital company, and a Canadian government agency. Two chapters from Helfat and Raubitschek, and Knott examine knowledge creation and use in the context of cycles of product development over time and across different chains or families of products. Helfat and Raubitschek show that knowledge, capabilities and products co-evolve over time, so that the firm's changing portfolios of products and knowledge open up strategic opportunities for linking products within and across chains. Knott examines the product development history of a successful major car model at Toyota, and found evidence that the firm had executed a knowledge strategy based on combining exploitation and exploration. Instead of viewing them as mutually exclusive, exploitation and exploration are complements that reinforce each other. Barabba, Pourdehnad and Ackoff apply a systems approach to knowledge management, and present a design of a learning and adaptation support system that has been implemented in General Motors. The system tracks significant decisions, checks assumptions and outcomes, diagnoses deviations, and makes new learning available to others. The GM experience showed that the willingness to learn is high when users have confidence in the quality of diagnosis and error correction.

Moving from manufacturing to the services sector, Starbuck's paper is an engaged and engaging look at the highly profitable and innovative US law firm of Wachtell, Lipton, Rosen and Katz. Starbuck attributes the success of the firm to its ability to assimilate what appear to be conflicting principles, and to learn swiftly from experience, converting initial difficulties into opportunities. Yoo and Torrey report interesting differences in how consultants in two countries of a global management consulting firm create, seek, and share knowledge. Differences in national cultures would account for these patterns. (Appleyard's chapter in the section on Knowledge Across Boundaries also report differences in knowledge sharing between Japanese and US employees in the semiconductor industry.) Multinational firms should recognize and manage the influence of national cultures, through for example, training and ways of leveraging particular cultural traits. Moldoveanu contrasts two epistemologies at work in a venture capital company and a government department as they decide whether to provide financial support for a high-technology start-up firm. Whereas the government department applied a rule-following "justificationist" approach, the venture capital company exercised a more open and questioning "falsificationist" approach. The latter's more adaptive belief revision strategy led to more robust causal models for guiding investment decisions.

Section 5: Knowledge Creation

The common theme in this section is the knowledge creation model developed by Nonaka. There are many aspects to the model (a full elaboration is in Nonaka and Takeuchi 1995), but among the most widely cited are the distinctions between tacit and explicit knowledge, and the cycle of four processes that create new knowledge by converting tacit knowledge into explicit knowledge (the socialization-externalization-combination-internalization or SECI model). Since 1995, more conceptual elements have been added to the basic model. Umemoto, a colleague of Nonaka, discusses three major extensions in terms of concepts and applications: the concept of "Ba" or shared context for knowledge creation, sharing and use; a typology of knowledge assets (experiential, conceptual, systemic, and routine knowledge assets); and knowledge leadership that provides "enabling conditions" conducive to knowledge creation. Ichijo examines the tension between exploitation and exploration in the context of knowledge creation, and suggests that both exploration (of firm-unique knowledge) and exploitation (of public knowledge) are necessary to increase intellectual capital and competitive advantage. Kulkki, who completed her doctoral work with Nonaka, expands the analysis of knowledge creation to global companies. She draws the distinction between local and global knowledge, and investigates how some global firms are architects of time in the way that they "constitutively create their futures and their future markets with customers, partners, suppliers, etc." This co-creation combines local and global innovation processes, and is based on shared visions and experiences at the local and global levels. Leonard and Sensiper suggest three ways that tacit knowledge is exercised in group innovation: problem solving, problem finding, and prediction and anticipation. In problem solving, experts overlay a problem with patterns derived from experience to quickly find a solution. In problem finding, tacit knowledge is used to frame a problem, often in a way that challenges assumptions or reveals hidden dimensions, so as to stimulate more radical innovation. In prediction and anticipation, tacit knowledge enables the prepared mind to follow hunches, listen to intuition, and take mental leaps to new ideas.

Section 6: Knowledge Across Boundaries

Transferring knowledge from beyond the firm's boundaries is an important strategy for organizations to add depth or breadth to their knowledge-based capabilities. The review chapter by Fischer, et al highlights findings in the research on knowledge transfer in alliances. Knowledge transferred is not necessarily assimilated or applied. The outcome of the knowledge transfer is conditioned by (1) the tacitness or causal ambiguity of the knowledge; and (2) the capacity of the firm to absorb the knowledge, or absorptive capacity (Cohen and Levinthal 1990). Recent research has extended the concept of absorptive capacity beyond technical similarities to include non-technical similarities, such as organizational structures, and compensation schemes. The chapter suggests that conceptual frameworks from organizational learning and social network theory would be helpful when analyzing interfirm knowledge transfer. Without prior prompting, this suggestion appears to have been taken up by other authors in this section. The effect of similarity between units in an organizational chain on the transfer of knowledge is examined empirically in the chapter by Mitchell, Baum et al. They found that transfer learning was both constrained and facilitated by the level and similarity of capabilities in component units and their chains. High-capability chains transferred knowledge to low-capability components, but low-capability chains required high-capability components to 'regress' to capabilities the chain was more experienced with.

A second, related theme of this section is the importance of social, cultural, or community norms that support knowledge sharing and contribution. The field study by Sole and Edmondson suggests that in dispersed, cross-functional teams, members not only need to engage knowledge from diverse communities in order to surmount difficult problems, they also have to integrate this knowledge by developing congruent understandings of the structure and goals of the collective effort, and by developing norms and practices for communication and information sharing. Ciborra and Andreu combine organizational learning with knowledge transfer as they develop the learning ladder model to analyze knowledge sharing within and between firms, and among firms collaborating in web-like networks. The way the Linux community has been able to operate successfully as a self-organizing web-like organization challenges conventional notions about coordination and governance, opportunism and free riding, and intellectual property rights protection.

A third theme in this section is the recognition that knowledge transfer is inherently two-way, so that some knowledge is given away even as new knowledge is acquired. Both Appleyard and Matusik propose a cost benefit analysis approach to understand firms' decisions to share knowledge. Two categories of costs appear important: costs due to the loss of knowledge by the focal firm, and costs due to having to manage the knowledge transfer transaction. Appleyard's survey of US and Japanese firms in the semiconductor industry also revealed interesting differences in their patterns of knowledge sharing. US employees relied more on private channels while Japanese employees relied more on public channels. Thus, US employees were approached more frequently for technical information, but Japanese employees were more likely to answer the (fewer) requests that they did receive. (See also chapter by Yoo and Torrey in the section on Knowledge Strategies in Practice, reporting differences in knowledge sharing by Korean and US employees in a consulting firm.)

Section 7: Managing Intellectual Capital

These chapters on intellectual capital discuss the stock of knowledge in the firm. Intellectual capital theorists such as Bontis, Nahapiet & Goshal as well as DeCarolis propose a multi-faceted description comprising of human capital, structural capital, customer capital, relational capital and social capital. Whereas the intellectual capital literature clearly identifies human capital and structural capital as distinct components, the final three seem to be intertwined and require further unravelling.

Bontis argues that customer capital is a subset of relational capital. In other words, the knowledge embedded in customers in the form of marketing and sales intelligence only considers one element of the integrated value chain. Presumably, organizations have knowledge embedded throughout their value chain starting with their suppliers. Considering both directions of the value chain requires a broader conceptualization than originally proposed in the literature. Relational capital extends the definition of customer capital by including both sides of the value chain.

Nahapiet & Goshal’s introduction of social capital expands the concept further by including all knowledge embedded in the social network of a firm beyond that of customers and suppliers. While the conceptualization of human and structural capital were initially inward-focused, the advent of relational and social capital allowed theorists to include an important environmental context as well. DeCarolis further develops the concept of social capital by providing an important link to entrepreneurial activities.

The other two chapters in this section by Pike, Rylander & Roos, and finally Crossan and Hulland, bring two vital perspectives into the fold. Although essential for practitioners, accounting disclosure still remains an untapped research area for intellectual capital academics. Researchers recognize the importance of describing intellectual capital assets but accounting policy makers are facing enormous roadblocks in implementing generally accepted principles that will be universally accepted. There is a tremendous opportunity for researchers to fill the void. The field study by Crossan and Hulland found a strong correlation between leadership and all elements of the organizational learning system. Moreover, there is also a strong correlation between the organizational learning system and organizational performance. The study concluded that over time, firms need to innovate through 'feed-forward flow of learning' (exploration), while also ensuring financial returns through 'feed-back flow of learning' that institutionalizes new learning through the levels of the organization (exploitation). Crossan and Hulland show clearly how organizational learning can bring a dynamic, process perspective to the strategic management of stocks and flows of organizational knowledge.

THEMES AND TENSIONS

The collection of 41 papers by 68 authors in this volume forms a rich pool of thinking and writing in which to look for patterns and motifs. Some of the themes are already apparent in the sections above, but here our intent is to clarify and broaden these conceptual pathways, bringing in other related work that illuminate these themes.

What unique perspective does a knowledge-based view of the firm offer?
Towards a knowledge-based theory of the firm

A theory of the firm seeks to answer at least three questions: Why do firms exist? What determine the scale and scope of firms? Why do firms differ? One widely applied approach to addressing these questions is based on Transaction Cost Economics. Williamson (1975, 1991) proposes that the unit of analysis in organizational study should be the transaction or the exchange of goods or services. An organization is seen as a pattern of transactions between individuals or groups of individuals, and it therefore adopts the structure which offers the lowest transaction costs for the exchanges it wishes to enter into. Transactions of goods or services consist of contractual relationships. Williamson argues that the efficacy of the contracting mechanism is constrained by bounded rationality and subject to opportunism or "self-interest seeking with guile" (Williamson 1975:26). Moreover, asset specificity arises when the firm is dependent on suppliers who have made specialized investment to engage in the transaction. Where bounded rationality, opportunism, and asset specificity occur together, transactions are better mediated by the private ordering of contracts. In the world of governance, the imperative is to organize transactions so as to economize on bounded rationality while safeguarding them against the hazards of opportunism. Williamson suggests that there are three generic governance structures: the market, the hierarchy, and a hybrid structure. Organizations move from the market to the hierarchy as transactions become more complex and uncertain. The hierarchy extends the bounds on rationality by allowing specialization in decision making and savings in communication; it curbs opportunism by allowing incentive and control techniques; it ‘absorbs’ uncertainty and allows interdependent units to adapt to contingencies; it resolves small-numbers indeterminacies by fiat; and it reduces information gaps between exchange agents by allowing audits and other checks (Williamson 1975:257).

The development of a knowledge-based theory of the firm is still in its infancy. One approach, first broached by Edith Penrose (1959/1995), is based on the idea that firms develop unique capabilities or "resources" as they develop products; build up research, production, and marketing capabilities; and learn from their customers. The Resource-Based View conceptualizes firms as bundles of resources that are heterogeneously distributed across firms. Moreover, these resources cannot be transferred between firms without cost, so that firms' resource differences will persist over time. Resources may include a firm's specific physical assets(e.g. equipment), human resources (e.g. expertise), and organizational processes (e.g. marketing). When firms possess resources that are valuable (they bring about efficiency or effectiveness) and rare, they can produce competitive advantage. Additionally, when these resources are also inimitable (difficult to replicate) and non-substitutable (other resources cannot serve the same function), then the competitive advantage becomes sustainable (Barney 1991). Conner and Prahalad (1996, this volume) show how the resource-based view predicts governance modes different from that predicted by transaction cost economics. When opportunism is low, transaction cost economics predicts the choice of a market mode. However, resource-based theory predicts that the firm structure would still be selected in low opportunism conditions when it allows more valuable knowledge to be applied to the firm's activities. Ghoshal and Moran (1996) argue that firms are not mere substitutes for structuring efficient transactions when markets fail. The advantage of organizations over markets lie not in overcoming human shortcomings through hierarchy, but in leveraging the human ability to take initiative, cooperate, and learn, and the organizational ability to develop shared purpose. Thus, learning and trust would take the place of cost economizing and opportunism.

In the ongoing debate between transaction cost economics (governance) and the resource-based (competence) perspective, Williamson (1999) observes that both views are needed:

Given that both governance and competence are bounded rationality constructs and hold that organization matters, both share a lot of common ground. To be sure, there are differences. Governance is more microanalytic (the transaction is the basic unit of analysis) and adopts an economizing approach to assessing comparative economic organization, whereas competence is more composite (the routine is the unit of analysis?) and is more concerned with processes (especially learning) and the lessons for strategy. Healthy tensions are posed between them. Both are needed in our efforts to understand complex economic phenomena as we build towards a science of organization. (Williamson 1999, p. 1106)

Priem and Butler (2001) evaluate the status of the Resource-Based View as a formal theory of the firm. They argue that its theoretical statements are true by definition and therefore tautological (e.g. "rare resources that enable a firm to implement specific value-creating strategies are a source of implementing strategies that are not being pursued by competitors"). The definition of resources is also problematic, since virtually anything associated with the firm can be a resource. Furthermore, the dependent variable ("value") lies outside the framework: value is determined by the product-market environment that is external to the firm. As a result, the theory is silent on "how" questions such as "How can the resource be obtained? How and in which contexts does it contribute to competitive advantage? How does it interact/compare with other resources?" (Priem and Butler 2001, p. 35)

In a rejoinder, Barney (2001) discusses a number of practical implications resulting from the resource-based logic. Firms experiencing strategic disadvantage can use the framework to identify those valuable and rare assets that they do not possess, and to indicate that these resources can be duplicated by imitation or substitution. Firms can also use the model to more completely evaluate its range of resources, and then to exploit these resources for sustained strategic advantage. Finally, firms can use resource-based reasoning to ensure that they nurture and maintain the resources that are the source of the firms' current competitive advantage.

Spender (1994) asserts that the resource-based view may be too narrow. By concentrating on the acquisition and protection of critical resources, it underestimates the importance of how resources are brought together, coordinated, integrated, and put into use. Spender suggests that this coordinating capacity is the essence of the firm, and that the core of the rent-producing firm is its ability to learn by doing and to develop its coordinating capabilities. In his chapter Grant notes that a knowledge-based perspective on economic organization implies that we are shifting our focus from governance towards the mechanisms and contexts through which coordination is achieved: "if the goal of organizational analysis is to predict the most efficient structures and systems for organizing production, a knowledge-based perspective suggests that the primary consideration is not so much the institution for governing transactions (markets vs. firms) as the mechanisms through which knowledge integration is achieved."

Teece, Pisano and Shuen (1997) propose that the competitive advantage of the firm depends on its dynamic capabilities, conditioned by its specific asset positions (its portfolio of knowledge and complementary assets), and the evolution path that it has taken. Dynamic capabilities are defined as "the firm's ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments." (p. 516) Eisenhardt and Martin (2000) extend the concept of dynamic capabilities to include "the organizational and strategic routines by which firms achieve new resource configurations." (p. 1107) They point out that some dynamic capabilities integrate and reconfigure resources, while others allow the firm to acquire and release resources. The papers in this volume provide many examples of firms deriving competitive advantage from this movement and integration of resources. Winter and Szulanski describe the strategic replication of routines in Banc One and Rank Xerox. Mitchell, Baum et al analyze the transfer of learning in chains of US nursing homes. Helfat and Raubitschek examine the co-evolution of knowledge, capabilities, and products through product sequencing capabilities in Sony, Canon and NEC. Knott describes a product development capability at Toyota that integrated exploitation and exploration. Garud and Kumaraswamy, and Sanchez show that modularity and modular product and process architectures can help articulate the firm's knowledge and facilitate knowledge reconfiguration and reuse.

Three concepts characterize the theory development so far: (1) Firms possess specific resources and capabilities that are heterogeneously distributed. (2) Competitive advantage depends on the firm's knowledge and ability to continuously configure and integrate resources into value-creating strategies. (3) The firm develops competitive advantage by expanding its unique knowledge and capabilities, and by knowing the specific product and market contexts in which this knowledge generates value. Thus, "resources, representing what can be done by the firm, and the competitive environment, representing what must be done to compete effectively in satisfying customer needs, are both essential in the strategy-making process." (Priem and Butler 2001, p. 64)

Should the organization focus on creating new knowledge or applying what it already knows? Exploration and Exploitation

The tension between exploitation and exploration has been sharply observed in organization theory. An organization that engages exclusively in exploration will ordinarily suffer from the fact that it never gains the returns of its knowledge. An organization that engages exclusively in exploitation will ordinarily suffer from obsolescence. The basic problem confronting an organization is "to engage in sufficient exploitation to ensure its current viability and, at the same time, to devote enough energy to exploration to ensure its future viability." (Levinthal and March 1993, p. 105) The returns to exploitation are more certain, more immediate, and closer in space than are returns to exploration (March 1991). However, the effect of exploitation is to increase competency in existing domains while raising the opportunity cost of exploration, resulting in "the traps of distinctive competence" or "the success trap." (Levinthal and March 1993) The reverse is a firm caught in a spiral of exploration, constant change, and frequent failure ("the failure trap"). Frequent failure is unsurprising since good new ideas are hard to come by, and time and experience is needed to learn how to make a good idea work. An organization can control the balance between exploration and exploitation by adjusting aspirations, beliefs, feedback, incentives, and socialization or selection processes (Levinthal and March 1993). An organization can break out of the success trap by raising aspirations to levels that induce exploration or new knowledge creation, or by introducing feedback that exaggerates the high value of exploration. For example, if aspiration levels are tied to the best performers in an industry, then individuals may perceive themselves as performing substantially below the standard, and are more likely to take risks and to explore. Symmetrically, an organization can break out of a failure cycle by lowering aspirations, or by introducing a particularly good alternative. When individuals perceive themselves as operating above or close to aspiration levels, they become risk averse and refrain from exploitation. In other words, modest success is associated with risk aversion (March and Shapira 1987).

Among the motifs that mark the papers in this volume, the tension between exploration and exploitation is one of the themes that appears most persistently. For example, Conner and Prahalad contrast the effects of knowledge-substitution (exploiting current knowledge) and knowledge flexibility (exploring future knowledge). Bierly and Daly, and Zack, who independently developed typologies of knowledge strategies, both used the dimension of exploitation versus exploration as a dimension for classifying knowledge strategies. As we will examine below, the chapters by Crossan and Hulland, Ichijo, and Knott also examine this tension.

The discussions in this volume point to three strategy options. The first would be to focus on exploitation. Exploitation is the use of the firm's existing stocks of knowledge and capabilities. A knowledge strategy focused on exploitation implies the codification of knowledge, rendering it explicit so as to promote reuse in multiple contexts, and to facilitate recombination with other sets of knowledge in the firm. This point of view may be discerned in the chapters by Sanchez, Garud and Kumaraswamy, and Winter and Szulanski. Sanchez recommends that firms develop modular product and process architectures so that knowledge components defined in the architecture can be reconfigured and reused. Garud and Kumaraswamy suggest that firms gain economies of substitution through partial retention and reuse of existing components when designing high performance systems. Winter and Szulanski show the efficacy of replicating organizational routines in exploiting a firm's knowledge assets.

The second strategy option would be to focus on exploration. Exploration leads to the creation of new knowledge that is then applied in the development of new products and services. Exploration and new knowledge can also expand the capabilities and range of responses available to the firm. Knowledge Creation is examined as a major theme on its own in the next section.

The third option is to embrace both exploitation and exploration. Several authors in this volume present the case for this option. Knott found empirical evidence that Toyota had executed a knowledge strategy combining exploitation and exploration as complements that reinforced each other. Exploitation led to learning curve cost reductions across product developments, while exploration led to product improvements and innovations. Crossan and Hulland also concluded from their field study that firms need two kinds of learning flows — feed-forward and feed-back — that correspond to exploration and exploitation. Ichijo looked at GE and found that it combined exploration of firm-unique knowledge with exploitation of public knowledge. Whereas Knott and Crossan and Hulland described the coexistence of exploitation and exploration across different processes, Ichijo described the dual strategy working on different categories of knowledge. Finally, Bierly and Daly propose a category of "bimodal learners" for firms that are adept at both exploration and exploitation. Bimodal learners may be "ambidextrous" organizations (Tushman and Anderson 1996) with multiple cultures or subcultures that allow it to pursue both directions successfully, or "chameleon" organizations that can rapidly switch its focus between exploitation and exploration in response to environmental changes.

To summarize somewhat baldly, the benefit of exploitation is based on increased efficiency, that of exploration is based on increased innovation, and that of a bimodal combination of the two is based on enhanced adaptability. The task for researchers and practitioners is to clarify the conditions under which exploitation, exploration, and/or bimodal learning would create sustainable advantage. Such conditions would probably relate to the type of industry, the nature of the knowledge, and the characteristics of the firm and its activity.

How do organizations create new knowledge? The knowledge to create knowledge

The model of knowledge creation developed by Nonaka (1994, also this volume) and Nonaka and Takeuchi (1995) is one of the most cited theories in the knowledge management literature. At the core of the model is the distinction between tacit and explicit knowledge, and the analysis of the dynamics of knowledge creation through cycles of socialization, externalization, combination, and internalization that engage tacit and explicit knowledge across organizational levels.

All organizational knowledge is rooted in tacit knowledge. Yet, as long as tacit knowledge remains the private property of individuals or select groups, the organization cannot multiply its value in at least two important modes. First, the organization is limited in its ability to lever that knowledge to gain economies of scale or strategic advantage:

Unless able to train large numbers of individuals or to transform skills into organizing principles, the craft shop is forever simply a shop. The speed of replication of knowledge determines the rate of growth; control over its diffusion deters competitive erosion of the market position. For a firm to grow, it must develop organizing principles and a widely-held and shared code by which to orchestrate large numbers of people and, potentially, varied functions.
(Kogut and Zander 1992, p. 390)

Second, the organization is unable to sustain cycles of new knowledge generation that depend on the continuous conversion of tacit and explicit knowledge, and on the amplification of this knowledge across many levels of the organization (Nonaka and Takeuchi 1995). Knowledge conversion takes place when people share, externalize, combine, and internalize their knowledge. Knowledge expansion takes place when new ideas and concepts move to other parts of the organization to spark new cycles of knowledge creation.

The dichotomy between tacit and explicit knowledge has been so often emphasized that we need to remind ourselves that the two are not only complementary to each other, but are in many ways interdependent. In an organization, the exercise of one form of knowledge almost always requires the presence and utilization of the other form of knowledge. Thus, the exercise of tacit knowledge typically makes references to plans or blueprints, entails the handling of tools and equipment, and involves following written or oral instructions, all of which embody various kinds of explicit knowledge. Conversely, the application of explicit knowledge often requires individuals who can interpret, elaborate, demonstrate, or instantiate the formal knowledge with respect to a particular problem setting. Behind every formal knowledge system in an organization is an informal support structure that is just as important and necessary for the organization to function properly. Some of the most useful sources of knowledge in an organization are those that combine the tacit and the explicit, that articulate the judgmental or the conjectural, and that reveal the hidden or the unobvious.

Organizations face a number of issues with respect to the management of its tacit knowledge. Tacit knowledge grows in the soil of experience, so that employees need to be given the time and opportunity to specialize and build up expertise in a certain area. As an alternative to cultivating its own tacit knowledge, an organization may consider contracting desired expertise on a "just-in-time" basis. This approach has limitations since tacit knowledge is not exercised in isolation, but needs to be contextualized and combined with the organization’s explicit and cultural knowledge. Another basic concern is one of access: how does an organization find out and provide access to what its participants know, particularly when this personal knowledge defies codification and classification? As long as the personal knowledge remains tacit, it constitutes a unique competitive advantage for the organization, since the knowledge is hard for other organizations to copy. Unfortunately this uniqueness is not permanent nor protected, since the tacit knowledge is lost should the individual decide to leave the organization (and perhaps join a competitor!). The organization managing its tacit knowledge has to deal with three major challenges: how to deepen its own stocks of tacit knowledge; how to access and activate this knowledge; and how to maximize the value derived from its use.

While the classification of organizational knowledge as tacit and explicit is widely discussed, the category of cultural knowledge is less often encountered. In epistemology, knowledge is sometimes defined as justified true belief (Audi 1998, Moser et al 1998). An organization’s cultural knowledge thus consists of the beliefs it holds to be true and justifiably so (based on experience, observation, reflection) about itself, its environment, and its way of doing business. Importantly, an organization’s cultural knowledge is used to answer questions such as "What kind of business are we in?" "What is our business model?" "What knowledge would be valuable to the organization?" and "What knowledge would be worth pursuing?" Cultural knowledge consists of the assumptions and beliefs that are habitually used by organizational members to perceive and explain reality, as well as the criteria and conditions that are used to assign value and significance to new knowledge. Collins (1998) highlights two important roles of cultural knowledge: cultural knowledge is required to understand and use facts, rules, and heuristics; and to make inductions in the same way as others in order to enable concerted action. Garud and Rappa (1994, p. 345) suggest that the development of new knowledge based on technology is a socio-cognitive process which rests on three definitions of technology: "technology as beliefs, artifacts, and evaluation routines." Technology development is guided by beliefs about what is possible, what is worth attempting, and what levels of effort are required. In their separate chapters in this volume, Grant and Spender emphasize that knowledge integration in the firm is dependent on a base of "common knowledge" that consists of shared meanings, common language, and other forms of shared knowledge. Sole and Edmondson's chapter described the need for dispersed teams to develop congruent understandings of the goals and structure of their collective effort in order to integrate knowledge.

Overall, an organization’s beliefs about what technology or new knowledge is feasible and worth attempting, a part of its cultural knowledge, would influence the direction and intensity of the knowledge development effort, as well as the routines and norms by which new information and knowledge would be evaluated. In the context of knowledge creation, cultural knowledge plays the vital role of providing a pattern of shared assumptions so that the organization can assign significance to new information and knowledge. Cultural knowledge supplies values and norms that

determine what kinds of knowledge are sought and nurtured, what kinds of knowledge-building activities are tolerated and encouraged. There are systems of caste and status, rituals of behavior, and passionate beliefs associated with various kinds of technological knowledge that are as rigid and complex as those associated with religion. Therefore, values serve as knowledge-screening and -control mechanisms. (Leonard 1995, p. 19)

There are familiar accounts of organizations in which cultural knowledge is misaligned with efforts to exploit tacit and explicit knowledge. For example, Xerox PARC in the 1970s had pioneered many innovations that Xerox itself did not exploit but other companies commercialized into products that defined the personal computer industry. Thus, PARC had invented or developed the bit-mapped display technology required for graphical user interfaces; software for on-screen windows and windows management; the mouse as a pointing device; the first personal computer Alto; and an early word-processing software Bravo for the Alto (Hiltzik 1999). Xerox did not fully apprehend the application potential of these inventions because its perception of self and what kinds of knowledge it should pursue were bounded by its established position in the photocopier market, and its belief in a business model based on selling closed, integrated systems. Developing the new technologies would have been too radical and risky a departure from what Xerox believed was its core business. Many of the researchers working on these projects subsequently left PARC, taking their knowledge with them.

Nonaka and Takeuchi (1995) do include aspects of cultural knowledge in the way they divide tacit knowledge into technical and cognitive dimensions. The technical dimension encompasses practical know-how; while the cognitive dimension includes mental models, beliefs, and perspectives that are so ingrained that they are taken for granted, and therefore cannot be easily articulated. However, the suggestion here is that a separate category of cultural knowledge is helpful for the following reason. Tacit knowledge is personal knowledge that is lost to the organization when the individual leaves. Cultural knowledge, although a large part of it is not codified, remains with the organization as its membership changes. As beliefs and values that endure in the form of shared perceptions, incentive and reward systems, and evaluation methods and criteria, cultural knowledge has a powerful effect on the creation and adoption of new knowledge.

What knowledge should the firm share and transfer, and what knowledge should the firm protect? Moving knowledge across boundaries

Because of the substantial investment needed to create new knowledge and turn it into new products, coupled with the risk and uncertainty of the knowledge generation process, the distribution of valuable knowledge is unlikely to be uniform. As a result, the ownership of valuable knowledge can potentially earn both Ricardian and monopoly rents (Winter 1987). Ricardian rents are earned because the firm owning valuable knowledge possesses a factor of production that is more productive than its rivals. At the same time, monopoly rents are earned because the product developed with superior knowledge will be unique. The corollary of this reasoning is that the firm should protect its knowledge from appropriation or imitation (Liebeskind 1996). Spender and Grant (1996) note that "if knowledge is the primary resource upon which competitive advantage is founded, then its transferability determines the period over which its possessor can earn rents from it." (p. 7) Barney (1991) has identified inimitability as a criterion for assessing the ability of a resource to sustain strategic advantage.

Yet there are contexts where the deliberate sharing and transference of knowledge constitutes a strategic move. Firms in highly networked and densely connected industries where technologies and markets are still evolving may purposefully share knowledge in order to (1) encourage and enable the development of complementary products and services, (2) influence the development of common platforms, dominant designs, and de facto or formal standards, and (3) build up a critical mass of customers and users. Industries that experience network externalities where the value and usefulness of a good or service depends on the installed base of connected users may choose to share knowledge with customers, competitors and collaborators. In addition to network externality effects, firms sharing knowledge may also stand to gain the advantage of increasing returns by establishing an early lead in a market or by developing a dominant position in an industry.

The strategic challenge then becomes knowing what knowledge to transfer and what knowledge to retain as part of the firm's valuable, rare, inimitable, non-substitutable resources.

Boisot analyzes the paradoxical nature of the value of information goods using the I-Space (Information Space model). An information good maximizes its value when it is highly articulated (abstracted and codified), and when it is scarce. Paradoxically, the scarcity of highly articulated knowledge is difficult to maintain precisely because that knowledge has been codified, given structure, and therefore is more diffusible. Boisot concludes:

A critical skill for the knowledge-based firm will thus be to know what to share and what to hold on to. Recognizing when knowledge should be actively diffused to outsiders rather than hoarded, when it can be used to extend the firm’s organizational reach beyond its boundaries, will become an important source of competitive advantage. Building up the capabilities of the networks a firm participates in through a judicious sharing of its knowledge, strengthens its own competitive position within the network. Confining its internal focus to core strengths prevents it from over-stretching what will always be limited cognitive resources. (Boisot, this volume)

In his chapter, Sanchez suggests that the fear of losing explicit knowledge may be exaggerated. In a knowledge-intensive economy, organizations do not possess all the knowledge they need internally but increasingly rely on sharing or buying technologies or services from other organizations. The movement of knowledge within and between organizations is often in the form of transferring explicit knowledge. Because explicit knowledge is articulated knowledge, it is often assumed to be readily understood by others and can therefore diffuse more easily beyond an organization's boundary. Sanchez suggests that this assumption may not always be warranted. Even though the knowledge has been made explicit, the receiving organization may experience problems of comprehension and valuation as it tries to understand and appraise the significance of the articulated knowledge. There may be several reasons: firms develop their own languages and vocabularies that others might not understand; different firms possess different levels of technical capability; different firms are at different stages of growth and development; the usefulness of the knowledge depends on its linkages with other knowledge, resources and capabilities in the originating firm. Given these uncertainties, the assumption that explicit knowledge is fundamentally "less secure" than tacit knowledge may be simplistic. Each firm would need to identify the kinds of knowledge that constitute its distinctive competencies, and maintain close control within the firm this explicit or articulated knowledge that is most critical, while leveraging as broadly as possible with other firms knowledge that is strategically less critical.

Is a knowledge-based strategy the product of careful planning, or the outcome of learning and discovery? Organizational learning as strategy making

Mintzberg, Ahlstrand and Lampel (1998) summarize the premises of the Learning School in strategy as follows. (1) Organizations operate in complex, unpredictable environments, so that strategy making becomes a process of learning over time, not deliberate control. (2) The leader is not the only person who learns — it is more common that the collective system learns. (3) The learning process is emergent, and proceeds through retrospection and sensemaking. (4) The role of leadership is to manage the process of strategic learning, allowing novel strategies to emerge. They note that a compelling example of learning-by-mistake leading to the radical (and successful) revision of strategy was Honda's experience breaking into the US motorcycle market in the 1960s, when the firm learned to refocus its strategy from large bikes to the much smaller Supercubs. Thus, viewing strategy as learning provides a perspective that is closer to the reality of how firms discover and formulate strategy than the more traditional schools of strategy thought based on positioning, planning, or decision making.

Three models of organizational learning as strategy making are presented in this volume. They share common assumptions and arrive at common implications: they conclude that the challenge of learning as strategy is managing the stocks and flows of knowledge across multiple levels of the organization in order to achieve both renewal and rent-generation.

In their chapter, Crossan and Hulland show how organizational learning can bring a dynamic, process perspective to the strategic management of stocks and flows of knowledge through the organization. The "4I framework" of organizational learning asserts that learning takes place at the levels of the individual, group, and organization. These modes of learning are linked by social and psychological processes of intuiting, interpreting, integrating, and institutionalizing. The framework is operationalized as the "Strategic Learning Assessment Map" that describes and analyzes the stocks and flows of knowledge in a comprehensive organizational learning system. Their research suggests that the transference of learning across levels is one of the greatest challenges of managing organizational learning.

Another conceptualization of the levels of organizational learning is presented by Ciborra and Andreu. They assert that learning occurs at the levels of (1) resources and work practices (routinization learning loop), (2) organizational routines (capability learning loop), and (3) firm goals and core capabilities (strategic loop). Each level of learning is dependent on resources and outcomes from the level beneath it, so that the model resembles a "learning ladder." As with Crossan and Hulland, Ciborra and Andreu believe that it is the transformation of learning across these levels ("climbing up the rungs of the learning ladder") that poses the major strategic challenge.

In another dynamic, process view of strategic learning, Boisot describes a "Social Learning Cycle" that is divided into the six phases of scanning (identifying threats and opportunities), problem solving (acquiring and codifying insights), abstraction (generalizing new insights), diffusion (sharing new insights with a population), absorption (applying insights through learning by doing), and impacting (embedding in concrete practices).

What is the difference between managing knowledge, and managing intellectual capital? The intellectual capital turf war

The concepts of organizational learning, knowledge management, and intellectual capital overlap significantly, but it is possible to draw some helpful distinctions. Bontis, Crossan and Hulland (2001) suggest that, at a general level of analysis, intellectual capital represents the "stock" of knowledge that exists in an organization at a particular point in time. Thus, it represents what the organization has learned in a cognitive sense. Managing this stock of knowledge in a firm as it flows and grows is the domain of knowledge management. The way that stocks of intellectual capital change and evolve over time is then dependent on knowledge management strategies. Finally, organizational learning expands the analysis to include behaviors at the individual, group, and organizational levels, as well as processes that create and utilize knowledge in order to understand more broadly how the "stocks" change and flow.

In his literature review, Bontis (this volume) describes both the benefits and challenges academic researchers face when studying the intellectual capital phenomenon. Its intuitive appeal allows ample opportunity for practitioners to work alongside academics in further understanding its complex inner-workings. This is good. However, while both groups venture forward, functional biases seem to provide added resistance. While accountants concern themselves with disclosing it, strategists maintain it is the "Holy Grail" for sustainable advantage. While finance researchers attempt to value it, technologists argue for its codification. While human resource researchers want to keep it, legal departments try to license it. Our fear in this turf war is that while intellectual capital increases in overall scope and popularity, the depth of our understanding from any single functional perspective will be limited. How can we pursue both depth and breadth?

There are many directions the accelerating research trajectory of this field can follow. These are some of the tensions that we suggest require increased attention. From an accounting perspective, we have spent significant time talking about disclosing intellectual capital assets, should we not disclose intellectual capital liabilities as well? Caddy (2000) warns that for every positive there is a negative and for every sunrise there is a sunset. Intellectual capital research would benefit from the same dual perspective. Microsoft Corporation and its loss in the famous anti-trust case on November 5, 1999 would be a perfect example. What was once considered an arrogant and overreaching monopoly, now suffers from an exodus of top executives. The considerable intellectual capital liability generated by the fallout in the public press puts significant downward pressure on Microsoft’s market capitalization. The Exxon Valdez disaster on March 24, 1989 provides another setting for the study of intellectual capital liability. Even with over $3.5 billion spent on clean up (Raeburn, 1999), senior executives at Exxon Corporation are still limited in their strategic choices while environment groups watch them under a suffocating microscope.

Another suggestion we would like to make is that intellectual capital empirical research should be pursued with more fervour. There is an appreciation that studying an intangible, elusive and ethereal phenomenon is never easy. However, the rewards of sound empirical research are countless. Most of the survey work done thus far including Bontis (in this volume), and the Malaysian extension of his previous study (Bontis, 2000) mainly reveal the intellectual capital topography of sampled firms. Other survey researchers include Bornemann et al. (1999) and Miller et al. (1999). More work is required that triangulates user perception items with quantitative metrics over longitudinal time periods. Such a research program is not easy given that only a few firms in the world even have metrics that span more than a couple of years. However, the number of these firms is slowly increasing and they are typically very enthusiastic about partnering with researchers who will enable them to be at the forefront of intellectual capital measurement.

A final suggestion on intellectual capital research comes from a user’s perspective. Do we know that financial analysts want intellectual capital reports? Do we know that IT administrators have bountiful knowledge repositories that are being used by all organizational members? Do we know that developing intellectual capital strategies is feasible in the long-term from a cost/benefit perspective? Do we know that firms who report intellectual capital actually perform better? And finally, do we know that senior management teams which generate intellectual capital reports make better decisions? Unfortunately, the answer to all of these questions is "no". The garden of opportunity awaits. The soil is moist and the sun is shining brightly. We have an extremely fertile ground for future research.

What are the main levers for designing a knowledge-based strategy? A framework for strategic knowledge management

Figure 1.1 ties the main threads of our discussion in a single framework consisting of (1) organizational knowledge processes, (2) locus or levels of learning, (3) types of intellectual capital, and (4) strategic levers.

A firm generates value from what it knows through the organizational processes of knowledge creation, knowledge transfer, and knowledge utilization. In knowledge creation, the firm produces new knowledge through the dynamic conversion and externalization of its tacit, embedded knowledge. In knowledge transfer, knowledge is shared within a firm across different functional groups, product families, geographical locations, and time periods. Knowledge is also transferred between firms through inter-organizational alliances and linkages. In knowledge utilization, the firm integrates and coordinates its different forms of knowledge in order to take action and to produce goods and services. Tacit knowledge plays a crucial role in knowledge creation; codified or explicit knowledge facilitates knowledge transfer; while "common" knowledge or shared understanding about goals and context give purpose and value to knowledge utilization.

Over time, the firm accumulates a stock of knowledge and capabilities that is unique to its learning and experience. This stock is the firm's intellectual capital, and it comprises human, structural, and relational capital that reside in its employees, organizational routines, intellectual property, and relationships with customers, suppliers, distributors, and partners. The stock of intellectual capital is continuously refreshed through new learning at various levels: the individual, the work group, the organization, and the network of organizations of which the firm is a part.

Within the framework composed by these elements, the papers in this volume discuss a number of actions that a firm may pursue to leverage its knowledge. These "strategic levers" are shown in the lower part of Figure 1.1. They include:

The set of options shown is by no means exhaustive, but they suggest the kind of dynamic interplay between knowledge processes, types of intellectual capital, and the locus of learning and innovation that is necessary in crafting an effective knowledge-based strategy. The framework may also serve as a guide for positioning the eight sections of the book, as shown in Figure 1.2.

Coda

Ultimately, there are no universal recipes on how a firm can best map out a knowledge-based strategy. Each organization would have to design its own responses and initiatives based on its aspirations, learning, and capabilities. These patterns of action would be shaped by conditions in the industry and the broader environment, as well as by the path that the organization has traveled. We recognize that organizations require many different kinds and levels of knowledge in order to be successful. Firms need knowledge to develop products; they need knowledge about customers and competitors in order to identify markets; they need knowledge about coordinating and integrating the flow and deployment of resources; and they also need knowledge about how to continuously refresh and rejuvenate the intellectual capital and core capabilities they possess. We recognize that knowledge-based strategy is both an enactment and a response linking the firm's specific characteristics and the contingencies of the environment it thrives in. In an increasingly dynamic and complex world, firms would need the agility and dexterity to enfold what would traditionally be regarded as opposites: combining exploration with exploitation; sharing and protecting knowledge; managing the stocks and flows of intellectual capital. While there are no pat solutions, the contributors in this volume offer a rich suite of conceptual lenses and analytical tools that can help us better understand and manage knowledge and intellectual capital in the pursuit of superior organizational performance.

References