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Developing a Knowledge Strategy: Epilogue.

Published in The Strategic Management of Intellectual Capital and Organizational Knowledge: A Collection of Readings,

N. Bontis and C. W. Choo (eds.), Oxford University Press, March, 2002

Michael H. Zack

Northeastern University

Boston MA 02115

m.zack@neu.edu

This epilogue presents additional observations and findings I have made as I continue to research the knowledge-strategy link first described in Zack (1999). I start by discussing the extent to which this link appears to be missing in many of today's corporations. I then clarify the term knowledge strategy and attempt to distinguish it from other similar terms in use today. I raise the need for taking an external view toward benchmarking a firm's knowledge against its competitors to identify knowledge opportunities and threats, rather than focusing only on internal strengths and weaknesses and expand the discussion on strategic learning raised in Zack (1999). I close with some implications of the knowledge strategy approach for market segmentation, organizational structure, new product development, and strategic alliances.

In introducing the knowledge strategy framework, I made two assertions (Zack 1999 p.126):

1. The link between knowledge management and business strategy, while often talked about has rarely been put into practice.

2. Executives are in need of a framework to help them understand the knowledge-strategy link

The evidence from further research in this area continues to overwhelmingly support those assertions. While many of the organizations recognize the importance of developing a strategic rationale for investing in knowledge creation and exploitation, they continue to be, for the most part, driven by focused, short-term, first-order outcomes rather than broader, longer-term strategic goals.

Those organizations that do attempt the strategic link typically begin by developing a knowledge management initiative and then trying to work "backwards" to determine its impact on the organization's strategy. They assume that knowledge management is "strategic" because it potentially improves knowledge creation and sharing. They frame knowledge strategy generically, in terms of knowledge exploration/creation vs. exploitation/codification (March 1991, Hansen, Norhia and Tierney 1999) and the configuration of organizational and technological resources to support those orientations. These categories, however, are process-oriented and do not speak to the issue of what knowledge needs to be exploited or created. This results in organizations attempting to share what they know without first understanding what they need to share. They are attacking their knowledge process gaps without considering their strategic knowledge content gaps. This is not to say that knowledge processing and organizational learning is not a strategic capability with its own intrinsic value. However, the mere act of processing knowledge itself does not guarantee strategic advantage.

As an example, consider Image Corp. (Zack 1999). They were doing an excellent job managing the exploration and exploitation of knowledge related to physical/analog cameras and film. They had an appropriate culture, a useful technology and well-designed knowledge management roles and processes. They judged their knowledge management initiatives a success - and from a process perspective they were. Their competitive strategy, however, called for a rapid move to digital imaging. Unfortunately the organization did not know much about how to develop, manufacture, distribute, fund, price, or service information systems hardware and software - the foundation of digital photography. And they were not systematically managing the acquisition, creation or sharing of this missing knowledge. While they were enjoying a near-term success, they were facing a potential future catastrophe. In the same vein, I studied a Fortune 50 firm whose strategy was to move from an engineering to a marketing focus without having the necessary marketing knowledge and skills. They did not systematically diagnose or manage this knowledge gap, and their knowledge management initiatives were focused elsewhere.

Similarly, I observed many firms whose strategy dictated a move to an e-business model without the requisite knowledge and skills and a knowledge management initiative to address those knowledge gaps. Others were migrating from selling products to selling knowledge-based services and solutions, without their first understanding what they knew (or did not know) about being a service provider, or identifying the unique value (if any) to be found in their existing knowledge. As explained by executives of one organization:

Again, their knowledge management programs, while effective from a process and infrastructure perspective, were not addressing key strategic content gaps.

In contrast, the knowledge strategy framework suggests that firms start with strategy and its link to knowledge before initiating formal knowledge management programs. Let the firm's strategy guide the management of its intellectual resources and capabilities.

I have found generally that the degree to which firms are attempting to link their intellectual resources and capabilities to strategy is associated with the extent to which their core product or service is knowledge-based. For example, consulting firms - in the business of selling knowledge - will tend to consider managing knowledge as a strategic issue more than firms producing physical products or services. However, surprisingly, I even have observed several consulting firms and others selling knowledge-based products who have not directly linked the management of their intellectual capital with their strategic processes.

One indicator of the degree to which knowledge is viewed strategically is the organizational linkage between those responsible for strategy and those responsible for knowledge management. I have found that the most strategically aware organizations have tightly integrated the responsibility for strategic management and knowledge management. For example, at Lincoln Re (Zack 1999), the same executive is responsible for both corporate strategy and knowledge management. At Xerox, the corporate knowledge management function reports to the office of strategy. Others have created separate organizational units linked via the strategic planning process. Most, however, maintain separate groups who may have little to no ongoing communication or coordination between them.

A secondary indicator is the extent of public relations directed toward building an image of the company as a knowledge-based organization. One organization I observed employed a PR staff to manage external communication to insure a consistent message supporting the image of the company as knowledge-based. They reinforced this in their annual report, press releases, speaking opportunities at conferences, trade journal articles, and other communication outlets.

The term knowledge strategy is coming into greater use, but is being used in various ways in the literature and the practitioner community. To bring some precision to the term, I make two distinctions. The first is between knowledge strategy and knowledge-management strategy. They are not the same. Knowledge strategy, as used in my article, implies a notion of knowledge-based strategy, that is, competitive strategy built around a firm's intellectual resources and capabilities. Once a firm identifies opportunities, threats, strengths and weaknesses related to its intellectual resources and capabilities, then actions it may take to manage knowledge gaps or surpluses (e.g., recruiting for particular skills, building online document repositories, establishing communities of practice, acquiring firms, licensing technologies, etc.) are guided by a knowledge management strategy. Knowledge strategy is oriented toward understanding what knowledge is strategic and why. Knowledge management strategy guides and defines the processes and infrastructure (organizational and technological) for managing knowledge. Knowledge management strategy typically includes broad generic components (e.g., emphasizing tacit vs. explicit knowledge, knowledge exploration vs. exploitation, or organizational vs. technical mechanisms for knowledge exchange) as well as those that are firm-specific (e.g., support for globally distributed field technicians). Regardless, it should focus action on strategic knowledge gaps or surpluses.

The second distinction is between knowledge strategy and what I call strategic knowledge management. To effectively formulate strategy, firms need to know things about themselves (their strengths and weaknesses regarding their resources and capabilities) and their competitive environment (opportunities and threats). The processes and infrastructures firms employ to acquire, create and share knowledge for formulating strategy I call strategic knowledge management. It is a type of knowledge management. It is not knowledge strategy. It involves all the things we have come to associate with knowledge management like communities of practice, information technologies, and knowledge management roles. But the knowledge management activities are directed towards providing knowledge for formulating strategy and making strategic decisions. For example, one company I observed created a formal strategic planning community that included people representing various functional and geographical units of the organization, supported by an online discussion area and document repository. Another created an online mechanism to gather competitive environmental knowledge from field technicians and sales people and make it available to those formulating strategy. In both cases, they were engaged in strategic knowledge management, the results of which could be used to formulate a knowledge strategy.

A third distinction can be made between strategic knowledge management and operational (or tactical) knowledge management. In addition to the knowledge needed to formulate strategy, firms need to know and know how to do particular things well to execute their strategy. This may include servicing customers better than their competitors can or building higher quality products. The knowledge required to support more efficient and effective operations is the focus of traditional knowledge management. I call this type of knowledge management operational knowledge management. Operational knowledge management supports the day-to-day activities and processes needed to execute a firm's strategy. For example, one organization I observed created formalized communities of practice around various aspects of automobile assembly. Another built an online capability for salespeople to share tips and techniques across sales regions. A consulting firm made its engagement documents accessible to other consultants. Another provided an online mechanism for locating expertise across the organization when trying to solve a client's problem. These are the familiar knowledge management examples and initiatives that we read about. They should be aligned with the firm's business strategy to provide long-term value.

Firms, therefore, must practice effective strategic knowledge management to enable informed strategic decision-making. They must practice effective operational knowledge management to ensure they bring all required knowledge to bear on executing their strategy. However, to start, they must formulate a knowledge strategy to understand what knowledge they should be managing.

Most firms have directed their knowledge management activities toward understanding and sharing what they currently know. The premise is that they have available somewhere all the knowledge they need. Their approach is to identify what they know and provide a mechanism for locating and sharing that knowledge. This usually starts with some type of knowledge mapping process. Knowledge mapping for that purpose is an operationally focused adjunct of knowledge management. The strategic use of a knowledge map, however, is not merely to catalog existing knowledge, but to map existing knowledge against what is required to formulate and execute the organization's strategy. Further, the map can be used to evaluate how an organization's knowledge compares to its competitors. If we think of strategy as defending knowledge positions rather than product/market positions, then competitive knowledge benchmarking is crucial for evaluating the firm's competitive position. Where a firm holds a strong strategic knowledge position, it may be prudent to invest to maintain that position. Where it holds a weak knowledge position, it may be prudent to invest to gain strength. These knowledge management decisions must be made within the context of knowledge-based competitive opportunities and threats.

Most organizations I have observed do not attempt to systematically understand what their competitors know. Some organizations have a unit engaged in business intelligence or similar scanning function. However, business intelligence typically is not part of the knowledge management function, therefore the benchmarking of an organization's knowledge against competitors is rarely done. Further, most business intelligence functions attempt to identify what competitors are doing, not what they know. However, it is possible to infer competitor knowledge based on their actions, products, and services. One company I observed learned about competitors' stages of knowledge by debriefing people they hired that had worked for the competition or had had interviewed with them. According to one senior executive,

The article identified one source of the strategic value of knowledge as lying in its sustainable uniqueness based on increasing returns. Applying the notions of time compression, asset mass efficiencies, and asset complementarity (Deidrix and Cool 1989) to intellectual resources, a knowledge advantage is sustainable if the knowledge-superior firm continues to learn from experience at least as well as its competitors (Zack 1999). The article, while addressing issues of exploration and learning, goes on to focus more on knowledge superiority than learning superiority. However, the dynamics of firm learning capabilities and industry learning cycles need more attention (especially in these turbulent times of e-business). Further thought and field observations have led me to propose that learning superiority will dominate knowledge superiority. A firm that does not have superior knowledge but is a better learner than the knowledge-superior firm eventually should attain knowledge superiority. A firm that has strategically superior knowledge and is superior learner should be able to maintain its dominant competitive position.

Therefore, firms need to focus as much on their strategic learning gaps as on their knowledge gaps. And so the gap analysis should not only focus on what the firm needs to know vs. what it does know, but on how much, how rapidly and how effectively it needs to learn to execute its strategy and defend its knowledge position.

Learning must be externally benchmarked not only against particular competitors, but against the firm's industry in general. The article raised the notion of a learning cycle for a firm and an industry. Similar to Nonaka's (1994) framework whereby tacit knowledge developed within one organizational unit is made explicit, transferred to another unit, applied within the new unit and thereby made tacit again; firms develop and transfer knowledge among themselves within their industry. An organization develops tacit knowledge as a byproduct of its activities. This knowledge may be made explicit to facilitate its transfer among other units of the organization. In doing so, it may leak out of the organization into the industry at large. At the same time, the organization may be absorbing knowledge leaking out of other firms within its industry, and internalizing that knowledge through its reapplication within the firm.

Each firm in an industry has some capability for engaging in this learning cycle. It may be more or less capable of identifying its own tacit knowledge, explicating and sharing it within the firm, limiting its transfer out of the firm, absorbing external knowledge from the industry and reapplying that external knowledge in some unique and strategic way.

The strategic knowledge environment of an industry can be viewed as the sum of the interactions among the knowledge strategies of the individual firms in the industry. Firms taking a conservative approach to knowledge strategy tend to be more internally focused and attempt to create barriers to knowledge transferring outside their organization. The objective is to financially exploit the knowledge for as long as possible. If the industry is characterized by conservative knowledge-strategy firms, then little knowledge moves through the industry and little is available to be absorbed from the outside. We can characterize the industry, then , as one having slow learning cycles. A conservative strategy may make sense for firms in industries where knowledge diffuses slowly, has a relatively long "shelf life" and therefore provides the opportunity to exploit that knowledge via explication and reuse without great exposure to imitation by competitors.

Barriers to knowledge diffusion may take several forms (Teece 1998). Strong patents may provide sufficient protection in some industries, for example pharmaceuticals. Barriers may also occur in industries that are based on technologies whose transfer is ‘sticky”. Stickiness may occur when the technology does not adhere to an industry standard or where no standard exists, making adoption risky, for example in electronics (e.g. the introduction of 56K modems or VHS vs. Betamax video formats). It may also arise where the technology lacks well-defined interfaces to other firms’ existing technologies, is embedded in a complex web of complementary technologies, or requires tight coupling to the other firms’ existing technologies, making adoption difficult and complex (e.g. enterprise-wide information system software packages). Adoption may be costly or diffusion irrelevant where knowledge is highly specific to the source-firm’s context for application and use. And some knowledge may be just too confusing for the rest of the industry to understand and adopt (Lippman and Rumelt 1982, Reed and DeFillippi 1990). For example, LeaseCo (Zack 1999) was unable to explain its pricing scheme to a competitor it was attempting to acquire. The approach was so different from that of the industry that the competitor could not make sense of the economic framework and assumptions on which it was based^[1].

Firms adopting an aggressive knowledge strategy accept the premise that continual learning is the key to maintaining a knowledge advantage. They are less concerned with what they know at any point in time, assuming they or their competitors will render that knowledge obsolete in the near-term. For example, CapitalOne has made this premise an explicit part of their strategy. Rather than concentrate on creating barriers to knowledge diffusing into the industry, they focus more on maintaining their capacity to learn and to absorb knowledge from the industry. Organizationally, they recognize the value of the tacit knowledge of their employees, and focus on retaining them via an attractive culture and work environment. While the leaner, more abstract explicit knowledge may diffuse out of the firm, the richer tacit knowledge providing the firm its sustainable knowledge-advantage still remains within the firm. That tacit knowledge is what enables the firm to learn faster and to develop more creative and valuable insights than its competitors.

Having strong barriers to knowledge diffusion or operating in a slow-cycle industry does not preclude firms from taking a more aggressive knowledge strategy. However, it suggests that in that context a moderately aggressive knowledge strategy may provide sufficient advantage. For example, knowledge diffusion in LeaseCo's industry occurred slowly. LeaseCo therefore had an incentive to invest in and to explicate their strategic knowledge because they could exploit it over a long enough period to recoup their investment while having low exposure to its diffusion. They in fact captured much of their knowledge in electronic documents and a computer-based decision support system enabling the knowledge to be easily, efficiently and consistently distributed to and used by a wide range of employees. They had perhaps a more aggressive knowledge strategy than needed and took more knowledge-building risks than required to compete in their industry, a reflection of LeaseCo's culture and the CEO's personal desire to "keep things interesting". The result, however, was a clear and persistent dominance in their markets accompanied by high profit margins relative to the industry.

In industries characterized by aggressive knowledge strategy firms, knowledge moves through the industry rapidly. We can characterize the industry, then, as one having rapid learning cycles. In general, more knowledge in total should be available for absorption from outside the firm than the amount diffusing out of any individual firm. However, only those firms with the best learning capability and the greatest capacity for absorbing external knowledge will benefit the most. Firms implementing an aggressive knowledge strategy from a strong existing knowledge position supplemented by an effective learning capability, should gain more knowledge than they lose and be able to maintain their strong knowledge position.

Ultra-aggressive firms proactively transfer their knowledge out of the firm to accelerate the learning cycle. One approach is to transfer out only part of the knowledge, creating a knowledge dependency on the remainder of the knowledge that is more highly protected. This is similar to the strategy taken by software companies that protect their main program source code but distribute sufficient knowledge of the program's workings to enable others to develop compatible programs with seamless interfaces. Other firms offer their knowledge in hopes of creating or influencing de facto industry standards. An example of perhaps the most aggressive strategy is that of the open-source movement used, for example, to develop the Linux computer operating system, which makes public the core source code to take advantage of those innovations others may develop^[2].

A firm's strategy, by placing it within an industry, also places it within some industry learning cycle and therefore determines the learning capabilities it must maintain. Likewise, a shift in business strategy can move firms to industries with learning cycles different than they are used to. Even having adequate knowledge to enter a new competitive position, may not be sufficient if the learning capability of the firm is inadequate. For example, Image Corp., facing a major technological discontinuity, was shifting from the more conservative learning cycle of the physical consumer goods industry to the highly aggressive industry learning cycle of computer software and systems.

In industries characterized by aggressive innovation cycles, firms may have to adopt an aggressive knowledge strategy or fall by the wayside. Firms without a learning capability, the ability to understand, acquire and absorb industry knowledge, or the knowledge management infrastructure to support unbounded innovation may need to search for a more compatible strategic position.

The focus on strategic learning has resulted in several organizations I observed changing the notion of customer segmentation from a product/market orientation to one focused on knowledge and learning. That is, they categorize customers not by what the firm can sell them, but by the value of the learning opportunity those potential customers may provide. Customers might then be pursued not for the current revenue they could generate, but for the opportunity to learn how to provide new products and services leading to additional revenue in the future. A "good" customer would be one that requires a significant amount of customer-specific knowledge to service, yet provides a long-term return sufficient to recoup the investment in learning required. If the relationship is one of a contractual nature (e.g., leasing, insurance, real estate, auditing, and various services, etc.) then the objective is to acquire the contract (even at a potential initial loss) and learn enough about serving the customer to preclude less knowledgeable competitors from obtaining the business when up for rebid. If the relationship is non-contractual, then the goal is to become sufficiently more knowledgeable about the customer than competitors and to combine that knowledge with the product or service, giving the customer an incentive not to do business with competitors. Because of the increasing returns to knowledge, if the firm is at least as good at learning as its competitors (and is willing and able to turn its learning into action (Pfeffer and Sutton 2000)), it should continue to retain the customer's loyalty as long as serving the customer requires unique, inimitable and non-substitutable knowledge. Firms not taking a customer-specific learning-based approach will find customers having less unique knowledge requirements to be more suitable.

Some customers, particularly those under contractual relationships, may provide enough revenue potential that they directly pay back the investment in learning. For example, Buckman Labs obtained a sole-source contract to manage the chemical consumption of the Fort Howard paper company. This is one of the first contracts in the industry where the supplier takes the risk for managing the customer's cost of operations. Typically, chemical companies maximize revenue by selling as much product as possible. Key strategic knowledge has traditionally been product-oriented; including the ability to manufacture, sell and distribute a low cost, high quality product. While the industry has been migrating to value-added services, the Buckman/Fort Howard deal has taken this to its extreme. Because Buckman is paid a flat rate based on production volume, Buckman now has an incentive to minimize the amount of chemical sold. Profitability now depends on applying its knowledge of the customer's total manufacturing system and how to run it efficiently, not merely knowledge of its own products. In fact, Buckman, to maximize mill performance (and its own profitability), may have to provide competitors' products in certain cases where it does not carry a needed chemical.

In addition to customer-specific learning, most learning-intensive customers provide the ability to reapply that unique knowledge elsewhere with other potential customers. For example, Lincoln Re contracts to reinsure difficult or novel risks so that it can learn how to develop new products and markets for these new classes of risk management. Its unique knowledge and learning opportunities gives it an advantage over competitors in those new markets.

Organizations are typically designed to maximize communication, coordination and interaction among those performing similar or interdependent tasks. Knowledge-focused organizations, however, seek opportunities to maximize communication, coordination and interaction among units to create knowledge synergies. For example, an information technology industry research firm I studied (Zack 1996) originally created separate organization units around its various product and service domains (e.g., data warehousing, client-server computing, and groupware). However, it realized that the knowledge being created within various units could be combined to generate new insights and, ultimately, new research products for its clients. For example, knowledge management technology represents the intersection of many existing areas such as business intelligence, intranets, online learning, data mining, and groupware. By bringing traditional units together into "virtual" lines of business, they were able to create entirely new sets of knowledge that could be spun off into new products.

Similarly, units may be combined because they provide better learning opportunities together than separating them by products or markets. For example, public accounting firms have traditionally organized by function: tax, audit and consulting. However, some are finding that by bringing these functions together by customer or industry, they can create greater insights into customer's problems and requirements than each can individually^[3].

The knowledge strategy framework also accommodates a positive knowledge gap - a situation where a firm knows "more" than it needs given its current strategy. This suggests the firm has knowledge it is not exploiting fully. The typical case is where firms hold patents they are neither using nor licensing. Patent management has become more active recently (Rivette and Klein 1999). However, again I did not observe many cases where firms systematically considered whether or not they could further exploit their tacit or non-patented knowledge in new products or markets. They may do this, but it is not explicitly or directly linked to the strategic planning process.

I observed several firms engaged in a significant level of alliance activity. However, the alliances, while often made to acquire knowledge, skills and technologies, were not mapped to the firm's strategic knowledge gaps. Again, those responsible for formulating alliances were not connected to those responsible for managing the firm's intellectual resources and capabilities.

If one accepts the premise that knowledge is the (or at least one of the) most strategic resources of a firm, then a firm' s business strategy should reflect the role of knowledge in helping the firm to compete. Once the link between strategy and knowledge is defined, then other aspects of strategic management such as resource allocation, organization design, product development and market segmentation can be configured to bolster knowledge strengths, reduce knowledge weaknesses, capitalize on knowledge-based competitive opportunities and mitigate knowledge-based competitive threats.

Where strategic knowledge is strong, knowledge management can focus on enabling knowledge sharing and distribution, and ensuring that learning is focused on maintaining a strong competitive knowledge-position. Where opportunities abound, knowledge management can focus on exploiting the firm's "knowledge platform" by deriving new products or services from or by locating new markets for its knowledge. Where weaknesses exist, knowledge management must focus on acquiring knowledge, for example through training, recruiting, or alliances. Where threats loom, knowledge management must focus on providing sufficient learning opportunities and capabilities to strengthen the firm's knowledge position. In all cases, a firm's strategic agenda and competitive context should drive the priorities for knowledge management.

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Hansen, M. T., N. Nohria, and Tierney, T., "What's Your Strategy For Managing Knowledge?", Harvard Business Review, Vol. 77, No. 2 , 1999, p. 106

Lippman, S. A. and R. P. Rumelt, “Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition”, Bell Journal of Economics, Vol. 13, 1982, pp. 418-438

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Zack, M. H., "Developing a Knowledge Strategy", California Management Review, Vol. 41, No. 3, Spring, 1999, pp. 125-145

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