As industrialised economies have moved from natural resources to intellectual assets, it has been argued that the most important asset that a firm possesses is its knowledge.
In terms of economic theory, we are looking for strategies that will produce Ricardian rents (or super profits) (Ricardo 1817) where the effective use of knowledge will enable firms to sustain competitive advantage. There are other forms of rent, such as luck, chance and history, but these rents cannot be managed (Liebeskind 1996). It is assumed
Critical thinking and reflection
Imagine you were given the position of IS manager in your organisation. What would be your approach to strategy? Think of data processing, management information systems, strategic information systems and information systems capability as potential options for IS strategy. Given the nature of your organisation, which option or combination of options would you adopt and why? How would you integrate and justify your approach with your company’s strategy?
that knowledge in its tacit and explicit manifestations can be managed. But how do we develop knowledge management strategies to effectively utilise this valuable resource?
Also, how do we protect the valuable knowledge from expropriation and imitation?
The KM strategy literature is relatively young and the forms of strategy proposed can be characterised as a dialectic between the forces of efficiency and innovation (Mintzberg 1991), as shown in Figure 4.4. Firms are never static and are moving in one or another direction towards efficiency or innovation given a certain set of market conditions. In this manner the firm’s KM strategy becomes aligned with the overall business strategy. It is likely that a crisis or discontinuity will trigger the firm to move from one force, say, efficiency to innovation. Discontinuities may arise from sudden deregulation of markets, economic downturns or aggressive competitor behaviour resulting in drastic loss of market share.
Among management consultants, the most common forms of knowledge man- agement strategies are codification strategies and personalisation strategies (Hansen et al. 1999) as shown in Figure 4.5. For example, Andersen Consulting and Ernst &
Young have pursued codification strategies. Codification strategies are heavily based on technology and use large databases to codify and store knowledge. The rationale of a codification strategy is to achieve ‘scale in knowledge reuse’. After completion of
EFFICIENCY Cost leadership Codification strategy Exploitation strategy
CRISIS
RAPID MARKET CHANGES SLOW MARKET CHANGES
DISCONTINUITY
INNOVATION Differentiation Personalisation strategy
Figure 4.4 The dialectic of knowledge management strategies
Chapter 4 / Strategic management perspectives 105
a project, consultants will retrieve key pieces of knowledge from the assignment and create ‘knowledge objects’ to store valuable knowledge such as key industry infor- mation, market segmentation analyses, presentations, interview guides, program- ming documents and change management programmes. This knowledge is stored in a knowledge repository so that others in the firm can use the same material for their assignments. Put crudely, consultancy reports for clients become little more than a ‘cut and paste’ affair from knowledge and templates found in the repository. Of course, there is significant input from consultants about the specifics of the case, but the tools, techniques and background knowledge come from the knowledge repositories. There is little room for creativity and innovation in this approach and they are likely to be discouraged. Instead, the tried and tested methods of consultancy are promoted. This is what the clients are paying them for: a solid consultancy approach based on previous knowledge without the potential risks of innovation. In this case, codification strategies are clearly aligned with the consultancy firm’s business strategy focused on efficiency, cost savings and cost leadership. What the clients value from such consultants is their reduced fees (half or a third) compared with other consultants in the field.
Other consultants such as Bain or McKinsey tend to favour knowledge management strategies focused on ‘personalisation’ strategies. These strategies are less about technol- ogy and more about people. Bain and McKinsey are more interested in developing people through brainstorming exercises and face-to-face communication and gaining deeper insights into problems. They place considerable emphasis on knowledge sharing, either face to face, over the phone, by e-mail or via videoconferences (Hansen et al. 1999). In
CODIFICATION STRATEGY
Technology-led Explicit knowledge
orientation Codify knowledge
Use databases High turnover
PERSONALISATION STRATEGY
People-led Tacit knowledge
orientation Engage in dialogue
Channel expertise High profits Figure 4.5 Codification and personalisation strategies
Critical thinking and reflection
Think of the way knowledge is managed in your organisation. How would you assess the level of personalisation or codification strategies involved? Has the emphasis towards one or the other strategy changed over the past few years? What is your involvement with strategy development? On a theoretical level, which one of these strategies do you consider most appropriate for small organisations? Do you consider personalisation strategies as the ultimate knowledge management strategy if companies can afford them?
terms of KM technology, they tend to use expertise databases or internal ‘yellow pages’
to find consultants with the right set of knowledge and skills for their problem. The focus is on networking within the organisation and through dialogue developing creative solu- tions for unique problems in their assignments. Knowledge sharing, mentoring and the use of creative and analytical skills are key to this approach. As certain clients value this approach, they are prepared to pay substantially higher fees for this personalised and unique service. In this sense, a personalisation strategy is in alignment with the business strategy focused on differentiation through innovative solutions.
Similar knowledge management strategies have been found in other industries where firms have followed a codification strategy if they were led by efficiency or cost leadership concerns and personalisation strategies where innovation forces and differentiation concerns were foremost. In the US pharmaceutical industry, the knowl- edge management strategies firms followed a similar pattern of codification strategies (‘exploiters’ and ‘loners’) and personalisation strategies (‘explorers’ and ‘innovators’) (Bierly and Chakrabarti 1996). Codification strategies rely on large investments in knowledge repositories and proprietary search engines and use incentives to encourage people to codify and store their knowledge in these large databases. On the contrary, personalisation strategies require low levels of technology such as expertise databases but high levels of reward for knowledge sharing and dialogue with their colleagues.
Firms that try to pursue both strategies simultaneously tend to fail, as with the prob- lems of ‘cleavage’ in business strategy where the forces of efficiency and innovation confront each other in the boardroom and can paralyse the firm if there are major divi- sions in competitive response (Hansen et al. 1999; Mintzberg 1991).
Given the dominance of codifying knowledge, what is the best way of codifying explicit knowledge that can be useful and valuable? For example, Ernst & Young has a three-level hierarchy in its knowledge repositories. There is an ‘elite’ database that has its best knowledge on a topic. In the next level there are specific ‘knowledge objects’
containing consultancy reports, templates, market analyses and so on from previous assignments. Finally, there are ‘holding tanks’ for a variety of materials (Hansen et al.
1999). A similar framework for mapping knowledge is to classify it under three levels of core knowledge, advanced knowledge and innovative knowledge (Zack 1999):
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● Core knowledge is the minimum knowledge required to function in any business or public arena.
●
● Advanced knowledge is knowledge in process, cost or quality that enables a firm to compete in a particular market and allows some knowledge differentiation between firms.
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● Innovative knowledge is knowledge that is substantially differentiated and allows the firm to lead the industry through doing things differently.
An alternative codification of strategic knowledge distinguishes between four types of business knowledge and the tools associated with them (Drew 1999):
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● What we know we know: knowledge sharing, access and inventory. Tools include benchmarking and communities of practice.
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● What we know we don’t know: knowledge seeking and creation. Tools include R&D, market research and competitive intelligence.
Chapter 4 / Strategic management perspectives 107
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● What we don’t know we know: uncovering hidden or tacit knowledge. Tools include knowledge maps, audits, training and networks.
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● What we don’t know we don’t know: discovering key risks, exposures and opportu- nities. Tools include creative tension, audits, dilemmas and complexity science.
Once we have codified knowledge in an appropriate manner, how do we acquire, integrate, store, share and apply the knowledge to achieve competitive advantage? It has been argued that the key drivers and creative tension for strategic action arise from a knowledge gap and strategic gap (Zack 1999). A knowledge gap is the difference between what a firm must know and what it actually knows. Similarly a strategic gap is the differ- ence between what a firm must do and what a firm can do given its resource base. From this gap analysis, there are two potential orientations to knowledge strategy (Zack 1999):
●
● pursue a conservative knowledge strategy of exploiting past internal knowledge (sim- ilar to a codification strategy);
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● pursue an aggressive knowledge strategy that integrates exploration and exploitation of internal and external knowledge (a combination of a codification and personalis- ation strategy). Whereas personalisation or exploration strategies may provide a useful alternative in their own right, firms need to be mindful of the dangers of pursuing both strategies at the same time (Hansen et al. 1999). This has often resulted in failure.
A knowledge management strategy needs to contribute to a firm’s bottom-line performance. But who takes responsibility for knowledge management in an organis- ation? If the firm pursues a codification strategy, should the IS/IT department take the lead? Alternatively, if a personalisation strategy is pursued, should the human resource department provide the necessary direction? Our argument is that knowledge manage- ment strategies need to be developed in consultation and partnership with both IS/IT and human resource departments. We would go further to include the finance depart- ment in these consultations as the benefits of a knowledge management strategy will affect the firm’s financial performance and its intellectual capital. The relationship between KM strategy and performance is shown in Figure 4.6.
Business strategy
KM strategy
HR strategy IS/IT strategy
Intellectual capital Financial
performance
Figure 4.6 KM strategy and performance