5 Strategy
5.1 Strategy and knowledge management
5.1.1 From market-based to knowledge-based view
The field of strategic management has exerted considerable influence on busi- nesses and business policies during the more than 40 years of its existence169. Dur- ing this period, organizations have been increasingly inventive and creative in their search for competitive advantages. Thus, it is not surprising that the field of strate- gic management has also undergone substantial development. Moreover, scholars at leading business schools, such as the Harvard Business School, and professional services companies, such as McKinsey & Co. (e.g., Hax/Majluf 1984, 20), have added a wide variety of models, portfolios, approaches and concepts to the field.
Scherer and Dowling not only speak of a theory-pluralism in the field of strategic management, but also warn that the multitude of underlying paradigms could cause difficulties because managers get contradictory advice from different schools of thought due to competing, possibly incommensurable theories170.
The origins of the word “strategy” can be traced back to the ancient Greek word
“strategós”. The word has been used within the military sector for a long time.
However, it is the “business policy” concept as laid out in the LCAG-framework that marks the first stage of development in strategic management (Scherer/Dowl- ing 1995, 198). The LCAG-framework was named after its authors, Learned, Christensen, Andrews and Guth (1965, 170ff). This framework was later renamed in SWOT analysis and has been widely applied in businesses. The SWOT analysis in its original conception has put equal importance to the analysis of organization- internal resources—Strengths and Weaknesses—and to the analysis of the organi- zation’s environment—Opportunities and Threats—which jointly determine the business policy. Thus, the goal of strategic management was to find a “fit” between the organization and its environment that maximizes its performance: the contin- gency theory of strategy (Hofer 1975).
In the subsequent refinements of the framework, the emphasis was clearly put on the external side: the market-oriented perspective. In the process of strategic management which is depicted in Figure B-11, the analysis of the organizational resources plays only a minor role, whereas the environmental analysis is a promi- nent activity influencing strategy evaluation.
The so-called market-based view was most prominently developed and pushed by the frameworks proposed by Porter. The frameworks have been well received in the literature, especially the five-forces model (Porter 1980, 4), the value chain (Porter 1985, 36ff) and the diamond (Porter 1990, 71f). The frameworks help to analyze the organization’s environment, namely the attractiveness of industries and competitive positions171. In its extreme form, the market-based view almost exclu-
169. The need for strategic change in the sense of giving guidance to the transformation of the firm, its products, markets, technology, culture, systems, structure and relationships with governmental bodies caught the attention of management in the mid-1950s (Ansoff 1979, 30).
170. See Scherer/Dowling 1995, 196ff; see also McKinley 1995, Scherer 1999, 19ff. The term “incommensurable”, introduced by Kuhn (1962, 4ff), means that one cannot decide objectively between competing theories if they come from different paradigms.
sively pays attention to the competitive position of an organization and it is mostly only during strategy implementation that the organizational resources are consid- ered. The main focus of a strategy in the market-based view is the selection of an attractive industry and the attractive positioning of an organization within this industry through one of the two generic strategies cost-leadership or differentia- tion. Along with the two possibilities of industry-wide activities versus a concen- tration to a specific niche within the industry, a resulting set of four generic strate- gies is proposed.
FIGURE B-11. The process of strategic management172
Attractiveness of an industry is determined by the intensity of competition. The less competition there is, the more attractive is the industry. Thus, ultimately, strat- egies in the market-based view seek to avoid competition (Hümmer 2001, 31) or implicitly assume that the characteristics of particular firms do not matter with regard to profit performance (Zack 1999b, 127). Resources are considered as homogeneous and mobile.
One of the central results of the strategic management process in the market- based view is the selection of product-market combinations in which an organiza- tion wants to be active using the four strategies as described above. These combi- nations are called strategic business fields (SBF). The resulting organizational units are called strategic business units (SBU).
Even though the market-based view recognizes resources as the underlying basis of competitive advantages, it shows in its original form a tendency to neglect
171. For the following see Porter 1980, 3ff, Porter 1985.
172. Source: Schendel/Hofer 1979, 15.
strategy implemen-
tation strategy
evaluation
strategic control
environmental analysis
goal structure
test of consistency
performance results strategy
choice strategy
formulation
goal formulation
proposed strategies
what an organization needs to do in order to create and integrate sustained compet- itive advantages based on unique resources173. Case studies have also shown that critical and complementary capabilities of an organization might be spread across strategic business units and thus it might be difficult to leverage them for future products and services that cross existing strategic business fields (e.g., Hümmer 2001). In his later work, Porter recognizes the increasing importance of the organi- zation’s resources and discusses their inclusion into his theoretical framework as addressing the longitudinal problem: how organizations can sustain competitive positions over time (Porter 1991, 108, Porter 1996, 68ff). The central concept of Porter’s additions are the organization’s activities which Porter classifies into pri- mary activities (inbound logistics, operations, outbound logistics, marketing and sales as well as service) and support activities (procurement, technology develop- ment, HRM and firm infrastructure, Porter 1985, 39ff). Strategy then rests on a strategic fit of a system of activities, not individual activities (Porter 1996, 70ff).
Strategic positioning in this view means performing different activities from com- petitors’ or performing similar activities in different ways whereas operational effectiveness means performing similar activities better than competitors perform them (Porter 1996, 62).
Critique to the one-sided orientation of the market-based view resulted earlier in the development of the resource-based view. The term resource-based view was originally coined by Wernerfelt (1984) who built on the ideas presented in Pen- rose’s theory of the growth of the firm (Penrose 1959). In the mid to late 80s, a number of articles were published that dealt with organization-internal resources, assets and skills as the basis for competitive advantage174. However, it was not until the beginning of the 90s that Wernerfelt’s work received broader attention and the resource-based view was established as a new paradigm in strategic man- agement. Since then, numerous researchers have built on the ideas and a lot of liter- ature has been published on how an organization should deal with its strategically important resources175.
Central idea of the resource-based view is that an organization’s success is determined by the existence of organization-specific unique resources. As opposed to the market-based view, competitive advantages thus are not due to a superior positioning of an organization in an industry, but to superior quality of resources or
173. See e.g., Zack 1999b, 127; see also Ansoff 1979, 43f who already recognized the prob- lem of an almost exclusive focus of literature on strategies of action in the external environment.
174. See e.g. Teece 1984, 89, Coyne 1986, Aaker 1989 and Rumelt 1984 who analyzed resources as isolating mechanisms creating sustained rents in his proposal for a strategic theory of the firm.
175. For example Prahalad/Hamel 1990, Barney 1991, Conner 1991, Grant 1991, Leonard- Barton 1992a, Black/Boal 1994, Barney 1996, Grant 1996a, Teece et al. 1997, see also e.g., Rumelt et al. 1991 and Nelson 1991 who analyze the relationship between strategic management and economic theory and postulate that economic theory should consider differences between firms in terms of resources or capabilities (Rumelt et al. 1991, 22);
see also the authors contributing to the knowledge-based view, an offspring of the resource-based view discussed on page 102 below.
a superior use of the organizational resources. The postulated heterogeneity of resources in different organizations which enables sustained competitive advan- tages is determined by the individual historical developments of the organization, the development of specific material and immaterial resources, the creation of complex organizational routines which in turn causes specific historical trajectories and lead to unique idiosyncratic combinations of resources in organizations (Bar- ney 1991, 103ff).
Another central hypothesis of the resource-based view is that in an uncertain and dynamic competitive environment, products and services demanded in the market change quickly, whereas resources and capabilities are more enduring. As a conse- quence, proponents of the resource-based view suggest to base a strategy on resources and capabilities rather than on product-market combinations as sug- gested in the market-based view (Zack 1999b, 127). Resources are seen as plat- forms for the development of varying products and services.
Due to the fact that the resource-based view has been developed by a multitude of authors with varying backgrounds and research interests, the key term of this approach—the “resource”—has remained quite vaguely and broadly defined.
Wernerfelt in his original paper on the resource-based view ties the definition of a resource to the internal side of the SWOT analysis: A resource is “... anything which could be thought of as a strength or weakness of a given firm” (Wernerfelt 1984, 172). Wernerfelt bases his view of a resource on Caves’ definition: “More formally, a firm’s resources at a given time could be defined as those (tangible and intangible) assets which are tied semi-permanently to the firm” (Caves 1980, cf.
Wernerfelt 1984, 172). This latter organization-specific element is what distin- guishes resources in the resource-based view from the traditional viewpoint in eco- nomics or business administration with its primary production factors land, labor and capital. Resources in the resource-based view typically have to be built and cannot be bought. Moreover, resources of interest for strategic management have to be of strategic relevance.
In order to avoid confusion with the traditional view on the term resource and in order to stress the strategic relevance of organization-internal assets, several other terms have been proposed. Examples which carry important implications for knowledge management are:
x (core) capabilities (e.g., Leonard-Barton 1992a, 112ff, Grant 1996a and for an early treatment Nelson/Winter 1982, 96ff) or (core) competencies (e.g., Pra- halad/Hamel 1990). These terms are seen as integrated combinations, consolida- tions or applications of resources in an organizational context, as “teams of resources working together” (Grant 1991, 120) or an “interconnected set of knowledge collections—a tightly coupled system” (Leonard-Barton 1992a, 122).
x dynamic capabilities (Teece et al. 1997): In recent years, some authors pointed out that in situations of quickly changing complex environments, dynamic capa- bilities are crucial. Dynamic capabilities are defined as the firm’s ability to inte-
grate, build, and reconfigure internal and external competencies to address rap- idly changing environments (Teece et al. 1997, 516, Eisenhardt/Martin 2000).
As mentioned in Wernerfelt’s definition cited above, organization-specific resources can be classified in a multitude of ways. The most prominent one is the distinction of tangible and intangible resources (Wernerfelt 1984, 172). The latter can be further classified according to whether they are tied to individuals or not.
This simple classification can be detailed along a variety of dimensions, e.g., indi- viduals versus collectives, organizational routines versus organizational culture, legally secured versus legally unsecured (or not securable) resources.
Figure B-12 presents a typical classification of resources with some examples that give an indication of what is meant by the terms. Tangible resources are detailed in financial and physical resources. Intangible resources are classified into person-dependent and person-independent ones. Person-independent resources are further divided into
x intangible assets which have a relationship to the organization’s environment because they are either legally secured (e.g., patents, intellectual property), they refer to the organizations’ business partners (e.g., networks, customer relation- ships) or the business partners or society’s image of the organization (reputa- tion) and
x organizational assets which refer to the organization’s culture (e.g., willingness to share knowledge, perception of service and quality) and routines (e.g., learn- ing cycles, managerial systems) and do not have a direct relationship to the organization’s environment.
The detailed classes overlap to some extent, especially with respect to the dimension person-dependency as e.g., the smooth functioning of networks (classi- fied here as person-independent) certainly depends on the contacts of individual employees. Their combination is termed an organizational capability.
Figure B-12 also shows that the value of organizational resources has to be determined in relation to the competition. A comparison reveals so-called differen- tials. Five types of capability differentials can be distinguished (Coyne 1986, 57f, Hall 1992, 136):
x functional/business system differentials: result from the knowledge, skills and experience of employees and others in the value chain, e.g., suppliers, distribu- tors, lawyers, agents working for the organization etc.,
x cultural differentials: applies to the organizational culture as a whole; however, organizational routines are considered as functional differentials because they are transparent and subject to systematic and intended change as opposed to the organizational culture. Cultural differentials are closely related to
x organization or managerial quality differentials: result from an organization’s ability to consistently innovate and adapt more quickly and effectively than its competitors. As it is probably easier to influence the quality of managerial sys- tems than it is to influence organizational cultures, managerial systems might constitute a factor that can be distinguished from cultural differentials,
FIGURE B-12. Classification of resources in the resource-based view176
posi tio nal
diff eren tia
intangible assetsorganizational assets l
person-independent resourcesperson-dependent resources
cultu ral
differ ential
org aniz atio n/m anage ria l
quality differ ential
organization-specific resources financial resources - borrowing capacity - internal funds generation physical resources - contextual ICT (e.g. KMS) - specific production facilities
organizational routines - production processes - flexible workflows - continuous process improvement - learning cycles - managerial systems
organizational culture - willingness to share knowledge - perception of quality - ability to manage change - perception of service
regul ato ry
differ ential tacit knowledge - expert knowledge - creativity - non-explicable know-how
explicit, personal knowledge - explicable individual knowledge - skills
within a legal context - contracts - patents - licences - intellectual property - trade secrets - brands competitive advantages
intangible resourcestangible resources without a legal context - reputation - networks - customer and supplier relation- ships
x positional differentials: are a consequence of past actions which build reputation with business partners, especially customers,
x regulatory/legal differentials: result from governments limiting competitors to perform certain activities. Regulatory differentials thus are based on those resources that are legally secured, such as patents, contracts, licences, trade secrets.
To sum up, resources are the basis for capability differentials. Capability differ- entials provide competitive advantages which can be leveraged in order to produce superior products and services.
In order to be strategically relevant and capable of generating sustained compet- itive advantages, resources must have the following characteristics177:
x scarce: Resources must be rare, otherwise competitors can access them easily.
x competitively superior/valuable/relevant: Resources must either enable organi- zations to create value for their customers, thus contributing significantly to the perceived customer benefits or to substantially improve effectiveness and effi- ciency of the organization’s processes. Additionally, the value of a resource depends on the relative advantage it bears when compared to the competition.
x multi-purposeful: Core competencies must provide potential access to a wide variety of markets. In other words, resources must be applicable in a multitude of products and services and a multitude of markets in order to be of strategic relevance.
x non- or imperfectly imitable: Resources must not be easily replicated in a rival organization. Replication is difficult, e.g., due to unique historical conditions in the creation of the resources, causal ambiguity (i.e., imperfect information and/
or lack of transparency), social complexity (i.e., several individuals jointly pro- vide the competitive advantages) or embedding in organizations (i.e., several resources can be complexly interrelated and integrated within an organization’s routines and/or culture). Thus, there exist so-called barriers to imitation in anal- ogy to the entry or mobility barriers in the market-based view.
x non-substitutable: Resources must not be easily substituted by other resources in order to generate sustained competitive advantages.
x non-transferable: A competitive advantage will be the more sustained, the more difficult it is to purchase the resource on the market or to acquire it in coopera-
176. The classification as presented here integrates the resource distinctions as made in Aaker 1989, 94, Barney 1991, 112f, Grant 1991, Hall 1992, 136ff, Lehner et al. 1995, 185, Grant 1998, 111ff and integrates it with the capability differentials as suggested by Coyne 1986, 57f and Hall 1992, 136ff. The distinction between intangible assets and organizational assets does not, however, correspond to Sveiby’s classification of resources into external structure and internal structure because he views intangible assets within a legal context that are applied within the organization (e.g., patents, licenses) as internal structure and only customer relationships, brands and reputation as external structure (Sveiby 1998, 29).
177. See Barney 1991, 106ff, Collis/Montgomery 1995, 119ff, Grant 1991, 123ff, Grant 1998, 128ff, Prahalad/Hamel 1990, 83ff.
tion with other organizations. The reasons for a lack of transferability are partly the same as the ones presented for lack of imitability, e.g., the geographical immobility, imperfect information or the fact that resources are firm-specific.
x durable: The longevity of competitive advantages depends upon the rate at which the underlying resources depreciate or become obsolete. Durability varies considerably, e.g., technological resources depreciate quickly due to the increas- ing pace of technological change whereas reputation and brands are a lot more durable.
x appropriable/legally undisputed: Profits from a resource can be subject to bar- gaining, e.g., with business partners, such as customers, suppliers or distribu- tors, and employees. The more the so-called knowledge worker is on the rise, the more employees know of their capabilities and negotiate with their employ- ers about the value of their contributions. The more an employee’s contribution is clearly identifiable, the more mobile this employee is and the easier his or her capabilities can be transferred to other organizations, the stronger is the employee’s position in the negotiations with the organization.
Organizations are therefore interested in keeping their competitive advantages up by protecting their resources. Table B-5 shows what organizations can do in order to protect their resources and/or capabilities from erosion, imitation and sub- stitution. It is important to keep these protective activities in mind when designing a KMS solution. Table B-5 also shows which strategies are primarily supported by the introduction of KMS and where an organization has to carefully design these systems in order not to threaten its favorable resource position.
TABLE B-5. Threats to favorable resource positions of organizations, strategies for their protection and influence of KMSa
measures defending existing
resource positions potential threats contribution of KM/KMS imitation substitution erosion
retain causal ambiguity x x !
increase complexity of bundled resources
x x +/!
increase organization-specificity of resources
x x +/!
reduce mobility of resources x !
secure appropriability of disposal rights (e.g., patents)
x x +
protect confidential information x x +/!
secure access to critical resources x x +/!
The relationship between resources and the more recent concept of organiza- tional capabilities or competencies and in turn their relationship with competitive advantages has been subject to discussion during the last years. Figure B-13 depicts a framework which shows the chain of arguments used in the resource- based view (Grant 1991, 115). A consequent management of the organizational resources thus has to handle the identification, selection, development, synergistic connection, transformation and retention of organizational resources and their inte- gration into capabilities.
During the last five years many authors within the resource-based view specifi- cally looked at knowledge as the key resource in organizations. Their contributions can be summarized under the label knowledge-based view178. Organizational capa- bilities or competencies in this view are based on a combination or integration of the (individual and common or organizational) knowledge in an organization (Grant 1996a, 376f). Capabilities can be hierarchically broken down, e.g., in sin- gle-task or single-process capabilities, specialized capabilities, activity-related capabilities, broad functional capabilities and cross-functional capabilities (Grant 1996a, 378). According to the knowledge-based view, competitive advantage of an organization depends on how successful it is in exploiting, applying and integrating its existing capabilities and in exploring and building new capabilities that can be applied to the market.
reduce incentives for competitors’
threatening
x x no influence
credible threatening linked with retaliation
x x x no influence
impede competitors' resource development
x x no influence
collectivize individual and
“hidden” knowledge
x x x +
a. The table is based on: Hümmer 2001, 316. The last column was added by the author.
Legend: + means a positive influence can be expected of the application of KM/KMS;
! means the KM/KMS design has to take care not to threaten the defending measures
178. See e.g., Leonard-Barton 1992a, Spender 1994, Grant 1996a, 1996b, Spender 1996, Zahn et al. 2000, 251ff; see also Quinn 1992, 31ff and 71ff who postulates a reorienta- tion of strategy on core intellectual competencies and talks of knowledge and service based strategies.
TABLE B-5. Threats to favorable resource positions of organizations, strategies for their protection and influence of KMSa
measures defending existing
resource positions potential threats contribution of KM/KMS imitation substitution erosion