Strategic Management of Intellectual Capital & Organizational Knowledge

Preface

Strategy management is concerned with understanding the causes and forces that explain performance differences between organizations. One approach analyzes industry structures as external determinants of competitive performance. An alternative view focuses on internal competencies and resources as the engine of superior achievement. In this view, organizational capabilities are bundles of physical assets, human know-how, and organizational routines that have evolved uniquely in each organization. This book adopts a knowledge-based perspective that sees the firm as a repository of knowledge resources and capabilities. The firm's knowledge base includes the expertise and experience of individuals, the routines and processes that define the distinctive way of doing things inside the organization, as well as the knowledge of customer needs and supplier strengths. To the extent that the knowledge and capabilities are unique and difficult to imitate, they confer sustainable competitive advantage on the firm. To what extent the firm actually appropriates rents depends on how effective it is at combining knowledge and capabilities in configurations that deliver value to its market or community. Knowledge is cumulative, so that the more that the firm knows, the more that it can apply what it knows to new areas of opportunity. Unlike traditional products, knowledge-based products and services can enjoy increasing returns, so the firm developing an early advantage has a better chance at growing market share through network externalities and customer familiarity effects.

The primary rationale of organizations is thus the creation and deployment of knowledge. Performance differences between organizations then are a result of their different stocks of knowledge and their differing capabilities in developing and deploying knowledge. Knowledge and competence have become the primary drivers of competitive advantage in advanced nations.

The field of intellectual capital poses special challenges. It has no legacy, few world-renowned researchers, and a modest literature. Defining its research agenda becomes a challenge. To complicate matters, intellectual capital is conceptualized from numerous disciplines resulting in a mosaic of perspectives. Thus, accountants are interested in how to measure it on the balance sheet; information technologists want to codify it in systems; sociologists want to balance power with it; psychologists want to develop minds because of it; human resource managers want to calculate a return on it; and training and development officers want to make sure that they can build it.

Purpose and Approach

The objective of the book is to bring together a balanced selection of core concepts as well as new perspectives that collectively articulate a knowledge-based view of strategy management. Three basic questions thread the discourse: How do organizations create knowledge and intellectual capital? How can organizations manage the accumulation and flow of knowledge and intellectual capital to sustain competitive advantage? What conceptual principles and action levers constitute a knowledge-based strategy of the firm?

Contributors from 10 countries are represented in this collection: Britain, Canada, Finland, France, Italy, Japan, Netherlands, Spain, Switzerland, and the United States. Each author is recognized to have completed important work in this field, and several individuals’ contributions are seminal in defining the scope and direction of knowledge and intellectual capital management.

As editors, we resisted the temptation of specifying a formal framework beforehand, and instead invited contributors to write on what they believe would belong in a collection that seeks to define a knowledge-based view of strategy management. We welcomed divergent perspectives, and did not attempt to guide the content of papers into pre-selected schools or points of view. After all the papers were received, we searched for unifying themes as well as interesting tensions, and present them in the Introduction chapter.

Overview of the Topics

This book contains 41 chapters written by a total of 68 authors. Of the 41 chapters, 27 are original papers. A significant number of papers are collaborations between academics and practitioners. Of the 14 reprint chapters, 8 are accompanied by new commentaries from the authors. Several of the commentaries are substantial works in themselves and extend the original arguments significantly. While the majority of chapters are aimed at theory building, a good number are focused on application and practice.

The book is divided into seven sections on: Knowledge in Organizations; Knowledge-based Perspectives of the Firm; Knowledge Strategy; Knowledge Strategy in Practice; Knowledge Creation; Knowledge Across Boundaries; Organizational Learning; and Managing Intellectual Capital.

Section 1: Knowledge in Organizations

Knowledge in organizations is not monolithic nor homogenous, but is developed from different origins and engaged in different modes. Thus, there is knowledge consisting of what the organization believes about its identity and purpose, its capabilities, and its environment. There is knowledge embedded in the physical goods the organization produces and in the rules and routines that the organization develops. There is knowledge possessed by individuals and groups derived from experience, skillful practice, and personal or collective insight. Because tacit knowledge is uniquely embodied in practice and cannot be easily codified or imitated, it is generally perceived as a vital source of sustainable advantage. Explicit knowledge, on the other hand, is transferable, but this diffusibility can be yet another source of strategic advantage when organizations are seeking to standardize platforms, accelerate development of complementary products, or collaborate with other knowledge-rich organizations.

Section 2: Knowledge-based Perspectives of the Firm

A defining competitive feature of any organization will be its capacity to develop and apply new and existing knowledge to generate economic rent and social value. In strategy management, the dilemma is often stark: for the same reasons that competitors cannot replicate the firm’s knowledge, so the firm itself may not be able to exploit that same knowledge effectively. A knowledge-based theory of the firm differs from previous theories in that it must grasp the implications of managing invisible assets which behave both as resources and as processes (Itami 1987). A number of contributors in this volume have noted that standard economic theory does not cover the management of knowledge, intellectual capital, and organizational learning adequately or appropriately (see for example the chapters by von Krogh and Grand, and Huizing and Bouman). Spender and Grant (1996) observe that "the knowledge-based theory of the firm is a paradigmatic gateway, the point in the evolution of our field where we abandon the older concept of a theory as a blueprint for creating the firm, and move towards a more agricultural notion of management as the intervention in and husbandry of the natural knowledge-creating processes of both individuals and collectivities." (p. 9) A knowledge-based theory of the firm suggests that the boundaries and governance structure of the firm are determined not only by the considerations of lowering transaction costs, but also by the value to be derived from the deployment of its knowledge resources and capabilities.

Section 3: Knowledge Strategy

An organization linking knowledge to strategy needs to balance a number of inherent tensions. Knowledge that is most unique to an organization is the tacit knowledge of its individuals and groups. An organization must assess the benefit of codifying this knowledge to facilitate sharing and operationalization against the risk of increasing its mobility and likelihood of being appropriated. Most organizations face the question of how to maximize the transfer and absorption of knowledge internally while controlling and directing the diffusion of that knowledge externally. Thus, Kogut and Zander (1992) wrote that "the central competitive dimension of what firms know how to do is to create and transfer knowledge efficiently within an organizational context." (p. 383) Recent research suggests a number of complementary approaches in formulating knowledge strategy. Bierly and Chakrabarti (1996) identify four generic knowledge strategy groups – "Explorers," "Exploiters," "Loners," and "Innovators" – and observed that at least in the US pharmaceutical industry, firms in the "Innovator" and "Explorer" groups tended to be more profitable. Zack (1999, also this volume) suggests a gap analysis that compares an organization’s strategic gap (between what a firm must do and what it can do) with its knowledge gap (between what a firm must know to execute its strategy and what it does know). Supporting the theory building is an expanding body of empirical research that scrutinizes the execution of knowledge strategies in industries such as biotechnology, financial services, pharmaceuticals, and semiconductors (see chapters in this volume).

Section 4: Knowledge Strategy in Practice

The firm implementing a knowledge-based strategy faces daunting challenges. New knowledge is created by individuals but this personal knowledge needs to be shared with others in the organization. Knowledge gained in one context has to be transferred and made usable in another process or problem. Knowledge-intensive organizations find it necessary to maintain a high degree of strategic flexibility: to be able to pursue multiple conflicting goals simultaneously, and to be prepared to act on options that reveal themselves as the firm increases its learning and experience. An important focus of the knowledge strategy discussion is on new product development. In their chapter, Helfat and Raubitschek show that knowledge, capabilities and products co-evolve together, generating strategic opportunities for linking products within and across chains. Knott's chapter attributes product development of a successful model at Toyota to a knowledge strategy that embraced both the creation of new knowledge and the exploitation of existing knowledge. Barabba, Pourdehnad and Ackoff introduce a systems approach to knowledge management, and describe the design of a decision-support learning system in General Motors that tracks significant decisions, assumptions and outcomes.

Section 5: Knowledge Creation

One of the best known and most influential models in the knowledge strategy literature is the knowledge creation model developed by Nonaka and Takeuchi (1995). The model is concerned with how organizations create new knowledge rather than how individuals create knowledge. Organizations create knowledge by converting tacit knowledge into explicit knowledge. At the core of the framework is the interaction between tacit and explicit knowledge through a continuously expanding cycle of processes that involve socialization, externalization, combination, and internalization of the organization's knowledge. Subsequent extensions to the model include the concept of "Ba" or a shared context for knowledge creation; a taxonomy for classifying a firm's knowledge assets into experiential, conceptual, systemic, and routine knowledge categories; and the role of knowledge leadership in establishing conditions conducive to knowledge creation. The knowledge creation model provides the intellectual scaffolding for a growing number of empirical and theoretical studies in strategic knowledge management.

Section 6: Knowledge Across Boundaries

An increasingly important strategy for organizations to add depth to their capabilities is to acquire knowledge from outside the organization's boundaries. Unfortunately, knowledge transferred is not the same as knowledge assimilated or applied. The outcome of the transfer is moderated by the embeddedness of the knowledge, and the capacity of the firm to absorb the knowledge. Thus, capability differences between organizations will influence the occurrence, direction and result of the transfer of knowledge. The empirical study of US nursing homes by Mitchell, Baum et al (this volume) found that transfer learning was both constrained and facilitated by the level and similarity of capabilities in component units and their chains. The capacity to absorb knowledge extends beyond pre-existing technical knowledge to organizational and social conditions. These would include organizational and alliance structures, the degree of trust between partner firms, and the extent that norms and practices support knowledge sharing. Ciborra and Andreu observe in their chapter that web-based organizational arrangements such as open source software development communities seem to challenge many conventional notions about coordination and governance, opportunism and free riding, and intellectual property rights protection.

Section 7: Managing Intellectual Capital.

The idea of intellectual capital surfaced from the dialogue between researchers and practitioners seeking a more complete representation of the visible and invisible assets and processes that constitute a firm’s capacity to create value (Bontis, 1999a). Conceptually, intellectual capital consists of human capital and structural capital. Human capital is a function of the competence, intellectual agility, and attitudes of the organization’s members. Structural capital refers to the learning and knowledge that is enacted in processes (process capital); knowledge that is codified as documents, objects, and intellectual property (intellectual assets); and the reputation and relationships the organization has developed over time with customers and partners (relationship capital). Roos et al (1998) observe the distinction between intellectual capital (IC) and organizational knowledge as follows: "While knowledge is a part of IC, IC is much more than just knowledge. Brands and trademarks as well as the management of relations with external parties (trade distributors, allies, customers, local communities, stakeholders in general and the like) are all dimensions of value creation." (p. 24) The strategic management of intellectual capital is not only concerned with the identification and measurement of stocks of organizational knowledge, but also with the control and alignment of flows of knowledge across organizational levels in order to enhance performance.

The book concludes with an Appendix excerpted from a research report published by The Conference Board in 2000. The Conference Board analyzed data collected by a survey and interviews with a working group of senior executives from 12 global organizations. The report is an insightful look at the practice of knowledge management and organizational learning from the perspective of senior line and staff executives.

Audience

The book is designed to meet the needs of students, faculty, and researchers working in the areas of strategy management and knowledge management. It may be used as a core text or supplement, especially in departments of business policy and strategy within schools of business, and in departments of management information systems. The text would also be useful in schools and departments of information management or information science. The material in this book would be of significant interest to the growing numbers of managers, professionals and practitioners who are leading, designing, or executing knowledge strategies in their organizations.

Acknowledgments

This book is the outcome of the generous knowledge sharing of the 68 authors who took part in this project. We are deeply indebted to each and every contributor who have created original papers for the volume. We salute the authors of the reprinted papers for laying the foundation. We are grateful to Professor Ikujiro Nonaka for writing the Foreword, and Professor Henry Mintzberg for suggesting the idea of adapting a chapter from the Strategy Safari book. We are grateful to the two reviewers who read the lengthy manuscript and provided helpful suggestions.

Katherine Young and John King, both graduate students of the Faculty of Information Studies at the University of Toronto, assisted with the preparation of the book. Over the years, interactions with students of the classes we teach at the University of Toronto and McMaster University have helped to sharpen some of the ideas presented here. The FIS Inforum library staff redefined customer service in responding to our requests. Finally, a special note of appreciation goes to the editors at Oxford University Press in New York. Kenneth MacLeod first approached one of us with the idea for this volume and advised the project through much of its duration. Martha Cooley joined the project later but became effective very quickly in steering the project to completion. Paul Donnelly, the executive editor, guided the project during a transition period.

The intellectual breadth and diversity of this collection point to the energy and momentum driving this work. If we mark the beginning of this research near the beginning of the 1990s, we are at a stage where reflection and synthesis of what we have learned so far will enrich the practice and inquiry of both strategy management and knowledge management. Our hope is that the book would make a contribution to our understanding of the link between strategy, knowledge and intellectual capital, for there could be no more appropriate way to express our gratitude to the many colleagues and friends who took part in this enterprise.

 

Chun Wei Choo

Nick Bontis

Faculty of Information Studies

DeGroote School of Business

University of Toronto

McMaster University

Toronto, Ontario, Canada

Hamilton, Ontario, Canada

http://choo.fis.utoronto.ca

http://www.bontis.com

Spring 2001

 

 

References

Bierly, Paul, and Alok Chakrabarti. 1996. Generic Knowledge Strategies in the US Pharmaceutical Industry. Strategic Management Journal 17 (Winter Special Issue):123-135.

de Geus, Arie P. 1988. Planning as Learning. Harvard Business Review 66 (2):70-74.

Itami, Hiroyuki. 1987. Mobilizing Invisible Assets. Cambridge, MA: Harvard University Press.

Kogut, Bruce, and Udo Zander. 1992. Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology. Organization Science 3 (3):383-397.

Roos, Johan, Goran Roos, and Nicola Carlo Dragonetti. 1998. Intellectual Capital: Navigating in the New Business Landscape. New York: New York University Press.

Spender, J. C., and R. M. Grant. 1996. Knowledge and the Firm: Overview. Strategic Management Journal 17 (Special Issue):5-10.

Zack, Michael H. 1999. Developing a Knowledge Strategy. California Management Review 41 (3):125-145.