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  • 1Knowledge, Intellectual Capital,and Strategy

    Themes and Tensions

    Chun Wei Choo and Nick Bontis

    The conversations in this volume about the roleof knowledge in strategy management may beframed by seven basic questions:

    1. What unique perspective does a knowledge-based view of the firm offer?

    2. Should the organization focus on creatingnew knowledge or applying what it alreadyknows ?

    3. How does an organization create newknowledge?

    4. What knowledge should the firm share andtransfer, and what knowledge should thefirm protect?

    5. Is a knowledge-based strategy the productof careful planning, or the outcome oflearning and discovery?

    6. What is the difference between managingknowledge and managing intellectual capi-tal?

    7. What are the main levers for designing aknowledge-based strategy?

    Most of the chapters in this book directly or in-directly address these questions. We searched for

    concepts that would increase our understanding,in two iterations. Below we first review the mainideas presented by contributors in each of theseven parts of the book, highlighting the waysin which they connect with or differ from eachother. After these sectional reviews, we drawupon the principal themes presented by the con-tributors in an attempt to answer the questionsraised above. We conclude this introductorychapter with a framework that brings togetherthe major elements in our discussions aboutstrategic knowledge management.

    Review of the Sections

    Knowledge in Organizations

    We begin part I with two chapters that examinethe fundamental ways that we look at organiza-tions. Adler (chap. 2) revisits the market and thehierarchy as mechanisms for coordination andmakes the observation that a third form of co-ordination based on trust and community will

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    Chun Wei ChooChoo, C.W., & Bontis, N. (Eds.). (2002). The Strategic Management of Intellectual Capital and Organizational Knowledge. New York: Oxford University Press.

    Chun Wei Choo

    Chun Wei Choo

  • 4 CHAPTER 1. K N O W L E D G E , INTELLECTUAL CAPITAL, AND STRATEGY

    become more important in a knowledge-intensive economy. Moreover, this form of trustis new. Instead of being derived from traditionor loyalty, the new trust is built upon values ofcompetence and integrity. This trust will be tem-pered by hierarchical rules to ensure stability,and by market competition to ensure flexibility.Blackler (chap. 3) sees the creation and use ofknowledge as the collective outcome of socialpractice that he labels organizational knowing.As a phenomenon, knowing is situated, medi-ated, provisional, pragmatic, and contested. Apromising framework to analyze knowledgework would be the version of activity theorydeveloped by Yrjo Engestrom, which views hu-man activity systems as multiple mediated in-teractions between individuals, communities orgroups, tools, and concepts. Boisot (chap. 4) mapsthe creation and sharing of organization in hisinformation space model. His focus is on the ar-ticulation and diffusion of knowledge. The artic-ulation of organizational knowledge requires ab-straction (creating cognitive categories to makesense of events) and codification (refining thecategories to simplify distinguishing betweenthem). The more abstract and codified the knowl-edge, the more diffusible it is. Diffusion resultsin use when the new knowledge is absorbed andembedded in practice. Choo (chap. 5) combineselements from Blackler's concept of organiza-tional knowing and Boisot's information-basedanalysis. Strategy is seen as the outcome of or-ganizational sensemaking, knowledge creation,and decision making. The greater the interplaybetween these three information processes, themore effective the organizational learning andadaptation. The final chapter by Despres andChauvel (chap. 6) makes a broad survey of theliterature and identifies seven concepts thatstructure the discussion on knowledge manage-ment: time, type or forms of knowledge, socialspace, context, transformation or dynamics, car-riers or media, and knowledge culture.

    Knowledge-Based Perspectivesof the Firm

    Conner and Prahalad (chap. 7) begin part II bycontrasting a resource-based theory of the firmwith the opportunism-based model of the firmin transaction cost economics. They note that theorganizational mode (market or firm) throughwhich individuals cooperate affects the knowl-edge they apply to business activity. Specifically,the organizational mode affects knowledge sub-

    stitution (how present knowledge is employed)and knowledge flexibility (how future knowl-edge is acquired). In the choice of organizationalmode, opportunism-independent considerationscan outweigh opportunism-based ones. Whenthe possibility for opportunism is low, transac-tion cost economics predicts the choice of a mar-ket mode. However, the resource-based theorypredicts that a firm organization would never-theless be selected in low-opportunism condi-tions when it results in more valuable knowl-edge being applied to the business activity.

    Grant (chap. 8) points out that we do have anumber of concepts that articulate a knowledge-based view of the firm: (1) Knowledge is the mostimportant resource for generating market valueand economic rent. (2) Explicit and tacit types ofknowledge vary in their transferability. (3)Knowledge is subject to economies of scale andscope, and knowledge-intensive industries mayexperience increasing returns. (4) Knowledge iscreated by human beings, who need to special-ize to be efficient in knowledge creation and stor-age. (5) Producing a good or service typicallyrequires the application of many types of knowl-edge. Based on these observations, Grant assertsthat firms exist to create conditions in whichmultiple individuals can integrate their special-ist knowledge. He identifies four integrationmechanisms (rules and directives, sequencing,routines, and group problem solving and deci-sion making) that need to be supported by a baseof "common knowledge" (common language,shared meanings, overlapping knowledge).

    Spender (chap. 9) also examines the "integra-tion" theme. He distinguishes two domains ofknowledge management. One presumes thatknowledge is objectifiable as an asset, while theother sees knowledge as the response to uncer-tainty arising from management's lack of knowl-edge on how to integrate what the firm knowsexplicitly. In the knowledge-based theory of thefirm, knowledge thus has a front face that com-prises knowledge about the elements of the firm'sactivities, and assumes that they are inherentlydesignable; and a back face that analyzes theuncertainties of integrating the front-face ele-ments. As does Grant, Spender considers "com-mon knowledge" the key to this integration.

    Von Krogh and Grand (chap. 10) specify thata knowledge-based theory of the firm would needconcepts to explain knowledge origin, knowledgecreation, how the firm establishes coherence, rev-olutionary versus evolutionary changes, and thelink between managerial action and knowledge

  • CHAPTER 1. KNOWLEDGE, INTELLECTUAL CAPITAL, AND STRATEGY 5

    creation leading to success. On this last criterion,they suggest that knowledge management shouldfocus on the management of conditions enablingknowledge creation. These enabling conditionsinclude formulating a vision, enabling new expe-riences among members, structuring relation-ships among members, changing the relation-ships, changing the quality of the relationships,and creating knowledge-centered activism.

    Huizing and Bouman (chap. 11) introduce theconcept of information transaction space asthe set of possible information exchanges avail-able to an actor at a point in time: a "marketfor knowledge" where information seekers,providers and brokers organize arrangements forinformation exchange. The object of knowledgemanagement is then the efficient allocation ofthe information transaction space. Four ideal-type governance modes are presented: (1) In themarket mode, information demand and supplyshape exchange relationships. (2) In the orga-nized market, knowledge management helpssolve the problem of finding reliable sources. (3)In the extended organized market, the focus ison finding sources and asking relevant questionsunambiguously. (4) Finally, in the firm, the in-formation space is organized to address all threeproblems of finding sources, asking relevantquestions, and facilitating interpretation and use.

    Knowledge Strategy

    In part III, both Zack (chap. 15) and Bierly andDaly (chap. 16) provide definitions of knowledgestrategy. Zack sees it as competitive strategy thatis built around a firm's intellectual resources andcapabilities. Bierly and Daly define it as the setof strategic choices addressing knowledge cre-ation in an organization, which guide the devel-opment of intellectual capital and thus compet-itive advantage. These two chapters also presenttypologies of knowledge strategies that share thesame pair of classificatory dimensions: the de-gree to which the firm creates or applies knowl-edge (exploration vs. exploitation), and the de-gree to which the firm learns or obtainsknowledge internally or externally (internal vs.external). Zack suggests that aggressive knowl-edge strategies based on innovative knowledgethat crosses boundaries would yield superiorperformance. Bierly and Daly describe "bimodallearners" that excel at both exploration and ex-ploitation.

    The three chapters by Winter and Szulanski(chap. 12), Sanchez (chap. 13), and Garud and

    Kumaraswamy (chap. 14) all elaborate on the ex-ploitation theme of leveraging existing knowl-edge to derive competitive advantage. Winterand Szulanski show that the replication of orga-nizational routines is an effective strategy forfirms to exploit their knowledge assets. More-over, firms pursuing replication are useful "lab-oratories" for studying differences in knowledgetransfer and use. Garud and Kumaraswamy pro-pose that in times of continuous and systemicchange, firms need to take advantage of econ-omies of substitution by reusing and retainingexisting components when developing high-per-forming systems. To reduce the cost of compo-nent reuse, firms would need to simultaneouslypursue elements normally viewed as antagonis-tic, for example, incremental and radical learn-ing, markets, and hierarchies. Sanchez continuesthe discussion of knowledge reuse by focusingon the principle of modularity. Firms that sys-tematically develop modular product and processarchitectures are specifying and articulating firmknowledge with the clarity needed to facilitatereuse, substitution, and reconfiguration of com-ponents. This in turn can promote strategic learn-ing through leveraging current architectures aswell as creating next-generation architectures.

    Choi and Karamanos (chap. 17) observe thatit is increasingly difficult to assess with high cer-tainty the exchange value of knowledge-basedgoods. Instead of trying to value goods them-selves, we rely on indices or indicators in the so-cioeconomic environment to identify certain ac-tors and to certify their resources. Consequently,firms pursuing a knowledge strategy would needto understand what these indices are and howthey may be managed.

    Knowledge Strategy in Practice

    The chapters in part IV describe and analyzeknowledge management in practice in a range ofsettings: technology-intensive Japanese compa-nies (Sony, Canon, NEC), Toyota Motor Com-pany, General Motors, a highly regarded U.S. lawfirm, Accenture/ Andersen Consulting, a venturecapital company, and a Canadian governmentagency. Helfat and Raubitschek (chap. 18) andKnott (chap. 19) examine knowledge creationand use in the context of cycles of product de-velopment over time and across different chainsor families of products. Helfat and Raubitschekshow that knowledge, capabilities, and productscoevolve, so the firm's changing portfolios ofproducts and knowledge open up strategic op-

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    portunities for linking products within andacross chains. Knott examines the product de-velopment history of a successful Toyota carmodel and found evidence that the firm had ex-ecuted a knowledge strategy based on combin-ing exploitation and exploration. Rather thanmutually exclusive, exploitation and explorationare complements that reinforce each other.Barabba et al. (chap. 20) apply a systems ap-proach to knowledge management and present adesign of a learning and adaptation support sys-tem that has been implemented at General Mo-tors. The system tracks significant decisions,checks assumptions and outcomes, diagnoses de-viations, and makes new learning available toothers. The GM experience shows that the will-ingness to learn is high when users have confi-dence in the quality of diagnosis and errorcorrection.

    Moving from manufacturing to the servicessector, Starbuck (chap. 21) takes an engaged andengaging look at the highly profitable and inno-vative U.S. law firm of Wachtell, Lipton, Rosen,and Katz. Starbuck attributes the success of thefirm to its ability to assimilate what appear to beconflicting principles and to learn swiftly fromexperience, converting initial difficulties into op-portunities. Yoo and Torrey (chap. 23) report in-teresting differences in how consultants of aglobal management consulting firm create, seek,and share knowledge in two countries. Differ-ences in national cultures would account for thepatterns that emerge. (Appleyard [chap. 30] inPart VI also reports differences in knowledgesharing between Japanese and U.S. employees inthe semiconductor industry.) Multinationalfirms should recognize and manage the influenceof national cultures, through, for example, train-ing and ways of leveraging particular culturaltraits. Moldoveanu (chap. 22) contrasts two epis-temologies at work in a venture capital companyand a government department as they decidewhether to provide financial support for a high-technology start-up firm. Whereas the gov-ernment department applied a rule-following"justificationist" approach, the venture capitalcompany exercised a more open and questioning"falsificationist" approach. The latter's moreadaptive belief revision strategy led to more ro-bust causal models for guiding investment deci-

    Knowledge Creation

    The common theme in part V is the knowledgecreation model developed by Nonaka (chap. 24).

    There are many aspects to the model (a full elab-oration is in Nonaka and Takeuchi 1995), butamong the most widely cited are the distinctionsbetween tacit and explicit knowledge, and the cy-cle of four processes that create new knowledgeby converting tacit knowledge into explicitknowledge (the socialization-externalization-combination-internalization, or SECI, model).Since 1995, more conceptual elements have beenadded to the basic model. Umemoto, a colleagueof Nonaka, discusses in chapter 25 three majorextensions in terms of concepts and applications:the concept of "Ba" or shared context for knowl-edge creation, sharing, and use; a typology ofknowledge assets (experiential, conceptual, sys-temic, and routine knowledge assets); and knowl-edge leadership that provides "enabling condi-tions" conducive to knowledge creation. Ichijo(chap. 26) examines the tension between ex-ploitation and exploration in the context ofknowledge creation and suggests that both ex-ploration (of firm-unique knowledge) and ex-ploitation (of public knowledge) are necessary toincrease intellectual capital and competitive ad-vantage. Kulkki (chap. 28), who completed herdoctoral work with Nonaka, expands the analy-sis of knowledge creation to global companies.She draws the distinction between local andglobal knowledge and investigates how someglobal firms are "architects of time" in the waythat they "constitutively create their futures andtheir future markets with customers, partners,suppliers, and so on." This co-creation combineslocal and global innovation processes and is basedon shared visions and experiences at the local andglobal levels. Leonard and Sensiper (chap. 27)suggest three ways that tacit knowledge is exer-cised in group innovation: problem solving,problem finding, and prediction and anticipation.In problem solving, experts overlay a problemwith patterns derived from experience to quicklyfind a solution. In problem finding, tacit knowl-edge is used to frame a problem, often in a waythat challenges assumptions or reveals hiddendimensions, so as to stimulate more radical in-novation. In prediction and anticipation, tacitknowledge enables the prepared mind to followhunches, listen to intuition, and take mentalleaps to new ideas.

    Knowledge across Boundaries

    Transferring knowledge from beyond the firm'sboundaries is an important strategy for organi-zations to add depth or breadth to theirknowledge-based capabilities. In part VI, the re-

    sions.

  • CHAPTER 1. KNOWLEDGE, INTELLECTUAL CAPITAL, AND STRATEGY 7

    view chapter by Fischer et al. (chap. 29) high-lights findings in the research on knowledgetransfer in alliances. Knowledge transferred isnot necessarily assimilated or applied. The out-come of the knowledge transfer is conditionedby (1) the tacitness or causal ambiguity of theknowledge and (2) the capacity of the firm to ab-sorb the knowledge, or absorptive capacity (Co-hen and Levinthal 1990). Recent research has ex-tended the concept of absorptive capacity beyondtechnical similarities to include such nontechni-cal similarities as organizational structures andcompensation schemes. Fischer et al. suggest thatconceptual frameworks from organizationallearning and social network theory would behelpful when analyzing interfirm knowledgetransfer. This same suggestion appears to havebeen taken up by other authors in this sectionwithout prior prompting. The effect of similar-ity between units in an organizational chain onthe transfer of knowledge is examined empiri-cally by Mitchell et al. (chap. 31). They foundthat transfer learning was both constrainedand facilitated by the level and similarity of ca-pabilities in component units and their chains.High-capability chains transferred knowledge tolow-capability components, but low-capabilitychains required high-capability components to"regress" to capabilities the chain was more ex-perienced with.

    A second, related theme of this part of thebook is the importance of social, cultural, or com-munity norms that support knowledge sharingand contribution. The field study by Sole and Ed-mondson (chap. 33) suggests that in dispersed,cross-functional teams, members not only needto engage knowledge from diverse communitiesin order to surmount difficult problems, but alsohave to integrate this knowledge by developingcongruent understandings of the structure andgoals of the collective effort, and by developingnorms and practices for communication and in-formation sharing. Ciborra and Andreu (chap.32) combine organizational learning with knowl-edge transfer as they develop the learning lad-der model to analyze knowledge sharing withinand between firms, and among firms collaborat-ing in weblike networks. The way the Linuxcommunity has been able to operate successfullyas a self-organizing weblike organization chal-lenges conventional notions about coordinationand governance, opportunism and free riding,and intellectual property rights protection.

    A third theme in this part is the recognitionthat knowledge transfer is inherently two-way,so that some knowledge is given away even as

    new knowledge is acquired. Both Appleyard(chap. 30) and Matusik (chap. 34) propose a cost-benefit analysis approach to understand firms'decisions to share knowledge. Two categories ofcosts appear important: costs due to the loss ofknowledge by the focal firm, and costs due tohaving to manage the knowledge transfer trans-action. Appleyard's survey of U.S. and Japanesefirms in the semiconductor industry also revealsinteresting differences in their patterns ofknowledge sharing. Employees in the UnitedStates relied more on private channels, whileJapanese employees relied more on public chan-nels. Thus, U.S. employees were approachedmore frequently for technical information, butJapanese employees were more likely to answerthe (fewer) requests that they did receive. (Seealso Yoo and Torrey in [chap. 23] Part IV, whoreport differences in knowledge sharing by Ko-rean and U.S. employees in a consulting firm.)

    Managing Intellectual Capital

    The chapters in part VII discuss intellectual cap-ital and the stock of knowledge in the firm. In-tellectual capital theorists Bontis (chaps. 35 and36), Nahapiet and Ghoshal (chap. 38) and De-Carolis (chap. 39) propose a multifaceted de-scription comprising human, structural, cus-tomer, relational, and social capital. Whereas theintellectual capital literature clearly identifieshuman capital and structural capital as distinctcomponents, the final three seem to be inter-twined and require further unraveling.

    Bontis argues that customer capital is a sub-set of relational capital. In other words, theknowledge embedded in customers in the formof marketing and sales intelligence considersonly one element of the integrated value chain.Presumably, organizations have knowledge em-bedded throughout their value chain, startingwith their suppliers. Considering both directionsof the value chain requires a broader conceptu-alization than originally proposed in the litera-ture. Relational capital extends the definition ofcustomer capital by including both sides of thevalue chain.

    Nahapiet and Ghoshal expand the concept ofsocial capital further by including all knowledgeembedded in the social network of a firm beyondthat of customers and suppliers. While the con-ceptualization of human and structural capitalwere initially focused inward, the advent of re-lational and social capital allows theorists to in-clude an important environmental context aswell. DeCarolis further develops the concept of

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    social capital by providing an important link toentrepreneurial activities.

    Pike et al. (chap. 37) bring two vital perspec-tives into the fold. Although essential for prac-titioners, accounting disclosure still remains anuntapped research area for intellectual capital ac-ademics. Researchers recognize the importanceof describing intellectual capital assets, but ac-counting policy makers are facing enormousroadblocks in implementing generally acceptedprinciples that will be universally accepted. Thereis a tremendous opportunity for researchers tofill the void.

    Crossan and Hulland (chap. 40) examine thelinks among learning, strategy, and knowledgemanagement, and the role of leadership in orga-nizational learning. They found a strong corre-lation between leadership and all elements of theorganizational learning system. Moreover, thereis also a strong correlation between the organi-zational learning system and organizational per-formance. They conclude that, over time, firmsneed to innovate through "feed-forward flow oflearning" (exploration) while also ensuring fi-nancial returns through "feedback flow of learn-ing" that institutionalizes new learning throughthe levels of the organization (exploitation).Crossan and Hulland show clearly how organi-zational learning can bring a dynamic, processperspective to the strategic management ofstocks and flows of organizational knowledge.

    Themes and Tensions

    The collection of 41 chapters by seventy-four au-thors in this volume forms a rich pool of think-ing and writing in which to look for patterns andmotifs. Some of the themes are already apparentfrom the summaries above, but here our intentis to clarify and broaden these conceptual path-ways, bringing in other related work that illu-minates these themes.

    What Unique Perspective Doesa Knowledge-Based View ofthe Firm Offer?

    Toward a Knowledge-BasedTheory of the Firm

    A theory of the firm seeks to answer at leastthree questions: Why do firms exist? What de-termines the scale and scope of firms? Why dofirms differ? One widely applied approach to ad-

    dressing these questions is based on transactioncost economics. Williamson (1975, 1991) pro-poses that the unit of analysis in organizationalstudy should be the transaction, or the exchangeof a good or service. An organization is seen asa pattern of transactions between individuals orgroups of individuals, and it therefore adopts thestructure that offers the lowest transaction costsfor the exchanges it wishes to enter into. Trans-actions of goods or services consist of contrac-tual relationships. Williamson (1995) argues thatthe efficacy of the contracting mechanism is con-strained by bounded rationality and subject toopportunism or "self-interest seeking withguile" (p. 26). Moreover, asset specificity ariseswhen the firm is dependent on suppliers whohave made specialized investment to engage inthe transaction. Where bounded rationality, op-portunism, and asset specificity occur together,transactions are better mediated by the privateordering of contracts. In the world of governance,the imperative is to organize transactions so asto economize on bounded rationality while safe-guarding them against the hazards of oppor-tunism. Williamson (1975) suggests that thereare three generic governance structures: themarket, the hierarchy, and a hybrid structure.Organizations move from the market to the hi-erarchy as transactions become more complexand uncertain. The hierarchy extends the boundson rationality by allowing specialization in deci-sion making and savings in communication;curbs opportunism by allowing incentive andcontrol techniques; "absorbs" uncertainty andallows interdependent units to adapt to contin-gencies; resolves small-numbers indeterminaciesby fiat; and reduces information gaps betweenexchange agents by allowing audits and otherchecks (Williamson 1975, p. 257).

    The development of a knowledge-based the-ory of the firm is still in its infancy. One ap-proach, first broached by Edith Penrose in 1959(see Penrose 1995), is based on the idea that firmsdevelop unique capabilities or "resources" asthey develop products; build up research, pro-duction, and marketing capabilities; and learnfrom their customers. The resource-based viewconceptualizes firms as bundles of resources thatare heterogeneously distributed across firms.Moreover, these resources cannot be transferredbetween firms without cost, so a firm's resourcedifferences will persist over time. Resources mayinclude a firm's specific physical assets (e.g.,equipment), human resources (e.g., expertise),and organizational processes (e.g., marketing).

  • C H A P T E R 1. K N O W L E D G E , INTELLECTUAL CAPITAL, AND STRATEGY 9

    When firms possess resources that are valuable(they bring about efficiency or effectiveness) andrare, they can produce competitive advantage.Additionally, when these resources are alsoinimitable (difficult to replicate) and nonsubsti-tutable (other resources cannot serve the samefunction), then the competitive advantage be-comes sustainable (Barney 1991). Conner andPrahalad (chap. 7 this volume) show how theresource-based view predicts governance modesdifferent from those predicted by transactioncost economics. When opportunism is low, trans-action cost economics predicts the choice of amarket mode. However, resource-based theorypredicts that the firm structure would still be se-lected in low-opportunism conditions when it al-lows more valuable knowledge to be applied tothe firm's activities. Ghoshal and Moran (1996)argue that firms are not mere substitutes forstructuring efficient transactions when marketsfail. The advantage of organizations over mar-kets lies not in overcoming human shortcomingsthrough hierarchy, but in leveraging the humanability to take initiative, cooperate, and learn, andthe organizational ability to develop shared pur-pose. Thus, learning and trust would take theplace of cost-economizing and opportunism.

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

    Given that both governance and competenceare bounded rationality constructs and holdthat organization matters, both share a lot ofcommon ground. To be sure, there are dif-ferences. Governance is more microanalytic(the transaction is the basic unit of analysis)and adopts an economizing approach to as-sessing comparative economic organization,whereas competence is more composite (theroutine is the unit of analysis?) and is moreconcerned with processes (especially learn-ing) and the lessons for strategy. Healthytensions are posed between them. Both areneeded in our efforts to understand complexeconomic phenomena as we build towards ascience of organization, (p. 1106)

    Priem and Butler (2001a, b) evaluate the statusof the resource-based view as a formal theory ofthe firm. They argue that its theoretical state-ments are true by definition and therefore tau-tological (e.g., "rare resources that enable a firmto implement specific value-creating strategies

    are a source of implementing strategies that arenot being pursued by competitors"). The defini-tion of "resources" is also problematic, since vir-tually anything associated with the firm can bea resource. Furthermore, the dependent variable("value") lies outside the framework: value is de-termined by the product-market environmentthat is external to the firm. As a result, the the-ory is silent on "how" questions: "How can theresource be obtained? How and in which con-texts does it contribute to competitive advan-tage? How does it interact/compare with otherresources?" (Priem and Butler 2001a, p. 35).

    In a rejoinder, Barney (2001) discusses a num-ber of practical implications resulting from theresource-based logic. Firms experiencing strate-gic disadvantage can use the framework to iden-tify those valuable and rare assets that they donot possess, and to indicate that these resourcescan be duplicated by imitation or substitution.Firms can also use the model to more completelyevaluate their range of resources, and then to ex-ploit these resources for sustained strategic ad-vantage. Finally, firms can use resource-basedreasoning to ensure that they nurture and main-tain the resources that are the source of theircurrent competitive advantage.

    Spender (1994) asserts that the resource-basedview may be too narrow. By concentrating on theacquisition and protection of critical resources, itunderestimates the importance of how resourcesare brought together, coordinated, integrated,and put into use. Spender suggests that this co-ordinating capacity is the essence of the firm, andthat the core of the rent-producing firm is itsability to learn by doing and to develop its co-ordinating capabilities. Grant (chap. 8 this vol.)notes that a knowledge-based perspective on eco-nomic organization implies that we are shiftingour focus away from governance, toward themechanisms and contexts through which coor-dination is achieved: "If the goal of organiza-tional analysis is to predict the most efficientstructures and systems for organizing produc-tion, a knowledge-based perspective suggeststhat the primary consideration is not so muchthe institution for governing transactions (mar-kets vs. firms) as the mechanisms through whichknowledge integration is achieved."

    Teece et al. (1997) propose that the competi-tive advantage of the firm depends on its dy-namic capabilities, conditioned by its specific as-set positions (its portfolio of knowledge andcomplementary assets), and the evolution paththat it has taken. Dynamic capabilities are de-

  • 10 C H A P T E R 1. K N O W L E D G E , INTELLECTUAL CAPITAL, AND STRATEGY

    fined as "the firm's ability to integrate, build, andreconfigure internal and external competences toaddress rapidly changing environments" (p. 516).Eisenhardt and Martin (2000) extend the con-cept of dynamic capabilities to include "the or-ganizational and strategic routines by whichfirms achieve new resource configurations"(p. 1107). They point out that some dynamic ca-pabilities integrate and reconfigure resources,while others allow the firm to acquire and re-lease resources. The chapters in this volume pro-vide many examples of firms deriving competi-tive advantage from this movement andintegration of resources. Winter and Szulanskidescribe the strategic replication of routines inBanc One and Rank Xerox. Mitchell et al. ana-lyze the transfer of learning in chains of U.S.nursing homes. Helfat and Raubitschek examinethe coevolution of knowledge, capabilities, andproducts through product sequencing capabili-ties in Sony, Canon, and NEC. Knott describes aproduct development capability at Toyota thatintegrated exploitation and exploration. Garudand Kumaraswamy, and Sanchez show that mod-ularity and modular product and process archi-tectures can help articulate the firm's knowledgeand facilitate knowledge reconfiguration andreuse.

    Three concepts characterize the theory devel-opment so far: (1) Firms possess specific re-sources and capabilities that are heterogeneouslydistributed. (2) Competitive advantage dependson the firm's knowledge and ability to continu-ously configure and integrate resources intovalue-creating strategies. (3) The firm developscompetitive advantage by expanding its uniqueknowledge and capabilities, and by knowing thespecific product and market contexts in whichthis knowledge generates value. Thus, "re-sources, representing what can be done by thefirm, and the competitive environment, repre-senting what must be done to compete effec-tively in satisfying customer needs, are both es-sential in the strategy-making process" (Priemand Butler 2001b, p. 64).

    Should the Organization Focus onCreating New Knowledge or ApplyingWhat It Already Knows?

    Exploration and Exploitation

    The tension between exploitation and explo-ration has been sharply observed in organizationtheory. An organization that engages exclusivelyin exploration will ordinarily suffer from the fact

    that it never gains the returns of its knowledge.An organization that engages exclusively in ex-ploitation will ordinarily suffer from obsoles-cence. The basic problem confronting an organi-zation is "to engage in sufficient exploitation toensure its current viability and, at the same time,to devote enough energy to exploration to en-sure its future viability" (Levinthal and March1993, p. 105). The returns to exploitation aremore certain, more immediate, and closer inspace than are returns to exploration (March1991). However, the effect of exploitation is toincrease competency in existing domains whileraising the opportunity cost of exploration, re-sulting in "the traps of distinctive competence"or "the success trap" (Levinthal and March1993). The reverse is a firm caught in a spiral ofexploration, constant change, and frequent fail-ure ("the failure trap"). Frequent failure is un-surprising since good new ideas are hard to comeby, and time and experience are needed to learnhow to make a good idea work. An organizationcan control the balance between exploration andexploitation by adjusting aspirations, beliefs,feedback, incentives, and socialization or selec-tion processes (Levinthal and March 1993). Anorganization can break out of the success trap byraising aspirations to levels that induce explo-ration or new knowledge creation, or by intro-ducing feedback that exaggerates the high valueof exploration. For example, if aspiration levelsare tied to the best performers in an industry,then individuals may perceive themselves as per-forming substantially below the standard and aremore likely to take risks and to explore. Sym-metrically, an organization can break out of afailure cycle by lowering aspirations or by in-troducing a particularly good alternative. Whenindividuals perceive themselves as operatingabove or close to aspiration levels, they becomerisk averse and refrain from exploitation. Inother words, modest success is associated withrisk aversion (March and Shapira 1987).

    The tension between exploration and ex-ploitation is one of the themes that appears mostpersistently among the chapters in this volume.For example, Conner and Prahalad contrast theeffects of knowledge-substitution (exploitingcurrent knowledge) and knowledge flexibility(exploring future knowledge). Bierly and Daly,and Zack, who independently developed typolo-gies of knowledge strategies, both use the di-mension of exploitation versus exploration forclassifying knowledge strategies. As we discussbelow, the chapters by Crossan and Hulland,Ichijo, and Knott also examine this tension.

  • CHAPTER 1. K N O W L E D G E , INTELLECTUAL CAPITAL, AND STRATEGY 11

    The discussions in this volume point to threestrategy options. The first would be to focus onexploitation. Exploitation is the use of the firm'sexisting stocks of knowledge and capabilities. Aknowledge strategy focused on exploitation im-plies the codification of knowledge, rendering itexplicit so as to promote reuse in multiple con-texts, and to facilitate recombination with othersets of knowledge in the firm. This point of viewmay be discerned in the chapters by Sanchez,Garud and Kumaraswamy, and Winter and Szu-lanski. Sanchez recommends that firms developmodular product and process architectures sothat knowledge components defined in the ar-chitecture can be reconfigured and reused. Garudand Kumaraswamy suggest that firms gaineconomies of substitution through partial reten-tion and reuse of existing components when de-signing high-performance systems. Winter andSzulanski show the efficacy of replicating orga-nizational routines in exploiting a firm's knowl-edge assets.

    The second strategy option would be to focuson exploration. Exploration leads to the creationof new knowledge that is then applied in the de-velopment of new products and services. Explo-ration and new knowledge can also expand thecapabilities and range of responses available tothe firm. (Knowledge creation is examined as amajor theme on its own in the next section.)

    The third option is to embrace both exploita-tion and exploration. Several authors in this vol-ume present the case for this option. Knott foundempirical evidence that Toyota had executed aknowledge strategy combining exploitation andexploration as complements that reinforced eachother. Exploitation led to learning curve cost re-ductions across product developments, while ex-ploration led to product improvements and in-novations. Crossan and Hulland also concludedfrom their field study that firms need two kindsof learning flowsfeed-forward and feedbackthat correspond to exploration and exploitation.Ichijo found that GE combined exploration offirm-unique knowledge with exploitation ofpublic knowledge. Whereas Knott, and Crossanand Hulland describe the coexistence of ex-ploitation and exploration across different pro-cesses, Ichijo describes the dual strategy work-ing on different categories of knowledge. Finally,Bierly and Daly propose a category of "bimodallearners" for firms that are adept at both explo-ration and exploitation. Bimodal learners may be"ambidextrous" organizations (Tushman andAnderson 1996) with multiple cultures or sub-cultures that allow it to pursue both directions

    successfully, or "chameleon" organizations thatcan rapidly switch their focus between exploita-tion and exploration in response to environ-mental changes.

    To summarize somewhat baldly, the benefit ofexploitation is based on increased efficiency, thatof exploration is based on increased innovation,and that of a bimodal combination is based onenhanced adaptability. The task for researchersand practitioners is to clarify the conditions un-der which exploitation, exploration, and/or bi-modal learning would create sustainable advan-tage. Such conditions would probably relate tothe type of industry, the nature of the knowl-edge, and the characteristics of the firm and itsactivity.

    How Do Organizations CreateNew Knowledge?

    The Knowledge to Create Knowledge

    The model of knowledge creation developed byNonaka (chap. 24 this vol.) and Nonaka andTakeuchi (1995) is one of the most cited theoriesin the knowledge management literature. At thecore of the model is the distinction between tacitand explicit knowledge, and the analysis of thedynamics of knowledge creation through cyclesof socialization, externalization, combination,and internalization (SECI cycles) that engage tacitand explicit knowledge across organizationallevels.

    All organizational knowledge is rooted in tacitknowledge. Yet, as long as tacit knowledge re-mains the private property of individuals or se-lect groups, the organization cannot multiply itsvalue in at least two important modes. First, theorganization is limited in its ability to leveragethat knowledge to gain economies of scale orstrategic advantage:

    Unless able to train large numbers of indi-viduals or to transform skills into organizingprinciples, the craft shop is forever simply ashop. The speed of replication of knowledgedetermines the rate of growth; control overits diffusion deters competitive erosion ofthe market position. For a firm to grow, itmust develop organizing principles and awidely held and shared code by which to or-chestrate large numbers of people and, po-tentially, varied functions. (Kogut and Zan-der 1992, p. 390)

    Second, the organization is unable to sustain cy-cles of new knowledge generation that depend on

  • 12 CHAPTER 1. KNOWLEDGE, INTELLECTUAL CAPITAL, AND STRATEGY

    the continuous conversion of tacit and explicitknowledge, and on the amplification of thisknowledge across many levels of the organiza-tion (Nonaka and Takeuchi 1995). Knowledgeconversion takes place when people share, exter-nalize, combine, and internalize their knowledge.Knowledge expansion takes place when new ideasand concepts move to other parts of the organi-zation to spark new cycles of knowledge creation.

    The dichotomy between tacit and explicitknowledge has been emphasized so often that weneed to remind ourselves that the two not onlyare complementary to each other, but also are inmany ways interdependent. In an organization,the exercise of one form of knowledge almost al-ways requires the presence and utilization of theother form. Thus, the exercise of tacit knowledgetypically makes references to plans or blueprints,entails the handling of tools and equipment, andinvolves following written or oral instructions,all of which embody various kinds of explicitknowledge. Conversely, the application of ex-plicit knowledge often requires individuals whocan interpret, elaborate, demonstrate, or instan-tiate the formal knowledge with respect to a par-ticular problem setting. Behind every formalknowledge system in an organization is an in-formal support structure that is just as impor-tant and necessary for the organization to func-tion properly. Some of the most useful sourcesof knowledge in an organization are those thatcombine the tacit and the explicit, that articulatethe judgmental or the conjectural, and that re-veal the hidden or the unobvious.

    Organizations face a number of issues with re-spect to the management of its tacit knowledge.Tacit knowledge grows in the soil of experience,so employees need to be given the time and op-portunity to specialize and build up expertise ina certain area. As an alternative to cultivating itsown tacit knowledge, an organization may con-sider contracting desired expertise on a "just-in-time" basis. This approach has limitations sincetacit knowledge is not exercised in isolation, butneeds to be contextualized and combined withthe organization's explicit and cultural knowl-edge. Another basic concern is one of access: howdoes an organization find out and provide accessto what its participants know, particularly whenthis personal knowledge defies codification andclassification? As long as the personal knowledgeremains tacit, it constitutes a unique competitiveadvantage for the organization, since the knowl-edge is hard for other organizations to copy. Un-fortunately, this uniqueness is not permanent or

    protected, since the tacit knowledge is lost shouldthe individual decide to leave the organization(and perhaps join a competitor!). The organiza-tion managing its tacit knowledge has to dealwith three major challenges: how to deepen itsown stocks of tacit knowledge, how to access andactivate this knowledge, and how to maximizethe value derived from its use.

    While the classification of organizationalknowledge as tacit and explicit is widely dis-cussed, the category of cultural knowledge is lessoften encountered. In epistemology, knowledgeis sometimes defined as justified true belief (Audi1998, Moser et al. 1998). An organization's cul-tural knowledge thus consists of the beliefs itholds to be true and justifiably so (based on ex-perience, observation, reflection) about itself, itsenvironment, and its way of doing business. Im-portantly, an organization's cultural knowledgeis used to answer such questions as, What kindof business are we in? What is our businessmodel? What knowledge would be valuable tothe organization? What knowledge would beworth pursuing? Cultural knowledge consists ofthe assumptions and beliefs that are habituallyused by organizational members to perceive andexplain reality, as well as the criteria and condi-tions that are used to assign value and signifi-cance to new knowledge. Collins (1998) high-lights two important roles of cultural knowledge:to understand and use facts, rules, and heuristics,and to make inductions in the same way as oth-ers in order to enable concerted action. Garudand Rappa (1994) suggest that the developmentof new knowledge based on technology is asociocognitive process that rests on three defini-tions of technology: "technology as beliefs, arti-facts, and evaluation routines" (p. 345). Technol-ogy development is guided by beliefs about whatis possible, what is worth attempting, and whatlevels of effort are required. In their separatechapters in this volume, both Grant and Spenderemphasize that knowledge integration in thefirm is dependent on a base of "common knowl-edge" that consists of shared meanings, commonlanguage, and other forms of shared knowledge.Sole and Edmondson's chapter describes the needfor dispersed teams to develop congruent un-derstandings of the goals and structure of theircollective effort in order to integrate knowledge.

    Overall, an organization's beliefs about whattechnology or new knowledge is feasible andworth attempting, a part of its cultural knowl-edge, would influence the direction and intensityof the knowledge development effort, as well as

  • CHAPTER 1. KNOWLEDGE, INTELLECTUAL CAPITAL, AND STRATEGY 13

    the routines and norms by which new informa-tion and knowledge would be evaluated. In thecontext of knowledge creation, cultural knowl-edge plays the vital role of providing a patternof shared assumptions so that the organizationcan assign significance to new information andknowledge. Cultural knowledge supplies valuesand norms that

    determine what kinds of knowledge aresought and nurtured, what kinds of knowl-edge-building activities are tolerated and en-couraged. There are systems of caste andstatus, rituals of behavior, and passionate be-liefs associated with various kinds of techno-logical knowledge that are as rigid and com-plex as those associated with religion.Therefore, values serve as knowledge-screening and -control mechanisms.(Leonard 1995, p. 19)

    There are familiar accounts of organizations inwhich cultural knowledge is misaligned with ef-forts to exploit tacit and explicit knowledge. Forexample, Xerox PARC in the 1970s had pioneeredmany innovations that Xerox itself did not ex-ploit but other companies commercialized intoproducts that defined the personal computerindustry. PARC had invented or developed the bit-mapped display technology required for graphi-cal user interfaces; software for on-screen win-dows and windows management; the mouse asa pointing device; the first personal computer,Alto; and an early word-processing software,Bravo, for the Alto (Hiltzik 1999). Xerox did notfully apprehend the application potential of theseinventions because its perception of self andwhat kinds of knowledge it should pursue werebounded by its established position in the photo-copier market, and its belief in a business modelbased on selling closed, integrated systems. De-veloping the new technologies would have beentoo radical and risky a departure from what Xe-rox believed was its core business. Many of theresearchers working on these projects subse-quently left PARC, taking their knowledge withthem.

    Nonaka and Takeuchi (1995) do include as-pects of cultural knowledge in the way they di-vide tacit knowledge into technical and cognitivedimensions. The technical dimension encom-passes practical know-how, while the cognitivedimension includes mental models, beliefs, andperspectives that are so ingrained that they aretaken for granted and therefore cannot be easily

    articulated. However, the suggestion here is thata separate category of cultural knowledge ishelpful for the following reason. Tacit knowledgeis personal knowledge that is lost to the organi-zation when the individual leaves. Culturalknowledge, though to a large part not codified,remains with the organization as its membershipchanges. As beliefs and values that endure in theform of shared perceptions, incentive and rewardsystems, and evaluation methods and criteria,cultural knowledge has a powerful effect on thecreation and adoption of new knowledge.

    What Knowledge Should the Firm Shareand Transfer, and What KnowledgeShould the Firm Protect?

    Moving Knowledge across Boundaries

    Because of the substantial investment needed tocreate new knowledge and turn it into new prod-ucts, coupled with the risk and uncertainty of theknowledge generation process, the distributionof valuable knowledge is unlikely to be uniform.As a result, the ownership of valuable knowledgecan potentially earn both Ricardian and monop-oly rents (Winter 1987). Ricardian rents areearned because the firm owning valuable knowl-edge possesses a factor of production that is moreproductive than its rivals. At the same time, mo-nopoly rents are earned because the product de-veloped with superior knowledge will be unique.The corollary of this reasoning is that the firmshould protect its knowledge from appropriationor imitation (Liebeskind 1996). Spender andGrant (1996) note that "if knowledge is the pri-mary resource upon which competitive advan-tage is founded, then its transferability deter-mines the period over which its possessor canearn rents from it" (p. 7). Barney (1991) hasidentified inimitability as a criterion for assess-ing the ability of a resource to sustain strategicadvantage.

    Yet there are contexts where the deliberatesharing and transfer of knowledge constitute astrategic move. Firms in highly networked anddensely connected industries where technologiesand markets are still evolving may purposefullyshare knowledge in order to (1) encourage andenable the development of complementary prod-ucts and services, (2) influence the developmentof common platforms, dominant designs, and defacto or formal standards, and (3) build up a crit-ical mass of customers and users. Industries thatexperience network externalities where the value

  • 14 CHAPTER 1. K N O W L E D G E , INTELLECTUAL CAPITAL, AND STRATEGY

    and usefulness of a good or service depend onthe installed base of connected users may chooseto share knowledge with customers, competitors,and collaborators. In addition to network exter-nality effects, firms sharing knowledge may alsostand to gain the advantage of increasing returnsby establishing an early lead in a market or bydeveloping a dominant position in an industry.The strategic challenge, then, becomes knowingwhat knowledge to transfer and what knowledgeto retain as part of the firm's valuable, rare, inim-itable, nonsubstitutable resources.

    Boisot (chap. 4 this vol.) analyzes the para-doxical nature of the value of information goodsusing I-space (information space model). An in-formation good maximizes its value when it ishighly articulated (abstracted and codified), andwhen it is scarce. Paradoxically, the scarcity ofhighly articulated knowledge is difficult to main-tain precisely because that knowledge has beencodified and given structure and is thereforemore diffusible. Boisot concludes:

    A critical skill for the knowledge-based firmwill thus be to know what to share and whatto hold on to. Recognizing when knowledgeshould be actively diffused to outsidersrather than hoarded, when it can be used toextend the firm's organizational reach be-yond its boundaries, will become an impor-tant source of competitive advantage. Build-ing up the capabilities of the networks a firmparticipates in through a judicious sharing ofits knowledge strengthens its own competi-tive position within the network. Confiningits internal focus to core strengths preventsit from overstretching what will always belimited cognitive resources, (chap. 4)

    Sanchez (chap. 13 this vol.) suggests that the fearof losing explicit knowledge may be exaggerated.In a knowledge-intensive economy, organiza-tions do not possess all the knowledge they needinternally but increasingly rely on sharing orbuying technologies or services from other or-ganizations. The movement of knowledge withinand between organizations is often in the formof transferring explicit knowledge. Because ex-plicit knowledge is articulated knowledge, it isoften assumed to be readily understood by oth-ers and can therefore diffuse more easily beyondan organization's boundary. Sanchez suggeststhat this assumption may not always be war-ranted. Even though the knowledge has beenmade explicit, the receiving organization may

    experience problems of comprehension and val-uation as it tries to understand and appraise thesignificance of the articulated knowledge. Theremay be several reasons: firms develop their ownlanguages and vocabularies that others might notunderstand; different firms possess different lev-els of technical capability; different firms are atdifferent stages of growth and development; theusefulness of the knowledge depends on its link-ages with other knowledge, resources, and capa-bilities in the originating firm. Given theseuncertainties, the assumption that explicitknowledge is fundamentally "less secure" thantacit knowledge may be simplistic. Each firmwould need to identify the kinds of knowledgethat constitute its distinctive competencies andmaintain close control within the firm of the ex-plicit or articulated knowledge that is most crit-ical, while leveraging as broadly as possible withother firms knowledge that is strategically lesscritical.

    Is a Knowledge-Based Strategy theProduct of Careful Planning or theOutcome of Learning and Discovery?

    Organizational Learning asStrategy Making

    Three models of organizational learning as strat-egy making are presented in this volume. Theyshare common assumptions and arrive at com-mon implications: that the challenge of learningas strategy is managing the stocks and flows ofknowledge across multiple levels of the organi-zation in order to achieve both renewal and rentgeneration.

    Crossan and Hulland (chap. 40 this vol.) showhow organizational learning can bring a dynamicprocess perspective to the strategic managementof stocks and flows of knowledge through theorganization. The "41 framework" asserts thatorganizational learning takes place at the levelsof the individual, group, and organization. Thesemodes of learning are linked by social and psy-chological processes of intuiting, interpreting,integrating, and institutionalizing. The frame-work is operationalized as the "strategic learn-ing assessment map" that describes and analyzesthe stocks and flows of knowledge in a compre-hensive organizational learning system. Theirresearch suggests that the transference of learn-ing across levels is one of the greatest challengesof managing organizational learning.

    Another conceptualization of the levels of or-

  • CHAPTER 1. K N O W L E D G E , INTELLECTUAL CAPITAL, AND STRATEGY 15

    ganizational learning is presented by Ciborraand Andreu (chap. 32 this vol.). They assert thatlearning occurs at the levels of (1) resourcesand work practices (routinization learning loop),(2) organizational routines (capability learningloop), and (3) firm goals and core capabilities(strategic loop). Each level of learning is depen-dent on resources and outcomes from the levelbeneath it, so the model resembles a "learningladder." As do Crossan and Hulland, Ciborra andAndreu believe that it is the transformation oflearning across these levels ("climbing up therungs of the learning ladder") that poses the ma-jor strategic challenge.

    In another dynamic, process view of strategiclearning, Boisot (chap. 4 this vol.) describes a"social learning cycle" that is divided into thesix phases: scanning (identifying threats and op-portunities), problem solving (acquiring andcodifying insights), abstraction (generalizingnew insights), diffusion (sharing new insightswith a population), absorption (applying in-sights through learning by doing), and impact-ing (embedding in concrete practices).

    What Is the Difference BetweenManaging Knowledge and ManagingIntellectual Capital?

    The Intellectual Capital Turf War

    The concepts of organizational learning, knowl-edge management, and intellectual capital over-lap significantly, but it is possible to draw somehelpful distinctions. Bonds et al. (2001) suggestthat, at a general level of analysis, intellectualcapital represents the "stock" of knowledge thatexists in an organization at a particular point intime. Thus, it represents what the organizationhas learned in a cognitive sense. Managing thisstock of knowledge in a firm as it flows and growsis the domain of knowledge management. Theway that stocks of intellectual capital change andevolve over time is then dependent on knowl-edge management strategies. Finally, organiza-tional learning expands the analysis to includebehaviors at the individual, group, and organi-zational levels, as well as processes that createand utilize knowledge in order to understandmore broadly how the "stocks" change and flow.

    In his literature review, Bontis (this volume)describes both the benefits and challenges aca-demic researchers face when studying the intel-lectual capital phenomenon. Its intuitive appealallows ample opportunity for practitioners to

    work alongside academics in further under-standing its complex inner workings. However,while both groups venture forward, functionalbiases seem to provide added resistance. Whileaccountants concern themselves with disclosingintellectual capital, strategists maintain it is theHoly Grail for sustainable advantage. Whilefinance researchers attempt to value it, technol-ogists argue for its codification. While human re-source researchers want to keep it, legal depart-ments try to license it. Our fear in this turf waris that while intellectual capital increases in over-all scope and popularity, the depth of our un-derstanding from any single functional perspec-tive will be limited. How can we pursue bothdepth and breadth?

    Among the many directions the acceleratingresearch trajectory of this field can follow, theseare some of the tensions that we suggest requireincreased attention. From an accounting per-spective, we have spent significant time talkingabout disclosing intellectual capital assets; shouldwe not disclose intellectual capital liabilities aswell? Caddy (2000) warns that for every posi-tive there is a negative, and for every sunrisethere is a sunset. Intellectual capital researchwould benefit from the same dual perspective.Microsoft Corporation and its loss in the famousantitrust case in 1999 would be a perfect exam-ple. What was once considered an arrogant andoverreaching monopoly now suffers from an ex-odus of top executives. The considerable intel-lectual capital liability generated by the falloutin the public press puts significant downwardpressure on Microsoft's market capitalization.The Exxon Valdez disaster in 1989 provides an-other setting for the study of intellectual capitalliability. Even with over $3.5 billion spent oncleanup (Raeburn 1999), senior executives atExxon Corporation are still limited in theirstrategic choices while environment groupswatch them under a suffocating microscope.

    Another suggestion we would like to make isthat intellectual capital empirical research shouldbe pursued with more fervor. We appreciate thatstudying an intangible, elusive, and ethereal phe-nomenon is never easy. However, the rewards ofsound empirical research are countless. Most ofthe survey work done thus far (including Bon-tis (2000; chap. 36 this vol.) mainly reveals theintellectual capital topography of sampled firms(see also other survey researchers, e.g., Borne-mann et al. 1999, Miller et al. 1999). More workis required that triangulates user perceptionswith quantitative metrics over longitudinal time

  • 16 CHAPTE R 1. KNOWLEDGE , INTELLECTUAL CAPITAL, AND STRATEGY

    Figure 1.1 A framework for strategic knowledge management.

    periods. Such a research program is not easygiven that only a few firms in the world evenhave metrics that span more than a couple ofyears. However, the number of these firms isslowly increasing, and they are typically veryenthusiastic about partnering with researcherswho will enable them to be at the forefront ofintellectual capital measurement.

    A final suggestion on intellectual capital re-search comes from a user's perspective. Do weknow that financial analysts want intellectualcapital reports? Do we know that informationtechnology administrators have bountiful knowl-edge repositories that are being used by all orga-nizational members? Do we know that develop-ing intellectual capital strategies is feasible in thelong term from a cost-benefit perspective? Do weknow that firms who report intellectual capitalactually perform better? And finally, do we knowthat senior management teams that generate in-tellectual capital reports make better decisions?Unfortunately, the answer to all of these ques-tions is no. The garden of opportunity awaits.We have an extremely fertile ground for futureresearch.

    What Are the Main Levers for Designinga Knowledge-Based Strategy?

    A Framework for StrategicKnowledge Management

    Figure 1.1 ties the main threads of our discus-sion in a single framework consisting of (1) or-

    ganizational knowledge processes, (2) locus orlevels of learning, (3) types of intellectual capi-tal, and (4) strategic levers.

    A firm generates value from what it knowsthrough the organizational processes of knowl-edge creation, knowledge transfer, and knowledgeutilization. In knowledge creation, the firm pro-duces new knowledge through the dynamic con-version and extcrnalization of its tacit, embeddedknowledge. In knowledge transfer, knowledge isshared within a firm across different functionalgroups, product families, geographical locations,and time periods. Knowledge is also transferredbetween firms through interorganizational al-liances and linkages. In knowledge utilization, thefirm integrates and coordinates its differentforms of knowledge in order to take action andto produce goods and services. Tacit knowledgeplays a crucial role in knowledge creation; codi-fied or explicit knowledge facilitates knowledgetransfer; "common" knowledge or shared under-standing about goals and purpose guides knowl-edge utilization.

    Over time, the firm accumulates a stock ofknowledge and capabilities that is unique to itslearning and experience. This stock is the firm'sintellectual capital, and it comprises human,structural, and relational capital that reside in itsemployees, organizational routines, intellectualproperty, and relationships with customers, sup-pliers, distributors, and partners. The stock of in-tellectual capital is continuously refreshedthrough new learning at various levels: the in-dividual, the work group, the organization, and

  • CHAPTER 1. KNOWLEDGE , INTELLECTUAL CAPITAL, AND STRATEGY 17

    Figure 1.2 Conceptual structure of the book.

    the network of organizations of which the firmis a part.

    Within the framework composed by these el-ements, the chapters in this volume discuss anumber of actions that a firm may pursue toleverage its knowledge. These "strategic levers"are shown in the lower part of figure 1.1. Theyinclude the following topics discussed by authorsin this volume:

    Promoting "exploration" or knowledge cre-ation through converting and sharing theorganization's tacit knowledge (Nonaka)

    Forming cross-functional work teams thatare able to access and integrate the diverseknowledge of members (Leonard and Sen-siper, Sole and Edmondson)

    Establishing "enabling conditions" that areconducive to organizational knowledge cre-ation (von Krogh and Grand, Umemoto)

    "Codifying" knowledge to facilitate diffusion(Boisot)

    Replicating organizational routines acrossdifferent parts and locations of the firm as away of exploiting knowledge assets (Winterand Szulanski)

    Developing "modular architectures" of prod-uct and process components and their inter-faces in order to encourage recombinationand reuse of knowledge (Sanchez, Garud andKumaraswamy)

    Transferring knowledge and learningthrough alliances and organizational chains(Fischer et al., Mitchell et al.)

    Combining exploitation and exploration ascomplementary elements of the firm'sknowledge strategy (Ichijo, Knott)

    "Sequencing" product development so as totake advantage of the path that organiza-tional knowledge, capabilities, and producthas coevolved over time (Helfat andRaubitschek)

    Using a cost-benefit calculus to decide on ex-ternal knowledge transfer (Appelyard, Ma-tusik)

    Designing decision support as a strategiclearning and adaptation system (Barabaaet al.)

    Reconceptualizing the role of leadership inthe context of learning and innovation(Crossan and Hulland)

    Purposefully measuring, evaluating, andmanaging the firm's intellectual assets (Bon-tis, Pike et al.)

    The set of options shown is by no means ex-haustive, but they suggest the kind of dynamicinterplay between knowledge processes, types ofintellectual capital, and the locus of learning andinnovation that is necessary in crafting an effec-tive knowledge-based strategy. The frameworkmay also serve as a guide for positioning theseven parts of this book, as shown in figure 1.2.

    Coda

    Ultimately, there are no universal recipes on howa firm can best map out a knowledge-based strat-

  • 18 CHAPTER 1. K N O W L E D G E , INTELLECTUAL CAPITAL, AND STRATEGY

    egy. Each organization would have to design itsown responses and initiatives based on its aspi-rations, learning, and capabilities. These patternsof action would be shaped by conditions in theindustry and the broader environment, as wellas by the path that the organization has traveled.We recognize that organizations require manydifferent kinds and levels of knowledge in orderto be successful. Firms need knowledge to de-velop products; they need knowledge about cus-tomers and competitors in order to identify mar-kets; they need knowledge about coordinatingand integrating the flow and deployment of re-sources; and they need knowledge about how tocontinuously refresh and rejuvenate the intel-lectual capital and core capabilities they possess.We recognize that knowledge-based strategy isboth an enactment and a response linking thefirm's specific characteristics and the contingen-cies of the environment it thrives in. In an in-creasingly dynamic and complex world, firmswould need the agility and dexterity to enfoldwhat would traditionally be regarded as oppo-sites: combining exploration with exploitation,sharing and protecting knowledge, managing thestocks and flows of intellectual capital. Whilethere are no pat solutions, the contributors inthis volume offer a rich suite of conceptual lensesand analytical tools that can help us better un-derstand and manage knowledge and intellectualcapital in the pursuit of superior organizationalperformance.

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