1

2 Published in: D. Chauvel and C. Despres, Knowledge

3 Horizons: The Present and the Promise of Knowledge
4 Management, Butterworth-Heinemann, 2000.
5
6
7 SHIFTS IN THE WORLD ECONOMY: THE DRIVERS
8 OF KNOWLEDGE MANAGEMENT
9
10 Robert M. Grant
11
12 Professor of Management
13 Georgetown University and City University
14
15 Correspondence to:
16 R.M. Grant
17 City University Business School
18 Barbican Center
19 London EC2Y 8HB
20
21 Tel. 44 171 916 8497
22 Fax 44 171 477 8328
23 E-mail: rgrant2208@aol.com
24
25INTRODUCTION
26
27 Among the innovations that have swept through the world of management during the past two
28decades total quality management, shareholder value creation, business process reengineering, and
29competence-based strategyknowledge management has probably aroused the greatest interest and
30made the biggest impact. Measured by numbers of conferences and books, the attention attracted by
31knowledge management is remarkable. For consulting companies it has provided the basis for a whole
32new line of business. Among companies a new genus of knowledge officers has appeared. Unusual
33among major management innovations, knowledge management has captured the interest of both
34practicing managers and business school academics. One of the most encouraging features of the many
35conferences covering knowledge management is the participation and dialogue between academics and
36practitioners. The breadth of interest in knowledge management is also apparent across the range of
37business functions. While early interest centered on strategy, IT, and new product development,
38knowledge management has extended into operations management, marketing, HR, and accounting and
39finance.
40 The purpose of this chapter is to explore two questions concerning the current knowledge
41revolution in management. First, why this recent explosion of interest in knowledge management?
42Second, what are the critically important contributions that the knowledge perspective offers to
43management theory and practice?
44 The first section of the chapter explores the reasons for the surge of interest and activity in
45knowledge management. I focus in particular on the changes that have occurred in the world economy.
46One of the key arguments of several leading exponents of knowledge management is that the new post-
47industrial, knowledge-based economy is fundamentally different from the economic structures of the past
48and that the “new rules” of competition and organization require new approaches to management.
49Certainly, the world economy at the end of the 20th century does display unique characteristics such as
50the critical role of information and communications technologies and the extent of globalization. At the
51same time, it is not apparent that the “knowledge-based economy” inhabited by “knowledge-intensive
52firms” and “knowledge workers” is fundamentally different from that which preceded it. Alternatively, it
53could be that the current enthusiasm for knowledge management is not so much the result of
54fundamental changes in our economic system, as the result of the discovery of new concepts and tools
55for dealing with the perennial issues of management. One of the themes that I shall develop is that all
56management is, in effect, about managing knowledge but, until recently, the principles of management
57have failed to take account of the critical role of knowledge and the implications of different types of
58management for coordinating organizations and generating profits from productive activity.
59 In moving on to the second major questionthe central contributions of knowledge
60managementlet me first address the issue of fad versus substance. Like most social phenomena,
61management is subject to fashion, hype, bandwagon effects, misinformation, and the activities of
62unscrupulous entrepreneurs (in academe as well as consulting). Even if we exclude pure charlatanism,

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 63there will inevitably be a tendency for so broad a subject to attract “more needless obfuscation and woolly
64thinking by academics and consultants than any other” (Financial Times, 1999) and idiosyncrasies such
65as the interest of Saatchi & Saatchi’s director of knowledge management which involves “the totality of
66the consumer” including an innovative Japanese panty hose “embedded with millions of microcapsules of
67vitamin C and seaweed extract that burst when worn to provide extra nourishment for the limbs.” (Wall
68Street Journal, 1997a). .
69 My own view is that, despite its peculiar, superficial, and wrong-headed manifestations,
70knowledge management offers a set of ideas and insights that give it the potential to make the most
71important advance in management theory and practice of the past 50 years. Already knowledge-based
72thinking is making important contributions to our thinking about information systems, strategy, innovation,
73and organizational design. Within firms and not-for-profit organizations, the introduction of knowledge
74management practices has shown some remarkable results in helping diffuse best practices, accelerate
75new product develop, improve work-place design, and increase the effectiveness of strategic planning
76processes. Within the broad diversity of knowledge management concepts and practices, which offer the
77most promising avenues of development in terms of future management practices?
78
79THE CURRENT BUSINESS ENVIRONMENT
80
81The New Knowledge Economy
82 Closely associated with the surge of interest in knowledge management has been the advent of
83the new, knowledge-based, post-industrial economy. What is this New Economy? Among the
84characteristics identified in the flood of written commentary are the following:
85
86 In contrast with previous periods of economic development, the primary factor of production in the
87 new economy is knowledge, as opposed to capital in the industrial economy or land in the agrarian
88 economy (Quinn, 1992; Drucker, 1993; Burton-Jones, 2000).

89 It is concentrated upon intangibles rather than tangibles (Stewart, 1997; Edvinsson and Malone,
90 1997). In terms of output this means a predominance of services over goods. In terms of inputs it
91 means that the primary assets of firms are intangibles such as technology and brands rather than
92 land, machines, inventories and financial assets. The increasing irrelevance of tangible assets is
93 indicated by the fact that by March 1999, the ratio of market value of the Business Week “nifty-fifty”
94 had reached 12 times book value.

95 It is networked—unprecedented interconnectivity is possible through the development of new

96 communication media: cellular telephony, direct satellite communication, the internet, and interactive
97 TV. The digitalization of major aspects of almost all communication media has greatly expanded the
98 potential for collaboration not just within organizations but also between organizations (Castells,
99 1999). Indeed, one consequence has been the declining role of formal organizations all together as
100 institutions for achieving coordinated action. The internet itself has provided both a metaphor and a
101 model for “virtual” organizationorganization that lacks either formal structure or authority.

102 It is digital. Don Tapscott (1995) has referred to the current era as the “age of sand” in that the
103 central components of digital technology—the silicon chip and fiber optical cable—are based on
104 sand. The digitization of information has had a huge impact upon the capacity for transferring,
105 storing, and processing information.

106 It is virtual. The virtual organization referred to above is just one example of the transition from real to
107 a virtual work made possible by digitization and networking (Hagel and Singer, 1999). The growing
108 role of virtual (i.e. electronic) money, virtual transactions, virtual communities, virtual vacations, and
109 virtual sex are dissolving the boundaries between the real and imaginary worlds to the point where
110 futurist Watts Wacker (1999) claims that we are entering an age where anything we can dream we
111 can do.

112 It is fast moving. The new economy is subject to rapid change. Partly because of the rapid pace of
113 innovation and partly because of the efficiency of communication that results in speedy diffusion, the
114 pace of technological change has accelerated sharply. Evidence of this is produced by the
115 compression of product life cycles. The automobile and the safety razor required more than a decade
116 to transition from their “introduction stage” into their “growth stage”, even for the microcomputer the
117 lag between introduction and rapid market penetration was about six years. By contrast, during the
118 past decade and a half, CD-ROMs, personal digital organizers, digital PCs telecommunications, and

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119 satellite TVs entered their growth phases almost immediately after their introduction. The
120 combination of speed, intangibility, and connectivity has created what Stan Davis and Chris Meyer
121 (1998) call the “blur” aspect of the modern economy. The high-velocity business environment calls
122 for a rethinking of firms’ strategies (Brown and Eisenhart, 1998).

123 It is better performing. While Japan and much of Western Europe are too affected by sluggish overall
124 demand to appreciate the benefits of the “new economy”, the US “Goldilocks” economy reveals with
125 remarkable clarity the capacity of the knowledge-based economy to reconcile high growth and high
126 employment with price stability.
127
128 These various trends have combined to produce a number of structural changes within the
129business sector. These include the dissolving boundaries between firms and markets and the growing
130role of collaborative organizational forms that are neither firms nor market transactions. Also prominent
131has been “disintermediation”—the tendency for firms to transact directly with final customers without the
132need for distributors, wholesalers, and agents to act as intermediaries. A further implication has been
133globalization. Once seen as a result of trade liberalization and the activities of multinational corporations,
134globalization is now knowledge driven. As Drucker remarked: “Knowledge knows no boundaries.” The
135jungle tribes of Papua New Guinea and the bushmen of the Kalahari are almost as knowledgeable about
136Monica Lewinski, the death of Princess Diana, and the OJ Simpson verdict as CNN watchers in North
137America and Europe. Global communication and information networks, the internet in particular, have
138permitted the smallest enterprises to engage in international transactions. Finally, the distinction between
139producers and consumers is becoming less clear. Interactive media results in consumers being drawn
140into designing their own news bulletins, vacations, and automobiles in a process that Don Tapscott
141(1997) calls “prosumption.”
142
143Looking beyond the hype
144 The danger of this approach is that by lumping together all significant changes that have
145occurred in the modern economy and labeling them as features of the “knowledge economy,” we will fail
146to analyze current trend. If we are to understand the contemporary business environment and plot its
147trajectory into the future, then it is essential that we look systematically at the drivers of change.
148 Many of the alleged characteristic features of the so-called “new knowledge economy” do not
149stand up to scrutiny. Take the much-discussed trend towards disintermediation. In the electronically
150interconnected age, firms do not need to distribute their wares through wholesalers and retail; they can
151sell direct to the consumer. Publishers can supply articles and complete newspapers and journals in
152directly downloadable form. House sellers do not need the services of realtors; they can locate buyers
153directly through the internet. Yet, these examples represent, not so much disintermediation, as the
154displacement of one type of intermediately by another. The new intermediaries are internet portals and
155ISPs such as AOL and Excite, telecom companies such as MCI-Worldcom which provide the
156communication infrastructure, Visa International that processes the transactions, and Federal Express
157that makes the physical delivery.
158 Similarly with the supposed convergence of industries. Are industries really converging, or is it
159simply that technology and deregulation are redrawing their boundaries? While communication and
160computing, commercial and investment banking, and TV and telephony converge, other industries
161fragment and diverge. For example, the once-monolithic computer industry has fragmented into
162industries supplying components, assembled computers, operating systems, applications software and
163computer services. Similar observations could be made of the telecommunications industry.
164 The idea that we have moved from an economy based upon land, labor and capital to one based
165upon knowledge is a nonsense. All major human advances since the beginning of civilization have been
166based upon knowledge. The building of Stonehenge and other megalithic monuments in Northern Europe
167at around 2,000 BC coincided with the economic growth arising from the knowledge revolution in the form
168of the introduction of agriculture. The agrarian and industrial revolutions of the 18th and early 19th
169centuries were also consequences of the development and diffusion of new knowledge. The econometric
170analysis of economic growth since the pioneering work of Kuznets (1966) and Denison (1968) has been
171consistent in identifying advances in knowledge as the primary driver of increasing real income per head.
172Hence, apart from the simple fact that knowledge accumulated over time and its growth pattern may well
173be exponential, it is not apparent that knowledge plays a fundamentally different role in today’s economy
174than it did a hundred or even a thousand years ago. The basic difference is that a greater stock of
175knowledge supports a far higher level of productivity.
176 Similar observations may be made about the so-called “knowledge worker”. Such a concept
177relies upon some restrictive assumptions about what constitutes knowledge. It is not obvious to me that a
178computer software engineer or a lawyer is any more a knowledge worker than a shepherd, a sculptor, or
179a Buddhist monk. The key point is that different workers use different types of knowledge, and it is

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 180difficult to compare the knowledge intensity of different occupations. Does a pharmacist use more
181knowledge than does a bus driver? Certainly the conventional distinction between working with one’s
182hands or with one’s brain is of little help. Is an office clerk more of a knowledge worker than a manual
183worker such as Antonio Stradavari or a brain surgeon? The most that can be said is that different types of
184knowledge are differentially distributed among individuals, that different types of knowledge take different
185lengths of time to acquire, and that without knowledge the human being is completely unproductive.
186 The challenge, then, is not to talk vaguely about the knowledge-based economy and knowledge
187workers, but to explore in precise terms the features of knowledge and its use that are different today
188than in previous periods of time.
189
190Productivity and increasing returns in the software-based economy
191 The defining feature of today’s knowledge-based economy is the digitization of information.
192Digital technologies embodied in semiconductors, computers, computer software, and communication
193systems have resulted in huge reductions in the costs of storing, processing and transferring explicit
194knowledge. The “soft revolution” has two main elements. First, knowledge is no longer embodied
195exclusively in people and capital equipment; it is embodied in software. Software takes the form of
196recipes, computer programs, movies, management systems, and all other codified representations of
197information, science and creative expression. Second, the economics of such software is fundamentally
198different from the economic principles associated with traditional factors of production. Traditional factors
199of production are associated with diminishing returns; explicit knowledge is subject to increasing returns.
200Explicit knowledge embodied in software is costly to create but once created, it can be reproduced and
201distributed at close to zero marginal cost. In contrast to the traditional sources of scale economies—the
202benefits from the specialization and division of labor in Adam Smith’s pin factorythe extent of scale
203economies in the movies, recorded music and computer software are huge. The exploitation of these
204increasing returns is the primary driver of globalization in today’s economy.
205 Nor are these increasing returns associated with explicit, codified knowledge restricted to
206information technology and media industries. The value creating potential associated with the low-cost
207replication of explicit knowledge offers huge incentives for systematizing existing knowledge, then
208replicating it over and over again in order to exploit its value. The major impact of digital technologies is in
209facilitating the systematization of knowledge into codified form and in greatly lowering the costs of its
210replication. This process of systematizing tacit knowledge is represented in Figure 1.
211
212 [Figure 1 about here]
213
214 If knowledge exists in two principal forms, explicit and tacit, and at two major levels, the individual
215and the firm, then there are major benefits to the firm in shifting the its primary knowledge base from
216individually-held tacit knowledge, to firm-held explicit knowledge. First, explicit knowledge offers greater
217potential for value creation because of its replicability potential. Second, the firm’s potential for
218appropriating this value is greater if ownership lies with the firm rather than with the individual. The
219systematization of tacit, individually-held knowledge into explicit, firm-held knowledge is the primary force
220behind the evolution of craft trades into industrialized trades. This process of industrializing craft
221businesses has been the basis of the many of the most outstanding business successes of this century.
222For example:
223 Henry Ford’s mass production system for the manufacture of automobiles took the tacit knowledge of
224 skilled craftsmen and embodied it into machine tools and an industrialized system that could be
225 replicated throughout the world.

226 Ray Kroc’s genius was in recognizing the potential for converting the McDonald brothers’ San
227 Bernardino hamburger joint into a system that could be replicated many thousands of times over in a
228 global chain of franchised hamburger restaurants.

229 In a similar process, Starbucks took the traditional Seattle coffee house and reduced it to set of
230 formulae capable of precise replication throughout North America, and now the world.

231 Andersen Consulting took the business of systems integration, one based upon the experiential
232 knowledge of IT professionals, and built a set of systems that allowed the creation of a worldwide
233 business based upon the systematic training of fresh, young graduates and equipping them with
234 package solutions to IT management.
235
236 In the field of management consulting Hansen, Nohria and Tierney (1999) have observed that a
237fundamental difference in firm strategies is between those that pursue a “codification strategy” based

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 238upon a “people-to-documents” approach that permits extensive knowledge reuse, and a “personalization
239strategy” offering customized solutions based upon the expertise of individual consultants and one-to-one
240consultant-client dialogue. Andersen Consulting and Ernst & Young have pursued codification strategies,
241McKinsey and Bain epitomize the personalization approach. While Hansen et al do not argue for the
242superiority of any one approach, our analysis suggests that, in principle, a codification strategy that
243exploits economies of reuse should offer greater potential for rent generation and appropriation.
244 The productivity gains associated with conversion of tacit into explicit knowledge then its
245subsequent replication on a global scale are fundamental to the rapid rates of economic growth
246experienced during the past few decades. Paul Romer has estimated that the growth in real output per
247hour of work achieved by the world’s leading economy has accelerated over the past three centuries (see
248Table 1). As the new information technologies increase the speed and lower the cost at which new forms
249of software can be created, replicated and diffused, so it is likely that long tem rates of productivity growth
250will continue to accelerate. “New recipes” whether they be Starbucks systematized approach to
251producing cappuccinos or Wal Mart’s cross-docking system of receiving and shipping goods to and from
252warehouses are permitting unparalleled productivity improvements in service activities. But, according to
253Romer (1999), the real gains are still to come: electronic commerce in particular offers the potential for
254massive efficiency gains in the distribution of goods and services—traditionally a low productivity sector.
255
256 [Table 1 about here]
257
258Standards and winner-take-all markets
259 Any markets subject to scale economies will tend towards high levels of concentration due to the
260cost advantages of large firms over small firms. The extent of the scale economies arising from the low
261cost of replicating information and other forms of explicit knowledge has been an important force driving
262rapidly increasing concentration across a range of once-fragmented industries ranging from management
263consulting to pizzerias. While the primary sources of industrial concentration were economies in large-
264scale manufacturing processes in sectors such as steel-making, automobile manufacture and
265petrochemicals, increasingly it is scale economies in information reuse that explain Microsoft’s
266dominance of the market for microcomputer software and McDonalds’ dominance of the world hamburger
267market.
268 However, the present trend towards “winner-take-all” markets is not solely a consequence of the
269economics of software replication, it is also a result of interconnectivity within the networked economy
270(Shapiro and Varian, 1999). In many industries the extent of concentration goes well beyond the
271requirements for minimum-efficient-scale of operation. The tendency in the markets for computer
272operating systems and video game players is for a single company to establish a position of near-
273unassailable market dominance. This phenomenon is associated with markets that combine low-cost
274replication with network externalities—the situation where a consumer’s utility from a product is
275dependent upon the number of other users consuming that product. For such products this relationship
276was expressed more precisely by Robert Metcalfe, the founder of 3Com. Metcalfe’s Law states that the
277utility of a network increases at the square of the number of members. While the “killer app” is no new
278phenomenonthe stirrup was a killer app of the 8th centurynetwork externalities in the interconnected,
279digital economy has greatly increased the number of, and speed of dissemination of, such innovations
280(Downes and Mui, 1998)
281 Network externalities may arise from a number of factors. The most basic is direct linkages
282between consumers—as in the case of a telephone system—where the usefulness of the product
283depends upon direct linkages between users. It may also arise from user mobility in the face of significant
284training costs. Thus, the emergence of Microsoft PowerPoint as the dominant presentation software was
285encouraged by the ability of users to take their presentation skills to any organization without the need to
286learn a different software package. Network externalities may also arise from the availability of
287complementary products. The tendency for computer software, videotape formats, and computer game
288consoles to move towards a single market-dominating product or system arises primarily from the linkage
289between product leadership and the availability of applications software: the disadvantage with ownership
290of a minority standard, whether it is a Sony Betamax VCR or a Apple Macintosh microcomputer is that
291most producers of applicationswhether movie studios or software developerswill be producing their
292products for the dominant standard.
293 The implications for competition are far-reaching. Because the winner takes all, the competition
294for market leadership is intense. The “battle of the browsers” competition between the two key players
295quickly resulted in both Netscape and Microsoft offering their products free. Similar trends are evident in
296other areas of internet competition. By mid-1999, competition between internet service providers in the
297UK had resulted in many leading players offering free service. The quest for standards-setting market
298leadership had also resulted in the tendency towards coalitions of players. The critical importance of
299winning standards battles often produced some strange bedfellows—arch rivals Kodak and Fuji

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300collaborating in developing and marketing the Advanced Photo system films and cameras, Microsoft
301collaborated with Sun Microsystems over…..[need to fill in the blanks here]
302
303Implications of the New Economy for knowledge management
304 My proposition, thus far, is that there is nothing fundamentally new about an economy based
305upon knowledge. What distinguishes the present economy from a knowledge perspective is the sheer
306accumulation of knowledge by society, the rapid pace of innovation and, most important, the advent of
307digital technologies that have had far-reaching implications for the sources of value in the modern
308economy. These characteristics of the “new economy” have been important drivers behind the explosion
309of interest in knowledge management over the past six years. In particular, four key aspects of
310knowledge management stand out.
311 Property rights in knowledge. Increased recognition of knowledge as the most valuable and
312 strategically important of resources used by firms together with the increased embodiment of
313 knowledge within recipes, designs, computer software and other forms of software has resulted in
314 increased attention to ownership. Looking back, the lack of interest in property rights by pioneers of
315 research and innovation seems remarkable. For most of the post-second World War period AT&T’s
316 Bell Labs simply gave away many of the foundations of the microelectronics revolution. Indeed, it
317 was not until Texas Instruments revealed the huge revenue potential from patent licenses that most
318 companies began to manage their patent portfolios as income generating assets (Grindley and
319 Teece, 1997). Recognition of the value of proprietary knowledge has propelled the strengthening of
320 intellectual property regimes by legislatures and judicial systems over the past two decades. Among
321 both companies and their industry associations, the enforcement of intellectual property in the form of
322 patents, copyrights and trademarks has become a central asset-management activity and a key
323 issue in international economic relations.

324 Accelerating knowledge creation and application. The increasing pace of technological change has
325 placed substantial pressures on companies to increase the speed at which they develop and apply
326 knowledge. This emphasis on speed is particularly evident in new product development where
327 across a wide range of industries, companies have struggled to shorten their product development
328 cycles. In automobiles, for example, U.S. and European manufacturers have fundamentally resigned
329 their approaches to new product development in an effort to cut the time from drawing board to
330 market launch from five to three years (Clark and Fujimoto, 1991). According to Brown and Eisenhart
331 (1998, pp. 163-168) the fundamental force behind Intel’s sustained success if its “time pacing”—the
332 time pacing of product development through continual minor innovation with periodic “mid-life
333 kickers,” together with a nine-month cycle of fab construction.

334 Converting tacit into explicit knowledge. If most knowledge is tacit and embodied within individual
335 employees, its rent potential for the firm is limited by its high costs of replication and inability of the
336 firm to appropriate its value. As Kogut and Zander (1992, p. 390) acknowledge: “Unless able to train
337 large numbers of individuals or to transform skills into organizing principles, the craft shop is forever
338 simply a shop.” However, what Kogut and Zander refer to as the “paradox of replication” is that the
339 codification of knowledge required for internal replication may also facilitate imitation by other firms.
340 The challenge is to build barriers to external replication through linking the firm’s internal systems to
341 knowledge that cannot be replicated by outsiders. Thus, all the major purveyors of systematized
342 knowledge whether McDonalds Restaurants or Andersen Consulting invest heavily in brand building.
343 The other is to reconvert codified knowledge into organizational routines that operate at the tacit
344 level. Thus, the training undertaken by McDonalds at its Oak Brook, IL Hamburger University or by
345 Andersen Consulting at its Lake Charles, IL training center emphasize socialization and cultural
346 integration conducive to the replication of organizational routines. Recognition that the value of the
347 firm is generated by the low-cost replication of its systematized knowledge has encouraged a
348 fundamental rethinking by many firms of their strategy and identity. In the same way that it is often
349 remarked that Apple Computer’s fundamental error was mistaken identity—it was a software
350 company that thought it was a hardware company—so other firms are recognizing that their value
351 lies not in their products but in their systems. Nike’s success and value lies in its system for
352 managing the design, supply chain, and marketing of lifestyle products to the youth market. It has
353 replicated this system worldwide and from athletic shoes to sports and casual clothing, into sports
354 equipment and accessories. Wal Mart’s fundamental strength is its retail system that integrates
355 point-of-sale technology and in-store management with its procurement and distribution system. This
356 system has been replicated not only throughout the US, but also increasingly to other countries, and
357 from its Wal Mart stores to Sam’s Club warehouses, and now to acquired retail chains such as Asda
358 in Britain.

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359 Competing for standards. The past two decades have seen a remarkable development in the
360 understanding of the role of standards in the economy and far greater sophistication in the strategies
361 used by companies in standards battles. In retrospect the errors made in earlier standards battles
362 make the players seem naïve. In the battle of the personal computers, Apple’s failure to license its
363 operating system and IBM’s failure to establish any proprietary interest in the PC-standard seem to
364 be remarkable misjudgments, as was Sony failure to license its Betamax technology. Recent
365 standards, whether for digital wireless telephony (GSM vs. TDMA vs. CDMA), recordable digital
366 audio media, and internet browsers, have all been characterized by a vastly greater insight into both
367 the value of owning, or even influencing, standards and into the dynamics of standard setting. Thus,
368 the recent standards battles have involved the willingness of the participants to forego current profits
369 in order to invest in market leadership and the building of broad-based coalitions around particular
370 standards. These coalitions have typically involved competitors as well as suppliers, customers and
371 providers of complementary goods and services.
372
373THE DISCOVERY OF KNOWLEDGE MANAGEMENT
374
375 Despite the increasing importance of knowledge within the economy and the far-reaching
376changes caused by the digital revolution, I am not convinced that the recent surge of interest in managing
377knowledge is primarily the result of external changes in the business environment. More important, in my
378opinion, has been the burst of intellectual activity that has accompanied the recognition of knowledge as
379a productive resource, the rediscovery of the discussion of knowledge by writers such as Hayek (1945),
380Polanyi (1962), Arrow (1962), and March and Simon (1958), and the wave of new thinking concerning the
381characteristics of knowledge and its role within the firm.
382 Thus, most of the developments in the concepts and techniques of knowledge management that
383appeared during the 1990s were not specific to the present digitally-based, post-industrial economy.
384Indeed, some of the powerful tools of knowledge management that have recently emerged concern the
385development and application of tacit knowledge as opposed to the management of codified knowledge.
386Taken as a whole, the main contribution of knowledge management has been in shedding light upon the
387fundamental issues of management that have long been central to strategy, organization, and human
388resource management. What knowledge management offers us is insight into aspects of management
389that we have failed to understand properly because of our failure to consider the nature and
390characteristics of knowledge.
391
392Seeing management through the knowledge lens
393 Consider, for example, two of the most important developments in management thinking during
394the 20th century: scientific management and total quality management. Although these two important
395and highly influential management paradigms are largely incompatible and to a great extent conflicting,
396we can reinterpret these approaches to management from a knowledge-based perspective. The result is
397not only insight into the implicit assumptions about knowledge in each, but recognition that the
398differences between the two paradigms can be traced to these different assumptions.
399
400Knowledge and scientific management
401 Fundamental to the emergence of the modern corporation has been the development of
402management as a specialized body of knowledge. The earliest manifestation of this, the “scientific
403management” movement at the turn of the century, was founded upon the idea of a division of labor
404between workers and managers: workers do the work, while managers, as experts in management,
405specialize in decision making. However, as with all production tasks, specialization requires integration:
406the manager’s knowledge of organization must be brought together with the workers’ skills and their
407familiarity with workplace conditions. Since managers possessed superior intelligence and specialized
408knowledge of the scientific principles of management, then managers must be given decision making
409rights over workers. However, a critical assumption of the approach is that managers can access all the
410knowledge held by the workers. Thus, Fredrick Taylor’s description of the application of scientific
411management to shoveling coal and iron ore at Bethlehem Steel is based upon the assumption that the
412manager has full knowledge of the skills of shoveling and of the range of situations encountered by
413shovelers (Taylor, 1916).
414 This implicit assumption that managers can access the knowledge of their subordinates is a
415striking weakness, not just of scientific management but of hierarchical models of decision making more
416generally. In a hierarchy, decision making over routine matters is delegated downwards through rules
417and procedures. Decision rights over complex and strategic issues tend to be retained in the upper
418organizational levels. Yet, if these upper-level decision-makers are unable to access the knowledge
419available at lower levels of the organization, then efficiency of decision making is constrained not only by
420“bounded rationality,” but also by bounded access to relevant knowledge.

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421
422Knowledge and total quality management (TQM)
423 It is interesting that TQM, like scientific management, is based upon the application of the
424principles of scientific method to decision making and the organization of work. TQM applies cause-and-
425effect decision trees to the diagnosis of problems and statistical analysis to the analysis of defects. Yet,
426despite these commonalities, TQM gives rise to quite different management methods and allocations of
427decision rights than those of scientific management.
428 The critical difference between scientific management and TQM lies in their assumptions about
429the distribution and characteristics of knowledge. While scientific management assumed that managers
430are capable of accessing all the knowledge possessed by workers, TQM recognizes that knowledge is
431not easily transferable. Given that good decisions require the application of the knowledge relevant to
432those decisions, TQM favors the transfer of decision making concerning each employee’s production
433tasks to the employees who are undertaking the tasks. Hence, in addressing Taylor’s “shoveling
434problem” TQM results in a fundamentally different allocation of decision to that recommended by Taylor.
435Although TQM focuses upon quality as the primary performance variable, the same principles can also
436be applied to efficiency. If know-how about shoveling coal and iron ore accrue to those who undertake
437the work, and this know-how is not easily transferred to a manager or foreman, then it is the shovelers
438who are best able to improve productivity through improving job design and working techniques. The
439second assumption about knowledge implicit in TQM is that all human beings are intelligent and capable
440of learning. Hence, it is easier to instruct the worker in those “principles of management” necessary for
441the worker to make optimal decisions concerning his work than it is to transfer the worker’s knowledge to
442manager. Thus, a key feature of TQM is training workers in the statistical process control and “scientific”
443approaches to the analysis of problems.[cite]
444
445Knowledge and the structure of decision making
446 The above examples concerning scientific management and TQM point to the fact that our
447assumptions about the distribution of general intelligence between individuals and the characteristics of
448knowledge have fundamental implications for the distribution of decision making within the firm. In order
449to generalize our discussion, let us consider the relationship between characteristics of different types of
450knowledge and the optimal distribution of decision making within an organization. We begin with the
451premise that the quality of a decision depends upon the extent to which decision making is co-located
452with the knowledge required for informing that decision. Such co-location can be achieved in two ways:
453decision making can be devolved to where the knowledge resides, or this knowledge can be transferred
454to the seat of decision-making authority.
455 The critical issue here is the mobility of knowledge which is a function of its codifiablity. Where
456knowledge is fully codifiable (e.g. information on inventories within the firm), not only can the knowledge
457be transferred at low cost, it can be aggregated within a single location. Given economies of scale in
458decision making, it is desirable to decentralize such decisions. Hence, in most companies, treasury
459functions, including cash management and foreign exchange hedging, are centralized in a single
460corporate treasury. Conversely, highly tacit knowledge is not capable of codification and is extremely
461difficult to transfer and to aggregate. Hence, where the relevant knowledge is tacit, then decision making
462power must be distributed to where the tacit knowledge is located. Thus, the productivity of lathe
463operators and other machinists depends critically upon their tacit skills: since their sensitivity to and
464awareness of their machines cannot easily be codified, this implies that decision about maintenance and
465settings should be delegated to the operatives.
466 Recent trends towards “empowerment” have been justified primarily in terms of motivation and
467philosophies of individualism and self-determination. Our knowledge-based approach provides a purely
468technical basis for empowerment decisions: where knowledge is tacit or is not readily codifiable for other
469reasons, then decision making quality is enhanced where decision making authority is delegated to those
470with the relevant knowledge. At the same time it points to situations where decisions should be
471decentralized and situations where centralization is more efficient. While the dominant trend of the 1990s
472was towards decentralization, developments in information technology and artificial intelligence promise
473to increase the potential for knowledge to be codified. Such a development may encourage increased
474centralization of decision making. Such centralization trends are apparent within fast-food chains where
475the information technology has encouraged a shift of decision making over menus, pricing and production
476scheduling from individual restaurant managers and franchisees to the corporate and regional
477headquarters.
478 However, as Jensen points out, there exists a trade off between the benefits of co-location of
479decision making and knowledge and the costs of agency. As decision making is devolved to those with
480the know-how relevant to those decisions, so the costs of agency arising from the inconsistent objectives
481of different organizational members tend to increase. [cite] Hence, there is an optimal degree of
482decentralization where, at the margin, the cost reductions from distributing decision rights to individual

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483employees is equal to the rising agency costs associated moving decision rights further from the CEO’s
484office.
485
486The emerging knowledge-based view of the firm
487 At the root of the intellectual contributions of knowledge management is a theory of the firm that
488establishes the existence and the role of firms upon different premises from those upon which the both
489microeconomic and sociological approaches have been based. The work of Demsetz (1988), Kogut and
490Zander (1992 and 1996), Connor and Prahalad (1996) and Grant (1996) among others point towards a
491theory of the existence and the nature of firms that is somewhat different from the transaction cost based
492approach of the new institutional economics.
493 Appreciating the characteristics of knowledge and the organizational challenge of integrating the
494knowledge assets of multiple individuals can provide considerable insight into the organizing role of firms.
495While transaction cost economics (TCE) can demonstrate the sources of market failure in knowledge
496transactions, simply showing the inefficiencies of market contracts in synchronizing team-based
497production does not provide us with much insight into the design of an administrative system capable of
498maximizing team performance.
499 Kogut and Zander present the firm not so much as an institution that economizes upon the
500transaction costs of markets, as a social institution capable of coordinating human behavior in ways that
501is impossible for pure market contracts. They argue that “organizations are social communities in which
502individual and social expertise is transferred into economically-useful products and services by the
503application of a set of higher-order organizing principles. Firms exist because they provide a social
504community of voluntaristic action structured by organizing principles that are not reducible to individuals.”
505(Kogut and Zander 1992, pp. 384). The precise nature of these social communities, the “social expertise”
506that they possess, and the “organizing principles” under which they operate is not made entirely clear.
507Grant (1996) discusses some of the mechanisms through which firms (and other organizations) achieve
508the integration of individuals' knowledge into the production of goods and services. The key to efficiency
509in knowledge integration is to create mechanisms that avoid the costs of learning: If each individual has
510to learn what every other individual knows, then the benefits of specialization are lost. The analysis of
511coordination was pioneered by James Thompson (1968) who classified the types of interdependency
512between individuals and units. Thompson viewed the modes of interdependence between individuals as
513exogenously determined by the technology of production and its component processes. Using a
514knowledge-based perspective, we may view coordination mechanisms as choices made by the firm as to
515how it achieves the integration of the specialist knowledge of multiple individuals. The most important of
516these mechanisms are rules and directives and organizational routines.
517 The case for the existence of the firm as a unit of economic organization rests upon the
518superiority of the firm over markets in supporting these knowledge integration mechanisms. To achieve
519coordination through these different mechanisms of integration requires authority (to permit direction),
520centralized decision making, co-location, and common knowledge (to permit communication). All these
521connotations are provided more readily within the firm than in any other type of organization.
522
523KNOWLEDGE MANAGEMENT’S CONTRIBUTION TO MANAGEMENT PRACTICE
524
525 Thus far, I have discussed knowledge management and the emerging knowledge-based view of
526the firm primarily from a theoretical viewpoint. However, the surge of activity among corporations and
527consulting firms during the past six years has been driven less by the contribution of the knowledge-
528based thinking to advances in the theory of the firm as by the potential for the techniques of knowledge
529management to directly impact company performance. The range of knowledge management tools and
530techniques has been broad. For years firms have been involved in actively managing particular types of
531knowledge and particular knowledge processes. For example, information systems, financial reporting
532and control systems, strategic management processes, and research and development are all
533management systems involving knowledge creation, knowledge transfer, and information management.
534The primary contribution of the recent knowledge management movement has been to look broadly at
535the entirety of knowledge and knowledge processes within firms in order to extend the scope of
536knowledge management activities to types of knowledge and knowledge activities that have been under-
537managed by firms, and also to achieve increasing integration across different knowledge management
538activities.
539
540The pioneers of knowledge management
541Pioneering developments in knowledge management have occurred in a diversity of organizations. Most
542prominent have been the management consulting firms. Their leading role in knowledge management
543has been the result of two factors. First, the internal challenges they have faced in managing their own
544development and deployment of knowledge. These have focussed upon the need to ensure that the
545learning gained from individual consulting projects is retained and transferred within the firm. The second

9 9
546is the recognition that knowledge management provides attractive opportunities for revenue growth for
547the firms. The consulting firms were among the first organizations to create internal systems for
548knowledge management and, in many cases, followed this by creating knowledge management
549practices. These include:
550 Andersen Consulting’s Knowledge Xchange that is at the heart of its dynamic matrix structure that
551 links employees, clients, knowledge databases, reporting systems, and consulting tools.

552 Arthur Andersen’s Knowledge Enterprises

553 Ernst & Young’s Center for Business Knowledge in Cleveland that links a technological IT
554 infrastructure with consultant interest groups and affinity groups.

555 KPMG’s KWEB knowledge management infrastructure and “Cyber Park Avenue”

556 McKinsey & Company’s “practice development” process that seeks to codify consultants’ learning
557 from client engagements and research projects. In addition McKinsey is a leader in the development
558 and exploitation of social networks that provide informal knowledge exchange mechanisms. These
559 networks extent to McKinsey former consultants (“alumni”) who are encouraged to keep in contact
560 with the firm.

561 Bain & Company’s “Experience Knowledge Base” that documents and distributes consultant learning
562 from client engagements.
563
564 Firms that have emerged as leaders in particular areas of knowledge management include:
565
566 IBM’s contributions to knowledge management are many, including one of the first attempts to
567 provide a company wide knowledge architecture for mapping the vast amount and range of
568 information within the company. IBM’s Guide to Market Information was a “catalog of catalogs” in
569 integrating the information available within IBM and linking each information area to a contact person
570 (Davenport, 1997, pp. 164-167).

571 Bechtel’s Global Knowledge Network is a companywide initiative that aims to disperse mission-
572 critical knowledge across Bechtel’s 20,000 employees throughout the world. It includes the BecWeb
573 intranet that provides standardized formats for storing and distributing documents, engineering
574 designs, standards, and client information. overseen by Bechtel’s Web Advisory Board

575 Dow Chemical has pioneered the systematic management of knowledge through its Intellectual
576 Asset Management Model, the core of which is Dow’s portfolio of over 30,000 patents, values these,
577 and links them with the strategies of Dow’s individual businesses. Intellectual asset management is
578 supported by 75 multifunctional teams, each aligned with a business, and each responsible for the
579 development and exploitation of a segment of Dow’s intellectual capital (Petrash, 1996).

580 Skandia, the Swedish insurance company, has been a world leader in intellectual capital accounting:-
581 identifying, valuing and measuring the performance of intellectual capital. Under the leadership of
582 Skandia AFS’s director of intellectual capital, Leif Edvinsson, Skandia has published since 1992 an
583 intellectual capital supplement to its annual report and in 1993 launched its “Business Navigator”, an
584 integrated system for linking intellectual; capital management with strategy and performance
585 measurement (Marchand and Roos, 1996).

586 Texas Instruments turned to knowledge management after an extensive program of cost reduction
587 and business process reengineering. The knowledge management program was launched in 1994.
588 Cindy Johnson, director of Collaboration and Knowledge Sharing noted: “We felt we needed to find a
589 new paradigm for reaching the next level of improvement. We had to find ways to become more agile
590 and learn faster so that we can innovate faster than our competitors. This is not about cutting people
591 or bringing in new machines. It is about facilitating the flow of ideas, practices and knowledge.”
592 (O’Dell and Jackson, 1998, pp. 152-153). The emphasis was on sharing best practices. Chairman
593 Jerry Junkins observed: “We had pockets of mediocrity right next door to world-class performance
594 simply because one operation did not know what was happening at the other operation.” The TI
595 Business Excellent Strategy (known as I-BEST) provided a common methodology and common
596 language for defining excellence, assessing progress, identifying opportunities for improvement, and

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597 establishing and deploying action. The first major initiative was transferring best practices around
598 TI’s 134 fabrication plants. In 1994 TI created an Office of Best Practices to facilitate best practice
599 identification and transfer. At the heart of the system was a Best Practices Knowledge Base based
600 upon Lotus Notes.

601 Hewlett Packard’s position as one of the oldest and most adaptable of the leading companies in
602 California’s Silicon Valley owes much to the company’s ability to acquire, reconfigure and redeploy
603 knowledgeeven though these processes were established in HP well before the term “knowledge
604 management” had achieved common currency. Like most companies, many of HP’s knowledge
605 management activities have focused on the management of explicit knowledge and have been
606 heavily IT-based. In addition, HP has been especially concerned with the management of tacit
607 knowledge. As chairman and CEO Lew Platt observes: “Successful companies of the companies of
608 the 21st century will be those who do the best jobs of capturing, storing, and leveraging what their
609 employees know.” HP’s “Knowledge Links” system shares knowledge about product generation while
610 at HP Consulting, knowledge sharing has extended beyond GroupWare and knowledge mapping to
611 include informal groupings with common interests called “learning communities” and “project
612 snapshots” that collect and lessons from project teams (Martiny, 1998).

613 Looking further beyond the use of IT to store and transfer explicit knowledge to the more complex
614 challenges of developing and deploying tacit knowledge, 3M has done more than any other company
615 to create organizational systems that promote the transfer of tacit knowledge and its integration into
616 new products. 3M aims to create “an atmosphere of generosity, freedom and safety in which
617 innovation can flourish.” (Brand, 1998). Lifetime employment and internal mobility develop
618 communication and knowledge sharing. Tolerance for mistakes is central to creativity: 3M began with
619 a mistake (the acquisition of a worthless mine) and has continued to develop success out of failure
620 (Post-it notes used a new adhesive that did not stick, the ceramics business was also founded on a
621 series of mistakes). Central to 3M’s knowledge management is the combination of “knowledge by
622 design” (defining customer needs that could use 3M technology) with “knowledge by emergence”
623 (the informal process through which all employees are permitted to devote 15% of their rime to
624 developing new ideas).
625
626 Not-for-profit organizations have also been among the leading innovators in the development of
627knowledge management concepts and techniques. In particular, the US Army has enhanced experiential
628learning through a systematized approach to identifying the lessons learned from both actual experience
629and experiments then fed back these lessons into procedures and policies. The Center for Army Lessons
630Learned at Fort Leavenworth, Kansas collects the lessons learned from a wide variety of activities,
631codifies them and distributed them. “The analysts quickly learned that the more hectic the operation, the
632more important is an organized system of collecting lessons learned….The remaining challenge is to
633ensure that lessons are applied. ..After the 1994 invasion of Haiti, CALL had experts interview soldiers
634about incidents with mobs and confrontations with local authorities, observe after-action reviews, read
635intelligence reports and compile lessons. They developed 26 training scenarios for use by replacement
636units. In the next six months, these units actually encountered 23 of these scenarios.” (Wall Street
637Journal, 1997b) The 1995 Bosnian operation involved even more intensive efforts to distill experience
638gained and disseminate it quickly—every 72 hours a list of new lessons was distributed.
639
640Key areas of knowledge management
641 A fundamental distinction in knowledge management is between those activities that involve the
642application of existing knowledge and those which generate knowledge that is new to the organization.
643Most management principles deal with the organization of existing knowledge. According to Spender
644(1992), the two types of activity are distinguished by the fact that knowledge application is formalized,
645while knowledge generation is institutionalized:its structure is not dependent upon the knowledge
646necessary for the task at handthat knowledge has to be generatedbut upon some other social
647patterningprofessional affiliation or membership of a creative team. If knowledge generating activities
648are to be successful in resolving uncertainty, then some form of alternative non-knowledge-based
649structure is essential. An implication, therefore, is that knowledge application and knowledge generating
650activities need to be organized differently within the firm. For example, in 3M there is a formal structure
651for managing 3M’s existing businesses with their 30,000+ separate products. At the same time there is a
652parallel, informal structure whereby the members of the formal structure engage in product development
653activities through an institutionalized system of “boot-legging” through which they appropriate time,
654materials and technical support.
655 Starting from the distinctions between knowledge generation and knowledge application
656activities, Figure 2 offers a classification of different knowledge management activities.

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 657
658 [Figure 2 about here]
659
660Major areas of knowledge management
661 To date (Summer 1999), most organizations’ knowledge management efforts have remained at a
662fairly basic level. The primary area of activity has been in the capture, storage, and transfer of
663knowledge. At the most basic level, organizations have attempting to identify the knowledge that resides
664within them in order to make it accessible by others in the organization. An interesting feature of
665management is that, despite recognition of knowledge as firms’ most productive asset, formal systems of
666asset management have focused upon the tangible assets identified and valued within firms’ financial
667accounting systems. Until recently, very few organizations had any formal system for establishing an
668inventory of knowledge. Knowledge identification and transfer occurred informally“If you want to know
669about warehousing bought-in widgets, speak to Joe—he worked for Widgets International before he
670came here.” IBM’s Guide to Market Information provides a mapping only of information resources. More
671ambitious is Teltech’s “KnowledgeScope” system which combines a thesaurus of technical terms with
672biographies of employee expertise, thus allowing both customers and employees to identify expertise
673relevant to their queries (Davenport, 172-173). At Hughes Communications, Adrian Ward developed a
674“Knowledge Highway” using organizational ethnography and archeology to discover and document the
675company’s tacit and explicit knowledge, competencies and communities and relationships (Ward, 1999).
676 Continuing with the contrast between the management of knowledge assets and the
677management of tangible assets, a feature of accounting systems for tangible assets is an overriding
678concern with valuation. By contrast, progress in measuring, let alone valuing, knowledge assets has been
679limited. The principles for valuing assets are well-known: if there is an external market for the asset, use
680the market price (based upon comparables where necessary); if there is not an external market then
681estimate the net present value of the future returns to the asset. In the case of knowledge neither
682approach is typically viable: market failure in knowledge transactions is widespread, the returns to
683knowledge are not readily identifiable, and most knowledge is embodied within people, systems or
684products. While progress has been made in the valuation of many intangible assetsbrands in
685particularthe valuation of knowledge assets remains elusive. The approach adopted by Skandia and
686several other companies has been to value knowledge as the residual of the stock market valuation of a
687firm over and above the book value of tangible assets. While such an approach can indicate the
688magnitude of intangible asset valuation, it does not permit the valuation of individual knowledge assets
689and is distorted by all the errors involved in the variations of tangible assets. The difficulties in applying
690the common measuring rod of monetary valuation to knowledge assets has resulted in the use of a
691variety of indicators of knowledge stocks and investments in knowledge. Thus, Skandia uses a variety of
692metrics for monitoring the development and utilization of its intellectual capital ranging from days of
693training per employee over the year to introductions of new products.
694 Looking beyond the mapping and measurement of existing knowledge is the capture and storage
695of new knowledge. The challenge is to build systems that collect the learning arising from projects and
696on-going activities, to systematize and archive that knowledge, then to distribute it to those members of
697organization likely to benefit from it. The management consulting companies have been leaders in this
698area, virtually all of which have created systems through which the learning from individual client
699assignments is standardized and stored within a central repository. The knowledge bases are typically
700accessed by consultants through intranets with specially designed search tools. March and Garvin
701(1997) describe the knowledge management databases constructed by Arthur Andersen and Ernst and
702Young.
703 Within the industrial and service sector more broadly, the major emphasis of knowledge
704management has been knowledge transfer and replication within corporations, particularly “best-practice
705transfer”. If learning and innovation are continuous processes that occur in all parts of a company, and if
706similar activities are being conducted in different locations within the company, then value can be created
707through the rapid internal diffusion of such knowledge. Among multinational enterprises in particular, it is
708increasingly recognized that one of the greatest benefits of multinationality is distributed learning.
709However, the major source of value creation from such learning occurs from the rapid replication of
710superior practices, products and processes. Unilever’s head of marketing has noted that across the
711thousands of products that Unilever markets in hundreds of countries, many similar problems and
712opportunities are encountered. The potential for transferring the knowledge gained in tackling these
713issues is huge. The intense interest in best practices transfer arises not simply because of the
714importance of such transfers in terms of performance enhancement, but also from the difficulty of such
715transfers. These difficulties arise, first, from the nature of the knowledgebest practices often involve
716organizational routines that are dependent upon the tacit knowledge of team members and complex
717patterns of interpersonal interactionand second, from the impediments of organizational structures,
718systems and behaviors. Gabriel Szulanski’s (1996) analysis of “stickiness” in the transfer of best

12 12
719practices looks beyond the inherrent complexity of the knowledge being transferred to explore the
720organizational conditions that hamper knowledge transfer including the relationship between the parties
721to the knowledge exchange and the motivation of each party.
722 While information and communications technology from e-mail to GroupWare, the internet and
723intranets have made huge strides in classifying, storing and transferring explicit knowledge, it is in the
724management of tacit knowledge that the major challenges remain. It is widely believed that for the great
725majority of companies it is know-how rather than know-what is the more important productive resource
726and the primary basis for competitive advantage. But if knowledge cannot be codified, how can it be
727managed? Three consideration appear to be important in designing approaches to managing tacit
728knowledge.
729  What is the degree of tacitness of different types of knowledge? Some knowledge is so deeply
730 embedded that is completely non-transferable. Consider the skills of a fragrance expert. The ability
731 to recognize and diagnose minute differences in fragrance require olfactory skills that may well be
732 genetically based. It is useless to train fragrance experts unless they have particular aptitudes to
733 begin with. Effective management of fragrance analysis knowledge requires the intense use of the
734 company’s few experts, requiring their mobility around the company to wherever their skills are
735 needed. Where skills are transferable then training processes and communication mechanisms
736 need to be designed which match the characteristics the how-how being transferred. If knowledge
737 acquisitions requires learning-by-doing, then training seminars and courses are likely to be of
738 limited value.

739  What social context is conducive to the tacit knowledge transfer? Brown and Duguid point to the
740 roles of narration, collaboration and social construction in learning, knowledge transfer, and the
741 interpretation of experience. These occur within informal social groups they call “communities of
742 practice.” The importance of these observation is the recognition that experiential, uncodifiable
743 knowledge can be transferred, integrated, and enriched within the appropriate social context. With
744 narratives as the principle medium of communication, tacit knowledge is transferable where there
745 exists a common language, common interests and a common knowledge basis. The implication of
746 this work has been intense interest in the existence of such communities of practice within
747 organizations and efforts at managing and creating such groups as instruments of knowledge
748 management.

749  Even if tacit knowledge cannot be readily transferred, can it be integrated? The key challenge of the
750 enterprise is achieving coordination between multiple specialists such that their different knowledge
751 bases can be integrated to produce goods and services. Such integration does not necessarily
752 require knowledge transfer. Knowledge transfer is critical for the purposes of replication, but for the
753 purposes of production the key is to efficiently integrate different specialist knowledge. A critical
754 issue in the design of processes is to integrate the specialist knowledge of different individuals
755 without the costs of their having to learn from each other. The trend towards modularity in product
756 design is one approach to efficient knowledge integration (Sanchez and Mahoney, 1996; Bayliss
757 and Clark, 1997). Thus, the key to Microsoft’s success in designing huge software programs such
758 as Windows NT, Internet Explorer, and Microsoft Office that require the coordinated efforts of close
759 to a 500 software developers is to modularize these programs using its “synch and stabilize” system
760 (Cusumano, 1997).
761
762CONCLUSIONS
763 Three main conclusions arise from this paper. First, the current surge of interest in knowledge
764management is not, primarily, a product of some “knowledge revolution”. While there are features of
765knowledge usage that are different today as compared with 30 years ago, digitization in particular, the
766scope of knowledge management is much broader. The importance of the current enthusiasm for
767knowledge management is that (a) it directs attention towards the most important and productive of the
768resources deployed by companies, and one that is the most inefficiently utilized, (b) by explicitly
769considering the role of knowledge within the enterprise, we are being forced to reconsider the most
770fundamental principles of management
771 Second, in any fashion trend that is as pervasive and encompassing as knowledge management
772there are likely to be elements that are worthwhile and enduring and other that will prove to be blind-
773alleys. Which aspects of knowledge management are likely to offer the greatest potential for insight and
774value generation? An interesting feature of management activities in the corporate sector has been its
775emphasis on fundamental, even simplistic aspects of knowledge management. Can we identify and draw
776up an inventory of the knowledge within the organization? How can we distill and archive the new
777knowledge that is being generated within a company? How can knowledge be transferred from one part

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 778of an organization to another? While these are basic issues of knowledge management, their solutions
779are not necessarily easy. The remarkable fact is that only recently have most companies addressed
780these issues on a systematic basis. Looking ahead, firms will need to look at the more complex aspects
781of knowledge management, especially with regard to the transfer and utilization of tacit knowledge and
782the redesign of organizational structures and processes in order to facilitate knowledge generation and
783utilization.
784 Which aspects of knowledge management are likely to prove of limited potential? The
785enthusiasm for knowledge accounting—the valuation of intellectual capital for exampleseems to offer a
786low ratio of output to input. Given close to 3,000 years of philosophical debate as to what knowledge is,
787the ability to value what we do yet understand seems unlikely. Ambiguity over the ownership of
788knowledge further compounds the problem of valuation. With the exceptions of knowledge forms for
789which property rights have been legislated—patents, copyrights, trade secretsownership both of
790explicit and tacit knowledge is ill-defined. A second area of dubious activity related to organizational
791learning. Clearly the ability to acquire knowledge from experience is critical to building a knowledge base.
792However, interest in organizational learning has tended to the obsessive in some quarters. The critical
793questions are what to learn and by whom? Learning is an investment, it is costly and these costs need to
794be justified by potential further returns. Much learning may offer little return, or even negative returns.
795Consider the enthusiasm for cross-functional learning. Clearly the ability to integrate the knowledge of
796different functional experts is critical to successful new product development. But the key to such
797knowledge integration is to retain the benefits of specialization in knowledge integration. If engineers,
798financial analysts, and marketing experts spend their time learning one another’s’ specialties, the danger
799is that they will become mediocre engineers, financiers and marketeers.
800 Finally, how are managers to steer their way through the plethora of concepts, tools and
801techniques of knowledge management to ensure that they select wisely without being overwhelmed by
802the onslaught of new practices and terminology. Two considerations are paramount. First, what are the
803characteristics of the knowledge being managed. The distinction between tacit and explicit knowledge is
804fundamental to virtually every aspect of knowledge management. If knowledge is explicit its identification,
805storage and transfer involves few problems—these can all be handled by the organization’s information
806systems. The issues surrounding the management of tacit knowledge are entirely different and the
807creation of value from such knowledge may require fundamentally new approaches to organizational
808structures and management systems. Knowledge also differs according to its importance. Which types of
809knowledge are critical to a firm’s performance and competitive advantage? Despite the widespread
810interest in organizational capabilities and competency modeling, most firms have a poor understanding of
811which types of knowledge are critical to their future success. Second, what are the purposes and
812characteristics of the knowledge management processes? There has been a profusion of glib talk about
813the need learn, to transfer knowledge, to absorb knowledge from competitors and partners and the like.
814The danger is that we use knowledge management processes that are not suited to the task at hand.
815Consider the example of managing relationships with strategic alliance partners. The type of knowledge
816management that is appropriate depends upon the knowledge goals of the alliance. Is it a “learning
817alliance” where the firm is attempting to acquire the partner’s knowledge? Or is it a “knowledge accessing
818alliance” where the goal is to access the partner’s knowledge base to maintain one’s focus on core
819competencies? Similarly with the internal transfer of knowledge—is the goal to replicate the knowledge
820that is in one location in another location, or is it simply to gain wider utilization of the knowledge that
821exists within a single location?
822
823References
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828
829Bayliss, C. Y and K.B. Clark (1997) “Managing in an age of modularity,” Harvard Business Review,
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832Brand, A. (1998) “Knowledge management and innovation at 3M,” Journal of Knowledge Management,
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835Brown, J.S. and P. Duguid (1991) “Organizational learning and communities of practice: Toward a unified
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838Brown, S.L. ad K.M. Eisenhart (1998) Competing on the Edge, HBS Press, Boston.
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840Burton-Jones, A. (2000) Knowledge Capitalism, Oxford University Press, Oxford.

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856
857Downes, L and C. Mui (1998) Unleashing the Killer App, HBS Press, Boston.
858
859Drucker, P.F. (1993) Post-Capitalist Society, HarperBusiness, New York.
860
861Edvinsson, L. and T. Malone (1997) Intellectual Capital, HarperBusiness, New York.
862
863Financial Times (1999) Lucy Kellaway column, June 28, p. 13.
864
865Grant, R.M. (1996) “Toward a knowledge-based theory of the firm,” Strategic Management Journal, 17,
866pp. 109-122.
867
868Grindley, P. and D.J. Teece (1997) “Managing intellectual capital: licensing and cross-licensing in
869semiconductors and electronics”, California Management Review, 39, Winter, pp. 8-41.
870
871Hagel, J. and M. Singer (1999) “Unbundling the corporation,” Harvard Business Review. 77, March-April,
872pp. 133-141.
873
874Hansen, M.T., N. Nohri, and T. Tierney (1999) “What’s your strategy for managing knowledge?” Harvard
875Business Review. 77, March-April, pp. 106-129.
876
877Hayek, F.A. (1945) “The uses of knowledge in society,” American Economic Review, 35, pp. 1-18.
878
879Jensen, M.C. and W.H. Meckling (1998) “Specific and general knowledge and organizational structure,”
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881103-125.
882
883Kogut, B. and U. Zander (1992) “Knowledge of the firm, combinative capabilities, and the replication of
884technology”, Organization Science, 3, pp. 383-397.
885
886Kuznets, Simon (1966) Modern Economic Growth, Yale University Press, New Haven, CT.
887
888March, A. and D.A. Garvin (1997) “A note on knowledge management,” Harvard Business School note 9-
889398-031, Boston.
890
891March, J. and H. Simon (1958) Organizations, Wiley, New York.
892
893Marchand, D. and J. Roos (1996) “Skandia AFS: measuring and visualizing intellectual capital,” Case
894GM 624, IMD, Lausanne.
895
896Martiny, M. (1998) “Knowledge management at HP Consulting,” Organizational Dynamics, Autumn, pp.
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898
899O’Dell, C. and C. Jackson (1998) If Only We Knew What We Know: The Transfer of Intenal Knowledge
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901
902Petrash, G. (1996) “Dow’s journey to a knowledge value management culture,” European Management
903Journal, 14, August, pp, 365-373.

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904
905Polanyi, M. (1962) Personal Knowledge: Towards a Post-critical Philosophy, University of Chicago Press,
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907
908Quinn, J.B. (1992) Intelligent Enterprise, Free Press, New York.
909
910Romer, P. (1999) “The new economy,” Presentation to the Strategic Leadership Forum Annual
911Conference, Chicago, April 19.
912
913Sanchez, R. and T. Mahoney (1996) “Modularity, flexibility and knowledge management in product and
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915
916Shapiro, C. and H. Varian (1999) “Information rules,” California Management Review, Spring, pp.
917
918Spender. J-C. (1992) “Limits to learning from the West,” The International Executive, 34,
919September/October, pp. 389-410.
920
921Stewart, T. (1997) Intellectual Capital: The New Wealth of Organizations, Doubleday, New York.
922
923Tapscott, Don (1995) The Digital Economy, McGraw-Hill, New York.
924
925Tapscott, Don (1997) “Strategy in the new economy.” Strategy & Leadership, 25, pp. 8-14.
926
927Taylor, F.W. (1916) “The principles of scientific management,” Bulletin of the Taylor Society, December.
928Reprinted in J.M. Shafritz and J.S. Ott, Classics of Organization Theory, Dorsey Press, Chicago, 1987,
929pp. 66-81.
930
931Taylor, Jim and Watts Wacker (1998) The 500 Year Delta: What Happens after What Comes Next,
932HarperBusiness, New York.
933
934Teece, D.J. (1998) “Capturing value from knowledge assets: the new economy, markets for know-how,
935and intangible assets”, California Management Review, 40, Spring, pp. 55-79.
936
937Thompson, J. D. (1967) Organizations in Action, McGraw Hill, New York.
938
939Wall Street Journal (1997a) “Saatchi’s manager of knowledge keeps track of what’s trendy,” February 28,
940p. B16.
941
942Wall Street Journal (1997b) “Army devises system to decide what does and does not work,” May 23, pp.
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944
945Ward, A. (1999) “Making knowledge work in the real world,” Presentation to Strategic Leadership Forum,
946Chicago, April 20, 1999.

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947
948
949
950
951Table 1. Growth in real output per hour worked by the world’s leading economy, 1700-1979
952
953
954 Period Country Annual growth of real output per hour(%)
955
956 1700-1785 Netherlands 0.1
957 1785-1820 U.K 0.5
958 1820-1890 U.K. 1.4
959 1890-1979 U.S.A. 2.2
960
961
962Source: Paul Romer, “The New Economy” Presentation to the Strategic Leadership Forum Annual
963Conference, Chicago, April 19, 1999.
964
965
966

17 17