The ability to learn faster than our competitors may be the only sustainable competitive advantage.

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1 DEVELOPING SKILLS FOR BUSINESS LEADERSHIP CHAPTER 2 ACTIVITY 2.3 IS KNOWLEDGE THE ONLY SOURCE OF COMPETITIVE ADVANTAGE TODAY? Assignment submitted by Stefanie Reissner for module Strategic Issues, MA International Business Administration Newcastle Business School University of Northumbria at Newcastle Introduction Since the last decades of the 20 th century, there have been intensive discussions about knowledge and its implications on organisations and business success. Knowledge is now widely considered to be a source of competitive advantage, as, for example, Arie de Geus states (quoted in Senge, 1990a, p. 4): The ability to learn faster than our competitors may be the only sustainable competitive advantage. In the following article, the question if knowledge is the only source of competitive advantage today is discussed on the basis of a literature review. Competitive Advantage The term of competitive advantage (CA) is often used to refer to the purpose of management strategy. It can be defined as the ability of an organisation to out-perform its competitors (Campbell, Stonehouse and Houston, 2000, p. 324). Measurement is possible in terms of superior profitability, increase in market share, return on investment, etc. (Stonehouse et al., 2000). However, it is an important aim of business strategy to maintain competitive advantage over a certain period of time, which is called sustained competitive advantage (SCA). Johnson and Scholes (1999) suggest low-price, differentiation or switching cost strategies to build up competitive advantage and hold it over time. There are three main approaches in management strategy that build company performance on competitive advantage. An introduction into these schools of thought is provided in the following paragraphs. 1

2 Competitive Positioning Approach This school of thought is dominated by the work of Michael Porter (1980, 1985). Porter suggests examining an organisation s value-adding activities by his model of the value chain in order to support the generic strategy of cost leadership or differentiation by configuring the value-adding activities accordingly. Value chain analysis refers to the activities within and around an organisation, and relates them to an analysis of the competitive strength of the organisation (Johnson and Scholes, 1999, p. 156). The value chain divides a company s value-adding activities into primary activities (e.g. logistics, operations, sales) and support activities (e.g. R&D, HRM and infrastructure). According to Porter (1985), an organisation s value chain has to be analysed and understood in the wider context of suppliers and customers in order to gain maximum benefit. Moreover, Porter (1985) stresses the importance of managing the linkages between the own value chain and those of suppliers and customers efficiently. Porter (1990) furthermore argues that multinational companies have gained competitive advantage by employing different strategies than their competitors. He contends that companies achieve competitive advantage through acts of innovation, which can be new technologies or new ways of doing things. Thus, innovation can be manifested in a number of things, for example in new product design or new processes. However, innovations require investments in skill and knowledge, physical assets and brand reputations. Resource-Based Approach The resource-based school of thought focuses on core competencies, which are defined as collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies (Prahalad and Hamel, 1990). Campbell, Stonehouse and Houston (2000, p. 324) argue that competences are core when they become the cause of the business s competitive advantage. Prahalad and Hamel (1990) suggest that core competencies are about harmonising streams of technology as well as organising work and delivery of value. This requires communication, involvement and employee commitment to work across organisational boundaries (crossfunctional teams). Moreover, successful companies do not see themselves as a bundles of businesses making products (Prahalad and Hamel, 1990), but know the importance of organisational learning. Unlike the competitive-positioning approach, there is no well-developed analytical framework for the evaluation of core competencies in the competence-based approach. However, Prahalad and Hamel (1990) identify three tests that core competencies have to pass: first, they offer access to a wide variety of markets; second, the contribute significantly to the perceived customer benefits; and third, they are difficult to imitate. The latter refers particularly to processes of internal coordination and learning. 2

3 Figure 1 provides a model for the analysis of competences and core competences combining the competitivepositioning and resource-based approach to strategy. Figure 1: Analysing Competences Source: adapted from Johnson and Scholes, 1999, p. 157 In this framework, cost efficiency refers to cost drivers like economies of scale, product and process design, etc., whereas value added is measured by the effectiveness of identifying customer needs and matching products. Managing linkages refers to the ability to co-ordinate the activities of specialist teams and the steps of the value chain. Finally, robustness means the difficulty for competitors to copy or imitate a competence and thus is a measure of an organisation s ability to stay ahead. Knowledge-Based Approach This school of thought is the most recent approach to business strategy, which originates in the resourcebased view of strategy (Whitehill, 1997). It is dominated by various authors in the fields of organisational learning, competencies, innovations, etc. and views knowledge as the preeminent productive source (Grant, 1997). In addition, he stresses the importance of the employees being the primary stakeholders. According to Gorman and Thomas (1997), resources are relatively tangible, visible assets, whereas capabilities or skills are somewhat less tangible, in contrary to competencies being various value-adding combinations of resources and capabilities. Whitehill (1997) emphasises that tangible assets can be easily identified and thus copied by the competition, offering decreasing competitive advantage. As a result, he recommends concentrating on intangible assets like patents, brands and processes. He also stresses that growing knowledge as a core competence focuses on the organisation by aligning mission, vision, strategy, core competence and individual competencies. According to Grant (1997), this view of the firm is likely to show the drawbacks of hierarchy and thus leading to changes in 3

4 the organisational architecture. This, on the other hand, will encourage questioning and creativity, trust and teamwork. What is Knowledge? Knowledge can be defined in numerous different ways. Demarest (1997), for instance, defines it as the actionable information embodied in the set of work practices, theories-in-action, skills, equipment, processes and heuristics of the firm s employees. A common classification of knowledge in this context is that of explicit and tacit 1 knowledge. According to MacDonald (1999), explicit knowledge is precisely and clearly expressed, with nothing left to implication, whereas tacit knowledge is understood but not clearly expressed. It is often personal knowledge embedded in individual experience and involves intangible factors, such as personal belief, perspective and values. This distinction can be combined into four basic patterns of knowledge creation, which can be visualised by the SECI-model (cf. Figure 2). Figure 2: SECI-Model adapted from Nonaka, Reinmoeller and Senoo (2000) Nonaka (1991) contends that in times of a rapidly changing environment, organisations have to manage all knowledge in order to gain sustained competitive advantage, stressing the importance of knowledge sharing and teamwork. Knowledge Management As for knowledge, there are also a variety of definitions for knowledge management (KM). Scarbrough, Swan and Preston (1999), for example, define knowledge management as any process or practice of creating, acquiring, capturing, sharing and using knowledge, wherever it resides, to enhance learning and performance in organisations. 1 Tacit knowledge is sometimes called implicit knowledge. 4

5 According to Pemberton and Stonehouse (2000), knowledge management has two functions: first, it is about formalising and coordinating new knowledge assets. Second, it stores, distributes and shares current knowledge assets. The latter is facilitated by the recent developments in information and communication technology (ICT). They argue that organisational knowledge is closely linked with core competencies, which is considered to be increasingly important. The Knowledge Society In the so-called knowledge society (Scarbrough, Swan and Preston, 1999), which is characterised by shortened product life cycles and a rapidly changing business environment (Stalk, Evans and Shulman, 1992; Harvey and Denton, 1999), companies are often struggling to build up competitive advantage and to maintain it over time, and knowledge is now widely considered to be a prime source of competitive advantage (Harvey and Denton, 1999). Drucker (1993), for example, stresses the importance of human capital as a carrier of knowledge by stating that knowledge is the real and controlling resource and the absolutely decisive factor of production (p. 5). This indicates a shift in the importance of traditional production factors towards intellectual labour. Due to increasing global competition, many organisations success depends upon the ability to react quickly on newly emerging customer needs (Nonaka, 1991). This most often requires changes in organisational architecture in the form of flatter hierarchical structures and teamwork in order to improve internal and external communication. On the other hand, this will foster creativity, which means that new ideas can be embedded into new and innovative products (Quinn, Anderson and Finkelstein, 1996; Quinn, 1992). However, the skilful management of knowledge in an organisation can also support the traditional valueadding activities and the establishment of core competencies with regard to the resource-based approach. It may thus complement them, as can be seen from the following paragraphs. Knowledge Management and the Value Chain Porter (1985) argues that competitive advantage can be built in each step of the value chain. Some organisations will have their core competences in production, others in R&D. Since these activities are linked, a successful organisation will manage these interrelationships efficiently. This requires not only a sound knowledge of the linkages, but also good communication structures. On the other hand, external factors like labour costs, interest and exchanges rate as well as economies of scale are likely to influence a company s competitiveness and thus competitive advantage (Porter, 1990). In order to anticipate such changes, the responsible person has to have a good information base and good knowledge about it. 5

6 In addition, Dawson (2000) argues that basic value-creating processes in an organisation are based on knowledge. He contends that virtually all organisations can be considered to be knowledge organisations due to similar knowledge-based processes. This means that a company cannot build competitive advantage on merely being a knowledge organisation, but that there must be other sources of competitive advantage. It can be concluded that knowledge underlies any value-adding activity in a company and that knowledge management can support the effective managing of linkages between these activities. The most important means of support are a better communication base due to flatter hierarchies, widely accessible knowledge stored in databases and an increasingly open culture based on trust and knowledge sharing. Knowledge Management and Core Competencies Whitehill (1997) argues that the window of competitive opportunity is shrinking due to the fact that products and services are increasingly copied in shorter time periods. He recommends that organisations should focus their strategies on their intangible assets, which are difficult to copy. On the other hand, he suggests that knowledge as a strategic core competence shall be in line with the general strategy of an organisation. In this context, he identifies the following benefits of adopting a knowledge-based strategy: quicker learning and changing, cost saving effects due to lower staff turnover and growing competitive knowledge, and the ability to respond to customers future demand today and thus creating wealth. Sometimes technology is also considered to be a source of competitive advantage, especially in today s business world, e.g. with regard to e-commerce. Nonaka and Konno (1998) quote the examples of Toshiba and Maekawa for which core technologies form the basis of their business success. It may then be argued that the development of such technologies is closely linked to knowledge, the competitive advantage itself is built on technology. However, the development and use of innovative technology are always the result of applied knowledge. There are numerous examples of company who have failed despite the latest technology because they have failed to draw an advantage out of it. One example for this is Phillips that cannot use its leading technology to outperform its Japanese competitors (Bartlett and Ghoshal, 1989). To summarise, it can be stated that knowledge is the basis of any competence. However, to exploit this often tacit knowledge in order to transform it into a core competence or competitive advantage, it has to be managed skilfully. Thus, knowledge management can support the building and sustaining of core competences. Failure of Knowledge Management Initiatives The majority of knowledge management literature is extremely enthusiastic, claiming that knowledge now represents the key competitive sustained resource (Storey and Barnett, 2000). However, recent research shows a high failure rate among knowledge management initiatives and programmes despite great efforts in terms of time and money. Until now, four main reasons for the failure of knowledge management 6

7 programmes have been established (quoted in Storey and Barnett, 2000). First, the business objective and benefits from the initiative are not specified detailed enough. Second, the dynamics of linkages between change and learning cannot be exploited due to insufficient programme architecture. Third, the initiative is not focused enough on specific business objectives. Fourth, top management is not getting involved sufficiently. There may also be further reasons for this failure. One of them may be that knowledge management is regarded to be the cure for any problem occurring within the organisation, a view which is popular especially among consultants (Senge, 1990b). This is most probably due to the fact that many people have not grasped the real idea of knowledge management and learning (Garvin, 1993). This may lead to applying a too narrow view on the subject. Different approaches to knowledge management focus on different elements like technology while neglecting the human factor (Windle, 2001). On the other hand, Pemberton and Stonehouse (2001) contend that the three central parts in a knowledge-centric organisation namely structure, infrastructure and culture are interlinked. They argue that technology alone can only be a knowledgeenabling factor, but not the source of competitive advantage. Moreover, the three above-mentioned sociotechnical factors are also vital for successful knowledge management since ignoring the human factor can lead to the failure of the knowledge management initiative. However, knowledge management can improve the ability to solve problems (Argyris, 1991) or help to solve problems in the human resource sector (Soliman and Spooner, 2000), but it does not happen automatically. The knowledge management programme, like any other initiative has to fit into the organisational context (Storey and Barnett, 2000). Conclusion Regardless of which approach to strategy is applied, knowledge management can be a powerful tool for improving internal processes, which facilitates building and sustaining competitive advantage. It furthermore leads to better communication, knowledge sharing and teamwork. The skilful exploitation and management of knowledge can help an organisation to built up and sustain competitive advantage in the form of innovative products or services, more effective internal and external communication and optimisation of processes. Being intangible and difficult to emulate, knowledge is extremely difficult to imitate or copy. However, a high percentage of knowledge management programmes fail due to a too narrow focus on the subject or a misfit with the organisational context. Thus, a company wishing to introduce knowledge management for improving its performance should think about the process first before implementing it. As could be seen from the above definitions and discussion, knowledge can be regarded as the only source of competitive advantage today. However, it should not be ignored that knowledge has to be managed effectively in order to gain maximum benefit and actually build up competitive advantage. 7

8 References Argyris C. (1991), Teaching Smart People How to Learn, in Harvard Business Review on Knowledge Management, pp , Boston: Harvard Business School Press Bartlett C. and Ghoshal S. (1989), Managing Across Boarders: The Transnational Solution, Cambridge/MA: Harvard Business School Press Campbell D., Stonehouse G. and Houston B. (2000), Business Strategy An Introduction, Oxford: Butterworth Heinemann Dawson R. (2000), Knowledge Capabilities as the Focus of Organisational Development and Strategy, Journal of Knowledge Management, 4 (4), pp Demarest M. (1997), Understanding Knowledge Management, Long Range Planning, 30 (3), pp Garvin D. A. (1993), Building a Learning Organisation, in Harvard Business Review on Knowledge Management, pp , Boston: Harvard Business School Press Gorman P. and Howard T. (1997), The Theory and Practice of Competence-Based Competition, Long Range Planning, 30 (6), pp Grant R. M. (1997), The Knowledge-based View of the Firm: Implications for Management Practice, Long Range Planning, 30 (3), pp Harvey C. and Denton J. (1999), To Come of Age: The Antecedents of Organizational Learning, Journal of Management Studies, 36 (7), pp Johnson G. and Scholes K. (1999), Exploring Corporate Strategy, 5 th Edition, Harlow/Essex: Pearson Education Ltd. MacDonald J. (1999), Understanding Knowledge Management in a Week, London: Hodder & Stoughton Nonaka I. (1991), The Knowledge-Creating Company, in Harvard Business Review on Knowledge Management, pp , Boston: Harvard Business School Press Nonaka I., Reinmoeller P. and Senoo D. (2000), Integrated IT Systems to Capitalize on Market Knowledge, pp in von Krogh G., Nonaka I. and Nishiguichi T. (eds.) Knowledge Creation A Source of Value, Basingstoke: Macmillan Press Pemberton J. D. and Stonehouse G. H. (2000), Organisational Learning and Knowledge Assets An Essential Partnership, The Learning Organization, 7 (4), pp Pemberton J. D. and Stonehouse G. H. (2001), The Importance of Individual Knowledge in Developing the Knowledge-Centric Organisation, in Clarke S. (ed.) Knowledge Management in the Socio-Technical World: The Graffiti Continues, Operational Research Society Porter M. E. (1980), Competitive Strategy: Techniques for Analysing Industries and Competitors, New York: The Free Press Porter M. E. (1985), Competitive Advantage, New York: The Free Press Porter M. E. (1990), The Competitive Advantage of Nations, Harvard Business Review, March/April, pp Prahalad C. K. and Hamel G. (1990), The Core Competence of the Corporation, Harvard Business Review, May/June, pp Quinn J. B. (1992), Intelligent Enterprise, Don Mills/Ontario: The Free Press 8

9 Quinn J. B., Anderson P. and Finkelstein S. (1996), Managing Professional Intellect Making most of the Best, in Harvard Business Review on Knowledge Management, pp , Boston: Harvard Business School Press Scarbrough H., Swan J. and Preston J. (1999), Knowledge Management A Literature Review, London: Institute of Personnel and Development Senge P. M. (1990a), The Fifth Discipline The Art & Practice of The Learning Organization, London: Random House UK Ltd. Senge P. M. (1990b), The Leader s New Work: Building Learning Organizations, Sloan Management Review, Fall Soliman F. and Spooner K. (2000), Strategies For Implementing Knowledge Management Role of Human Resources Management, Journal of Knowledge Management, 4 (4), pp Stalk G., Evans P. and Shulman L. (1992), Competing on Capabilities, Harvard Business Review, March/April, pp Stonehouse G., Hamill J., Campbell D. and Purdie T. (2000), Global and Transnational Business Strategy and Management, Chichester/West Sussex: John Wiley & Sons Ltd. Storey J. and Barnett E. (2000), Knowledge Management Initiatives: Learning from Failure, Journal of Knowledge Management, Vol. 4, No. 2, pp Whitehill M. (1997), Knowledge-based Strategy to Deliver Sustained Competitive Advantage, Long Range Planning, 30 (4), pp Windle I. (2001), Efficiency through knowledge, Financial Times, 21 February 2001, p. 17 9