Aligning Knowledge Strategy and Knowledge Capabilities

Source: Technology Analysis & Strategic Management; Jan2007, Vol. 19 Issue 1, p.69-81
 
Abstract: This paper outlines a framework that links knowledge strategy and knowledge capabilities in a similar way as prior studies for the more generic concepts of strategy and capabilities. Existing theory in knowledge strategy is fragmented and focused on competitive positioning. We utilize concepts of good strategic management and the theory of the firm to place knowledge strategy on a more theoretically sound basis. This expands knowledge strategy beyond competitive positioning to include internal organization and the boundaries of the firm. This expanded view of knowledge strategy is compared to a conceptualization of knowledge capabilities that focuses on different capabilities for internal, collaborative and competitive situations. Using this perspective highlights the interconnection between knowledge capabilities and knowledge strategy—they are often jointly determined. It also provides a basis for integrating competence- and knowledge-based views of the firm in an empirically testable model. Suggestions for further research are proposed

Introduction

As traditional structural advantages decay and more products and services enter the global competitive arena, strategies formed around knowledge can change the game and open up new paths to profitability.1
A number of seminal studies focusing on the linkage between strategy, capabilities, the environment and performance were undertaken when strategy and capabilities were in their early stages of evolution.2 These studies provided a broad framework that analysed the differences between strategy, capabilities and performance, and helped to frame the relations between these key concepts. They also provided an empirical link that reinforced the importance of strategy and capabilities to firm performance.
Similar studies using a knowledge-based view (KBV) have yet to be developed, even though the KBV has gained wide acceptance as one of the fundamental approaches that explains the overall functioning of a firm. This is not surprising. KBV is a relatively new theory and knowledge is not only difficult to measure, but also a highly complex concept whose definition continues to be debated. In addition, there is a great deal of complexity in moving from the detail of knowledge to the overarching strategic decisions that a firm must make.3
This paper proposes a framework for linking knowledge strategy and knowledge
capabilities in a similar way as prior studies for the more generic concepts of strategy
and capabilities. This framework integrates concepts from the knowledge-based view of
the firm, the competence-based view of the firm and knowledge management. It provides
a theoretically sound view of knowledge strategy that includes key strategic decisions
regarding the structure and boundaries of the firm. It also reworks existing conceptualizations
of knowledge capabilities so that the relationship between knowledge strategy and
knowledge capabilities becomes more evident.
A model that incorporates both knowledge strategy and knowledge capability has a
number of key advantages. It provides an empirically testable basis to evaluate the
KBV. The use of knowledge capability avoids the issue of having to directly measure
knowledge by focusing on more tangible infrastructural and process elements. As well,
a focus on key decision points, processes and infrastructure provides a more readily executable
strategy for practitioners to utilize. This integration of the knowledge-based view
(KBV) and the competence-based view (CBV) also leads to additional insights and highlights
areas for further research.

A Practical Framework for Knowledge
Knowledge is at the heart of both knowledge resources and capabilities. Knowledge resources, such as patents or processes, are a vehicle for dealing with the complexity of knowledge and the various different forms that knowledge can assume. Capabilities are composed of knowledge-in-action.4 The more specific concept of ‘knowledge capabilities’ represents the processes and infrastructure a firm uses to manage knowledge.5 Similarly, we can think of knowledge strategy as a number of key decisions related to knowledge that provide a context or strategic intent for the firm. In this view of strategy, knowledge decisions are the precursor to more traditional market-based views of strategy.
So, the combination of knowledge strategy and knowledge capability provides a reasonably complete model of the knowledge-based view of the firm. It encompasses the knowledge resources, the knowledge processes and the ‘knowledge decisions’ or strategic intent of the company.
Prior work in capabilities reinforces the perspective of studying knowledge through a
capabilities lens. King and Zeithaml used deions of capabilities to measure the
knowledge resources of a firm.6 We propose to move further than this and use capabilities
related to the management of knowledge as a proxy for the knowledge resources of the
firm. A firm’s ability to identify, absorb and utilize knowledge is critical to its strategic
success.7 Hence, knowledge capabilities become the critical capabilities under a knowledge-
based view of the firm.
Work in capabilities has also highlighted the importance of environmental conditions.
Particularly in the dynamic capabilities perspective, the dynamism of the environment
impacts the types of routines or capabilities that are present.8 One of the key aspects of
dynamic capabilities is that they are seen as impacted by strategic management and adapting
to a changing environment. Strategic management acts by constantly modifying organizational
skills, resources and competencies in an effort to adapt to the unfolding
environment. To Eisenhardt and Martin, dynamic capabilities are: ‘specific strategic and organizational processes like product development, alliancing, and strategic decision
making that create value for firms within dynamic markets by manipulating resources into
new value-creating strategies’.9 By focusing specifically on knowledge processes and
knowledge capability, our approach can be seen to be a specific case of a dynamic capabilities
perspective by examining the specific strategic and organizational processes
related to knowledge.
Combining knowledge strategy and knowledge capabilities in an overall framework
(see Figure 1) accomplishes a number of things. First, it recognizes the interrelatedness
of knowledge strategy and knowledge capabilities. Prior work in knowledge strategy
and knowledge capabilities has failed to examine the link between the two—that resources
and strategy are often jointly determined. Second, by switching the focus to strategic
decisions and capabilities, empirical testing avoids issues with directly measuring
knowledge. Finally, it recognizes the importance of the external environment and how
it affects both the construction of the firm and its direct influences on performance. The
firm’s interaction with the environment reinforces the need to go beyond competitive
advantage perspectives of knowledge strategy, to include decisions related to the boundaries
and structure of the firm, something that is traditionally buried within capabilities and
understated in terms of its importance to performance.
Knowledge Strategy
There are a number of problems with existing conceptualizations of knowledge strategy.
Most analyses view knowledge strategy as a functionally based issue focusing on knowledge
management without integrating the overall strategic management of the firm.10 The
broader view of knowledge strategy has received very little attention in the management
literature.11 This is despite the fact that, from a practitioner perspective, this view of
knowledge strategy is seen as leading edge.12 Those studies that do take broader views
of knowledge strategy tend to focus on competitive positioning, and fail to incorporate
other components of good strategic management.
For example, Zack provided a model of knowledge strategy that focused on dealing
with knowledge gaps between existing knowledge resources and strategic intent.13 He recommended
the use of a knowledge-based SWOT (strengths, weaknesses, opportunities
and threats) analysis. This resulted in two key aspects to a knowledge strategy: exploration
vs. exploitation and internal vs. external sources of knowledge. In a similar fashion to Zack, Clarke proposes an analysis of competition focused on scenario planning and building
knowledge in areas where future competitive advantage is anticipated.14 In both cases,
there is limited application of knowledge to critical strategic decision points such as the
structure of the firm and the boundaries of the firm.
Bierly’s work on generic knowledge strategies focuses on strategic decision-making.15
Bierly’s dimensions of analysis are stated to be the four following strategic choices: external
vs. internal learning; radical vs. incremental learning; learning speed; and, depth vs.
breadth of knowledge base. The strength of this categorization is that it begins to look
beyond a mainly competitive advantage focus to issues of investment intensity and the
scope of a firm’s operations. However, Bierly’s generic strategies represent strategic
choices that are overlapping and lack clear definition. For example, internal and external
learning are ‘interdependent and complimentary processes’.16 Since the choices are not
mutually exclusive, they do not represent clear strategic decision points for companies.
This is a critical issue in any research using generic strategy, as the explanatory power
of generic strategy comes from the clear differentiation between strategic categories.17
Existing work in knowledge strategy has also not integrated a number of key concepts
that have been developed elsewhere in the literature. In particular, Quinn’s work in intellect
and organizational intelligence18 identifies the importance of flexible organizational
structures and the outsourcing of intellectual functions.
Even when these key concepts are integrated into knowledge strategy, the focus is often
on narrow or competitive orientations. This is evident in discussions of disaggregation19 or
knowledge domains.20 Disaggregation is ‘the devolution of decision-making authority
within and beyond the organization, making the controlled economy of the firm more
like a market’.21 In knowledge terms, it is an effort to break down the company’s value
chain into manageable knowledge components. This approach is used by Von Krogh
et al.22, who break a company’s knowledge into different knowledge domains, establish
strategic goals for these domains from a knowledge transfer and a knowledge creation perspective
and then base resource a decisions on this analysis. The scope of this
concept of knowledge disaggregation is potentially powerful and it should be explored
beyond its relation to competitive positioning and knowledge management.
Good Strategy and the Theory of the Firm
Knowledge strategy can be improved by drawing on concepts from strategic management
and the theory of the firm. Chrisman, Hofer and Boulton’s work in strategy (which uses a
market-based view) has argued that good strategy entails four key components: scope,
investment intensity, competitive weapons and segment differentiation.23 This parallels
work by Hofer and Schendel, which only differed in the use of synergy rather than
segment differentiation in the critical components of strategy.24 Each of these components
has parallels when viewed in light of a knowledge-based view of the firm and should be
incorporated in knowledge strategy. These key themes of strategy are also echoed in theories
of the firm that focus on the existence of the firm, firm boundaries, internal organization
and competitive advantage.25
While each component of both good strategy and theories of the firm can give insight
into improving knowledge strategy, we focus on three key aspects in this section: scope or
boundaries, internal organization, and the existence of the firm. The focus is on moving
knowledge strategy beyond just competitive positioning. However, a summary of all knowledge strategy elements and their relation to each of the key components of good
strategy and theories of the firm are presented in Table 1.
The scope of the firm (from strategy) and firm boundaries (from theories of the firm) are
key decisions in the overall positioning of a firm within its environment. The question in a
knowledge-based view is whether knowledge is integral in determining the boundaries of a
firm, a case that has been clearly presented in prior research.26 To be considered part of
knowledge strategy, boundaries of the firm must represent a strategic decision available
to managers that is based on knowledge. Clearly, this is the case as many studies of outsourcing,
partnering and collaboration indicate that knowledge is a key basis for participation.
27 Particularly in cases where firms lack knowledge or do not find knowledge to
be able to deliver significant value, they are likely to pursue partnering or outsourcing
In the first case, they lack the capability and use the boundary of the firm to accomplish
their ives through indirect or complementary capabilities.28 In the second case, they
don’t see value in the knowledge and use outsourcing to reduce costs and increase focus on
key knowledge in the value chain.
Similarly, knowledge is key to the organizational structure of a firm and represents a
strategic decision point. In a market-based view of the world, firms often use products
or market segments as a method of structuring the firm. However, if distinctive knowledge
areas fundamentally cross these product-based views it causes potential for inefficient and
ineffective organizations. When knowledge becomes the predominant value creation
mechanism, it is natural that organizational structures would support this.
Utilizing the theory of the firm concept of the ‘existence of the firm’ seems to lie outside
the scope of knowledge strategy. However, as Day and Wendler argue, one of the key strategic
issues for CEOs is creating a significant level of entrepreneurialism within the firm.29
Structuring components of the firm to be exposed to market mechanisms (either internally
or externally) is a method of dealing with this issue. Seen in a slightly different light, the
existence of the firm is represented by a combined mechanism of disaggregation and the
boundaries of the firm. Where components of the business are dealt with more effectively
through markets, the boundaries of the firm are changed. Thus, astute CEOs utilize
markets as a tool for strategic thinking. In the extreme case, one could envision a
virtual company, where all components existed outside the company. We will assume
that issues related to the existence of the firm, from a knowledge strategy perspective,
are captured under the boundaries of the firm.

Key Components of Knowledge Strategy
By incorporating components of good strategy and the theory of the firm, knowledge strategy
can be seen to have seven key components: disaggregation, organizational structure,
measurement and reward, knowledge advantages, boundaries of the firm, knowledge protection
and investment intensity. Each of these represents a key decision in the strategic
management of a firm.

Disaggregating
One of the key principles in the strategic management of knowledge is some form of partitioning
of the company into sub-units that focus on different areas of knowledge. These
techniques have been labelled disaggregation.30 Disaggregation refers to decisions on how
to break up the value chain of the organization from a knowledge perspective. This
concept was introduced by Quinn et al.31 and is related to the idea of knowledge
domains.32 Bohn also refers to this with respect to technological process management—
you need to understand the of knowledge and break it into manageable
components.33 This is one of the fundamental decisions in knowledge strategy as it
impacts a number of other factors. How you disaggregate knowledge impacts organizational
structure, boundaries of the firm and the nature of a firm’s competitive focus.
Breaking knowledge in particular ways limits its transferability and may prevent an organization
from discovering effective ways to leverage it. Bounded rationality, knowledge
transfer and appropriability all underlie this decision