Knowledge Management and the Value Chain - CIPD


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Assignment submitted by Stefanie Reissner for module Strategic Issues,

MA International Business Administration

Newcastle Busine
ss School

University of Northumbria at Newcastle


Since the last decades of the 20

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

In the following article, the question if know
ledge 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.
et al.,

r, it is an important aim of business strategy to
maintain competitive advantage over a certain period of time, which is called

competitive advantage
(SCA). Johnson and Scholes (1999) suggest low
price, differentiation or switching cost strategie
s 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 paragraph



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 strateg
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 organisatio
n’ (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 orga
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 sup
pliers 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 a
cts 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, ph
ysical assets and brand reputations.

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 integ
rate 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 tha
t 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, s
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 frame
work 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 signif
icantly to the perceived customer benefits; and third, they are difficult to imitate.
The latter refers particularly to processes of internal coordination and learning.



provides a model for the analysis of co
mpetences and core competences combining the competitive
positioning and resource
based approach to strategy.

: Analysing Competences

Source: adapted from Johnson and Scholes, 1999, p. 157

In this framework, cost effic
iency 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 act
ivities 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.

Based Approach

This school o
f thought is the most recent approach to business strategy, which originates in the resource
based view of strategy (Whitehill, 1997). It is dominated by various authors in the fields of organisational
learning, competencies, innovations, etc. and views kn
owledge 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 capabi
lities 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 competiti
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, v
ision, 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

the organisational architecture. This, on the other hand, will encour
age questioning and creativity, trust and

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
skills, equipment, processes
and heuristics of the firm’s employees’.

A common classification of knowledge in this context is that of explicit and tacit

knowledge. According to
MacDonald (1999), ‘explicit knowledge is precisely and clearly expressed, wi
th 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
inction can be combined into four basic patterns of knowledge creation, which can be visualised by the
model (cf.


adapted from Nonaka, Reinmoeller and Senoo (2000)

naka (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 know
ledge, 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’.


Tacit knowledge is sometimes called implicit knowledge.


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 increa
singly 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;

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 product
ion factors towards intellectual

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
ecture 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 value
adding activities and the establishment of core competencies with regard to the resource
based approach. I
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 compet
ences 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 ot
her 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.


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 hierar
chies, 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 a
s 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 knowled
ge, 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 an
y 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

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
s 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

programmes have been established (quoted in Storey and Barnet
t, 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 i
s 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 th
ree central parts in a knowledge
centric organisation

namely structure,
infrastructure and culture

are interlinked. They argue that technology alone can only be a knowledge
enabling factor, but not the source of competitive advantage. Moreover, the thr
ee above
mentioned socio
technical 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 pr
oblems (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
y and Barnett, 2000).


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 be
tter 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 exte
rnal 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
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.



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