Knolge Creat - Compt Advtge

Knowledge creation and its place in the development of sustainable competitive advantage Rob Sharkie

Abstract Organizations operate in all areas through people and it is their contribution which determines success and it is their skills and knowledge which need to be cultivated and then leveraged to create competitive advantage. Sustainability of this competitive advantage comes from the development of tightly coordinated and complementary activities and directed towards producing a strategy of differentiation and making a unique offering to customers. A consistency in strategic direction is essential and this will necessitate the exercise of choice to develop a unique strategy. The development of sustainable competitive advantage is a vital management function and an important requirement is the nurturing of a knowledge creating environment to enable the organization to exploit and develop resources better than rivals and create suf®cient knowledge to address the industry's future success factors.

Rob Sharkie is a lecturer at the School of Management, Charles Sturt University, Wagga Wagga ([email protected])

Keywords Knowledge Value added

creation,

Tacit

knowledge,

Competitive

advantage,

People and sustainable competitive advantage Success for an organization will depend on the degree to which the corporate culture fosters and maximizes organizational capability and the success for this will obviously depend on the capability of both the management and the employees. A successful culture will need to be seen to foster employee development and encourage highly competent employees to exercise their talents to impact positively on the organization (Zwell, 2000). A successful culture will provide a work environment in which employees are engaged, challenged, motivated and rewarded in a positive way for their performance and contribution to the organization's success. This positive culture is of critical importance because organizations operate in all areas through people and it is their contribution which determines success, because it is people working within organizations, not the organization itself, who provide the initiative, the productive input and the re¯ection on these activities. The value of human capital in the development and use of capabilities and ultimately in the development of competitive advantage cannot be overstated according to Hitt et al. (2001) and this is supported by Thurow (1999) who argues that skilled people operating in a supportive culture become the only sustainable competitive advantage.

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DOI 10.1108/13673270310463590

According to Beer (1997) it will be necessary for human resource management to change from their traditional focus on attracting, selecting and developing talented individuals and adopt a new focus on competitive advantage. It will need to establish an organizational context that will develop leaders and also focus on facilitating teamwork because this new focus will enable the development of a more intelligent organization that according to Pfeffer (1998) will be ``less bureaucratic, less elitist, hierarchical and authoritarian and one that is more communicative, participatory and empowered''. This more intelligent organization will be more able to integrate the knowledge and skills of employees in competitively valuable ways according to Thompson and Strickland (2001) and develop the knowledge and skill capabilities to be able to use the resources to create competitive advantage by managing the value chain effectively, rather than the organization just possessing these resources. This ability to manage the value chain better than rivals is an argument also used by Ulrick (1998) when he argues that it is increasingly being recognized that the only competitive weapon an organization really has is its ability to organize work better than their rivals. Pfeffer (1994) also supports this line of argument by claiming that competitive advantage comes from managing people effectively and that competitive advantage will be sustainable because the causes of the success will not be highly visible or transparent and this will make the advantage very dif®cult to copy. A number of capabilities are needed by an organization if it is to develop competitive advantage and achieve success in a competitive context, according to Ulrick (1997). It is necessary to develop a shared mindset which will enable the development of a unique identity for the organization in the minds of all stakeholders and it is this shared mindset which is an enabler for the creation of wealth for all. Ulrick (1997) also suggests that organizations need to be able to capture the intellectual capital or tacit knowledge of its employees and to do this it is argued that the management needs to involve and engage employees fully in the activities of the organization.

Sustainable competitive advantage from knowledge Capabilities embedded in the management and employees are not readily classi®able by hierarchy, function or position and an organization needs to remove any impediments to accessing this knowledge and competence. The organization will need to develop capabilities to handle change and learn rapidly and this will be developed by focusing attention on such skills and attitudes as agility, ¯exibility and speed. The organization's success will ®nally depend on the speed at which it can generate, capture and disseminate knowledge and then use this knowledge to develop capabilities that cannot easily be copied by rivals. This ability to create knowledge and to continue to learn from it can become a competitive advantage because innovative knowledge developed today will become the core knowledge of tomorrow (Zack, 1999). The question of sustainability of competitive advantage is an important one. Research done by Hodgetts (1994) on US ®rms highlights the dif®culty in maintaining or sustaining competitive advantage. This survey based on 100 of the largest ®rms showed that over a 12 year period, 82 percent of them had declined in performance or

knowledge developed today will `` Innovative become the core knowledge of tomorrow. ''

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disappeared off the list entirely. Barney (1995) presents some tests that could be directed at potential competitive advantages to see if they qualify as valuable and sustainable. Managers need to constantly evaluate capabilities to see if they continue to provide value to the organization in spite of changes that might be happening in the competitive environment and competitive advantages will be of much more value if they are relatively rare and/or are unable to be relatively easily, or cost effectively, imitated. These two tests really relate to the degree of exclusivity of the advantage enjoyed by the organization and the protection to this exclusivity in the future. The ®nal test relates to the ability of the organization to exploit these competitive advantages in strategic terms. There are various types of capabilities described by Long and Vickers-Koch (1995). Threshold capabilities are those that are needed just to operate in an industry and are fairly common to most organizations operating in that industry but the capabilities that are of most interest to Long and Vickers-Koch (1995) are ®rst, critical core competencies which are capable of providing competitive advantage in the current context of the competitive environment, and second, cutting edge core capabilities that can be developed into tomorrow's competitive advantage. Core competencies, the basic unit of competitive advantage, rarely consist of narrow skills or outputs of a single functional department. Rather the competitive advantage comes from bundles of skills or know-how built and nurtured by senior managers who have the necessary in¯uence in the organization to enforce the necessary networking and cooperation to allow for their development. Organizations need to gain their competitive advantage by linking the processes in their organization which gives them strength in delivery of products or services, based on capabilities coming from the entire value chain (Thompson and Strickland, 2001; Long and Vickers-Koch, 1995). A by-product of this concentration on the processes in the organization can help to break down the functional barriers and foster the development of cross functional teams and structures which provides the opportunities for knowledge and skills of individuals to be used (Pfeffer, 1994) and opportunities for employees to pool their ideas to come up with even better and more creative solutions to problems (Foley, 2000). Zack (1999) stresses the importance of concentrating on the development of unique and valuable capabilities, rather than exclusively focusing attention on the production of goods or services. A concentration of goods and services can, at the best, only provide short-term advantages because, as Schumpeter (1934) argued, organizations engage in invention, innovation and imitation in a continual cycle which render current products and services obsolete. This concentration on capabilities and not on goods and services is also supported by Long and Vickers-Koch (1995) who argue that organizations who wish to improve their performance need to understand and then develop underlying skills and know-how and channel this into process improvements. The usual keys to building up these skills and know-how will come from looking at areas like superior employee selection, training and retraining, culture, networking, motivation, empowerment, incentives, ¯exibility, short deadlines and good databases according to Quinn (1992) and the building up of these internal human capital related capabilities will result in competitive advantage which will be sustainable, because of the dif®culty in copying competencies based on knowledge, skills and attitudes, built into processes and developed over time into working combinations in a particular organizational context (Long and Vickers-Koch, 1995). The more unobservable these competitive advantages are the more sustainable they will be and this particularly applies to competitive advantages which are based on developing and exchanging

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information and knowledge through the ®rm's human capital (McEvily and Zaheer, 1999).

Knowledge strategies for survival Strategic knowledge gap analysis can be used to look at what the ®rm must know in terms of being able to meet the industry's key success factors in a superior manner to rivals. Having determined the knowledge the organization must know then this can be compared with what knowledge the organization has, particularly in the embedded tacit form, and then take steps to eliminate these gaps. If a knowledge de®ciency in depth or breadth is uncovered then the organization may be limited in what it can do to compete successfully. The organization therefore needs to create knowledge within the organization by establishing an enabling context which will encourage individuals within an organization to share their tacit knowledge with others to create new knowledge. If this gap analysis reveals that certain explicit knowledge is available to rivals, but is not currently available to the organization, then the organization will also need to acquire this knowledge. On the other hand if the organization has an excess of knowledge to its knowledge need then it is in an ideal situation to be able to leverage this knowledge resource for the bene®t of the organization. This leverage, or exploitation of knowledge, maximizes the value of this knowledge resource in the same way as leveraging any other organizational resource. Von Krogh et al. (1994) suggest that the two basic strategies for organizations are survival and advancement. Survival strategies are attempting to gain success in the organization's known business environment and advancement strategies are directed towards securing future pro®tability. Knowledge has a different part to play in these two strategies. Survival strategies rely on the effective utilization of existing assets and resources, including the existing level of knowledge. For knowledge to be considered as a source of competitive advantage it must pass the normal tests of value and non-imitability. The value test will be satis®ed if the knowledge makes a valuable contribution to the capability of the organization to capitalize on existing opportunities and in the short run, this contribution will consist primarily of explicit knowledge being transferred from outside the organization, or within the organization and used to improve organizational ef®ciency. The non-imitability test will value knowledge based on the dif®culty faced by a rival in imitating the knowledge. Knowledge must be unique to the organization to provide competitive advantage because publicly available knowledge, although valuable for business performance, can rarely allow the organization to achieve competitive advantage. The organization can of course use public knowledge to develop unique processes within an organization, support this process with the organizational culture and hence convert public knowledge into organizationally unique knowledge. A short run or survival focus is about securing current pro®tability at a level which is higher than the average for the industry and by spelling out the near term results to be achieved, short range objectives indicate the speed at which management wants the organization to progress, as well as the level of performance being aimed at over the next two or three years (Thompson and Strickland, 2001). This focus on the short

must be unique to the organization to `` Knowledge provide competitive advantage. ''

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run, or on survival as proposed by Von Krogh et al. (2000) concentrates attention in the organization on achieving mastery of the current business environment by leveraging current strengths to compensate for current weakness while at the same time taking advantage of existing opportunities and minimising the effect of current threats. The organization will, for example, exploit any current sources of competitive advantage such as economies of scale or economies of scope in an effort to lower operating costs. This survival approach to management is likely to be successful if the organization is operating in a relatively stable environment. Its weakness is highlighted by its failure to focus management's attention and resources on developing a vision for the future and ensuring that the organization is developing the right capabilities to enable it to build for itself a strong competitive position in the future environment.

Knowledge strategies for the future A long run strategic approach will aim to position the organization for future pro®tability and strength in a market which is likely to be considerably different from the existing market environment. This approach will attempt to secure future pro®tability by building future strengths, making strategic moves to strengthen weakness, positioning itself to maximize the advantages to be obtained from future opportunities and by building capabilities, within itself, to defend against future threats and the actions of rivals. Strategic management is about formulating and implementing strategy and seeking to not only develop capability, but also to attempt to manipulate the external environment to make it more favorable to the future operations of the organization. This latter aim is supported by Von Krogh et al. (2000) who claim that strategy will ultimately determine the areas an organization will do business in and to what extent it will be successful in competing in those areas.

Knowledge strategies for the future If a long run strategic approach is taken, a creative approach will need to be adopted. Management will have to exit a short run, survival thinking mode and a concentration on the needs and immediate returns to stakeholders and will have to develop and implement strategies not being used by current or expected future competitors. In developing this forward looking strategic approach an understanding of the current environment will be of little use and the experience of senior management may be less important than creative, intuitive and insightful images coming from middle or junior management (Hamel, 1996). Knowledge will be vital for an organization's long run strategy and it will be important to envision future knowledge needs. The importance of knowledge will revolve around knowledge creation and the radical innovation that this can release. When the intuitive and insightful images residing in the tacit knowledge of the knowledge creators is made available to other managers and employees, a knowledge resource will be created that is much harder to imitate than explicit knowledge captured from documents, manuals and publications. This new resource will be tied to personal relations and shared habits of employees and will be embedded in organizationspeci®c processes, providing a high degree of sustainability for the organization's future competitive advantage. This strategic view of knowledge requires the formulation of a knowledge vision or intent, the tearing down of knowledge barriers existing in the form of a culture of low levels of care and trust and developing a culture

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pressure on organizations to improve their `` The performance is increasing. '' which encourages the sharing of tacit knowledge. As above, new knowledge creation that results can be unique and dif®cult to imitate. Knowledge created from a strategic intent to position an organization for successful long term success, will need to be leveraged to get the most bene®t from it. The knowledge resulting will have to be documented and disseminated to all sections of the organization, with a view to speeding up the time delay between knowledge creation and use. The necessity of shortening the creation-use cycle is also supported by Zack (1999) who argues that the strategic challenge for organizations is to create suf®cient knowledge to support a shift to new technologies and new markets before traditional competitors are able to do so. This will also serve to strengthen the barriers against future new entrants and hence operate to enhance future pro®tability. It is vital that this new knowledge created is used as a building block to ®nd even more applications for this knowledge (Sveiby, 1996). A bene®t from this knowledge creation process comes directly from the organizational experiences according to Edvinsson and Sullivan (1996) because it is the experiences of working together, exchanging tacit knowledge and then documenting the created knowledge that can be leveraged and this newly developed capability used elsewhere in the organization in other business activities to produce more knowledge.

Operational effectiveness versus strategy The pressure on organizations to improve their performance is increasing, particularly under the in¯uence of institutional investors. These investors, as well as ordinary shareholders, are seeking increasing pro®ts and dividends while at the same time expecting the organization's share price to grow. These pressures, plus those from rivals who are being exposed to similar pressures, are causing managers to seek all possible opportunities and to take all possible steps to satisfy the claims. The hypercompetitive environment resulting emphasizes the necessity for improving operation effectiveness. This hypercompetition has forced managers to concentrate on current results at the expense of strategy. More immediate results, although not necessarily superior pro®tability, can be achieved by actions aimed at improving operational effectiveness, for example by taking action to reduce wastage. Similarly taking action to nullify the moves of rivals, by attempting to copy their strategic moves results in an ever increasing race to improve operational ef®ciency because all competitors are using a similar basic strategy. With the same strategy the only means to beat rivals is to implement the strategy in a way that is superior to the implementation of it by rivals. New management practices such as total quality management and business process reengineering for example, are presented as generic solutions to solve hypercompetition problems and because of their generic nature, are available to all rivals and hence the race is to do the same thing but do it better than rivals. While there are obviously substantial bene®ts available from the use of these practices, particularly to improve performance and ef®ciency, the wide use of benchmarking involved in these practices would suggest that it is dif®cult to achieve superior competitive advantage and superior pro®tability against rivals who are likely to be also using these practices (Von Krogh et al., 2000). As with public knowledge, generic solutions to problems tend to

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be diffused quickly and the competitive advantage expected from these practices is short lived, producing a race for even more organizational effectiveness. Industry consolidation could also be seen in the light of this race as being undertaken to preserve pro®ts affected by this hypercompetition as well as to gain market power. Outsourcing to ef®cient third parties, as another management practice designed to allow organizations a much greater concentration of resources on building core capability by outsourcing non core (but necessary) activities, has the effect also of reducing the opportunities for using different strategies because rivals will show a tendency to direct their outsourcing to these same ef®cient third parties (Porter, 1996). Operational effectiveness is of course necessary for good performance, but superior performance requires activities of a strategic type designed to enable the organization to improve its relative market position and to ensure that the gains from improved operational effectiveness are able to be re¯ected in sustained pro®tability. Porter (1996) argues that in this effort to improve market position, it is necessary to establish a difference in the strategic approach. It is either necessary to perform different activities to rivals, or alternatively perform similar activities but in different ways. This difference relates to the desire to establish a competitive advantage that can be preserved and sustained. From a theoretic perspective this argument has strength. It is necessary to conduct activities differently from rivals because if there was only one best way to develop and implement a strategy for success in a particular environment, then all organizations would pursue it. No organization would then have a strategic advantage and the winner and most successful performer would be the organization able to achieve the best organizational effectiveness. The argument to develop a unique strategy is supported by Viljoen and Dann (2000) who argue that strategy generation and selection is contingent upon the speci®c predicament facing an organization.

Complementary activities and competitive advantage Competitive advantage comes from the way activities ®t and reinforce each other, (Porter, 1996) with the advantage arising out of the entire system of activities and not from the production or availability of a particular product or service or the possession of a particular capability. Individual products or services can be readily copied by rivals, but those capabilities that are built upon the way people manage and control activities, centred around the optimization of value from resources, are harder to duplicate. The satisfaction of consumer wants in a superior way to rivals requires organizations to concentrate on building distinct capabilities based on a series of tightly coordinated activities. To achieve competitive advantage the activities as above need to be complementary and must result in a single-mindedness or consistency in action. A consistent complementarity in the activities, to produce for example an effective differentiation strategy, will produce a strongly reinforced approach to differentiation, a strong communication to customers and a consistent message to other stakeholders about the contribution required from them. These interlocking activities can be even further enhanced if a consistency is developed in relation to other steps in an organization's value chain and attempts are made to promote this differentiation in all critical success factor areas. With this emphasis, differentiation becomes an allconsuming aim of providing differentiated value and exceeding buyers expectations. A competitive position, built around a culture of providing differentiated value, will be exceedingly dif®cult for rivals to copy and hence delivers a sustainable competitive advantage.

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An organization's competitive strategy is developed as a choice between the three generic strategies: low cost leadership, differentiation and best cost provider strategy (Thompson and Strickland, 2001) and consistency is required between the selection of a strategy and the activities that are needed to support it. The choice of strategy will also be affected by an intention to satisfy a selected group of customers or supply a particular selection of products or services. The search for sustainable competitive advantage should be a search for a superior competitive position for the organization but despite this, it is possible that an organization may stray from its generic strategic position by attempting to graft on to its strategy any differentiation feature added by any rival. This might appear to be successful in protecting the organization from the strategic moves of rivals, but will fail in the task of producing real differentiation in the form of a unique offering to customers. This continual sharing of differentiation features, or a me too approach, does nothing to enhance the market standing of the organization or to provide performance superior to that of rivals.

Consistency in strategy implementation The choosing of a particular generic strategy will require an organization to strongly pursue this strategy and give a consistent message about the priorities that they have adopted. For example if a low cost strategy is chosen then it would be inconsistent for the organization to try and simultaneously attempt to make their offering to consumers more attractive by adding costly features without charging for them. A trade-off here is essential from a pro®t perspective, but also from a need to provide credibility to the organization's image and reputation as a low-cost provider.

Consistency in strategy implementation Organizations need to decide which customers, variety and wants to concentrate on, and equally must decide when not to serve customers or provide some of their wants (Porter, 1996). The arguments put forward against this necessity of deciding on restrictions to an organization's strategy claim that decisions to limit activities automatically reduce an organization's growth prospects, or portray an organization as being weak, if they acknowledge that they are unable to defeat rivals in all areas of competition. Organizations that fail to make these choices really weaken their strategy. When they suggest that they can be all things to all people they will be compromising their strategic aim of maximising the long term value of the organization. Decisions do need to be made to restrict the scope of an organization's activities to protect the uniqueness and the strength of their competitive position. Failure to make choices invariably leads to a lessening of the power of a consistently pursued strategy. The widening of scope which results, diminishes their strategic power and requires even greater attention to organizational ef®ciency in an effort to match the activities of rivals.

Capabilities should be the foundation for strategy It will be contended that it is important to focus on capabilities rather than resources because distinctive capabilities are things that the organization does better than its rivals and it is the capability to use resources better than rivals that gives an organization superiority. The competitive forces model developed by Porter (1980) argued that industries should be investigated to determine their attractiveness and then organizations needed to take steps to align themselves with the industry. Porter's forces of rivalry,

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threat from suppliers, threat from buyers, threats from new entrants and from substitutes were to be used to examine competition and its effect on pro®tability, which would allow a judgement to be made on the attractiveness of that industry. Porter's argument was that individual ®rms did not matter (Barney, 1995) and that the level of success depended on the relative attractiveness of the industry. Under this positionalist theory, organizations had to identify, and then occupy, defensible market positions within the industry by adjusting their value chains to develop an attractive position within that industry. This theory had a medium term focus and basic presumptions that ®rstly, the industry could be studied and understood (a reasonable presumption only under relatively stable conditions) and then that the organization could plot a path to succeed in it (again a reasonable presumption only under relatively predictable times). Under Porter's theory, the argument was advanced that an individual organization's pro®t would come from the development of superior internal systems and structures (Burnes, 2000). This industry-only focus has been criticized by arguments that unique ®rm factors were important (Zack, 1999) because without this consideration it was dif®cult to explain poor or good performance by organizations operating in the same industry. Prahalad and Hamel's (1990) introduction of core competencies and integrated capabilities focused attention of what an organization must do to provide signi®cant value to the customer. They argued that it is necessary to look at what connects the business together, or the bundle of constituent skills and technologies, rather than at discrete skills if an organization wishes to obtain a competitive advantage based on them differentiating themselves from their rivals. This portfolio of capabilities is the fundamental building block for an organization's core competence (Birchall and Tovstiga, 1999) and to be the base for developing an organization's sustainable competitive advantage this portfolio must be able to pass the following tests for sustainability. Collis and Montgomery (1995) discuss these tests as follows: (1) Is the capability hard to copy? This ease of copying can be looked at from several points of view. The characteristics might be related to physical uniqueness, for example with a patent; related to path dependency and the need to be built up over time; related to an economic deterrent where for example a large capital investment is required or where the character of the capability is dif®cult to determine, which makes it dif®cult to copy. (2) The test of durability, and how quickly it will be used up in applying that resource or capability in the exercise of gaining competitive advantage. It is signi®cant to note in this context that a knowledge based capability exhibits unique characteristics. Tacit knowledge in fact expands as it is applied to gaining competitive advantage and tacit knowledge existing in culture or speci®c communities of practice is dif®cult to decontextualize and replicate (Grant and Gregory, 1997). Substantial tacit knowledge is often embodied in capabilities such as start up and problem solving according to Rebentisch and Ferretti (1997) and as above are expanded rather than extinguished with use. (3) Test of appropriability and the ability of the organization to retain ownership of the capabilities. Value arising from capabilities is often subject to a degree of bargaining over ownership between suppliers, employees, distributors etc. and this will affect the value of these capabilities. (4) To be of sustainable value, rivals must not be able to easily substitute a different set of capabilities producing in fact the same results.

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(5) The test of competitive superiority must also be passed to make a claim for sustainable competitive advantage. The value of the capability must be compared with the worth of it as against rivals, rather than only asking if the organization considers it to be internally valuable. Capabilities can be of three types according to Birchall and Tovstiga (1999) and all have a component of knowledge in them. Integrity related capabilities are built when the organization is able to do things more quickly, ¯exibly or reliably than rivals are able to do. These capabilities might relate to such things as management of cycle time or quality management and the superiority of these capabilities comes from the exercise of embedded knowledge. Market access capabilities refer to superior ability to interface between the organization and the marketplace and again rely on the knowledge base of people in such things as brand development, marketing and communication and functionally related capabilities, where knowledge is used to get skills and technologies rapidly integrated into the organization's services or produced in such a way that they will produce customer bene®ts. In all of the above, as previously argued, capabilities cannot be evaluated in isolation because the real value of capabilities is determined in a context of what the market demands and what the rivals are offering (Collis and Montgomery, 1995).

Conclusion Knowledge is the most important strategic resource and the ability to acquire and develop it, share it and apply it can lead to sustainable competitive advantage (Grant, 1996) because organizations with superior knowledge can combine traditional resources and assets in new and distinctive ways and thereby provide superior value to customers (Teece et al., 1997). It is this superior knowledge that enables organizations to exploit and develop resources, enhance their fundamental ability to compete and allows an organization to develop sustainable competitive advantage and do better than rivals, even if its other resources are not unique. It is the capability that is developed from knowledge and especially context speci®c tacit knowledge that is embedded in complex organizational routines and developed from experience that tends to be unique and dif®cult to imitate. According to Zack (1999) this capability is unique and dif®cult to copy because rivals cannot buy it and, even if it is acquired by rivals, there is a time delay because it needs to be embedded into the organization and it takes time to accumulate the experience to do this. Knowledge held internally is especially strategically valuable because it is tacitly held, speci®c to the organizational context and therefore dif®cult for rivals to copy. Reece (1998) also supports the notion that knowledge can form the basis for sustainable competitive advantage with the argument that the sustainability is derived from the time constraint on rivals learning what the other organization already knows. The big strategic value that organizations can obtain from knowledge and particularly tacit knowledge is derived from the claim that the more an organization knows, the more it can learn and that knowledge is not like other resources which are used up when applied to a business activity (Cohen and Leventhal, 1990). Knowledge can be re-used and new knowledge can be integrated with current knowledge to develop even more valuable knowledge and strategically valuable new insights to improve performance. This valuable synergy will be unique to an organization promoting the creation of knowledge.

References Barney, J. (1995), ``Firm resources and sustained competitive advantage'', Journal of Management, Vol. 17, pp. 99-120.

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