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 20th 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.

CompetitivePositioning Approach
This school of thought is dominated by the work of Michael Porter (1980, 1985). Porter
suggests examining an organisations 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 companys 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 organisations 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 businesss 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.
Figure 1 provides a model for the analysis of competences and core competences
combining the competitive-positioning 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 organisations ability to stay ahead.

Knowledge-Based Approach
This school of 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
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 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, theoriesin-action, skills, equipment, processes and heuristics of the firms 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)

Tacit knowledge is sometimes called implicit knowledge.

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.
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 value-adding 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 companys 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 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 todays 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
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 knowledge-enabling factor,
but not the source of competitive advantage. Moreover, the three 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 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.

References
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