Developing a

Knowledge Strategy

Michael H. Zack

usiness organizations are coming to view knowledge as their most

B valuable and strategic resource. They are realizing that to remain com-
petitive they must explicitly manage their intellectual resources and
capabilities. To this end, many organizations have initiated a range of
knowledge management projects and programs.1 The primary focus of these
efforts has been on developing new applications of information technology to
support the digital capture, storage, retrieval, and distribution of an organiza-
tion’s explicitly documented knowledge.2 A smaller number of organizations,
on the other hand, believe that the most valuable knowledge is the tacit knowl-
edge existing within peoples’ heads, augmented or shared via interpersonal
interaction and social relationships. To build their intellectual capital, those
organizations are utilizing the “social capital” that develops from people inter-
acting repeatedly over time.3 Many are experimenting with new organizational
cultures, forms, and reward systems to enhance those social relationships.4
Technical and organizational initiatives, when aligned and integrated,
can provide a comprehensive infrastructure to support knowledge management
processes. However, while the appropriate infrastructure can enhance an organi-
zation’s ability to create and exploit knowledge, it does not insure that the orga-
nization is making the best investment of its resources or that it is managing the
right knowledge in the right way. How should an organization determine which
efforts are appropriate, or which knowledge should be managed and developed?
My research with more than 25 firms has found that the most impor-
tant context for guiding knowledge management is the firm’s strategy. An

I wish to thank Nicholas Athanassiou, Dr. Arthur DeTore (Director of Strategy and Knowledge Manage-
ment, Lincoln Re), and William Habeck (CEO,TIE Logistics) for their helpful comments.

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 Developing a Knowledge Strategy

organization’s strategic context helps to identify knowledge management initia-

tives that support its purpose or mission, strengthen its competitive position, and
create shareholder value. Intuitively, it makes sense that the firm that knows
more about its customers, products, technologies, markets, and their linkages
should perform better. However, the link between knowledge management and
business strategy, while often talked about, has been widely ignored in practice.5
Many executives are struggling to articulate the relationship between
their organization’s competitive strategy and its intellectual resources and capa-
bilities. They do not have well-developed strategic models that help them to link
knowledge-oriented processes, technologies, and organizational forms to busi-
ness strategy, and they are unsure of how to translate the goal of making their
organizations more intelligent into a strategic course of action. They need a
pragmatic, yet theoretically sound model of what I call knowledge strategy.
This article provides a framework for describing and evaluating an organi-
zation’s knowledge strategy. The framework is illustrated using examples from
five companies representing the spectrum of physical and knowledge-based
products and services (see Figure 1).6
“Image Corp.” is a leading photographic
FIGURE 1 imaging firm manufacturing physical
assembled products such as film and photo-
Products Services processing equipment. Buckman Labs is a
Physical leading manufacturer of specialty chemi-
cals, a physical non-assembled product.
Image
• Assembled Lincoln Re, one of the world’s largest
Corp
life/health reinsurers, provides knowledge-
based products and services. “LeaseCo,” an
Buckman industrial garment and small equipment-
• Non-assembled LeaseCo
Labs leasing firm, provides a service based on
physical products, some requiring assembly.
Lincoln “Big6” is a leading public accounting and
Knowledge- professional services firm, providing knowl-
National Big6
based edge-based services. Together, these com-
Re
panies demonstrate the importance of
knowledge strategy regardless of industrial
sector.

Business Strategy
The strengths, weaknesses, opportunities, and threats (SWOT) frame-
work is perhaps the most well-known approach to defining strategy, having
influenced both practice and research for over 30 years.7 Performing a SWOT
analysis involves describing and analyzing a firm’s internal capabilities—its
strengths and weaknesses—relative to the opportunities and threats of its
competitive environment. Organizations are advised to take strategic actions

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 Developing a Knowledge Strategy

to preserve or sustain strengths, offset weaknesses, avert or mitigate threats, and

capitalize on opportunities. Strategy can be seen as the balancing act between
the external environment (opportunities and threats) and the internal capabili-
ties of the firm (strengths and weaknesses).
Application of the SWOT framework has been dominated over the last 20
years by Porter’s “five-forces” model.8 This model focuses on the external side of
strategy, helping firms analyze the forces in an industry that give rise to opportu-
nities and threats. Industries that are structured so as to enable firms to dictate
terms to suppliers and customers as well as to provide barriers to new entrants
and substitute products are seen as favorable. Strategy becomes a matter of
choosing an appropriate industry and positioning the firm within that industry
according to a generic strategy of either low cost or product differentiation.
While enjoying much popularity (in no small part because it was perhaps
the first attempt to apply solid economic thinking to strategic management in a
practical and understandable way), Porter’s model has come under criticism.9
The main argument is that the model addresses the profitability of industries
rather than individual firms and therefore does not help particular firms to iden-
tify and leverage unique and sustainable advantages. Its underlying economic
theory assumes that the characteristics of particular firms per se do not matter
with regard to profit performance.10 Rather it is the overall pattern of relation-
ships among firms in the industry that makes the difference. If the industry as a
whole is structured properly (i.e., with sufficient barriers and other impediments
to competition), then all firms should realize excess returns.
It turns out, however, that unique characteristics of particular firms
within an industry can make a difference in terms of profit performance.11 To
put balance back into the original notion of business strategy, recent work in
the area of strategic management and economic theory has begun to focus on
the internal side of the equation—the firm’s resources and capabilities.12 This
new perspective is referred to as the resource-based view of the firm.13 Strategic
management models traditionally have defined the firm’s strategy in terms of
its product/market positioning—the products it makes and the markets it serves.
The resource-based approach suggests, however, that firms should position
themselves strategically based on their unique, valuable, and inimitable resources
and capabilities rather than the products and services derived from those capabili-
ties. Resources and capabilities can be thought of as a platform from which the
firm derives various products for various markets.14 Leveraging resources and
capabilities across many markets and products, rather than targeting specific
products for specific markets, becomes the strategic driver. While products and
markets may come and go, resources and capabilities are more enduring. There-
fore, a resource-based strategy provides a more long-term view than the tradi-
tional approach, and one more robust in uncertain and dynamic competitive
environments. Competitive advantage based on resources and capabilities there-
fore is potentially more sustainable than that based solely on product and mar-
ket positioning.

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 Developing a Knowledge Strategy

Knowledge as a Strategic Resource

While having unique access to valuable resources is one way to create
competitive advantage, in some cases either this may not be possible, or com-
petitors may imitate or develop substitutes for those resources. Companies hav-
ing superior knowledge, however, are able to coordinate and combine their
traditional resources and capabilities in new and distinctive ways, providing
more value for their customers than can their competitors.15 That is, by having
superior intellectual resources, an organization can understand how to exploit
and develop their traditional resources better than competitors, even if some
or all of those traditional resources are not unique. Therefore, knowledge can
be considered the most important strategic resource, and the ability to acquire,
integrate, store, share, and apply it the most important capability for building
and sustaining competitive advantage.16 The broadest value proposition, then,
for engaging in knowledge management is that it can enhance the organization’s
fundamental ability to compete.
What is it about knowledge that makes the advantage sustainable?
Knowledge—especially context-specific, tacit knowledge embedded in complex
organizational routines and developed from experience—tends to be unique and
difficult to imitate. Unlike many traditional resources, it is not easily purchased
in the marketplace in a ready-to-use form. To acquire similar knowledge, com-
petitors have to engage in similar experiences. However, acquiring knowledge
through experience takes time, and competitors are limited in how much they
can accelerate their learning merely through greater investment.
LeaseCo, for example, recognized this opportunity by occasionally bidding
aggressively on complex, novel, or unpredictable lease opportunities (e.g., leas-
ing personal computers in 1980) to gain unique and leverageable knowledge
from those experiences, while attempting to prevent its competitors from gain-
ing that same knowledge. LeaseCo realized a double benefit over its competitors,
first by investing in its strategic knowledge platform and second by learning
enough about the particular client to competitively and profitably price leases
for future opportunities with the same client. Often, enough mutual learning
occurred between LeaseCo and its client that the client contracted with LeaseCo
for future leases without going out for competitive bids. In essence, LeaseCo
created a sustainable (or renewable) knowledge-based barrier to competition.
Lincoln Re, as part of its “experimental underwriting” process, similarly invested
in its learning by insuring strategically selected novel and difficult classes of risk
at favorable rates.
Knowledge-based competitive advantage is also sustainable because the
more a firm already knows, the more it can learn.17 Learning opportunities for
an organization that already has a knowledge advantage may be more valuable
than for competitors having similar learning opportunities but starting off know-
ing less.18 For example, Big6 invested heavily in capturing and sharing knowl-
edge about key engagements across the firm so that it could sustain its areas of

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advantage by always building on its latest knowledge, rather than “reinventing

the wheel” while giving its competitors a chance to catch up.
Sustainability may also come from an organization already knowing
something that uniquely complements newly acquired knowledge, which pro-
vides an opportunity for knowledge synergy not available to its competitors.
New knowledge is integrated with existing knowledge to develop unique
insights and create even more valuable knowledge. Organizations should there-
fore seek areas of learning and experimentation that can potentially add value
to their existing knowledge via synergistic combination. For example, Lincoln
Re’s unique (and patented) capability for capturing and distributing medical
risk knowledge via expert systems—above and beyond the knowledge stored
in these systems—enabled it to outperform competitors. Combining newly
acquired risk management knowledge with its “meta-knowledge” (of how to
document, codify, and structure that knowledge) provided Lincoln Re a greater
benefit that either alone. As an additional benefit, by designing its expert system
to function as a generic knowledge platform, Lincoln Re was able to apply it to
additional knowledge domains at essentially no additional cost (except for that
to codify the content knowledge of those new areas), thus providing an
economic advantage for entering new markets.
Sustainability of a knowledge advantage, then, comes from knowing
more about some things than competitors, combined with the time constraints
faced by competitors in acquiring similar knowledge, regardless of how much
they invest to catch up. These examples represent what economists call increasing
returns.19 Unlike traditional physical goods that are consumed as they are used
(providing decreasing returns over time), knowledge provides increasing returns
as it is used. The more it is used, the more valuable it becomes, creating a self-
reinforcing cycle. If an organization can identify areas where its knowledge leads
the competition, and if that unique knowledge can be applied profitably in the
marketplace, it can represent a powerful and sustainable competitive advantage.
Organizations should strive to use their learning experiences to build on
or complement knowledge positions that provide a current or future competitive
advantage. Systematically mapping, categorizing, and benchmarking organiza-
tional knowledge not only can help make knowledge more accessible through-
out an organization, but by using a knowledge map to prioritize and focus its
learning experiences, an organization can create greater leverage for its learning
efforts. It can combine its learning experiences into a “critical learning mass”
around particular strategic areas of knowledge.
For example, LeaseCo proactively searched for opportunities to build
continually on what it knew about leasing formal dress apparel to appearance-
conscious organizations. It became one of the most knowledgeable firms in the
industry regarding this premium market. Buckman Labs took a similar approach
by focusing its learning to maintain and grow its superior knowledge of the
pulp and paper industry. Big6 implemented a computer system that tracked its
employees experiences and formal training and matched their capabilities to the

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 Developing a Knowledge Strategy

knowledge and skills required of its current and future engagements. They
focused their training, assignments, and recruiting on continually building
the knowledge base to support their most strategically important competitive
positions.
While a knowledge advantage may be sustainable, building a defensible
competitive knowledge position internally is a long-term effort, requiring fore-
sight and planning as well as luck. For example, as part of its prospective risk
management process, Lincoln Re has a “early-warning” process in place to mon-
itor research in the medical field for anything that eventually may improve its
mortality and risk management knowledge. Using its unique expertise for trans-
lating commonly available research data into an estimate of actual experience,
Lincoln Re is able to effectively learn about and profitably insure emergent risk
management opportunities sooner than its competitors.
Long lead time explains the attraction of strategic alliances and other
forms of external ventures as potentially quicker means for gaining access to
knowledge. It also explains why the strategic threat from technological disconti-
nuity tends to come from firms outside of or peripheral to an industry.20 New
entrants often enjoy a knowledge base different than that of incumbents, one
which can be applied to the products and services of the industry under attack.
This has been especially evident in industries where analog products are giving
way to digital equivalents. For example, Image Corp. is experiencing a signifi-
cant shift from physical film substrates to digital imaging. Its knowledge base
is built on the science and technology of a physical consumable packaged good.
Digital imaging, on the other hand, requires knowledge of computer systems
and peripherals, imaging software, electronic distribution channels, and an eco-
nomic model entirely different than for consumable physical products. The
strategic challenge for the firm is to develop sufficient knowledge to support a
shift to those new technologies and markets before non-traditional competitors
make significant inroads in those markets. At the same time, it must not aban-
don its years of experience and knowledge about physical imaging that is sup-
porting its core business.
This long learning lead-time or “knowledge friction” highlights the impor-
tance of benchmarking and evaluating the strengths, weaknesses, opportunities,
and threats of an organization’s current knowledge platform and position, as this
knowledge provides the primary opportunity (and constraint) from which to
compete and grow over the near-to-intermediate term. This must, in turn, be
balanced against the organization’s long-term plans for developing its knowledge
platform.

The Knowledge-Strategy Link

The traditional SWOT framework, updated to reflect today’s knowledge-
intensive environment, provides a basis for describing a knowledge strategy. In
essence, firms need to perform a knowledge-based SWOT analysis, mapping their

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 Developing a Knowledge Strategy

knowledge resources and capabilities against their strategic opportunities and

threats to better understand their points of advantage and weakness. They can
use this map to strategically guide their knowledge management efforts, bol-
stering their knowledge advantages and reducing their knowledge weaknesses.
Knowledge strategy, then, can be thought of as balancing knowledge-based
resources and capabilities to the knowledge required for providing products or
services in ways superior to those of competitors. Identifying which knowledge-
based resources and capabilities are valuable, unique, and inimitable as well as
how those resources and capabilities support the firm’s product and market
positions are essential elements of a knowledge strategy.
To explicate the link between strategy and knowledge, an organization
must articulate its strategic intent,21 identify the knowledge required to execute
its intended strategy, and compare that to its actual knowledge, thus revealing
its strategic knowledge gaps.

Linking Knowledge to Strategy

Every firm competes in a particular way—operating within some industry
and adopting a competitive position within that industry. Competitive strategy
may result from an explicit grand decision—the traditional perspective on strat-
egy—or from an accumulation of smaller incremental decisions.22 It may even
be revealed in hindsight, by looking back on actual behaviors and events over
time.23 Regardless of the strategy formation process, organizations have a de
facto strategy that must first be articulated.
Every strategic position is linked to some set of intellectual resources and
capabilities. That is, given what the firm believes it must do to compete, there
are some things it must know and know how to do. The strategic choices that
companies make—regarding technologies, products, services, markets, processes
—have a profound influence on the knowledge, skills, and core competencies
required to compete and excel in an industry.
On the other hand, what a firm does know and knows how to do limits
the ways it can actually compete. The firm, given what it knows, must identify
the best product and market opportunities for exploiting that knowledge. For
example, Buckman Labs competed on value-added services, requiring it to
develop and maintain superior knowledge of how to use its chemicals in various
microbiocidal treatment applications to solve its customers’ problems. In some
markets, Buckman Labs had well-developed knowledge and expertise. In others,
it was more limited. Most importantly, it recognized the difference and managed
and developed its strategic knowledge accordingly.
Lincoln Re competed directly via the high quality of its knowledge about
particular classes of medical risk as well as its knowledge about how to combine
ancillary services into an integrated packaged solution for its clients’ risk man-
agement problems. Lincoln Re, however, knew less about property and casualty
risk than some of its competitors and its competitive strategy reflected this.

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LeaseCo, which specialized in novel and customized leases, had to know more
about the economics of pricing a complex lease than its competitors. LeaseCo
did not know as much as its competitors about low-cost, high-volume produc-
tion or high-volume inventory management. Image Corp. had extensive knowl-
edge and expertise regarding its traditional imaging technologies and products
and how they could best be marketed to consumer and industrial customers.
Their knowledge regarding digital imaging was much less developed, potentially
limiting their ability to compete in that emerging market. Given the strategic
importance of the digital imaging market, they were aggressively moving to
close this gap.
So-called category killers such as Circuit City and Toys ‘R’ Us focus their
retailing knowledge on one product category at the expense of others. In com-
parison, many broad-line retailers, led by Wal-Mart, have taken a different com-
petitive knowledge position. They have come to realize that while they know
some things about retailing tens of thousands of products to the consumer mar-
ket, their suppliers are able to develop a more focused understanding about the
particular products each supplies. Rather than try to be the consumer expert on
every product, these retailers have recognized the limits to what they know and
can know. They are asking their suppliers to take responsibility for understand-
ing consumption habits, practices, needs, and buying patterns and to share that
knowledge with the retailer. The retailer is, in fact, operating as a knowledge
integrator, integrating the knowledge of many suppliers to better serve
consumers.
In each case, an organization’s competitive position created a knowledge
requirement, while its existing knowledge created an opportunity and a con-
straint on selecting viable competitive positions. Success required dynamically
aligning those knowledge-based requirements and capabilities.

A Strategic Framework for Mapping Knowledge

Assessing an organization’s knowledge position requires cataloging its
existing intellectual resources by creating what is commonly called a knowledge
map. Knowledge can be characterized in many ways. Popular taxonomies distin-
guish between tacit and explicit knowledge, general and situated context-specific
knowledge, and individual and collective knowledge.24 Knowledge can also be
categorized by type, including declarative (knowledge about), procedural
(know-how), causal (know-why), conditional (know when), and relational
(know-with). While these distinctions are useful for mapping and managing
knowledge at the process level once a knowledge strategy has been formulated,
our purpose requires a knowledge taxonomy oriented towards strategy and
which reflects the competitive uniqueness of each organization.
Categorizing or describing what a business firm knows and must know
about its industry or competitive position is not easy. Although firms within
particular industries, firms maintaining similar competitive positions, or those
employing similar technologies and other resources often share some common

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 Developing a Knowledge Strategy

knowledge, there are no simple answers regarding what a firm must know to be
competitive—if there were, then there would be no sustainable advantage.
Each company I have worked with has developed an approach to describ-
ing and classifying its strategic or competitive knowledge that is in some ways
unique. In fact, each firm’s general awareness of and orientation to the link
between knowledge and strategy tends to be somewhat unique and may, itself,
represent an advantage. Regardless of how knowledge is categorized based on
content, every firm’s strategic knowledge can be categorized by its ability to sup-
port a competitive position. Specifically, knowledge can be classified according to
whether it is core, advanced, or innovative.
Core knowledge is that minimum scope and level of knowledge required
just to “play the game.” Having that level of knowledge and capability will not
assure the long-term competitive viability of a firm, but does present a basic
industry knowledge barrier to entry. Core knowledge tends to be commonly
held by members of an industry and therefore provides little advantage other
than over nonmembers.
Advanced knowledge enables a firm to be competitively viable. The firm
may have generally the same level, scope, or quality of knowledge as its com-
petitors although the specific knowledge content will often vary among com-
petitors, enabling knowledge differentiation. Firms may chose to compete on
knowledge head-on in the same strategic position, hoping to know more than a
competitor. They instead may chose to compete for that position by differentiat-
ing their knowledge. LeaseCo, for example, competed with others for the cus-
tom lease market but used their knowledge of lease pricing and equipment
sourcing rather than garment finishing or equipment integration to compete for
that position. Buckman Labs competed in certain markets based on its superior
knowledge of how to apply its chemicals to solve the process treatment problems
of its customers. Big6 knew how to deliver accounting, tax, and consulting solu-
tions of a quality sufficient to enable it to attract and retain high-quality clients.
Innovative knowledge is that knowledge that enables a firm to lead its
industry and competitors and to significantly differentiate itself from its competi-
tors. Innovative knowledge often enables a firm to change the rules of the game
itself.25 LeaseCo, based on its extensive knowledge of cost accounting and lease
economics, challenged the traditional way leases were priced in its industry. Not
only did this confuse the competition to LeaseCo’s advantage, but it also allowed
LeaseCo to identify many profitable opportunities passed over by competitors
while avoiding potentially unprofitable ventures. Lincoln Re developed highly
innovative knowledge not only about assessing risk, but also about how to cod-
ify, structure, distribute, leverage, and market that knowledge using expert sys-
tems. Big6 developed expertise in particular industries and services that clearly
led its competitors. Buckman Labs developed innovative knowledge for deliver-
ing more comprehensive solutions to its customers to help increase their overall
processing plant efficiency and quality.

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 Developing a Knowledge Strategy

FIGURE 2

Knowledge is not static and what is innovative knowledge today will ulti-
mately become the core knowledge of tomorrow. Thus defending and growing a
competitive position requires continual learning and knowledge acquisition. The
ability of an organization to learn, accumulate knowledge from its experiences,
and reapply that knowledge is itself a skill or competence that—beyond the core
competencies directly related to delivering its product or service—may provide
strategic advantage.
Although knowledge is dynamic, this strategic knowledge framework
(Figure 2) does offer the ability to take a snapshot of where the firm is today
vis-à-vis its desired strategic knowledge profile (to assess its internal knowledge
gaps) and vis-à-vis its competitors (to assess its external knowledge gaps). Addi-
tionally, it can be used to plot the historical path and future trajectory of the
firm’s knowledge. The framework may be applied by area of competency or,
taking a more traditional strategic perspective, by SBU, division, product line,
function, or market position. Regardless of the particular way each firm catego-
rizes its knowledge, each category can be further broken down into elements
that are core, competitive, or innovative to produce a strategic knowledge map.

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Gap Analysis
Having mapped the firm’s competitive knowledge position, an organiza-
tion can perform a gap analysis. The gap between what a firm must do to com-
pete and what it actually is doing represents a strategic gap. Addressing this gap is
the stuff of traditional strategic management. As suggested by the SWOT frame-
work, strengths and weaknesses represent what the firm can do, opportunities
and threats dictate what it must do. Strategy, then, represents how the firm bal-
ances its competitive “cans” and “musts” to develop and protect its strategic
niche.
At the same time, underlying a firm’s strategic gap is a potential knowledge
gap. That is, given a gap between what a firm must do to compete and what it
can do, there may also be a gap between what the firm must know to execute its
strategy and what it does know. Based on a strategic knowledge and capabilities
map, an organization can identify the extent to which its various categories of
existing knowledge are in alignment with its strategic requirements. The result
is a set of potential knowledge gaps. In some cases, an organization might even
know more than needed to support its competitive position. Nevertheless, a
knowledge strategy must address any possible misalignments. The greater the
number, variety, or size of the current and future knowledge gaps, and the more
volatile the knowledge base because of a dynamic or uncertain competitive envi-
ronment, the more aggressive the knowledge strategy required. A firm not capa-
ble of executing its intended or required strategy must either align its strategy
with its capabilities or acquire the capabilities to execute its strategy.
Having performed a strategic evaluation of its knowledge-based resources
and capabilities, an organization can determine which knowledge should be
developed or acquired. To give knowledge management a strategic focus, the
firm’s knowledge management initiatives should be directed toward closing
this strategic knowledge gap. The important issue is that the knowledge gap
is directly derived from and aligned with the strategic gap (see Figure 3). This
simultaneous alignment of strategy and knowledge is a crucial element of a
firm’s knowledge strategy. In many firms, knowledge management efforts are
divorced from strategic planing and execution. However, having an appropriate
knowledge strategy in place is essential for assuring that knowledge manage-
ment efforts are being driven by and are supporting the firm’s competitive strat-
egy. For example, to insure alignment, Lincoln Re placed responsibility for
knowledge management and corporate strategy within the same senior execu-
tive position.

A Knowledge Strategy Framework

A knowledge strategy, paralleling the traditional SWOT analysis, describes
the overall approach an organization intends to take to align its knowledge
resources and capabilities to the intellectual requirements of its strategy. It can
be described along two dimensions reflecting its degree of aggressiveness. The

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 Developing a Knowledge Strategy

FIGURE 3

first addresses the degree to which an organization needs to increase its knowl-
edge in a particular area vs. the opportunity it may have to leverage existing but
underutilized knowledge resources—that is, the extent to which the firm is pri-
marily a creator vs. user of knowledge. The second dimension addresses whether
the primary sources of knowledge are internal or external. Together these char-
acteristics help a firm to describe and evaluate its current and desired knowledge
strategy.26

Exploration vs. Exploitation

To the extent that an organization finds itself to be at a lower level of
knowledge than required to execute its strategy or to defend its position, it
requires a high level of knowledge processing to close its internal knowledge gap.
To the extent that many competitors in an organization’s industry are operating
at higher levels of knowledge across many more knowledge positions, a high
level of knowledge processing is required to close the external competitive
knowledge gap. To the extent that knowledge in the industry is changing
rapidly, the organization may need to be creating new knowledge just to keep
pace. In these situations, the organization’s requirement is to be an explorer—
a creator or acquirer of the knowledge required to become and to remain com-
petitive in its strategic position.
On the other hand, when knowledge resources and capabilities signifi-
cantly exceed the requirements of a competitive position, the organization has
the opportunity to further exploit that knowledge platform, possibly within or
across other competitive niches. In this situation, the organization’s requirement

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is to be a knowledge exploiter. For example, Dow Chemicals screened its portfolio

of 29,000 patents to see which should be exploited (and by whom), which could
be licensed, and which should be abandoned. This generated $125 million in
licensing income and $40 million in savings over 10 years.27 Big6 aggressively
sought to sell additional engagements leveraging its experiences, and Lincoln
Re aggressively sought reinsurance deals that exploited its existing knowledge
regarding insurance risk, service integration, and deal making.
Exploitation and exploration are not mutually exclusive. An organization
may need to develop one area of knowledge while simultaneously exploiting
another. Ultimately, the ideal for most companies is to maintain a balance
between exploration and exploitation within all areas of strategic knowledge.
Exploration provides the knowledge capital to propel the company into new
niches while maintaining the viability of existing ones. Exploitation of that
knowledge provides the financial capital to fuel successive rounds of innovation
and exploration. Exploration without exploitation cannot be economically sus-
tained over the long run unless it is subsidized or directly generates a revenue
stream (e.g., a research institute). Exploitation without exploration will
ultimately result in trying to pump from a dry well. Eventually knowledge
becomes stale or obsolete. Those companies that closely integrate knowledge
exploration and exploitation I refer to as innovators.
Firms that are extremely efficient in exploiting others’ knowledge may
enjoy some long-term success as an exploiter. However, given the difficulty
in transferring knowledge, these cases are rare. Success in those cases usually
requires competing against firms whose ability to exploit is not well developed
and who make their tacit knowledge accessible to outsiders. For example, recall
Apple’s exploitation of Xerox’s development of the personal computer graphical
user interface. The value from knowledge exploitation may be greater when
done by the firm creating it or via some form of joint venture between explorer
and exploiter firms.
Exploration and exploitation typically occur in different parts of an orga-
nization and are often separated temporally and culturally as well as organiza-
tionally. Balancing exploitation and exploration requires a well-developed
internal knowledge transfer capability between functions such as R&D, sales,
marketing, manufacturing, and customer service. This requires a culture, reward
systems, and communication networks that support the flow of knowledge and
a well-functioning organizational memory (both as embedded in humans and
in technology) to transcend the time delays between developing and applying
knowledge as well as between applying and developing the next round of
knowledge. This knowledge transfer and integration capability is itself strategic.
The creation of unique, strategic knowledge takes time, forcing the firm
to balance short- and long-term strategic resource decisions. The firm therefore
must determine whether its efforts are best focused on longer-term knowledge
exploration, shorter-term exploitation, or both. It must then balance its knowl-
edge-processing resources and efforts accordingly. For example, Image Corp.

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focused its recruiting and training on the knowledge required to support its
future digital products and services. It also implemented computer-based con-
ferencing technologies and created opportunities for face-to-face interaction
to support knowledge transfer between its few highly knowledgeable technical,
sales, and marketing people in the growing digital products division and their
counterparts in traditional products divisions. It did not, however, abandon its
existing analog imaging niche but implemented a computer-based knowledge
sharing capability among its sales and marketing personnel to exploit as much
of their existing knowledge about selling and marketing traditional products as
possible.
It is not enough for an organization merely to engage in both exploration
and exploitation. More importantly, those activities must be linked and coordi-
nated so that they can reinforce one another. For example, Big6 turned its learn-
ing experiences first into semi-structured documents that could be accessed and
reused by others immediately and eventually into formal, structured methods
for efficiently delivering the service. They established organizational units hav-
ing explicit responsibility for this function. In this way, they actively managed
the exploitation of their exploratory knowledge. New insights gained in the field
from reapplying and adapting this knowledge to different contexts were subse-
quently captured and integrated into existing methods, closing the exploitation/
exploration loop. Lincoln Re explored new areas of risk via its prospective R&D
process, using the knowledge gained to create new risk management products
and services. Those products generated a loss-experience history that cold be
monitored and analyzed to create additional learning, closing the loop. Image
Corp. and Buckman Labs linked their R&D personnel and technical specialists to
their field-based marketing, sales, and technical support staffs to insure that new
products were developed with the customers’ needs in mind and that customer
needs were quickly and accurately communicated to the product development
group. New knowledge and insights were therefore more effectively exploited
in the marketplace in the form of better products, while interaction with the
customers generated knowledge to guide future developments. LeaseCo aggres-
sively attempted to explore knowledge via taking on novel leases and to exploit
that learning across its other clients and markets.

Internal vs. External Knowledge

A second way to orient a knowledge strategy is to describe the firm’s pri-
mary sources of knowledge.28 Knowledge sources may lie within or outside the
firm. Internal knowledge may be resident within peoples’ heads; embedded in
behaviors, procedures, software and equipment; recorded in various documents;
or stored in databases and online repositories. Common sources of external
knowledge include publications, universities, government agencies, professional
associations, personal relations, consultants, vendors, knowledge brokers, and
interorganizational alliances.
Knowledge generated within the firm is especially valuable because it
tends to be unique, specific, and tacitly held. It is therefore more difficult for

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 Developing a Knowledge Strategy

competitors to imitate, making it strategically valuable. Knowledge from outside

the firm—while more abstract, more costly to obtain, and more widely available
to competitors—can provide for fresh thinking and a context for benchmarking
internal knowledge. Commonly available external knowledge combined with
unique internal knowledge can still result in new and unique insights. Buckman
labs, for example, maintains close links to universities, taking the generic body
of microbiological knowledge and reapplying it within the specific context of its
own products and customer applications. Lincoln Re has similarly obtained and
reapplied knowledge through its university ties. Joint ventures provide an
important means to obtain external knowledge that is tacit, has not been widely
distributed, and therefore retains its competitive value.29 The biotechnology
industry, for example, thrives on the collaboration that occurs among firms.30
Many externally oriented organizations create opportunities for ongoing
dialog with their customers to exchange knowledge. These mechanisms range
in formality and include user groups, joint ventures, beta-testing, web sites, elec-
tronic mail, toll-free numbers, customer care centers, customer advisory boards,
conferences, and social gatherings. For example, Lincoln Re maintains strong
relationships with its clients through a company-sponsored user group. An advi-
sory council and periodic conferences also provide many opportunities for Lin-
coln Re to gain access to valuable external customer knowledge and to share its
internal knowledge regarding its products and markets. Often, firms use com-
puter-based conferencing systems to supplement face-to-face interaction. They
also are creating electronically based repositories to be used for collecting exter-
nal knowledge, both informal and formal. These materials include papers and
presentation slides from conferences, comments and observations acquired in
the field, knowledge picked up at trade shows, and lessons learned from interac-
tions with customers. Buckman Labs is quite well-known for their worldwide
online conferencing capability and their efforts to build customer-focused
knowledge repositories.

Aggressive vs. Conservative

Combining the knowledge exploitation vs. exploration orientation of
the firm with its internally acquired vs. externally acquired orientation towards
knowledge sources provides a more complete picture of a firm’s knowledge
strategy (Figure 4). Firms oriented toward exploiting internal knowledge exhibit
the most conservative knowledge strategy, while unbounded innovators (those
who closely integrate knowledge exploration and exploitation without regard
to organizational boundaries) represent the most aggressive strategy. In knowl-
edge-intensive industries, firms that pursue an aggressive knowledge strategy
tend to outperform those competitors who pursue less aggressive knowledge
strategies over time.31
In cases where a firm’s knowledge significantly lags its competitors or the
firm is defending a knowledge position, an aggressive knowledge strategy will be
required to remain viable.32 Buckman Labs, for example, prioritized its knowl-
edge management efforts by focusing on several markets where its treatment

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 Developing a Knowledge Strategy

FIGURE 4

Unbounded Aggressive

External

Internal Conservative

Exploiter Explorer Innovator

applications knowledge lagged its current or potential competitors, although to

maintain existing advantages it continually created and renewed its knowledge
of all markets. It took a more aggressive knowledge strategy in those markets
than in markets where its knowledge led the industry. LeaseCo claimed the pre-
mium, upscale-garment, service-intensive market as a competitive niche and
aggressively sought to learn as much as possible about serving that market.
Image Corp. found itself needing to aggressively acquire knowledge about digital
imaging to ward off both traditional and new competitors. Lincoln Re staked out
superior knowledge of risk underwriting and pricing as well as how to integrate
multiple services into innovative and comprehensive risk management solu-
tions, and it put in place an aggressive knowledge strategy to maintain this
competitive differentiation.

Industry Learning Cycles

Knowledge strategy cannot be formulated in isolation of what competi-
tors are doing. Comparing aggressive and conservative strategies, then, also
requires looking at the overall flow of industry knowledge. At the industry level,
there is the potential for knowledge to diffuse out from the firm and into the
industry at large where it can be absorbed by competitors. At the same time, a
similar process may be occurring with other firms in the industry, creating the
opportunity for the firm to absorb knowledge from the industry.
Firms taking a conservative strategy view knowledge primarily as an
proprietary asset to be protected. They attempt to create barriers to its diffusion
or transfer outside of the firm. Aggressive firms, however, take a Shumpeterian

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 Developing a Knowledge Strategy

view of knowledge as an ongoing process of creative destruction. Rather than

wait for a competitor to destroy the value of their knowledge, these firms
aggressively seek to obsolete their own knowledge, always staying one step
ahead of the competition. Aggressive firms are less concerned with erecting bar-
riers to the diffusion or transfer of knowledge, rather they protect their knowl-
edge resources by recruiting and developing intelligent, loyal, and committed
employees and support them with a culture of learning, commitment, and col-
laboration. The firm’s advantage comes from being able to absorb external
knowledge and integrate it with their internal knowledge to develop new
insights faster than the competition. For example, Lincoln Re’s competitors
were often able to acquire and imitate the underwriting guidelines Lincoln Re
provided its clients. However, they were not able to replicate Lincoln Re’s skilled
medical and actuarial researchers, their deep understanding of how the medical
research related to managing and pricing risk, and their unique process for
experimenting with that publicly available research to improve and expand
their existing knowledge.
The strategic knowledge environment of an industry can be viewed as the
sum of the interactions among the knowledge strategies of the individual firms
in the industry. In industries with many firms pursuing conservative knowledge
strategies, knowledge leaks into the industry slowly and the opportunities to
learn from the industry at large may be limited. In industries with many aggres-
sive firms, knowledge flows between individual firms and the industry at large
relatively quickly. Only those firms with the best learning capability and the
greatest capacity for absorbing external knowledge will survive. Lincoln Re,
Buckman, Big6, and Image Corp. were all operating in industries where knowl-
edge was changing rapidly enough that an aggressive strategy was needed just to
keep up with the pace of change. Buckman was faced with adding service exper-
tise to its product and manufacturing knowledge. Lincoln Re and Big6 were
selling their knowledge directly, transferring it out of the organization at a price.
This opened the way for diffusion among competitors and further drove the
need to aggressively and continually learn and develop new knowledge.

Positioning
Knowledge can profoundly change the way an organization positions
itself in its industry and in doing so, can radically change the organization itself.
Buckman Labs exemplified this in their shift from selling chemical products to
providing broad microbiocidal treatment solutions. Lincoln Re similarly reposi-
tioned themselves from selling reinsurance to selling their knowledge in the
form of comprehensive risk management solutions. The case of Bay State Ship-
pers provides an even more profound example. Originally a freight forwarder
(a “travel agent for freight”), Bay State took responsibility for physically routing
a shipment from its point of origin to its intended destination, potentially via
several modes of transportation (e.g., truck, rail, ship). Using satellite systems,
barcodes, and other information technologies, Bay State created the ability to

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 Developing a Knowledge Strategy

track a package throughout its multi-modal trip, functioning as “information

central.” While this tracking data was useful to customers, Bay State found a
way to add significantly more value while at the same time repositioning them-
selves from freight handlers to knowledge brokers. Bay State was sitting on a
huge amount of transaction data describing point-to-point travel times for vari-
ous routings and modalities. By analyzing this data and combining it with their
employees’ experience, they learned how to predict shipment transit times for
particular routes and modalities, and they were able to learn about travel pat-
terns in great detail. For example, they might find that particular goods shipped
by train through a certain part of Iowa always ran into delays at particular
freight yard on Fridays. They combined this knowledge with their ability to track
shipments in real time and to create an early warning system for customers.
Customers could list their shipments on a computer screen. Shipments high-
lighted in green indicated expected on time delivery. Yellow indicated the freight
was running behind forecasted time. If red, the shipment was expected to arrive
late. Customers could now plan and react more intelligently. Beyond this freight
control capability, Bay State was able to use their routing knowledge to recom-
mend the most efficient and effective routing for the customer’s needs, helping
them to avoid delays in the first place. Bay State used its superior knowledge to
carve out a significant competitive advantage. In fact, they (like American Air-
lines and its Sabre reservation system, and Lincoln Re and its Life Underwriting
System) eventually saw enough value in the knowledge-based routing system
to create a company to sell the system.33

Conclusion
Knowledge is the fundamental basis of competition. Competing success-
fully on knowledge requires either aligning strategy to what the organization
knows or developing the knowledge and capabilities needed to support a desired
strategy. Organizations must strategically assess their knowledge resources and
capabilities, and they need to broadly conceptualize their knowledge strategy to
address any gaps. A summary of the process is outlined in Table 1. An organiza-
tion’s knowledge strategy must then be translated into an organizational and
technical architecture to support knowledge creation, management, and utiliza-
tion processes for closing those gaps.34
If knowledge management is to take hold rather than become merely
a passing fad, it will have to be solidly linked to the creation of economic value
and competitive advantage. This can be accomplished by grounding knowledge
management within the context of business strategy. Given the state of the art in
knowledge management, firms just starting to build a knowledge management
infrastructure are not far behind their more established rivals. By developing the
proper strategic grounding, they will be able to focus and prioritize their invest-
ments in knowledge management and come out ahead of competitors who have
not grounded their efforts in strategy.

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 Developing a Knowledge Strategy

TABLE 1.

Step Key Question Action

1 How do you want to play the game? Articulate desired or intended strategy
2 What do you need to know? Articulate strategy fi knowledge link

3 What do you know? Create internal knowledge map

4 What’s your internal knowledge gap? Compare what you need to know to what
you do know
5 What do your competitors know? Create external (competitor/industry)
knowledge map

6 What’s your external knowledge gap? Compare what you know to what your
competitors know
7 What is your learning cycle? Assess your dynamic learning capabilities and
intentions

8 What are your competitors’ and industry Assess your industry’s and competitors’
learning cycles and capabilities dynamic learning capabilities and intentions
9 What is your learning gap? Compare your dynamic learning capabilities to
those of your competitors and your industry

10 What’s your internal strategic gap? Assess how your internal knowledge gap
affects your current strategy
11 What’s your external strategic gap? Assess how your external knowledge gap
affects your current strategy

12 What’s your industry cycle strategic gap? Assess how your dynamic learning gap affects
your future strategy
13 What’s your new current and future Determine if and how your knowledge and
strategy? learning gaps require a revision in strategy

14 What’s your knowledge strategy? Determine how aggressive you will be to

close your knowledge gaps
— regarding exploration vs. exploitation
— regarding internal vs. external sources

Notes
1. For a good overview of knowledge management, see T. Davenport and L. Prusak,
Working Knowledge (Cambridge, MA: Harvard Business School Press, 1998).
2. For example, see T. Davenport, S. Jarvenpaa, and M. Beers, “Improving Knowl-
edge Work Processes,” Sloan Management Review, 37/4 (Summer 1996): 53-66;
P. Goodman and E. Darr, “Exchanging Best Practices Through Computer-Aided
Systems,” The Academy of Management Executive, 10/2 (1996): 7-19.
3. J. Nahapiet and S. Ghoshal, “Social Capital, Intellectual Capital, and the Organi-
zational Advantage,” Academy of Management Review, 23/2 (1998): 242-267.
4. J.B. Quinn, P. Anderson, and S. Finkelstein, “Leveraging Intellect,” Academy of
Management Executive, 10/3 (1996): 7-27.

CALIFORNIA MANAGEMENT REVIEW VOL. 41, NO. 3 SPRING 1999 143

 Developing a Knowledge Strategy

5. For example, strategy was not identified as a motivating factor or key evaluation
criterion regarding knowledge management efforts in a field study of 31 projects
in 24 companies [T. Davenport, D.W. De Long, and M.C. Beers, “Successful
Knowledge Management Projects,” Sloan Management Review, 39/2 (1998): 43-58],
a survey of 431 U.S. and European companies [R. Ruggles, “The State of the
Notion: Knowledge Management in Practice,” California Management Review, 40/3
(Spring 1998): 80-89], or a survey of 100 U.S. and European companies [D.E.
Leidner, panel presentation, Organization and Information Cultures in Knowledge
Management Initiatives, 6th European Conference on Information Systems, Aix-
en-Provence, June 1998].
6. Image Corp., LeaseCo, and Big6 are pseudonyms.
7. K.R. Andrews, The Concept of Corporate Strategy (Homewood, IL: Dow-Jones Irwin,
1971).
8. M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors
(New York, NY: Free Press, 1980).
9. D.J. Teece, “Economic Analysis and Strategic Management,” California Management
Review, 26/3 (Spring 1984): 87-110; J. B. Barney, “Firm Resources and Sustained
Competitive Advantage,” Journal of Management, 17 (1991): 99-120.
10. K.R. Connor, “A Historical Comparison of Resource-based Theory and Five
Schools of Thought within Industrial Organization Economics: Do We Have a New
Theory of the Firm?” Journal of Management, 17 (1991): 121-154.
11. R. Nelson, “Why Do Firms Differ and Does it Matter?” Strategic Management
Journal, 12 (Winter 1991, Special Issue): 61-74; A.M. McGahan and M.E. Porter,
“How Much Does Industry Matter, Really?” Strategic Management Journal, 18
(1997): 15-30; R.P. Rumelt, “How Much Does Industry Matter?” Strategic Manage-
ment Journal, 12/3 (1991): 167-185.
12. While many authors distinguish (often not consistently) between capabilities and
competences, the term capabilities as used here is meant to include both.
13. J.B. Barney, “The Resource-Based Theory of the Firm,” Organization Science, 7/5
(September/October 1996): 469-476; D.J. Collis and C. A. Montgomery, “Com-
peting on Resources: Strategy in the 1990s,” Harvard Business Review, 73/4 (July/
August, 1995): 118-128; R. M. Grant, “The Resource-Based Theory of Competi-
tive Advantage: Implications for Strategy Formulation,” California Management
Review, 33/3 (Spring 1991): 114-135; C. K. Prahalad and G. Hamel, “The Core
Competence of the Corporation,” Harvard Business Review, 68/3 (May/June 1990):
79-91.
14. B. Kogut and N. Kulatilaka, “Options Thinking and Platform Investments: Invest-
ing in Opportunity,” California Management Review, 36/2 (Winter 1994): 52-71.
15. E.T. Penrose, The Theory of The Growth of the Firm (White Plains, NY: M.E. Sharpe,
Inc., U.S. edition,1980), pp. 76-80; P. M. Romer, “Beyond the Knowledge
Worker,” World Link, Davos ‘95, January/February 1995; D.J. Teece, G. Pisano,
and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Man-
agement Journal, 18/7 (1997): 509-533.
16. R.M. Grant, “Prospering in Dynamically Competitive Environments: Organiza-
tional Capability as Knowledge Integration,” Organization Science, 7/4 (1996):
375-387; B. Kogut and U. Zander, “Knowledge of the Firm, Combinative Capabili-
ties, and the Replication of Technology,” Organization Science, 3/3 (August 1992):
383-397; Penrose, op. cit.; J.-C. Spender, “Organizational Knowledge, Collective
Practice and Penrose Rents,” International Business Review, 3/4 (1994): 353-367;
Teece, Pisano, and Shuen, op. cit.; S.G. Winter, “Knowledge and Competence
as Strategic Assets,” in David J. Teece, ed., The Competitive Challenge: Strategies for
Industrial Innovation and Renewal (Cambridge, MA: Ballinger Publishing Company,
1987), Chapter 8, pp.159-184.

144 CALIFORNIA MANAGEMENT REVIEW VOL. 41, NO. 3 SPRING 1999

 Developing a Knowledge Strategy

17. W. Cohen, and D. Leventhal, “ Absorptive Capacity: A New Perspective on Learn-

ing and Innovation, Administrative Science Quarterly, 35 (1990): 128-152.
18. D.K. Goldstein and M.H. Zack, “The Impact of Marketing Information Supply on
Product Managers: An Organizational Information Processing Perspective,” Office,
Technology and People, 4/4 (June 1989): 313-336.
19. Romer, op. cit.; D.J. Teece, “Capturing Value from Knowledge Assets: The New
Economy, Markets for Know-how, and Intangible Assets,” California Management
Review, 40/3 (Spring 1998): 55-79.
20. J.M. Utterback, Mastering the Dynamics of Innovation: How Companies Can Seize
Opportunities in the Face of Technological Change (Boston, MA: Harvard Business
School Press, 1994).
21. G. Hamel and C.K. Prahalad, “Strategic Intent,” Harvard Business Review, 67/3
(May/June 1989): 63-76.
22. J.B. Quinn, Strategies for Change: Logical Incrementalism (Homewood, IL: Irwin,
1980).
23. H. Mintzberg, “The Fall and Rise of Strategic Planning,” Harvard Business Review,
72/1 (January/February 1994):107-114.; K. E. Weick, “Substitutes for Strategy,”
in D.J. Teece, ed., The Competitive Challenge: Strategies for Industrial Innovation and
Renewal (Cambridge, MA: Ballinger Publishing Co., 1987), pp. 221-233.
24. H. Demsetz, “The Theory of the Firm Revisited,” Journal of Law, Economics and
Organization, 4/1 (Spring 1988): 141-161; M. Polyani, The Tacit Dimension (Garden
City, NY: Doubleday, 1966), J.-C. Spender, “Organizational Knowledge, Learning
and Memory: Three Concepts in Search of a Theory,” Journal of Organizational
Change Management, 9/1 (1996): 63-78.
25. C. Markides, “Strategic Innovation in Established Companies,” Sloan Management
Review, 39/3 (1998): 31-42.
26. P. Bierly, and A. Chakrabarti, “Generic Knowledge Strategies in the U.S. Pharma-
ceutical Industry,” Strategic Management Journal, 17 (Winter 1996, Special Issue):
123-135; J.G. March, “Exploration and Exploitation in Organizational Learning,”
Organization Science, 2/1 (1991): 71-87.
27. D. Cohen, “Toward a Knowledge Context: Report on the First Annual U.C. Ber-
keley Forum on Knowledge and the Firm,” California Management Review, 40/3
(Spring 1998): 22-39.
28. Bierly and Chakrabarti, op. cit.
29. J. Badaracco, Jr., The Knowledge Link: How Firms Compete Through Strategic Alliances
(Boston, MA: Harvard Business School Press, 1991).
30. W.W. Powell, “Learning from Collaboration: Knowledge and Networks in the
Biotechnology and Pharmaceutical Industries,” California Management Review, 40/3
(Spring 1998): 228-240.
31. Bierly and Chakrabarti, op. cit.
32. L. Kim, “Crisis Construction and Organizational Learning: Capability Building in
Catching-up at Hyundai Motor,” Organization Science, 9/4 (1998): 506-521.
33. In 1992, Bay State Shippers spun off their software product, COMMAND, into
Tie Logistics, Inc. In 1993, Tie Logistics won the Computerworld Smithsonian
Transportation Award for innovative use of information technology in transporta-
tion, and COMMAND was made part of the permanent Information Age exhibit
at the Smithsonian National Museum of American History. C.H. Robinson
Worldwide, Inc acquired Bay State in 1994.
34. For a good discussion, see Davenport and Prusak, op. cit.; M.H. Zack, “An
Architecture for Managing Explicated Knowledge,” Sloan Management Review
(forthcoming).

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