Strategic thinking and stategically important capability for business organisations

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2.2.1 Introduction

Today, strategic thinking considers knowledge as perhaps the most strategically important resource and learning as the most strategically important capability for business organisations. Organisations are realising that in order to remain competitive, they must carefully manage their intellectual resources and capabilities. To this end, many organisations have initiated a range of knowledge management projects and programmes.

However, most of the initiatives, which are being undertaken to develop and exploit organisational knowledge, are not explicitly linked to or framed by the organisations business strategy. Therefore, most of these ad-hoc Knowledge Management initiatives address only a small part of the organisation's knowledge needs while also ignoring links between business strategy and knowledge. While many managers intuitively believe that strategic advantage can come from knowing more than competitors, they are unable to explicitly articulate the link between knowledge and strategy.

The following text tries to present managers with a practical framework, which helps to link their business strategy with a knowledge management strategy. This is done by following a new approach to the traditional SWOT analysis. In brief, readers will see that in order to build an effective business strategy the company first needs to identify its current strategic position and then it needs to decide where its strategy should be. The current strategic position can be linked to a certain level of knowledge and in order to reach the desired strategic position, a certain knowledge gap (internal or external) should be bridged. This is the knowledge-strategy link - i.e. to decide which knowledge the company needs in order to reach the desired strategic position.

To understand this chapter, readers would benefit by being familiar with fundamental concepts and terminology of business strategy such as SWOT methodology, competitive advantage, etc.

2.2.2 The Need to link Strategy with Knowledge

In recent years, interest in knowledge management has grown rapidly resulting in several Knowledge Management initiatives, projects and investments. However, these initiatives typically originated with individual KM enthusiasts or small KM research groups without any strategic management views. The reason that these teams don't start with strategy is because people typically involved with strategy don't interact at all with those involved in KM (nor do they understand much about KM) and vice versa.?>


Zack [1] suggests that in order to link knowledge with strategic advantage, we need to understand and articulate those particular sources of advantage that come from using knowledge as a strategic resource. Only then can KM be considered as a strategic discipline. Zack provides the following definition of strategic knowledge management:


Strategic Knowledge Management: If the application of some specific body of knowledge can be shown to create or sustain a competitive advantage by enabling an organisation to better formulate and execute its competitive strategy then that knowledge is a strategic resource. If KM is applied to the care and feeding of that strategic knowledge, then KM is "strategic" because it directly supports the competitive strategy of the organisation.


This approach starts with business strategy and then considers knowledge requirements during a competitive analysis. Finally Knowledge Management is introduced in order to address the knowledge requirements. This is considerably different to an approach, which starts with KM and works backwards trying to identify if KM has any effect on business strategy. The latter, is an incorrect approach or at least an approach that cannot be considered as strategic knowledge management because it's starting point lacks the strategy-knowledge link. This is the reason why the great majority of all leading KM researchers and practitioners such as Nonaka, Wig, ?>Davenport, etc identify top management commitment as the most important success factor for KM implementation.

2.2.3 The Knowledge-Strategy Link

The best place to begin assessing strategy is with a SWOT framework (Andrews, 1971) because it is perhaps the best-known approach to defining strategy, having influenced practise for over 30 years. Performing a SWOT analysis involves describing and analysing a firm's internal capabilities - its Strengths and Weaknesses - relative to Opportunities and Threats posed by its competitive environment.?


Strategy can be seen as the means by which an organisation balances its internal strengths and weaknesses (internal capabilities) with its external opportunities & threats (external environment).


In an effort to link strategy with knowledge, Zack aims to develop an integrated framework for strategy development, by combining two different strategic views into a SWOT framework. They are:


·         The new Resource Based View where a firm's success depends on how well the firm, which is seen (internally) as a platform of resources and capabilities, co-ordinates its knowledge (resource) and learning efforts (capabilities).

·         The other view is Porter's traditional strategy model, which is focused on the competitive environment and industry structure (external to the firm). Here, a firm only succeeds if it co-ordinates its products and services to specific customer markets more effectively than its competitors.




Figure 2.1(4): The K-SWOT framework. Source: M. Zack (1999)

2.2.4 Combined approach of Porters Five Forces Model & the Resource Based View (R.B.V) of a firm

The first model that dominated strategic thinking over the last 20 years was Porter's "five forces'' model. This traditional strategic management models defines the firm's strategy in terms of its product / market positioning, i.e. the products it makes and the market it serves. This model is mainly focused on the external impact on strategy development and it helps firms to analyze those forces in an industry, which give rise to opportunities and threats. As a result, the dominant strategy became of matter of choosing an appropriate industry and positioning the firm within that industry according the following five forces: ?>


New entrants

Supplier bargaining power

Customer bargaining power

Threat of substitute products or services

Traditional intra-industry rivalry


Although Porters model enjoyed popularity mainly because it was the first attempt to apply solid economic thinking to strategic management in a practical and understandable way, it has come under criticism [4]. The main argument is that the model addresses the profitability of the industries rather than individual firms and therefore does not help particular firms to identify and leverage unique and therefore sustainable advantages. However, in the knowledge economy, it turns out that unique characteristics of particular firms within the industry can make a difference in terms of profit performance [5] and value creation.

Recent work in the area of strategic management and economic theory has begun to focus on the internal side of the equation, i.e. the firm's resources and capabilities [1] and this new perspective is referred to as the resource-based view (RBV) of the firm.


The resource-based approach suggests 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 capabilities. In this way, resources and capabilities can be thought of as platform from which the firm derives various products for various markets. While products and markets may come and go, resources and capabilities are more enduring. Therefore, in this view of strategy, leveraging resources and capabilities across many markets and products, rather than targeting specific products for specific markets  (Porter's model) becomes the strategic driver.


While these two views of strategy may appear to be different they are actually complementary when combined and integrated in a SWOT framework (see figure 2.1.4). The industry structure and position approach helps an organisation to understand its competitive environment while the resource-based view helps it to evaluate its ability to exploit strengths and respond to identified weaknesses.


This is where a practical approach to linking strategy and knowledge can be adopted. The following paragraphs develop the 'Strengths and Weaknesses' side of Knowledge-SWOT (K-SWOT) framework by looking at knowledge and learning capabilities from the internal resource based approach in order to explain why knowledge may be the firm's most strategic resource. The Opportunities and Threats side of the K-SWOT are also examined by looking at knowledge as the basis for describing and evaluating strategic positions within industries and related knowledge-based opportunities and threats.

2.2.5 Strengths & Weaknesses related to Knowledge and Learning: (Internal View of Strategy)

There are three characteristics which knowledge and learning have that make their advantage sustainable and therefore strategic. Knowledge and learning are unique, they are built over time and they are sustainable.


Knowledge tends to provide unique advantages

Most organisations hire from the same labour pools, use similar raw materials have access to the same information technology, energy resources, machinery, plant, etc. but they don't combine and co-ordinate those resources in the same manner. Knowledge, especially context-specific, tacit knowledge that is embedded in complex organisational routines and developed from experience, tends to be unique and difficult to imitate. In addition, the learning capabilities of firms are different because they are based on each firm's specific culture, nature of work, staff interaction, etc. as well as many other unique and company specific factors.


Knowledge advantages are built over time

Knowledge, unlike many traditional resources, is not easily purchased in the marketplace in a ready-to-use form. To acquire similar knowledge, competitors have to develop similar experiences. However, acquiring knowledge through experience takes time and competitors are limited in how quickly they can accelerate their learning simply through greater investment. Mergers and acquisitions for example can lead to disappointing results due to culture conflicts between the existing firm and the new acquisitions.


Knowledge provides sustainability

Knowledge-based competitive advantage is furthermore sustainable because the more a firm already knows, the more its learning capability is increased [2].


According to Zack, these knowledge characteristics provide a new strategy development methodology. If an organisation can identify areas where its knowledge leads the competition, and if that unique knowledge can be applied profitably in the market place, it can represent a powerful and sustainable competitive advantage.


Organisations, therefore should strive to focus their learning experiences on building or complementing those knowledge positions, which currently provide or will provide a competitive advantage. Zack uses the maps concept but instead of traditional strategy positioning maps, where the two dimensions were factors such as price, market share, etc., he uses the term knowledge maps where the dimensions are knowledge and learning capability.  A knowledge strategy map helps a firm to identify its relative strengths and weaknesses and to strategically prioritise and focus its learning experiences in order to create greater leverage for its learning efforts. By using a knowledge map, a firm is able to combine its learning experiences into a "critical learning mass" around particular strategic areas of knowledge. Knowledge maps can be used in any area where the firm believes it has strategic knowledge and these maps should be used in turn to help form its knowledge-driven strategic plan.


According to Zack, a sustainable knowledge advantage comes from a combination of superior knowledge and superior learning. Four possible generic competitive positions can be derived: ?>Superior or Lagging Knowledge vs. Superior or Lagging Learning Capability.


Firms having a superior knowledge position in some strategically important domain and a superior ability to learn from experiences within the same domain should enjoy a persistent and sustainable knowledge advantage. Those lagging in both are at risk. Those with superior knowledge but without superior learning capability will leave their competitive position open to those with possibly less current knowledge but a greater ability to learn and catch up.



Figure 2.1(5): Four generic competitive positions based on one knowledge strategic domain. Source: M. Zack (1999)

2.2.6 Opportunities and Threats related to Knowledge Positions: (External View of Strategy)

According to the traditional approaches of SWOT as exemplified by Porter, strategy can be represented by the competitive position of a firm in an industry (Porter, 1996) as opposed to the specific bundle of resources and capabilities it controls. There can be many factors on which firms compete in particular industries such as price, service, location, reputation, time to market, quality of design, product reliability, etc. These could form the dimensions or elements by which traditional strategic positions are identified. Porter's work also examines the following five forces which affect firms' ability to earn profits in an industry: New Entrants, Supplier Bargaining Power, Customer Bargaining Power, Threat of Substitute Products or Services and Traditional Intra-industry Rivalry. It identifies determinants of the relative power between a firm and these factors many of which are dependent on the industry as a whole. However, it also identifies some opportunities and threats for individual organisations to mitigate these forces. Below, the two main traditional advantages a firm could identify during an external strategy view are explained. These are the switching cost and first mover advantage.


Switching cost

Perhaps the most robust factor is switching costs, i.e. the cost of switching from using one product or firm to another.


·         Switching costs - if the cost for customers to switch to new suppliers is large enough it can discourage new entrants and those offering substitute products and can help lock customers in and keep existing rivals away.

·         If low enough, the customer has an opportunity to switch suppliers at will and consequently may receive price or product concessions.


First mover advantage

·         Being the fist to occupy a strategic position often provides long-lasting cost advantages by tying up the best locations, recruiting the best personnel, gaining access to preferred suppliers or acquiring assets while demand is low.

·         Perhaps the first mover may get to define the rules of competition. However there may also be costs associated with being first in the market (Porter 1985).


To adopt knowledge as a strategic positioning factor, Zack suggests ranking knowledge on three levels in order to compare strategic knowledge amongst competing firms. If managers identify the existing levels of knowledge for all competitors, then they could easily develop knowledge maps depicting the relative competitive positions of all competitors on a knowledge basis. Using this information they can better identify the relative knowledge advantages or limitations of all competitors. This will reveal all the possible opportunities and threats that a firm has if its knowledge is compared with the knowledge of all other rivals.


Three Levels of Knowledge

According to Zack, to participate in an industry, firms must have some minimal or threshold level of knowledge in each of the three following domains. In order to make knowledge comparable from firm to firm during any strategic analysis, Zack suggests analysis in terms of core, knowledge, advanced knowledge and innovative knowledge.


Core knowledge: A minimal or threshold value of knowledge relating to the organisations industry. It is the basic knowledge required by a firm to simply participate in that industry.

Advanced knowledge: It is the knowledge, which enables a firm to carve out or participate effectively in some specific knowledge-, based competitive niche in the industry.

Innovative knowledge: Represents truly distinctive, unique and valuable knowledge in the industry.


Knowledge requirements beyond the core level correspond to traditional barriers to mobility among strategic positions within an industry. This knowledge gap represents an obstacle in the form of the required acquisition or development of new knowledge, which must be overcome to move from one strategic position to another.

2.2.7 Success Factors for a Knowledge-SWOT Analysis

Analysts should think of strategy and competition in terms of defending competitive knowledge positions rather than market/product positions (traditional approach)

Strategic positioning based on knowledge requires a prior definition for the basis of competition, i.e. not with traditional dimensions like price, location, etc. but rather with strategic knowledge domains

The internal knowledge-based view should be focused on an organisations capability to acquire, develop and share knowledge resources to formulate and execute its strategy. This view identifies the relative strengths and weaknesses of the firm corresponding to those internal knowledge strengths and weaknesses

The external knowledge-based view suggests that an organisation faces opportunities and threats based on how their knowledge drives strategy when compared with the knowledge-driven strategy of their competitors. This view identifies the external knowledge gaps between the organisation's knowledge and that of its competitors both now and in the future

To add strategic value, Knowledge Management and learning must be aligned with both internal and external strategic knowledge gaps

Competition should be seen in terms of how one organisation's strategic knowledge compares to another defending a similar knowledge position, regardless of whether or not they are currently producing similar products or selling to similar markets Knowledge, as the underlying resource for producing and marketing products, however, means that these strategic knowledge positions represent potential (if not actual) product/market competition.

A strategic knowledge map offers a more forward-looking view to identify those firms who have the greatest potential to become a strategic threat. Looking only at current products and markets is like looking at the tip of an iceberg. Looking at the underlying knowledge helps see the whole iceberg.

2.2.8 How to implement a Knowledge SWOT (K-SWOT)

The following framework put forward by Zack provides a good systematic description of a general Knowledge-SWOT:


Describe the organisation's industry in terms of its key knowledge domains / elements

Identify the organisation's strategy

Identify the knowledge required to successfully formulate and execute that strategy

4.       Compare the required knowledge to the organisation's existing knowledge in order to identify its internal knowledge gaps or strengths

Compare the organisations internal knowledge status to that of the competitors' knowledge status in order to identify external knowledge gaps, i.e. knowledge opportunities and threats

Evaluate the organization's learning ability in terms of the need to realign existing internal knowledge and in terms of the learning abilities of competitors

Determine whether the organization's knowledge and strategy are in alignment. If not, determine whether the organisation is capable of modifying its knowledge or whether it should instead modify its strategy

Regardless of the knowledge strategy position eventually adopted, determine whether KM and organisational learning programs and initiatives are focused on the internal and external strategic knowledge gaps

2.2.9 Case study:

The following case study summarises the most important steps to be undertaken during a Knowledge based strategic positioning study.


Diagram 1 - Knowledge Map - Knowledge Position. Source: M. Zack (1999)


Diagram 1, shows a strategic positioning exercise based on knowledge of both the target company (black circle) and the main competitor (A). The first question with the traditional strategy positioning school is to define the bases of competition in the industry. As has been explained in the previous paragraphs in the case of a Knowledge-SWOT analysis, instead of traditional dimensions like price, location, etc., we have to define knowledge elements as the strategic forces in the industry. That is, we have identified general elements of knowledge, which firms must have in order to participate in the industry. In this simple case and for the purpose of illustration, strategic analysis based on knowledge showed that the dominating strategic forces in this industry are:


Knowledge in the development of Strengths and Weaknesses, which in this case is the main product and technology knowledge required

Customer knowledge including all types of relationships with customers (including marketing surveys, after sales support systems, etc.).

Readers must know that the dominating knowledge elements in the industry could be many and varied. Therefore, a full K-SWOT for this case would require the use of many other knowledge maps. In addition, a knowledge map could be analysed in more detailed maps, for example managers of an organisation could analyse software development knowledge by examining:


         Software platforms used,

         Knowledge of software analysts

         Knowledge of programmers

         System reliability,

         System Interoperability,

         System transferability

         etc.


Case Study - Analysis of the Competition based on Knowledge

         In this simplistic example the company's historical competitive strategy has focused on product leadership (in software development) and consequently they have developed a relatively strong knowledge position in software development while customer knowledge is moderate. Competitor A however, has a stronger software technology position but weaker customer knowledge

         the trend in the industry has moved towards more value-added services thereby decreasing prices and margins. Therefore the product leadership strategy requires greater investment in R&D in order to maintain unique product knowledge and superiority. Those remaining in the traditional product space but not investing in R&D will increasingly have to rely on (and probably acquire or develop) operational and software development knowledge in order to maintain a low cost operation

         In light of these trends the company has evaluated the ability of their existing knowledge position to support their current leadership in the development of products and technology. They also evaluated the strength of their knowledge position relative to their main competitors A & B.

         After a careful strategic analysis, the company has decided to pursue a customer relationship strategy and in order to achieve this strategic position (marked as a star) new / additional knowledge is required (Diagram 2).

         This new position requires greater knowledge of customers and markets and less knowledge that they currently enjoy regarding software technologies.


Diagram 2: Strategic knowledge map depicting internal and external knowledge gaps. Source: M. Zack (1999)


Considering the new knowledge position (marked by the star) as its strategic aim, the firm has to address the internal, negative customer knowledge gap (marked by the red line).

In addition, the firm has to ensure that the existing customer knowledge gap with competitor B (which provides an opportunity) and the negative product and technology knowledge gap with competitor A (which provides a small threat) must also be considered so that the organisation can sustain its new strategic position.

To better focus its learning efforts, the firm should analyse its relative knowledge position for all the important strategic knowledge elements that have been identified when trying to compare its knowledge positions with others in terms of knowledge and learning superiority. Knowledge maps are important in this regard.