Four basic characteristics of a successful strategy

2.1.1 What is Strategy?

So, what is strategy? Or, better, what it is not? According to Grant (2005) “strategy is not a detailed plan or program of instructions; it is a unifying theme that gives coherence and direction to the actions and decisions of an individual or an organization”. Furthermore, there are four basic characteristics of a successful strategy: goals that are simple, consistent and long term; profound understanding of the competitive environment; objective appraisal of the resources; and, effective implementation.

Other definitions of strategy include:

· “the determination of the long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals” (Chandler, 1962),

· “the pattern of objectives, purposes, or goals and the major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is to be” (Andrews, 1971),

· “the match an organization makes between its internal resources and skills … and the opportunities and risks created by its external environment” (Hofer and Schendel, 1978),

· “the pattern or plan that integrates an organization’s major goals, policies and action sequence into a cohesive whole” (Quinn, 1980).

To simplify things we could say that strategy is when a firm assesses its internal organization and external environment, sets its goals and objectives, and designs the action plan to accomplish them.

2.1.2 A Brief Presentation of some Strategic Concepts

The concepts and theories of business strategy have their antecedents in military strategy. The term strategy derives from the Greek word strategia, meaning “generalship”, itself formed from stratos, meaning “army” and -ag, “to lead”. Another early contributor to the forming of the concept of strategy is the Chinese Sun Tzu (about 500 B.C.) with his classic piece of work The Art of War, which is regarded as the first thesis on strategy.

In modern times, the field of business strategy has largely been shaped around a framework first conceived by Andrews (1971) in his classic book The Concept of Corporate Strategy. As we’ve seen above, Andrews saw strategy as the match between what a company can do on one hand (organizational strengths and weaknesses) within the universe of what it might do on the other hand (environmental opportunities and threats). This is how the famous concept of SWOT (strengths, weaknesses, opportunities and threats) has emerged. This concept is examined further in the following chapter.

Although the power of the SWOT framework was recognized from the outset, managers were given very few insights about how to assess either side of the equation systematically. The first important breakthrough came from Porter (1980) in his book Competitive Strategy: Techniques for Analysing Industries and Competitors where he introduced the concept of the “five forces” model. This model focuses on the external side of the SWOT strategic balancing act, helping firms to understand those forces in an industry that give rise to opportunities and threats. In this framework, strategy becomes a matter of choosing an appropriate industry and positioning the firm in that industry according to a generic strategy of either low cost or product differentiation. Again, this concept is examined further in the following chapter.

Fig. 2.1(1) The Five Competitive Forces – Porter

These theories have been criticized mainly because they do not help particular firms to identify and leverage unique and therefore sustainable advantages. Furthermore, studies have shown that internal characteristics of particular firms within an industry can make a difference in terms of profit performance. Based on these experiences, a new perspective, known as the “capabilities approaches”, which is focused on the internal, organisational part of the SWOT equation, has emerged. Based on this theory, firms are exhorted to compete based on their unique or distinctive capabilities, competences and resources. These approaches assume that the roots of competitive advantage lie within the organization and that the adoption of new strategies is constrained by the current level of company’s resources. In this framework, external environment received little (if any) attention.

Finally, another approach which tries to bridge the two parts (internal organizational element and external environment) and fulfill the promise of Andrew’s framework is the “resource – based” view. Like the “capabilities approaches”, the “resource – based” view acknowledges the importance of company specific resources and competences, yet it does so in the context of the competitive environment. It sees capabilities and resources as the heart of a company’s competitive position, subject to the interplay of three fundamental market forces: demand (does it meet customers’ needs and is it competitively superior?), scarcity (is it imitable or substitutable, and is it durable?) and appropriability (who owns the profits?).

2.1.3 Towards a Knowledge Strategy Model

Strategic management models have traditionally 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, however, prescribes that firms position themselves strategically, based on their resources and capabilities rather than on the products and services derived from those capabilities. Resources and capabilities, especially organizational skills and practices learned over time, can become highly unique to a particular firm and hard to imitate by others. Therefore, competitive advantage based on these resources and capabilities is potentially much more sustainable than that based on product and market positioning. Products and markets may come and go, but the firm’s capabilities are more enduring. Creating a strategy based on unique resources and capabilities provides a more long-term view of strategy than the traditional approach, and one, which is more robust in today’s uncertain and dynamic competitive environment.

In modern business, knowledge is being considered the most important strategic resource, and the ability to create and apply it the most important capability for building and sustaining competitive advantage. The firm that knows more about its customers, products, technologies, markets and their linkages, performs better. This view is leading to a further development in the “resource – based” theory called the “knowledge – based” view of the firm. The firm is seen primarily as a vehicle for creating, integrating, storing and applying knowledge. Firms embracing the “knowledge – based” view of the world have many difficult questions to answer in formulating their knowledge strategy. If we update the original model of strategy to reflect today’s knowledge intensive environment, knowledge strategy becomes the way in which the firm balances its knowledge resources and knowledge processing capabilities with the knowledge required to create its products for its markets in a manner superior to its competitors. In essence, firms need to perform a “knowledge – based” SWOT analysis.

Identifying which knowledge is a unique and valuable resource, which knowledge processes represent unique and valuable capabilities, and how those resources and capabilities support the firm’s product and market positions, are the essential elements of a knowledge strategy. The firm must identify what it has to “know” for a given product / market position. Every firm requires some level of knowledge about its technology, markets, products, customers and industry merely to participate and hold its own in its industry. The strategic choices that companies make regarding these factors directly influence what the firm and its members must know to effectively compete. Furthermore, these choices all set the stage for the development of future knowledge through the processes of learning and innovation.

Conversely, the firm, given what it knows, must identify the best product and market opportunities for exploiting that knowledge. The creation of unique, strategic knowledge takes time, forcing the firm to balance short and long-term strategic resources decisions. The firm must therefore determine whether its efforts are best focused on knowledge creation, exploitation, or both, and then balance its knowledge processing resources and efforts accordingly.

Other critical issues in knowledge strategy include organizational learning (the ability of an organization to learn, accumulate knowledge from its experiences, and reapply that knowledge is itself a skill or competence that can provide strategic advantage), the competition (the firm must assess the knowledge resources and capabilities required by its industry merely to “play the game”, those required to be competitive and those required to be uniquely innovative) and how easily the firm’s knowledge can be imitated (on the one hand, knowledge must be made explicit and transferable to share it among the firm, while, on the other hand, once made explicit it is subject to being appropriated by other firms, reducing or eliminating its competitive value).

2.1.4 Knowledge Strategies

It has become clear, especially during the last few years, that the term Knowledge Management (KM) has been applied to a very broad spectrum of activities designed to manage, exchange and create or enhance intellectual assets within an organization. In other words, there is no widespread agreement on what KM actually is. For example, information technology applications that are using the term “knowledge management” in their title range from the development of highly codified help desk systems to the provision of video conferencing to facilitate the exchange of ideas between people. The one fact that there does seem to be agreement on is that different situations require different KM strategies. In this section we will examine a number of proposed different KM strategies and consider how they can be classified. Then we will look into a range of different driving forces behind the strategies and propose how we can select a suitable knowledge strategy.

The main difference between the various approaches in knowledge strategy is that they emphasize different aspects of KM: some focus on the knowledge (content), others on the business processes / areas and some on the end results.

(A) Knowledge Matrix

One of the most widely accepted and widely quoted approaches is that of the “knowledge matrix” of Nonaka & Takeuchi (see Figure 1.3-2 in chapter 1.3.1). This matrix classifies knowledge as explicit or tacit, and as either individual or collective. Nonaka & Takeuchi also propose corresponding knowledge processes that transform knowledge from one form to another: socialisation (from tacit to tacit, whereby an individual acquires tacit knowledge directly from others through shared experience, observation, imitation and so on); externalisation (from tacit to explicit, through articulation of tacit knowledge into explicit concepts); combination (from explicit to explicit, through a systematisation of concepts drawing on different bodies of explicit knowledge); and internalisation (from explicit to tacit, through a process of “learning by doing” and through a verbalisation and documentation of experiences). Nonaka & Takeuchi model the process of “organisational knowledge creation” as a spiral in which knowledge is “amplified” through these four modes of knowledge conversion. It is also considered that knowledge becomes “crystallized” within the organisation at higher levels moving from the individual through the group to organisational and even inter-organisational levels.

(B) I-Space

In another well-known application, Boisot proposes a model of knowledge asset development along similar lines to that of Nonaka and Takeuchi. In Boisot’s scheme, knowledge assets can be located within a three dimensional space (“Information Space” or “I-Space”) defined by three axes from “uncodified” to “codified”, from “concrete” to “abstract” and from “undiffused” to “diffused”. He then proposes a “Social Learning Cycle” (SLC) that uses the I-Space to model the dynamic flow of knowledge through a series of six phases:

1. Scanning: insights are gained from generally available (diffused) data

2. Codification – Problem-Solving: problems are solved giving structure and coherence to these insights (knowledge becomes ‘codified’)

3. Abstraction: the newly codified insights are generalised to a wide range of situations (knowledge becomes more ‘abstract’)

4. Diffusion: the new insights are shared with a target population in a codified and abstract form (knowledge becomes ‘diffused’)

5. Absorption: the newly codified insights are applied to a variety of situations producing new learning experiences (knowledge is absorbed and produces learnt behaviour and so becomes ‘uncodified’, or ‘tacit’)

6. Impacting: abstract knowledge becomes embedded in concrete practices, for example in artefacts, rules or behaviour patterns (knowledge becomes ‘concrete’)

Fig. 2.1(2). Boisot’s I-Space I

In his model, Boisot develops an interesting application of the laws of thermodynamics. This thermodynamic analogy points to the elusive and dynamic nature of knowledge. It seems that what is happening is a cycle in which data is filtered to produce meaningful information and this information is then abstracted and codified to produce useful knowledge. As the knowledge is applied in diverse situations it produces new experiences in an uncodified form that produces the data for a new cycle of knowledge creation.

(C) Wiig Model

Moving on to the business process side, one of the most widely accepted KM models is that of Wiig and the APQC (American Productivity and Quality Center). Wiig identified six emerging KM strategies in a study of organisations considered to be leading the way in this area. The strategies reflect the different natures and strengths of the organisations involved:

· Knowledge Strategy as Business Strategy

A comprehensive, enterprise-wide approach to KM, where knowledge is seen frequently as the product

· Intellectual Asset Management Strategy

Focuses on assets already within the company that can be more fully exploited or enhanced

· Personal Knowledge Asset Responsibility Strategy

Encourage and support individual employees to develop their skills and knowledge as well as share their knowledge with each other

· Knowledge Creation Strategy

Emphasises the innovation and creation of new knowledge through R&D. Adopted by market leaders who shape the future direction of their sector

· Knowledge Transfer Strategy

Transfer of knowledge and best practices in order to improve operational quality and efficiency

· Customer-Focused Knowledge Strategy

Aims to understand customers and their needs and so provide them with exactly what they want.

(D) Day and Wendler of McKinsey & Company

Along the same lines, Day and Wendler of McKinsey & Company, identified five knowledge strategies employed by large corporations:

· Developing and Transferring Best Practices

Like the “Knowledge Transfer Strategy” identified by Wiig and the APQC above, this strategy focuses on identifying best practices within an organisation and spreading them across a dispersed network of locations

· Creating a new industry from embedded knowledge

This approach is to recognise that an organisation may have knowledge, which it can exploit in new ways. In particular, it may have built up knowledge about its customers, which reveals a gap in the market for a new product

· Shaping Corporate Strategy around knowledge

This strategy was identified from the experiences of Monsanto, which encompassed two very different business groups: a chemicals group and a life sciences group. The chemicals group was focused on best practice while the life sciences group was an innovation-based business. The knowledge strategies for these two groups were perceived to be so different that Monsanto decided to sell off the chemicals group and concentrate on the life sciences business. This is an interesting example of the tensions between two very different KM strategies

· Fostering and Commercialising Innovation

Similar to the Knowledge Creation Strategy identified by Wiig and the APQC above, this strategy focuses on establishing a competitive position by increased technological innovation and reduced time to market

· Creating a standard by releasing proprietary knowledge

The cited example is Netscape who responded to the rapid decline of its market share in the internet browser market by making its source code publicly available at no cost. The strategy is an example of the “Intellectual Asset Management Strategy” identified by Wiig and the APQC study. In this case, Netscape felt that it could capitalise on a key asset (its source code) by giving it away. In return, it hoped to establish its browser as a widely used standard (increased by the adaptation to new specialty areas) and gain indirectly, by securing its share of a complementary product, namely: server software.

(E) Three Value Disciplines (Treacy and Wiersema)

Moving to the area of strategies based on the end results, we could refer to Treacy and Wiersema who proposed three “value disciplines,” as a way to focus an organisation’s activities. In this model, successful organizations concentrate their efforts on a particular area and excel at it, rather than trying to be all things to all people and failing to excel at anything. The three areas are:

· Customer Intimacy

· Product Leadership

· Operational Excellence

These value disciplines reflect the fact that ‘value’ is determined as a trade-off between convenience, quality and price. It is the inherent tension between these three qualities of a product that makes it necessary for an organisation to focus on excelling at just one of them. There are a few organisations that have managed to become leaders in two disciplines, but they have done this by focusing on one area first before turning to a second one.

At a simplistic level, there are three primary elements to any competitive business: the business itself, its product(s) and its customers. Each of these components represents the focus of attention for one of the value disciplines. The focus is on the customers and their needs and desires when pursuing “Customer Intimacy”; the focus is on the product(s) when pursuing “Product Leadership”; and the focus is on the organisation itself and its delivery processes, when pursuing “Operational Excellence”.

Some organizations will concentrate on their relationship with their customers (to increase customer satisfaction and retention by better understanding the customer’s needs and preferences). Other organisations will focus on their products (constantly developing new ideas and getting them to market quickly). The third group of organisations focus primarily on themselves and their internal processes (sharing best practices between different units, reducing costs and improving efficiency).

(F) Zacks Strategy

Another approach to identifying what KM strategy to take is proposed by Zack. He proposes a framework which helps an organisation make an explicit connection between its competitive situation and a knowledge management strategy to help the organisation maintain or (re-) establish its competitive advantage. He makes it clear that while each organisation will find its own unique link between knowledge and strategy, any such competitive knowledge can be classified on a scale of innovation relative to the rest of the particular industry as: core, advanced or innovative:

· Core knowledge is a basic level of knowledge required by all members of a particular industry. It does not represent a competitive advantage, but is simply the knowledge needed to be able to function in that sector at all.

· Advanced knowledge gives an organisation a competitive edge. It is specific knowledge that differentiates an organisation from its competitors, either by knowing more than a competitor or by applying knowledge in different ways.

· Innovative knowledge is that which enables a company to be a market leader. It allows an organisation to change the way a sector works and represents a significant differentiating factor from other organisations.

Having identified the organisation’s competitive knowledge position, Zack’s approach is to use a SWOT analysis to identify the strategic gaps in an organisation’s knowledge. This allows the organisation to identify where it has knowledge which it can exploit and where it needs to develop knowledge to maintain or grow its competitive position. This is achieved by analysing the organisation’s knowledge position along two dimensions:

· Exploration vs. Exploitation

This is “the degree to which the organisation needs to increase its knowledge in a particular area vs. the opportunity it may have to leverage existing but under-exploited knowledge resources.”

· Internal vs. External Knowledge

This refers to whether the knowledge is primarily within the organisation or outside. Some organisations are more externally oriented, drawing on publications, universities, consultants, customers, etc. Others are more internally oriented, building up unique knowledge and experience, which is difficult for competitors to imitate.

Putting these two dimensions together, Zack describes organisations which are more exploitative of internal knowledge as having a “Conservative” KM Strategy while those that are more innovative (exploring external knowledge) have a more “Aggressive” KM Strategy. However, he points out that a KM Strategy cannot be made without reference to competitors. Thus, some industries (where knowledge is changing more rapidly) tend to be characterized by more aggressive firms, while other industries are generally more conservative.

Summary

Given that the classifications by knowledge listed above (Nonaka & Takeuchi’s knowledge matrix and Boisot’s I-Space model) focus on the process of knowledge transformation and that most real world processes operate on a continuum rather than a step transformation, it is perhaps not surprising to find that some researchers have suggested that “explicit” and “tacit” knowledge should be considered to be at the ends of a spectrum of knowledge types rather than being the only two categories on that spectrum. Beckman has suggested that “implicit” knowledge is an intermediate category of knowledge that is tacit in form, but is accessible through querying and discussion. Nickols proposes that Nonaka & Takeuchi’s categories should be further broken down according to whether they focus on declarative or procedural knowledge.

What is needed is a classification that proposes a spectrum of knowledge management approaches. If this spectrum can accommodate the various approaches suggested previously, then it can be considered to be sufficiently comprehensive to be useful. Derek Binney provides a framework, the “KM Spectrum”, to help organisations make sense of the large diversity of material appearing under the heading of KM, and to help them assess where they are in KM terms. His focus is on the KM activities that are being carried out, grouped into six categories:

· Transactional KM: Knowledge is embedded in technology

· Analytical KM: Knowledge is derived from external data sources, typically focussing on customer-related information

· Asset Management KM: Explicit management of knowledge assets (often created as a by-product of the business) which can be reused in different ways

· Process-based KM: The codification and improvement of business practice and the sharing of these improved processes within the organisation

· Developmental KM: Building up the capabilities of the organisation’s knowledge workers through training and staff development

· Innovation/creation KM: Fostering an environment, which promotes the creation of new knowledge, for example through R & D and through forming teams of people from different disciplines.

Binney’s analysis is interesting because it reflects aspects of both the knowledge-centred classification of KM and the business perspectives classification of KM. In terms of business perspectives, Binney’s categories reflect activities that support particular perspectives; for example, “Asset Management KM” matches Wiig’s “intellectual asset management strategy”, while “Innovation and Creation KM” reflects Treacy & Wiersema’s “product leadership” strategy. Yet, Binney’s categories also form a progression from the management of explicit knowledge at one end to tacit knowledge at the other. So, for example, “Transactional KM” involves codifying knowledge and embedding it in applications such as Help Desk Systems or Case Based Reasoning systems, while “Innovation and Creation KM” focuses on facilitating knowledge workers sharing and creating new knowledge which rests in a tacit form in their heads.

For each element of the spectrum, Binney also lists a set of enabling technologies used to implement those kinds of KM Applications. This provides an alternative way to identify KM activity already being undertaken within an organisation, even if not previously perceived in KM terms (Table 1).

Table 1 – Enabling technologies mapped to the KM Spectrum (Binney, 2001)

Transactional

Analytical

Asset Management

Process

Developmental

Innovation & Creation

Expert Systems

Cognitive Technologies

Semantic Networks

Rule-based Expert Systems

Probability Networks

Rule Induction Decision Trees

Geospatial Information Systems

Intelligent Agents

Web Crawlers

Relational and Object DBMS

Neural Computing

Push Technologies

Data Analysis and Reporting Tools

Document Management Tools

Search Engines

Knowledge Maps

Library Systems

Workflow Management

Process Modeling Tools

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Finally, we should note that the latest developments in the field suggest that the KM strategy in a modern, rapidly changing business environment should be dynamic, meaning it should change to follow the developments in the way the business functions or the competition is progressing in the industry. Scholars even go on to propose different KM strategies for different departments of the same organization.