Getting to Know You - Gearing your KM for Competition

When you’re forced to cut costs in your business, you must carefully weigh what’s most important to your competitive edge. The recently-constructed, expensive institutions supporting Knowledge Management (KM) may be first to go—after all, their contribution to the bottom line is hard to measure and they represent high fixed costs for the firm. But is this necessarily the right move? Professors Elie Ofek and Miklos Savary explain that when you consider your competitive goals, your approach to KM will make a difference.

by Miklos Sarvary
Last Updated: 23 Jul 2013

It’s time to trim down and cut costs in your organisation, but where?

Some say you should tighten the belt around projects that don’t show immediate profitability. In professional services, that’s likely to be Knowledge Management (KM). True, investment in KM may be the key to long-term success, but in the short-term, perhaps the high salaries of the specialised KM executives are too tough to manage.

But others argue that when it’s slow-going externally, it’s time to turn to internal strengthening. In that respect, KM is more of a preventative measure, because it will pay off later by preventing another slump.

What could explain this KM dichotomy? Elie Ofek (Assistant Professor of Business Administration, Harvard Business School) and Miklos Savary (Associate Professor of Marketing, INSEAD) say it may stem from the two conceptual categories of KM: Knowledge Exchange and Knowledge Creation. These two branches have scale economies of different types with varying implications for competitive dynamics.

KM processes may facilitate Knowledge Exchange in the firm, leading to more efficient operations and lower costs, i.e. supply-side scale economies. They can lower the firm’s marginal costs and increase efficiency, making it easier for professionals to access and adapt previously-generated solutions. Many firms do this in a centralized (through electronic documents of client and project information) or decentralized way (through communication, directories, and general sharing of information among colleagues).

On the other hand, KM processes may enhance Knowledge Creation if the experience gained through individual assignments is synthesised and integrated. Knowledge Creation results in deeper understanding of the business environment, better service quality, i.e. demand-side scale economics. They enrich the end-product, creating analytic frameworks and transform problem-solving time into time spent getting at the core concepts involved. This eventually leads to happier clients.

To discover what aspect of KM the firms truly value in a competitive environment, the authors pose some direct questions: How does KM generate sustainable competitive advantage for the firm? And in a situation where a firm makes cutbacks, which aspects of KM are the ones worth keeping? Which are more important to secure competitive advantage?

They find that the answers depend on two factors: the competitiveness of the business environment and the firms’ ability to leverage the customer base. Specifically, in a non-competitive environment, the firm is always better off focusing on Knowledge Exchange. This is in sharp contrast with the situation where competition is significant. Then, if the ability to leverage the customer base is relatively high, firms should shift the emphasis of their KM system to Knowledge Creation.

The authors also explore the evolution of the professional services industry where firms compete with KM systems geared to Knowledge Creation. The results indicate that, while the quality of their services increases with a better performance of the KM technology, long-term industry profits first increase but then decrease because of more intense competition.

They provide anecdotal evidence form the Management Consulting Industry to illustrate the findings and discuss the implications for other sectors. Generally, the findings can apply to all industries where firms can generate valuable knowledge by interactive with their customers. Thanks to technological advances, instantaneous feedback possibilities make customer response much easier to obtain and analyse.

INSEAD 2002

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