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ir
Knowledge management and the
occasional links with performance
Thomas Kalling
Thomas Kalling is Assistant
Professor of Strategic
Management and Informatics at
the Institute of Economic
Research at Lund University,
Lund, Sweden
(thomas.kalling@ics.lu.se).
`` Knowledge is not always utilized, and that utilized
knowledge does not always result in improved
performance.
''
DOI 10.1108/13673270310485631
Abstract This paper argues that current research into knowledge management fails to recognize
and offer a detailed understanding about the role of knowledge in improving ®rm performance.
Instead of focusing, exclusively, on the nature and attributes of knowledge, and the
management of learning, research should also direct attention to the factors that enable
knowledge to contribute to performance. To aid in this, this paper suggests that the concept
of knowledge management is divided into three instances; development, utilization and
capitalization, based on the assumption that knowledge is not always utilized, and that utilized
knowledge does not always result in improved performance. The paper also identi®es
challenges and solutions in relation to each of the instances. Empirical ®ndings are based on
empirical study of three knowledge ventures within a European manufacturing MNC.
Keywords Knowledge management, Strategy, Performance
Introduction
Research into knowledge management within a business context has grown dramatically over
the last years, in a number of different directions. Research has been conducted within the
frames provided by theories such as e.g. the resource-based view (Conner and Prahalad, 1996),
the competence-based view (Sanchez, 2001b), cognitive frameworks theory (Ginsberg, 1994),
the capability perspective (Teece et al., 1997), dominant logics (Prahalad and Bettis, 1986), and
other theoretical ®elds. This stream of research on knowledge management has certainly
increased the general understanding of the nature of knowledge in organizational contexts (for
instance tacit vs. explicit knowledge, individual vs. group vs. organization, knowledge vs.
competence), and of the dynamics of knowledge (learning mechanisms such as induction (trial-
end-error), deduction, and knowledge transfer). As a result, we know a great deal about the
ways in which knowledge is managed, and what knowledge is or might be perceived as.
However, despite the growing body of theory, there are relatively few knowledge management
texts that make an explicit connection between knowledge and performance. Although
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knowledge management researchers assumedly take the question of the connection between
knowledge and value for granted, one might assume that, despite the apparent tautology
(successful ®rms have, and utilize more, and better knowledge than others), the conversion of
knowledge into improved performance is not automatic or free from problems, i.e. there are
factors that hamper or drive the capitalization of knowledge. This assumption is rarely in focus in
the contemporary research on knowledge management.
This paper aims to deal with the issue of converting knowledge into improved performance, and
the purpose is to improve the understanding of knowledge management. The paper takes its
starting point in knowledge management literature, connecting to general strategy theory,
which is a perspective that deals explicitly with relative performance (Rumelt et al., 1994). Then
three empirical examples of attempts to manage knowledge in one European MNC are
presented and discussed in relation to theory. A model linking knowledge with performance is
presented.

Theory
A thorough reading of available knowledge management literature is virtually impossible due to
the current scope of the ®eld, but in the following I shall brie¯y review some of the frameworks of
knowledge management, with regard to the issue of converting knowledge into improved
performance.

The stream of research on ``organizational learning'' is diverse in terms of the meaning of the
organizational learning concept. Furthermore, it is not very attentive to strategic implications
of learning (Crossan et al., 1999). A range of highly impressive and well-known texts on
organizational learning, such as Daft and Weick (1984), Fiol and Lyles (1985), Cohen and
Levinthal (1990), Huber (1991), and Nonaka (1994) focus on learning processes, not processes
related to converting knowledge to performance improvements. Consequently, Crossan
et al. (1999) state that much of the research into organizational learning fails to realize the
end to learning. They claim that March (1991) is a rare exception, which stipulates that
organizational learning requires a balancing of ``exploration'' and ``exploitation'' of knowledge.
Organizational learning studies have their relative advantage in the in-depth discussion about
the dynamics of knowledge, rather than strategy.

Another ®eld is the so-called ``knowledge-based view of the ®rm'' (e.g. Grant, 1996b; Conner
and Prahalad, 1996; Spender, 1996), which is strategic in its orientation, focusing the
mechanisms that drive relative performance and competitive advantage. It rests intellectually on
the ideas of the resource-based view (Barney, 1991; Peteraf, 1993), focusing explicitly on
knowledge as the ultimate resource. A central feature of the knowledge-based view is the
notion of ``tacitness'' (Grant, 1996a), because tacit knowledge is a potential source of
competitive advantage due to its limited transferability. Thus the knowledge-based view partly
approaches the management of knowledge conversion. But although the knowledge-based
view clearly suggests that knowledge can be a source of sustained competitive advantage, it is
relatively unclear about the ways in which knowledge is utilized in order to contribute. For
instance, Spender (1996, p. 59) says ``It is the performance, especially in the face of
unanticipated uncertainties and challenges, that is the true test of executive knowledge''.
However, the four key managerial heuristics proposed by Spender (interpretive ¯exibility,
boundary management, identi®cation of institutional in¯uences, distinguishing between
systemic and component features) do not say much about the issues associated with the
materialization of knowledge, but rather about how new knowledge is created and organized.
Correspondingly, Grant's (1996a,b) discussions about organization of knowledge gives little
input as to whether the capitalization of knowledge is complex or not.
Another similar approach is the ``competence-based view'', primarily represented by
anthologies such as Sanchez et al. (1996), Heene and Sanchez (1997), Sanchez and Heene
(1997), and Sanchez (2001a). Included in this rich range of research are both empirical and
conceptual papers that address knowledge management from a strategic perspective. The
perspective rests solidly on resource-based thinking. Firms utilize competence in order to reach

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`` The conversion of knowledge into improved performance

is not automatic or free from problems.
''
set goals, regardless of whether it is reduced costs or competitive advantage. But the core of
the competence-based perspective lies in its approach to the nature of knowledge, and of its
discussion of learning processes (cf. Sanchez, 2001b). For instance, the difference between
data, information, knowledge and interpretive frameworks is highlighted, as is the difference
between learning and sense-making. Furthermore, the relations between assets, resources,
skills, competencies, capabilities and competences are elaborated upon (Sanchez, 2001b). A
key feature is the transformation of knowledge into competence, which is made through
learning cycles, encompassing individual, group and organizational learning (Sanchez, 2001b).
However, the management of the transformation of knowledge into set goals is not well
covered.
Within the so-called ``capability perspective'', knowledge is also approached without any
detailed discussion about the link between capabilities and performance. Winter (2000) states
that a capability is a ``high-level routine (or collection of routines) that, together with its
implementing input ¯ows, confers upon an organization's management a set of decision
options for producing signi®cant outputs of a particular type'' (Winter, 2000, p. 983). Leonard-
Barton (1992) suggests that capabilities consist of particular skills, technical systems,
managerial systems, all of which are grounded in the norms and values that the ®rm has built
during its existence. Teece et al. (1997) along with Eisenhardt and Martin (2000) claim that
capabilities comprise the abilities to create and utilize resources so as to improve performance.
Like many of the other perspectives mentioned, the capability perspective suggests that
knowledge is important, that it can contribute to improved performance. However, despite
identifying the link between capabilities and performance, it is not very clear on how this link is
managed and whether there is automatic causality between capabilities and performance.
Apart from the perspectives discussed so far, there is a growing body of research on knowledge
management-related topics that at least partially does address the management of the
conversion of knowledge into improved performance. A classic example of this is the concept of
the ``experience curve'' (Yelle, 1979; Henderson, 1984), which proposes that unit costs go
down as experience accumulates, albeit at a decreasing rate. More recently, Darr et al. (1995)
found that the transfer of knowledge between units within the same corporation do lead to
improved productivity. Szulanski (1996) found that in order to be successful, knowledge transfer
must be accompanied by the management of causal ambiguity, absorptive capacity and
relationships between organizational units. However, in Szulanski's study, the dependent
variable is not improved performance, but rather the perception of respondents as to whether
the transfer had been successful in helping the unit improve their routines and work tasks.
Argote (1999) used cost-effectiveness as a dependent variable, whereas Baum and Ingram
(1998) used ``survival'', as a variable dependent upon knowledge. In an interesting twist of
causality, Argote and Ingram (2000) suggest that knowledge transfer can be measured by
measuring changes in performance. However, Tsai (2001) actually used both innovation (rate of
new innovations per year) and performance (pro®tability) as dependent variables to knowledge
sharing within organizations, and found evidence that both variables were improved if the unit in
question had absorptive capacity and a central position in the organizational network. So,
obviously, there are studies focusing on the performance results of knowledge management.
However, normally, emphasis is at best on cost improvement, rather than competitive
advantage or pro®t. The underlying assumption, one might assume, is that all new knowledge is
good knowledge that automatically brings improved performance. And in cases where the
dependent variable is stretched into cost improvement, it is assumed that other components of
pro®t, i.e. volume and price, are not affected (a notable exception being Tsai, 2001). From a
managerial standpoint, it appears that causal ambiguity, absorptive capacity and organizational
context are key factors (Darr et al., 1995; Szulanski, 1996, 2000; Tsai, 2001).

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The above discussion of knowledge management orientated research indicates a strong focus
on knowledge itself: what is it and how can we manage it? Managing knowledge so as to
improve performance is less well discussed. In many of the discussed approaches, there is,
evidently, an assumption that there are few obstacles to the use or capitalization of knowledge.
However, there appears to be a difference between managing knowledge in order to improve it
and in order to utilize it. Expanding knowledge in depth or in breadth by experience or learning,
transferring it, codifying it, and explicating it does not necessarily mean routines or results are
improved. As a consequence, it might be relevant to distinguish between three causally related
components, i.e. knowledge development (knowledge is the subject of attention), knowledge
utilization (routines are the subject of attention), and knowledge capitalization (pro®t is the
subject of attention). This approach acknowledges that the link between knowledge and pro®t is
not automatic. It also assumes that a successful link requires managerial and organizational
effort.
The connection between knowledge and pro®t is also, tacitly, re¯ected in the strategic
management ®eld. Strategy theory is a broad subject, but one central tension is the apparent
dichotomy between ``industrial organization'' (I/O) and the resource-based view (RBV). The
former (Porter, 1980, 1985), suggests that relative performance is dependent upon ®rm-
external forces, and that the choice of generic strategy and con®guration of the value chain are
the primary strategic issues for managers. RBV however, claims that relative performance and
competitive advantage is based on valuable, unique and costly-to-imitate resources (Barney,
1991). The knowledge management perspectives discussed above would logically pass for
being resource-based with their focus on knowledge as the fundamental source of human
productivity (Grant, 1996b). RBV has been criticized for many things, including for not clarifying
how relative pro®tability is affected by resources (Collis, 1996; Eisenhardt and Martin, 2000).
Mosakowski and McKelvey (1997) and Chatterjee (1998) claim that the key issue in strategy is
to have a unique feature of the offering (low cost, high quality), rather than unique resources,
because the offering is the ultimate interface with the market. It might well be that a unique
offering is reliant upon unique resources, but research is relatively clear on the existence of
substitution effects (Barney, 1991) and ``equi®nality'' (Eisenhardt and Martin, 2000). The logic of
this criticism invites for viewing I/O and RBV perspectives as causally complementary:
resources are used in activities which are needed in order to produce a service or good, to be
supplied to customers in competition. RBV details the attributes of strategic resources, and I/O
gives the same detail to the attributes closer to the product market.
I would argue that the current situation within knowledge management is similar to the one
within strategy. Knowledge is a resource, and we know a lot about the nature, the attributes of
knowledge, and we do know about how to develop knowledge, i.e. to learn. But the factors that
convert knowledge (and other resources) into improved and possibly unique offerings and
performance are not well studied, especially not the management implications. Hence the
background to this study; it is not so strange that researchers, tautologically or not, assume that
more knowledge means higher performance, or that the sheer existence of a new or modi®ed
resource means improved pro®tability. But because relatively few have studied, empirically, the
links between learning and performance and the management of such processes, and because
it is not completely unthinkable that new learning might not result in performance alterations,

Figure 1 Area of study

Knowledge Knowledge Knowledge

Development Utilisation Capitalisation

Mechanisms Mechanisms Mechanisms

Management Management Management

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research is justi®ed. In order to de®ne the area of study, it is assumed that the process involves
the development, utilization and capitalization of knowledge (see Figure 1).

Method
This study is qualitative, partly bearing resemblance with so-called grounded theory (Glaser and
Strauss, 1967), which normally is seen as inductive in nature. A key question over which
researchers still debate is the extent to which a priori theory should be applied in a grounded
theory study. Some claim that a clear mindset is important in order to avoid interpreting in
accordance with existing theories (Glaser and Strauss, 1967), whereas others (Miles, 1979;
Eisenhardt, 1989; Yin, 1994) claim that a priori theory is important for positioning the emergent
theory and stimulating creative analysis. This study acknowledges this logic ± and is based on
the theories of knowledge management and strategy described above ± meaning deductive
opportunities are drawn upon. The disadvantage of only using one case, like when using ten
cases is obvious: lack of generalization. However, the purpose of this study is exploratory in
nature. The method is qualitative in the sense that it does not claim to deliver statistical but
theoretical generalizations (Yin, 1994), meaning the improvement of existing theory. In this case,
the theories of knowledge management and strategy are the object of interest, and empirical
®ndings are used to propose extensions of existing theory.
The cases
The reported cases are three explicit knowledge management ventures within an (anonymous)
European manufacturing MNC, present with more than 60 production units in some 30
countries, predominantly in Western Europe. Each plant is a pro®t centre, employing between
50-300 people, with sales turnovers ranging between 20 and 70 MEUR.
One of the ventures was orientated towards production knowledge, which will be referred to as
``the production project''. The idea was to absorb knowledge about production methods (such
as machine maintenance methods, machine speed, work organization and safety prevention)
internally and externally, and document and redistribute it internally. The purpose was to reduce
production costs (labor, raw material, capital costs).
The second venture, referred to as the ``supply chain project'', was orientated towards
improving and distributing knowledge about the ``performance'' of the offered product in the
downstream supply chain, in terms of its storage, palletizing, sustainability, shape, exterior and
more. The overall purpose was to be able to improve product functionality and understand
better the effects of the product design on the economics of transport and warehousing.
The third venture, referred to as the ``design project'', was orientated towards improving
structural product design and to assist designers and sales representatives. The overall
purpose was to support designers by enabling them to construct products requiring a minimum
of raw material, and to avoid having to do extensive prototyping.
The reason for choosing one company and these particular cases was primarily the access
provided and the aspect richness that this allowed. The cases differ in character: they cover
different activities (production, downstream supply chain, design and sales). The nature of
knowledge differs. In the production project, knowledge was primarily explicit and procedural.
The supply chain and design projects aimed at capturing more tacit knowledge, and explicating
it by codifying it into software programs. The different pieces of knowledge were also
implemented differently. The production project was rolled out across all plant units
simultaneously, with no exceptions. The supply chain and the design projects were rolled
out on a voluntary basis.
Data
The research design aimed at clarifying
(1) the relations between knowledge, knowledge utilization and performance; and
(2) the managerial and other mechanisms that affected the chain of events.

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In order to cover these matters, a range of knowledge management concepts were taken into
account in the empirical study (see Appendix 1).
The three steps in the proposed sequence between knowledge and performance are
knowledge development, knowledge utilization and knowledge capitalization. They could be
de®ned as follows. During knowledge development, focus is put on learning, and results, at
best, in new knowledge, either broader or deeper, or more broadly distributed within the
organization. It becomes knowledge utilization when knowledge is applied. Learning can take
many forms, including experience, and so knowledge utilization also holds a learning
component. But rather than integrating knowledge development and utilization, we accept and
expect iteration between knowledge development and utilization. Knowledge utilization can
result in modi®ed and improved activities, for instance less time spent per job. Knowledge
capitalization means ensuring the net effects on activities are transformed into pro®t, i.e. that
positive effects in one activity are not compensated for by negative effects elsewhere.
Because the areas of enquiry differ in character, different sources of information were required.
Some questions related to performance required quanti®ed data, whereas questions related to
the character of knowledge or learning mechanisms could only be discussed using qualitative
data, such as accounts of events. The areas of enquiry (Appendix 1) include the theoretical
(``sensitizing'') concepts enquired about. For each step in the sequence, this is what we can
expect, according to existing theory. The management-related factors under ``Key events and
incidents'' are common in management and knowledge management literature. The categories
for effects and objectives have been taken from general management literature. The concepts
were operationalized (albeit not always into quanti®able measurements), and the semi-
structured enquiry guide is presented in Appendix 2.
Sources include both interviews and documentation, such as board meeting minutes, internal
correspondence, project documentation, and annual reports. Together, interviews have been
conducted with 12 corporate staff and 43 local plant staff. At corporate level, project sponsors,
technical experts and the CEO have been included, and at local level, general managers, local
sponsors, project members and practitioners have been interviewed. Quantitative data has
been used to uncover effects on activities and on ®nancial performance. This included a range
of statistics on production performance as well as local pro®t and loss statements (each plant is
a pro®t centre). For one of the studied projects it was possible to conduct regression analysis
between activity-based metrics and pro®t and loss performance for a larger sample of plants. In
the other two this was not relevant or possible.
Reliability of the data sources has been sought through the cross-checking of accounts and
respondent validation. Individual incidents have been double-checked with multiple sources (cf.
Van de Ven and Poole, 1990).

Empirical ®ndings
The following brief presentation will be structured by case. As a ®rst general note, none of the
different projects did result in improved performance on a corporate level. At best and in a few
local cases, the projects did result in improved ®nancial performance, i.e. pro®t.
The production project
The production project was successful in absorbing knowledge from the outside, in capturing
the knowledge existing in different plants within the company, and in transferring the knowledge
to any plant that needed it. As a result, the organizational level of knowledge increased,
production performance increased, and certain costs were reduced. However, overall pro®t
was not signi®cantly altered. Some plants did manage to increase pro®t, but others did not.
Knowledge development ± in terms of developing knowledge, the project was successful. A
team of three technical experts and one database administrator was created at corporate level,
reporting directly to the Vice President (manufacturing). The team quickly absorbed knowledge
and methods from the ®eld of production science and applied it to the particular circumstances
of the business. The knowledge was recorded in manuals entitled ``book of ideas'',
``manufacturing improvements'', and ``the toolbox''. The character of knowledge varied; some

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of it was highly explicit, and could be expressed as ``use device X when you produce
component B'', whereas other pieces of knowledge were more tacit, requiring descriptions of
multi-step methods. Parallel, training of key staff was implemented on a large scale, whereby
machine operators and supervisors were taken to courses on manufacturing techniques.
Furthermore, the central team maintained a database where they measured the performance of
each machine (each plant has on average between 7 and 12 different machines, which are
similar from plant to plant) in terms of machine speed, output, output per hour of labor and a
range of other measures. This was done on a monthly basis, and each year the machine team
with the best overall improvement for that particular type of machine was awarded at a
corporate venue, including a nice weekend in a European capital with fellow workmen from
other countries. This benchmarking exercise was also important in order to compare
performance and identify extremes. Anybody within the company could easily use the
recommendations and advice provided by training and by the manuals. They could also visit
other plants.
Knowledge utilization ± although participation was mandatory, utilization was not, based on
the idea of pro®t centre status. Plants were not penalized for being inactive. So some plants
were more successful than others; out of the 40 plants that were included in the benchmarking
data base, approximately ten did not improve their production ®gures at all. In the case studies
made, it was clear that these plants lacked the incentives to absorb and utilize the new
knowledge, and they claimed they were pro®table from the outset, or that they had strategies
other than low cost. They also reported that they did not have the time to devote to new
knowledge, other issues had higher priority, such as the acquisition of new customers.
Nonetheless, corporate utilization showed in statistics; the ®rst two years after implementation
in 1996 saw signi®cant improvements: average machine speed for the company increased by
16 percent, and average direct productivity (output per labor hour on the average machine) rose
by 19 percent.
Costs went down in most of the plants that utilized the knowledge (those who had improved
machine performance). Plants that did not reduce costs despite improved production
performance were unsuccessful because they failed in other activities; redundant staff was not
dismissed but given other jobs in production or administration because management was
expecting a growth of business; material improvements were not realized in the sense that
stock levels were not reduced, raw material price cuts were not actively searched for; some
plants claim they had to increase their resource levels on other activities, such as production
planning and stock management. But overall, as illustrated in Figure 2, total costs were reduced
in plants that were successful in increasing their machine speed (the same correlations were
due for other production performance indicators as well). Less raw material and less labor were
needed per unit of output, which signi®cantly reduced costs per unit of output.
Knowledge capitalization ± interestingly, those that did improve production performance and
cost levels did not necessarily improve their pro®t (those that did not improve production

Figure 2 Machine speed (horizontal axis) and total cost and price/unit of output

Price/Unit
r = -0.64***

Total Cost/Unit
r = -0.65***

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performance did not either). As is also illustrated in Figure 2, the price level was reduced as well
in those plants, meaning there was no correlation between machine speed and pro®t (the same
correlations were due for productivity and other indicators as well). There are several reasons for
these correlations, which turned out after case studies. For some plants, increased speed, not
carefully managed, meant physical product quality was reduced, and over time, prices fell. It
also meant that some plants narrowed their range of product offerings, which also forced price
reductions. But it also, surprisingly, turned out that sales representatives informed about the
cost reduction reduced average price levels since cost improvements would allow this while
maintaining pro®t levels. As one local sales director said, ``the market pressure is so strong here
that we sometimes give prices away, especially if we have made cost cuts'' (nonetheless
respondents claim there has been no leakage of knowledge). Hence we touch upon the
reversing of the correlations in Figure 2: those plants that faced strong market pressure were
able to cut their costs more than others, simply because they had to, in order to sell at price
levels that allowed them to survive in competition.
The supply-chain project
The supply-chain project was driven by the corporate sales and sought knowledge from
customers, warehouse delivery centers, transporters, and end-consumers. The objective was
to increase and transfer (internally) knowledge about the ``behavior'' of the company's
products, and to understand the requirements on the products downstream in the value chain.
The idea was to reduce costs and improve the offering by teaching customers how to use
and transport the company's products, and by having a more accurate pricing. The resultant
knowledge was converted into software and made available to all local sales people and
designers. However, the knowledge was never used extensively.
Knowledge development ± when a new corporate sales director was employed in 1996, the
company slowly changed their view on the market. The preferences of customers and the
heterogeneity of the customer base were acknowledged and given greater attention (in total,
the company serves more than 10,000 customers). More knowledge about the different
segments was needed. They were especially interested in the requirements on logistics issues
such as palletizing, pallet stacking, storing conditions, order sizes, packing features, dispatch
routines, display of the product on the shelves of retailers, promotion, waste and recycling, and
so forth. A central team of ®ve sales people and designers set about to document the life-cycle
of the products after dispatch. They studied several plants, and followed dispatches to
customers from different segments. Interviews and video recording were made. It resulted in a
software program (including video clips) that helped designers, sales people and others to
understand the preferences and requirements of different segments and even signi®cant
individual customers. The software could be used in designing products to meet better the
requirements of the downstream value chain, and to offer customers better services.
Knowledge utilization ± the project was terminated with the launch of the system, and the
corporate team involved was transferred to other duties. The system is now widely available
over the intranet. However, the system is not used extensively. Of the respondents, no one
claims they use the system regularly. Sales people only use it when they are seeing a customer
for the ®rst time to present the company. They rarely show the system to customers more than
once. With a rate of customer acquisition less than 3 percent annually, there is limited use of the
system. Sales people also claim the system cannot give them any new information that they do
not already have about their particular customer. Sales people claim the system occasionally
impresses customers, because it is ``¯ashy'', but that it never has resulted in increased prices or
sales volume. For designers, the system did not help them create better products, directly, but it
did help them understand better the heterogeneous requirements on the function of the
product: end-consumers had preferences that sometimes were contrary to what the customers
said they wanted. This knowledge, however, was very dif®cult to bring the customers' attention.
Sales representatives found that customers did not like the fact that the company approached
their customers directly, and they did not want to feel that they knew less about their customers
than their suppliers did. The system was sparsely used, and resulted in activity improvements
only very locally. One instance that did bene®t from the knowledge was the corporate level,

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where executives from areas not related to supply chain got a glimpse of what the market
expects from their products.
Knowledge capitalization ± consequently, knowledge was not capitalized. No cost or pro®t
improvements were visible, and respondents, both corporately and locally, claim the system
has not generated any improvements in cost, price or volume despite being expensively
implemented since 1996.
The design project
Like the supply-chain project, the design project knowledge is put on disk. But the contents are
rather different. Here, the idea was to help designers to use state-of-the-art methods for
structural design, using the so-called Finite element method (FEM), which helps predict tenacity
of products under certain conditions. The method has been successfully applied by NASA, and
the aviation and automotive industries. The system resembles an advanced CAD system
available to salesmen and designers. However, the system has been sparsely used.
Knowledge development ± two corporate R&D scientists with a design background studied
FEM, and applied the method to their product. Since they made a software application out of it,
there was also a substantial part of programming involved. Between 1992 and 1994, they
developed the software very much on their own in the corporate lab. The system helps
designers to predict what will happen with a particular component, under certain conditions.
Variables include temperature, product surface dimensions and thickness grades, under
certain packing conditions, over time and so forth. A designer enters the variables and can then
see where the most intense material stress will appear, and how intense it will be. This
knowledge enables a cost-effective design requiring minimal material.
Knowledge utilization ± since its launching in 1994, the system has been more or less entirely
neglected, apart from the PR department who featured the system strongly in their
communications, because of the stylish pictures the system generated when in use. Designers
at the different plants claim they understand the system, but that they never use it, simply
because it is cumbersome and it does not give them anything they could not resolve by other
knowledge. They still produce the same amounts of prototypes as they did before. Raw material
cost has not been reduced. Designers use the system only upon special occasions, e.g. when
new employees are introduced. The system is perceived by all respondents as highly technically
advanced, yet dif®cult to comprehend. Sales representatives con®rm the system is perceived as
complex, but they also imply that it is a good ``marketing tool'' due to the appealing graphics.
One R&D scientist also claims that the system is nowhere as good as it looks to be, and that ``it
is just a matter of time before a competent person at the customer understands that what the
system really says, we know already. But it does make us appear as technically competent''.
Knowledge capitalization ± the design project has not generated any improvements of price,
cost or sales volume. It is becoming obsolete and is not updated. The experiences have been
valuable, but not directly applicable to other areas of design.

Discussion
The cases indicate that it might be relevant to distinguish between knowledge development,
knowledge utilization and knowledge capitalization. In all the cases, new knowledge was
developed through various means, but it did not result in widespread utilization, and it did not
result in overall improvements in pro®tability. Of course there are spin-off effects that can not be
measured, but the initial ambitions were not met in the two projects.
Knowledge utilization
Knowledge is utilized constantly in human activity, often in a manner that means knowledge is
being developed as we progress, through accumulated experience or re¯ection. So, obviously,
knowledge development and knowledge utilization are partly overlapping. But as proposed
here, there might be a point in distinguishing between the two, because although utilization
always requires knowledge in the ®rst place, all knowledge contained within an organization or
an individual might not be used, or might be utilized in a non-optimal way. In the reported cases,

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the knowledge within the production project was only used by those who felt a need to improve
in light of their current performance, and who prioritized production performance. Within the
supply-chain project, knowledge utilization was hampered by the fact that the resulting system
was seen as cumbersome and negatively affecting other activities. However, there were some
side-effects, in that the system was perceived as ``¯ashy'' and could be used as a marketing
tool. But the system never delivered what it was intended to in terms of supporting activities.
The same is true for the design project, which also suffered from being limitedly supportive, yet
graphically appealing. The knowledge development efforts undertaken were intended to satisfy
a non-existing demand. In the end, the system was only used in corporate communications.
So, evidently, knowledge is not always utilized, even in cases where it has been carefully
absorbed internally or externally, codi®ed, and distributed.
Knowledge capitalization
If knowledge is not utilized, it will not contribute much to pro®t (unless it is sold externally). But
even if knowledge is utilized, it might not contribute to improved performance. In the production
project, knowledge was utilized, not by everybody, but a majority of the plants within the
corporation, but this did not always result in improved performance. Failure to materialize quality
or cost improvements, for instance through making redundancies and demonstrating to the
market the improved quality of the offering, means no payback is in sight. Although activity-
based performance (e.g. machine speed) correlated with cost per unit of output, so it did with
price per unit of output. This somewhat surprising ®nding was explained by reduced customer-
perceived quality, but also by the fact that misguided sales representatives occasionally
reduced prices after cost levels had been cut. If this had resulted in larger volume there could
have been positive effects on pro®t but this was not the case. As hypothesized, knowledge
utilization means other activities may also be in¯uenced, underlining the importance of a holistic
management approach.
Knowledge management and performance
The empirical study presented here cannot reject theory about knowledge management, but it
can provide proposals about the managerial challenges to increasing pro®ts through knowledge
ventures. From the literature we already know a great deal about knowledge management
(particularly knowledge development), and hence we shall focus on complementary ®ndings.
The objective of knowledge development is to create or extend organizational knowledge. In
doing so, companies will manage the explication of knowledge, the transformation of individual
knowledge into organizational knowledge, and norms and values to support the venture. Theory
on knowledge development offers many solutions to these obstacles, and the ®ndings only give
examples of what can be done: knowledge explication could be facilitated through the creation
of supporting software, and through aggressive absorption and application and testing of new
knowledge on idiosyncratic routines. The transformation of knowledge from individual to
organizational levels can be managed by setting up organizational centers which focus on
categorizing, storing and documenting valuable work methods and advice. They can also
facilitate the internal transfer of knowledge. Managing norms and values can be done by
formulating, strongly, a strategic purpose of the venture, including clear performance
objectives. If those who have or use the knowledge know up front what it is supposed to
deliver, it will be easier to get support.
Turning to knowledge utilization, the objective can be stated as utilizing knowledge to improve
activities. This can be measured through proxies such as productivity, time spent per job or
stock levels: measurements that may indicate but are not identical with increased pro®ts.
The challenge lies in managing aspiration levels, in dealing with potential causal ambiguity,
absorptive and retentive capacity, in the characteristics of the organizational context (intra-

`` The objective of knowledge development is to create or

extend organizational knowledge.
''

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organizational relations, control mechanisms), in strategic priorities and in comprehending side

effects of knowledge utilization. Aspiration levels is a very important variable. If a user or his
manager does not feel that they need to improve their performance, they might not utilize useful
knowledge. This is a factor of and can be managed through incentives, control mechanisms,
and benchmarking that visualizes operational performance in more detail than pro®tability does.
For instance, a manager whose normal incentive is to deliver a tidy pro®t in relation to budget at
the end of the month could be measured also by how well his unit utilizes knowledge. Speci®c
key ratios (e.g. productivity) could be used as temporary complements. Causal ambiguity
connects to the issue of the purpose of the knowledge. If the purpose is well communicated,
for instance in a strategy plan, it becomes easier to use the knowledge. However, most
importantly, utilization of a particular type of knowledge can have unexpected side effects.
Hence it is important to have a holistic and integrative perspective. This requires that specialist
knowledge is coupled with generalist business overview, and signals that general managers
need to be active in managing the entire business, not just those activities that are directly
affected by the knowledge.
The objective of knowledge capitalization is to increase pro®t, to make sure that improvements
in activities actually are converted into reduced costs, a higher price or a larger sales volume
without negative side effects. Challenges include the management of aspiration, change
management, and in obtaining a grip of all the consequences of knowledge utilization; cost
improvements should not be eroded by price reductions, and price or volume increases should
not be eroded by cost increases. Managing aspiration, again, means potentially to alter control
mechanisms, to benchmark not just utilization but also the links with pro®t (measuring whether
increased utilization actually delivers increased pro®t), to educate adequately, and to continue
to revisit the strategic objectives. Change management means making sure that improvements
made in individual activities are actually realized, ®nancially. This involves potentially demanding
tasks such as organizational change, the creation or termination of speci®c jobs, making staff
redundant, reducing warehouse space, and divesting non-useful resources. It also involves
making sure that staff is committed to the changes, ensuring that there is a well-understood
strategic logic and incentives in place. Managing the balancing of cost and revenue bene®ts
requires a generalist management style.
Summary: three instances of knowledge management
The aim of this paper was to improve our understanding of how knowledge is managed to
improve performance. It is proposed that this depends on the management of not just
knowledge, but also knowledge utilization and knowledge capitalization. Thus we need to
develop a model that includes all three instances (see Table I).
The proposed knowledge management framework highlights what to some is given. As has
been discussed, knowledge management theory is not very explicit on how knowledge is
converted into pro®t, or interested in whether it does or not. In relation to that side of knowledge
management theory (cf. Daft and Weick, 1984; Nonaka, 1994; Grant, 1996b; Winter, 2000;
Sanchez, 2001b), this study claims that the link between knowledge and performance is not
given or automatic. In comparison to knowledge management theory, this study also extends
the discussion about the management of knowledge utilization and capitalization, i.e. it brings
some nuance to the concept of ``knowledge exploitation'' (March, 1991). In relation to much
recent research on knowledge management (e.g. Szulanski, 2000; Tsai, 2001), this study
acknowledges the importance of managing aspiration levels, strategic purpose, organizational
context, the generalist/specialist knowledge balance, and active change programs ± not just
cognitive factors.
It seems appropriate to connect the propositions made here with strategy theory. Like RBV, this
paper acknowledges the importance of understanding the role of knowledge and how it can be
developed ± it is also important to realize that the character of knowledge can determine the
risks of competitor imitation and loss of rents. But it is also necessary to understand how
the knowledge and changes of it affects activities and the cost and price of the offering. In fact,
the three instances of knowledge management correspond well with three core concepts in I/O
and RBV; knowledge development refers to development of resources; knowledge utilization

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Table I The three instances of knowledge management

Knowledge development Knowledge utilization Knowledge capitalization

Purpose J Create or extend knowledge
Challenges J Tacit to explicit
J Individual to organization
J Supportive norms and values
Managerial solutions J Aggressive absorption internally
and externally
J Fit to idiosyncratic routines
J Organizational knowledge
centers to store and distribute
knowledge
J Strategic purpose, with clear
performance objectives
J Improve activities
J Aspiration levels
J Causal ambiguity
J Absorptive and retentive
capacity
J Organizational context (relations,
control mechanisms, incentives)
J Strategic priorities
J Comprehension of effects
J New control mechanisms
(potentially temporary) that
visualize usage
J New metrics
J Communication of strategic
purpose
J Holistically sensitive and
integrative management style
which can grasp the overall
effects of specialist knowledge
utilization
J Increase pro®t, ceteris paribus
J Aspiration levels
J Change management
J Comprehension of total effect
on pro®t, not just cost, price
and volume individually
J New control mechanisms
(potentially temporary) that links
usage with pro®t
J Revisit strategic purpose
J Realize bene®ts by executing
change programs, that might be
stressful to succeed with
J Integrative management style
which can grasp and interrelate
costs and bene®ts

refers to improvements of activities (as described in the value-chain); knowledge capitalization

refers to the ability to reduce costs and/or to differentiate the offering, including prevention from
imitation. Unless we assume the value can only be realized if knowledge was sold instead of
being used, the understanding of knowledge management would bene®t from complementing
RBV thinking with the value chain and the generic strategy concepts.

Conclusion
This paper claims that the link between knowledge and performance, which so frequently is
taken for granted, might not always exist. At best, the few empirical studies that focus on the
links between knowledge and performance often stop with proxies; not at pro®t, but at proxies
of pro®t, such as productivity. It is evident that although activities always require knowledge, all
knowledge is not always used. And even if it is, it might not result in pro®ts, due to side effects or
because managers and staff are not keen enough on using it. The concluding propositions,
based on the empirical ®ndings, recognize the consistency of the three instances of knowledge
management, and also describe how each of them can be managed.
This study is qualitative in nature, and the case study design limits, of course, the ability to
generalize ®ndings other than in relation to existing theory. Based on the same argument as in
the beginning of the paper, more research is needed into the complex relations between
knowledge and value. Given the small amount of empirical research presented on the topic,
there are plenty of windows for both qualitative and quantitative research. Testing the links
between knowledge and value is easily done in large populations, if data is available on activity
level performance (knowledge utilization) and on price and cost per unit of output (knowledge
capitalization).

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Appendix 1 Research questions, sensitizing concepts and sources of data

Instance Areas of enquiry Sources

Knowledge development
New knowledge
Key events and incidents
(intended and unintended)
Objective
Knowledge utilization
Effects on activities
Key events and incidents
(intended and unintended)
Objective
Knowledge capitalization
Effects on ®nancial
performance
Key events and incidents
(intended and unintended)
Objective
* Including project documentation, memos, correspondence and similar
** Based on computations of business data obtained from the case company
Tacit/explicit, individual/organizational, internal/ Interviews
external, norms and values
Experimentation, sharing, transfer, deduction, Interviews
education, people transfer, motivation unlearning Documentation*
Intended effects; learning, cost, quality, pro®t, Interviews
competitive advantage Documentation
Selected metrics for identi®ed work tasks, e.g. Documentation**
man hours/job, material cost/unit, price/unit,
volume, output/employee, cost/unit
Experience, experimentation, sharing, transfer, Interviews
deduction, interaction, education, people Documentation*
transfer, motivation, organizational context,
causal ambiguity, absorptive and retentive
capacity, relations
Effects on activities other than those intended Interviews
Documentation**
Pro®t and loss performance at plant and Documentation**
corporate level
Managing side effects, controlling and Interviews
monitoring performance, incentives, Documentation*
organizational context, change management
Performance objectives met Interviews
Documentation**

Appendix 2 Guide for the enquiry (for interviews and archival sources)
1. The purpose of the project
2. The objectives of the project
3. The demands of knowledge
4. The organization of the project
5. Chronological outline of the project
6. Stakeholders, project participants
7. The nature of the knowledge
8. Where was it absorbed from
9. How was knowledge documented
10. Was there a point in time when knowledge was ready to use
12. When
12. Which were the effects on activities and how did they match initial objectives. Metrics
13. Which factors were important to manage
± sharing, transfer, interaction, training
± organizational factors (control, incentives, structure, power etc.)
± ability to understand new knowledge and its effects
± motivation, culture
± side effects
14. Any effects on costs, price and sales volume. Metrics
15. When
16. Which factors were important to manage
± side effects
± change programs
± organizational factors (control, incentives, structure, power etc.)
17. Visible effects on pro®t, and did they match initial objectives. Metrics

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