Journal of Knowledge Management Practice, October 2002

Creating Competitive Advantage By Effectively Managing Knowledge:

A Framework for Knowledge Management

Atul Gupta & Jason  McDaniel, Lynchburg College


This paper investigates the vital link between the management of knowledge in contemporary organizations and the development of a sustainable competitive advantage.  A framework synthesized from a review of the literature is offered.  Five distinct hypotheses are developed, which constitute the essential ingredients of the formulated framework.  Although each of these should be viewed as critical to the success of the entire process when examined individually, they should be considered most influential when viewed as forming a comprehensive gestalt for effectively managing knowledge.  The paper also provides practical implications for creating a competitive advantage in modern firms.



In the landscape of modern business, companies are persistently striving to create mechanisms for differentiating themselves from their competitors within given markets.  Because many markets are quite saturated with numerous firms endeavoring toward like core competencies, organizations are forced to dissect their business processes for the purpose of determining what can produce a sustainable competitive advantage.  The information age and the changes created by it have shifted firms away from being myopically concerned with the exploitation of tangible assets toward a steadfast and holistic interest in leveraging intangible assets as well.  The management of information as a key to grasping and retaining competitive advantage has recently evolved into the more strategically focused management of knowledge.

The concept of knowledge management concerns the creation of structures that combine the most advanced elements of technological resources and the indispensable input of human response and decision-making (Raisinghani, 2000).  The notion of knowledge management is nothing new.  Corporations have always had some process to synthesize their experience and integrate it with knowledge acquired from outside sources (Sarvary, 1999).  However, not until recently have scholars and practitioners alike become increasingly attracted to the science of applied knowledge within organizations.  This movement is unique in combining information technology theory with pioneering work on models of learning organizations (Senge, 1994).

This paper investigates the vital link between the management of knowledge in contemporary organizations and the development of a sustainable competitive advantage.  The burgeoning field of knowledge management is differentially defined from other more traditional information technology functions, and the evolution of knowledge management is discussed.  A framework synthesized from a review of the literature is offered.  Five distinct hypotheses are developed, which constitute the essential ingredients of the formulated framework.  Although each of these should be viewed as critical to the success of the entire process when examined individually, they should be considered most influential when viewed as forming a comprehensive gestalt for effectively managing knowledge.  The paper concludes with a section on practical implications for creating a competitive advantage in modern firms.

Knowledge Management Defined

The abstract construct of knowledge can be understood through its relationship to data and information.  Parikh (2001) posits that data are merely raw facts collected from business transactions and activities, and that data must be structured into a meaningful, composite model to become information.  Once information is created from such constitution of pure data sets, it is able to filtered through a relative model of understanding.  Thus, knowledge is created only as information is interpreted and evaluated from a contextual mental model.  Because individuals and companies as wholes have different mental models (Senge, 1994), the knowledge gleaned from the same compilation of information can differ greatly, not only in quality but also in applicability.  Knowledge management thus differs from information management because the former implies a persistent, intentional effort of extracting from available information what is critical for business success, while the latter is more concerned with making critical information available in a timely and consistent manner to end-users within the organizational structure.  Knowledge management is therefore the creative mining of information from diverse sources with the purpose of business opportunities in mind.  As a firm works diligently toward perusing its information assets through the multitude of perceptual filters available, high-impact, matchless gems are unearthed, which have the potential to substantially affect the bottom-line.

A distinction between tacit and explicit knowledge is critical to understanding the working mechanisms of knowledge management.  Lubit (2001) observes that explicit knowledge is codified and stored in the “organizational memory” and is available to employees throughout the structure.  Conversely, tacit knowledge is personal knowledge possessed by an employee that may be difficult to express or communicate to others.  Because a population of employees possesses a theoretically infinite number of mental models, or ways of perceiving information, tacit knowledge is often individualized and highly specific in scope.  Lubit (2001) argues that it is this knowledge that is often difficult to disseminate to others in the context of the workplace, but it is also invaluable to propagate because it is a unique asset that is very hard to copy by other firms.  Hence, given this premise, it can be logically understood that tacit knowledge can form the basis for competitive advantage, but to do so it must become manifest in the real world and utilized to actualize the strategic agendas of the organization.  Ideally, a firm can better manage its intellectual capital base by uncovering the tacit knowledge of its employees and turning that into explicit knowledge, available to others (Erickson & Rothberg, 2000). 

Stonehouse et al. (2001) note that the concept of knowledge management has evolved from research on organizational learning.  They argue that it is simply the next phase of an evolutionary process of strategic frameworks that seek to explain how an organization may generate superior performance relative to the competitors in its market.  Earlier approaches centered on the competitive position of an organization within its industry.  Subsequent attention was focused on the creative mastery of an organization’s core competencies to achieve competitive advantage.  Currently, the concentration is firmly upon effectively “working” knowledge to produce the fruits of fiscal gain, as reflected in the company’s financial statements and stock price.  Senge (1994) contends that the only construct within grasp of an organization, which will produce lasting, sustainable advantage, is the usable knowledge produced from purposeful, well-orchestrated learning by all employees within the firm.  This collaborative effort toward an openness to learning and new ideas creates a culture of excitement and creativity, which forms the basis for the organization as a learning organism synergistically created by the steadfast efforts of individual employees committed to this undergirding philosophy.

Most investigation into knowledge management has been concerned with capturing the knowledge embedded inside of the heads of individual employees (Nidumolu et al., 2001).  This “within” approach is certainly a substantial place to begin the challenge of developing a thriving knowledge base, but appears to be less than holistic in its efforts.  The vast expanse of knowledge outside the traditional boundaries of the company may prove just as useful (Gold et al., 2001).  Yet the challenge of capturing functional knowledge in the midst of overwhelming information availability remains elusive (Oder, 2001).  If a company is bathed in the true spirit of learning (Senge, 1994), it will develop structures and processes which create a balanced and complementary effort toward combining knowledge acquisition from inside and outside of the firm.

A Framework for Knowledge Management

The science and art of knowledge management can be understood as a sequential framework of purposeful activity designed to produce tangible management decisions and resulting organizational activities, toward the ultimate purpose of producing gains in net income and market share.  Knowledge management is a strategic process, which implies the goal of differentiation from competitors such that a sustainable competitive advantage is forged.  It is hypothesized that five components are essential to producing effective management of knowledge: harvesting, filtering, configuration, dissemination, and application.  For the final end of competitive advantage to be achieved, all of these activities must dovetail together to create a seamless working model for managing knowledge. 

It should be noted that even though the theoretical framework is presented in a linear fashion, it often does not exist in this manner in the reality that is business.  One stage in the process may require the input of several other phases to galvanize its movement toward a usable “knowledge product”, appropriate in supporting concrete decision-making and business action.  In addition, the methodologies subsumed in each phase are presented as discrete activities unique to that step in the process, but in reality often overlap considerably.  In this manner, the deliberate business behaviors that constitute the essence of any given stage may be strikingly similar to those of other steps, depending upon the specificity of the circumstances under which a firm operates.


Before knowledge can be effectively manipulated for the business purposes at hand, it must be harnessed from within the organization or acquired in some sense from outside the firm.  It is hypothesized that such harvesting activities lead to the creation of competitive advantage.  It is at the point of knowledge acquisition that the boundaries between knowledge and information as defined above blur considerably (Jacob & Ebrahimpur, 2001).  When searching relevant sources external to the organization, it is quite conceivable that the firm may be gathering both information and knowledge from those familiar enough with its core competencies to provide meaningful inputs.  However, it is thought that, even in this context, knowledge continues to be more value-added than information, because the former implies the acquisition of not only the information but the benefits of why it may be useful to the strategic initiatives of the organization, as informed by the perceptual lens through which it is known.

Yli-Renko et al. (2001) have produced research findings that indicate that knowledge acquisition is positively correlated with knowledge exploitation for competitive advantage.  Hence, the strategic activities involved in harvesting knowledge have been empirically linked to tangible differentiation in the marketplace.  With this as a base of understanding, firms should move forward in a purposeful manner in hopes of capturing knowledge with the potential for exploitation.  In a pragmatic sense, the reasonable objective should be to identify knowledge relevant for current and predictable future needs (Parikh, 2001), rather than harvesting that which solely supports the ideas of management in the mere fledgling stages. 

Knowledge can be captured as existing knowledge within the firm, which resides as tacit knowledge inside the minds of its employees or is stored in company databases as codified information wrapped in contextual footnotes meant to inject a lens through which such information is known.  Gold et al. (2001) argue that collaboration between employees begins the transformational process of tacit knowledge to explicit knowledge.  Collaboration brings together individual differences in backgrounds, experience, ways of doing things, and cognitive style, which has the potential of generating novel strategic mechanisms for achieving company ends.  If this socialization of knowledge is successful, learning will be produced, often laden with the potential for activation toward competitive advantage.

Knowledge can also be acquired from outside the company as new knowledge.  Two examples of methodologies utilized to accomplish this goal are benchmarking and interorganizational collaboration (Gold et al., 2001).  Through benchmarking, an organization identifies outstanding practices from well-positioned competitors, and then evaluates the current state of a particular process to identify gaps or problems in design.  Once these variances have been identified, the firm can then capture the knowledge for internal use.  Additionally, collaboration between an organization and its network of business partners can produce knowledge through such mechanisms as technology sharing, personnel movement, linkages between alliance partners, or joint ventures.  Assuming that the firm has the intellectual and pragmatic infrastructure to absorb such interfirm pooling of resources, such mechanisms have been shown to assist with the accumulation of knowledge (Gold et al., 2001).   


Hibbard & Carrillo (1998) warn against harvesting all existing information or knowledge without knowing whether it will pay off.  Organizations should thus resist the temptation to categorize and catalog knowledge just because it has been captured.  Because all knowledge is not relevant to the business ventures at hand, and because all relevant knowledge is not created equal (Lubit, 2001), some mechanism must logically exist to sift through unnecessary and even distracting knowledge such that that which is useful and applicable to achieve reality-based results remains.  It is proposed that the activities involved in filtering aid in the establishment of competitive advantage.  In the broadest sense, the process of filtering should be guided by the organization’s vision, mission, and overarching goals, so as to provide an effective focal framework by which the management team can successfully evaluate knowledge. 

In this manner, managers should ask themselves, “What’s the potential value of that information?” (Hibbard & Carillo, 1998).  Other important questions may be: “How does this knowledge set complement the existing strategic activities already in place?”; “Given the practical constraints within the firm and in the marketplace as a whole, will this piece of knowledge likely produce value-added benefits to the company’s processes and outputs?”; “Can this knowledge substantially contribute to the concrete differentiation of the firm from its competitors?”.  A staff lacking vision can completely overlook, or at least under evaluate the potential value of available knowledge.  This cannot only significantly inhibit knowledge management success, but can ultimately constrict organizational learning as whole (Gogan, 1998), in such a manner as to stifle the creative chain of ideas springing forth from one gem of invaluable knowledge.

Mullin (1996) recommends devising cross-divisional review teams to determine which knowledge is valuable in its scope.  Pending a thorough and collaborative appraisal process, valuable knowledge from various departments can then be made available to other divisions within the firm.  In much the same manner, an executive team appointed for knowledge review appears to be an appropriate mechanism for screening knowledge gleaned from outside of the company’s traditional boundaries.  Such a team should have an awareness of both the broad strategic objectives of the organization as well as a working understanding of internal processes and the division of labor within the firm, in order to use discernment in evaluating novel knowledge inputs.  Further, Hibbard & Carrillo (1998) recommend a combination of human and technological resources to help determine what explicit knowledge to manage and how to manage it.  Oftentimes a vast repository of value-adding knowledge exists in database archives, but can only be evaluated for its potential usefulness by assigning a team to data mine and evaluate existing files.   


Once the vast array of knowledge available to the company has been thoroughly examined for its strategic and pragmatic usefulness, the organization benefits from developing mechanisms for organizing and storing this knowledge.  It is hypothesized that the processes involved in configuration assist in the creation competitive advantage.  Database management and data warehousing can provide the formal structure for configuring knowledge.  Activities associated with retaining accumulated knowledge are essential, because often employee contributions as well as external gleanings may be well conceived in a strategic sense, but not able to be acted on in the near future.  This is logically because a firm often has to deal with pressing business matters in the present, or it may already be engaged in other promising initiatives farther along in the developmental process.  Such codification of knowledge can increase the knowledge exchange, assisting autonomous and sometimes systemic innovations in the future (Parikh, 2001).  To assist future efforts at interpreting stored knowledge, it is important to include contextual and strategic thought processes that went into the development of stored ideas, so as to indicate the perpetual filters (Senge, 1994) through which given information sets were understood.  These efforts at augmentation help transform codified information into structured, usable knowledge.  The ultimate end of all such organizing efforts is to interactively assist firm employees in capturing stored knowledge when they need it and to assist in decision-making processes (Chandra et al., 2001).

Tidd (2000) suggests that successful knowledge management is critically dependent on successful document management, since a significant amount of the information captured and shared is in some form of text-based document.  He identifies several software applications, designed for compatibility with a Windows operating system, which show some promise in helping to enhance the configuration of knowledge.  Software such as Linkman 5 Professional, Harvest One, KeeBoo 2.1, and PaperMaster 98 accomplish this by managing digitized documents (Tidd, 2000).  They essentially augment the knowledge management process by allowing users to organize, catalog, search, and share files. 


Dissemination of salient knowledge is surmised to impact the formation of competitive advantage. The two most cited mediating factors for ensuring proper dissemination of knowledge are communication facilitation and organizational culture development.  Buckman (1998) argues that one of the central purposes of knowledge management and sharing is to facilitate communication across all of the organization’s boundaries, so that the entire company works together to address given business challenges and seize covert opportunities.  In this way, knowledge managers need to look at specific tools and tactics that will encourage collaborative and productive exchange between employees.  Managing knowledge flow is a crucial step in moving the asset of quiescent knowledge into actualization (Fahey & Prusak, 1998).  With efficient dissemination of knowledge, the company’s ability to make impacting decisions increases dramatically, because individuals throughout the firm gain access to important strategic ideas, rather than merely retaining this knowledge within the ranks of high-level management.  By giving employees access to each other, rather than going through vertical channels of upper management, those with the most current knowledge can share it with those who will benefit most from it (DeTienne & Jackson, 2001).  This improves the organization’s ability to make rapid decisions and execute them effectively.  

Pfeffer & Sutton (2000) maintain that to create a culture appropriate for transforming tacit knowledge into communal, explicit knowledge fear-based approaches to management must be abandoned.  Despite the burgeoning literature within the field of leadership about the need to reconceptualize the control orientation of management and replace it with one that emphasizes facilitation and coaching, management practice remains dominated by control impulses (Beech & Crane, 1999).   A key in overcoming tendencies of employees to hoard knowledge or to remain cautious in sharing ideas with others is for management to take the lead in creating an environment of understanding, shared control, compassion, and learning.  All ideas set forth in good faith and backed by rational analysis should be reinforced as beneficial to the company’s efforts to create a cauldron of strategic innovation, even if such shared knowledge does not immediately produce resounding results.


Pfeffer & Sutton (2000) argue that competitive advantage goes not to those firms who have the best knowledge, but to those who use knowledge best.  They maintain that unless this final step of applying knowledge in real world business activity is achieved, all of the preceding phases of knowledge management are in vain.  It is hypothesized that the application of knowledge to organizational technologies and processes aids in producing a competitive advantage.  More specifically, Pfeffer & Sutton (2000) suggest that there is truly a “knowing-doing gap” in modern business, in which briefings, discussions, and planning sessions all seem to take the place of action in many organizations.  This can create a passive culture in which sounding smart is increasingly rewarded in lieu of real world results.  These kinds of arrangements not only create an environment in which project managers are more interested in knowledge in place than in knowledge at work, but they also cripple the vital “learning-by-doing” feedback loop (Pfeffer & Sutton, 2000), which involves applying knowledge to a new scenario and gaining contextual learning from that application (Parikh, 2001).  Such newly gained knowledge not only adds to the knowledge bank of a firm, but also is seen as more reliable than more theoretical, abstract knowledge.

Pfeffer & Sutton  (2000) describe three approaches that move organizations from adopting an almost mindless reliance on things past that impede action in the present: building a novel sub organization liberated from the passive ways of being, making it difficult—sometimes by drastic means—to adhere to the old ways, and building an organization in which employees constantly question precedent.  The leaders of the firm must take the reins in galvanizing and maintaining a persistent effort towards an organizational culture of purposeful activity and knowledge application.  This may be done by clearing articulating new expectations for firm employees, and by socially and fiscally rewarding pro-initiative behavior change, while penalizing lagging efforts toward organizational proactivity. 

Learning from knowledge application involves post-analysis and critical process evaluation.  Such evaluations lead to managerial learning regarding what knowledge initiatives actually produced tangible business results.  This learning is difficult and often neglected by firms, but it is very important to maintain the wellspring of knowledge (Parikh, 2001).  This cycle of knowledge implementation and critical review helps bridge the gap between the possession of theoretical knowledge and the actual application of such.  In this sense, the speculative ideas regarding what will impact the bottom-line are empirically tested in the real world.  This is yet another crucial step in moving from esoteric conceptualizations to refined knowledge that can impact business decisions.  Knowledge management should ideally provide relevant knowledge to help knowledge workers make appropriate decisions to determine organizational actions (Parikh, 2001).

Implications for Creating Competitive Advantage

The five components of the framework described above should be viewed as unique hypotheses regarding the management of knowledge.  The research questions produced are essentially two: Does any individual component generate effective knowledge management for the firm?; Does any given component infuse the knowledge management process as a whole in such a manner as to produce measures of sustainable competitive advantage for the firm?  These same research questions should also be examined regarding the framework as a whole.  The framework elucidated within this paper describes a logical progression from obtaining knowledge to actually applying it, which makes good conceptual sense.  However, only rigorous hypothesis testing will yield empirical results, most appropriate for drawing conclusions regarding the actual practice of knowledge management.

One central measure of organizational effectiveness is the creation and continuance of a measurable competitive advantage.  Many broad initiatives such as efficiency, core competency advancement, actualization of customer-centric products and services, and limitation of the fixed costs of doing business can help to achieve a sustainable competitive advantage within the marketplace.  Knowledge management is a targeted expertise designed to impact productivity and innovation in profound ways.  It represents a new technology that is changing the competitive landscape of contemporary business (Sarvary, 1999).  Knowledge management may exploit supply-side or demand-side economies of scale (Ofek & Sarvary, 2001).  In the former case, the role is to reduce the operating costs of the firm, while in the latter case its role is to create added value to customers by appreciably increasing product quality.  Thus, the effective management of knowledge understandably has the capacity to deeply impact the way a firm does business from the minor details of daily operations to the broadest strategic decision-making processes.  There always exists better ways to transform inputs into outputs through the refinement of processes.  Both academics and business practitioners alike are beginning to grasp the power of knowledge in helping to do so.


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Contact The Authors:

Atul Gupta & Jason McDaniel, School of Business & Economics, Lynchburg College, 1501 Lakeside Dr., Lynchburg, VA 24501 USA; Phone: 434-544-8651; Fax: 434-544-8639