Mismanagement of Tacit Knowledge

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International Journal of Information Management 21 (2001) 3}20

Mismanagement of tacit knowledge: the importance of tacitknowledge, the danger of information technology,

and what to do about it

Jon-Arild Johannessen*, Johan Olaisen, Bj+rn Olsen

Norwegian School of Management, Bod~ Graduate School of Business, Evenvollvn. 46, 2623-Vestre Gausdal, Norway

Norwegian School of Management, Norway

Graduate School of Business, Norway

Abstract

Businesses are increasingly "nding themselves in a world characterized by globalization, turbulence and

complexity, paralleled with an exponential advancement in information technology (IT). Although empirical

evidence indicates a lack of support for the positive economic impact of IT, we have seen that companies

increasingly invest in the new technology. As this technology is limited to the transfer of explicit knowledge,

this may relegate tacit knowledge to the background, in spite of the strategic importance of tacit knowledge,

hence, leading to the mismanagement of knowledge. The problem stated in this article is as follows: How does

investment in, and the use of IT in#uence tacit knowledge and what impact does this have on the ability of

"rms' to create sustainable competitive advantages? The purpose of the article is to improve our understand-

ing of the role of tacit knowledge and to re#ect on and give guidance on how to handle the relationship

between tacit knowledge and IT. 2001 Published by Elsevier Science Ltd.

Keywords: Information technology; Tacit knowledge; Innovation; Knowledge management

1. Introduction

Business are increasingly "nding themselves in a world characterized by globalization, turbu-lence and complexity, paralleled with an exponential advancement in information and communica-

tion technology, denoted in its extreme form as hypercompetition (D'aveni, 1994). Within thispicture, signifying the transition from an industrial society to a knowledge-based society, we havewitnessed an increasing focus on knowledge as the most important resource for companies.

* Corresponding author. Tel.:#47-61229520; fax:#47-61229570.

0268-4012/01/$ - see front matter 2001 Published by Elsevier Science Ltd.PII: S 0 2 6 8 - 4 0 1 2 ( 0 0 ) 0 0 0 4 7 - 5


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Drucker (1993) postulates that knowledge, as an input resource will have a greater impact than

physical capital in the future. This has also been underlined by Quinn, Anderson, and Finkelstein(1996); Thurow (1997); Sveiby (1997); Solow (1997) and Stewart (1997). Grant (1996) argues that as

the market for knowledge resources experiences the same dynamic competitive conditions as is thecase within the product markets, knowledge has appeared as the most strategically important

resource for companies. We have also seen an increased emphasis on innovation as paramount increating and sustaining competitive advantages (e.g. Freeman, 1995; Landabaso, 1995). The pace

and magnitude of this development are changing the rules of the game (Spender & Grant, 1996;Sveiby, 1997) and the challenge is to "nd new recipes for increasing "rms continuous improve-

ments, innovation and performance, so as to create sustainable competitive advantages. The focuson knowledge has lead to increased attention towards information technology (IT) as one of the

most important sources of competitive advantages (European Commission, 1996). Althoughempirical evidence indicates a lack of support for the positive economic impact, we have seen that

companies increasingly invest in IT. As this technology is limited to the transfer of explicit

(codi"able) knowledge (Antonelli, 1997), our concern is that this may relegate tacit knowledge(Polanyi, 1962, 1966) to the background, in spite of this knowledge being emphasized by theliterature as an important strategic resource for most companies (Black & Boal, 1994; G+ranzon,

1993; G+ranzon & Florin, 1990; Howells, 1996; Nonaka & Takeuchi, 1995). Hence, leading to themismanagement of knowledge.

The problem stated in this article is as follows: How does investment in, and the use ofinformation technology in#uence tacit knowledge and what impact does this have on the ability of

"rms to create sustainable competitive advantages? The purpose of the article is to improve ourunderstanding of the role of tacit knowledge in a knowledge-based society where IT gains access tomany social areas, and also to re#ect on and give guidance on how to handle the relationship

between tacit knowledge, IT, continuous improvements, innovation, performance, and sustainablecompetitive advantages. The remainder of the paper is divided into three parts. First, we developa conceptual model based on a discussion of the importance of knowledge and the consequences of

IT investments. The model presents us with the puzzle of handling both explicit and tacitknowledge. For better understanding the puzzle, and what to do about it, a revised modelexplaining the role of tacit and explicit knowledge in creating sustainable competitive advantages is

then presented. Finally, in the conclusion we present a number of suggestions for how to overcomethe mismanagement of knowledge.

2. Developing the conceptual model: information technology and the mismanagement of tacit

knowledge

Knowledge can be categorized in two di!erent categories: explicit and tacit knowledge (Nonaka& Takeuchi, 1995). Explicit knowledge can relatively easily be formulated by means of symbols and

can be digitalized. This knowledge can thus with relative ease be transferred to others by e.g. the useof information technology. Tacit knowledge (Polanyi, 1962, 1966) is entrained in action (practice)and is linked to concrete contexts (Rolf, 1995; Molander, 1993; G+ranzon, 1993; Sch+n, 1987). This

knowledge is di$cult to communicate to others as information, and can at best be di$cult todigitalize. Tacit knowledge is de"ned by Howells (1996, p. 92) as: `non-codi"ed, disembodied

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know-how that is acquired via the informal take-up of learned behavior and procedures.2tacit

knowledge does not involve the generation and acquisition of tangible products and processes, orthe more formal element of intangible knowledge #ows associated with speci"c research, technical

or training programsa

. Fleck (1996, p. 119) describes tacit knowledge as:`

a subtle level ofunderstanding often di$cult to put into words, a trained recognition and perception, a good feeling

for the technology. This form of knowledge is wholly embodied in the individual, rooted in practiceand experience, expressed through skillful execution, and transmitted by apprenticeship and

training through watching and doing forms of learninga. Polanyi (1966, p. 4), who was the "rst oneto introduce the concept of tacit knowledge, expresses the meaning of the concept in the following

simple and precise way: `We can know more than we can tella.What happens when enterprises unilaterally invest in IT? The focus will easily be on the part of the

knowledge base that can be formalized, i.e. that can easily be communicated to others as information.The tacit knowledge can then easily be de-emphasized. However, much of the literature argues that it

is tacit knowledge which will determine to what extent companies will be competitive in a turbulent

market, and a global economy (Nonaka & Takeuchi, 1995; Spender & Grant, 1996; Sweeney, 1996;Teece, Pisano, & Schuen, 1997). If the tacit part of knowledge is important to generate sustainablecompetitive advantages for companies, they will easily lose their competitive edge if they emphasize

investments in, and use of IT without taking tacit knowledge into consideration. To put it moredirectly, companies invest into a position where they lose, and do not improve competitive

advantages, if they do not emphasize the entire knowledge base. This argument is consistent withthe `strategic necessity hypothesisa (Clemons, 1988; Powell & Dent-Micallef, 1997). The hypothesis

argues that "rms cannot expect IT to produce sustainable competitive advantages because most ITis readily available to all "rms in competitive factor markets. Conclusions being drawn on the basisof the resource base point of view (e.g. Grant, 1996) and the dynamic capability approach (e.g.

Teece et al., 1997) seem to reinforce the trends towards deteriorating competitive ability, ifinvestment in IT is emphasized without any consideration for tacit knowledge.

The part of the knowledge base which can be communicated to others as information, and which

can be formalized in various IT solutions, is of course important. But it is so well taken care of bypublic and private enterprises alike, that we do not need to worry about it to the same extent as inthe case with tacit knowledge. But tacit knowledge (which cannot be formulated in instruction

manuals, between covers, in data bases, and which cannot be transmitted by means of electronicmail, internet or intranet, be hidden in the group-ware, and which cannot be encapsulatednumerically or alphabetically), is probably the part of the knowledge base which in the information

and knowledge society will make the di!erence in creating and sustaining competitive advantagesfor companies. The above arguments are summarized in Fig. 1.

3. The puzzle: the importance of knowledge and the consequences of information technology

investments

3.1. Information technology investments and use

From the beginning of the 1980s there has been extensive focus on IT and increased organiza-tional e$ciency. Fielder, Grover, and Teng (1994) argue that traditionally, the conservative

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Fig. 1. Investment in IT, the "rm's knowledge base and its sustainable competitive advantage.

approach for applying IT was through the automation of the existing processes within theboundary of a traditional function, such as "nance or marketing, and based on the assumption that

the design of the original process was satisfactory. Hammer and Champy (1993) also point out thisdevelopment. In this context, IT's role focuses primarily on creating operational e$ciency throughimproving administrative and management information systems. This approach could also be

linked to the `ampli"er e!ect of ITa (Cron & Sobol, 1983), where its use reinforces existingmanagement approaches. From the beginning of the 1990s, the focus has increasingly been morecentered towards including communication technology as an important part of IT. Freeman (1995,

p. x) states that: `Information and communication technology has become the dominant techno-logy in the world economya.

Although we observe a general optimism, in the society as a whole, concerning IT's potential for

creating sustainable competitive advantages, recently, challenges to the earlier optimism have risenfrom the emerging empirical evidence which indicate a lack of support for the positive economic

impact of IT investments (Loveman, 1994; Morrison & Berndt, 1990; Strassman, 1990; Brynjol-fsson, 1993; Wilson, 1993; Dos Santos, Pe!ers, & Mauer, 1993; Powell & Dent-Micallef, 1997). Thisis denoted as the `productivity paradox of information technologya. Sweeny (1996, p. 6) arguesthat: `The expectation that investment in science and high technology would result in higher levels

of economic prosperity has not been ful"lled. Something has gone wronga. This is also consistentwith the observations of the Nobel Prize winner in economics, Robert M. Solow (1987), whoargued that he could see the computers everywhere except in the productivity statistics.

Various explanations to the lack of empirical"ndings have been proposed. Brynjolfsson (1993, p.73) grouped the explanations into four groups: (1) Mismeasurement of outputs and inputs, (2) Lags



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due to learning and adjustments, (3) Redistribution and dissipation of pro"ts, and (4) Mismanage-

ment of information and technology. Our main concern in the present paper is on mismanagement.However, when Brynjolfsson (1993, p. 76) discussed the issue, he argued that `the problems of

mismanagement stem from the lack of explicit measures of the value of information, which makes itparticularly vulnerable to misallocation and over consumption by managersa. We take a rather

di!erent approach by arguing that the mismanagement of IT is found in the lack of understandingof tacit knowledge, and the relationship between tacit knowledge and IT.

Also, most of the literature concerning the economic impact (or lack of it) of IT investments arelimited to using productivity as an output measure. However, Merri"eld (1994) argues that

conventional measures of productivity are limited in their usefulness in hyper-competitive markets.Hence, only emphasizing productivity as an output measure may be misleading in searching for the

value of IT, especially within hypercompetitive situations. We argue that there is a need forfocusing on a wider range of performance measures in order to reveal factors that contribute to

creating and maintaining sustainable competitive advantages. Throughout the paper we use

continuous improvements, innovations, performance and sustainable competitive advantages asoutput measures.

3.2. The importance of tacit knowledge

Tacit knowledge is the practical knowledge used to perform a task, and it is also `the knowledgethat is used as a tool to handle what is being focused ona (Sveiby, 1997, p. 30). Consequently, tacit

knowledge is, in the business context: practical, action-oriented, experience-based, context-linkedand personal, but not subjective or relative. It is objective, i.e. can be tested, checked, investigatedempirically, in the sense that it is objective in its consequences. This means that the work done by

using tacit knowledge can be tested for quality, durability, and reductions in the cost of production.Tacit knowledge is as real as explicit knowledge, but the processes to acquire this kind ofknowledge, i.e. tacit knowing, rely on awareness of details which cannot be speci"ed or tested in

any known scienti"c way. But this does not apply to tacit knowledge, which is the outcome of theprocesses of tacit knowing (Polanyi, 1966, pp. 3}27). Tacit knowing is a process of a complex whole,a pattern that escapes when taken apart for analysis. But tacit knowing is not only involved in the

process by which tacit knowledge is gained. It is also involved in the processes by which allknowledge is gained (Polanyi, 1958). For Polanyi (1958) tacit knowing is the dominant principle ofall knowledge.

In spite of the great interest in knowledge processes in organizations, the link between know-ledge, particularly tacit knowledge, and IT, have not been explained and concretized (see Nonaka

& Takeuchi, 1995; Stewart, 1997; Stehr, 1994). Although there exists a Scandinavian traditionhaving studied this link (see G+ranzon, 1983, 1988, 1993), the main streak in this tradition has beenlinked to vocational knowledge and computerization.

Until fairly recently tacit knowledge has been overlooked or toned down in terms of competitive

importance for companies, both by academics, managers and policy-makers (see Sveiby, 1997;Stewart, 1997; Howells, 1996; Sparrow, 1998; Fleck, 1996). This is clearly expressed by Howells(1996, p. 91): `Just as technological innovation up until the 1960s was treated as an unexplained

variance in economic growth and performance, so tacit knowledge as an element within technolo-gical innovation has, until recently, been seen in a similar waya. This development has, however,



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fairly recently changed in favor of emphasis on this part of the company's knowledge base (see

Nonaka, 1994; Nonaka & Takeuchi, 1995; Grant, 1996) and is now `recognized as playing a keyrole in "rm growth and economic competitivenessa (Howells, 1996, p. 91).

The emphasis on tacit knowledge as a strategic competitive factor has emerged along with theincreasing globalization (see Thurow, 1997) and hyper-competition (see D'aveni, 1994) in the

economy. In the strategy literature the resource base perspective (Penrose, 1959; Robins & Wier-sema, 1995; Barney, 1991; Peteraf, 1993; Dierickx & Cool, 1989; Mahoney & Pendian, 1992; Teece,

1984; Black & Boal, 1994; Grant, 1991, 1996) the knowledge theory (see Grant, 1996), in addition tothe dynamic capability approach (Penrose, 1959; Teece, 1988, 1990; Teece et al., 1997; Mahoney,

1995; Nelson & Winter, 1982; Hamel & Prahalad, 1991) have addressed parts of this development,but still we know little about links between tacit knowledge, and IT (see Howells, 1996). What we

know about tacit knowledge, from a company perspective, is that it is developed throughorganizational processes, where procedures (Nelson & Winter, 1982), internal communication

processes, in addition to external meeting places (Lei, 1997) constitute essential factors for the

development and transfer of this part of the company's knowledge base. What we on the otherhand do not know, is how tacit knowledge in#uences and is in#uenced by the new IT.

Polanyi's theory about tacit knowledge (see Polanyi, 1962, 1966) describes how individuals

develop and use knowledge in a process. It is action-oriented and focused on the process itself.Transferred to companies the process perspective is interesting, since the dynamic perspective in

Polanyi's theory also corresponds to the evolutionary perspective presented by Nelson (1987, 1988)and Nelson and Winter (1982), among others, and `Austrian economicsa, discussed by Jacobsen

(1992). Helfat (1994) has also pointed out the link between tacit knowledge and the evolutionaryperspective.

Polanyi (1962, 1966) argues that tacit knowledge belongs to the personal domain, but is still

embodied in the meeting between the individual and the culture he belongs to. Vygotsky (1978,1986) strongly points out that all knowledge is social in some way or the other, and thus contingenton social structures existing in social systems. Thus to Vygotsky, knowledge exists in the collective

structure existing in social systems. Simon (1987) argues in favor of the view that tacit knowledgecan be made explicit by `unfreezing social habitsa. Simon focuses on organizations, while Vygotskyfocuses on social structures, and Polanyi has his attention directed towards the meeting between

individual and culture. These three authors are, however, concerned about the process where thetacit dimension can be made explicit, which is also in evidence with Nonaka and Takeuchi (1995).A point that is important to be aware of has been formulated in the following way by Nonaka

(1994, p. 14); `2organizational knowledge is created through a continuous dialogue between tacitand explicit knowledgea. This means that tacit knowledge cannot be studied without regard to the

explicit part of the knowledge base. This view is also underlined by Senker and Faulkner (1992).When tacit knowledge is made explicit it could be subject to collective re#ection (see Sch+n,

1987). This is an important point in international research; to make tacit knowledge explicit (seeNonaka, 1991, 1994; Nonaka & Takeuchi, 1995; Sveiby, 1997). Hence, for companies, the challenge

is to make tacit knowledge at the personal level explicit at the organizational level, to ensurecollective re#ection.

We argue that tacit knowledge, which is knowledge based on personal experience, and social in

some way or another, can be made explicit at the organizational level through thrust andrelationship building processes. We further argue that this is best provided by organizing the



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company in teams based on apprenticeship were practical experience based on thrust and a helping

attitude predominates. This is also consistent with the argument of Johannessen et al. (1997). Wedenote this organizing as `apprenticeship teamsa. The importance for the individual company of

focusing on this process, is that the explicit knowledge is only`

the tip of the iceberga

(See Sveiby,1997), and the competitive position of companies will be strengthened if processes are developed to

make larger parts of the knowledge base visible (see Thurow, 1997; Stewart, 1997).

3.3. An example: the importance of tacit knowledge, and the transfer of such knowledge

As we have seen, tacit knowledge is essential in creating sustainable competitive advantages.However, tacit knowledge needs to be made explicit. As we have argued, and will see in the

following example, the role of IT in making this happen is rather limited. The example is froma Norwegian shipyard, employing 650 people. The case study was conducted from December 1990

to July 1944. A thorough example of this case is given by Johannessen, Olaisen, and Hauan

(1993a}c) and Johannessen and Hauan (1994).In a reorganization of the shipyard, two fundamental changes in production were made. One was

the development of teams where a multi-skilled group of people that possessed all the specialized

skills necessary to perform the required operations. The second was a transition to vertical sectionswhere each ship was built according to a `bricka principle. Through a system of partial job

rotation, members of the teams were supposed to serve as instructors (apprenticeship) to theirfellow workers within their particular skill, thus enabling all members of the group to perform at

least the more basic operations across particular skills whenever the need may arise.In focusing on making tacit knowledge explicit within the teams, they experienced a high level of

team learning. Organizing in such teams was seen as a win}win situation for everyone in the team,

creating the foundation for thrust and a helping attitude within the team. This also implied thatmembers of the teams were more inclined to share crucial knowledge without the fear of loosingownership. In addition to increased #exibility, enlarging the scope of interaction contributed

toward releasing the full creative potential inherent in the team by making tacit knowledge moreexplicit. However, in making tacit knowledge explicit within the process team, part of it became,over time, a knowledge that was di$cult to communicate to others outside the team. I.e. part of the

tacit knowledge that had become explicit within the team became tacit for others, as we shall see.The transition to vertical sections where each ship was built according to a `bricka principle,

involved ships that were divided into seven main sections (bricks), which were forged together, after

each of them had been "tted with as much technical `stu$nga as possible. The technical directorhad put much of his technical prestige/power on the line in the actual development of the design, so

that a great deal of`sunk costa was invested in the design. The team which was working on one ofthe seven sections at the back of the boat construction, felt, based on their personal experience, thatthis design did not "t one of the sub-sections they were working on. They were convinced thata more e$cient use of labor could be achieved by changing some of the actual design philosophy.

This change would mean that parts of the design had to be changed from vertical to horizontalproduction at one partial section of the boat. However, the team had di$culty in describing andexplaining their suggestion verbally to the engineers involved and the technical manager. Gradual-

ly the prestige aspect was brought into the discussion. It became imperative for the engineers andthe technical manager to maintain the original design, which in itself represented a large change in



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relation to how the shipyard only one year earlier had manufactured boats. According to the

team involved in this communication it was impossible to get through with the proposed change tothe design o$ce, represented by the technical manager and the engineers, because the teams' view

was based on personal experience, intuition and a grasp of the situation as such, i.e. tacitknowledge.

However, parallel to the reorganization of the shipyard, a new management philosophy was alsointroduced. One element of this management philosophy was the internal information system.

A cornerstone within this system was the ideas generated by the process team through means ofchange reports. A basic principle of this information system was that no suggestions from the

operators were to be put aside without a well-founded answer, and that the rejection should bemade in the form of a face-to-face meeting between the management and the process team, opening

for dialog and possibilities for changes. The technical manager, who was the leader of the entireinnovation project, felt a strong obligation to follow the basic rule of the management philosophy

he had taken part in designing, and did so by encouraging the team to formulate a suggestion for

change without needing to argue for its solution in writing. The consequence was that themanagement was not able to argue strongly enough in disfavor of the suggestion from the processteam. It wound up that the suggested change was accepted by the management. The result was

a 60% increase in productivity in the mentioned section of the ship. The result from the system assuch was also that, over a three-year period, 376 changes were implemented on the bases of these

reports, and used in a continuous change and innovation process in the company. Hence, thecompany was able to maintain a higher level of sustainable competitive advantages than was

the case before they reorganized. This was partly the result of the bene"t provided by organizingthe work into teams, where tacit knowledge was made explicit within the team, combined witha management philosophy which had designed systems that allowed the tacit knowledge to be`

hearda

. In digitalizing the report system process by the use of IT (which was discussed by themanagement team, but rejected in designing the change report system), the possibilities for tacitknowledge to be `hearda would have been limited considerably. In focusing on making

tacit knowledge explicit by organizing the company into teams and introducing the changereport system, where part of the tacit knowledge was transferred to the management team,the company also facilitated organizational learning.

4. The management of knowledge and information technology

We have argued that a digitalization of companies through IT could lead to growing

opposition between explicit and tacit knowledge, which could have a negative impact on the"rm's ability to create and sustain competitive advantages. The remaining question is: how couldthe use of tacit and explicit knowledge be balanced to positively impact the outcome of a company?To answer the question, we need to know more about how tacit knowledge and IT a!ect

continuous improvements, innovations, performance, and subsequently, sustainable competitiveadvantages.

A natural starting point for a search for more profound understanding of the link between tacit

knowledge and IT in organizations is within the research of organizational learning. The reason isquite simply that knowledge is closely linked to learning and could be understood in the way that



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knowledge is a result of learning and includes cognitive development and behavioral change (Fiol

& Lyles, 1985). Leonard-Barton (1995) has also pointed out the link between tacit knowledge andlearning.

Organizational knowledge processes and organizational learning constitute an integrated pro-cess (see Spender & Grant, 1996; Sobol & Lei, 1994), and it is impossible to study one element

without studying the other element as well. This is clearly underlined by Lewin's recommendationof Nonaka's article (Nonaka, 1994, p. 14), and is the main theme in Nonaka's article. Pisano (1994)

further underlines the increased attention focused on tacit knowledge and organizational learning.What particularly links tacit knowledge to organizational learning is perspectives linked to the

concepts `situated learninga (see Lave & Wenger, 1991) and `contextual learninga (see Chaiklin& Lave, 1993; "sterlund, 1996).

Organizational knowledge is a resource, resulting from various interactive learning processes.But organizational learning, knowledge processes and the use of IT all have one purpose in

common in the company context, namely to generate sustainable competitive advantages. Parti-

cularly important in this context is the tacit knowledge possessed by the actors in the company, asthis type of knowledge is di$cult to imitate by the competitors (Wernerfelt, 1989; Rumelt, 1984,1987; Peteraf, 1993; Nelson & Winter, 1982; Teece, 1987; Winter, 1987). The tacit knowledge

constitutes a `core capabilitya (Grant, 1996, p. 380) for companies, as it distinguishes companiesfrom their competitors and promotes their strategic advantages (Leonard-Barton, 1995). This type

of core capability, according to Hamel and Prahalad (1994), is developed through a collectivelearning processes in the company. Learning by doing, using experimenting and interacting is here

seen as the processes constituting tacit knowledge. This is also seen by i.e. Badaracco (1991),Dierickx and Cool (1989), Dosi (1988) and Reed and de Fillippi (1990).

We have underlined the importance of tacit knowledge in creating sustainable competitive

advantages. But what about innovation? We argue that tacit knowledge, on its own, does notenhance innovation, only continuous improvements. Also, that tacit knowledge can be a keybarrier to innovation. This is because tacit knowledge is usually part of a long term learning

process in a speci"c context, being embodied in the structure of thinking, the way of thinking, andtherefore functions as a conservative element in relation to innovation. Tacit knowledge, statesFleck (1996, p. 119): ìs2 the most crucial in restricting the social distribution of knowledge, and

has been widely identi"ed as a major constraint on the di!usion of both science and technologya.This has also been pointed at by Basalla (1988). But on the other hand, tacit knowledge is a sort oforganizational ìmmunea system hindering imitation from other social systems. The function of

tacit knowledge is then both conservative, i.e. stabilizing the system, and acting as an imitation`guarda. However, the immune system does have a #ip side. Teece et al. (1997) argues that to

understand imitation, one must understand replication. Replication involves transferring know-ledge from one concrete economic setting to another, whereas imitation is simply replicationperformed by a competitor. Teece et al. (1997) argue that the more tacit the "rm's productiveknowledge, the harder it is to replicate not only by competitors, but also by the "rm itself. In

a study of internal stickiness (connotes the di$culty of transferring knowledge within the organiza-tion), Szulanski (1996, p. 31) argues that: à knowledge source may be reluctant to share crucialknowledge for fear of loosing ownership, a position of privilege2a, hence acting as an impediment

for the transfer of both tacit and explicit knowledge within organizations. This is also consistentwith Leonard and Sensiper (1998, p. 123), who argued that: `2rational people may be unlikely to



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surrender the power they gain from being an important knowledge source * especially since

sharing tacit knowledge requires time devoted to personal contacta.However, continuous improvements are enhanced by tacit knowledge. Solow (1997, p. 24) argues

that:`

The routine continuous improvement of products and processes is arguably the mostimportant source of increased productivity in mature industriesa, i.e. the experience-based part of

the "rm's knowledge base. Young (1993, p. 447) makes the following statement: `Following modelsof learning by doing, I assume that production experience generates new knowledge on how to

produce goods more e$ciently.2Experience in production increases the productivity of the newtechnology2a. But, tacit knowledge is bounded by a negative feedback factor. This negative factor

is found when no innovation occurs in the organization, continuous improvement increasesperformance, but only to a certain degree. Thus tacit knowledge promotes continuous improve-

ment only to a certain level, and then declines. This is in line with Solow (1997, p. 25), who denotesthis phenomenon as `bounded learning by doinga. We assume that all tacit knowledge has this

e!ect on continuous improvement.

We have argued that tacit knowledge `on its owna does not produce innovations. A major pointis that the entire knowledge base for the individual company, the tacit part included, is developed ina social and cultural context, where the interaction between companies and among companies and

external systems constitutes important elements for both the development and transfer of tacitknowledge (see Adeboye, 1997). This is very obvious with Sweeny (1996, p. 5): `In the past

organizational innovation tended to be the force driving technological and social change. Theindications are that social forces will determine technological and organizational change in the

long wavea. Howells (1996) too elaborates this chain of arguments, where he particularly makesthe link to the market as an important factor for the development and transfer of tacit knowledge.In order to study tacit knowledge in the individual companies it will therefore be highly essential to

examine the external systems with which the company interacts. Hence, we argue that it is onlywhen tacit knowledge is linked to the explicit knowledge in the system, and the systems externalknowledge base, that innovations appears, increasing performance and promoting sustainable

competitive advantages. Hence, linked to the external knowledge base, something new may occurand innovation is brought into the system. Both continuous improvement and innovations arecreated by the interaction between the system-speci"c knowledge base, the link to other systems

in the environment and organizational learning. That innovations promote continuous improve-ment is shown by Fruin (1997) at Toshiba. Innovations may be understood as punctuation 's ofcontinuous improvements (Fruin, 1997). When at a certain time innovation enters the organization

performance will increase to a higher level, which gives a positive bandwagon e!ect upon learningby doing, using, interacting and experimenting (constituting tacit knowledge), because something

new brings the learning process to a higher level of achievement. Innovation opens up a new "eldfor learning, which gives learning by doing, using, interacting and experimenting a new inputfactor, even if the bounded negative feedback factor is still in operation. I.e. it is in operation, but ata new level of achievement. Learning by doing, using, interacting and experimenting is here seen as

generalized tacit knowledge. The more conservative this generalized tacit knowledge is, i.e. notlinked e!ectively to the environment, the more it is bounded by the negative feedback factor, andvice versa.

We further argue that for the company's external knowledge base to promote innovations, itneeds to be accompanied by sensitivity to change (give guidance) and external meeting places



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(facilitating the transfer of external tacit knowledge) and the use of IT (facilitating the transfer of

external explicit knowledge).The use of IT in#uences the use of the company's external knowledge base by e!ectively

transferring explicit knowledge. Huber (1990) argued that the use of information technology leadsto more quickly retrieved information. Kessler and Chakrabarti (1996) argued after an extensive

literature review that there is a growing recognition that speed is important in the development ofsuccessful innovations. To enable "rms to initiate innovations within a turbulent and complex

environment, they need fast access to information. Hence, using IT increases the speed on theavailability of information, which in turn enhances innovations.

However, Lee (1994, p. 143) argued that: `In the view of information richness theory, electronicmail "lters out important cues such as body language and tone of voice and, unlike face-to-face

meetings, is not conductive to immediate feedbacka. Hence, for innovations to appear, we argue forthe need for external meeting places. We further argue that external meeting places constitute an

arena where tacit knowledge can be converted to explicit knowledge. This is also underlined by

Nonaka and Takeuchi (1995), because the interaction between individuals at such meeting places ispsychologically close and the information media is rich. Daft and Lengel (1986, p. 560) argue that:`In a sense, richness pertains to the learning capacity of communicationa.

Gupta and Wilemon (1996) found that successful R&D managers were categorized as beingsensitive to changes in the business environment, and by maintaining a spirit of inquiry. Song,

Souder, and Dyer (1997) further argue that sensitivity to customers wants and needs is paramountfor successful innovations. This might also be viewed in light of a "rm's proactiveness. Ashford and

Black (1996) argue that information and feedback seeking are seen as proactive activities. Also,Premkumar and Ramamurthy (1995) argue that proactive "rms are found to have a greater extentof adoption and more external connectivity. Lumpkin and Dess (1996, p. 146) argue that `2a

proactive "rm is a leader rather than a follower, because it has the will and the foresight to seizenew opportunitiesa. They make a distinction between competitive aggressiveness and proactive-ness, where proactiveness has to do with meeting demand, whereas competitive aggressiveness is

about competing for demand. Hence, we argue that sensitivity to change both has a direct e!ecton the "rm's innovativeness, but that it also is a prerequisite for seeking the kind of informationthat enables the "rm to meet customers future demands through external meeting places and by

using IT.In Fig. 2, which summarizes the above discussion, we argue that unilateral investment in IT may

lead to a de-emphasizing of tacit knowledge, hindering the development of sustainable competitive

advantages. If, on the other hand, tacit knowledge is emphasized, it will promote continuousimprovements by learning by doing, using, experimenting, and interacting. However, although

tacit knowledge is acting as an imitation guard, the negative feedback factor is only causingcontinuous improvements to increase performance to a certain degree. I.e. there is a need tointroduce innovations into the system. To be able to do that, there is a need to link the system to itsexternal knowledge base. The role of IT is to increase the availability and speed of external

information. To give guidance, the information search needs to be accompanied by a sensitivity tochange and there is a need for establishing external meeting places to capture the tacit part of theexternal knowledge. A central point which is implicit in the model, is a learning loop whereby

innovations enhance a higher level of continuous improvements by learning by doing, using,experimenting, and interacting, creating a positive spiral. The learning loop also improves the



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Fig. 2. Solving the puzzle of investment in IT, the "rm's knowledge base and its sustainable competitive advantage.

company's sustainable competitive advantages, by limiting competitor's possibilities for imitation(through a higher level of tacit knowledge), and by increasing continuous improvements, innova-tion and performance.

5. Conclusions

The aim of this paper was to investigate how investment in and the use of information

technology in#uence tacit knowledge, and what impact this has on the "rm's ability to createsustainable competitive advantages. Although we observe a general optimism in the society asa whole, concerning the investment in, and use of information technology, we have argued that thismay lead to a de-emphasizing of tacit knowledge. As tacit knowledge is recognized as playing a key

role in determining the extent to which companies are able to create sustainable competitiveadvantages, the consequences may be devastating.

It may appear that research has developed a subspecies of Veblen 's `trained incapacitya, where

tacit knowledge has been overlooked, toned down or completely removed from the scienti"ccontext, and where explicit knowledge has been in focus. Our main point in this article is that the



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Fig. 3. The management of knowledge.

lack of empirical "ndings regarding the positive economic impact of IT can be attributed to

a toned-down role of tacit knowledge. We "nd support for the argument with Sweeny (1996), andwith Dertouzos, Lester, and Solow (1989) in their explanations on the declining competitive

position of American companies during the 1980s. Their explanation is, roughly speaking, thatresearch has moved upstream away for the practical grasp of working experiences. Our contention

is that it is when explicit knowledge with focus on theory development is emphasized, at theexpense of practice, interactive learning in and among systems, that IT does not function adequate-

ly as a mechanism for creating sustainable competitive advantages. The result is the mismanage-ment of knowledge. To overcome the puzzle of the mismanagement of knowledge, companies need

to develop knowledge strategies. In succeeding with such e!ort we argue for the need to focus onthe total knowledge base of the company, focus on innovation processes and continuous improve-

ment processes, focus on organizational learning and organize in apprenticeship terms. This ispresented in Fig. 3 below.

5.1. Emphasize the total knowledge base of the company

A company's knowledge base is both explicit and tacit, and exists both internally in the "rm andwithin the company's external connectivity. Nonaka (1994) argued that organizational knowledgeis created through a continuous dialogue between tacit and explicit knowledge. We have argued

that over-emphasizing on explicit knowledge, especially by IT investments, may lead to a situationwere companies lose their competitive edge. On the other hand, over-emphasizing tacit



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knowledge may lead to the same result, as tacit knowledge on its own does not e.g. enhance

innovation. Neither does it provide the necessary speed and availability of external information.Hence, in order to achieve sustainable competitive advantage, companies need to emphasize the

total knowledge base of the company, i.e. the explicit-and tacit knowledge, both internally andexternally.

5.2. Focus on innovation and continuous improvement processes

Innovation is a critical activity that is vitally important for most "rms to embrace in order tomaintain sustainable competitive advantages (e.g. Drucker, 1985). This entails the pursuit of new

knowledge. To achieve this, "rms need to focus on innovation processes within the company, so asto bene"t from the creative potential inherent in the company's employees. Emphasizing the total

knowledge base promotes this. Although innovation is critical, organizations also need to ensure

a productive exploitation of existing knowledge (see e.g. Levinthal & March, 1993). Hence, tomaintain a competitive edge,"rms need both a sense of stability and continuity, at the same time, asthere is a potential in continuous improvement of existing products and services within "rms. Tacit

knowledge plays a crucial part in the successful process of continuous improvements. An emphasison the total knowledge base promotes this.

5.3. Focus on organizational learning

In a Schumpeterian world of innovation-based competition, with increasing hyper-competition

(D'aveni, 1994), knowledge will increasingly be focused on companies ability to learn. However,such focus must entail an emphasis on both innovations and continuous improvements as`exploration and exploitation are complementary modes of organizational learninga (Choo, 1998,

p. 251). We have argued for the existence of a learning loop between innovations and continuousimprovements. Hence, successful innovation processes and continuous improvement processespresuppose systems for organizational learning.

5.4. Organize in apprenticeship teams

One of the great challenges we confront is making tacit knowledge at the individual level explicit

at the organizational level. We have argued that tacit knowledge can be made explicit at theorganizational level by organizing the company in teams based on apprenticeship where practicalexperience based on thrust and a helping attitude predominates. This is also consistent with theOECD report (1990) which points out very strongly that a fully e$cient use of IT presupposes

a change from the tayloristic production model, so widely recognized in the early stages ofindustrialization, to a more knowledge-based production model. In a turbulent and complexbusiness environment, team member's external connectivity is vital. Hence, such organizing

reinforces an emphasis on the total knowledge base, the tacit, the explicit, the internal and theexternal.



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Acknowledgements

The authors want to thank The Research Council of Norway for "nancial support (SKIKT-

programme). Leif Mardal and Arnulf Hauan have been the discussion partners on selected issueswithin this paper and we want to thank them for their theoretical and philosophical comments.

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Mismanagement of Tacit Knowledge