Knowledge-based view of the firm

Why do firms exist, and why do some outperform others? One answer looks past products and markets to the knowledge a firm holds and how well it applies it.

The knowledge-based view of the firm treats knowledge as the most strategically important resource an organisation has, and sees the firm fundamentally as an institution for creating, integrating, and applying knowledge. An offshoot of the resource-based view, it locates the deepest source of advantage in what a firm knows and how it puts that knowledge to work.

The firm as a knowledge integrator

The central idea is that the essential thing firms do is integrate the specialised knowledge of many individuals into productive activity. No single person knows how to design, build, and sell a complex product; the firm exists, in this view, because it is good at combining the dispersed, specialised knowledge of many people into a coordinated whole, something a market of individuals struggles to do. What distinguishes one firm from another is how effectively it integrates and applies the knowledge distributed among its members.

Why knowledge is the key resource

The knowledge-based view elevates knowledge above other resources because of its peculiar strategic properties. Knowledge, especially the tacit kind, is hard to imitate, hard to transfer, and slow to build, which makes it a durable source of advantage in a way that easily acquired resources are not. A rival can buy the same equipment and raw materials, but cannot quickly acquire the accumulated, embedded knowledge that lets one firm outperform another. Advantage, in this account, rests on what a firm knows and on its superior ability to create and apply new knowledge.

Implications

Seeing the firm as a knowledge integrator reframes management around the creation, sharing, and application of knowledge: building the structures, routines, and culture that let specialised knowledge combine and grow, protecting the tacit knowledge that confers advantage, and developing the capacity to keep learning. It also illuminates questions of organisational boundaries, why some activities are best kept inside the firm where knowledge can be integrated, and why mergers meant to combine knowledge so often fail when the integration proves harder than expected.

The knowledge-based view places knowledge at the centre of strategy and of the very existence of firms, arguing that the ability to create and integrate knowledge is the deepest and most durable source of advantage. Whatever its limits as a complete theory, it captures something essential about why, in a knowledge economy, what an organisation knows matters more than almost anything else it holds.