British Journal of Management, Vol.

15, S27S41 (2004)

Strategies for Knowledge Creation in Firms*

C. A. Un and Alvaro Cuervo-Cazurraw
Cornell University, Johnson Graduate School of Management, 370 Sage Hall, Ithaca, NY 14853, USA and w University of Minnesota, Carlson School of Management, 321 19th Avenue South, 3-165, Minneapolis, MN 55455, USA Email: cau3@cornell.edu [Un]; acuervo@csom.umn.edu [Cuervo-Cazurra]
We extend the knowledge-based view by providing an explanation of how rms develop the capability to create knowledge. We take the view that rms are distributed knowledge systems composed of individuals who embody knowledge, and theoretically identify and empirically test the existence and eectiveness of two strategies organization and project team that promote their interactions to develop this capability. On the one hand, building on what we call the organization-level innovation literature, we identify the organization strategy, which suggests investment in organization-level integrative management practices to facilitate interactions to create knowledge among individuals situated in dierent parts of the system, independently of when a knowledge-creation task is established and individuals are organized to create knowledge. On the other hand, building on what we call the team-level innovation literature, we identify the project team strategy, which suggests investment in project team-level integrative management practices to facilitate interactions to create knowledge among individuals once a knowledge-creation task is dened and individuals are placed into teams to create knowledge. The two strategies are substitute approaches for the development of the capability, although the organization strategy appears to better predict outcomes of the capability. However, this approach might be more costly, so not all managers will choose to follow it.

Introduction
*The paper is derived from data collected for the rst

authors thesis at the Sloan School of Management, Massachusetts Institute of Technology. The detailed suggestions of Eleanor Westney, Michael Beer, John Carroll, Deborah Ancona, the editors Haridimos Tsoukas and Nico Mylonopoulos, and anonymous reviewers, and the comments of participants at the Academy of Management Annual Meeting in Toronto, Canada, the DRUID Conference in Aalborg, Denmark, and the OKLC conference in Athens, Greece, helped improve previous versions of the paper. We would like to thank the managers of the companies studied for sharing their experiences. The rst author would also like to thank The MIT-Japan Program Starr Foundation, the CS Holding Fellowship in International Management, and the Massachusetts Institute of Technology Doctoral Fellowship for the nancial support for this study. All errors remain ours. r 2004 British Academy of Management

Knowledge creation and use are critical if rms are to have a competitive advantage, but the dierent strategies for creating them are still not well understood. In the knowledge-based view of the rm, an organizations ability to create knowledge is a source of competitive advantage (Conner and Prahalad, 1996; Grant, 1996; Kogut and Zander, 1992, 1996; Spender, 1996; Tsoukas, 1996). However, despite the importance of knowledge and the wealth of studies on the eects of knowledge on competitive advantage, it is still not well understood how it is generated in rms (Eisenhardt and Santos, 2002). Part of the reason for this is that studies on knowledge tend to be theoretical (Grant, 1996; Helfat and

S28 Raubitschek, 2000; Kogut and Zander, 1992; Spender, 1996; Tsoukas, 1996), while empirical tests have focused on knowledge transfer or sharing (Hansen, 1999; Szulanski, 1996; Tsai, 2002; Zander and Kogut, 1995) rather than on knowledge creation, with some exceptions based on case studies (Leonard-Barton, 1995; Nonaka and Takeuchi, 1995). In this paper we take the view that rms are distributed knowledge systems, which means that they are composed of knowledge embodied in individuals and their social interactions (Tsoukas, 1996). The creation of knowledge in such a distributed knowledge system requires the promotion of interactions among the individuals situated in its various parts. Therefore, in this paper we answer the following question: what are the strategies that managers can use to promote interactions among individuals, thereby developing the capability to create knowledge? Although in the knowledge-based view we do not have a good understanding of knowledge creation (Eisenhardt and Santos, 2002), we can make use of another body of literature that has discussed it indirectly, the product innovation literature. We view research on product innovation as being about knowledge creation in the sense that it explains some factors that facilitate it, although it focuses on the innovation of products. Moreover, our analysis of this literature suggests that it is divided into two dierent camps, which operate at dierent levels of analysis, thereby providing us with dierent explanations for the development of the capability to create knowledge. Thus, we extend the knowledge-based view by linking it to existing product innovation literature to identify two strategies organization and project team that facilitate interactions and understanding among individuals and thus allow them to create knowledge. On the one hand, building on what we term the organization-level product innovation literature (e.g. Brown and Eisenhardt, 1997; Dougherty, 2001; Lawrence and Lorsch, 1967; Tushman and Anderson, 1997), we identify the organization strategy. This suggests investment in organization-level integrative management practices in order to facilitate interactions to create knowledge among individuals situated in dierent parts of the system, independently of when a knowledge-creation task is established and individuals are organized for creating knowledge.

C. A. Un and A. Cuervo-Cazurra On the other hand, building on what we call the team-level product innovation literature (e.g. Ancona and Caldwell, 1992; Clark and Wheelwright, 1992; Grin and Hauser, 1992; Keller, 2001), we identify the project team strategy. This suggests investment in project team-level integrative management practices to facilitate interactions to create knowledge among individuals once a knowledge-creation task is dened and individuals are placed into teams to create knowledge. After theoretically identifying two strategies for the development of the capability to create knowledge, we test their existence and eectiveness in terms of knowledge creation. We focus here on dierent aspects of knowledge creation for product innovation (Helfat and Raubitschek, 2000; Leonard-Barton, 1995; Nonaka and Takeuchi, 1995) as an outcome of the capability, because it is a tractable outcome that delimits the complexity of the knowledge construct (Alvesson and Karreman, 2001) and knowledge is best observed in practice (Leonard-Barton, 1995; Nonaka and Takeuchi, 1995). Moreover, the capability to create knowledge, an intangible, cannot be measured directly, but only through its eects (Godfrey and Hill, 1995).

Strategies for developing the capability to create knowledge in rms as knowledge systems
In order for the rm to become a knowledge system, the promotion of interactions among the components of the system, that is, individuals who embody knowledge (Polanyi, 1962), is required (Tsoukas, 1996; Tsoukas and Vladimirou, 2001). Whereas single individuals can create knowledge, and technology can facilitate the transfer of knowledge among individuals (Hansen and Haas, 2001), the greater challenge is to promote the social interactions among individuals that facilitate not only the transfer of explicit knowledge (Hansen, 1999; Szulanski, 1996; Tsai, 2002; Zander and Kogut, 1995), but also the creation of both explicit and tacit knowledge (Nonaka, 1994; Nonaka and Takeuchi, 1995). It is the establishment of these social interactions among individuals that enables the creation of knowledge that we analyse in this paper. We therefore take a functionalist view, in

Strategies for Knowledge Creation in Firms line with other researchers in the area of strategic management (Grant, 1996; Helfat and Raubitschek, 2000; Kogut and Zander, 1992) who view knowledge as an economic resource (Swan and Scarbrough, 2001), and identify strategies to develop the capability to create knowledge. The creation of knowledge in a rm is better accomplished through the interaction among individuals with dierent knowledge sets rather than individuals with similar knowledge sets. The complexity of the environment and task, such as product innovation meeting the demands of the external markets, requires diverse knowledge sets (Leonard-Barton, 1995; Nonaka and Takeuchi, 1995). In the case of the development of a particular product, an individual might initiate an idea. However, in order for this idea to become a product innovation that generates value for the rm, it has to be combined with other types of knowledge, such as design engineering, manufacturing, marketing and customer services, in order to ensure that it suits the demands of the external markets. Therefore, the possibility of exchanging knowledge and recombining existing knowledge in order to create knowledge is greater when the people involved have diverse knowledge sets; in this way a degree of economies of scale and scope in knowledge is achieved. Moreover, in contrast to knowledge transfer, which can be performed unidirectionally from source to recipient, such as when diusing practices across sub-units of the rm (Szulanski, 1996; Tsai, 2002; Zander and Kogut, 1995), knowledge creation requires multidirectional interaction among people with diverse knowledge sets, enabling people to become both sources and recipients of knowledge. This multidirectional interaction is facilitated by the use of teams with a limited number of people, as it is not only the transfer of explicit knowledge that is involved, but also that of tacit knowledge, which can only be acquired through personal interaction (Nonaka, 1994; Nonaka and Takeuchi, 1995). Interactions among individuals with dierent knowledge sets that are shared and transformed to create new knowledge have two key prerequisites: the willingness of these individuals situated in dierent parts of the distributed knowledge system to share their knowledge in order to create knowledge, and understanding among the individuals who share knowledge. First, individuals need to be willing to establish interactions and

S29 share their knowledge sets to create knowledge; that is, they need to be provided with incentives, which can be economic (Holstrom and Melgrom, 1994; Kerr, 1975; Milgrom and Roberts, 1992) and/or social (Hansen, 1999; Nahapiet and Ghoshal, 1998; Tsai, 2002). Second, individuals with dierent knowledge sets need to be able to understand each other; that is, they need a common code (Arrow, 1974), common knowledge (Grant, 1996), or overlapping knowledge (Leonard-Barton, 1995; Nonaka and Takeuchi, 1995). Each of these factors is necessary but insucient on its own. Without willingness on the part of the individuals to interact, there is little sharing of knowledge among them. Without understanding among individuals, knowledge cannot be exchanged in a meaningful manner, because misunderstandings could arise. Only when the two coexist is knowledge creation possible. Therefore, the strategies that management can use need to act upon both drivers. Two strategies for developing the capability to create knowledge To expand the knowledge-based view and identify strategies that rms can use to develop the capability to create knowledge, we make use of the product innovation literature. This literature deals with knowledge creation, although focusing on the innovation of products, and oers some explanation for management practices that facilitate the achievement of innovation. Thus, we link the knowledge-based view and the product innovation literature to propose two strategies organization and project team that managers can potentially use to facilitate the development of the capability to create knowledge. The term strategy is dened as a set of integrative management practices that facilitates interactions for knowledge creation among individuals by inuencing the drivers of these interactions: willingness and understanding. These integrative management practices are a subset of the management practices that rms use to organize their employees, such as recruiting, rewarding, training and developing them, but focus on facilitating the integration of knowledge sets of individuals by promoting their interactions towards knowledge creation. The integrative management practices that compose each strategy form a system of practices, as each inuences

S30
Organization strategy Individuals understanding of others knowledge sets Individuals willingness to share knowledge with others and create knowledge

C. A. Un and A. Cuervo-Cazurra

Capability to create knowledge

Outcomes of the capability to create knowledge

Project team strategy

Observable Unobservable

Figure 1. Theoretical framework for the development of the capability to create knowledge

dierent dimensions of the requisites for knowledge creation, thus complementing and reinforcing each other (Holstrom and Melgrom, 1991; Melgrom and Roberts, 1990). Figure 1 illustrates the relationships among the various constructs discussed. Each strategy will now be analysed in more detail, reviewing what it entails in terms of integrative management practices and how it aects the capability to create knowledge in the distributed knowledge system. The organization strategy. The organization strategy is dened as a set of organization-level integrative management practices that encourage individuals to interact with others to create knowledge, independently of when they are organized to create knowledge. These organization-level integrative management practices are organization-level integrative reward (Galbraith, 1977; Katz and Allen, 1985; Lawrence and Lorsch, 1967; Morrill, 1995), organization-level integrative socialization (Katz, 1997; Nohria and Ghoshal, 1997; Nonaka and Takeuchi, 1995), and organization-level integrative routine communication (Lawrence and Lorsch, 1967; Morrill, 1995; Nohria and Ghoshal, 1997). Organization-level integrative reward, specically the assignment of responsibility for determining individuals rewards, promotes knowledge creation by inuencing the willingness of individuals to interact and create knowledge. When the control of individuals rewards is shared between functional managers and managers outside the functional areas, individuals are encouraged to interact with others outside their disciplines to share knowledge, as they are controlled and rewarded by people in dierent functions. This occurs because individuals are likely to make the eort to interact with others outside the functional area in order to make a

good impression and thus inuence their rewards (Katz and Allen, 1985; Milgrom and Roberts, 1992; Morrill, 1995). Organization-level integrative socialization of employees facilitates the development of the capability to create knowledge by promoting understanding among individuals with dierent knowledge sets. It does so by integrating dierent functions in the rm through cross-functional socialization of new employees. By exposing employees to dierent parts of the rm such as R&D, production, sales/marketing and customer services, they build social ties with others in these parts of the company, which encourages both the willingness to interact in order to share knowledge (Hansen, 1999; Nahapiet and Ghoshal, 1998; Nohria and Ghoshal, 1997) and the understanding among employees based in dierent parts of the knowledge system. Organization-level integrative routine communication, which we dene as the formal and informal communication patterns that occur on a regular basis among organizational members belonging to dierent functions, facilitates knowledge creation by inuencing willingness and understanding among individuals. We depart from previous organization-level innovation literature in that, rather than arguing for crossfunctional communication that occurs formally among employees in the management ranks (Brown and Eisenhardt, 1997; Lawrence and Lorsch, 1967; Nohria and Ghoshal, 1997), we argue for the more comprehensive concept of organization-level integrative routine communication among individuals. This is composed of institutionalized communication patterns (Morrill, 1995) or routines (Nelson and Winter, 1982) that include both formal and informal communication between individuals at all levels of the organization. These patterns may be vertical, that

Strategies for Knowledge Creation in Firms is, between superior and subordinates within the same part of the knowledge system, or lateral, that is, between employees in similar ranks in dierent parts of the knowledge system (Galbraith, 1977; Morrill, 1995). Organization-level integrative routine communication improves willingness and understanding among individuals as they become accustomed to interacting with people from these dierent parts of the rm, thus inducing them to develop the necessary common code to understand people with dierent knowledge sets. The establishment of routines leads to automatic behaviours, which require less subsequent eort (Nelson and Winter, 1982). These three organization-level integrative management practices composing the organization strategy become a system of practices, as they have complementary inuences on the willingness and understanding among individuals to create knowledge. The practices reinforce each other by operating at the same level and with the same intention. They promote knowledge creation by establishing interactions and interdependencies among individuals with dierent knowledge sets, that is, the components of the knowledge system. Hence, we formally hypothesize that: H1: The organization strategy (organizationlevel integrative reward, organization-level integrative socialization and organization-level integrative routine communication) is positively correlated with the capability to create knowledge. The project team strategy. The project team strategy is dened as a set of integrative management practices that encourage individuals from dierent parts of the knowledge system to interact with others to create knowledge once the knowledge-creation task has been established. These integrative management practices are project team-level integrative reward (Ancona and Caldwell, 1999; Wageman, 1995; Wageman and Baker, 1997), project team-level integrative socialization (Roth and Kleiner, 1996; Thamhain and Wilemon, 1997) and project team-level integrative routine communication (Grin and Hauser, 1992; Keller, 2001; Subramaniam and Venkatraman, 2001; Takeishi, 2001). Specically, project team-level integrative reward, which is reward for team performance, impacts knowledge creation since it provides

S31 individuals with the willingness to interact and share knowledge. Research on teams in laboratory settings and single-function teams suggests that team reward impacts team interaction (Ichniowski, Shaw, and Prennushi, 1997; Wageman and Baker, 1997). Pinto, Pinto and Prescott (1993) suggest that rewards based on team outcomes, such as product innovation, place the emphasis on a common goal and nurture cooperation and the associated interaction. Similarly, Tjosvold (1986) nds that interaction is developed by providing a common goal and informing team members that their role is to interact to share knowledge, rewarding them to the extent that the group successfully accomplishes its goal of creating knowledge. Project team-level integrative socialization facilitates knowledge creation by promoting understanding among individuals. Project teamlevel integrative socialization is a process by which teams receive training as an initial step in their teamwork to better understand people that have dierent knowledge sets based in dierent parts of the knowledge system. For example, Roth and Kleiner (2000), analysing a new product development team in an automobile company, show that misunderstanding among team members based in manufacturing, nance, design engineering, is prevalent; however, it can be minimized when the team receives some training on their dierences and builds a common language and common view points specically to create knowledge for that product innovation. In their study, experts on cross-functional project teams external to the rm were hired to conduct this integrative socialization while in a study by Un (2002) team leader or experts within the rm, who are not members of the team, provided this integrative socialization. Through this process the team members also learn about the organization of their work such as setting the agenda for meetings or task allocation that also inuences their interactions. Teams that have a clear objective and a schedule for meetings to work on the project meet more frequently than those that do not have these measures in place at the beginning of the project (Roth and Kleiner, 2000; Thamhain and Wilemon, 1997; Un, 2002). Lastly, project team-level integrative routine communication inuences knowledge creation (Ancona and Caldwell, 1992; Grin and Hauser, 1992; Takeishi, 2001) by aecting understanding

S32 among team members and their willingness to share knowledge. In the study by Grin and Hauser (1992), for example, project teams that experienced a higher frequency of communication outperformed project teams that communicated less frequently. Moreover, Takeishi (2001) also found that product development teams that achieved a higher product quality communicated more frequently than those project teams that did not perform as well. Therefore, routine communication at the project-team level also promotes social interactions and a sense of interdependence among team members, which encourages knowledge sharing. Moreover, it simultaneously increases understanding among individuals as they gain a better comprehension of each others knowledge sets. The project team strategy and its associated integrative management practices facilitate the willingness and understanding among individuals that support knowledge creation. The practices become a system whereby dierent practices exercise complementary inuences on the drivers of knowledge creation. As such, they operate together and reinforce each others inuence on the willingness and understanding of individuals to create knowledge, enabling the establishment of links among the components of the distributed knowledge system. Therefore, we formally hypothesize that: H2: The project team strategy (project-team integrative reward, project-team integrative socialization, and project-team integrative routine communication) is positively correlated with the capability to create knowledge. Selecting strategies. The extension of the knowledge-based view and its integration with strands of the innovation literature enabled us to present two strategies composed of integrative management practices that facilitate the creation of knowledge in the rm. The two strategies discussed are substitute approaches since we argued that both are valid avenues for creating knowledge. However, rms might need to choose between implementing one strategy or the other. We now speculate on the costs and benets that each strategy entails, analysis that is necessary properly to establish a selection criterion. Both strategies have dierent costs and benets associated with them, which limit the straightfor-

C. A. Un and A. Cuervo-Cazurra ward dominance of one strategy over the other. On the one hand, the organization strategy has a higher implementation cost associated with it. Organization-level integrative management practices require the management of all employees in the rm as they join the company and over time to continuously reinforce their willingness and understanding. Additionally, the implementation of this strategy requires time to diuse across the rm. Moreover, for this strategy to work in a cost-eective manner, the employment base of the rm needs to be relatively stable in order to avoid continuously applying the integrative management practices to new employees who might leave before the benets in terms of knowledge creation are realized. Nevertheless, although this strategy is, in principle, costly and requires a long time to implement, these same costs support its ability to create a sustainable competitive advantage, as they render imitation more dicult. The promotion of interactions for knowledge creation among all employees in the rm leads to the establishment of systemic interactions that reduce the ability to pinpoint the sources of knowledge creation to one or a few individuals. Thus, the causal ambiguity of the sources of advantages is increased (Lippman and Rumelt, 1982). Moreover, its time-consuming nature increases the time-compression dis-economies and reduces its imitation (Dierickx and Cool, 1989). Lastly, rms that choose to be leaders in knowledge creation will nd this strategy more appropriate, since a predetermined knowledge-creation task is not required before people can be managed to create knowledge, as is the case for the project team strategy. On the other hand, the project team strategy is less costly in terms of the requirements for its implementation in the rm. It entails the application of integrative management practices on a selected group of employees organized in a team to create knowledge, rather than involving all the rms employees. It can be implemented more quickly as the practices need to be used only after the knowledge-creation task has been determined. Additionally, it is more exible, as the practices can be adapted to the requirements of the specic knowledge-creation task at hand, rather than utilizing more generic integrative management practices that are applied throughout the company. However, the strategy might be more subject to imitation by other rms, thus

Strategies for Knowledge Creation in Firms reducing the sustainability of the advantage it is built upon, as the practices are less systemic and can be applied in a short period of time. Therefore, this strategy might be more appropriate for rms that choose to follow the actions of other companies and thus have a model or design to follow. Alternatively, in situations where most work is done in projects and the content of each project is quite distinct, the project team strategy would be more appropriate, as each project team would require dierent types of integrative management practices depending on the nature of the knowledge-creation task. Whereas the strategies are substitute approaches for knowledge creation, they could, in principle, complement each other and lead to greater knowledge creation. However, this presents two challenges regarding the cost of application. On the one hand, the use of both strategies would entail the additional cost of implementing two sets of integrative management practices, additional costs that might be dicult to justify when each strategy is valid individually. On the other hand, the two sets of integrative management practices must be coherent so that they do not create competing demands on the individuals during their knowledge creation. For example, the organization strategy might induce employees to interact with people outside the task at hand, whereas the project team strategy might establish the basis for knowledge sharing only with those people relevant for the task, therefore undermining the organization strategy. In summary, these practices are substitute approaches for creating knowledge. Selection between them requires taking into account their cost of implementation. Although the strategies could, in principle, complement one another, this would entail additional costs that might not be justied in terms of knowledge creation when both approaches are individually valid avenues to knowledge creation.

S33 manufacture of personal computer, photo imaging and automotive products. We selected rms that belong to these industries, because they face dierent innovation cycles that aect the time pressure on gathering and processing dierent types of knowledge for knowledge creation (Lawrence and Lorsch, 1967). For each company, we randomly selected a set of project teams whose main objective was to use specic market knowledge to innovate their products. The response rate was 88.4% at the rm level and 95.8% at the project team level. Since we use cross-level analysis we collected data from four dierent sources using four separate surveys, in order to avoid singlerespondent bias and separate out levels of analysis (Klein, Tosi and Cannella, 1999; Rousseau, 1985). Data on organization-level integrative routine communication were collected from four randomly selected employees based in R&D, sales/marketing, customer services and manufacturing engineering respectively. Data on organization-level reward and organization-level socialization were obtained from the personnel manager of the division of each rm. Data on team-level management practices were collected from the project team-leaders. Data on project outcomes were collected from project managers. Dependent variable The capability to create knowledge. This capability is represented by its outcomes, because capability is an intangible that is not directly measurable (Godfrey and Hill, 1995). Five outcomes of capability are analysed: product innovation, technological innovativeness of the product, speed-to-market, customer satisfaction and eciency. All measures are based on a vepoint Likert scale. We use factor analysis for all variables consisting of multiple measures and report their reliability scores indicated by their Cronbachs alpha. All of the scales have a Cronbachs alpha above 0.70, thus providing an adequate level of reliability for predictor tests and hypothesized measures of a construct (Nunnally, 1978, pp. 245246). Product innovation is measured by the extent to which projects whose purpose was to use market intelligence (customer feedback about the product) led to (1) new product development and (2) product modication. The Cronbachs alpha for this factor is 0.87.

Research design and methods

Data were gathered through surveys of 182 crossfunctional knowledge-creation teams in 38 US and Japanese rms located in the United States. We focus on the divisions responsible for the

S34 Technological innovativeness is measured by the extent to which the project led to a high degree of technological innovativeness in the product (Ancona and Caldwell, 1992). Speed-to-market is measured by the extent to which the innovation was delivered to market according to schedule (Ancona and Caldwell, 1992). Customer satisfaction is measured by the extent to which the innovation met customer expectation. Eciency is a factor analysis of two items, measured by the extent to which the project met expectations in terms of (1) the level of sta hours and (2) nancial resources (excluding sta hours) that would be necessary to complete the project. The Cronbachs alpha for this factor is 0.81. Independent variables Organization strategy. The integrative practices that compose the organization strategy are organization-level integrative reward, organization-level integrative socialization and organization-level integrative routine communication. All measures are based on a ve-point Likert scale. Organization-level integrative reward is measured by the extent to which managers other than functional managers have inuence over individuals rewards in terms of promotion opportunities, salary increase, bonus payment, and job assignment (Katz and Allen, 1985; Milgrom and Roberts, 1992; Morrill, 1995). Organization-level integrative socialization is measured by the extent to which new professional employees are provided with cross-functional orientation (Nohria and Ghoshal, 1997). Lastly, organization-level integrative routine communication is measured by six items examining the frequency with which individuals interact with others outside their functional areas (5 5 daily, 4 5 more than once a week, 3 5 once every 12 weeks, 2 5 once every 23 weeks, 1 5 once every 34 weeks). The respondents were asked about the frequency of: (1) meetings between management employees from dierent functions to discuss work-related issues; (2) meetings between non-management employees from dierent functions to discuss work-related issues; (3) meetings between management personnel from dierent functions during personal time to discuss work-related issues; (4) meetings between non-management personnel from dierent functions during personal time to

C. A. Un and A. Cuervo-Cazurra discuss work-related issues; (5) meetings between management personnel from dierent functions during personal time to discuss non-work-related issues; and (6) meetings between non-management personnel from dierent functions during personal time to discuss non-work-related issues. The Cronbachs alpha of this factor is 0.81. Project team strategy. The integrative management practices that compose the project team strategy are project team-level integrative reward, project team-level integrative socialization and project team-level integrative routine communication. We also used a ve-point Likert scale for all of these measures, except for project teamlevel integrative reward. Project team-level integrative reward is measured by a factor analysis of four items, evaluating the extent to which project team outcome aects team members (1) salary increases, (2) bonus payments, (3) promotions and (4) job assignment. A value of 1 is given for each component aected. The Cronbachs alpha for this composite is 0.78. Project team-level integrative socialization is measured by evaluating the extent to which the team agreed that they received specic training to work on the project as an initial step in their teamwork. Project teamlevel integrative routine communication is measured using a factor analysis of four items to assess communication frequency among team members (5 5 daily, 4 5 more than once a week, 3 5 once every 12 weeks, 2 5 once every 23 weeks, 1 5 once every 34 weeks). Respondents were asked about the frequency of: (1) formal face-to-face meetings with all the core team members, (2) informal face-to-face meetings with only certain team members, (3) phone conversations and (4) e-mail. Measures are based on previous team-level product innovation studies (Grin and Hauser, 1992; Subramaniam and Venkatraman, 2001). The Cronbachs alpha for this composite is 0.83. Control variables. We control for industry and country of origin of the rm using dummy variables. Additionally, at the project team-level, we control for tenure diversity and functional diversity. Consistent with previous research (Ancona and Caldwell, 1992; Keller, 2001; Smith et al., 1994), we measure tenure diversity using the standard deviation of team members tenure

Strategies for Knowledge Creation in Firms divided by its mean. The same procedure is followed to measure functional diversity. Analysis Before testing the hypotheses, we conducted a cluster analysis based on the integrative management practices to identify whether the practices form a system of practices that we term knowledge-creation strategies, and whether rms can be classied as following one of the strategies suggested by the theoretical discussion. We choose the hierarchical cluster analysis, a statistical technique that sorts observations into similar sets or groups, rather than a nonhierarchical analysis such as the K-means used by Slater and Olson (2001), because the former is not predetermined by the researcher (Ketchen and Shook, 1996). Therefore, the cluster analysis serves to classify rms according to the similarity in practices that they use in managing their employees to create knowledge. Hierarchical algorithms progress through a series of steps that build a tree-like structure by either adding individual cases to or deleting them from clusters based on the similarities or dierences between the practices in the model. After identifying these strategies, because this study has a set of independent and dependent variables, we also used a canonical analysis to establish that the strategies as a set are able to explain a signicant amount of variation in these outcomes of capability simultaneously (Bolch and Huang, 1974; Glisson and Durick, 1988; Lambert and Durand, 1975; Wherry, 1984). If the two strategies are unable to explain a signicant amount of variation in these dependent variables as a set, subsequent analyses of each dependent variable are not permitted. This protects against repeated explanation of the same variation shared by correlated dependent variables. We use the ordinary least-squares regression analyses to test the eect of each strategy on knowledge creation and related outcomes. Our decision rule to test the hypotheses regarding whether a strategy is valid for the development of the capability to create knowledge is that, rst, the overall model is statistically signicant, and thus explains the variance in the outcomes of the capability; and second, that the integrative management practices that compose each of the strate-

S35 gies have positive coecients that are statistically signicant.

Results
Following Ketchen and Shook (1996), results from the cluster analysis presented in Figure 2 indicate that 45% of the rms sampled follow the organization strategy, while the other 55% follow the project team strategy. Thus, both strategies are valid avenues for knowledge-creation, and they are selected by a similar number of rms. Moreover, in analysing the nature of the companies that choose one strategy or the other, we nd that rms with the same country of origin or operating in the same industry choose dierent strategies. Thus, it is managers rather than the characteristics of the industry or the country of origin that lead rms to select knowledge-creation strategies. Table 1 presents the descriptive statistics and correlation matrix. The variables from both categories of predictors correlate signicantly with outcomes of the capability. The variables that correlate most highly with product innovation are organization-level integrative socialization (0.51) and project team-level integrative routine communication (0.58), suggesting that there is a strong relationship. Table 2 presents the results from a canonical analysis. The two strategies explain 65.6% (the canonical correlation squared) of the variation in the combined set of dependent variables. The slightly larger canonical weight for product innovation than for the other outcomes indicates that a somewhat stronger relationship exists between the two strategies and product innovation. The strength and signicance of the relationship between the two strategies and the relatively equal canonical coecients for the outcomes of capability indicate that the two strategies are able to explain variation in each dependent variable unrelated to the other, and that ordinary least-squares regression analyses are appropriate. The results of the empirical test of the existence and eectiveness of the organization strategy (Table 3) support H1, that is, that the organization strategy facilitates the development of the capability to create knowledge. The models are statistically signicant and the explanatory power is over one-third of the variance of the dierent

S36

C. A. Un and A. Cuervo-Cazurra
Organization ID Number (N=38) 0 5 10 15 20 25 +---------+---------+---------+---------+---------+ 17 35 6 2 9 14 36 15 28 19 29 10 27 32 33 12 22 8 11 13 38 25 26 30 34 7 31 18 37 5 21 24 1 20 4 3 23 16 -+---------+ -+ +---------+ -----------+ +---------------+ -----------+---------+ I -----------+ I ---------------------+---+ +---+ ---------------------+ +---------+ I I ---------------------+---+ I I I ---------------------+ I I I -----------+-------------+ +-+ I -----------+ +-----+ I I ---------------------+---+ I I I ---------------------+ +---+ +-------+ -----------+---------+ I I I -----------+ +---+ I I I -----------+---------+ +-----+ I I -----------+ I I I -------------------------+ I I -----------+-------------+ I I -----------+ +---------------+ I -------------------------+ I -----------+-----------------------+ I -----------+ +---------+ I ---------------------+-------------+ I I ---------------------+ I I -----------+---------+ I I -----------+ +---------+ I I -----------+---+ I I +---+ -----------+ +-----+ I I ---------------+ I I -+---------+ +-----+ I -+ +-+ I I I -----------+ +-+ I I I -------------+ +-----------+ I +-------+ ---------------+ +-+ I I ---------------------------+ +-+ I -----------------------------+ I -------------------------------------+

Figure 2. Hierarchical cluster analysis of organization-level and project team-level practices: Cluster 1 contains companies following the project team strategy and Cluster 2 contains companies following the organization strategy Dendrogram using average linkage (between groups) rescaled distance cluster combine.

outcomes of the capability to create knowledge. Moreover, the three integrative management practices that compose this strategy have positive and statistically signicant coecients across all outcomes of the capability. The results of the empirical analysis of the existence and eectiveness of the project team strategy (Table 4) provide support for H2, indicating that the project team strategy facilitates the development of the capability to create knowledge. The models are statistically signicant and their explanatory power is also over one third of the variance of the dierent outcomes of the capability to create knowledge. Additionally,

1. Project team strategy 2. Organization strategy

the three project-team level integrative management practices that are part of this strategy have positive and statistically signicant coecients in all outcomes of the capability. A comparison of strategies seems to indicate that the organization strategy has a slightly higher explanatory power of the dierent outcomes of the capability to create knowledge, but this nding needs to be qualied. The results of the analysis reveal only the benets of using the strategies in terms of knowledge creation. However, the strategies entail costs in implementing the set of integrative management practices, costs that, as we argued before, are likely to be higher

Table 1. Descriptive statistics and correlation matrix Mean Std Dev 3.72 3.83 3.05 3.07 1 0.42** 1 1 2 3 4 5 6 7 8 9 10 11 12

Outcomes of the capability to create knowledge

Strategies for Knowledge Creation in Firms

Organization strategy 1 0.22 0.38** 1.37 2.63 2.65 0.49*** 0.37** 0.39** 0.42** 0.44*** 3.02 0.51*** 0.43** 0.48*** 0.39** 0.43**

3.24 4.05 1.79 1.12 1 0.18 0.31* 1 0.34* 1 0.48***

2.90 2.85 1.85 3.69

0.27 0.28 0.17 0.42**

0.25 0.17 0.28 0.38*

1 0.36* 0.04 0.36**

Project team strategy 0.25 0.43** 0.48*** 0.46*** 2.91 2.78 2.10 0.58*** 0.38* 3.70 0.32*

2.12

1.56

0.34*

0.37**

0.38**

0.39** 0.06 0.19 0.35* 0.21

0.26 0.17 0.36**

0.33* 0.46*** 0.53***

1 0.12 1 0.27 0.38* 1

0.41** 0.23 0.47***

Controls for project team strategy 3.63 1.55 0.27 0.21

3.40

1.26

0.22

0.19

0.17 0.01

0.19 0.05

0.13

0.23 0.50*** 0.25

0.22 0.18

0.56*** 0.21 0.02 0.47** 1 0.19 0.28 0.07 0.19 0.11

1. Product innovation 2. Technological innovativeness 3. Speed-to-market 4. Customer satisfaction 5. Eciency 6. Organization-level integrative reward 7. Organization-level integrative socialization 8. Organization-level integrative routine communication 9. Project team-level integrative reward 10. Project team-level integrative socialization 11. Project team-level integrative routine communication 12. Project team-level tenure diversity 13. Project team-level functional diversity

*po0.05, **po0.01, ***po0.001

S37

S38
Table 2. Canonical analysis Variable Standardized canonical coecients

C. A. Un and A. Cuervo-Cazurra for the organization strategy. Unfortunately we do not have measures of cost of implementation to fully establish this claim. Overall, the results of the analyses reveal that the strategies are substitute approaches for the creation of knowledge, since both yield statistically signicant models with similar explanatory power and the set of integrative management practices that compose each have statistically signicant coecients. Although we have argued for and presented the two strategies as substitutes, they could be thought of as complementary. Additional analyses, not presented here, where we studied the interaction among practices do not yield statistically signicant eects for the cross products of the integrative management practices that compose each strategy, except in the case of the cross product of organizationlevel and project team-level integrative routine communication. Thus, although using both approaches can reinforce integrative routine communication, the cost of implementing two sets of integrative management practices might not be warranted by the additional benet.

Outcomes of the capability to create knowledge Product innovation Technological innovativeness Speed-to-market Customer satisfaction Eciency Organization strategy Organization-level integrative reward Organization-level integrative socialization Organization-level integrative routine communication Project team strategy Project team-level integrative reward Project team-level integrative socialization Project team-level integrative routine communication Canonical correlation df F-ratio
*po0.05, **po0.01, ***po0.001

0.52 0.46 0.39 0.44 0.42 0.37 0.39 0.42

0.39 0.41 0.35 0.81 12/336 16.99***

Table 3. Results of the regression analysis for testing whether the organization strategy supports the development of the capability to create knowledge Outcomes of the capability to create knowledge Model 1 Product Innovation Organization strategy Organization-level integrative reward Organization-level integrative socialization Organization-level integrative routine communication Industry1 Industry2 Country of origin Intercept F R2 Adjusted R2 0.47** (0.11) 0.92*** (0.23) 0.85*** (0.16) -0.18 (0.18) 0.21 (0.14) 0.18 (0.23) 4.97*** (0.63) 4.99*** 0.42 0.37 Model 2 Technological Innovativeness 0.84** (0.19) 0.71** (0.32) 0.66*** (0.27) 0.32 (0.19) 0.11 (0.09) 0.17 (0.19) 4.67*** (0.37) 4.97*** 0.43 0.39 Model 3 Speed-tomarket 0.55*** (0.17) 0.88*** (0.30) 0.83*** (0.32) 0.41 (0.61) 0.63** (0.16) 0.22 (0.18) 3.24*** (0.53) 4.77*** 0.46 0.32 Model 4 Customer satisfaction 0.61** (0.21) 0.93*** (0.21) 0.77*** (0.26) 0.38** (0.11) 0.75** (0.27) 0.28 (0.31) 2.55*** (0.16) 4.82*** 0.43 0.29 Model 5 Eciency

0.39** (0.11) 0.66** (0.25) 0.59** (0.22) 0.68** (0.19) 0.61** (0.22) 0.43 (0.26) 3.76*** (0.59) 3.89*** 0.39 0.33

Controls

Whites heteroskedastic-consistent standard errors in parentheses. N 5 182. *po0.05, **po0.01, ***po0.001

Strategies for Knowledge Creation in Firms

S39

Table 4. Results of the regression analysis for testing whether the project team strategy supports the development of the capability to create knowledge Outcomes of the capability to create knowledge Model 1 Product Innovation Project team strategy Project team-level integrative reward Project team-level integrative socialization Project team-level integrative routine communication Project team-level tenure diversity Project team-level functional diversity Industry1 Industry2 Country of origin Intercept F R2 Adjusted R2 0.39** (0.13) 0.83*** (0.21) 0.72** (0.29) 0.29** (0.09) 0.23 (0.19) 0.12 (0.42) 0.25 (0.19) 0.41 (0.35) 2.17** (0.89) 4.32*** 0.36 0.35 Model 2 Technological innovativeness 0.64** (0.26) 0.89*** (0.29) 0.95** (0.27) 0.27** (0.11) 0.78*** (0.24) 0.48 (0.27) 0.62 (0.38) 0.49 (0.37) 4.19*** (0.89) 3.97** 0.42 0.37 Model 3 Speed-tomarket 0.38*** (0.09) 0.63*** (0.14) 0.49** (0.15) 0.52** (0.19) 0.27 (0.14) 0.17 (0.31) 0.53** (0.22) 0.19 (0.18) 4.67*** (0.99) 3.63** 0.37 0.28 Model 4 Customer satisfaction 0.39*** (0.10) 0.48** (0.14) 0.90*** (0.26) 0.58*** (0.14) 0.44* (0.17) 0.36 (0.17) 0.81* (0.37) 0.52 (0.81) 2.77*** (0.32) 3.89** 0.32 0.26 Model 5 Eciency

0.53*** (0.21) 0.47* (0.21) 0.49** (0.21) 0.71*** (0.32) 0.42 (0.73) 0.46 (0.42) 0.22 (0.17) 0.69 (0.34) 4.11*** (0.63) 4.52** 0.38 0.31

Controls

Whites heteroskedastic-consistent standard errors in parentheses. N 5 182. *po0.05, **po0.01, ***po0.001

Conclusions
In this study we take the view that rms are distributed knowledge systems. We identied two strategies that enable the development of the capability to create knowledge by promoting interactions among the individuals composing the system: the organization strategy and the project team strategy. The two strategies, which are composed of dierent sets of integrative management practices, are both valid approaches for developing the capability to create knowledge. Although the organization strategy appears to better predict outcomes of the capability, it might be a more costly approach that not all managers would choose to follow. Before we discuss the contributions of this research, we acknowledge several limitations. First, like all cross-sectional studies, the paper is limited in its ability to establish causality. It could be that high-performing rms are the only ones with high levels of knowledge creation and also the only ones that can aord to make extensive

use of the strategies. However, since the rms in the study are all large companies, they would all, in principle, have the necessary resources to implement one strategy or the other. Thus, the applicability of the results of the study might be limited to large rms, since smaller rms might lack the resources to use these strategies, particularly the organization strategy. Second, although the organization strategy appears to be a better predictor of the outcomes of the capability to create knowledge, we have data on the benets of using the strategies but not on the cost of implementing them, which limits the establishment of the superiority of one strategy over the other. Despite the limitations, the study makes an important contribution to the knowledge-based view by being among the rst to empirically identify and test the eectiveness of dierent strategies that rms use to develop the capability to create knowledge. It provides both a theoretical explanation and empirical evidence of two strategies to manage individuals in the rm. As

S40 such, it provides a rst step towards understanding knowledge creation. Future research would need to tackle not only the benets but also the cost of the strategies for knowledge creation in rms. Although the study is academic in nature, it can help guide managerial practice. It suggests that managers have a choice of two strategies for the development of the capability to create knowledge. It presents the specic integrative management practices (integrative reward, integrative socialisation and integrative routine communication) that each strategy entails and on which managers can base the creation of the knowledge system, highlighting the equinality of the strategies and indicating the limitations of each strategy in terms of its costs, applicability and sustainability of the associated competitive advantage. For rms to be able to compete on the basis of knowledge, managers have to be able to manage employees not only to interact in order to share knowledge, but also to use that knowledge to create new knowledge. This paper assists them in understanding how to do this by providing an explanation grounded in the knowledge-based view.

C. A. Un and A. Cuervo-Cazurra
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