2002/21/MKT/SM  

This paper argues that different implementations of Knowledge Management (KM) will result in different types of scale economies for Professional Services Firms. On the one hand, KM processes may facilitate Knowledge Exchange in the firm leading to more efficient operations and lower costs, i.e. supply-side scale economies. On the other hand, KM processes can enhance Knowledge Creation if the experience gained via individual assignments is synthesized and integrated. Knowledge Creation results in deeper understanding of the business environment, better service quality, i.e. demand-side scale economies. Based on a game-theoretic model the authors examined what emphasis should be given to the two types of KM processes in the firm in a competitive environment. They find that the answer depends on two factors: (i) the competitiveness of the business environment and (ii) the firms’ ability to leverage the customer base. Specifically, in a non-competitive environment, the firm is always better off focusing on Knowledge Exchange. This is in sharp contrast with the situation where competition is significant. Then, if the ability to leverage the customer base is relatively high, firms should shift the emphasis of their KM system to Knowledge Creation. The authors also explore the evolution of an industry where firms compete with KM systems geared to Knowledge Creation. The results indicate that, while the quality of their services increases with a better performance of the KM technology, long-term industry profits first increase but then decrease because of more intense competition. They provide anecdotal evidence from the Management Consulting Industry to illustrate the authors’ findings and discuss the implications for other sectors.