Knowledge management” is one of the hottest buzzwords in business management today. More and more executives now recognize that in an increasingly information-based economy, intangible assets like patents, brands, and intellectual capital need cultivation and management as much as tangible assets like buildings, machines, and inventories. In recent years, legions of consultants, managers and newly-minted knowledge officers armed with corporate intranets and knowledge management software packages have taken on the task of documenting, storing, mining and sharing firms’ intellectual capital. For the most part, however, these knowledge managers have been focusing exclusively on firms’ internal knowledge. What about knowledge external to the firm? Do firms derive economic value from it, and can it too be a source of competitive advantage?

“Yes,” argues Bruce Kogut, co-director of the Reginald H. Jones Center for Management Policy, Strategy and Organization at Wharton. In a research paper titled “The Network as Knowledge,” Kogut posits that firms derive value from membership and participation in networks (defined as economic activity organized around a pattern of relationships among firms and institutions) by generating joint economic rents through cooperation. A fundamental example would be how rapid product development cycles often rely on a policy of outsourcing to suppliers – essentially successfully exploiting the knowledge of other firms for mutual gain.

While this observation that participating in a network is valuable to the firm may seem relatively straightforward, Kogut’s theoretical insight is that the basis of the network itself is really the external knowledge valuable to the firm. In other words, the external knowledge is not simply information of who is doing what and at what price; it is also the organizing principles by which the network itself is coordinated. The organizing principles that serve as the foundation of the network determine the patterns of learning that the network members follow. As a result, the organizing principles in turn both enhance individual capabilities of member firms, as well as lead to network capabilities that are not specific to a firm, but that allow the member firms to reap joint gains in learning and coordination.

The degree of learning and coordination achieved and the magnitude of economic rent derived by a network member are largely determined by the structure of the network itself. Network structure, according to Kogut, evolves according to “the systematic interaction of technological, organizational, and institutional factors,” as well as the multiple rules that guide the behaviors of interacting entities in the market. If the network has a very hierarchical structure, like that of the computer industry centered in California’s Route 128 region, then members with non-redundant ties to other members — occupying powerful “brokerage positions” — will gain the most economic rents. On the other hand, if the network has a flatter structure, like that of the computer industry centered in Silicon Valley, then most rents accrue to the entire membership of the group.

Kogut illustrates his theory of the network as valuable source of external knowledge to a firm by examining a case study in the automotive industry — the Toyota Production System. In this case, cooperation in a complex network of automotive assemblers, parts suppliers, and subcontractors generated organizational innovation and productivity improvements that led to a competitive advantage over U.S. automakers. Specifically, the network’s organizing principles supported the capabilities of providing variety and speed to market: “Capable suppliers in a network provide competing variety based upon specialized competence. Black box modularity permits specialization, and yet demands a high degree of coordination. The rapid diffusion of production know-how serves to reduce the costs, while the tight coordination of suppliers and assembly in design and production reduces overall time to the market.”

Clearly, the emergence of knowledge management reflects a growing understanding that firm knowledge is a significant intangible asset and source of firm value. Hopefully, Kogut’s message that an important source of value for a firm lies in the capabilities supported by organizing principles of work will spur business managers and knowledge managers alike to revisit and reconsider the sources of value of a viable firm, and recognize that firm knowledge extends beyond the four walls of a company, encompassing both relationships and activities external to the firm.