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Category: Application-Specific Knowledge Management

Customer Knowledge Management

Scott Paquette
University of Toronto, Canada

INTRODUCTION
As companies begin to develop competence in managing
internal knowledge and applying it towards achieving
organizational goals, they are setting their sights on new
sources of knowledge that are not necessarily found
within the boundaries of the firm. Customer knowledge
management comprises the processes that are concerned
with the identification, acquisition, and utilization of
knowledge from beyond a firms external boundary in
order to create value for an organization. Companies can
utilize this knowledge in many different forms of organizational improvement and change, but it is especially
valuable for innovation and the new product development function.
The notion of working with partners to share information was first discussed in 1966 where the possibility of
transferring information between a company and its suppliers and customers was identified. Kaufman (1966) describes the advantages to a business that include reduced
order costs, reduced delivery time, and increased customer confidence and goodwill (p. 148).
Organizations have since been viewed as interpretation systems that must find ways of knowing their environment (Daft & Weick, 1984). Through this environmental learning, a firms ability to innovate can improve by
going beyond a firms boundaries to expand the knowledge available for creating new and successful products.
Some organizations conduct ongoing, active searches of
the environment to seek new and vital information. Such
organizations become the key innovators within an industry. Other, more passive organizations accept whatever
information the environment presents and avoid the processes of testing new ideas and innovation. Marketing
literature refers to this concept as market orientation
(Kohli & Jaworski, 1990; Slater & Narver, 1995).
More recently, many organizations have realized the
value of information about their customers through customer relationship management and data mining strategies, and have used this information to tailor their marketing efforts (Berson, Smith, & Thearling, 2003; Blattberg,
Getz, & Thomas, 2001; Davenport, Harris, & Kohli, 2001).
The idea of using information from suppliers to accurately
manage inventory levels within the supply chain (Lin,
Huang, & Lin, 2002) also reflects this notion. However,
what is missing from these theories and strategies is the

realization of the value of knowledge residing within

customers, and not information about customers.
Iansiti and Levien (2004) describe an organizations
environment as an ecosystem, where networked organizations rely on the strength of others for survival. Within
this ecology, they identify certain keystone organizations that simplify the complex task of connecting
network participants to one another or by making the
creation of new products by third parties more efficient
(p. 73). This increase in overall ecosystem productivity is
accomplished though the incorporation of technological
innovations and niche creation through innovative technologies. Through recognizing customer knowledge as a
key component to a firms ability to innovate, and actively
searching for sources of knowledge within the business
environment, a firm is able to augment its innovation
capabilities and position themselves as a keystone organization.

BACKGROUND
In examining the role of external knowledge in an
organizations internal processes, customer is broadly
defined as an organizations stakeholders such as consumers, suppliers, partners, joint ventures and alliances,
and competitors. In some cases, a customer may not have
a current relationship with the organization, but one is
likely to develop in the future. Knowledge in this context
refers to the model presented by Cook and Brown (1999),
where it can be explicit or tacit, and individual or group
knowledge. Explicit knowledge is easily codified, transferred, and understood by multiple individuals, where
tacit knowledge requires experience and practice in order
to flow from one individual to another. Both of these forms
of knowledge can reside at the individual level, or be
created and transferred between different groups.
Knowledge derived from these relationships through
an interactive and mutually beneficial process is referred
to as customer knowledge. Customer knowledge can be
composed of a combination of consumer knowledge,
supply chain knowledge, joint venture specific knowledge, and so forth. This knowledge is created within a
two-way flow of knowledge which creates value for both
parties. It goes beyond information identifying and classifying customers, to knowledge that is resident within

Copyright 2006, Idea Group Inc., distributing in print or electronic forms without written permission of IGI is prohibited.

Customer Knowledge Management

the external organization that has been developed through

industry and market experience. Examples can be consumer preferences of new product features, newly recognized uses for current products, knowledge derived from
joint research and development, design improvements
from suppliers intended to reduce the cost of manufacturing, and knowledge regarding trends within the business
environment.
An important aspect of customer knowledge is that it
is knowledge not owned by the firm, but by others who
may or may not be willing to share such knowledge. The
processes that a firm employs to manage the identification, acquisition, and internal utilization of customer
knowledge are collectively referred to as customer knowledge management. It is within these processes that an
organization and its customers collectively work together
to combine their existing knowledge to create new knowledge. This new knowledge is a key input into a companys
ability to innovate, which is reflected in their research and
development function. Furthermore, the ability to design
and improve new products is also impacted by the level of
customer knowledge flows. A depiction of customer knowledge flows is shown in Figure 1.
Many studies have used customer knowledge and
customer information interchangeably, causing confusion between the two terms. Blosch (2000) states that
understanding how each customer interacts with business processes is to gain knowledge about that customer (p. 266). Gibbert, Leibold, and Probst (2002) would
describe this only as customer information, as it is knowl-

edge about the customer and is gained without a predetermined close interaction or partnership. Dennis,
Marsland, and Cockett (2001) also examine the use of
customer information within a retail environment, and
look at how data mining can contribute to an organizations
understanding of the customer. Once again, the emphasis
is on acquiring information about the customer, without
interaction or joint knowledge creation.
Davenport et al. (2001) begin to argue that knowledge
about the customer is only the first step, and organizations should create processes to better manage the relationships they discover with this information to create
profitable interactions. The focus they present remains
with learning about the customers needs through different channels. However, the customers involvement in
the knowledge process is still passive, and not participatory.
Recently, an emphasis on customers as partners in the
knowledge creation process has been presented (Sawhney
& Prandelli, 2000). Customers co-create knowledge with
an organization in order to create value for both parties by
sharing knowledge residing within customers in order to
create better products. Here, the two entities work together with a shared goal in mind, and the customer
becomes an active and key participant in the knowledge
creation process. Gibbert et al. (2002) examined a set of
organizations that have implemented this idea into their
customer relationship strategy, and described the types
of CKM they observed.

Figure 1. Summary of customer knowledge

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Customer Knowledge Management

CUSTOMER KNOWLEDGE AND

INNOVATION
Henry Chesbrough (2003) states that most innovations fail
when brought to the marketplace. However, if companies
do not continually innovate, they die. This is in part due
to the key role innovation plays in value creation and
profitable growth (Prahalad & Ramaswamy, 2003). Innovation creates advantages in the marketplace over competitors, leads to and supports other competitive advantages
such as cost savings, and differentiates the organization
in the marketplace through the eyes of its customers.
Innovation relies on the creation of new knowledge by
the organization, and this is derived from many sources.
Companies can identify new and usable knowledge within
their employees (Bontis, Crossan, & Hulland, 2002; Leonard
& Sensiper, 1998), convert this existing tacit knowledge to
easily shared explicit knowledge (Nonaka & Takeuchi,
1995), purchase or acquire knowledge from other organizations, or look to the external environment for new sources
of knowledge such as their customers. This is where
customer knowledge can significantly contribute to a
firms ability to innovate.
An organization is continually challenged to create
new knowledge, and transform this knowledge (i.e., into
solutions to problems, new products, etc.) through the
integration of knowledge from different sources (Carlile &
Rebentisch, 2003). Firms are constantly striving to identify
valuable information and disseminate it to the appropriate
areas of the organization in order to make informed decisions and create a competitive advantage. More and more,
firms are looking beyond external boundaries for new
sources of knowledge, and in many cases this points them
towards their customers. An organization will be able to
stimulate its new product development process and create
well-received products if it can collaborate via a knowledge sharing strategy with its customers. A successful
knowledge partnership with the most valuable and important customers can not only strengthen these business
relationships, but also create a competitive advantage that
is difficult for the competition to duplicate.
Customer knowledge can establish a competitive advantage for the organization through increased organizational learning and innovation. The competitive advantage gained through knowledge acquisition can either be
temporary, as other competitors will follow and learn the
new skills, processes, products, and so forth, or it can be
more permanent if the competition is prevented from gaining this knowledge. Customer knowledge can be a barrier
to knowledge acquisition for the competition by building
a close relationship with the customer that cannot be
duplicated. This barrier is strengthened if the customer
perceives an intrinsic benefit that cannot be duplicated by
other competitors. For example, as Amazon.com learns a
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customers buying preferences and is able to offer valuable recommendations, that customer will be reluctant to
switch retailers and begin the learning process over. In
some cases this is referred to as customer learning (Stewart,
1997), where the two-way exchange of knowledge allows
the customer to gain new knowledge and use this to his
or her benefit. The knowledge sharing partnership acts
both as a facilitator of knowledge transfer and sharing,
and a barrier to the competition.

Types of Customer Knowledge

Customers can provide unique knowledge that allows an
organization to learn and acquire knowledge to improve
its internal operations, including innovation. In turn, the
organization provides to the customer knowledge of its
products and services which improves the functionality
to the customer. This two-way flow of knowledge provides the basis for a competitive advantage through a
strong relationship or partnership. Gibbert et al. (2002)
discuss the five basic forms of customer knowledge
which are prosumerism, team based co-learning, mutual
innovation, communities of creation, and joint intellectual property development (Table 1). Each form of customer knowledge originates from a relationship between
the organization and a customer source, and can be
derived from multiple sources.
The first version of customer knowledge is
prosumerism, a term derived from Tofflers (1980)
prosumer, which describes a customer filling the dual
role of consumer and producer. In this instance, knowledge co-production is generated from role patterns and
interactivity. For example, Bosch develops engine management systems with Mercedes-Benz who then creates
and assembles the finished product, a car. Boschs customer, Mercedes-Benz, is allowed to share value-creating ideas and facilitates the development of new initiatives and products.
The second form of customer knowledge management is team-based co-learning. This involves intense
interactions with the customer to gain their knowledge
on processes and systems to facilitate systematic change.
A prominent example of this is Amazon.com. By restructuring their organization from being an online book retailer to a seller of many varieties of goods, they accomplished many co-learning interactions with their customers (i.e., suppliers) to design a new value chain.
Amazon.com uses this value chain as a competitive
advantage against other online retailers, as it allows for
quick movement of goods at competitive prices. This
strategy has the added value of creating an even closer
relationship with their suppliers that other online retailers will not be able to duplicate. A second illustration is
Toyota, who has created knowledge-sharing networks

Customer Knowledge Management

Table 1. Summary of the five forms of customer knowledge

Knowledge Form (Gibbert et al., 2002)

Typical Relationship Form

Prosumerism
Team-Based Co-Learning
Mutual Innovation
Communities of Creation
Joint Intellectual Property

FirmProducer/Manufacturer
FirmConsumer/Joint Venture
FirmSupplier/Joint Venture
FirmConsumer/Joint Venture
FirmConsumer

with its suppliers, with the common goal of learning

through combining each others knowledge to create
efficiencies in the production process (Dyer & Nobeoka,
2000). Toyota and a supplier will create a team, co-populated with employees from each organization who together study organizational processes and create new
customer knowledge.
Mutual innovation was initially identified by von
Hippel (1988), who discussed that most product innovations come from the end-users of the product, as they
have specific product knowledge derived from use and
their own needs. Mutual innovation is more than just
asking for future requirements, but constructing knowledge that comes from closely integrated innovation practices. Rider Logistics developed complex and extensive
logistical solutions for its customers through close examination of their manufacturing operations and supply
chain strategies, then designed services that fit and
added value to these processes. This may convert Rider
from a basic trucking company towards a logistics solutions provider (Gibbert et al., 2002).
Communities of creation occur when companies organize their customers into groups holding similar expert
knowledge and encourage interaction in order to generate
new knowledge. These groups are characterized by working together over a long period of time, sharing a common
interest, and wanting to create and share valuable knowledge. Unlike traditional communities of practice (Wenger,
1998), these groups span organizational boundaries and
develop value for multiple organizations. Microsoft beta
testing with customers is an example where groups of
targeted customers test products together with the
Microsoft product development engineers to jointly create a product that provides value for Microsoft and its
participating customer organizations. These communities also form through informal relationships which are
capable of producing valuable knowledge.
The final form of CKM is joint intellectual property,
which may be the most intense form of cooperation
between a company and its customers. Here, the company
takes the view that it is owned by its customers and they
have ownership in product development. This notion
goes beyond normal customer relationships and co-cre-

ates new businesses based on customer education and

co-development. Skandia Insurance is an example where
a company and its valued consumers created new businesses owned by both. They have proven this strategy
especially successful in emerging markets where the company initially lacks customer knowledge, yet gains a great
deal from its local customers.

Challenges for Customer Knowledge

Management
Many of the discussions on internal knowledge transfer
deal with the challenges of sharing knowledge at the
individual, group, or organizational level. These challenges remain true for sharing customer knowledge across
an external boundary. Initially, firms may experience a
cultural challenge of perceiving customers as a source of
knowledge, not just revenue. This is reflected in the not
invented here concept, which demonstrates an
organizations unwillingness to accept externally generated ideas. Other companies fear showing internal processes to customers such as suppliers or alliance partners
in case a poor perception develops. It is common for
heavily brand-based companies who want to control what
the customer sees to be afraid of giving away strategic
secrets to the marketplace (Gibbert et al., 2002). A further
case is resistance to sharing proprietary knowledge with
suppliers. Questions of how to control the flow of this
knowledge to competitors arise, and the effectiveness of
confidentiality agreements are doubted when a firm must
reveal or share proprietary technology that is part of a
firms competitive advantage (Ragatz, Handfield et al.,
1997).
Besides cultural influences, a firm may not have the
competency required to absorb and utilize the external
knowledge. Cohen and Levinthal (1990) state that a firms
absorptive capacity, or its ability to absorb new knowledge, is a function of the firms prior knowledge that
allows it to recognize and synthesize new knowledge.
Also, information systems may not be able to handle the
transfer of knowledge from external sources, as most
knowledge sharing support systems are only designed
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Customer Knowledge Management

for internal use. Organizations can be quite reluctant to

open up these systems, as technical challenges occur
without a universal integration and security mechanism
that interfaces with both parties systems. Control of
content may be lost, as external knowledge transfer can
push the locus of control beyond a firms boundaries
which for some may cause apprehension (Gibbert et al.,
2002).
A further obstacle exists when the customer can solely
derive innovations from their knowledge and the need for
a partner becomes insignificant. Von Hippel (1988) argues
that innovators must have a poor ability to gain from their
knowledge regarding innovations in order to share this
information with others, or else they would capitalize on
their knowledge independently and realize higher revenues. Factors such as manufacturing capability, geography, market knowledge, or supply chain requirements can
increase an innovators ability to bring their development
to market, and prevent the opportunity for a formalized
knowledge sharing alliance.
A key question an organization may ask is how do they
know the customer is supplying correct information or
that it is representative of the entire market? Although
some knowledge sharing partnerships may only be able to
encompass the knowledge of one customer, market researchers have techniques to ensure enough customers
were consulted to recognize trends or significant findings. However, customer knowledge management still
depends on the assumption that an environment exists
where useful knowledge can be provided to the company.
This may indicate that the potential value to be realized by
a customer knowledge management initiative is equal to
the ability of the external environment to provide such
knowledge, and customer knowledge management may be
more effective in some industries over others.
To further this point, companies should realize the
limitations of focusing on their current customers and
markets, and look beyond their range to products that
cannot be foreseen or their value realized by current
customers. These new ideas, sometimes called disruptive
technologies (Christensen, 2000), go against the axiom of
staying close to your customer (Prahalad & Ramaswamy,
2000) and encourage innovators to develop innovative
ideas that disrupt a customers process and patterns to
introduce new products that leap the product lifecycle
and replace current paradigms and technologies. They
may even target new markets that do not exist or satisfy
customers needs today, and therefore cannot be currently used to gain customer knowledge, but possibly will
in the future.

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FUTURE TRENDS
The concept of customer knowledge is relatively new to
the field of knowledge management, yet it continues to
develop as more organizations embrace the idea and put
it into practice. It is becoming quite common to observe
knowledge-sharing agreements between separate firms,
and in some cases joint ventures for the specific purpose
of creating new knowledge.
As competency in utilizing customer knowledge increases, more companies will conduct new product development through a web of businesses capable of enhancing the process with their unique core competencies. By
working as a team, each firms internal knowledge will
contribute to the creation of a new set of shared knowledge. This new knowledge will be the driver for innovative
product ideas and advancements. Developing the ability
to learn from external organizations will become a key
objective in organizational knowledge management strategies. Firms will take the best practices of sharing knowledge over external boundaries, and apply these skills
towards improving internal knowledge transfer between
different teams, departments, units, and subsidiaries. A
cyclical learning cycle of improving knowledge management practices by learning through internal and external
knowledge transfer only strengthens a firms knowledge
management abilities.
The definition of customer can be broadened even
further to include those entities that may not have a
transactional relationship with the firm, yet contain pertinent knowledge of an organizations business environment. Lobby groups, government organizations, legal
entities, activist groups such as environmental awareness associations, professional associations, and standards boards all influence the business environment and
a firms ability to operate within it. Each should be considered a valuable source of external knowledge a firm requires to not only understand the environment, but flourish in it (Paquette, 2004). Expanding the range of sources
providing customer knowledge will transform this knowledge set into external knowledge management, encompassing all stakeholders knowledge available to the firm.

CONCLUSION
Facilitating knowledge sharing between internal individuals and groups can be a daunting task for any organization. The challenges of this endeavor multiply when
the knowledge sharing involves an external entity possessing knowledge that is not owned by the firm.

Customer Knowledge Management

However, the benefits of creating social structures,

business processes, and technologies to facilitate customer knowledge flows can have a substantial impact on
the performance of the organization, and in particular its
ability to innovate. By actively involving customers in
creating a two-way flow of knowledge that supports
innovation, an organization leverages a new source of
knowledge which can improve its standing in the marketplace. Determining the correct combination of valuable
customer knowledge sources and customer knowledge
management forms can create a sustainable competitive
advantage through the introduction of products that
satisfy a markets latent needs. A firms acknowledgement
of the importance of customer knowledge will encourage
the expansion of its current knowledge management practices to beyond the organizational boundary. This creates
an improved ability to identify, acquire, and utilize valuable knowledge that an organization requires to be successful.

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