The proprietary knowledge that resides in the minds of a company's top professionals is a source of competitive advantage. An effective, efficient, company-wide knowledge market can deliver this power in ways that past efforts at knowledge management have failed to do. By creating a market mechanism for knowledge and a culture that encourages employees to share valuable knowledge with peers, companies can aggregate internal supply and demand from the many small, subscale knowledge-management systems that already exist within them.

Lowell Bryan, the author, is a director in McKinsey's New York office.

Knowledge or Information?

Effective knowledge management begins with drawing a distinction between information and knowledge, because these terms are often used interchangeably. If information is the raw material — the input — used to make decisions, knowledge is what provides the context for how people think. As people approach a traffic light that has turned red, they take in that information and decide to stop. They do so because they have a knowledge of what red, green, and yellow mean.

Companies gain a competitive advantage from information by providing the right information to the right managers at the right time. If information isn't timely, it is often useless. For most of the past several decades, corporate investments in IT provided employees with information useful to their jobs. These investments paid off, for the most part. Not so for knowledge-management investments.

In a large company, a competitive advantage from knowledge is gained through the productive internal exchange of insights that help employees think differently as they make decisions and take actions. This is a far higher bar than the one for exchanging information, because people must be persuaded by the quality of the thought, the facts, and the logic presented that the knowledge they are being asked to acquire is superior to what they already know.

Beyond personal experience, people acquire knowledge through formal training, dialogue with others, or reading, viewing, and listening to codified knowledge content. "Knowledge management" usually refers to a company's investment to improve the internal exchange of proprietary knowledge, through dialogue or codified content. McKinsey's work in building knowledge markets focuses on this latter form of knowledge exchange — particularly the electronic exchange of knowledge through codified content among managers and professional staff. (A subject closely related to knowledge management is distance learning, which focuses on electronically assisted education and training.)

Knowledge by nature has a much longer shelf life than information does. Knowledge about how a competitor acts in the marketplace, for example, can be valuable to a company for years. But even the most distinctive and proprietary knowledge, such as that held by a company's best professionals, undergoes an eventual decay curve that terminates at the point where it becomes common knowledge. A professional possessing secret information on a key business issue may initially have no incentive to dilute its value by sharing it. But as others learn what once was secret, there eventually comes a point in the half-life of proprietary knowledge when it has greatest value to a company if its insights become easily and broadly available across the organization.

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