The business press is filled with accounts of the power of knowledge to reshape corporate fortunes. Conferences on knowledge management are announced with increasing frequency. Yet a closer look at the prescriptions on offer reveals that much of the discussion is about knowledge in the narrowest sense: the use of processes and technology to foster the spread of best practices across a company.

Here, we explore the practical implications of a wider view of knowledge for strategy formulation. As traditional structural advantages decay and more products and services enter the global competitive arena, strategies formed around knowledge can change the game and open up new paths to profitability.

The knowledge difference

Knowledge is an asset unlike any other. The first step in framing a knowledge strategy is to understand four characteristics in particular:

Extraordinary leverage and increasing returns. Most assets are subject to diminishing returns, but not knowledge. The bulk of the fixed cost in knowledge products usually lies in creation rather than in manufacturing or distribution. Once the knowledge has been created, the initial development cost can be spread across rising volumes.

Network effects can emerge as knowledge is used by more and more people. These users can...