• Knowledge is a main source of most firms’ competitive advantage. This includes both codified knowledge such as written documents and blueprints as well as tacit knowledge such as routines.
• Firms that do a better job of protecting their unique knowledge from being stolen, observed, and imitated, will have an advantage over those that don’t.
• While there are some legal protections of knowledge, such as patents and trademarks, they are weak and costly to write and enforce. Therefore, firms also use the following organizational methods to protect their knowledge.

Ways Firms Protect Knowledge

1. Alignment of incentives - a firm's existence can protect knowledge, e.g. two scientists creating a patentable substance will be better able to share their knowledge without worrying about the other stealing their ideas if they form a jointly owned firm.
   Employment contracts.
   
   1. employee conduct rules such as exclusivity, confidentiality and non-disclosure, location of work, and non-compete clauses help to keep knowledge inside the firm.
      
   2. job design - desegregation of tasks through job specialization makes it unlikely that one person will know enough to reproduce an entire product, hierarchies in which knowledge is restricted to upper level managers serve a similar purpose.
      
   Deferred incentive plans such as stock options, pensions with delayed vesting, and promotions impose exit costs on employees.

Costs of Knowledge Protection

1. Increased sunk and administrative costs - most important sunk cost is the commitment to employ knowledge workers for long periods of time (versus short-term contractors, for instance). Administrative costs may go up because monitoring employee conduct may require increased technology and may demotivate employees, making hiring and retention more difficult.

2. Loss of communication within firm and between firm and outside sources.
   1. Loss of internal communication decreases productivity and speed-to-market,
      
   2. Lack of willingness to share firm information decreases access to new knowledge that may come from outside sources such as University research labs, small R&D firms, or individual experts since getting information usually requires sharing it,
      
   3. The value of some of firm’s knowledge may depend on whether it is communicated to outsiders. For instance, not sharing early stage designs with potential customers could inhibit product development.

Moral:  While knowledge protection is becoming increasingly important, there is a trade- off between protection and innovation; thus, firms need to figure out how to do both.