What is Opportunity Costs

Interest in knowledge-based perspectives on the firm has grown in both practitioner and academic realms, spurred by management bestsellers such as Senge’s Fifth Discipline (1990) and the acknowledgement that intangible assets are key to the firm’s sustainable competitive advantage. Knowledge management tools and processes are used by organizations to identify, create, represent, and distribute knowledge for reuse, awareness, and learning. One component of knowledge management is the “communities of practice” (CoPs) concept. CoPs are informal networks of individuals who possess various levels of a common capability and apply their knowledge in pursuit of a similar endeavor (Brown & Duguid, 1991). For example, Xerox technicians solve problems by relying on informal communication with colleagues in addition to formal user user manuals. Created as a response to bureaucratization, CoPs emerge from individuals’ passions for a particular activity and the term is used to describe a formal of organization that is distinct from traditional formal boundaries around geographic and functional business units or other institutional affiliations and divisions. For the most part, managers use the CoP concept to encourage informal, situated learning (e.g., Hildreth & Kimble, 2004). However, some managers developed highly formalized structures with regulated membership, prescribed roles, scheduled meetings, and technical tools. This formalization distorts the original concept—that CoPs are created as a response to bureaucracy and are, by definition, emergent. The formalization of CoPs defeats both the original intent and the ability to reap full benefits for the firm. The chapter reviews three models of communities of practice — pure, applied, and formalized — and explores how coordination, opportunity, and knowledge flow costs in formalized CoPs can impede organizational performance.