Why old tools won't work in the “new” knowledge economy

Purpose – Knowledge‐intensive firms are growing in importance yet there are few tools to help managers to analyze and improve their performance, which this paper aims to describe. Design/methodology/approach – This paper builds on Michael Porter's strategic frameworks for industrial firms. It outlines how his frameworks, in particular the five forces and value chain, need to be modified if they are to be effectively applied to knowledge‐intensive firms. Findings – Managers of knowledge‐intensive firms need to use the old tools in new ways, if they are to improve their business models and ultimately increase their profitability. Practical implications – The paper outlines ways for managers of knowledge‐intensive firms to improve their firm's performance. First, managers using a revised five forces can improve their value capture by reducing bargaining power of its experts, making outsourcing of expert services more attractive, or improving their reputational status. Second, the paper outlines a continuum of business models and suggests that the appropriate choice of business model depends on the firm's problem‐solving expertise, its target clients, desired risk level and aspirations. The paper elaborates on the business model by examining choices surrounding the scope of the firm's problem‐solving activities, suggesting that these allow the firm to find profitable niches. Originality/value – This is one of the first attempts to develop strategic tools that managers of knowledge‐intensive firms can used to increase their firm's profitability.