Within a broader comparison of the management of innovation in British and Japanese firms, this paper focuses on an alliance between British Steel Strip Products and Nippon Steel Corporation established to help the UK firm improve its plant-level procedures for product and process development. The alliance proved successful and clear improvements in defect rates, productivity and product quality were achieved by the UK firm. Some practices, however, proved to be difficult or impossible to "learn" or develop in the organisation context of the British firm. A variety of theoretical approaches, including dynamic capabilities, innovation studies and the "social shaping of technology" are combined in a knowledge-based approach to analyse how differences in the organisation context influence knowledge-management capabilities and innovation. The findings highlight important differences between the two firms, including aspects of managerial power and employee motivation, that influence how specialist knowledge is developed, deployed, integrated and "leveraged" for manufacturing innovation. Contextual factors underpin sustained differences between such firms and therefore represent sources of competitive advantage, but may also contribute to inertia and path-dependency.