Despite evidence that the majority of knowledge management (KM) initiatives miscarry, there has been a paucity of critical, in-depth research into the causes of failure. In this paper, an action research (AR) project is described in a major motor manufacturer (WWM) focusing on one of their key knowledge processes (Design for Manufacturabilty, DFM). Intensive field work using a grounded theory methodology led to the production of a model relating the effectiveness of knowledge generation and use to a set of success factors. Many of the factors resonate with key issues described in previous KM research; for example, the need for a shared knowledge repository, a formal KM process, and a culture disposed towards knowledge sharing and re-use. The model has provided a rigorous platform on which to design interventions to improve the DFM process in WWM. Whilst technical changes (creating infrastructure, defining processes) are readily feasible, bringing about cultural change is less tractable and process improvements in WWM have tended to focus on the former rather than the latter. As well as providing insights into KM success and failure, the paper demonstrates the valuable role that grounded theory can make to the practice of action research in IS. In relation to the problem-solving aspect of AR, grounded theory can help to inform the design of organisational interventions and the evaluation of their impact; in relation to research, GT adds rigour and method to the theory building process, thereby raising the status of AR as a research tool.