Rethinking the Knowledge-Based Organization
Michael H. Zack
Northeastern University
214 Hayden Hall
Sloan Management Review, Vol. 44, No. 4, Summer 2003, pp.
67-71
Most
companies in one way or another have embraced the notion that to operate
effectively in today’s economy, it is necessary to become a knowledge-based
organization [1]. But few truly understand
what that means or how to carry out the changes required to bring it about.
Perhaps the most common misunderstanding is the view that the more a company’s products or services have knowledge at their core, the more the organization is, by definition, knowledge based. So, for example, a research institute or consulting firm whose product is entirely knowledge would be at the high end of the knowledge-based continuum, and companies making and selling simple physical products like cement would be at the low end. This is a dangerous assumption, both for industrial-age businesses that may believe they can’t change and for information-age businesses that complacently believe they don’t need to change the way they operate.
In short, the focus on products or services
as a means of categorizing companies or defining the knowledge-based
organization leads to a distorted image. Products and services are only what’s
visible or tangible to customers—they’re the tip of the iceberg. But like the
iceberg, most of what enables a company to produce anything lies below the
surface, hidden within the so-called invisible assets of the organization – its
knowledge about what it does, how it does it, and why. [2]
In the course of working with more than 30
companies over the past eight years, I have found that a knowledge-based
organization is made up of four characteristics that can be summarized as
process, place, purpose and perspective. Process refers to the activities
within an organization, some of which are directly involved with making a
product or selling a service and others that are ancillary but no less
important. Place refers to the boundaries of the organization, which for the
purposes of sharing and creating knowledge often go beyond traditional legal
boundaries. Purpose refers to the mission and strategy of the organization –
how it intends to profitably serve its customers. Perspective refers to the
worldview and culture that influences and constrains the decisions and actions
of an organization.
Each of these elements forms a basis for evaluating the degree to which knowledge is an integral part of the organization and the way it competes. Executives who understand how the four elements interact will be able to start changing their companies to take advantage of the vast intellectual assets hidden below the surface.
Most organizations are primarily focused on the concrete and
observable activities that make up what they do on a day-to-day basis. A
knowledge-based organization attends to two related processes that underlie
these direct processes: the effective application of existing knowledge and the
creation of new knowledge [3]. The goal is fourfold: to ensure that knowledge
from one part of a company is applied to activities in other parts; to ensure
that knowledge is shared over time so that the company benefits from past
experience; to make it possible for people from various parts of the
organization to find each other and collaborate to create new knowledge; and to
provide opportunities and incentives for experimentation and learning.
Consider how a company whose
process for making its main product has been essentially unchanged for more
than 100 years—Holcim, one of the world’s largest suppliers of cement,
aggregates (gravel and sand), and concrete—took on this challenge [4].
The company
operates more than 100 cement-manufacturing facilities, 240 quarries and 600
mixed-concrete facilities in over 70 countries. Although it functions in a
highly decentralized manner (country managers have the authority to make many
decisions on their own), Holcim realized several years ago that the exchange of
knowledge and expertise is the glue that holds the company together. It now explicitly
regards knowledge as its key resource and learning as its key capability.
In order to make that view operational, an
internal group, Holcim Management and Consulting (now Holcim Group Support),
was reorganized in 1996 to develop, identify, transfer and apply strategic
knowledge among all Holcim’s entities worldwide. The group reports directly to
the executive committee, a clear indication of its strategic importance. In
addition to facilitating interaction among managers worldwide, HMC is itself a
repository of knowledge, expertise and best practices that it shares and
reapplies by consulting to the company’s various units. For example, energy
costs are the most expensive part of cement production, and HMC helped plants
improve process efficiency by diffusing knowledge about how to use cheaper and
more efficient fuels. A related problem facing Holcim has been the need to
reduce CO2 emissions, as part of its strategy to be a responsible
corporate citizen promoting worldwide sustainable development. HMC helps Holcim
to document and transfer new energy-related technologies and manufacturing
methods among the company’s plants worldwide. Company engineers and managers
have therefore invested effort in learning more about alternative fuels. For
example, Holcim
Now consider Technology Research Group (not its real name), a leading provider of research and analysis in the information-technology hardware, software and services industry. At TRG, analysts with expertise in a particular industry segment make economic forecasts by continually monitoring news and economic activity and conducting surveys and interviews of key industry participants. Based on judgment and experience, they interpret the story behind the numbers to create a plausible future scenario. The results are published as a series of research reports. [5]
TRG tracks dozens of industry segments, and
each analyst segment is organized as its own small, autonomous profit center.
Although that organizational approach encourages an entrepreneurial spirit
within each segment, it does not help TRG leverage its knowledge resources.
Each analyst team uses a different approach to gathering and analyzing market
information, and each uses a different technology and format to capture and
store raw data, analysis, interpretation and final reports. The content and
structure of the reports tends to vary and even the names of the lines of
business are not standardized. Thus TRG has not been well positioned to respond
to the biggest recent change in the IT industry, convergence. Separate businesses
or research areas, for example, would be responsible for tracking markets for
groupware, web portals, networking, and document management. Rather than
combine portions of those existing segments into a new virtual segment that
would meet a healthy market demand, TRG found it difficult to make this change.
It has failed so far to leverage the considerable information and expertise
residing within the company as a whole to create new products or reach new
markets.
To put it succinctly, TRG, the “knowledge” company, does not have the processes in place to make it a knowledge-based organization, while Holcim, producer of what most would consider a boring commodity, has employed new processes to exploit the expertise at its many sites around the globe.
Place: Knowledge Boundaries
Knowledge creation and sharing in today’s economy are not bound by the traditional physical and legal limits of the corporation. Companies are increasingly realizing that knowledge is often produced and shared as a by-product of daily interactions with customers, vendors, alliance partners and even competitors. The knowledge-based organization, then, is a collection of people and supporting resources that create and apply knowledge via continued interaction. Its boundaries are blurred, malleable and dynamic. The organization seeks knowledge wherever it exists and allies with whomever can help it to learn what it needs.
At some point, the knowledge-based organization stops worrying about who works for whom and focuses instead on who needs to work with whom. For example, the field-service technicians at Buckman Labs, an international specialty chemicals company, spend more time on the premises of their customers than at Buckman offices. And when Procter & Gamble was creating a new supply-chain management process with Wal-Mart, it sent several of its information management people to work with their counterparts at Wal-Mart’s headquarters so that they could mutually learn how to implement their vision of better sales management via the sharing of information.
Holcim built knowledge communities within its global organization that transcended formal boundaries; it also made the necessary investments to learn from customers. Technology Research Group, on the other hand, did a good job of extracting and packaging knowledge from outside its organization but could not surmount the boundaries raised around the 60 minicompanies it had created. Each was extremely provincial, carefully guarding its own turf. The knowledge-based organization recognizes that the dangers of failing to share knowledge across traditional boundaries outweigh any potential benefits that may come from hoarding it.
Even a highly effective set of knowledge
management processes does not guarantee that an organization will perform well
or better than its competitors. Only a few years ago Polaroid, for example, had
generally effective processes in place to capture and share knowledge about
products, customers, applications, technologies and the competitive
environment. The culture was conducive to sharing and cooperation, and the
company had implemented a reasonably good information system for supporting
virtual collaboration. All in all, it appeared to be managing knowledge well.
The knowledge being created and shared, however, was entirely focused on analog
film and cameras. Polaroid knew little about digital imaging and this
contributed to its eventual bankruptcy. [6]
Companies that succeed over the long term align their knowledge management processes with their strategy. The knowledge-based organization recognizes that knowledge is a key strategic resource, and asks What do we need to know to formulate and execute our desired strategy? What do we know? And what do our competitors know? The gap between what an organization knows and needs to know focuses attention internally, just as the strengths and weaknesses components of a SWOT analysis does. The gap between what it knows and what its competitors know focuses attention externally on the opportunities and threats. Companies must seek to close those knowledge gaps, both external and internal, faster and more effectively than their competitors.
Holcim clearly recognized the strategic
nature of its knowledge. Given its strategy to provide the best quality and
most innovative cement-based products using the most efficient, sustainable and
environmentally friendly processes, it engaged the hearts and minds of its
entire organization in managing the knowledge and learning to support that
strategy. But the link between knowledge and strategy was never explicitly
considered at TRG.
The knowledge-based organization, regardless of whether its
products are tangible or not, holds a knowledge-oriented image of itself. [7] That is, it
takes knowledge into account in every aspect of its operation and treats every
activity as a potentially knowledge-enhancing act. It uses knowledge and
learning as its primary criteria for evaluating how it organizes, what it
makes, where it locates, who it hires, how it relates to customers, the image
it projects, and the nature of its competition.[8]
Buckman Labs has the knowledge perspective.
The company started in 1945 manufacturing chemical microbicides--products that
would kill or control the growth of microbes in pulp and paper manufacturing
and leather treatment. Over time, however, it realized that its products were
becoming commodities and that to stay competitive it would need to deliver
knowledge-based services. To support that strategy, Buckman implemented
processes, technologies, training and incentives to promote the development,
sharing and delivery of knowledge about how to actually apply microbicidal
chemicals to solve customers’ treatment problems. [9]
The company has continually refreshed its
strategic knowledge and directs all activity toward learning as much as
possible about its customers. This approach culminated in the decision to learn
more about how to manage the chemistry of their customers’ plants than even its
customers knew. In the late 1990s, Buckman undertook to learn about customers’
operations in detail, the economics of their businesses, and their strategic
direction -- a tall order for a bunch of chemists.
To accomplish this learning, the company first implemented a business-oriented training program tailored to the specifics of their customers’ industries. It then entered into a learning partnership with a major paper manufacturer. For a fixed fee, Buckman became the exclusive provider of all chemicals and treatment services the manufacturer needed. Whereas sales technicians were formerly rewarded for selling as much chemical product as possible, now they were rewarded for minimizing chemical use. And they were free to use any product, regardless of who made it, that created the most efficient and effective customer operation. In return, Buckman gained exclusive access to the customer and thus the opportunity to learn more about how to service that segment of the market than any of its competitors.
Buckman now considers itself to be in the
knowledge business: Chemicals are merely the tangible tip of their knowledge
iceberg. Many other companies in recent years have made a similar transition in
perspective by redefining their fundamental mission from one based on selling
traditional products and services to one based on exploiting knowledge.
Rethinking process, place, purpose and
perspective is a daunting but achievable goal. Managers who want to turn their
companies into knowledge-based organizations need to focus on several key
actions:
Define the organization’s mission and
purpose in terms of knowledge. For example,
the World Bank now refers to itself as “the knowledge bank.” This is not mere
window dressing. The World Bank has gone to great lengths to understand and
manage the role of knowledge and learning in reducing world poverty. It
realized that just supplying development funds was not an effective solution
and has invested and reorganized to foster knowledge creation and sharing
activities. The money it lends is just one part of how it carries out its
mission. Similarly, Lincoln National Re (recently acquired by Swiss Re) thinks
of itself as a provider of knowledge-based risk management rather than a seller
of reinsurance. Its strategy, organization, technology infrastructure and core
processes are all focused on creating and maintaining the strategic “knowledge
platform” from which it derives its products and services.
Like
Define the organization’s industry and
position within it in terms of knowledge. Traditional
SIC codes based on products and services no longer give a true picture of how
companies fit into industries. The most important thing that competitors have
in common today is similar knowledge, not products. For example, food
processing and pharmaceutical companies have different SIC codes but have
similar kinds of patents, employee skills and other knowledge-based metrics. A
pharmaceutical executive who understands her industry in knowledge-based terms
would have an eye on food-processing companies making cholesterol-lowering food
spreads. An executive in the photographic-imaging industry would realize that
consumer-electronics companies might know more than his own company about how
to make the next generation of digital cameras.
Formulate strategy with knowledge in mind.
A knowledge-based organization defines its strategy based on what it knows as
well as what it makes. It finds strategic leverage points where knowing more
than competitors provides a competitive advantage. It also recognizes that
knowledge imposes limits on what the company can successfully execute. Capital
One’s core expertise, for example, is in micromarketing and targeted risk
analysis, not in selling credit cards. It built its strategy of individual
financial risk management based on its superior knowledge of statistical
modeling and experimental design. It explicitly recognized, however, that it
could not compete as well in markets (those involving lending or insurance, for
example) that were not susceptible to the development of proprietary databases
that could be statistically analyzed to support rapid-cycle experimentation.
Implement KM processes and structures that directly
support the company’s strategic knowledge requirements. Knowledge management has
gotten a bad rap lately, but much of it can be attributed to the fact that most
KM initiatives are not focused on strategic knowledge. An organization that
defines its strategy in terms of knowledge and identifies the strategic knowledge
leverage points will know where to focus its KM efforts, get a long-term return
on its investment, and best the KM efforts of competitors.
Transform
the company into a strategic learning organization. An organization’s ability to sustain a knowledge
advantage is based on its ability to learn. Successful companies look for
opportunities to experiment and learn in knowledge domains they consider
strategic. Lincoln Re, for example, searched for difficult reinsurance cases to
create learning opportunities. Holcim did the same, seeking out novel
construction opportunities. It’s also important to involve customers, trading
partners, suppliers, consumers, interest groups – in short, anyone who can help
the business to create the knowledge it needs. Finally, learning can be
fostered by treating the company’s strategy as a hypothesis and then testing
it. Capital One, for example, views every market, every product, and every
process as an experiment to be measured, tested and improved.
Segment
the company’s customers and markets not only on the basis of products and
services but also according to how much can be learned from them. While companies like Capital One and Lincoln Re look
to exploit what they know with familiar customers who offer incremental learning
opportunities, they also actively seek market segments that they know little
about. New customer segments are the most important source of learning and
future strategic opportunities.
Treat the cost of learning as an investment, not an expense. Managers should evaluate investments in learning as options for future action rather than sunk costs according to traditional ROI or DCF analysis. A customer taken at a loss is a good investment if it provides significant learning for future market opportunities or keeps the company in the game long enough to learn more about an opportunity. Lincoln Re, for example, routinely used options-pricing models to value its investments in knowledge and learning. Knowledge-based organizations understand the economic as well as strategic value of learning.
Rethink the business model. A company making the transition from selling primarily physical products or services to knowledge-based ones will see the economics of the business radically change. IBM, which makes most of its money today selling its knowledge, will recommend competitors’ products if that is in the best interest of its clients: The company knows that its knowledge has even more value for clients (and leads to more profit for IBM) than its hardware. Similarly, Buckman Labs found that it provided more value to its customer by selling less of its chemicals. Companies that make a change on this order must develop knowledge-based pricing and delivery models and support them with the right people, rewards and culture.
Take
human resource management seriously.
The knowledge-based organization recruits employees and develops their careers
based on the knowledge it needs to compete and execute the company’s strategy.
It builds and relies on social capital as a key motivator for knowledge
creation, exchange and application. And it rewards creativity, risk taking,
experimentation, imagination and even failure when it generates important
lessons learned.
Reinforce the organization’s mission via
coordinated internal and external communication.
A large part of being a knowledge-based organization is being perceived as one.
Thus Buckman Labs invested significant resources in communicating to its
employees the substance of its new knowledge-based perspective. Lincoln Re
actively cultivated and managed its external image as a knowledge-based
organization via pieces in its annual report, articles in trade and scholarly
journals, speeches by executives, and more.
The
steps outlined here are not easy to accomplish, of course. Managers that try to
implement them will need to employ both imagination and effort to make their
organizations truly knowledge-based. But it’s especially important for those
running businesses that sell knowledge-based products or services to make this
effort; there is great danger in coasting along and missing out on
opportunities, as TRG has done. On the other hand, any company—even one that
makes cement—can find a significant and sustainable competitive advantage in
becoming a real knowledge-based organization.
[1] See for example M. Alvesson,
“Organizations as Rhetoric: Knowledge-Intensive Firms and the Struggle with
Ambiguity,” Journal of Management Studies, Vol. 30, Vol. 6, 1993, pp. 97-1015;
S. Davis and J. Botkin, “The Coming of Knowledge-Based Business,” Harvard
Business Review, Sept.-Oct., 1994, pp. 165-170;
P.F. Drucker, “The Coming of the New Organization,” Harvard Business
Review, Vol. 66, No. 1, 1988, pp. 45-53;
R. Nurmi, “Knowledge-Intensive Firms,” Business Horizons, May-June,
1998, pp. 26-32; J.B. Quinn, Intelligent
Enterprise (New York: Free Press, 1992);
W. Starbuck, “Learning by Knowledge-Intensive Firms,” Journal of
Management Studies, 1992, Vol. 29, No. 6, pp. 713-740.
[2] See H. Itami, Mobilizing Invisible
Assets (Cambridge, Massachusetts: Harvard University Press, 1987).
[3]
M.H. Zack, “Developing a Knowledge Strategy,”
[4]
www.holcim.com
[5] M.H. Zack, “Electronic Publishing: A Product
Architecture Perspective,” Information & Management, Vol. 31, No. 2,
November, 1996, pp 75-86.
[6] “Tech Icon Polaroid Files for
Bankruptcy,”
[7] For more on the concept of image from
an economist’s viewpoint, see K.E. Boulding, The Image (Binghamton, New York:
Vail-Ballou Press, 1956).
[8] M.H. Zack, “Developing a Knowledge
Strategy: Epilogue,” in The Strategic Management of Intellectual Capital and
Organizational Knowledge: A Collection of
[9] M.H. Zack, “Managing Codified
Knowledge,” Sloan Management Review, Vol. 40, No. 4, Summer, 1999, pp. 45-58.