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Rethinking the Knowledge-Based Organization

Michael H. Zack Northeastern University 214 Hayden Hall Boston, MA 02115

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 todays 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 companys 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 cant change and for information-age businesses that complacently believe they dont 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 whats visible or tangible to customerstheyre 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. Process: Knowledge Sharing and Creation 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 yearsHolcim, one of the worlds largest suppliers of cement, aggregates (gravel and sand), and concretetook 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 Holcims 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 companys 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 companys plants worldwide. Company engineers and managers have therefore invested effort in learning more about alternative fuels. For example, Holcim Switzerland developed the use of waste plastic, used tires, and dried sewerage sludge as replacement fuels along with the technologies to burn them cleanly. In addition, the company has enjoyed product innovation (possible even with cement) as plants experimented with various admixtures to vary and improve the properties of cement for different local market applications. Even though it makes a simple, industrial-age product, Holcim is clearly operating as a knowledge-based organization. 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 todays 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-Marts 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. Purpose: Knowledge Strategy 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. Perspective: The Knowledge Point of View 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. Steps Toward a Knowledge-Based Organization 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 organizations 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 Lincoln, a company

that wants to change must be able to define the strategic role knowledge plays in the organization. Define the organizations 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 knowledgebased 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 consumerelectronics 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 Ones 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 companys 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 organizations 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. Its 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 companys 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 companys 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 companys 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 organizations 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 its especially important for those running businesses that sell knowledgebased 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 companyeven one that makes cementcan find a significant and sustainable competitive advantage in becoming a real knowledge-based organization. References


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. 971015; 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 KnowledgeIntensive 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, California Management Review, Vol. 4, No. 3, 1999, pp. 125-145. [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, Boston Globe, October 13, 2001. [7] For more on the concept of image from an economists 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 Readings, N. Bontis and C. W. Choo (eds.), (New York: OxfordUniversity Press, 2002). [9] M.H. Zack, Managing Codified Knowledge, Sloan Management Review, Vol. 40, No. 4, Summer, 1999, pp. 45-58.