European Management Journal (2013) xxx, xxx– xxx

Adam Smith
Business School

journal homepage: www.elsevier.com/locate/emj

Dynamic fractal organizations for promoting

knowledge-based transformation – A new paradigm
for organizational theory
Ikujiro Nonaka a, Mitsuru Kodama b, Ayano Hirose c,d,*
, Florian Kohlbacher d

a
Hitotsubashi University, Japan
b
Nihon University, College of Commerce and Graduate School of Business Administration, Japan
c
Hitotsubashi University, Graduate School of International Corporate Strategy, Japan
d
German Institute for Japanese Studies (DIJ), Japan

KEYWORDS Summary How can a company become sustainably innovative? We propose that the com-
Knowledge creation; pany needs to have organizational forms that achieve a dynamic synthesis of knowledge
Organization theory; exploration and exploitation. In this paper, we present the ‘‘dynamic fractal organiza-
Exploration; tion’’ as a new organizational model. This model departs from the conventional informa-
Exploitation; tion processing paradigm. Instead, we present a new frontier in organizational theory: the
Phronesis ‘‘dynamic fractal organization based on dynamic !ba".’’ Dynamic fractal organizations
build and utilize a triad relationship of knowledge that integrates and synthesizes tacit
and explicit knowledge and creates a third type of knowledge, phronesis. The triad rela-
tionship is an upward spiraling process of converting tacit and explicit knowledge, and
propels sustainable knowledge transformation across the diverse boundaries within and
between organizations, and their environments.
ª 2013 Elsevier Ltd. All rights reserved.

The Way gave birth to unity, The need for a new organizational theory
Unity gave birth to duality,
Duality gave birth to trinity, In order to achieve and maintain competitiveness and sus-
Trinity gave birth to the myriad creatures. tainable growth, companies have to constantly create new
Lao Tzu, Tao Te Ching knowledge and pursue practical wisdom (Nonaka, 1991;
Nonaka, 1994; Nonaka & Takeuchi, 1995; Nonaka, Toyama,
& Hirata, 2008; von Krogh, Nonaka, & Rechsteiner, 2012). At
the same time, the resulting continuous innovation activi-
ties need to embrace new values grounded in reality and
on a society-wide scale (Nonaka & Takeuchi, 2011). In es-
sence, the source of real innovation stems from the creation
* Corresponding author. Tel.: +81 3 4212 3066. and exploitation of knowledge, with this relationship
E-mail address: ahirose@ics.hit-u.sc.jp (A. Hirose). between the creation and exploitation of knowledge being

0263-2373/$ - see front matter ª 2013 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.emj.2013.02.003

Please cite this article in press as: Nonaka, I. et al., Dynamic fractal organizations for promoting knowledge-based transformation – A new par-
adigm for organizational theory, European Management Journal (2013), http://dx.doi.org/10.1016/j.emj.2013.02.003
2 I. Nonaka et al.
socially dynamic. Specifically, the creation and utilization
of knowledge occur simultaneously and cannot be separated
(Osono, Kodama, Yachi, & Nonaka, 2006).
This relationship of creating new knowledge and exploit-
ing extant knowledge has been the subject of academic re-
search in organizational studies and strategic management
for a long time. The investigation of ‘‘exploration’’ and
‘‘exploitation’’ of information and knowledge has become
an important stream of research (March, 1991). Given that
the simultaneous pursuit of exploration and exploitation is
contradictory and sometimes even paradoxical, research
has started to focus on the way in which the two processes
can be reconciled (e.g., Tushman & O"Reilly, 1997). Recent
studies have shown that in order to construct and motivate
ideas for maintaining innovation in the company, managers
and organizations have to face and solve this paradox (e.g.,
Graetz & Smith, 2007; Lewis, 2000). Indeed, maintaining an
appropriate balance between exploration and exploitation,
(e.g., Ahn, Lee, & Lee, 2006; Gibson & Birkinshaw, 2004;
Kodama, 2003) and promoting synergies between explora-
tion and exploitation (He & Wong, 2004) can help improve
corporate performance. However, the coexistence and
simultaneous application of these two different archetypes
(exploration and exploitation) in a company calls for the
skillful management of ‘‘strategic contradiction’’ (Smith
and Tushman, 2005), ‘‘creative abrasion’’ (Leonard-Barton,
1995), and ‘‘productive conflicts’’ (Hagel III and Brown,
2005) in order to leverage potential synergies. There are
also studies suggesting that the role of management to
use and integrate these two different processes of explora-
tion and exploitation is to form a so-called !ambidextrous
organization1, (e.g., O"Reilley and Tushman, 2004). How-
ever, direct empirical evidence is still lacking on how man-
agers implement the theoretical principles to actually
create ambidextrous organizations (Durisin & Todorova,
2012).
From our previous research in the realm of knowledge
creating theory (Nonaka & Takeuchi, 1995; Nonaka et al.,
2008; von Krogh, Ichijo, & Nonaka, 2000; von Krogh et al.,
2012), we can show how to implement ambidexterity in
organizations and even how to go beyond this mere dichot-
omy of exploration and exploitation. Knowledge creation
theory sets the premise that the process of knowledge cre-
ation and usage forms a continuum and occurs simulta-
neously. This also leads to diversity as a consequence of
multiple levels of involvements of individuals, teams and
organizations. In order to foster innovation it is important
for corporations to possess the ‘‘synthesizing capabilities’’
which is needed to integrate diverse pieces of knowledge
1
A number of issues have also been raised about the ambidex-
trous organization concept and how is can support the generation of
innovations. One challenge of driving innovation businesses through
ambidexterity is related to fusing and harmonizing new and old
organizational cultures in the long run (Markides, 1998, 1999). Even
if the culture is completely revamped in the new organization and
an innovation business established, the task of transforming
traditional organizations with old values may remain for the
company overall. In disagreement with the ambidextrous organiza-
tion concept, Govindarajan and Trimble (2005) also argue that
exchange at the general manager level (senior management) should
be minimized in favor of a resource exchange at the operational
level (middle management and below).
Please cite this article in press as: Nonaka, I. et al., Dynamic fractal organizations for promoting knowledge-based transformation – A new
paradigm for organizational theory, European Management Journal (2013), http://dx.doi.org/10.1016/j.emj.2013.02.003
and increase the quality of knowledge (Nonaka & Toyama,
2002)2.
In sum, the fundamental question we face today is ‘‘How
can a company become sustainably innovative?’’ This paper
intends to answer this question by asking the following re-
search question:‘‘What form should an organization that
aims for the !dynamic synthesis of exploration and exploita-
tion" take?’’ In answering this question, we depart from the
dualistic and structuralist organizational theory, and pres-
ent a new conceptual framework of the organization. We
call this new concept ‘‘fractal organization3 based on dy-
namic !ba"4 formation’’ to achieve ‘‘the dynamic synthesis
of exploration and exploitation.’’
Limitations of the dualistic ‘‘exploration–
exploitation’’ model
We propose that innovative corporations that maintain
growth through knowledge creation and utilization have
organizational structures that dynamically synthesize explo-
ration and exploitation. To examine this proposition, we
first highlight the problems and limitations with the infor-
mation processing model that forms the basis of most of
the extant research on exploration and exploitation. Finally
we will propose a new organizational model. The concept of
‘‘exploration and exploitation’’ is grounded in the informa-
tion processing model proposed by the Carnegie School of
Thought in the 1950s and 1960s.
According to the School, organizations are required in or-
der to raise the level of rationality and exceed the limited
and bounded level of the individual as well as increase the
effectiveness in economic activity. Organizations are able
to address circumstantial uncertainties through the process
of gathering and transferring information and decision-mak-
ing processes (Simon, 1969).
The Carnegie School considers the environment as a gi-
ven condition in which individuals or organizations exist pas-
sively. It does not consider environmental creation in which
individuals or organizations exert influence on the environ-
ment, actively work the environment with their own beliefs
and commitments for creating something new. Similarly,
the Carnegie School assumes that information already exists
in the external world, and people are merely processors of
this extant information. This means that there is no notion
2
Synthesizing capability is the process of dialectic solution – the
result of the interaction of thesis and antithesis – of diverse
knowledge dispersed inside and outside of a company through the
process of affirming, negating and integrating; it is the ability to
dynamically create consistent knowledge systems and synthesize a
wide range of contradictory factors through the structure of the
knowledge creation firm model (Nonaka and Toyama, 2005). At the
foundations of achieving innovation with synthesizing capability is
the ‘‘phronetic knowledge leadership’’ demonstrated by leaders
with practical wisdom (Nonaka, et al., 2008; Nonaka & Toyama,
2007), which is a requisite for acquiring collective knowledge
through organized practical training.
3
Note that by organization we refer not only to companies but
also to smaller organizational units such as groups and teams, as
well as larger ones such as communities, i.e. to any kind of system.
We are grateful to an anonymous reviewer for pointing this out.
4
Ba is a shared context in motion (see also Nonaka & Konno,
1998).
Dynamic fractal organizations for promoting knowledge-based transformation – A new paradigm for organizational
that people can create new information or knowledge. Also,
the Carnegie School removes the subjectivity of the individ-
ual completely when analyzing information processing, and
thus does not explain sufficiently the actions of corporations
in the complex and dynamically changing environment of
the modern world.
However, in the ‘‘knowledge society’’ of the 21st cen-
tury in which value creation and innovation are pursued
(Drucker, 1993), we see that the ideas of the Carnegie
School are utterly outdated. We believe that the most
important aspect of economics and business studies from
now on will be the focus on knowledge and the subjectivity
of the humans, who create and utilize the knowledge.
A new organizational model: ‘‘knowledge triad
relationships’’ and ‘‘dynamic fractal
organization’’
We argue that the separation between exploration and
exploitation is merely artificial; and that does not exist in
actual practice. There are no pure forms of exploration
and exploitation, just as there are no pure forms of tacit
or explicit knowledge and knowing. That is, all knowledge
is rooted in tacit knowledge, and even the most explicit
knowledge still contains some tacit parts or aspects. Knowl-
edge is information in context and once we add context we
add tacitness. Therefore, we believe that companies cannot
either exploit or explore, but they will inevitably always do
both at the same time. It is just a matter of degree whether
there is more exploration or exploitation in a specific con-
text. As a consequence, we need to be able to explain
how to convert and/or synthesize exploration and exploita-
tion in the actual situations.
From many of the detailed case studies of corporations
we have conducted (e.g., Nonaka & Takeuchi, 1995; Nonaka
et al., 2008; Kodama, 2007; Kodama, 2011; Kohlbacher,
2007; Wilhelm and Kohlbacher 2011), we have identified
the existence of multi-layered networks of !ba" that activate
and facilitate multiple ‘‘knowledge triad relationships’’ in
corporations. In this paper, we propose that the ‘‘dynamic
synthesis of exploration and exploitation’’ is realized
through the knowledge dialectics of tacit knowledge, expli-
cit knowledge and phronesis (practical wisdom). We will ex-
plain each of these concepts in the following sections.
Knowledge triad relationships and multilayered
networks of ba
In the knowledge creation theory, there are two types of
knowledge, !tacit" and !explicit". It is the continuous conver-
sion between these two types of knowledge that enables the
creation of new knowledge. Knowledge creating activities
are conversion processes through which the tacit knowledge
originating in the body, experiences, thoughts and beliefs of
an individual is put into words and thus transformed into ex-
plicit knowledge (Nonaka & von Krogh, 2009). Note that this
process happens at all levels of the organization, from the
individual to the team to the whole company. The knowl-
edge creating spiral transcends all organizational levels
and at the same time synthesizes them.
Please cite this article in press as: Nonaka, I. et al., Dynamic fractal organizations for promoting knowledge-based transformation – A new par-
adigm for organizational theory, European Management Journal (2013), http://dx.doi.org/10.1016/j.emj.2013.02.003
3
Figure 1 Phronesis drives the conversion of tacit and explicit
knowing.
Although the two types of knowledge contrast each
other, they are not mere opposites, but rather lie on a con-
tinuum. When an individual"s tacit knowledge is shared with
another person it becomes explicit knowledge, and when
this is merged with other explicit knowledge it becomes
new explicit knowledge, which in turn can then be con-
verted into the tacit knowledge of an(other or the same)
individual and thus link with the subsequent conversion pro-
cess. Innovation emerges from the spiraling continuity of
this conversion process. The same holds true for the
relationship between exploration and exploitation. They,
too, lie on a continuum and interact in a spiraling
continuity. This means that the concept of exploration
and exploitation—and thus also the concept of ambidextrous
organizations—can be easily and straightforwardly explained
by the knowledge-creation theory. As a matter of fact,
these concepts are actually already submitted in knowledge
creation theory and thus part of it.
As stated, we propose in this paper that phronesis5 is the
factor that promotes this spiraling process; the synthesis of
tacit and explicit knowledge. We call the synthesis of these
three types of knowledge the ‘‘knowledge triad’’ relation-
ship (See Fig. 1).
With the ‘‘triad’’ relationship among tacit knowledge,
explicit knowledge, and phronesis we are now able to incor-
porate value judgments into the knowledge creation process
as they are embedded in phronesis. These value judgments
help interpret contexts, grasp the essence, and create
meaning out of the contexts. In our model of the organiza-
tion, the value judgments are complemented by leadership
capabilities that promote the contextual judgment and the
upward spiral of the convergence between tacit and explicit
knowledge. Tacit knowledge is closely related to ontology,
5
Phronesis is a concept first put forward by the ancient Greek
philosopher Aristotle in the ‘‘Nicomachean Ethics,’’ and it can be
translated as prudence or practical wisdom (Aristotle, 2002).
Phronesis is a way of practical understanding that accompanies
goals, values and actions. It is the practical knowledge that enables
optimum ‘‘here and now’’ judgment in particular contexts, while
maintaining the standards of common good. Phronesis is charac-
terized by contemplation in action – thinking things through while
engaged in activity – and quick judgment within a context with
timely balance.
4 I. Nonaka et al.
explicit knowledge to epistemology, and phronesis can add
axiology, i.e. value that comes from people"s beliefs,
commitment, passion, and judgments. Phronesis is a leader-
ship capability that needs to be distributed at every level of
organization. But at the same time all of them have to be
synthesized into a whole. The concept of !ba," can explain
the relationships between the parts and the whole, as !ba"
promotes connecting and relating of people and their
knowledge.
In the knowledge creating theory, organizations are per-
ceived as mutually interleaved multi-layered networks of di-
verse !ba" (Nonaka & Konno, 1998). !Ba" means shared-
context in motion, the interactions of circumstances, struc-
tures and actors in a ‘‘here and now’’ relationship in a time
and space nexus. !Ba" emerges and develops through inter-
action among actorns, and between actors and the environ-
ment. Therefore, the actions in !ba" or relationships
between !ba" also form the environments, structures and ac-
tions by actors. In other words, synthesis and convergence
occur between people, and between people and the envi-
ronment based on their knowledge and the meanings they
generate. Subsequently, the !ba" of these newly-built rela-
tionships move into action, and these !ba" are mutually
linked with one-another. Part of the capability to create
bas and to share and create new knowledge within them
can also be seen as the organization"s absorptive capacity
(Cohen & Levinthal, 1990; Lane, Koka, & Pathak, 2006; Le-
win, Massini, & Peeters, 2011). But it goes far beyond it as
this section clearly shows.
Further, the relationships between organizations as envi-
ronments, structures, and individuals as actors, are dialec-
tic relationships that constantly change while !ba" reforms
and reshapes when multiple ba connect and relate with
each other. Such reforming and reshaping of ba enables
both adaptations to the environment as well as creation of
new environments, because within the particular context
of !ba," individuals are endowed with a practical power that
enables them to transform environments by their own ac-
tions. The boundaries in such !ba" are self-organizing and
permeable.
One of the recent findings in neuro-science is the discov-
ery of !mirror neurons," that can help explain why people
can sense and empathize with others even without any ex-
plicit communication, and as a consequence, create and
share the !ba". With the mirror neurons, we can understand
the intentions of others, by watching and copying the body
movements of the others. In short, a concrete encounter
between self and other becomes the shared existential
meaning that connects each other deeply (Iacoboni et al.,
2005; Rizzolatti, 2005).
The structural characteristics of organizations are one
factor that promotes the generation and activation of !ba".
For instance, as !ba" grow both horizontally and vertically,
they can become stably structured, or they can be disman-
tled by self-organizing groups or teams. The !invisible orga-
nizations" derived from the perspective of !ba" are on multi-
layered networks of diverse and mutually interleaved !ba".
Accordingly, the degree to which !ba" is strategically or
autonomously bound together, and the synergies occuring
between ‘‘ba’’ will determine the quality of the knowledge
created.
Please cite this article in press as: Nonaka, I. et al., Dynamic fractal organizations for promoting knowledge-based transformation – A new
paradigm for organizational theory, European Management Journal (2013), http://dx.doi.org/10.1016/j.emj.2013.02.003
The case of the Toyota Prius (see Prius column) is an
example of the ‘‘dynamic synthesis of exploration and
exploitation,’’—innovation through convergence—the fusion
of diverse technologies (exploration) that was subse-
quently commercialized as a specific product with ongoing
improvements and upgrades (exploitation) (Garriga, Aks-
uyek, Hacklin, & von Krogh, 2012). For these reasons, Toy-
ota"s various project teams and existing line organizations
had to form !ba" as multi-layered networks both horizon-
tally and vertically within and between organizations to
simultaneously bring about the creation and utilization of
knowledge.
In cases like the Toyota Prius, it is clearly shown that
tacit knowledge is shared and converted into explicit
knowledge in the !ba" that drive exploratory activities to
create knowledge for innovation (exploration !ba"), and ex-
plicit knowledge is combined and embodied in individuals
through personal experiences in the !ba" that drive exploit-
ative activities (exploitation !ba") such as developing a
commercial product and/or carrying out upgrades and
improvements. In short, the level of tacit knowledge is
high in exploration !ba", while explicit knowledge is high
in exploitation !ba". However, tacit and explicit knowledge
exist on a continuum and both are synthesized in a spiral-
ing manner. In this spiraling process, the third knowledge,
phronesis, is created and built up, and phronesis drives the
spiraling.
In the next section, we present perspectives for a new
organizational model based on the insights from these
‘‘knowledge triad relationships,’’ and multi-layered net-
worked !ba".
Dynamic fractal organizations
Organizations that realize !requisite variety" through multi-
layered networks of !ba" achieve knowledge triad relation-
ships and make use of knowledge creation and exploitation
dynamically. Ultimately, the organizations configure
sphere-like !invisible organizations".
On the time axis, these invisible organizations expand
the knowledge ecosystem both inside and outside of the
company while driving knowledge creation activities, and
dynamically enlarge the scope of their multi-layered net-
works of !ba" while maintaining knowledge triad relation-
ships and the metaphorical ‘‘sphere’’ of requisite variety.
Thus, in the internal systems within this sphere, knowledge
triad relationships of tacit knowledge, explicit knowledge
and practical wisdom (phronesis) are established as multi-
faceted aggregations of !ba," which dialectically sublate
(synthesis - the formation of phronesis) the exploratory with
the exploitative, and which are in turn dynamically reconfig-
ured by the synergies between people and organizations,
within and between the various organizations within a
company, between other organizations, and across entire
environments as knowledge ecosystems. This clearly illus-
trates what has been said above about the nature of the
relationship between exploration and exploitation, namely
that they are inseparable, just as tacit and explicit
knowledge.
Taking our reasoning one step further, we now can
observe the ‘‘fractal phenomenon’’ in the organization, a
Dynamic fractal organizations for promoting knowledge-based transformation – A new paradigm for organizational
Figure 2 Dynamic fractal organizations.
concept that has evolved from the natural sciences (Man-
delbrot, 1983)6. This perspective forms the basis of the con-
cept of the new ‘‘dynamic fractal organization’’. We
propose this concept as our contribution to organizational
theory and describe it below (See Fig. 2).
Fractal organization here refers to an organization in
which multiple knowledge triad relationships emerge from
multi-layered and networked bas. In a fractal organization,
knowledge conversion processes driving creative self-inno-
vation are instilled as ‘‘kata’’ or ‘‘creative routines (Nonaka
& Toyama, 2002). In such an organization, the knowledge
triad relationship is the fundamental form of the fractal,
and thus distributed throughout the organization. In other
words, it dynamically constructs the fractal organization.
By transcending the knowledge creation processes through
dialogue (synthesis of thought) and practice (synthesis of
action) to the organization"s kata and culture, the kata
and culture become the ‘‘synthesizing capability’’ (Nonaka
and Toyama, 2005) and spread throughout the every level
and section of the organization. As a consequence, the orga-
nization will be capable of transforming knowledge both
horizontally and vertically.
Structured organizations provide the foundations for the
formation of !ba," whereas !ba" are dynamic organization sys-
tems when viewed from a behavioral perspective. !Ba" and
structured organizations form mutually supplementing rela-
tionships and interconvert. In this way, the knowledge triad
relationships can be observed both within the structured
6
The word fractal (Mandelbrot, 1983) is a word used in complex
adaptive systems theory, in which the whole consists of parts that
resemble the whole or the creation of the whole by assembling
those parts and ending up with the same basic shape. In business
organizations - because organizations can have fractal character-
istics in that any part could be extracted and expanded to form the
same shape as the whole - it is possible to assign the same standards
to decision-making and knowledge creation at any level (c.f.
Christian, 2011). As a concrete example, the supply chain mech-
anisms that comprise systems affiliated with automobile manufac-
turing businesses have also have been shown to possess fractal
characteristics (Nishiguchi & Beaudet, 2000).
Please cite this article in press as: Nonaka, I. et al., Dynamic fractal organizations for promoting knowledge-based transformation – A new par-
adigm for organizational theory, European Management Journal (2013), http://dx.doi.org/10.1016/j.emj.2013.02.003
5
organizations as well as within the dynamic organization
systems in a company, in between organizations, and across
the boundaries of the companies and their environment.
In other words, multi-layered, organizational, and fractal
characteristics can be found at the various management lev-
els (top, middle and front lines), among different specialties
and job types, and between organizations and companies
(See Fig. 3).
Multi-layered !ba" networks that achieve knowledge triad
relationships dynamically synthesize exploration and exploi-
tation, and enable companies to adapt to circumstances and
create environments, while at the same time sustainably
advance new and existing knowledge resources (see ‘‘Fuji
Film’’ column). In short, a dynamic view of strategy is sup-
ported by the multi-layered !ba" networks that construct
knowledge triad relationships.
One typical case is the U.S. Marine Corps, a military orga-
nization. The Fleet Marine Forces must be organized to pro-
vide forward-deployed or rapidly-deployable forces capable
of mounting expeditionary operations in any environment;
they must maintain a capability to deploy by whatever means
is appropriate to the situation (The United States Marine
Corps, 1989, p. 54). For this purpose, Marine Air-Ground Task
Forces (MAGTFs) are formed, consisting of ground, aviation,
combat services support, and command components (The
United States Marine Corps, 1989, p. 55). MAGTFs have no
standard structure, but rather are constituted as appropriate
for the specific situation. MAGTF task force organization is
structured by the rules of three hierarchy. Corporal leads a
squad with three men, Sergeant leads a platoon with three
squads, Captain leads a company with a three platoons,
etc. There are eight levels, up to Colonel, but every structure
follows the rules of three hierarchy.
Leadership with practical wisdom that produces
dynamic fractal organizations
‘‘Dynamic fractal organizations’’ are structured so that they
do not only take advantage of both exploration and exploi-
tation in setting down and executing corporate strategy. But
6 I. Nonaka et al.
Figure 3 Fractal organization in knowledge creating companies.
they also enable leaders with practical wisdom to demon-
strate synthesizing capabilities as they drive the interaction
of exploration and exploitation. This is done by promoting
synergies between different types of exploration and exploi-
tation as well as promoting conversions between explora-
tion to exploitation and vice versa. In this way, the
dynamic view of strategy encompasses the synthesis of dif-
ferent modes of exploration and exploitation through the
knowledge triad relationships of tacit knowledge, explicit
knowledge and phronesis, not only to achieve short-term
corporate growth, but also to ensure growth in the long-
term (e.g., Benner & Tushman, 2003; March, 1991).
In our model of dynamic fractal organization, there is no
dichotomy between exploration and exploitation in strate-
gic activity; rather, strategies must be executed in which
knowledge triad relationships are created and distributed
while finding a robust balance and mutually supplementary
relationship between the exploration and exploitation.
One of the characteristics of the dynamic fractal organiza-
tion is that fractal structures are connected and related
with other fractal structures both horizontally and verti-
cally. Thus, it offers multiple viewpoints simultaneously.
In other words, it is the crucial leadership capability to be
able to see phenomena from multiple viewpoints so that
the fractal structures interact with each other and establish
dynamic relationships. Fractal structures can self-organize
and therefore can interact with each other easily, and as
a consequence, can create new knowledge. Fractal organi-
zation realizes the symbiosis of parts and whole; parts com-
pose the whole, and at the same time, the whole can
become a part and compose other whole. Where and when
to stop this relationship, that is to change the level of view-
points, depends on the vision of the leader.
Dynamic fractal organizations possess knowledge triad
relationships to simultaneously improve the performance
of exploration and exploitation by successfully and dynami-
cally integrating strategies in multiple organizations, or
seeking out synergies between strategies. This leads to a dy-
Please cite this article in press as: Nonaka, I. et al., Dynamic fractal organizations for promoting knowledge-based transformation – A new
paradigm for organizational theory, European Management Journal (2013), http://dx.doi.org/10.1016/j.emj.2013.02.003
namic view of strategy, where dense collaboration between
the multiple organizations comprising a dynamic fractal
organization and organic collaboration with customers and
partners in the knowledge ecosystem of the environment
is required. At the basis of this type of diverse collaboration
lies the formation of dynamic multi-layered networks of !ba"
to create knowledge triad relationships, and the key to
these multi-layered networks of !ba" is in the creation of
autonomous and distributed phronesis in leaders with prac-
tical wisdom (distributed phronesis), and the aggregation of
these to gather together their collective phronesis (see Ap-
ple column).
Implications and future challenges
This paper has presented the ‘‘dynamic fractal organiza-
tion’’ as a new organizational model to foster innovation
through sustained knowledge creation. Specifically, this
view departs from the information processing model, in
which exploration and exploitation of knowledge is artifi-
cially separated. There, these concepts are only integrated
at the management level, and thus cannot explain dynamic
knowledge creation and innovation processes. From the per-
spective of knowledge creating theory, it is clear that com-
panies that sustainably achieve the dynamic synthesis of
exploration and exploitation commonly have multi-layered
networks of !ba" that produce the knowledge triad relation-
ships of tacit knowledge, explicit knowledge and phronesis
These knowledge triad relationships synthesize the activi-
ties of exploration and exploitation and create robust dy-
namic fractal organizations which enable environmental
adaptation and creation simultaneously.
Knowledge triad relationships in dynamic fractal organi-
zations set down and define new rules for dynamic synthesis
of internal and external knowledge, and enable conver-
gence of different technologies and the creation of new
business models. Thus, it is the phronesis of the leaders with
their practical wisdom that facilitates and propels these
Dynamic fractal organizations for promoting knowledge-based transformation – A new paradigm for organizational
successes. Most importantly, phronesis must be distributed
and exist at all levels of an organization.
Therefore, as a practical implication, companies that
aim to achieve sustainable growth must proactively config-
ure multi-layered networks of !ba" to establish knowledge
triad relationships within and between all kinds of organiza-
tions both inside and outside of the company. Companies
must also foster leadership with practical wisdom and infuse
it deeply into and throughout their organizations.
Finally it is crucial that the !ba" for realizing knowledge
triad relationships eventually self-organize so that phronesis
is distributed and collective across the organization. This
way, it can give directions and drivers to convert tacit and
explicit knowledge.
Columns:
Prius Column: The Prius development - knowledge
conversion in technical fusion at Toyota
First released in December 1997, the Prius is a hybrid
vehicle innovation brought about through a world-first tech-
nical convergence of the gasoline engine and electric mo-
tor. This project triggered a massive conversion of
knowledge at Toyota.
With the arrival of the 1990s, Toyota was facing ques-
tions about what will be required for cars in the 21st cen-
tury, and what sort of vision the company should have to
respond in this new era. Started in 1993, the first response
the company made was a project called ‘‘G21’’, followed
by the 2nd ‘‘G21’’ project a year later. In this project, Toy-
ota brought together 10 engineers from 8 different techni-
cal areas to form a temporary cross-functional team
(CFT). In car development, various skills are required to cre-
ate a new vehicle - body design, engine design, production
technologies and so forth. The new CFT enabled the
‘‘G21’’ project to proceed while coordinating related
departments with the support of top management. This ap-
proach was completely different from Toyota"s previous
development processes. A main meeting room was prepared
for the team, in which they created a !ba" to share knowl-
edge, and as an autonomous and dispersed organization,
the team decided upon their own rules and regulations
which they called the ‘‘G21 team code of conduct.’’
Subsequently, the ‘‘3rd G21’’ project was established in
September 1994, and the hybrid system concept was solidi-
fied. Then in February 1995, a specialized hybrid engine sys-
tem development project called ‘‘1st BR-VF’’ was
commenced in addition to the G21 vehicle development pro-
ject. After that, this project continued into its 2nd and 3rd
phases, and in April 1997 prior to the Prius being released onto
the market, the project was converted into an official line
organization called the !EHV Technology Division".
After the decision was made to mass produce the Prius,
top management in line organizations including the design,
body design, engine technology, production technology,
quality control, electronic, factory and sales divisions, and
overhead divisions formed a ‘‘leader team’’ as a grand syn-
thesis !ba" from the two project organizations. In this leader
team, phronetic leaders from management layers in all divi-
sions were able to make all relevant decisions and take the
necessary actions to adapt to the current state of affairs,
and demonstrate and accumulate phronesis to dynamically
synthesize tacit and explicit knowledge.
Please cite this article in press as: Nonaka, I. et al., Dynamic fractal organizations for promoting knowledge-based transformation – A new par-
adigm for organizational theory, European Management Journal (2013), http://dx.doi.org/10.1016/j.emj.2013.02.003
7
The success of the Prius development was a result of the
convergence of differing technologies in mechanics, preci-
sion engineering, electrical and electronic engineering,
and IT. In particular, various exploratory !ba" were estab-
lished for the creation of diverse pieces of tacit knowledge
to synthesize technologies both within and outside the com-
pany, for instance with Panasonic Energy to develop
rechargeable batteries, and with Nippon Steel to develop
the motor/generator.
Also, closer towards actual commercialization of the Pri-
us, an exploitation !ba" was formed for the integration of ex-
plicit knowledge to create and restructure existing
knowledge in the line organizations in Toyota as well as out-
sourcing companies for parts delivery and production line
maintenance and improvement.
In Toyota, knowledge triad relationships are distributed
in every level and section throughout the organization.
Knowledge triad relationships are embedded in every ba
and their multiple networks. In this fractal organization,
creative routines that accumulate and transcend the expli-
cit and tacit knowledge through dialogue and practice, and
synthesize product improvement (exploitation) and new
product development (exploration) transcend throughout
the organizational culture.
This way, Toyota created a knowledge triad relationship
entwining tacit knowledge, explicit knowledge and phrone-
sis from the processes of planning and development through
to release into the market of the Prius, and created multiple
multi-layered !ba" networks across the boundaries both
within and outside of the company (See Fig. 4).
Fuji Film Column: The Creation and Advance of New
Business - Knowledge Conversion through Reforming
Intelligence Structures at Fuji Film
Having been involved mainly in the business of silver ha-
lide film, Fuji Photo Film became Fuji Film Holdings in 2006,
setting its business domain as a solutions business dealing
with documents, imaging and information. Moreover, in
the advent of digital photography, the company did not just
try to defend the silver halide technologies it had fostered,
but made proactive and strategic moves into the three new
fields of imaging, graphic systems and medical systems in
order to develop its own digital technologies for digital cam-
eras, health care systems etc. One of the major driving
force of their transformation was the establishment of the
Fujifilm Advanced Research Laboratories in April 2006 to
serve as the core R&D center for the Fujifilm group. The
Laboratories was structured as a group of interconnected
laboratories to support the three new product fields; specif-
ically in the fields include organic synthesis, thin multi-layer
coatings, precision micromachining, lens design, lasers,
printing, and image processing.
The company also continued with its ‘‘Vision 75’’ medium-
term management plan positioned as its ‘‘second establish-
ment,’’ and under orders to ‘‘build a new cash cow,’’ the
company produced a string of hit products such as its ‘‘Asta-
lift’’ cosmetics products, its ‘‘similar case search system’’
for lung cancer diagnosis support, and its polarizer tack film
indispensable for LCD panels among others. Fuji Film suc-
ceeded by restructuring its knowledge offensively.
To raise the synergies in new business areas to replace its
silver halide business, Fuji"s top management, centered
8 I. Nonaka et al.

Figure 4 Knowledge transformation via knowledge triads in Toyota"s Prius development.

around CEO Shigetaka Komori, proactively formed the
exploratory !ba" needed to generate tacit knowledge as well
as the exploitative !ba" needed to integrate explicit knowl-
edge and dynamically synthesize these two different types
of knowledge.
In addition, employees had to transcend their existing
business, market and knowledge domains and fuse the
knowledge and approaches to thinking of engineers in dif-
ferent fields by making concerted efforts to form explor-
atory !ba" both inside and outside of the company.
Through these exploratory !ba," the employees were able
to seek out new relationships between dissimilar areas of
tacit knowledge, and thus give rise to new forms of tacit
knowledge. In other words, the company demonstrated its
phronetic capability at top and middle management.
In this way, at all levels of the organization, Fuji Film
constructed the knowledge triad relationships of tacit and
explicit knowledge with phronesis, and enabled the offen-
sive knowledge structure transformation through the activ-
ities of its phronetic leaders in their respective !ba". Those
possessing practical wisdom in the company formed multi-
layered networks of !ba," and thus Fuji Film was able to
restructure its knowledge and achieve persistent and self-
sustaining growth.
Apple Column: The Formation of a New Business Model
- Knowledge Transformation through Convergence at
Apple
In January 2001, Apple announced iTunes at the Mac-
World Expo held in San Francisco, and Steve Jobs pro-
claimed the digital hub strategy. At the time, a wide
range of digital devices had become popular such as the
PC, digital cameras, mobile telephones and digital audio
players, and Jobs declared that iTunes was to become the
digital hub of these devices. The digital hub strategy has
since come to fruition through a chain of innovative products
and services - iPod, iPhone and iPad - products that fuse a
wide range of digital technologies, content and applications.
This also shows how Apple expanded outwards from its Mac-
intosh hardware business (products) into music distribution
and smartphones with software (services), by redefining its
business domains and advancing its knowledge vision.
The trigger for Apple"s knowledge transformation into the
music distribution business was Jobs" deep insight and gut feel-
ing. Steve Jobs was warming to the idea of an online music
store that brought together portable music players and content
through iTunes that had already been developed. To achieve
this, Jobs and his management team decided to develop a
product with a creative, unique and superior human interface
that would outdo any other portable music player. Making use
of the company"s strengths, Apple set out to develop the supe-
rior portable music player by involving itself in the creation of
everything from an easy-to-use interface and hardware,
through to the OS, applications, software and product design.
It is here where Apple"s practical wisdom leaders came to
the fore. From the dissimilar information and contexts sur-
rounding jukebox software, portable music players, music
content, Internet distribution, accounting and so forth, ta-
cit knowledge emerged, and Apple synthesized this tacit
knowledge across these different knowledge boundaries to
create its proprietary online music store (iTunes music
store) as new explicit knowledge.
Furthermore, with the development of iPod and iTunes,
Apple created a !ba" of exploration to integrate the tacit
knowledge that the company had built up over the years
with the tacit knowledge of its external partners (experts
and partners in different business categories), and accom-
plished a novel business model with the emergence of new
tacit knowledge in its !ba" integrating the non-technological
aspects of marketing and design strategies.

Please cite this article in press as: Nonaka, I. et al., Dynamic fractal organizations for promoting knowledge-based transformation – A new
paradigm for organizational theory, European Management Journal (2013), http://dx.doi.org/10.1016/j.emj.2013.02.003
Dynamic fractal organizations for promoting knowledge-based transformation – A new paradigm for organizational
Also, in the production of iPod, Apple formed !ba" of exploi-
tation to achieve integration of explicit knowledge not only
within the company, but also with the company"s best out-
sourcing partners for horizontal integration all the way from
upstream through to downstream in the value chain.
In a nutshell, behind Apple"s successful knowledge trans-
formation with iTunes and iPod (and then with iPhone and
iPad later on), lies the configuration of multi-layered net-
works of !ba" that enable knowledge triad relationships of
tacit knowledge, explicit knowledge and phronesis inside
and outside of the company that promoted the conversion
of multimedia technologies and services.
At Apple, multiple and multi-layered ba are created be-
tween and beyond the organizational boundary, and knowl-
edge triad relationships are embedded in every level and
section of the organization, resulting in a fractal organiza-
tion. The knowledge triad relationship promotes creative
routines to produce unique and cutting-edge business mod-
els and to optimize the whole supply chain. In addition, it
fosters the culture of synthesizing the parts and the whole
- the strategy of the company and the details of the prod-
ucts in this case- through dialogue and practice from which
new knowledge constantly emerges.
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IKUJIRO NONAKA is Professor Emeritus, Hitot-
subashi University. He received his B.A.
(Political Science) from Waseda University,
M.B.A. and Ph.D. (Business Administration)
from the University of California, Berkeley.
Professor Nonaka"s main research interest is to
establish a new theory of organizational
knowledge creation, innovation, and leader-
ship for realizing sustainable organizations
that aim at the common good. His research
areas cover private and public, large to small and medium sized com-
panies, local to global, and social to community level organizations.
AYANO HIROSE is an Adjunct Assistant Pro-
fessor at the Graduate School of Interna-
tional Corporate Strategy, Hitotsubashi
University, Tokyo, Japan. Her research is in
the field of Knowledge Creation and Man-
agement, and Social Innovation of both pri-
vate and public organizations. She has been
a Research Assistant to Professor Ikujiro
Nonaka while in the Doctor of Business
Administration program, and has collabo-
rated in some of his works such as ‘‘Managing Flow’’.
FLORIAN KOHLBACHER is a Senior Research
Fellow and Head of the Business & Eco-
nomics Section at the German Institute for
Japanese Studies (DIJ), Tokyo. He is also an
adjunct professor at Temple University,
Japan Campus and a visiting researcher at
the Institute for Media and Communications
Research at Keio University. Florian is the
author of ‘‘International Marketing in the
Network Economy: A Knowledge-Based
Approach’’, and co-editor of ‘‘The Silver Market Phenomenon:
Marketing and Innovation in the Aging Society’’.

MITSURU KODAMA is Professor of Innovation

and Technology Management in the College
of Commerce and Graduate School of Busi-
ness Administration at Nihon University. His
research has been published in international
journals such as Long Range Planning,
Organization Studies and Journal of Man-
agement Studies, among others. He also has
published nine books in English such as
Competing through ICT Capability (Palgrave
Macmillan, 2012), Knowledge Integration Dynamics (World Scien-
tific, 2011), Boundary Management (Springer, 2009), Knowledge
Innovation (Edward Elgar, 2007), among others.

Please cite this article in press as: Nonaka, I. et al., Dynamic fractal organizations for promoting knowledge-based transformation – A new
paradigm for organizational theory, European Management Journal (2013), http://dx.doi.org/10.1016/j.emj.2013.02.003