New Rules. We’re moving out of an industrial era with old rules and into a knowledge era with new rules. Yet few organizations are taking advantage of these new rules. They are acting as if old industrial era rules of scale and physical production still apply.
Scarcity and Diminishing Returns. The creation of physical products, after a certain point, tend to return less and less value to their producers. Prices start to increase because of scarcity of materials, and demand and prices start to drop because of market saturation. Thus the laws of scarcity and diminishing returns kick in.
Abundance and Increasing Returns. What are the new rules? They are abundance and increasing returns. In the industrial era, land labor and capital were the primary sources of wealth. In the knowledge era, more and more intangible ideas are the primary source of wealth.
Value of Ideas. The creation of high value ideas tend to have significant up front costs, but then these costs approach zero as these ideas are replicated. An illustration of this increasing return phenomenon is software development. It may cost thousands of dollars to develop a new killer application, but once it is developed the creator can market and sell thousands of copies of it with minimal production and distribution costs and make huge profits.
Perpetual Profits. In other words, with knowledge-based products and services, the laws of abundance and increasing returns start to kick in. Knowledge unlike physical assets doesn’t get used up, but can be both replicated and used to develop and grow more knowledge. And with intellectual property rights and market share, organizations can almost have a perpetual profit making machine.
What Is Knowledge Management (KM)?
First of all, what’s KM? What working definitions can we use? Well, KM will be “more than” the next big thing in organizational performance improvement initiatives. I originally subtitled this article The Next Big Thing, but some of my colleagues pointed out to me this phrase possibly connotes “just another fad.” I believe KM will not end up being just a fad. Instead, it will positively impact now and in the coming years the performance of organizations.
Definitions. To define KM, we first need to establish a working definition of knowledge itself. Knowledge is more than data or information. While data and information form the building blocks of knowledge, knowledge goes further.
Knowledge. Knowledge is really making information actionable and getting value from it. We don’t know the value of information until we try it out. That which works and adds value for our customers constitutes knowledge on a very practical level.
Definition of KM. Then what does all this mean when we combine knowledge with Management? Some may think definitions are boring, but they don’t have to be. For our common understanding, I would like to ask you to consider the following definition: KM is —
- Recognizing the value of knowledge as intellectual capital.
- Leveraging intellectual capital through its deliberate creation, development, maintenance, transfer, sharing and use to improve organizational performance.
Intangible Assets. First, KM attempts to recognize the value of an organization’s intangible assets. These intangible values come from the productive relationships between an organization and its employees, its processes, structures and systems, and its external environment of customers, suppliers and community.
Intellectual Capital. Second, these intangible assets can be measured as intellectual capital which in many cases constitutes more of an organization’s total value than physical and monetary assets.
Deliberate Leverage. Third, KM leverages this intellectual capital through the deliberate creation, development, maintenance (codification, storage & protection), transfer, sharing, and use of knowledge for the purpose of organizational performance improvement.
Now that we’ve have a common definition of KM, I’d like for you to consider the most effective approach to getting organizations to use KM. The effective use of KM ensures that it doesn’t become just another fad. It indeed can be more than the next big thing and possess true staying power.
Initiatives. All organizations have critical issues. Since these issues invariably require more knowledge, organizations need KM initiatives to resolve the issues. We also need a method to build trust and guide these initiatives.
AIC. A colleague of mine, Bill Smith, in Washington, D.C. has developed a useful method he calls AIC for appreciation, influence and control. If we start by appreciating an organization’s critical issues, we can begin to build the trust and acceptance needed for influence. We then begin to influence the organization by focusing our KM initiatives on critical issues. From this perspective, we naturally make the most relevant improvements for the organization, and thereby gain the latitude (control) to expand our KM implementation.
Prototypes, Projects and Experiments. We cannot all at once get our arms around what a total shift to KM means for an organization. Organizations may find a strategic framework for movement to KM useful, but they realistically will move toward this framework a piece at a time. In KM, organizations use prototypes, projects and experiments to learn and move forward.
So Why KM and Why Now?
Now that I’ve asked you to consider a common definition for KM and to focus your KM initiatives on critical issues, I’d like to give you three challenges to work on during the next two to three days of the conference. Effectively addressing these challenges will further ensure that KM is more than the next big thing.
1st Challenge: Making the Business Case
Market Value versus Book Value. Traditionally, organizations tend to be valued based on their physical assets or book value. A knowledge-based organization’s value tends to be much higher than its book value.
Tip of the Iceberg. Valuing a knowledge-based organization on its book value is like looking at the tip of an iceberg. For example, entrepreneurs can realize this hidden value by going public with a stock offering. The market value of their stock less the book value of the company is a rough way to measure the value of an organization’s intellectual capital. Microsoft went public with their stock years ago, and today their market value ranges from 12 to 13 times higher than the book value.
Balanced Scorecard (BSC). To elaborate on my earlier discussion of definitions, intellectual capital can be broken down into three major categories of human, organizational and external capital. These three categories are respectively impacted by People Value Added, Organizational Value Added, and External Value Added initiatives.
The Business Case. All three major categories of intellectual capital support a fourth area called Economic Value Added (EVA). A set of measures like these is necessary to translate intellectual capital into financial data to make the business case. This framework is similar to the one outlined by Robert Kaplan and David Norton in their landmark bookThe Balanced Scorecard.
Cause & Effect Relationship. A balanced scorecard assumes a cause and effect relationship between improvements in human, organizational and external capital and financial performance. The validity of this cause and effect relationship constitutes the heart of KM initiatives, and it further makes the business case for pursuing KM. By investing in KM initiatives, an organization improves its competitive position and financial performance.
The Calculations. To get a gross measurement of intellectual capital, we look at macro-level measures. Central to this measurement process is the notion that a knowledge-based organization’s intellectual capital (IC) value can be estimated by subtracting its book value (BV) from the market value (MV) of its stocks. Again, its financial performance (EVA) is impacted by the three major categories of intellectual capital. This financial performance can be distributed as earnings, held as retained earnings, or invested in organizational growth initiatives.
2nd Challenge: Using Three Main KM Strategies
There are three main KM strategies: (1) knowledge creation and development, (2) knowledge transfer and sharing, and (3) knowledge and information enabling systems. These three strategies overlap and reinforce one another. Their effective use shows us that KM can indeed be more than just the next big thing.
(1) Knowledge Creation and Development Strategy
The Cycle. This strategy is based on the deliberate use of a knowledge development cycle. One such cycle is outlined in the breakthrough book by Ikujiro Nonaka and Hirotaka Takeuchi called The Knowledge Creating Company. It is used to deliberately create and develop intellectual capital. A knowledge development cycle allows us to capitalize on the power of balancing divergent and convergent thinking. In this way, we brainstorm, refine, select, test and capture the best knowledge. We can continuously repeat this cycle creating more and more valuable knowledge which spirals up and across an organization.
Strength in Differences. This strategy is also based on the notion that a group as a whole can be smarter than any one individual in the group. A group also brings together diverse creative thinking styles, abilities and experiences. We can leverage this diversity to further knowledge development, but people in groups need to appreciate each other’s strengths and differences and work together more effectively. People have their own creative preference. Some prefer to stay open to possibilities, other prefer to get down to action, and others tend to be balanced between the two. All three styles are required to effectively develop new knowledge.
(2) Knowledge Transfer and Sharing Strategy
The second main strategy is knowledge transfer and sharing. For knowledge to be leveraged, we must ensure it is transferred and shared among people. This knowledge transfer and sharing increases creativity and innovation and keeps knowledge in the organization even when people who possess it leave.
Dynamic Process. Organization have wasted large amounts of time and resources trying to control knowledge. Knowledge development and sharing cannot be forced. Trying to control knowledge kills the necessary spontaneity. Facilitation instead of control is the key. Knowledge self organizes around human interests. It occurs naturally to meet human needs. People are attracted to other people and sources that meet their needs for knowledge. People will share knowledge with others when a common interests, trust and respect exist among them.
Necessity. To some extent, traditional organizations have always transferred knowledge through training on and off the job. Otherwise, knowledge tends to be hoarded rather than transferred and shared. In many organizations, people have undergone so much downsizing they’re learning their transfer and sharing lessons the hard way. They often have the same amount of work to do and less people to do it. As a result, they start to do a little more transfer and sharing to ease the burden.
WIIFM. Unfortunately, necessity does not create a systematic effort. For people to actively transfer and share knowledge rather than to hoard it, they need clear and consistent incentives for doing so. This is the old loud and clear radio station WII FM (What’s in it for me). Incentives are important to support an environment of knowledge sharing and transfer to increase organizational creativity and innovation.
Money. Financial and other extrinsic rewards can be used to some extent to reinforce the transfer and sharing of knowledge. When used equitably, it provides useful feedback and clarity for goals. Conversely, money can de-motivate people if they perceive there’s any inequity. The best approach: pay people better than market scale wage and salary, and share financial gains equally.
Freedom to Make Mistakes. We need to give people the freedom to experiment and make mistakes. We all learn from mistakes and the key is to accelerate learning so it can be transferred and shared. People who are afraid to make mistakes can’t learn very much.
(3) Knowledge and Information Enabling Systems Strategy
The third main strategy consist of providing an organization with the necessary knowledge and information enabling systems. To respond to the turbulence and competition so common nowadays, an organization needs adequate support systems and information technology. This means that all knowledge workers need ready and easy access to a corporate network, the World Wide Web, email and a common-work platform such as Lotus Notes, applications software, databases and libraries, and special equipment such as scanners to reduce paper files.
Build It and They Will Come. I should add that often organizations confuse the provision of information systems technology with KM. Some managers who attend my KM seminar tell me they thought their organizations were doing KM, but after the seminar they realize they organizations were only doing information management. Building information systems technology systems are a necessary, but not sufficient condition for effective KM.
Knowledge Mapping. Knowledge mapping represents an emerging tool for capturing and sharing organizational knowledge. Similar to the way organization charts show formal lines of authority and responsibility, knowledge maps show the location and relationships of information and knowledge bases.
Knowledge Navigation. Maps help us make sense of and navigate an organizational landscape. Knowledge performance issues, strategic and operational concepts, processes and structures become visible and measurable. Knowledge mapping facilitates the deliberate location and use of organizational knowledge.
Organization As Brain. Another kind of map is the analogy of the organization as a brain. Organizations like people tend to use only a small fraction of their brain power. The brain has billions of interconnected brain cells (neurons). Each brain cell looks like a tiny octopus with its tentacles (dendrites and axons) radiating out in all directions. These extensions pass electrochemical impulses between the cells. Learning occurs in the brain when repeated impulses create a connection (synapse) between cells.
Organizational Interconnections. Much like the brain and its cells, an organization consists of multiple interconnections among people, their bosses, staff, peers, suppliers, customers, allies, networks and knowledge and information repositories. All these interconnections in a sense map what an organization knows and doesn’t know. By paying attention to this phenomenon and linking it with enabling systems, an organization can become smarter.
Improving Performance. Because organizations lack such basic means to recognize knowledge resources, they fail to realize their potential for developing, sharing and using intellectual capital. By drawing individual knowledge maps and going over them individually and collectively, an organization improves its performance by uncovering new knowledge sources, identifying and filling knowledge gaps and increasing knowledge development, sharing and usage.
Knowledge or Information Mapping? While we gain value by distinguishing between knowledge and information, sometimes we find it useful to forget these distinctions. Knowledge mapping and information mapping relate too closely to get much value from making any distinction between them.
Information About Knowledge. Technically, much of the content in knowledge maps really consist of information about knowledge. For example, a corporate yellow pages directory of experts really amounts to information on where to find useful knowledge. To stay true to our definition, knowledge is not knowledge until we put it to use and gain value from it.
3rd Challenge: Turning the 3 Major Driving Forces
This challenge calls for you to explore ways to make these potentially crisis inducing forces into opportunities. The three major driving forces are: (1) the move to a global economy; (2) the speed of technological change; and (3) the spread of democracy. These three forces interconnect and interact with each other which further multiplies their effect. They also make the move of organizations to KM inevitable, and ensure KM will be more than just the next big thing.
(1) Global Economy.
This first driving force concerns the move to a global economy. This force makes the world seem smaller. As trade barriers drop, organizations world wide seek expanded opportunities and consumers receive more choices. This expansion feeds on itself. As consumers come to expect more, competitive organizations rise to the occasion, and the less competitive ones fall by the wayside.
Comparative Advantage. Most of this global commerce results from a comparative advantage of the companies from the various countries involved. This advantage equates to their possessing the knowledge that enables them to provide better quality, convenience and price relative to the competition.
Differentiation. In this larger picture of global trade, more than ever organizations must focus on doing what they are good at and continuously acquiring the intellectual capital needed to be the best. They must do this to survive and thrive in an increasingly competitive future driven by a global economy.
Example. To turn this driving force into an opportunity, an American-based global corporation promotes an Asian, European, and a South American to executive positions, and moves them into the headquarters in New York City. The new diversity of human capital broadens everyone’s perspective, which enables the firm to better implement world wide standards. At the same time, the organization can customize products and services to meet the varying demands of disparate cultures thus increasing its external capital.
The speed of technological change constitutes the second driving force.
A rule of thumb called Moore’s law says the speed of computer chips will double every 18 months. The rate of scientific knowledge also doubles every seven years based on the volume of scientific articles published. This dizzying pace creates both crises and opportunities.
Electronic Commerce. With electronic data interchange (EDI) and electronic networks, leading organizations cut both their paper work and their inventories by ordering what they need as they need it. They’ve gone from maintaining inventory just in case they need it to ordering just in time to meet customer needs. All of this reduces administrative costs, saves sizable amounts of inventory carrying costs, decreases cycle time and increases customer satisfaction.
Supplier-Customer Interfaces. Wal-Mart’s interface with Procter & Gamble illustrates these benefits. Their computerized point of sale (POS) cash registers linked to their inventory and accounting systems indicate when products run low on the shelf and automatically trigger an order and delivery of more products. Payment goes out automatically based on goods sold.
Example. To turn this driving force into opportunity, a large company improves its human and structural capital by adopting a work at home policy for its sales force. It helps them set up and wire their home offices with state of the art technology. Work requirements and boundaries are clearly established. Sales force work satisfaction improves, sales increase, and corporate real estate costs drop.
The third driving force results in less respect for position power and more respect for knowledge that can improve performance. Because of the related forces of globalism and technological development, people’s awareness of what’s possible for them is growing too. At the macro level the impact of these forces surprised everyone with the fall of the Berlin wall and the break up of the Soviet Union.
People Expect More. At the micro level, look at your own organization. While people may expect less employment security, they want more growth opportunities and freedom of action. A KM approach supports these changes and selects the best candidates to staff and renew the organization.
Example. To turn this driving force into opportunity, a company improves its human and organizational capital by instituting an Employee Stock Ownership program (ESOP), and a group of employee owners challenge the continuation of executive prerequisites such as off site meetings at posh resorts. Top management phases out expensive prerequisites. Both executives and front line people develop organizational capital by becoming more sensitive to all expenses. As the spirit of cooperation and productivity overflows into all aspects of business, costs drop significantly.
Now you’ve had the opportunity to:
- Consider both a common definition for KM and focusing on critical issues.
- And reflect about how you might over the next two or three days formulate ideas to meet the three challenges of — (1) Making a Business Case for KM, (2) Using the Three Main KM Strategies, and (3) Turning The Three Major Driving Forces into Opportunities.
The Secret. Now let’s turn to the secret to success in KM. It’s to actively use and balance divergent and convergent thinking. Brainstorming is an easy and effective way to diverge, but few people really practice it in the nonjudgmental and freewheeling way they should. Convergence, on the other hand, works best by evaluating ideas based on how interesting or intriguing they are. Don’t over analyze the ideas, but instead keep the process moving forward to learn from experience. The key is to balance divergent and convergent thinking.
Body Model. Stand up and hold your arms up forming a “Y” with your body. This should give you a feeling of openness to possibilities, and this position is an analogue for “divergence.” We’ve all known people who want to stay open forever and never make up their mind. To develop new learning we must make a choice of the best possibilities and converge on them with action. So at this point bring your arms down and grasp your hands together at your knees forming a “V” with your hands and arms. Get a feeling of how this position represents being closed. You’ve made a choice and you’re ready to act on it. Call this position “convergence.” Now we’ve all known people that always have their mind closed to new ideas, and they don’t want anyone confusing them with new facts. Again, the secret to effective KM is to balance divergent and convergent thinking.
Your Critical Issues. Now take about 30 seconds to individually brainstorm what your organization’s critical issues might be. Next, check two or three that seem the most interesting to you. Now circle the one that’s most interesting for you. You can combine some of your selections into a single choice if it makes sense for you. What you’ve just done is modeled a step in the process for creating knowledge. I suggest you use the critical issue you’ve just selected as part of your perspective for further action planning over the next two or three days.
An Old Song. Now I’d like to conclude with a line from an old song. “If I don’t do it somebody else will.” Likewise, if you don’t use KM to create added value for your customers, someone else will. KM constitutes the core of the creativity and innovation needed to survive and thrive in the future. I encourage you to take the considerations and challenges I’ve given you and move forward. Enjoy the conference!
- Arthur, W. Brian, Increasing Returns and the New World of Business, (Harvard Business Review, July-August 1996, pages 100-109, Cambridge, MA)
- Basadur, Min, Simplex: A Flight to Creativity, (Creative Education Foundation, Buffalo, NY, 1994)
- Deming, W. Edwards, The New Economics: For Industry, Government, Education, 2nd Edition, (MIT Center for Advanced Engineering Study, Cambridge, MA, 1994)
- Kaplan, Robert M. and David P. Norton, The Balanced Scorecard: Translating Strategy into Action, (Harvard Business School Press, Boston, MA, 1996)
- Nonaka, Ikujiro and Hirotaka Takeuchi, The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Innovation, (Oxford university Press, New York, NY, 1995)
- Stewart, Thomas A., Intellectual Capital: The New Wealth of Nations, (Doubleday / Currency, New York, NY, 1997)