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|Learn how valuable corporate knowledge is
acquired, created, bought, sold and bartered
By Tom Davenport and Larry Prusak
In His Own Voice
You can hear Larry Prusak's complete responses to such questions as
Why is this the time to write about knowledge as an asset?
How would you respond to a CEO who says, "We've always exchanged knowledge. What's the big deal?"
How does a company know what it knows?
healthy organizations generate and use knowledge. As organizations interact
with their environments, they absorb information, turn it into knowledge
and take action based on it in combination with their experiences, values
and internal rules. Without knowledge, an organization could not organize
itself; it would be unable to maintain itself as a functioning enterprise.
We will consider five modes of knowledge generation: acquisition, dedicated
resources, fusion, adaptation and knowledge networking. In each case, the
conventions of language force us to discuss knowledge as a thing that can
be managed. We want to emphasize, however, that knowledge is as much an
act or process as an artifact or thing.
Acquired knowledge does not have to be newly created, only new to the organization. British Petroleum gives a Thief of the Year Award to the person who has "stolen" the best ideas in application development. The company recognizes that, when it comes to organizational knowledge, originality is less important than usefulness. Texas Instruments has created a Not Invented Here, but I Did It Anyway Award for borrowing a practice from either inside or outside the company. The Spanish proverb "Well stolen is half-done" sums up this idea succinctly. The knowledge-focused firm needs to have appropriate knowledge available when and where it can be applied, not to generate new ideas for their own sake.
The most direct and often most effective way to acquire knowledge is to buy it-that is, to buy an organization or hire individuals who have it. Of course, not all corporate purchases are knowledge acquisitions. Companies buy other companies for various reasons: to generate additional revenue, to achieve a strategic size or product mix, to get access to new markets or to gain the skills of a senior management team (this last reason, however, borders on knowledge acquisition). Increasingly, firms acquire other companies specifically for their knowledge. They are often willing to pay a premium over the market value of the company purchased because of the value they expect to get from adding that new knowledge to their own knowledge stock. One recent example of this is IBM's 1995 purchase of Lotus. IBM paid $3.5 billion, which was 14 times Lotus's book valuation of $250 million. Clearly, IBM did not pay that amount of money for the current revenue generated by Notes and other Lotus products or for Lotus's manufacturing and sales capabilities. The $3.25 billion premium IBM paid represents its appraisal of Lotus's unique knowledge of Notes and other collaborative software applications. The minds that invented Notes are more valuable than the software itself.
In addition to being purchased, outside knowledge can be leased or rented. A common type of leasing is a firm's financial support of university or institutional research in exchange for the right to first commercial use of promising results. The drug company Hoechst, for example, supports research at the Department of Molecular Biology at Massachusetts General Hospital in hopes that it will lead to the development of profitable new drugs. R&D efforts are always speculative, and it is not easy to predict when or if research will pay off. However, it should be possible over time and in the aggregate to calculate the value of leased knowledge in terms of the eventual returns that are derived from the funded research.
Renting knowledge really means renting a knowledge source. Hiring a consultant for a project is an obvious example. Unlike rentals of equipment or facilities, knowledge rentals are likely to involve some degree of knowledge transfer. Although the knowledge source is temporary, some of the knowledge is likely to stay with the firm. Some clients we have worked with now specify in their consulting contracts that consultants' knowledge be made available in some structured, codifiable format. And consultants are beginning to market their services partly on the basis of transferring knowledge to clients. For example, more than one high-tech consulting firm now offers technical training in the software package SAP if the client employs these firms to implement the package.
As with so many investments in knowledge generation, intentions are important: A firm needs to know what it wants in order to have a good chance of getting it. High-level consultants are sometimes surprised at how little clients ask of them in terms of knowledge transfer. Firms that hire them for a day or a week at considerable expense might be expected to squeeze as much knowledge out of them as possible. But they usually do not ask the questions that would help them absorb that expertise in practical ways.
A customary way to generate knowledge in an organization is to establish units or groups specifically for that purpose. But since the financial returns on research take time to materialize and may be difficult to measure when they do come, a focus on near-term profits may create pressure to cut costs by cutting R&D. While no part of a business can be funded indefinitely if it generates no measurable value, a narrow bottom-line view of that return can lead to "savings" that deplete vital knowledge-generating resources.
The premise behind separating R&D from other parts of the firm is to give researchers the freedom to explore ideas without the constraints imposed by a preoccupation with profits and deadlines. However, this distance may be difficult to bridge when the time comes to transfer the results of R&D to the wider organization. Knowledge creators and users may not even speak the same language.
Probably the most notorious case of a costly transfer gap occurred at Xerox's Palo Alto Research Center in the mid-1970s. The knowledge workers at Xerox PARC invented key elements of the graphical interface computer, including the mouse, graphical icons and menus. Ironically, the independence that made this breakthrough possible probably contributed to Xerox's inability to understand its importance and potential value. They were not close enough to the research to evaluate the newly created knowledge. Steve Jobs, on the other hand, was prepared for those new ideas by his work at Apple (as well as by culture and temperament) and quickly grasped their significance. A brief tour of Xerox PARC was all he needed to gather the fruits of research funded for years by Xerox. He went back to Apple and built the Macintosh.
Whereas the R&D approach is predicated on reducing the pressure and distractions that can stifle productive research, knowledge generation through fusion purposely introduces complexity and even conflict to create new synergy. It brings together people with different perspectives to work on a problem or project, forcing them to come up with a joint answer.
In The Knowledge-Creating Company (Oxford University Press, 1995), [Ikujiro] Nonaka and [Hirotaka] Takeuchi cite Matsushita's development of the first automatic breadmaking machine as an example of diversity and creative chaos in action. Matsushita combined three product divisions with different cultures to develop a successful breadmaking machine, realizing that it needed the variety of knowledge possessed by groups that had previously made rice cookers, toasters and coffeemakers, and food processors. The new product combined the computer-control expertise of the first group, the second's experience with induction heater technology and the third's knowledge of rotating motors. The creative chaos came from a breakdown of old assumptions and ways of working, an intentional shake-up of the status quo that, as conventionally portrayed, is not innovative. The combined groups (a total of 1,400 employees) initially almost "spoke different languages."
Although fusion can lead to powerful results that are unobtainable in other ways, it is not a shortcut to knowledge generation. A significant commitment of time and effort is required to give group members enough shared knowledge and shared language to be able to work together. Careful management is also necessary to make sure that the collaboration of different styles and ideas is positive, not merely confrontational.
Here are five knowledge management principles that can help make fusion work effectively: