Innovation and Knowledge Creation: The real value behind the concept of Knowledge Management

Feature

posted 1 Apr 1999 in Volume 2 Issue 7

Innovation and Knowledge Creation:
The real value behind the concept of Knowledge Management

Knowledge Management is increasingly on management agendas in a variety of forms, and has principally focused on capturing, sharing and codifying 'knowledge'; often with a heavy emphasis on the design of IT systems to hold the 'knowledge' captured. Here, Terry Finerty argues that the value of Knowledge Management lies in a focus primarily on learning and innovation, or the creation and application of new knowledge. It is only once knowledge is created that there is value in 'sharing'. When companies put the creation of knowledge, or intellectual capital explicitly on their agenda, innovation becomes a core to successful strategy.

The borders that have historically defined the world's industries are breaking down. As new technologies are invented, industries redefined, new markets developed and global competition intensifies, the rate at which an organisation can learn and leverage know-how is becoming the critical strategic capability.

A director of Procter and Gamble (P&G) said to me recently 'when I joined P&G 25 years ago my first task was to analyse the past 3 years data for a brand, and use that to develop the next annual plan. Nowadays, the market and competition is moving so fast that the past 3 years data is irrelevant to next years' plan.' This director is currently involved in implementing the 'Breakthrough' programme at P&G, a global exercise aimed at increasing creativity and innovation in everything P&G does. Companies such as P&G must learn and change to survive, and the rate at which they develop know-how, and apply it in the market can be the difference between failure and success. It is for this reason that the term 'Knowledge Management' has entered the number one hit list of recent management buzzwords. Like all 'new' ideas, it has the element of 'fad' about it.
I recently found in my loft a newspaper advertisement selling correspondence courses. It was titled 'Don't Wait for Dead Men's Shoes' with a subtitle - 'secure promotion through the value of specialised knowledge' and dated 1919. It further went on to say 'a man barters his knowledge as surely as a merchant sells his wares.' This convinces me that fad or not, the concept that knowledge is valuable is certainly not new!

My experience suggests that the concept does have tremendous strategic and practical value, and under one name or another, the perspective of learning and knowledge management will help to re-define how businesses are managed in the future. However, Knowledge Management will become less a name for one-off projects aimed at sharing good practices, and more a perspective and set of principles and tools that help businesses innovate and learn.

In the future, the tools, concepts and perspectives referred to as 'Knowledge Management' will remain critical. However, the emphasis will shift:

a). From 'sharing' to using Knowledge to make business impact

b). From efficiency to innovation

c). From 'experimental' initiatives to 'part of how we do business'

Successful companies will embed Knowledge Management in the work process and in the 'DNA' of their organisation. They will begin to recognise that intellectual assets (or capital) are the key assets in an organisation, and their perspectives and processes will be geared toward managing and maximising the creation of such intangible assets, and the effective exploitation of them.

Knowledge as an asset

Many studies have pointed out the difference between company market values and their tangible asset values. Clearly, intangible assets account for the lion's share of the value of any organisation. Not all intangible assets may fit the definition of 'knowledge' assets. For example, the value of the Coca-Cola name, the customer perspective of the reliability of a retailer like M&S or the reputation of Virgin Airlines are all critical components of the market value of these businesses.

However, in addition to such 'customer capital' there is a wide range of intangible assets that do add value to organisations, and which fall in the domain of 'knowledge management'. For example:

1. Patent rights - Dow Chemicals realised significant sums of money through the deliberate management of previously ignored patents which had lain dormant for years

2. Distinctive competencies - Toyota's capabilities in new product design and lean manufacturing has enabled them to dominate large segments of the global automobile industry

3. Software design know-how - the market value of many of today's internet stocks is based on the anticipation of development and exploitation of software products.

If the evidence is clear that most of the value of a business is tied up in intangible assets, then management clearly need a means to manage their business to create and exploit such assets.

Knowledge Management, properly considered, provides such a perspective. Knowledge Management is valuable in as much as it provides management with the processes, tools and capability to:

1. Understand the role of know-how in their business

2. Recognise the intellectual assets they have; those they wish to build; and manage the effective exploitation of such assets.

Role of knowledge in the business

Knowledge is ubiquitous to social systems. In the business context knowledge clearly plays many roles.

Knowledge Management and Strategy

For example, knowledge plays a role in strategy. If the essence of strategy is to identify the opportunities of the future, and to shape the enterprise's position and capability to capture those opportunities, then knowledge about the future is critical, as is the development of the capabilities supporting the strategic intent. In this context, Knowledge Management becomes a critical element embedded within the strategic development process.

For example, an integrated UK utility's scenario for the future indicates that 'embedded generation' to support local generation of power and electric cars is critical to it's future. Building technical know-how in this area is critical for the future and the strategy includes alliances with other companies and academics, recruitment of technically skilled engineers and experimentation. The end result is expected to be proprietary know-how in this area (structural capital) as well as outstanding technical engineers (human capital).

In this case, the strategic agenda is one where the 'organisational space' is created for innovation necessary to support the strategic intent of the business. The Knowledge Management agenda needs to address many elements:

The external scanning necessary to form a point of view about the future

The conversations and processes necessary to develop a tacit understanding and agreement about the opportunities and the strategic intent of the organisation

Specific processes (research and development, alliances, experiments) designed to create proprietary know-how

Processes to manage the commercial exploitation of such knowledge.

The utility is not undertaking a stand-alone 'knowledge management' project, but is undertaking a strategy development process using the lens of knowledge and intellectual capital to inform the process - it becomes part of 'how to do strategy' rather than knowledge management.

Process Innovation

Much of the work published to date on Knowledge Management focuses on the sharing of 'best practice'. This has been an extremely valuable approach for many companies. Chevron is one of many companies that have saved tens of millions of dollars through the sharing of best practices. However, the full Knowledge Management perspective also considers the question of how the 'best' (or good) practice is developed in the first place. How does an organisation use sharing in this context to its best advantage, to ensure that application of best practice avoids the trap of institutionalising mediocrity?

If one frames the role of knowledge, in this case to provide continuous and continual improvement in process performance, then management has an agenda to create the space to develop the best practice, and make sure that the organisation takes best advantage of the resulting innovations.

For example, Unilever identified a need to reduce the time to bring new soap factories into production. Over a 2-year period, a team of engineers worked to codify and capture best practice in design and commissioning new soap factories, reducing lead times from 57 weeks to 7 weeks. The learning and know-how developed through that effort has paid benefits through accelerated revenues and reduced costs. Not only are these engineers now experts in this field (human capital); the standard processes, layout and design criteria are embedded in Unilever's processes and systems (structural capital). Here the value came as much from creating the space for reflection and learning to create the know-how, as in the subsequent sharing for exploitation.

Similarly, a client in the oil exploration sector undertook an analysis of the role of Knowledge in their business and identified several areas where know-how was critical. One included the area of exploration well drilling. Their efforts to improve the feet drilled per day could be represented as a 'process design' project. However, by embedding the perspective of Knowledge Management into their efforts, they considered not only how to develop processes for well drilling, but also how to explicitly make sure the resulting innovations were shared across the community of drilling engineers.

As a result of explicitly considering knowledge as an issue, the company was able to not only improve drilling performance, but to organise a supporting knowledge system for drilling engineers that holds information on well by geology, complexity, the process and technologies used, and the geography. Drilling engineers can access these repositories to understand how others have solved problems when in similar conditions. In addition, a network amongst the engineers has been established, covering areas such as topical problem areas, experts and their background and ideas being trialled.

As with the strategy example, this case has embedded knowledge management tools and thinking into it's efforts to innovate and improve the process for drilling exploration wells.

Organisational Change and Growth

A large multi-national client has recently been developing a new approach to it's sales strategy. The agenda is to develop a solutions-based sales capability to rapidly increase sales and to margin the face of increasing competition and commodity pricing for sales of it's highly technical product sales. This will involve moving from average customer account relationships of some £2m to 4m where technical products are provided, to relationships of some £5m to 20m where this company will partner with it's customers to design and develop solutions that help improve the customers' business.

The work has involved assessing competitive position, market opportunity, customer needs, alliances required and the processes and business model needed to fulfil these aspirations. However, the leader of this sales force has also recognised that to succeed, he will need to be able to build and capitalise on new knowledge in a range of areas. These include:

Building a deep understanding of the emerging changes in IP (internet protocol) technologies, as these play a major part in the solutions being developed

Building the tacit capability to identify and develop leading edge solutions for the customer, incorporating multiple technologies

Understanding the capabilities of their own technical organisation, as well as the capabilities of a wide range of alliance partners, who will need to work more closely with the sales teams in shaping these solutions.

As a result, the client is building a learning infrastructure to help build the knowledge necessary. The process being used is 'Action Learning'. Action learning was pioneered by Reg Revans in the early seventies and received widespread recognition through its introduction in his book 'Developing Effective Managers.' The learning unit is a team, and the learning is 'action-centred' - it is based around real business issues. Action Learning espouses the view that the most effective way for individuals and teams to learn is by doing.

The client in question has taken the principles of Revan's Action Learning process and is using it to build conscious and insightful reflection as part of their day to day work. As the project progresses, the Action Learning cycle of plan, apply, reflect, contribute is followed for as long as it is useful. A key element of this is the time allowed for reflection and learning that is built into working on-the-job. At the end of the project, the team takes part in a formal close out event to ensure that the learning is captured for sharing with others facing similar challenges. For example, 'action learning sets' are being established to develop the capability, to begin shaping solution sales at major accounts, and to learn how business developers can best take advantage of existing account relationships.

A Knowledge Management process has been established to identify and implement the processes necessary to capture the lessons being learned, to be leveraged across the global account base and to begin to build the competencies needed to support the sales strategy. Yet again, the tools and perspectives of Knowledge Management have been useful when embedded within a significant business improvement project. Although this is not a stand alone 'Knowledge Management' initiative. The perspective of Knowledge Management is being used to deliberately manage the development and exploitation of intellectual assets.

Summary

As I gain more experience in the area of Knowledge Management, I am finding that the creation of the space and processes for innovation and knowledge creation are the keys to delivering value. In many organisations, the perspective of Knowledge Management is adding significant value to businesses, regardless of whether or not the term 'Knowledge Management' is used.

In the future, I anticipate that businesses will need to understand the role and impact of intangible assets; the role of knowledge in their business and the tools and approaches that are useful in managing knowledge. As familiarity increases, knowledge management will become less of a new fad and more of 'the way we do business' in successful organisations.

Action learning is providing a means for the creation and development of new skills, ways of working and approaches ; in effect, the creation of new knowledge for individuals and teams.

Terry Finerty, is a Partner, Knowledge Services at Arthur Andersen. He can be contacted at: 0171 438 3158
j.terrance.finerty@arthurandersen.com