posted 1 May 1999 in Volume 2 Issue 8
Evolution of the knowledge
In the same way that natural selection chooses the best adapted animals for prevailing environmental conditions, so do companies try their best to cope with and adjust to changing technological environments. Here Basilis Masoulas outlines the Knowledge environment evolution, and advises on how companies can stay ahead in the survival of the fittest.
The dynamic nature of the business environment obligates organisations to constantly look for new ways to adapt to this environment and to survive. Organisations seek new approaches to increase their competitiveness.
It is from this search that a new strategy has evolved which recommends a change from the current focus, based principally on management of financial and tangible assets (buildings, machines, etc.) to a new approach based on management of the intangible assets [Drucker, 1993 and 1994], [Hudson, 1993], [Nonaka et al, 1995], [Quinn, 1992], [Romer, 1986]. This approach has been called “Knowledge and Intellectual Capital Management” (K&ICM). The objective of K&ICM is to support the production processes with processes that support innovation, learning, experience distribution and brokering.
Companies can be classified into those that produce tangible products (i.e. Ford, British Petroleum or CEMEX) and those that produce intangible “products” (i.e. solution providers like Shell Services International, Ernst & Young, Monsanto, or Harvard University). Both have proved that they require efficient management of their K&IC in order to improve their business results. The increasing demand for management of an organisation’s K&IC gave rise to the development of the “K&IC Management Practice” and of the corresponding technology for implementing it (ORDIC Methodology, see later). As will be demonstrated in this paper, the above have been applied with good results in companies in various sectors (including education, financial services, manufacturing and IT).
The knowledge era
In the same way that human beings have had to adapt to their environment in order to survive, organisations have had to pass through a process of evolution in order to be able to adapt to the environment in which they operate.
Five fundamental concepts can be derived:
a) The objective of an organisation ranges from the production of tangible products to the production of intellectual services and products.
b) The basis for achieving economic growth has been progressing from tangible (land and machinery) to intangible assets (information and knowledge), i.e. the more competitive an organisation needs to be, the greater access to and use of knowledge it requires.
c) The organisational structure is evolving from strictly hierarchical to collaborative due to the fact that knowledge grows through the sharing and challenging of ideas.
d) The principal resource for a company’s output in the Knowledge era is an intrinsically human and inexhaustible resource i.e. ideas. The goal is to establish a system of production processes based on knowledge and innovation using ideas as the raw materials. This is radically different from the goal in previous eras.
e) Technology is focused on facilitating production processes by supporting the acquisition of existing knowledge (learning), the creation of new knowledge (innovation), the sharing of knowledge (collaboration) and distribution of knowledge (consulting).
In the Knowledge Era new product and new production processes that use different types of intangible input are paramount in importance. In order to optimise these processes and increase the flow of ideas, management should put emphasis on intangible assets like innovation, information, and also people skills, experience and attitudes.
Assets of organisations
Thus it is apparent that we are living in an era in which the value of knowledge is continuously increasing. This gives rise to the need for managing knowledge effectively in order to achieve business results. To understand the implications of this need, in this section knowledge management will be analysed both in terms of content and process.
In terms of content, knowledge can be classified as tacit or explicit [Nonaka & Takeutchi, 1995]. Tacit knowledge is what we know how to do, but is hard to explain. Explicit knowledge is structured tacit knowledge in a form that can be explained and transmitted to others.
Explicit knowledge is presented in the form of information. Tacit knowledge includes experience, skills of people as well as the ideas they generate. What is key in order to manage tacit and explicit knowledge is people’s attitudes. It has been proved that attitudes are key both in documenting, structuring and accessing knowledge in the form of information as well as in sharing experience, applying existing skills and generating new ideas. In terms of process, it can be derived that knowledge can be:
|Created through activities of basic research and innovation|
|Acquired through activities of learning or merger and acquisition|
|Sold/Distributed/Transferred through consulting, experience sharing|
|Brokered through alliance development or through eCommerce of skills and experience|
The first three subprocesses are intimately related. On the one hand, the need to acquire and/or create knowledge arises from the need to transfer and apply this knowledge to resolve a problematic situation. On the other hand, the transfer and application of knowledge in a problematic situation is what facilitates (a) the learning of the explicit knowledge related to the problem at hand and (b) the innovative solution of new problems which arise as a result of the specific context.
Knowledge brokering is the process through which knowledge from different sources and disciplines can be combined in order to create/add value. The “owners” of this knowledge may or may not be members of the same organisation. The party acting as intermediary implements a procedure similar to that currently undertaken by financial capital brokers:
1. Receives capital deposited by its customers, paying them an interest of X
2. Makes investment packages available to others out of the sum of this capital, charging them interest of Y%(>X%)
3. Profits from the difference of (Y%-X%) and/or a part of the value created through the capital investment
Simple examples of what can be described as a Knowledge Intermediary include the role of a “head hunter” (does not have the skills required by an organisation but knows where to find them and charges for linking the demand to the offer); the role of a project manager (does not have the specialised skills required to complete the project but knows how to get access to and manage the people who have them); the role of a venture capital company or bank (brings together required skills and meets the individual interests of the holder of financial capital, the holder of the brilliant idea and the holder of the skills).
All the above KM sub processes can be defined at two levels: individual and organisational. To clarify this dichotomy let’s focus on the Knowledge Acquisition sub process. Individual learning can be described as a cycle in which the person assimilates new information, associates it with past experience, reflects and finally modifies/adapts his behaviour. In the early stages of the existence of an organisation, organisational learning is frequently synonymous with individual learning as it involves a small number of people. However, when an organisation increases in size, the organisational learning process involves translating individual actions into organisational actions, producing a congruent response to the situation. This response provides feedback and affects individual learning which in turn influences individual mind models.
To establish the link between the content and process perspectives in terms of knowledge based on earlier structure it can be observed that the objective of the process of acquisition of knowledge at the individual level is that of making “tacit” the explicit knowledge of the organisation. On the other hand, at an organisation level the objective of the process of acquisition of knowledge is to make “explicit” the tacit knowledge of the individuals. The same holds for all four subprocesses of Knowledge Management.
Knowledge as an asset of an organisation
During the last 4 or 5 years the idea has been brought up very often that knowledge itself has now come to explicitly form part of the value chain (e.g. [Stewart, 1994 and 1997], [Edvinsson et al, 1997]. It is said and documented that any organisation which restricts itself to the use of the traditional indicators will be measuring only a small part of its assets [Drake, 1995]. Based on this, substantial efforts have been made to help organisations understand how this happens and manage it. In this context for example, Drake speaks of a “new balance”, in which in order to determine the market value of a company, aspects such as intellectual capital, human capital, structural capital, etc. are taken into account. As a result of this new approach of including intangible assets in an organisation’s accounting, the role of Chief Knowledge Officer or Intellectual Capital Manager has been born. Many organisations acting as early adopters have participated in these efforts. There are companies that have developed/acquired and put in place “enhanced” measuring and accounting systems, document management systems, web applications etc. A famous early adaptor and protagonist in these efforts is Skandia.
Consulting firms very soon anticipated the market and are now offering “knowledge management” systems. Nevertheless, the outcome of these efforts does not seem to be convincing. Organisations are confused. Often when consultants talk about “intellectual capital” and “knowledge management” it appears that what they really refer to is “intellectual property” and “information management” respectively. As a result, many organisations either see Knowledge Management as another fad, or do not believe there is yet a proved method or tool for managing their intangible assets.
Consequently, the value of organisational assets is still perceived to be the sum of all the tangible items plus something else. Its still not clear what that something else is or how it can be managed. To avoid any confusion here are some definitions of terminology in relation to knowledge and intellectual capital:
|Intellectual Capital: The combination of the intangible assets which add value to the organisation’s effort to achieve its targets|
|Intangible Assets: Corporate assets without physical presence; these include information, innovation, experience, skills and attitudes of the employees|
|Human Capital: Employee skills which are of value to the organisation and which can be developed through monetary investment (i.e. on developing and implementing learning systems)|
|Structural Capital: The tools used in order to manage tangible and intangible assets; they include data bases, client and supplier archives, software, procedures manuals, etc.|
|Intellectual Property: Tangible assets resulting from the Knowledge Creation sub process, over which someone has legal rights.|
The intention of these definitions is to distinguish between Intellectual Capital and Intellectual Property. For example, a patent is a tangible object which can be bought or sold exactly as any other. This does not apply to intangible assets. The definitions are also meant to help us distinguish between Structural and Intellectual Capital. The latter is the combination of intangible assets that help a company achieve its goals while the former is a set of tools that the company uses to manage tangible and intangible assets.
Current requirements of companies
An analysis of the most recent of the manifestations which have occurred since the start of the century shows firstly that, from an economic point of view, it is knowledge rather than labour or financial capital which is the key resource. Secondly, from the social point of view, differentiation based on knowledge is the greatest challenge [Drucker 1994]. As Drucker explains, we are living in the age of knowledge, meaning that organisations are confronting new needs, such as those presented in the following.
The need to determine and share the tacit and explicit knowledge which already exists within an organisation. For some companies the principal problem is not that of creating knowledge but rather of knowing how to determine its existence and share knowledge which already exists within the company or within a department, a division, or even in the minds of the workforce [Hiebeler, 1996].
The need to determine what information is relevant to whom. The key within organisations is to develop a group with the skill to know what information adds value or, more precisely, in what circumstances a particular fact becomes relevant and to whom [Mullin, 1996].
The need to use to the best advantage all the knowledge involved in the design process. A company dedicated to aircraft design shows itself to have “islands” of knowledge: a programme here, another programme there; engineering here, assembly and testing there. And of course, customers and suppliers are also islands of knowledge about their products. This type of environment increases production costs [Leo and Ward, 1996].
The need to benefit from innovations created by the company. According to the National Confederations of Micro and Small Industries, 99.9 % of companies do not register their technology or patent their inventions.
The need to ensure that learning takes place in a deliberate and organised manner. In the era of knowledge, the rate at which individuals and organisations learn can become the sole source of competitive advantage. Unfortunately, this learning frequently happens by accident and not as the result of a deliberate intention to deepen understanding. As a result, learning can be confined to small parts of the organisation [Dixon, 1993].
The need to retain access to the knowledge and experience of a person when this person leaves the company or is given a different job. This type of problem is common to the majority of organisations.
The need to remunerate, train and create the necessary environment in which an individual and a team can innovate and grow. The survey, “Competing in a Global Economy” which includes the responses of senior executives in 2,143 companies in 23 countries reveals that there are three principal issues of concern regarding the workforce: the development of leadership, performance-related payment and training and development.
The need to share knowledge. Knowledge sharing must be intentional, methodical and effective. The first two are aspects related to people attitudes, while the third depends on having the tools and the means to share significant knowledge throughout the length and breadth of the organisation (adopted from [Rogers, 1996] and adapted).
By analysing these needs it can be seen that in general, organisations are facing the following challenges:
|To create an environment which promotes the efficient creation, acquisition, application and distribution of knowledge. The word “environment” makes reference to the existence of appropriate processes, structures and support systems (soft and hard).|
|To prevent the “knowledge drain”.|
|To protect and take advantage of the product of the company’s innovation (intellectual property).|
|To redefine the business functions creating value brokering systems that help identify who knows what and link her/him with knowledge demand.|
|Companies need to recognise the nature and value of their intangible assets. They need to and to establish a strategy which allows them to manage both their tangible and intangible assets in an integral form.|
Managing organisational knowledge & intellectual capital
As already mentioned, several authors have already discussed the importance of Intellectual Capital and have made contributions in terms of putting in place knowledge based production processes and systems that help manage it. Nevertheless, company response make it evident that although they recognise the importance of Intellectual Capital, it has not yet been clearly established how to introduce these new knowledge-based production processes into an organisation. In the following sections this concern will be addressed. A process for managing an organisation’s Knowledge & Intellectual Capital will be presented together with a systemic, participative and human oriented approach. Furthermore, formal implementation results in companies of different industrial sectors will provide evidence of its effectiveness.
As discussed in previous sections, in this paper Intellectual Capital is considered as the combination of innovation, information, experience, skills and attitudes which allows the employees of an organisation to undertake their work, adding value for themselves, for the organisation and for society [Masoulas 1997a]. In order to enable the management of organisational Knowledge and Intellectual Capital, appropriate technology has been developed. This technology is the result of 6 years of applied research and development with participation of the industry and academia. Furthermore, it has proved to be very effective in its application to companies of different sectors. This technology takes into consideration three fundamental aspects [Masoulas, 1997b]:
The systemic aspect. The actions and elements in an organisation are interdependent. Therefore, Intellectual Capital management requires a systemic vision which ensures that all these interdependencies will be properly addressed. The proposed technology offers a systemic model and a set of tools to support that.
The human aspect. All organisations have in common the fact that they are formed from people and that it is people in whom experience reside. Through them, ideas are generated and knowledge is applied. The question is how to ensure that people continue to develop ideas, apply their knowledge and share their experience. How do we link individual growth to organisational growth based on knowledge? These are the main questions answered by the proposed technology as it establishes a positive reinforcement cycle which allows the benefits of personal development to be translated into benefits to the organisation and vice versa.
The participative aspect. This aspect is fundamental in ensuring the involvement of the users of the Intellectual Capital management systems in the process of designing them. The intention is that they become the owners of these systems and are able to define their needs and to generate and evaluate design options.
Note that the term “technology” as it is used here covers processes, structures, methods, tools and systems, both hard and soft in nature. This technology includes ORDIC methodology and Changeland5 environment.
ORDIC (Organisational Requirement Definition for Intellectual Capital) is a formal methodology for participative definition and design of social, intellectual and technological systems. The underlying concept is that the macro-tasks of an organisation are achieved by means of the assignment of responsibility for the various sub-tasks to members of the organisation, guaranteeing the alignment of individual objectives with those of the organisation [Masoulas, 1997c]. ORDIC is designed to facilitate integration of Intellectual Capital systems and production systems. This is achieved through:
|Identification of individual and organisational needs in respect to innovation, skills development, motivation, access to experience and information.|
|Exploration of the implications of possible Intellectual Capital systems to meet these needs (i.e. systems for innovation management, learning, selection, reward, career development, retirement, information management and experience management).|
|Changeland is an environment that allows the integrated implementation of the four functions of Knowledge Management (innovation, learning, consulting and brokering). The Changeland environment is composed of the following:|
|A process that implements the four functions of Knowledge Management|
|A structure based on networked communities (value communities, provider communities, allied communities, customer communities);|
|The systems that support the networked communities in implementing the process.|
Results obtained from the management of knowledge & intellectual capital
As has already been said, one of the keys of ORDIC and Changeland is their applicability to a wide range of organisational problems in different contexts, cultures and structures. This statement is supported by more than 65 analyses undertaken by Masoulas 
and others in the following industrial sectors: telecommunications, chemical analytical services, financial and banking services, the food and beverages industry, construction, domestic appliances, and the automotive industry. For the purposes of this analysis, a survey was performed to measure the degree to which the design of an organisation is consistent with the principles proposed in the Knowledge & Intellectual Capital Management practice. In carrying out the survey it sought to measure six organisational dimensions
Each dimension is measured by several questions (100 in total). Since organisations are unique in terms of their history, goals, social systems, technical systems and environments, not all questions apply to every organisation; nor is the high end of each scale ideal in every instance. Generally speaking however, the closer the organisation is to the high end of each question (“5” on the 5 point scale) the better it is considered for managing its Knowledge & Intellectual Capital.
The survey was conducted in 65 companies in different sectors, before and after the implementation of measures to help with the management of their Knowledge and Intellectual Capital and achieve superior business results. The overall results presented in Figure 2 show an upward movement in all the dimensions in the 8 months following the introduction of the ORDIC and Changeland technology. Variations in improvement of the different dimensions where expected due to underlying correlation between dimensions (e.g. innovation and environmental agility are correlated to most of the other dimensions) and the short time gap between implementation and post-doc application of the survey (8 months).
This paper has highlighted the evolutionary process through which organisations have been going in their journey through the knowledge era. The two types of knowledge have been briefly discussed, the processes related to them were described and the importance of including knowledge in the company’s value chain was addressed, together with the fact that knowledge should be considered as forming part of the company’s assets. As a result, the need was defined for the management of the Intellectual Capital of the organisation. In response to the need for companies to consider the innovation, experience, information, skills and attitudes of their people as the new intangible assets to be managed, this paper proposes that this should be based on Intellectual Capital Management Theory. Appropriate technology has been developed to be implemented in organisations and consists of (I) Changeland processes, networked community based structures and support systems and (II) ORDIC methodology for participative design of systems based on the definition of individual, organisational and social requirements. On the basis of the results demonstrated in this paper, this technology could help companies grow and keep themselves profitable through the establishment of production processes based on knowledge.
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1. B. Masoulas (Virtual Centre for Knowledge & Intellectual Capital Management)
2. B. Masoulas (Virtual Centre for Knowledge & Intellectual Capital Management)
3. B. Masoulas (Virtual Centre for Knowledge & Intellectual Capital Management)
4. Changeland is registered trademark of Virtual Centre of Knowledge & Intellectual Capital.
Basilis Masoulas is the global programme manager for Knowledge and Intellectual Capital at Shell Services International. He can be contacted at: