How to Determine Which Part of What
You Know Really Matters
In
the corporate world, businesses are regularly graded on the value of their
assets: They report to their shareholders about the physical assets they own,
their cash in hand, and revenues and profits, both past and expected. But when
it comes to measuring their knowledge assets — the value of those can be harder
to gauge. However, the entrepreneurial management of knowledge assets can be
critical to the success of any business.
In
this interview with Knowledge@Wharton, Wharton management professor Ian MacMillan, who is also director of the Sol C. Snider
Entrepreneurial Research Center, and Wharton adjunct professor Martin Ihrig, who is also a practice professor in the
University of Pennsylvania’s Graduate School of Education, talk about how
organizations can determine which of their knowledge assets are the most
strategically relevant, and how best to deploy them.
An
edited transcript of the conversation appears below.
What
We Mean by ‘Knowledge Assets’
Martin
Ihrig: Knowledge assets are
the knowledge drivers of an organization’s success. And they can be
unstructured, tacit knowledge. So as an example, there would be the deep
expertise of key personnel. Or knowledge assets can be structured, explicit
knowledge, codified. Examples there would be patents, copyrights and
intellectual proprietary rights in codified form. What is interesting with
knowledge assets is that the more you structure, the more you codify knowledge,
the easier it is to share that knowledge, both internally and externally…. Very
structured knowledge can be shared in milliseconds via the Internet, whereas
deep expertise or experience, it takes more time to share it with other people.
Ian
MacMillan: And the other
thing that I think is important about knowledge assets is to think of the term
“assets” like you would with physical assets. There are some pieces of
knowledge that are just not valuable from the point of view of the firm. And
there are others where that knowledge is basically fundamental to your ability
to compete. And this is where we start to distinguish between “knowledge
assets” and let’s say “strategic knowledge assets,” which are the pieces of
knowledge that make a difference in your ability to compete and prosper.
How
a ‘Knowledge Map’ Works
Ihrig: When it comes to physical assets, you
have a balance sheet that shows you what you own or possess. It’s more
difficult, more tricky when it comes to knowledge. So with a knowledge map, we
intend to really identify the key knowledge resources that underpin an
organization’s competitive advantage. And we map them along two dimensions: One
is the structure of knowledge, unstructured to structured, tacit to explicit.
And the second dimension is the level of diffusion. Do only a few people in the
organization have that knowledge? Do many people in the organization have
access to that knowledge? Or does the competition have access to that
knowledge? Or is it available to the general public?
MacMillan: So what you have is the two dimensions. To
keep it simple, highly diffused or highly undiffused, and then highly
structured or codified and uncodified. So that gives you sort of four blocks in
which you can place your knowledge.
On
the Art of Knowing What’s Important:
Ihrig: When you look at knowledge management
[historically], there was a tendency to try to capture all the knowledge in an
organization. First of all, this is not possible. It’s really hard to capture
all the tacit experience and put it into a computer system. But even if it were
possible, you’d suffer cognitive overload because it’s just too much. So what
we propose is [to] really focus on the knowledge assets that are critical for
success and underpin performance. Those critical knowledge assets should be
mapped so that the management can decide how to further develop [them] to
create growth and competitive advantage.
MacMillan: Associated with that is the fact that you can
take knowledge in the four blocks that we identified, and each one of those
blocks has specific indications for your ability to take that knowledge and go
out and create and capture value from the marketplace.
On
Turning Key Knowledge into Innovation:
Ihrig: The strategic management of knowledge
links knowledge to competitive performance and growth. Now, with the
entrepreneurial management of knowledge we try to understand how innovation is
created in organizations. How do organizations, big and small, create new
ideas, create new knowledge? How is that knowledge then further developed in
the pursuit of innovation? How is it shared and applied to different contexts?
This link to
innovation, which is really important, is captured by the entrepreneurial
management of knowledge. With the research initiative, we tried to create
research that has impact, to really balance theory and practice. The outcome of
the research initiative has been both academic publications and
practitioner-oriented publications. And we’ve also been able to build a new
executive education program at Wharton that deals with the strategic management
of knowledge assets.
MacMillan: And going back to the two-by-two [grid] that
we set up earlier, each one of those blocks has specific challenges associated
with how you strategically deploy that knowledge and how you go about
innovating. So knowledge which is very codified and diffused out and everybody
knows it, the challenges are very, very different from basically being able to
go in the bottom left and capture the expertise of your key people in the
organization and think about how you can use that knowledge to create
competitive advantage.
On
What Can Be Shared, and What Should Not Be:
Ihrig: With knowledge networks, we try to
understand the linkages between knowledge assets: How are they related and how
do they interact? A little example would be looking at a patent on a new
technology: That would be one knowledge asset. And another knowledge asset
would be the experience or the expertise of the key engineer that developed
that patent. So two knowledge assets linked to one another, that’s a
mini-network. So the question is, when we want to be strategic about knowledge
development and the sharing of knowledge, can we give away one knowledge asset
and hold onto another knowledge asset.
So looking at Tesla
for example, which last year opened
up its patents to competitors: They might have given away the patents, but they haven’t given
away the engineers that worked on the patents. So it’s very clever. They give
something, but the competition cannot necessarily do too much with it, because
another part of the knowledge network stays within the organization and is not
shared.
MacMillan: To me, there are two challenges. One is,
as I look at my various knowledge assets, can I think about ways of linking
them? Because if I link two knowledge assets, that allows me to come up with a
new combination, and that might be very, very powerful. Then the other one is,
how do I, particularly with the more tacit types of knowledge, actually
identify that knowledge and where we can get traction using that knowledge in a
competitive marketplace?
Taking
Inventory:
Ihrig: When we think about open innovation and
sharing knowledge or giving away knowledge, before you can decide what to
share, you have to know what to have. So to me the first step in any open
innovation initiative or strategic alliance initiative has to be looking inside
and thinking about what are the critical knowledge pieces that I have. And what
are knowledge gaps, what are knowledge assets that I don’t have and might be
able to source from the outside? So I think it’s really important to have a
strategic knowledge map to think make informed decisions about who to partner
with and what kind of knowledge to obtain from partners.
MacMillan: And if you think about it, combining two
pieces of knowledge in some novel way is the essence of what most or all
entrepreneurs do. And the challenge than becomes, I have a piece of knowledge,
and I may underestimate its true value until I start thinking about who else
might have knowledge that I can link up [with]. I don’t have to have the new
knowledge myself. What I need to do is find some way of identifying whether
that knowledge would be useful [as a component in] some new combination.
On
Convincing People to Share that Valuable Knowledge:
Ihrig: There’s a huge culture and political
dimension when it comes to the sharing of knowledge. And when we look at people
and their motivations, also in terms of their careers, sometimes it’s difficult
to incentivize them to share that knowledge. [But] innovative technology
companies, like for example Google, [find] ways to incentivize people to work
together. … One day a week, you can [work on] whatever [project] you want to
do, but [you must] do it in teams.
So there are ways, I
think, to bring employees together and take [away] the fear of sharing the
knowledge, and make sure that they contribute to a common goal. I think that’s
important — to establish that goal and make everyone feel comfortable to work
in a team.
MacMillan: This might be an opportunity to put up
another chart. This shows you that up in the top left-hand corner of the chart
is where value lies, because what you have is undiffused knowledge, so other
people want it. And you have it. And what you have is highly codified
knowledge, which is easy to replicate and to use.
Here’s where the
dilemma lies: The people up in that top left-hand corner ( SEE FIGURE IN THE
FULL ARTICLE) want to try to keep that value. And unless you formally recognize
that it’s necessary for that knowledge to be spread in the organization so that
you can go forward and prosper competitively, it just isn’t going to happen. So
unless you’ve got some kind of map that shows you where the valuable knowledge
lies in terms of getting fairly early returns on it, people are just not going
to share it.
The second thing is to
start to begin to think about how can I reward people for being willing to
share?
MacMillan: The second point is that if you’re up in
that top left-hand corner, what you really need to identify that the knowledge
is in that [category]. To prevent people from trying to retain the value of
that knowledge by not sharing it, you need to have that formally recognized in
your reward system.
Ihrig: Within the company, you would like to
share all your knowledge, but outside the company, you have to be strategic:
You don’t want to necessarily share your knowledge with the competition. But
once you have the map, once you know what is structured, what is unstructured
and how diffused it is, you can make those strategic decisions.
Four
Blocks, Four Types of Companies:
Ihrig: If you have a look at the chart, what you have
is — in the simplified world — four blocks. And there are companies that
historically have played in each one of those blocks. And it might be
interesting just to talk very briefly about that.
If you look at the
bottom left-hand block, this is where the essence of your knowledge is deep,
tacit expertise, which is kind of hard to articulate. And that’s resident in
the minds and experience of experts. Typically, [the companies] you’d find
there [are] like Goldman Sachs, which is brilliant about being able to use
financial expertise to come up with new kinds of financial instruments that it
can take into the marketplace. And as the old menu changes, it keeps on
changing as well. So the heart of the firm’s knowledge is to be able to tap
that expertise. A much more pragmatic example of that would be Bain, the
consulting firm, which is particularly interested in deeply understanding and
being able to develop new solutions for new problems.
The top left hand side
[are organizations that]would be depending very much on using protected
knowledge that has been patented. So examples to this day of the most prolific
companies in terms of patenting are people like IBM, people like Samsung,
people like Canon. And the essence of their knowledge is to keep on generating
new, protected patents.
As we move to the
right, the knowledge gets more diffused. The companies up at the top right are
companies that are able to come up with new combinations of existing knowledge.
A beautiful example — and in fact the source of the concept of open innovation
— was [CEO] A.G. Lafley at Procter & Gamble, who basically said: “Why do we
have to create new knowledge ourselves, why don’t we go out and find solutions
to the problems?” And this led to amazing products like the Swiffer. It was a
very, very big business and was just created from basically taking old mops and
detergents and [thinking about them] in new ways.
And then, the bottom
right is perhaps the most interesting. That [is where you find companies] that
are constantly experimenting with trying to find new ways of applying their
existing knowledge. And our two favorite examples: The German company Bayer,
which for 110 years has been creating new uses for aspirin; and W.L. Gore,
which is constantly innovating around the use of Teflon.
Ihrig: I think for senior management, it’s
important to think about [this]. What kind of knowledge assets does my
organization have? Is it in the bottom left, the top left, the bottom right,
the top right? And then, how do I want to strategically develop that knowledge?
There are opportunities for growth in each of those quadrants.
To
Learn More:
Ihrig: We’ve just published a Harvard Business
Review article about the topic. We have created a three-day executive education
program at Wharton that helps people understand what is strategic about the
development of knowledge. We have experts like Peter Cappelli talk about the
management of tacit knowledge, talent. Our vice dean for innovation, Karl
Ulrich, talks about technical innovations. It’s an interesting mix of faculty
discussing the challenges that come with managing knowledge strategically.
MacMillan: Martin, when he did his dissertation on the
topic, actually developed a way of simulating the evolution of knowledge by
making some fundamental assumptions about the nature of knowledge and then how
that evolves using different types of strategy for knowledge development. So if
you have a particular knowledge strategy in mind, you can test it in the
simulation, and test 100 years of knowledge development in a few minutes. It’s
a very powerful way of beginning to look at the implications of making certain strategic
moves in knowledge management.
FOR FIGURES AND FULL ARTICLE
http://knowledge.wharton.upenn.edu/article/why-firms-need-to-think-strategically-about-knowledge-management/
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