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How Knowledge Management Is Transforming Commerce

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What is knowledge management and how does it affect your business? James Cortada explains how an effective manager in the emerging digital economy consciously takes overt action to encourage knowledge management and application of inherent corporate competencies.

In the world of business, knowledge is about insight based on the combination of experience, context, and data. It is the understanding people have in their heads about the world they occupy. For an organization, knowledge management is about organizing the use of what is in an employee's mind in some coordinated fashion for the betterment of the firm. For both individuals and firms, relevance of knowledge is gauged by its applicability to the creation of value and wealth. Jack Welch, CEO at GE, often admonished his managers to translate learnings into rapid action, believing that act of translation provides what he called "the ultimate competitive business advantage." Thomas H. Davenport and Laurence Prusak, two leading experts on knowledge management, view knowledge as a corporate asset, requiring managers to invest and protect it much like anything else of value, such as money, stocks, factories, and inventory. As new value propositions emerge over the next few years, sorting out the role of technological collections of systems such as the Internet (which facilitated many types of globalized business transactions and learnings) and informationalized products (such as computer-controlled machines), places an increasing premium on knowledge. Use of knowledge is already a differentiator for a corporation because so many firms can make good products or deliver fine service. However, being able to do new things quickly, and very well, become the differentiators. These require a group of knowledgeable employees organized in a way to get that done.

There is also the question of efficiency. By using computer networks and imaging, for example, an increasing number of firms are able to bring together experts from around the world without the expense and loss of time of putting them on airplanes. Large firms have staff meetings with participants from around the world. Experts on oil drilling meet quickly to solve operational problems threatening the operations of an offshore oil rig in Southeast Asia, but stay in Saudi Arabia or in the Caribbean. A financial officer moves cash assets through various international markets with the advice and help of colleagues working in those markets.

An enormous amount of work has been done over the past two decades to define knowledge management and how it functions as part of the work of business workers. Much of this new knowledge focuses on how organizations collect, codify, and disseminate knowledge within an organization, sharing what is in peoples' heads. These findings are accessible to anyone who chooses to understand them.

A second area of focus concerns development of tools for knowledge management. So far, these have primarily been computer-based, such as Lotus Notes for e-mail and intellectual capital systems, electronic file cabinets available to any employee off the Internet to systems that do data mining. Increasing amounts of work have been done around the theme of how best to design organizations, how to manage knowledge workers (e.g., use of teams and empowerment), motivating and facilitating product development (e.g., 3M's approach), creating new ways of arriving at business decisions quickly and effectively and, of course, establishing strategic alliances.

Pulling various pieces of knowledge together into the strategic management of intellectual capital brings people to yet another frontier in their codex of management practices in the Information Age. There they find others at work as well, such as the economists who are trying to understand how the shift from "brawn to brains" is playing out in this economy, and what kinds of organizations are needed (e.g., something different than the large corporation), while documenting implications for public policy and education. This is work still underway; much remains to be done to define new management practices.

Managerial tasks which require exploiting knowledge can't wait. There are already actions that need to be taken to exploit opportunities in the new economy different from what existed in the Industrial Age. First, managers are beginning to recognize the strategic value of knowledge and are agreeing to protect and exploit it. This is more than traditional patent protections, this involves protecting and nurturing knowledge about their firms' core competencies. Second, employees at all levels of the enterprise are generating, codifying, and coordinating its accumulation, sharing this collection with those who need it the most to do their work. Third, traditional definitions of roles and skills—applied for decades—are taking on a knowledge twist. Fourth, and often done nearly first, executives are creating a digital infrastructure to support the movement of data around the organization. In turn, access to information is making employees more knowledgeable about what they must do and how.

What works well in this new world? For one thing, the practical manager begins with high-value knowledge, that is to say, collecting, preserving, and using information and insight which today most leverages capabilities of the organization in a competitive way. For another, like all good new initiatives, the best of these managers start slowly with highly defined projects—pilot programs and experiments—which they extend as people learn what works and why. For instance, the oil rig experts meet electronically several times to learn how best to attack complex engineering problems and then expand their meetings to deal with a wider variety of issues on a routine basis. Meanwhile, the insight from the original pilot project has generated information and observations which are transferred to other groups of engineers designing new oil rig platforms. Because speed in innovation is so crucial today, tinkering and experimenting along several fronts usually makes sense. The best managers and technical experts (e.g., engineers and consultants) install technological tools to facilitate collection and transfer of information. They create organizations that value and use knowledge (e.g., training programs, delegation of authority, horizontal and distributed organizational structures), and most important, transform corporate cultures into those that reward, reinforce, and promote results in innovation, speed, and action, leading to profits from different ways needed as market circumstances change. Thomas Henry Huxley, the great nineteenth century biologist, got it right when he said, "the great end of knowledge is not knowledge but action." Effective workers do not forget this obvious truth.

Since I am discussing knowledge it is fair to ask, What don't we know? For one thing, managers normally do not know how pilot projects will turn out until they are implemented. For another, most companies are just learning how to apply remote telecommunications combined with video, and know even less about how these will effect the culture of the organization. Today many managers only know that they save travel time, cost of airplane tickets, and make critical resources available in a timely manner. What else should you know? Many managers would like to understand more fully the kind of corporate culture they need. Many experts, typically consultants, sociologists and business professors, understand what that looks like in a university or in a monastery, but not necessarily at Phillips, or even at 3M, or at IBM, firms that leverage knowledge relatively well in comparison to so many others. Is a small enterprise rather than a large corporation the right structure for your business? Is it more like Handy suggests, a cluster of core employees surrounded by partners and allies in other enterprises?

Management in this new age does not absolve itself from action while learning takes place. It still must make decisions, rely on accounting measures of costs and results, and worry about the environment in which employees can develop knowledge, the new gold of the modern economy.

How does knowledge management differ from corporate competencies? Are they the same? I argue they are relatives. Think of knowledge management and knowledge as essentially housed in the heads of employees. To be sure, much information is, and can be, stored and analyzed by computers to augment the skills, and speed with which an employee works, and to point out patterns and correlations. But ultimately, knowledge resides in the minds of people where implicit and explicit insights and information mix with tacit knowledge and experience, often in ways students of the human mind do not yet understand. Personnel practices and corporate cultures should deal with the acquisition and use of knowledge resident in brains. Corporate competencies are the organization's collective skills that transcend any individual. Managing these effectively calls for different business activities. The most crucial concern the tasks required to bring people together in groups such that, for example, it makes it possible for a competency to be used, or a collection of workers to design or build a product. For instance, bringing together all the experts on oil rig maintenance into some virtual community where they can learn from each other and mentor new employees doing the same kind of work is essential. Nurturing a corporate culture that facilitates levering competencies of the organization is equally important. For instance, if the firm knows how to sell globally, it must create measures and rewards that encourage global marketing and selling.

On the other hand, corporate competencies and knowledge management are different. Perhaps their most significant disparity concerns their rate of change. Corporate competencies change far more slowly than individual knowledge. Databases take time to reflect new entries, corporate beliefs about itself are often generational in duration, sometimes lasting a century or more.

Personal knowledge does change and ultimately shrink in value. Remember the rate of new knowledge of doctors and the half-life of engineering knowledge? But the problem extends further than that. Professor Edward Wakin, of Fordham University, makes the point that knowledge is plastic. This is knowledge that can be used as plastic is used, not in a pejorative way, but as a thorough authentic contemporary body of insight useful right now. Like plastic, it can be molded under the heat of changing market realities, whenever a person can make knowledge work in different shapes and forms. Flexibility and utility make it plastic. It is a wonderful metaphor for anyone to use when thinking about acquisition, use, and replacement of knowledge.

Plastic qualities are nice; however, the key point to keep in mind is that an effective manager in the emerging digital economy consciously takes overt action to encourage knowledge management and application of inherent corporate competencies. The second operating principle is that there has to be activity on both fronts simultaneously and constantly. Case studies of dramatic successes always demonstrate that both are present. While incremental exploitation of both inevitably begins with narrowly-focused, small projects in one arena or another, over time they converge and become the "way we do things around here." In short, by thinking of the new value proposition, the value nets business leaders are looking for can be found by thinking in terms of economic ecologies, environments that have knowledge as a strong feature, not simply computers and networks. Balancing what is in peoples's heads with what their computer systems allow them to do proves crucial to the emerging way of work.

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