Knowledge Capabilities as the Focus of Organisational Development and Strategy

Ross Dawson
Published in Journal of Knowledge Management

Abstract

Knowledge organisations perform knowledge processes, using their primary resources of intellectual capital, and their key input of information. Their effectiveness in performing these processes depends on their knowledge capabilities. In most cases these capabilities must be highly dynamic in order to respond to the changing environment of the organisation and resulting evolution of the required core knowledge processes of the organisation. All organisational development must be centred around developing those dynamic knowledge capabilities on an ongoing basis. The strategic capabilities of an organisation depend on its ability to process rapidly changing information and perspectives on the organisation and its business environment, so these are in fact high-order knowledge capabilities. The development of organisational knowledge capabilities can be addressed most completely by considering the four fields of individual technology, organisational technology, individual skills and behaviours, and organisational skills and behaviours.

1 Introduction

The term “knowledge management” is used to refer generally to all efforts to enhance and increase the value of the generation, sharing and application of knowledge, however the phrase implies that knowledge already exists and needs to be managed, with connotations that knowledge is a relatively static asset (cf. “property management” and “asset management”). Particularly to managers who are new to the field, this can result in a misconception of the nature of management efforts relating to knowledge.

By examining the nature of knowledge organisations, it becomes clear that their fundamental processes are knowledge-based, and that value is created for the organisation and its clients through those knowledge processes. An organisation’s knowledge capabilities determine its effectiveness at creating value through those processes. As the underlying knowledge processes are highly dynamic, the capabilities used in performing those processes must also be dynamic. It is most useful for managers to focus on the dynamic knowledge capabilities of the organisation, and how these can be developed on an ongoing basis.

Organisational strategy deals with the relationship between the organisation and its environment. This is clearly an extremely dynamic process, as there is an increasingly rapid pace of change in all organisations’ environments. Strategy is based not only on identifying the core competences of the organisation which will be reinforced rather than eroded over time, but also on responding rapidly and effectively to changes in its environment.[1] Since this process depends on relating changing external information to the intellectual capital of the organisation in a dynamic process, this is a very pure example of the implementation of organisational knowledge capabilities. Effective real-time development and implementation of strategy—which is essential for organisational success—depends completely on the organisation’s knowledge capabilities.

Having reframed the management of knowledge in organisations as the ongoing development of the organisation’s knowledge capabilities, we must find practical approaches to achieve this. We present a framework for implementing initiatives to develop organisational knowledge capabilities.

1.1 Information and Knowledge

To understand the nature of knowledge in organisations, it is important to distinguish between information and knowledge. We provide a working definition of knowledge as “the capacity to act effectively”, and see this as an attribute of people, with currently only few exceptions in narrow domains.[2] In contrast, we define information as anything which is or can be digitised.[3] These are linked through the processes of internalisation of information into personal knowledge, and externalisation of personal knowledge into information.[4] These processes have major deficiencies, however, partly as people can know far more than they can communicate to others.[5]

This distinction helps to clarify the difference between information management and knowledge management. Information management is confined to the management of digitised information, and thus is a subset of knowledge management, which deals with all aspects of how people in organisations are enabled in performing knowledge-based functions. This includes providing effective interfaces with repositories of digital information, however it ultimately encompasses almost all aspects of management. In the same way, information capabilities are a subset of knowledge capabilities, so when we refer to knowledge capabilities, this encompasses both the organisation’s capabilities at dealing with digital information, as well as the broader organisational capabilities which are enabled by these.

2 The Nature of Knowledge Organisations

Today virtually all companies can be considered to be knowledge organisations, in that knowledge is their primary resource and source of differentiation. This is most obviously true in services and information-based industries, but it can be—and often is—applicable in industry sectors such as manufacturing and mining. While knowledge is applied in very different ways in each industry, the essential knowledge-based processes are the same, meaning that a model of knowledge organisations can be developed which can be applied across a wide variety of companies. Here we will examine the resources, inputs and processes of knowledge organisations, and how they create value for clients.

2.1 Resources of Knowledge Organisations

Clearly the primary resources of knowledge organisations are not the traditional ones of financial capital, land, and plant and equipment. The new field of intellectual capital has been developed specifically in order to understand the nature and value of the intangible assets which are the foundation of the productive capacity of knowledge-based organisations. A number of authors and practitioners, including Sveiby,[6] Edvinsson and Malone,[7] Roos et al.,[8] and Brookings[9], have developed frameworks to categorise intellectual capital. Synthesising and adapting these proposals yields three groups of intangible assets[10]:

Human capital. The skills and capabilities of the people in the organisation, working individually and in teams.

Structural capital. Organisational infrastructure (including technology such as databases), and processes which do not depend on key staff.

Relationship capital. Relationships with clients, suppliers, distributors, partners, alliance members, academics, regulators and others, as well as organisational image and brands.

These three categories of intellectual capital comprise the primary resources of knowledge organisations. While financial capital, land and other resources can also be important resources of knowledge organisations, the primary resources are the intangible ones. Organisations with sufficient intellectual capital are currently experiencing no difficulties in raising the financial capital they require.

2.2 Inputs of Knowledge Organisations

Knowledge organisations may well deal with goods as well as services, and as such will sometimes have substantial physical inputs to their operations. However in organisations for which their differentiation stems primarily from knowledge, the primary input is information. Where companies specifically provide information and knowledge-based services and products, information is very clearly the raw commodity to which they add value in their ‘production’ processes. In the case of knowledge organisations which have physical outputs, information is still often the most important input, however it is primarily applied to enhancing the production processes, as well as the strategic and marketing decisions which usually provide the bulk of the value created by an organisation.

2.3 Processes of Knowledge Organisations

The processes of knowledge organisations are the means by which value is added to raw inputs in order to create value for their clients. The specifics of this will of course vary substantially across industries, however for knowledge organisations the fundamental knowledge processes are essentially the same. There are three primary knowledge processes which are common across knowledge organisations:

Adding value to information. This is the central function of many organisations today, resulting in both information products which create value for clients, and internal information which enables better decisions. It is in fact a composite of many processes, which to create a high level of value must be directed to a specific audience. At the input stage, people must filter information overload, and to do this engage in sensemaking of information,[11] and recognise emergent patterns.[12] Filtering is the first key process of adding value to information; the other key processes are validation, analysis, synthesis, presentation, ease of access, and customisation.[13]

Generating, capturing and sharing knowledge. Capturing and sharing knowledge is necessary for knowledge organisations to develop their capabilities and maintain or enhance their competitiveness. To a large degree this involves the interplay between human capital and structural capital: if knowledge is effectively captured this means that human capital is converted to structural capital, while for people to be most effective at their functions they need to tap knowledge which has been captured as information. Knowledge captured as structural capital can include both databases of information, as well as processes which enable people to perform tasks more effectively. Generating knowledge—in other words innovation—is essential to knowledge organisations, as the value of knowledge is ephemeral, and organisations must continually create new knowledge in order to develop and maintain their competitiveness.

Another perspective on generating, capturing and sharing knowledge is that it is the means to achieve the greatest productivity from the organisation’s intellectual capital resources, and its information inputs.

Applying knowledge. To have value knowledge must be applied within a specific business context to create value. This will be done differently depending on the industry, however the underlying processes are often very similar, drawing on people with diverse expertise and knowledge both to enhance existing value chains, and to create new ones. Specific examples where knowledge is applied to create value include product development, process enhancement, marketing, and all client interaction.

2.4 Creation of Value for Clients

Organisations most commonly build shareholder value by creating substantial value for clients, and appropriating part of that value through financial or other exchanges. As we have seen, the underlying processes of all knowledge organisations are essentially the same, however in different industries value is created for clients in a wide variety of ways. One important way in which value is created is by saving money, time or effort for the client; this is implemented in for example more favourable price, convenience or reliability. The nature of value creation for individual and organisational clients is substantially different; in the case of organisational clients, a very high level of value is created by enabling the client organisation in turn to create greater value for its own clients. Perhaps the highest level of value creation through the direct application of knowledge is actually making the client more knowledgeable. This will become an increasingly important source of client value as knowledge becomes more central to economic value, and the differentiation provided by other sources erodes.[14]

3 Dynamic Knowledge Capabilities

In examining the functions of knowledge organisations, the dynamic nature of knowledge becomes clear. Their functions are an ongoing process of gathering information and knowledge, integrating that into existing organisational knowledge, sharing and leveraging it, and appying it to create value for clients. The success of the organisation depends wholly on its ability to perform each of these processes more effectively. These are the organisation’s knowledge capabilities, which are the foundation of organisational success. It is far more useful to think in terms of developing the organisation’s dynamic knowledge capabilities than about knowledge as a static asset which needs to be managed.

3.1 Knowledge Processes and Knowledge Capabilities

We have seen that the functions of knowledge organisations are based on knowledge processes, many of which are fundamentally similar across organisations, even those in quite different industries. The success of knowledge organisations depends largely on how effectively and efficiently they can perform those processes. As such knowledge capabilities can be understood as the capabilities of organisations to perform effectively the knowledge processes on which their success depends.

3.2 Dynamic and Static Knowledge Capabilities

The specific knowledge processes which have the greatest impact on organisational value creation are different for each organisation. In some cases, there is a large existing base of knowledge or intellectual capital which can be leveraged with appropriate initiatives. An example is where a company owns many patents which are not being fully exploited, either directly in production or licensing, or through undertaking research which builds on the intellectual property. Dow Chemical, for example, began its knowledge management initiatives by seeking to leverage its existing base of patents. Another example is where organisations endeavour to capture the knowledge of their staff in expert systems. The kinds of knowledge capabilities required to achieve these tasks are relatively static in that the central tasks remain the same over time, and there are generally not severe time pressures, however these capabilities can be developed and improved as they are applied.

Other organisations require geographically distributed teams to collaborate effectively on client projects, or to add value to information on a real-time basis. The timeframes and rapidly changing parameters of these tasks means that the knowledge capabilities which determine their success must be highly dynamic. This situation is more representative of the knowledge processes that are central to organisations today, especially in key areas such as product development and marketing.

Each organisation requires a different set of knowledge capabilities to perform its core knowledge processes effectively. Some of these capabilities may be relatively static in nature, however all organisations require dynamic knowledge capabilities, in particular in their market and strategic responses. Shifts in the business environment are resulting in an increasing emphasis on dynamic rather static than knowledge capabilities. Since static capabilities can far more easily be emulated, dynamic capabilities must be at the source of any sustainable competitive advantage.

3.3 Scope of Knowledge Capabilities

In the case of ‘pure’ knowledge organisations, which provide information and knowledge-based services, almost all of their core capabilities are essentially knowledge capabilities. While these can be fairly diverse in nature, seeing them all as knowledge capabilities not only helps to gain greater insight into the common aspects of those capabilities, but is very valuable in designing initiatives to develop and reinforce those capabilities.

3.4 Knowledge Capabilities as Meta-Capabilities

In the case of organisations which have physical outputs or provide services which are not heavily information or knowledge-based, knowledge capabilities can be seen as meta-capabilities, in the sense of developing other lower-order organisational capabilities.[15] In this way, knowledge capabilities have the greatest leverage and impact on overall organisational performance.

Argyris has differentiated between single-loop and double-loop learning; single loop learning results in better ways of doing things within existing norms and assumptions, while double-loop learning involves questioning and changing those norms and assumptions.[16] This is both intrinsic to the concept of knowledge capabilities, and to their dynamic nature, in terms of being able to evolve and adapt to rapidly changing conditions.

3.5 Knowledge Capabilities and Organisational Development

Knowledge capabilities are at the heart of the effectiveness of organisations. Since the market and competitive environment of all companies is rapidly changing, the value of existing capabilities will quickly decay, resulting in a lack of competitiveness. It is an imperative for organisations to focus on developing their knowledge capabilities on an ongoing basis, or they will face extinction. Organisational development must be centered on the continual enhancement of knowledge capabilities, as the foundation of organisational effectiveness in all fields.

4 Strategy and Knowledge Capabilities

Organisational strategy defines the organisation relative to its environment. This includes defining the core competences of the organisation—that which distinguishes it from its competitors—and how these result in sustainable greater value creation for its clients and itself. The establishment of the strategic positioning and direction of an organisation—and the implementation of that strategy—are almost certainly the factors which have the greatest impact on its success.

4.1 Strategic Capabilities are Knowledge Capabilities

Since strategy is all about the relationship between the organisation and its environment, its success depends on the effective gathering, filtering and synthesis of information about both the organisation itself, and the organisation’s environment, including how current and future developments may impact it. As such, capabilities in scanning, sensemaking and pattern recognition in the organisation’s environment—which are core knowledge capabilities—are also fundamental to its strategic capabilities.[17] These are the key capabilities in interfacing with the external environment, however value must be added to that information by making it relevant to the issues and decisions that face the organisation. Again, this is a core knowledge capability, which is a central process not only in how the organisation creates value for its clients, but also in being able to make effective strategic decisions.

The pace of change in the business environment means that strategic plans can no longer be set for a fixed term and then implemented, but must continually evolve in response to management’s evolving understanding of the organisation in the context of its environment. The ability to implement real-time strategic response is becoming the core strategic capability, which underlines that it is a knowledge capability, and that organisational knowledge capabilities must be dynamic.

While strategic decision-making is usually concentrated at a senior management level, the knowledge which is required to establish an effective strategy must be obtained from and filtered through the organisation. This filtering and concentration of input into strategic decision-making is perhaps the most valuable knowledge process of the organisation, as the quality of the long-term strategic decisions of the organisation—which are the greatest determinant of value creation—depends on its effectiveness.

5 Developing Organisational Information and Knowledge Capabilities

Since information and knowledge capabilities are the source of competitiveness, and the heart of organisational development and strategy, organisations must focus on developing these dynamic capabilities. Here we present a framework which is valuable for establishing and monitoring these initiatives.

5.1 Domains for Developing Knowledge Capabilities

Knowledge organisations almost by definition depend on knowledge workers, who are at the heart of the processes that create the most value for the organisation and its clients. These individual knowledge workers and their ability to add value must form a focus for development. These individuals, however, work within an organisational context that provides them with an infrastructure and framework that enables them to maximise their value creation. In terms of developing knowledge capabilities, the key aspect of the organisational context is the flow of information and knowledge, which is fundamental to how an organisation comprised of many individuals can create greater value than those individuals working separately. Thus the two domains on which we must focus in developing knowledge capabilities are the individual and organisational levels.

5.2 Means for Developing Knowledge Capabilities

Technology is clearly invaluable for enhancing capabilities at dealing with and adding value to information and knowledge; it is a primary means of developing knowledge capabilities. This alone is insufficient, however; the skills and behaviours of people in fact provide the bulk of the added value in knowledge processes. Certainly technology has little value unless it is complemented by effective skills and behaviours on the part of those using the technology. Thus the two primary means of developing knowledge capabilities are technology, and human skills and behaviours.

5.3 Four Fields for Developing Knowledge Capabilities

Applying the two domains of developing knowledge capabilities of the individual and the organisation, and the two means of developing knowledge capabilities of technology, and skills and behaviours, yields a two-by-two matrix. Each of the four fields in the matrix represents a key area for developing knowledge capabilities. While developing each field on its own will result in greater organisational knowledge capabilities, each one relies substantially on all of the fields; to achieve large and sustainable gains in capabilities all four fields must be addressed and developed on an ongoing basis. Here we briefly describe some of the specific tools and initiatives which can be used to develop each of fields, as shown in Table 1.

Table 1. Four fields for developing organisational information and knowledge capabilities, with examples of focal issues, processes and tools.
Individual use of information and knowledge Organisational flow of information and knowledge
Technology Search enginesE-mail filters
Intelligent agents
Information visualisation
E-mail
Intranets and groupware
Knowledge yellow pages
Videoconferencing
Skills and behaviours Filtering information overload
Analysis
Synthesising ideas
Decision-making
Organisational culture
Teamwork and team objectives
Group processes
Communication skills

Individual Technology. This refers to technology which can increase the effectiveness and capabilities of knowledge workers. Some of these tools are already commonly implemented in knowledge organisations, such as search engines, e-mail filters and rule-based push technology. Others are only just beginning to be implemented, such as intelligent agent technology. A critical aspect of individual technology is facilitating the internalisation of information as personal knowledge by people; the importance of information visualisation and similar tools will rapidly increase.

Organisational Technology. Digital technology is an extremely powerful tool for assisting the organisational flow of information and knowledge, and most knowledge management efforts are focused on the implementation of this technology. At the simplest level this introduces e-mail and shared storage of documents, moving on to intranets, threaded discussion boards and knowledge directories. The key elements are effectively capturing individual and organisational knowledge in digital documents, and making these easily available to others across the organisation, or possibly discriminately ‘pushing’ these to individuals who may find them useful. Collaborative filtering, in which users rate the value of documents, can greatly increase the effectiveness of these processes.

Individual Skills and Behaviours. The effectiveness of knowledge workers—whatever the field in which they work—depends on their basic information and knowledge skills. Since their tasks are dealing with information, adding value to that, and using it to create value for others inside or outside the organisation, their abilities at these tasks are intrinsic to the organisation’s knowledge capabilities. These knowledge skills include filtering information overload, reading and note-taking, analysis, synthesising ideas and information, communicating concepts and knowledge to others, and of course skills in using technology. While high-level professionals may be already excellent at these tasks, their skills can always be developed further. Organisations should embed development of these fundamental knowledge skills into all of their internal training and development programs.

Organisational Skills and Behaviours. Even when the other three fields are well developed, if an organisation’s culture and internal behaviours do not support its knowledge capabilities, these will remain largely ineffective. People may have the infrastructure and ability to share knowledge and work effectively with others within knowledge processes, however they also require the motivation to do so, and ultimately this depends on the organisational culture and the behaviours manifested. Some of the key enablers are leadership, remuneration and recognition.[18]

5.4 Developing Strategic Capabilities

The preceding matrix has mapped out the key areas which must be covered in order for an organisation to develop the full spectrum of its knowledge capabilities. As we have seen strategic capabilities are knowledge capabilities, however they are highly specialised; as such they can be developed with a high degree of specificity.

Since strategy depends so largely on understanding changes in the organisation’s environment, as well as the organisation’s competences and capabilities relative to that, filtering, gathering, synthesising and sensemaking of information from both external and internal sources is critical to strategic capabilities. Some elements which will assist greatly in this are developing the skills of key individuals in their abilities in filtering and sensemaking, developing technology both to assist in scanning external information and in communicating high-value information to decision-makers, and building a culture which encourages market intelligence from front-line sales and support staff to be channeled to decision-makers, as well as distributing decision-making within the organisation.

Strategic capabilities are perhaps the most dynamic of organisational knowledge capabilities—a relatively static approach will not keep pace with environmental change, and places the organisation at substantial risk. Since the dynamic aspect of knowledge capabilities depends largely on individual and organisational skills and behaviours, these must be developed specifically in order to build a high degree of responsiveness, and a willingness to re-examine continually the frameworks and implicit mental models of individual and organisational strategic thinking.[19]

6 Conclusion

The nature of all knowledge organisations is similar in the way they apply knowledge and their primary resources of intellectual capital to the processes through which they create value. An organisation’s effectiveness at its core knowledge processes depends on its capabilities at dealing with knowledge, in other words its knowledge capabilities. Since the knowledge processes of all organisations are continually evolving, partly in response to rapid changes in the external environment, these knowledge capabilities must be highly dynamic in order to maintain and advance the organisation’s competitiveness.

Organisational strategy is the primary source of the creation of shareholder value over the long-term. The strategic capabilities on which the success of organisational strategy depends are themselves knowledge capabilities of the highest order, which must be extremely dynamic given the pace of change in all organisations’ business environment.

In order to develop knowledge capabilities, organisations must address both the individual and organisational domains, and use the twin means of developing technology, and skills and behaviours. All four fields of the matrix formed by these domains and means must be covered by initiatives in order to develop effective organisation-wide knowledge capabilities.

References

[1] Kees van der Heijden, Scenarios: The Art of Strategic Conversation. London, UK: John Wiley & Sons, 1996.

[2] Ross Dawson, Developing Knowledge-Based Client Relationships: The Future of Professional Services. Boston, MA: Butterworth-Heinemann, 1999 (forthcoming).

[3] Carl Shapiro and Hal Varian, Information Rules: A Strategic Guide to the Network Economy. Boston: Harvard Business School Press, 1998.

[4] Ikujiro Nonaka and Hirotaka Takeuchi, The Knowledge-Creating Company. New York: Oxford University Press, 1995.

[5] Michael Polanyi, The Tacit Dimension. London: Routledge & Kegan Paul, 1967.

[6] Karl Erik Sveiby, The New Organizational Wealth: Managing and Measuring Knowledge-Based Assets. San Francisco: Berrett-Koehler, 1997.

[7] Leif Edvinsson and Michael S. Malone, Intellectual Capital: Realizing Your Company’s True Value by Finding Its Hidden Roots. New York: Harperbusiness, 1997.

[8] Johan Roos, Göran Roos, Leif Edvinsson and Nicola Dragnetti, Intellectual Capital. Basingstoke, UK: Macmillan Press, 1997.

[9] Annie Brooking, Intellectual Capital: Core Asset for the Third Millenium Enterprise. London, UK: International Thomson Business Press, 1996.

[10] Dawson, op. cit.

[11] Karl E. Weick, Sensemaking in Organizations. Thousand Oaks, California: 1995.

[12] Henry Mintzberg, Mintzberg on Management: Inside Our Strange World of Organizations. New York: Free Press, 1989.

[13] Dawson, op. cit.

[14] Ibid

[15] Jeanne M. Liedtka, and John W. Rosenblum. Shaping Conversations: Making Strategy, Managing Change. California Management Review, v. 39, no.1, Fall 1996, 141-157.

[16] Chris Argyris, Single-Loop and Double-Loop Models in Research on Decision Making. Administrative Science Quarterly, vol.21 September 1976, 363-75.

[17] Bronwynne Jones and Ross Dawson, Scanning, Sensemaking and Pattern Recognition. ABN Report, vol.7, no. 6, July/August 1999, 8-11.

[18] Ross Dawson, Performance Management Strategies for Knowledge Organisations. Reward Management Bulletin, v.2 no.3, February/ March 1998, 183-186.

[19] Constantinos Markides, Strategic Innovation. Sloan Management Review, Spring 1997, 9-23.