~// Pergamon European Management Journal Vol. I4, No. 4, pp. 333-337, 1996

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EDITORIAL AND OVERVIEW

The Epistemological Challenge; Managing Knowledge and Intellectual Capital

What is All the Fuss About?

For the last couple of years, managing knowledge and intellectual capital has attracted tremendous attention. Knowledge management 'assessment tool kits', 'knowledge directories', 'yellow pages' techniques and associated consulting services have become big business for consulting companies. After making the headlines, managers who have developed new concepts and techniques tour the world to share their approaches and experiences, often at conferences. As a participant at one such conference told us: 'I came here because my boss is all hyped up on this topic now. Although he doesn't have a clue about what it means, I am sure knowledge management will be the next "thing" in our firm.' In our opinion, this is an issue pertaining to theories of how and what we know in companies, which is what is called corporate epistemology (episteme coming from the Greek for knowledge). Why this focus on corporate epistemology, and why now7

Gone are the days when companies were seen only as physical entities that convert raw materials into tangible products. Today, for an increasing number of companies - no matter how you twist it - physical capital is of less relative importance for creating and sustaining competitive advantage than intellectual capital - just like economic value. In fact, for more and more companies the market value of intellectual capital (the gap between book value and market value) is now simply too large to be categorised as 'goodwill' (for example, IBM paid US$3.5 billion for Lotus in 1995, seven times the book value). Gone are the days when employees were seen and managed as 'human resources' analogous to physical resources. Today, numerous companies have embarked on a different route, to

understand more about what this knowledge, or intellectual capital, is made of. This is borne out by the recent appointment of Directors of Intellectual Capital, or Knowledge Management, and serious talk about the 'knowledge workers' in the company. No longer can the behaviour of companies best be explained by linear functions in a static, economic environment, where everything moves towards manageable equilibrium. Now increasing-return economics, resting on assump- tions of non-linear dynamics - like most natural pro- cesses and behaviours - explain more accurately the economic activities in more and more industries. The driving force for the increasing returns in companies is 'intellectual' capital, rather than physical or financial capital.

The emerging recognition of knowledge and intellectual capital has laid the groundwork for new, knowledge- based concepts, theories and practices of management. An increasing number of articles and books on management are produced by not only business school professors, but by business magazine writers, management consultants and managers. Most publishers of business books have at least one title on 'knowledge management' in their lists, and a search on knowledge management and/or intellectual capital on the Intemet gives tens of thousands of entries and numerous discussion group opportunities. The overall message of these publications and discussions is strikingly clear: Move knowledge from the background to the forefront of management! Of course, this special issue of the European Management Journal itself is yet another manifestation of this growing attention to knowledge in management. This special issue attempts to do precisely this fine- tuned, but cumbersome manoeuvre.

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EDITORIAL AND OVERVIEW

Make Up Your Mind!

Managers we meet have often come to the conclusion that they have to do more than just import and apply new concepts, models and tools. Because many managers, consultants and scholars seem to agree that knowledge is an issue in management, and since the intellectual roots of knowledge management are so diverse, it is critical to uncover on what assumptions these concepts, models and tools of knowledge management rest. To understand the implications of concepts, models and tools of managing knowledge, you will inevitably have to understand the nature of knowledge, at least what it means for you and your organisation. There is nothing mystical about this. Basic questions for the reflective manager, consultant and scholar interested in and/or contributing to the realm of corporate epistemology include:

°*,° What is knowledge? °5 ° Is it information, processed data, beliefs or sensory

experience? °5 ° How do we know, and where and when? • 5 ° How do we know more, i.e. learn? °5 ° How do we know we know, or have learnt? °5 ° How is knowledge transferred from individuals to

groups of people, and the other way around? °,*° What happens during this process? °5° What is a company's knowledge? °5° How can the way we manage knowledge be

compared with our competitors? • 5 ° How can it be visualised, measured and valued? °5° How can all of this be 'managed'? °,*° Are the traditional languages and methods of

management sufficient? °5 ° Do we need to develop a new language that can

bring forth a new kind of knowledge management?

You may well have already raised such questions and reflected on their implications. As we have written elsewhere, what you see depends on who you are (Roos and von Krogh, 1996). The way you conceive of knowledge influences the way you manage it! And to manage and evaluate the performance of a company, all its tangible and intangible assets must be both conceptualised and operationalised. Therefore, successfully managing knowledge and intellectual capital requires making up our minds with respect to the nature of knowledge. So, managing knowledge becomes an epistemological issue.

Three views of the nature of knowledge in companies - corporate epistemologies - can be distinguished. The first, we call Information Processing epistemology, i.e., you think knowledge and information is basically the same thing. In this case, it is natural to invest heavily in increasing the speed of information processing in your company. The more information-processing capacity you employees have, the more knowledge you develop in the company. The second, we call Network epistemology, i.e., you think that knowledge is the outcome of interaction among people in networks, so it

is natural to invest in connecting people throughout the organisation and encourage the use of electronic communication technology for storage and retrieval of company knowledge. Thus, the more connections among people, especially experts, the more knowledge you develop in the company.

These two ways of perceiving knowledge in companies come naturally to most managers in most companies. However, it is not until recently that they have been clearly defined and contrasted to what we call Self- referential epistemology. Here, you think knowledge is a private, history-dependent process in each one of us. What knowledge is for you is only raw data for everybody else. Thus, you have always organisational knowledge with somebody, and the means to this is language. ~ Therefore, it is natural that you, for instance, invest in creating a context to stimulate on-going dialogues throughout the organisation. This latter way of perceiving and bringing forth knowledge is, to our understanding, a more natural way to view knowledge development. Although some managers feel more at home in one of these epistemologies, every manager, hence every organisation, moves across all three over time for different tasks. Understanding how knowledge is developed in a company is a precondition to managing knowledge and intellectual capital.

This is easier said than done. To many managers it is more natural to begin at the other end; to capture intellectual capital after it has been developed, like financial performance systems have been doing for financial capital over hundreds of years. Because many managers believe that 'what you can measure you can manage', a major dimension of the conceptual and practical work on managing knowledge and intellectual capital is how to visualise and measure it. But, how you approach measuring the 'intellectual' performance of a company inevitably depends on what epistemology you are comfortable with and/or subscribe to. Remember, if you think knowledge is information, you can more readily categorise and measure its growth than if you think knowledge is embodied in each employee. Although much of this work is recent, we feel that the area of measuring knowledge and knowledge development will lead to even more attention in the years to come.

Knowing More About It

A word about research on managing knowledge. Much of the academic research undertaken on knowledge management and/or intellectual capital is in line with the positivistic, deductive research tradition so prevalent in most business schools. The theoretical lenses used to view this area differ, including economics, sociology, philosophy, management and accounting. All of these, it seems, are used as the theoretical lenses through which knowledge management issues are studied. This is, in itself, very encouraging because it probably takes all

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kinds of perspectives to get a better understanding of what is knowledge and how we know in companies.

So far, we have seen too few inductive studies, that is, studies that are trying to build theory from observation of and participation in the context of the business issue investigated. While research on how to measure knowledge may be pursued by deduction, in our opinion research on knowledge development will require more participant observation and action research projects. Moreover, it is encouraging to see the many joint efforts between business school professors and practising managers to research and publish in this area. We are convinced this is the way to know more about knowledge management and intellectual capital in companies.

The managers, scholars and consultants that work in this exciting area, including the authors of the articles in this special issue, have different experiences and rest their assumptions on different epistemologies, as described above. This means that they all bring something valuable to the 'party', shedding more light on the issue of managing knowledge and intellectual capital.

The Special Issue and its Contributions 2

In putting together this special issue of European Management Journal, we solicited abstracts from over I00 people working in the field of knowledge management and intellectual capital. We selected ten articles we considered the most exciting and which represented a range of topics, issues and methodologies. As we organised the special issue, several categories or branches of study emerged to describe the selected articles. The first distinction we drew was between articles written by practising managers, and those written by business academics (see Figure 1). Each of these two main branches could then be subdivided into two sub-branches, including articles based on several company practices or theories, and those focusing on a single company practice or theory.

We begin the special issue with five articles describing concepts being developed by busy, practising managers. The first three articles come from work conducted across several companies, where the authors draw out patterns from the way a variety of companies are approaching knowledge-related issues. This helicopter view is followed by a closer look at two companies who are developing and employing knowledge-related concepts in their own firms.

The second part of the issue brings us into the realm of more traditional theory development conducted by business academics. We begin with researchers who use multiple theoretical lenses to draw together several strands of research as grounds for making new claims that shed flesh light on the knowledge field. This exploration of diverse theories is followed by two

authors who focus on one theoretical lens, that of Viable Systems Theory, and explore its applications in an organisational context.

Our journey begins with the results of a 38-company research study, performed by Graham and Pizzo for the Economist Intelligence Unit. The survey is an attempt to find the balance between building organisational systems that are open and flexible enough to allow creativity to flourish, but at the same time disciplined enough to ensure that creativity leads to tangible business results. As a barometer of interest in knowledge-related issues, Graham and Pizzo found that approximately one-third of companies surveyed explicitly included knowledge management as part of their overall strategy, and that three more companies had integrated these concepts so deeply that they ceased to be labelled as such - these companies were considered to have a 'genetic advantage'. Through use of best practice case studies, the authors develop a framework for knowledge management.

Maintaining such a balance between flexibility and discipline requires a new form of strategy formulation. According to Barnett, we should develop a style for strategic thinking, rather than work out strategies by trying to develop and nail down a more closed view of the future. This is useful because the future is, of course, in a constant state of flux, and we should therefore focus more on conversing with people with vastly different perspectives in developing strategy. Barnett explores alternatives to traditional epistemologies in thinking about strategy, blending new developments in complexity and feminist theory to propose a list of ways for organisations to survive and indeed seek out persistent disequilibrium.

Sullivan and Edvinsson attempt to tie knowledge down to tangible business results. They make distinctions and define terminology related to intellectual capital, and present a model showing how it can be leveraged into concrete business results. They distinguish between human capital and intellectual assets, between physical and intangible structural capital, and between generic and specific complementary business assets, which are all fundamental sources of value for the firm. By drawing these distinctions, Sullivan and Edvinsson lay some foundations for developing a new vocabulary and way of thinking about intellectual capital.

So how is this work filtering down to individual companies7 A collaborator of Sullivan's and Edvinsson's, Petrash, has developed several practical knowledge concepts. Building on some distinctions developed in co-operation with Sullivan, Edvinsson and an informal association of companies, Petrash outlines the ten-stage Dow Intellectual Asset Management Model, developed and used by over 75 multifunctional teams within the company. By developing a portfolio of its intellectual assets, monitoring its patents and making know-how visible, Dow intends to integrate its intellectual assets into the strategic thinking of the company.

European Management Journal Vo114 No 4 Aug ust 1996 33 5

EDITORIAL AND OVERVIEW

The Epistemological

Challenge

Practice Driven Concept

Development

Theory Driven Concept

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Across Several Companies

Single Company

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Single Theoretical Lens

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Galvin

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Figure 1 The Epistemological Challange: Branches of Study

A firm believer in the importance of developing knowledge and intellectual capital, Motorola Chairman Robert Galvin brings forth invaluable business experience in an essay describing the 'Age of the Mind'. In calling creativity a vocational skill, he asserts that it can be developed by everyone and implies that it is self- referential in nature. He also offers advice on how to reach the essence of knowledge, i.e. how the information stimulating our senses can be converted into knowledge that will help us do our jobs better.

With the above evidence of interest in knowledge and intellectual capital among business practitioners, what are some broader patterns, directions and models being explored by theorists? Sveiby looks at the issue of knowledge transfer - including if and how this is possible. He looks at Polanyi's theory of tradition, which states that people gain knowledge through patterns of action, rules, values and norms. The apprentice learns from the master and gradually the new knowledge becomes part of his store of 'tacit' or embedded knowledge. In the second part of his article, Sveiby contrasts Polanyi's tradition theory with modem information theory, which suggests that information in and of itself is meaningless - meaning is constructed by the recipient of the information. Sveiby asserts that the 'process of knowing' is better transferred through tradition than through information. As we have to place the information in our own context, learning a new process or craft takes time to be integrated into our actions on an unconscious, tacit level.

Behind strategic decision-making processes lies a series of assumptions held by the decision maker. One of these assumptions may be that external reality is 'given', another may be that it is invented and constructed by individuals. Durand et al. argue that the way people see the world is not shared across society; instead, a wide diversity of representations exist that are constantly being shaped by communication. They borrow analysis

from social sciences to claim that beyond the individual level, representations or views of the world can be constructed on a collective or social level, as well as on an emotional level (e.g. through culture or corporate identity). According to the authors, these interactions among us are a neglected yet crucial factor in the way we perceive the world.

In order to give meaning to enterprise re-engineering and organisational learning, Whitaker examines the importance of context. He calls the process by which we restrict the cues we receive, contexture. To facilitate contexture in a knowledge-based organisation (a research lab), he adopted the analogy of the ecosystem in order to map out organisational 'niches'. This process, which he calls nichepicking, enabled his organisation to produce a coherent self-image that it could then use to develop knowledge-building strategies in a structured way. Whitaker also identifies two bottlenecks in the problem-solving cycle of observe-orient-decide-act. The first bottleneck occurs as we move from observation to orientation, when we also move from the task venue, where real world operational actions are taken, to the depiction venue, where representations of the world are developed and ideas worked through. After orienting and deciding in the depiction venue, the second bottleneck occurs as we re-enter the task venue in order to act.

The two final articles probe the rich theoretical vein of Stafford Beer's Viable Systems Model and point the way for future research directions. Like many researchers in the field, Leonard emphasises the importance of group activity in knowledge development, and describes an innovative methodology called a 'syntegration'. This technique encourages 'democratic conversation' among team members working on a complex task by reducing hierarchical barriers among participants. Espejo looks at the important concept of self-similar relationships or relationships which share common features, even though

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EDITORIAL AND OVERVIEW

they occur at different levels or scales throughout an organisation. He uses self-similarity to describe recursive organisations, in which everyone creates their own action space, rather than a few people on top of the organisation creating the context for everyone else. He recommends that people in organisations look for patterns of self-similarity between the primary tasks for which they are responsible, in the (sub-primary) activities required to complete these primary tasks, in the teams required to complete sub-primary activities, and so on.

From both the viewpoints of theory and practice, interest in the topic of knowledge management and intellectual capital is growing, and recent work in this field is leading us to challenge prevailing epistemologies. It is our hope that the breadth of work covered by this issue will stimulate discussion and further conceptual development as we accelerate rapidly into the knowledge era. To fuel the journey ahead, we offer a short conceptual article at the end of this special issue, entitled 'Five Claims on Knowing'. In this article, we claim that (1) knowing is distinction-making, (2) knowing is caring, (3) knowing is languaging, (4) knowing is shaping the future, and (5) competence is not an asset, it is an event.

There is an exciting future ahead in which knowledge will assume more than just a residual role in business - it will become the key to sustained survival and

advancement. We truly hope you will enjoy the messages of the articles in this special issue. If you find just one concept or model, or get a single idea for how to better manage knowledge and intellectual capital, it will be worthwhile, for you and for us. Enjoy.

Notes

I. For some time we have been pursuing a research programme on corporate epistemology. Some of the findings are reported in von Krogh, Roos and Slocum (I994), yon Krogh and Roos (I995a, I995b), and Roos and von Krogh (I996).

2. This section was co-authored with David Oliver, Research Associate, IMD.

References

von Krogh, G. and Roos, J. (eds) (1996), Managing Knowledge: Perspectives on Cooperation and Competition, SAGE Publications, London.

von Krogh, G. and Roos, J. (1995a), Conversation Management, European Management Journal December, pp. 390--394.

von Krogh, G. and Roos, J. (1995b), Organizational Epistemology, Macmillan, Basingstoke.

von Krogh, G., Roos, J. and Slocum, K. (1994), An Essay on Corporate Epistemology, Strategic Management Journal, Special Issue, Summer, pp. 55-7I.

Roos, J. and von Krogh, G. (1996), The New Language Lab - Parts 1 and 2, Financial Times, Mastering Management Series no. 20, March.

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