6 principles of management in the knowledge era

We often use the image of a “knowledge factory” to talk about the infrastructure of the today’s business. A huge percentage of this infrastructure is in intangible knowledge assets that work together as a system, the knowledge factory. Once you begin to understand the power of the combination of your knowledge assets, you are on your way to becoming building a smarter company–and you are ready to think about what this model means.

What are the business implications of the knowledge factory? These principles explain why management of a knowledge factory is different than management of a physical factory. Here are the main points, followed by an explanation of each:

1. The KF is greater than the sum of its parts
2. Ownership of the KF is dispersed
3. Power in the KF flows down…and up
4. The KF is held together by reputation, not control
5. The KF runs on information technology
6. The KF is a business

1. The knowledge factory is greater than the sum of its parts

When we were bankers, our customers often had to supply appraisals of their equipment. The appraisals always used several value approaches. One was the value “in place,” also sometimes called their “highest and best use.” Borrowers liked that one because it yielded the highest value. Then there was the forced liquidation value. The liquidation value was always the lowest of all, not just in reflection of the costs of taking it out of the factory. It also reflected the fact that the value of a stand-alone machine is not the same as one that is integrated on an assembly line ready to manufacture products. Borrowers obviously didn’t like that one because it reduced the genius of its factory design to a bunch of scrap machines.

The knowledge factory is similar. The best value and utility are created through the combination of knowledge assets. Discrete pieces of knowledge are usually not that valuable. So you cannot look at a piece of the knowledge factory in the same way as you would an individual piece of machinery; you really need to look at the whole system.

For example, think about the Google model from last week. The software algorithms that govern Google’s search technology remain in the company when the employees walk out the door at night. But they would lose value and degrade in functionality very quickly if the employees stopped modifying and improving them. And the business side of the equation would come crashing down if the “customers” using the search engine (in quotes because they don’t pay for the service) started using a competing engine. It is all a system and it is through the combination that each piece of knowledge gains value.

2. Ownership of the knowledge factory is dispersed

If you think about the individual pieces of a knowledge factory models, How many of these pieces are actually owned by the corporations? Not the human capital. Not the relationship capital. Just the structural capital. Even with structural capital, ownership and control can be difficult to track or establish. Only selected pieces of structural capital can be protected as intellectual property. And obtaining that protection, while worth it, is often expensive and labor intensive.

The issue of ownership is one that has caused a lot of people to ignore intangibles as business “assets.” If you don’t own something, the logic goes, then it’s wrong to talk about it as a corporate asset. But if you accept the idea of the knowledge factory, you know that you have no choice but to find ways of measuring and managing your organization as a system of knowledge assets. And the fact remains that you don’t own or control many of them. The implications of this fact are much greater than most people realize.

3. Power in the knowledge factory flows down…and up

If you don’t own or control your productive assets to the same degree as in the past, the power dynamic shifts. This state of affairs is very different from the industrial era when a company owned and controlled most of its productive assets. Wait a minute, you’ll tell us, industrial companies didn’t own their human capital or relationship capital either, which is absolutely true. But remember that it was the physical assets that were creating most of the value. Ownership and control of the “means of production,” the factory itself, was the defining characteristic of the industrial organization.

This meant that an industrial company didn’t need its people and relationships in the same way. The nature of mass production made a company less dependent on its workforce. The operating model in the industrial era was dependent on standardization and control. Most jobs in a factory were well defined. They might have required specific experience but the boss could still tell the subordinate what to do. Workers were told what to do and could usually be replaced. One could make the case that this uneven power dynamic was the reason that unions had to come into being.

There was a similar dynamic with a lot of vendor relationships. Specifications and purchasing decisions emanated from the inside out. Vendors had to meet the expectations set out by their customers. Purchasing departments controlled the relationships.

Has/will this change completely in the knowledge era? No. But there is a shift that is slowly happening. Organizations need knowledge workers to contribute more than just their time and muscle—they need their attention and their brain power. They rely on employee knowledge to complete daily work and to fuel innovation for the future. This means that corporations are willing to give more power and control to their employees, to give them freedom to get their work done. Most organizations are seeing value in giving more control to their vendors too, viewing them as experienced outsourcing partners rather than generic suppliers to be pitted against each other for the lowest price.

We’re not talking about a utopian view of a “nicer” business world. Just the recognition that if you have a relationship—with an employee, a vendor, a customer or any kind of stakeholder—because you value their knowledge, then it changes the dynamic. Power is shared more equally in the relationship. And the glue that holds the relationship together changes too.

4. The knowledge factory is held together by reputation, not control

If you value your stakeholders for their intangible capital, then keeping your knowledge factory together requires more than just a command and control style of management. Your human capital and relationship capital are part of your factory because they want to be. Sure, in the short run, they may stick with you because they don’t have any alternative. But they are always free to go. This means that power does not just come from the top, from the “owner” of the factory—but also from the owner of the knowledge and capability. Those that are participating also have a say in how their knowledge is applied.

Of course, if the relationship is based on knowledge you actually don’t want to have the participants in your factory just do what you tell them. The viability and value of the system relies on their contribution of knowledge and thinking to build, maintain, and improve the system. You need your human and relationship capital partners to be engaged.

So what keeps your knowledge partners engaged? There are a lot of little reasons but maybe the simplest way to summarize them is to say that you keep everyone in your knowledge factory engaged through your reputation. But you don’t make your reputation—you earn it. Your reputation is the reflection of your stakeholders’ view of your organization. Different types of stakeholders have different priorities. Ultimately, however, you will have to balance these priorities with your own and come up with a combination that keeps everyone coming back, that keeps them engaged in your organization, that keeps their Lego pieces connected to yours.

5. The knowledge factory runs on information technology

Something that is often left out of discussions of knowledge assets is information technology (IT). This is a dangerous omission because IT is the reason we are here. It is the advances in information technology that created the knowledge era. IT (information technology) and IC (intangible capital) are so intimately connected that you have to think of them together. IT fueled the knowledge economy because it made movement, sharing and storage of knowledge possible. IT also enables the creation and greater standardization of process (the magical form of structural capital). That means that the explosion in the value of knowledge and intangible capital has been facilitated and fueled by IT. And if you want to optimize your intangible capital, you will have to optimize the underlying IT.

In most companies today, IT is handled as a discrete business function. There are a lot of good reasons for this—cost and risk control, efficiencies, and expertise. However, the knowledge of what needs to be automated resides in a different business group. Failure to connect the business needs with the right IT solution is a problem that plagues every business. You will see in the next chapter that the knowledge factory is a series of networks. And that networks of people working together are almost always connected to some degree by IT. So the right solution to management of IT has to include greater integration with the operations of the knowledge factory.

6. The knowledge factory is a business

There are a lot of people that see a promise in the shift to a knowledge economy of a new, better and kinder business world. We are actually optimistic about the enormous opportunities out there and the potential for huge changes in our society and in business. A knowledge economy could be a wonderful place where each person is valued for their contribution to a community, where we solve the many challenges facing our nation and the planet.

The end of the industrial era isn’t just about manufacturing (it’s not about the end of manufacturing either—it’s about the total change in its model). Many sectors of our economy are reaching the end of their existing models due to the need for new sources of energy, for lower carbon emissions, for increased environmental sustainability of all kinds. These challenges will force significant changes in the fields of energy, transportation, housing, and food production, to name just a few.

But these changes will not occur because of an abstract belief in the “right” thing for business to do. It will occur because people, businesses and governments will realize that it is in their own self interest to make the changes. The wonderful news is that these challenges are coming along at a time when our capability to solve problems through applied knowledge is greater than ever before. Sustainability and profitability will go hand and hand.

If we capture the moment, these challenges—and our collective knowledge—can be turned into economic engines that fuel a century of prosperity. Let the fun begin. Get started in your own organization by learning to visualize, measure and manage the knowledge you already have. Turn it into greater good and turn it into profits. Don’t wait another day.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.