6.1.2 The value of knowledge
Knowledge has value. Knowledge held by individuals or by the organisation has a capital value that can be managed, evaluated and manipulated. Knowledge has been variously described as contributing to ‘pools’ of capital value.
There are many forms of capital. Financial capital deals with qualification of value of assets. Physical capital covers various resources which may be described as natural and environmental which have not been adequately valued but are on the agenda. Human capital is used to describe the knowledge owned and acquired by individuals for use to earn and produce, and cultural capital is the knowledge used by individuals in the course of daily life . . . social capital is different completely because it deals with the social links which create society and cannot therefore be owned or depleted by one. (Cox & Lewis, 1998:2–3)
Knowledge also has a value that is not determined by its possession. The value is determined by the processes that impact the acquisition, transfer and expansion of the knowledge required by an organisation. This is both a knowledge management and a learning process that can promote an organisation’s agility and responsiveness to new and emerging customer demands. In other words, knowledge also has a social value. It is valued by colleagues as a possession — something that gives the 'owner' some respect and authority. It is valued by the organisation, however, for its strategic capacity to enhance productivity in the dollar value sense.
Edvinsson and Malone (1997:44–45) studied intellectual capital as a means of building successful organisations. From experiences at Skandia they determined that:
Intellectual Capital is the possession of the knowledge, applied experience, organisational technology, customer relationships and professional skills that provide Skandia with a competitive edge in the market.
They devised a formula:
Human Capital + Structural Capital = Intellectual Capital
This formula reinforces human capital as the knowledge ‘owned’ by an individual and harnessed by a company to achieve strategic ends. It was tacit. It was structural capital that the authors viewed as explicit to the company. Besides the traditional financial capital they confirmed that management of structural and human capital requires a strategy to build intellectual capital. Structural capital refers to the knowledge possessed by the company or having only contextual value in the organisation (Edvinsson & Malone, 1997:46). Market value of an organisation and its success is tied to the management of more than just people and the management of knowledge and intellectual properties. It requires management of relationships, values and the technology within the workplace. This formula varied from an earlier version advanced by Edvinsson when working with Sullivan (1996). This formula had the additional dimension of relational capital. Relational capital was viewed as knowledge embedded in the relationships established with the outside environment. This included suppliers, customers, communities and so on.
Into the equation of intellectual capital subsequent authors replaced relational capital with customer capital (Stewart, 1997:142–144). Leveraging human capital assets to improve customer capital (relationships; networks; value chains; sales, supply and service alliances; and customer loyalty) requires an understanding of how to specialise knowledge to maximise specific sets of capital. Stewart (1997:100–101) emphasised the need to manage all three dimensions of intellectual capital, or the so-called soft and hard knowledge — or tacit and explicit knowledge— to achieve specialisation.
Human, structural, and customer capital work together. It’s not enough to invest in people, systems, and customers separately. They can support one another; they can detract from one another. (Stewart, 1997:165)
Stewart reinforces the importance of knowing not only how the types of knowledge impact intellectual capital but also how different types of capital assets can then be managed to support each other.
Table 1 Intellectual capital and mutually reinforcing roles
Source |
Reinforce each other by . . . |
Human capital and structural capital |
Shared sense of purpose Entrepreneurial spirit Managers’ value on agility |
Human capital and customer capital |
Individual feeling responsible for their part in the enterprise Direct contact with customers Clear sense of customer expectations Knowledge of internal customer relationships |
Customer capital and structural capital |
Customers and company learning from each other Ease of doing business so that formal processes become ‘second nature’ Customer loyalty |
(Stewart, 1997:165)
Annie Brooking in her book Corporate Memory: Strategies for Knowledge Management(1999:16) defines intellectual capital as having four main categories:
- Market assets;
- Intellectual property assets;
- Human-centred assets; and
- Infrastructural assets.
Market assets include brands, positioning, customer base, company name, responsiveness to customers, distribution channels, collaborative structures, franchise agreements, licensing arrangements, contracts and the like (Brooking, 1999:17).
Intellectual property assets are knowledge able to be protected by law; this includes patents, copyright, design rights, trade secrets, trademarks and the like (Brooking, 1999:19).
Human-centred assets comprise the ‘collective expertise, creative and problem-solving capability, leadership, entrepreneurial and managerial skills embodied by the employees of the organisation’ (Brooking, 1999:21).
Infrastructural assets include the broad category of assets that contribute to how an organisation conducts business, such as processes, financial relationships, communication systems, information systems, philosophies and financial structures (Brooking, 1999:20).
Brooking’s categories encompass very broad areas of knowledge. However, she goes on to determine that competent employees encompass more than the knowledge required to perform work. They require experience and the capabilities that enable proficiency. As such, knowledge management requires corporations to enhance not only competencies but also factors promoting proficiency. The Brooking formula states:
Organisational Capability = Competence + Proficiency (1999:46).
Organisational capability also requires transfer of knowledge between individuals. Codification of knowledge is therefore viewed as essential to the construction of infrastructural assets (processes, management systems, etc.) and generation of intellectual capital. Managing knowledge as a corporate asset relies upon managers considering the tacit or explicit dimensions of knowledge (Brooking, 1999:51–52). Brooking elaborates, suggesting two critical rules for knowledge management: ‘making knowledge explicit generates infrastructural assets’ (Brooking, 1999:53) and ‘strive to make critical knowledge explicit’ (Brooking, 1999:60).
Basically, Brooking argues that tacit and explicit knowledge in an organisation requires different management strategies and these directly impact both how intellectual capital is generated and the asset value of this knowledge to a corporation.
In The Knowledge Evolution: Expanding Organisational Intelligence, Verna Allee differentiates knowledge, wisdom, data, information and meaning (1997:67–68). However, she also examines who controls, builds and maximises the value of knowledge assets within an organisation. She supports arguments that not all knowledge required by the organisation can be owned by the organisation. While intellectual and codified knowledge (brand names, patents, copyrights, products, formulas, images, processes, etc.) can be ‘owned’ by an organisation (Allee, 1997:33–34), Allee identifies that the largest body of knowledge assets often exist in ‘collective knowledge’. This latter includes knowledge that may not be owned by the organisation, including working solutions, webs of relationships, communities of practice, expertise and theoretical knowledge and databases (Allee, 1997:35).
In her study of knowledge and learning, Allee stresses the importance of understanding how tacit and explicit knowledge require different approaches to learning. Equally some forms of learning require that knowledge be converted or codified to enhance learning and performance. For instance, converting tacit procedural knowledge into explicit shared knowledge can occur by codifying knowledge in documents, formulas, procedural manuals and so on (Allee, 1997:69). This is seen as a ‘relatively straightforward’ exercise that can often help focus learning and transformation of individual performance to agreed organisational outcomes.
In defining organisational intelligence Karl Erik Sveiby (1997) defines two main types of knowledge: focal knowledge — ‘the knowledge about the object or phenomenon that is the focus’ — and tacit knowledge — ‘knowledge that is used as a tool to handle what is being focused on’ (1997:30). If knowledge is a combination of both types, all action requires both aspects of knowledge. Building on Polanyi’s work (1948 & 1966), Sveiby states: ‘Human knowledge is tacit, it is action-oriented, it is based on rules, it is individual, and it is constantly changing’ (1997:35). Defining knowledge as the ‘capacity to act’, Sveiby uses competence to differentiate tacit knowledge held by the individual from knowledge that is applied in a business context. Individual competence is defined as five mutually dependent elements (Sveiby, 1997:35):
Explicit knowledge |
The formal information acquired, or facts |
Skill |
‘Know how’ to achieve proficiency in physical or mentalpractices |
Experience |
Acquired by (having done something previously and) reflecting on past mistakes and successes |
Value judgments |
Perceptions of what the individual believes to be right |
Social network |
Individual’s relationships with other human beings in an environment and a culture that is transferred through tradition |
While the early writers on the subject have strongly influenced works of authors right up to the present (see sources used in major compilation works such as Bontis, 2002a&b; Dieng-Kuntz & Matta, 2002), it is worth noting that Jac Fitz-ens, in his work on human capital, identified that other ‘organisational knowledge artefacts’ include process and culture, relationships, and intellectual property (2000:11).
All the authors who provide the foundations for the conceptualisation of intellectual capital and knowledge management note that the creation, transfer and utilisation of knowledge are all implicitly affected by the organisation’s capacity to learn (Choo & Bontis, 2002:16-17). While the concept of organisational learning is explored in some depth in Part 2, it is important to note that learning is affected by the type of knowledge. Learning is also a major force enabling the flow of knowledge across and outside an organisation.
Table 2 indicates how tacit and explicit knowledge can be aligned against a range of definitions used by various authors. However, to construct a comparable table using migratory and embedded knowledge as the basis for cross-alignment would be at best arbitrary and almost certainly unreliable.
Table 2 Comparison of knowledge typologies with authors IC/KC frameworks
|
COMPARATIVE FRAMEWORKS BY AUTHOR |
||||
Nonaka & Takeuchi (1995) |
Edvinsson & Sullivan (1996) |
Allee |
Sveiby (1997) |
Brooking (1999) |
Fitz-ens (2000) |
Explicit |
Structural capital |
Intellectual and codified knowledge |
(Focal) |
Market assets Infrastructural assets |
Human capital Intellectual property |
Tacit |
Human capital |
Collective knowledge |
(Tacit) |
Human-centred assets |
Relationships
|
Either |
Relational capital |
|
Human Capital |
Intellectual assets |
Processes and Culture |
(Bowles, 1999:41)
Comparison of the above approaches can be extended further. Below we have established a matrix that classifies different dimensions to the study of IC or KC. The two key axis represent the level at which the author or researcher wish to study knowledge (individual, group or process, organisational or cross-organisation levels); and the perspective on value created by knowledge. For instance the main focus on a organisational knowledge level and valuing knowledge based on tangible current performance in a marketplace could be used to classify particular approaches to IC and KC (e.g. Fitz-ens, 2000; Daum, 2002; Hand & Baruch, 2003). Approaches focussing on organisational knowledge level from a future value perspective may classify different authors (e.g. Bowles, 1999; Skaikh, 2004). Many of the early authors would fall into the lower two quadrants dealing with how individuals contribute to team and organisational knowledge, predominantly tied to current position performance and market value (e.g. Brooking, 1999), with a few extending their models to cover future performance potential (e.g. Sveiby, 1997).
Figure 1 Dimensions that differentiate KC and IC approaches
Activity 1
As you progress through this chapter use the above matrix to classify authors or research work dealing with IC or KC.
The nature of the value is not locked into one of the quadrants established in the diagram above. In fact, value may reside in moving knowledge across levels. The relationship between knowledge and whether value is tied to position performance is at the heart of earlier study on the structure and type of knowledge (See Chapter 2).
Migratory knowledge has a less than tangible relationship to explicit knowledge. Certainly the more explicit the knowledge, the more the factors influencing the migration of that knowledge can be determined (accessibility of the packaged/codified knowledge, compatible capabilities, incentives, barriers). But tacit knowledge is far more dependent on the individual. It is given meaning by interaction with others in a social context.
Tacit knowledge when built into the relationship between individuals and their work or social c o ntext can become embedded into a context that is difficult to replicate.
Tacit knowledge where it is held by individuals in ‘pools’ of human capital cannot be owned by an organisation. One would therefore argue that generally tacit knowledge is likely to be more migratory than explicit knowledge.
This, however, is the crux of the problem. Explicit and tacit knowledge may be either migratory or embedded. Making knowledge explicit can embed the knowledge into the processes and systems owned by the organisation and completed by individuals. However, this action also increases the factors influencing how knowledge can become migratory. Codified knowledge is easier to manage and convert within the organisation. It is also easier to absorb, transfer and generate outside that organisation into another organisation or context.
Uncodified or tacit knowledge may be hard to transfer and can be embedded within a specific context. Take the individual out of the context and the knowledge can diminish in value, meaning or relevance.
Table 3 Comparison of tacit, explicit, embedded and migratory knowledge
|
Tacit Knowledge |
Explicit Knowledge |
Embedded |
Embedded Tacit Knowledge Non-transferable individual knowledge that impacts how people think, the way they do things and the way they interact. Examples
|
Embedded Explicit Knowledge Rules and beliefs that govern conduct and interaction within the workplace. Examples Codes of conduct Value statements Participative planning processes Manual on how to build empowered teams Image Shared visions Service ethic |
Migratory
|
Migratory Tacit Knowledge The knowledge individuals hold but can take beyond the organisation. Examples
|
Migratory Explicit Knowledge The knowledge owned by the organisation; usually the codification of tacit knowledge into explicit forms. Examples Procedural manuals/templates Training courses/manuals Process flow charts Design specifications Technology Service strategies Systems architecture Strategic plans Market research |
|
Owned by the individual |
Owned by the organisation |
(See Nonaka & Takeuchi, 1995:62–70)
Tacit knowledge and embedded knowledge are closely related. How explicit knowledge is embedded may vary greatly. By definition and comparative analysis in the previous tables, the two seem to be mutually exclusive. The factors that make knowledge explicit also make it more vulnerable to migration. Embedding explicit knowledge is therefore conceptually very difficult to grasp.
Migratory tacit knowledge is also difficult to achieve, albeit not impossible. Tacit knowledge could be held in groups or individuals who leave or are removed from an organisation and who can take advantage of their knowledge; for instance, traditional craftsmanship skills or relationships between individuals and groups that cease to be utilised by a company for various reasons (the company removes large components of its workforce, markets no longer exist for specific activities, or a company simply closes due to other factors). The pool of knowledge, however, still exists and can migrate to another user, assuming that the knowledge can be utilised. Migration of knowledge can occur directly or indirectly.
One example could be workers in a unit of production who have been made redundant; they set themselves up as a spin-off company, keeping the shared knowledge that has evolved of corporate and production processes, working structures, common language, as well as skills and culture, even their hierarchy.
Imagine, as another example, that a company specialising in manufacturing high-quality traditional wooden furniture goes bankrupt. The workforce is made redundant and the workers all live in one geographic region.
The tacit knowledge held by this redundant workforce may migrate to another furniture manufacturing company that recruits the workforce because it wishes to expand its market presence into the ‘high-quality’ furniture marketplace. The new company can recruit the workforce into similar operations. The new company will ‘graft’ knowledge held by the individuals onto its existing capabilities or what Annie Brooking calls ‘infrastructural, market and intellectual property assets’ and Edvinsson and Malone list as ‘financial and structural capital assets’ (1997). The explicit knowledge that these individuals already possess is secured along with the tacit knowledge they have in terms of their craft, their working relationships and the relationships they have with their region or operational setting, such as suppliers and customers. The incentive to access this knowledge and the compatible capabilities required to utilise this knowledge can be evidenced in the value that the knowledge adds to the existing financial, market, strategic and cultural focus of the company recruiting these individuals.
Alternatively a company may wish to specifically recruit the workforce for its tacit knowledge. The new company may not be in the furniture business. As an extreme example, imagine that the recruiting company manufactures handmade, high-quality boots. The advantages of recruiting furniture joiners and carpenters may not centre on explicit knowledge. It may be that the members of the former workforce and their extended social networks are committed to making a business work in the region. The workforce may represent individuals with a personal commitment to quality products, who possess knowledge of regional players able to assist the export of high-quality merchandise and perhaps be attuned to a culture where craftspeople work alone within a highly effective communication network. Recruiting from a pool of labour with pre-existing tacit knowledge, but no explicit skills, may accelerate ‘start-up’ time for this new company and add knowledge assets that would be difficult to create or absorb.
Yet another example may be more familiar. The absence of tacit knowledge may impact on a company’s performance. Call centres are increasingly centralising customer service functions across large geographic regions. In many cases, tacit knowledge is not adequately addressed. For instance recruiting people in the geographic region where the call centre is located can break down service relationships with customers from other regions. All the best service skills and knowledge required to provide even the most routinised service by the service assistant does not represent all the knowledge required to build a sustainable service relationship with a customer or customer base (Frenkel & Donoghue, 1996:12 & 15). For instance a caller from a specific region, with a pre-existing frame of reference, may deal with a service assistant with no empathy for or understanding of that frame of reference. The assistant may have no basis for shared meaning or social experiences that can align the communication occurring over the phone line. The service provider lacks not only the face-to-face context but also a basis for constructing shared experiences and an ‘identity’ with each customer (Bowles, 1997; Frenkel & Donoghue, 1996:26).
The service provider can be taken out of the geographic region but the tacit knowledge that assists in building and sustaining a service relationship between individuals who share at least some sense of history, experience and context provided by their societal interactions may be lost.
Reading 1
Bradburn, A & Coakes, E (April, 2004), ‘Intangible assets and social, intellectual and cultural capital: origins, functions and value’, Fifth European Conference on Organisational Learning and Knowledge, Innsbruck Austria, 20 pages. Available at www.ofenhandwerk.com/oklc/pdf_files/K-2_bradburn.pdf.
Activity 2
- Establish how KM relates to IC (or as we label it, KC).
- Is KM a sub-set of IC?
- Why does knowledge hold value for shareholders?
- Can knowledge value be reported on an organisation’s balance sheet? How?
- Why do trust and relationships hold value as knowledge for an organisation? Keep this in mind when we study Social Capital.
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