One of the more intangible indicators of Maine's business sector was the subject of the University of Southern Maine School of Business Executive Forum held on June 4, 1998. The subject: Knowledge. Knowledge was presented as a crucial factor in creating and maintaining the means by which a company may successfully compete in today's marketplace.
In the January 30, 1998 edition of the Wall Street Journal, in an article entitled "Value Knowledge or Pay the Price," W. Chan Kim and Renee Mauborgne stated that "when it comes to wealth creation, the value of the traditional factors of production -- land, labor, and capital -- is increasingly taking a back seat to a company's stock of knowledge." An example put forward was that of Microsoft Corporation. With $6 billion in revenues and $7 billion in assets in 1995, Microsoft held a market value 1.5 times that of General Motors with $168 billion in revenues and $217 billion in assets. Why? "While companies' balance sheets may fail to value intangibles," the authors asserted, "the market does not."
If indeed we are seeing a transition from tangibles (land, labor, and capital) to intangibles (knowledge) as integral market value indicators, what is this thing called "knowledge" all about?
Dean John Burt of the USM School of Business, along with members of the School's Advisory Council and Steering Committee, perceived the need to bring this illusive intangible to the forefront of discussion. Thomas A. Stewart, was selected to be the keynote speaker for the June Forum to address this subject. As author of the best selling text, Intellectual Capital: The New Wealth of Organizations (Doubleday, 1997), Stewart holds that:
Joining Stewart on the rostrum were four Maine business leaders: Ernesto J. D'Escoubet, vice president of operations for the Logic Product Group, Fairchild Semiconductor, South Portland; Heather D. Blease, founder and president of Envisionet, a technical support company located in Augusta; Neal P. Workman, founder and CEO of Seafax, Portland; and Dr. Edmund J. Lovett III, founding Director of Maine Medical Center's Research Institute and Director of its Clinical Cytometry Lab, Portland, as well as Chairman of the Maine Science and Technology Foundation in Augusta.
Each of these panel members brought a unique perspective in regard to their use of knowledge within their organizations. Together with Stewart, panel members and audience engaged in a "town meeting" style discussion of knowledge as our new competitive currency.
The concept of knowledge as essential to establishing competitive advantage has evolved throughout the current century. The Industrial Revolution, with its social upheaval and realignment of values, simultaneously witnessed a surge in inventions and inventors' using knowledge to create new ways to do things faster, easier, and cheaper -- the hallmark of the age. It is commonly conceived that we are presently in the midst of a new revolution: the Information Age, or in economic terms the knowledge economy. As in the past, this revolution heralded its arrival amidst the chaos of social and economic upheaval. The Information Revolution threw our workforce into disarray as a new spirit of dehumanization took over the business ethic. A century before, employees became the muscle for the forward movement of industrial growth. As a new economic revolution has begun to emerge over the last half of the twentieth century, employees have become decimal points on ledgers to be kept or dismissed seemingly based upon profit alone. Where business and industry had once measured profit in tangibles sold and profit reaped, new values for intangibles were emerging and ledger books were inaccurately reflecting where profit centers really were -- or could be.
One subtle value change taking place concerns what exactly constitutes "competitive advantage." We live today in a world in which just about anyone can build a huge plant, fill it with many people, and produce millions of pieces of this product or that. Lesser developed countries were doing just that and selling the same products at cheaper prices than the industrialized countries did. Once the issue of quality evened out, what could possibly create a competitive edge and by what means could we measure it?
As the oft quoted Peter F. Drucker remarked in an insightful article entitled "The Age of Social Transformation," appearing in the November 1994 issue of The Atlantic Monthly,
What he saw on the horizon was an economy based upon emerging technology. Competitive advantage would soon become more a matter of using one's head rather than one's hands. Success in business would become measured less by the number of widgets sold than by finding new and innovative ways to use the widget, develop offshoots of the widget, or make the widget obsolete with new, innovative generations placed in its stead.
Drucker was not alone in his insights. In the ground breaking-book, The Fifth Discipline, which appeared in 1990, Peter M. Senge declared: "The organization that will truly excel in the future will be the organization that discovers how to tap people's commitment and capacity to learn at all levels of the organization." Learning was beginning to be seen as the means by which competitive advantage could be gained in this brave new world.
At the same time, economists such as Harvard University's David A. Garvin were developing the concept of the "learning organization." In an article entitled "Building a Learning Organization," which appeared in the January 1994 publication of the National Association of Credit Management, Gavin wrote:
Tom Stewart was developing his own concepts of "intellectual capital" in an early article on the subject, which appeared as a cover story in the October 3, 1994 issue of Fortune magazine. Entitled "Your Company's Most Valuable Asset: Intellectual Capital," Stewart presented the thesis that, for individual workers, "more than ever, learning results in earning power." In turn, this power, shared throughout the organization in which that employee works, will result in corporate earning power or competitive advantage. Accounting for intellectual capital is more than an exercise "for the cloistered or the fad-struck," Stewart cautioned his readers. "What's at stake is nothing less than learning how to operate and evaluate a business when knowledge is its chief resource and result."
As early as 1993 Dow Chemical Company created the position of intellectual asset manager, and placed Gordon Petrash in that position. Stewart relates that Petrash established a six-step process for managing intellectual assets:
1. Strategy -- define the role of knowledge in your business.
2. Assess competitors' strategies and knowledge assets.
3. Classify your portfolio -- put it in order so you know where everything is.
4. Evaluate -- what are these assets worth, and what will it take to maximize their value?
5. Invest -- direct dollars where you find gaps.
6. Assemble a new knowledge portfolio and repeat the process ad infinitum.
Those involved with developing the use of intellectual capital (knowledge) were discovering that sharing tips and best practices was an ideal pathway toward becoming a company that learns and, taking advantage of its new knowledge, attains a competitive advantage.
In 1991, Skandia Assurance & Financial Services (Stockholm, Sweden) hired Leif Edvinsson as, what Stewart believes to be, the world's first director of intellectual capital. Edvinsson came to three basic but very important conclusions:
1. The value of intellectual assets exceeds by many times the value of assets that appear on the balance sheet.
2. Intellectual capital is the raw material from which financial results are made.
3. Managers must distinguish between two kinds of intellectual capital: human and structural.
Step by step, we were learning that innovation and renewal within a company stemmed from its human capital. As a result of a conversation with Hubert Saint-Onge, a vice president of the Canadian Imperial Bank of Commerce, Stewart put forward what he termed an "elegant taxonomy." He concluded that intellectual capital was created as a result of three key elements working in sync with one another: individual skills needed to meet customer's needs (human capital), organizational capabilities demanded by the market (structural capital), and the strength of its franchise (customer capital). However one measures capital, Stewart cautioned, "unless managing intangible assets leads to tangible results, the quest to understand intellectual capital will falter."
During the years following that 1994 article, Stewart and his peers around the world have pursued the difficult task of exploring how intangible asset management can lead to tangible results. One concrete result can be measured by the degree to which the concepts of knowledge management have begun to enter the lexicon of business. One of the most popular has become the "learning or knowledge organization" concept, witnessed in Garvin's early work on the subject. In 1997, according to the December 16, 1997 Portland Press Herald, the Corporate Knowledge Center at the Annenberg Incubator Project at the University of Southern California and OmniTech Consulting Group issued a report which interviewed senior "educators" at U.S. companies with annual sales topping $1 billion. Among their findings was that, of the 202 companies canvassed, 15% accepted the concept of a "knowledge organization" as "one that is focused on continuous training and assessment programs for employers." Of those not yet embracing the concept, 78% reported that they intended to do so.
John Voyer, associate professor in the USM School of Business, puts forward a list of "key attributes of learning organizations." This list, originated by Matthew J. Kiernan in The Eleven Commandments of 21st Century Management (Prentice Hall, 1996), contains the following items:
In May 1997, George David, CEO of General Dynamics, delivered a powerful speech in Portland, Maine, where he spoke about the rewards of sponsoring continuous learning on the part of its employees. Forum panel member D'Escoubet spoke highly of the returned value for the investment that Fairchild Semiconductor has placed in providing in-house and off-site continuous learning opportunities.
Stewart and others contend, however, that even more is needed. As Dr. James Botkin, president of the International Corporate Learning Association recently told a gathering of the World Affairs Council of Maine, "what is difficult to duplicate is how fast and deeply organizations and their key executives, managers, and workforces can learn and apply learning." The competitive edge emerges from the sharing of subsequent applications of learning. If individuals among the workforce obtain knowledge on their own but then fail to share it, all the training and highways in the world will do no competitive good -- neither for the individual nor for the company as a whole. "Intellectual capital is intellectual material -- knowledge, information, intellectual property, experience -- that can be put to use to create wealth," writes Stewart in Intellectual Capital: The New Wealth of Organizations. "It is collective brainpower. It is collective sharing."
In one conversation with Stewart, an executive from Xerox Corporation pointed out that, if one of their thousands of technicians in the field gleaned some bit of information that would improve a product or solve a problem, and that individual possessed neither the inclination, pathway, nor sense of freedom and trust to pass on the vital piece of learning, Xerox's competitive edge would be dulled that much more. "Because knowledge (and passing on that knowledge) has become the single most important factor of production," Stewart writes, "managing intellectual assets has become the single most important task of business." If you are not managing your company's knowledge, he contends, then you are not managing your business.
Stewart's keynote address to the Executive Forum audience articulated a number of key ingredients fundamental to the application of intellectual capital as a means to obtain competitive advantage. He pointed out that airlines, for instance, made far more profit in selling information about flying than they did in flying passengers from one location to another. Stewart relates the words of Brian Arthur, a Stanford University economist, who pointed out that "in the old economy, people bought and sold 'congealed resources' -- a lot of material held together by a little bit of knowledge. In the new economy, we buy and sell 'congealed knowledge' -- a lot of intellectual content in a physical slipcase (such as computer software or a space shuttle)." Increasingly, the way we foster and use knowledge, the way we "congeal" it, the way we market it, builds the competitive edge for our business and industry as well as for our nation as a whole.
Forum panelist Heather Blease's company is Envisionet, a firm in Maine which, since its startup in 1995, has grown to be worth several million dollars in assets. Her company sells knowledge. When you dial the number for assistance in regard to a variety of best-selling software and Internet search products, one of Envisionet's 130 employees answers the phone in Winthrop, Maine. Their knowledge of the product is the service Envisionet sells. Moreover, Blease and her staff do not stop the process there. As each call comes in, the employees glean more about the kinds of problems customers are experiencing and the solutions offered. By sharing this knowledge, Envisonet is able to create new value-added services to sell to its clients. Thus, the ripples extend ever outward.
Fairchild Semiconductor's Ernesto D'Escoubet is responsible for all manufacturing, process development, product quality, logistical support, and information systems for the Logic Products Group, which includes the South Portland wafer fabrication facility as well as the assembly and test facility in Penang, Malaysia. These sites, which represent the production of four to five million circuits each day and employ over 3,500 people, earn over $400 million a year in revenue. Fairchild sells the chip, but the company's collective knowledge and application of its learning is what makes their product valuable.
"A significant part of what our customers pay for goes beyond simply the costs of the component parts and the labor and facilities required to manufacture them," D'Escoubet stated during the Forum's proceedings. "Our operators, engineers, and designers have to give our customers more value than our competition if we are to remain successful. We compete by working with our customers to give them the technology they need, when they need it, in order for them to be successful. This implies that our technologists and operators are continually using their ingenuity to devise improvements that increase the value of our goods and services for our customers."
Seafax, founded in 1985 in Portland, Maine, by Neal Workman, carved out a niche for itself in the field of credit information and collections in the seafood industry. Since then, the company, which presently employees 60 people, has gone from specializing in credit and financial information to lobster dealing along the Maine coast to representing many of the largest meat, poultry, seafood, produce, and other food service companies throughout the world. Earlier this year, Workman was presented the Governor's Award for Business Excellence.
Workman expressed his conviction that the sharing of market information throughout his company, and utilizing this knowledge to stay current with customer needs, allowed Seafax to maintain the strength of its core business as well as to capitalize on growth opportunities. "The field presence of the sales staff along with daily phone contact with customers," Workman explained, "allows Seafax to blend listening, thinking, and acting in a manner that promotes survival and expansion through adaptation to customer needs."
For his part, Dr. Edmund J. Lovett told the audience of 300 business men and women that:
The use of the term "joy" in Lovett's statement brings us full circle. If value is returned to the individual through the recognition and acknowledgment of the asset he or she brings to a business, than we reverse the process of dehumanization in the workplace which dramatized so much of the latter part of the twentieth century.
A recent publication authored by Eric Klein and John B. Izzo, entitled Awakening Corporate Soul: Four Paths to Unleash the Power of People at Work (Fairwinds Press, 1988), defines "corporate soul" as being "about people wanting work to have meaning and even more, to engage more of them at the deepest levels of their capacity and desire. . . . It is about whether someone who feels 'locked up' inside our organization for forty hours each week can perform at the level they must for us to stay competitive."
Getting "psyched" by what one does at work has much to do with the encouragement and freedom a company may extend to an employee in "developing our craft -- our artistry and excellence," as Klein and Izzo refer to it. This, they tell their readers, "requires that we keep learning and developing our capabilities."
Only when these opportunities are teamed with a corporate philosophy, trust, pathways for sharing, and acknowledgment of the value attached to an employee's knowledge and skill, can a business truly be called a "learning organization." Only then can knowledge justifiably be deemed a competitive advantage possessed and exercised for the good of the company and of the individuals who make up its workforce.
During Stewart's closing remarks to the Forum audience, he spoke of his own continuous exploratory journey into the concept of knowledge. He finds emerging a kind of duality within the concept and application of intellectual knowledge. On the one hand we have intellectual knowledge itself. On the other we have what might be called "intellectual working capital."
Intellectual knowledge exists on a larger scale. It is knowledge of customer's needs, the trusting relationship between company and customer. Intellectual working capital, on the other hand, is the inventory of information, the data one works with every day. This data changes. It is, Stewart postulates, "what you need to know at any moment, but don't need to know every moment." It is, in fact, "just in time" knowledge.
Where should we most profitably invest intellectual capital? Where lies the critical mass? Stewart believes that, in order to achieve competitive advantage out of knowledge, the critical mass -- the "center of excellence" -- lies within the human being and the sense of community -- sharing -- which is the social context for the human being. Creating lasting knowledge occurs when it is socialized, Stewart observed.
Of the three components of capital -- human, structural, and customer -- only structural capital is owned by the business. The other goes home at night. No customer buys a product because the company has built a beautiful corporate office or such a magnificent plant. No one trusts you because you have such a well-constructed customer tracking program on your computer. Customers buy products because of accumulated customer capital -- knowing the customers needs and gaining their trust -- and human capital -- how well your employees use their knowledge to best meet the needs of your customers thereby returning their trust.
In the closing chapter of his book, Stewart asserts that "intellectual capital is the source of wealth for individuals as well as for organizations -- and it is held in common between them." It will be in the ways and means we encourage and facilitate the socialization and application of knowledge -- intellectual capital -- that our individual and economic future will be spelled out.
It will only be spelled out, literally, if and when we recognize that the economies of the future will be fundamentally based upon what we know -- what we have learned through formal and informal education, skills training, and a keen sense of knowledge not as a means to an end, but the means to new revelations and discoveries. "If knowledge is the greatest source of wealth," Stewart tells us, "then individuals, companies, and nations should invest in the assets that produce and process knowledge." Only by addressing the needs of our schools, colleges, and universities will we be able to compete effectively, and in the end survive in the global marketplace.