Entovation International


An Atlas for Knowledge-Innovation:
Migration from Business Planning to Innovation Strategy

by Debra M. Amidon and Darius Mahdjoubi

“I saw the earth without any borders
Without any fighting, without any fear;
So, captain, give the order,
We’re going to the next frontier.”

recollections of Apollo commander Eugene Cernan
as written in a song by Paul and Ralph Colwell

Shortly after the astronauts of Apollo 17 reached the moon, the world awakened to a new perspective of bringing a vision into reality. It required more collaboration and faith than anyone previously dared to dream. Results were wondrous - beyond expectations. Similarly, executives today are caught in a quandary. They can continue to utilize the tried-and-true methodologies (unsuited for today’s economic environment) or they can experiment with the unknown and venture forth with management initiatives that project innovation, creativity and responsible risk.

Background

Interest in an economy based on knowledge and intellectual capital has grown exponentially around the world. Executives and general managers are wrestling with the implications of knowledge as an inexhaustible and renewable resource. Managers burdened with traditional concepts and methodologies are not able to implement knowledge-based strategies. With markets merging and technologies converging, the real competitive game will be in how well we incorporate knowledge as a resource and then manage the process of innovation.

This article examines the nature of the new knowledge value proposition in the context of innovation strategy - the single competence necessary to thrive in the 21st century. It illustrates the comparative advantages of a knowledge-innovation strategy versus classical business planning and offers a concrete map for migration of management processes, which capitalize upon the opportunities afforded in a robust knowledge economy.

In a monograph recently issued by the Society of Management Accountants of Canada - Collaborative Innovation and the Knowledge Economy, five assumptions were made:

Knowledge is the primary driver of innovation - not technology.

The value of human potential can and should be linked to economic results.

It is a systems dynamic - not a cause- effect value chain - that is operating.

A prosperous future is based increasingly on interdependence, interaction and collaboration.

It is the flow of knowledge that must be visualised, monitored and incentivised.

Integration of knowledge as an interdependent variable into conventional business methodologies creates a dynamic no less dramatic as the shifting from a flat earth view of the world to a global view. Initially, the world was seen as 2-dimensional - similar to how many business managers perceive their business environment today. Design a market matrix, create a balance sheet and manage the process in a simple methodical linear mode. Build the better mousetrap and the market will beat a path to your door.

In contrast, a 3-dimensional global view capitalizes upon the dynamics of the multiple compounding effects of what we might describe as a kaleidoscopic economy. It is not the speed of change of a variable, or the speed of change of multiple variables. It is the compounding effect of the speed of change of multiple variables creating a business environment that is difficult to understand, much less manage. The challenge is not to make existing businesses bigger; it is to create new businesses. It is not to evolve existing technologies as much as it is to envision products and services, which meet the unarticulated needs of customers or an unserved market and to do so ahead of the competition. Today, the market operates with a systems dynamic we do not yet understand.

To gain a sense of the magnitude of the changing perspective, let’s examine the evolution of the World maps from 14th century to recently [Note: See Figure 1]. A global world generates commercial, governance, social and ecological challenges and opportunities believed impossible in a flat world. Gone are the days of discrete problem-solving management techniques. It is not that they were not valuable; they are simply not enough. So will the knowledge-innovation economy create unimaginable business challenge and opportunity for every person, organization and nation able to participate.

There is growing activity and momentum in the knowledge field - focus on measurement and tools - the quick fix. Everyone is searching for the case study example, the proven methodology, and the evidence of success. The real answers, however, are in a systemic and comprehensive view that will be as different as the world viewed flat versus round. [Note: See Figure 1 - maps 3 and 4.] In fact, the answers to today’s management dilemmas must - by definition - be unique. Successful approaches to current market demands lie within your capability, not in the example of others. One of the few things that make you unique as an organization is your knowledge base - how you define it and how it is utilized. This includes the knowledge inside as well and external to the firm.

This transformation is fundamental, a watershed. We must embrace a very different view of the knowledge world and the innovation systems embedded in it. The good news is once managers and executives take this holistic view and see the whole operation in its entirely - including how it relates to wide sources of knowledge (e.g., customers, suppliers, alliance partners, and yes, competitors) - a common taxonomy and methodology (language) will emerge. This will enable managers to set priorities and lay strategies and plans, which will have broad and profound results.

 


Figure 1: Evolution of the Word Maps
 

Here, we focus on the structures for innovation strategy, and the deficiencies of today's systems. Innovation strategies must migrate and evolve from the conventional business planning. These are not independent systems separate from the essence of product/service positioning. Instead, the capacity to innovate is integral to the success of any enterprise regardless of a particular industry or product segment. In other words, it is not the technology per se but how we manage the technology that contributes to eventual enterprise sustainability. Knowledge-innovation strategies are structured to provide managers, as well as individual contributors and organizational stakeholders, with tools and methodologies allow them observe what they may not be able to see otherwise - the interrelationship among the parts. Even though the ‘known’ is ‘unknown’ - just as it must have been in the minds of the Apollo astronauts - it is a necessary first step in modern business strategy.

THE INNOVATION ATLAS - AN ANALOGY

We use the analogy of the Atlas (i.e., system for depicting and measuring worldviews) and the metaphor of road maps to illustrate the migration from business planning to a knowledge-innovation strategy. We are discovering the increasing need for story telling, simulation, and sense making as a way to understand the enormity and complexity of the transformation.

Analogy, in logic, is the name of an inductive form of argument, which asserts that if two or more entities are similar in one or more respects, then a probability exists that they will be similar in some other respects. Ikujiro Nonaka and Hirotaka Takeuchi (1995) further indicate:

A metaphor or an analogy is a distinctive method of perception. It is a way for individuals grounded in different contexts and with different experiences to understand something intuitively through the use of imagination and symbols. No analysis or generalization is needed. Through metaphors, people put together what they know in new ways and begin to express what they know but can not yet say. As such, metaphor is highly effective in fostering direct commitment to the creative process in the early stage of knowledge creation.

A geographic Atlas (Note: See Figure 2) provides a systematic presentation of the World - or part of it - on a flat surface, although the earth is a globe. It provides a methodology needed for planning and implementing travel. It is generally considered a comprehensive resource of the world, as we might know it today. Usually, it consists of three distinct, albeit interrelated, parts: (1) Mapping for organizing commonalties, (2) Scaling to provide measurement and relational information and (3) Compass for direction.

Similarly, Business Planning is the current representation of the process and plans necessary to position a particular enterprise with competitive advantage in a particular industry or region of the world. It provides a methodology to define business plans usually based upon a product/market portfolio. It includes a similar set of techniques for (1) Mapping according to organization capabilities and financial investments, (2) Scaling based upon external market share measurements and technology positioning, and (3) Compass to allocate internal resources to specific project plans. Ordinarily, a business plan has no explicit role for knowledge and the innovation process is defined according to the flow of technology (i.e., materials into products and services for the customer). It is an analytic routine based upon the tacit assumption of an extrapolation of current ‘run rates’ (i.e., today’s knowledge at best).

Innovation Strategy, on the other hand, provides a focus on the future - the products that are yet unarticulated and the markets yet to be served. It is comprehensive process to integrate the financial, behavioral and technological aspects of the firm. It provides a methodology to articulate business strategy in terms of leadership positioning and the subsequent related business plans. A solid innovation strategy consists of the same three parts utilized in a different way. (1) Mapping considers all the resources - human, financial and technical - to be integrated as a continuous learning system, (2) Scaling measurements consider the intellectual capital of an enterprise - often described as the difference between book value and market value, and the (3) Compass provides a coherent, common vision within which internal and external variables are leveraged to optimal value, including the flexibility to capitalize upon unexpected market changes. Innovation strategy, by definition, assumes an explicit role for knowledge and is more of a synthetic process based upon vision and uncertainty.

Geographic Atlas

Business Planning

Innovation Strategy

Is a systematic representation of the World, albeit on a flat surface. Provides a methodology needed for planning and implementing travel. Consists of three parts: Mapping (classification), Scaling (measurement and relational information), Compass (direction.)

Is a representation of the process and plans necessary to competitive positioning of an enterprise. Provides a methodology to define business plans based upon a desired product/market portfolio. Consists of three parts: Organization capabilities and financial investments, Measurements based upon external market-share, Technology positioning and specific project plans designed to build competitive advantage.

Is a comprehensive, systematic process to integrate the financial, behavioral and technological aspects of the firm. Provides a methodology to articulate a leadership business, subsequent related business plans and desired learning systems. Consists of three parts: Resources - human, financial and technical, Measurements for intellectual capital; Coherent shared vision and common language to build sustained collaborative advantage.

Figure 2: Contrasting Atlas Variables with Business Planning and Innovation Strategy

 

THE NEW KNOWLEDGE VALUE PROPOSITION

A new knowledge economic dynamic is operating that creates a management environment in which the old traditional policies and practices are not sufficient. Most companies are operating on a value proposition based upon Cost, Quality and Time.

However,

As the marketplace becomes hyper-competitive …

As the performance metrics become more complex and intangible, …

As the organization becomes more networked, …

As people become more empowered and energized, …

As process becomes boundary-less,

Enterprise will become increasingly reliant upon technology.

As enterprises become more reliant on technology and its attendant complexity, they will become more dependent upon the knowledge and behavior of employees as well as other stakeholders - both inside and external to the firm. Simultaneously, performance metrics will become more hidden, intangible - related to what leading management philosophers have defined as intellectual capital. Therefore, the traditional value proposition of cost, quality and time - although still very important - is just not enough.

There are lessons to be learned from the decade of research into what became known as the “technology paradox,” later defined as the “productivity paradox.” It is important to revisit this paradox since development in information technology is the primarily enabler of collaborative innovation efforts. Hundreds of billion dollars spent annually on information technology aim to improve the productivity of individuals and groups, and yet they have little measurable impact. Michael Schrage outlines the problem:

The big lie is pervasive, and it offers a seductive logic that actually makes it believable. The lie says that if organization only had greater quantities of cheaper, faster, and more useful information, they should increase their profitability and enhance their competitive position in the marketplace. On the surface, that makes sense … Although in many situations better performance will result, the sad reality is that even improved information often has little or no impact on people's behavior … networks depend on the culture and politics of their companies.

This problem has been the subject of significant studies by organizations such as National Research Council (NRC), as well as the focus of applied research by information technology firms. Productivity is a concept that relates to the level of output to the level of input and is understood to be more of a multivariable problem than a linear cause-effect relationship. As noted, given the system nature of innovation and the independent effects of variables, results are difficult to quantify, and seemingly impossible to measure and predict. For example:

Information technology has value only if surrounded by appropriate policy, strategy, methods for measuring results, project controls, talented and committed people, sound organizational relationships, and well-designed information systems. The productivity of management is the decisive elements in whether a computer helps or hurts.

The NRC report notes that on the enterprise level there are great difficulties in predicting strategic effects, measuring certain types of output, assessing benefits that might be diffused or delayed, and separating the contributions of information technology from those of other factors. It suggests that the firm's most valuable asset may become professional know-how, flexible response, capabilities for innovation, information and management systems, and knowledge about customers and markets. These assets are also not often reflected in the organization's financial statements or in the nation's accounting system.

The report also indicates that information technology has been used to increase cross-competition among industries and among individual activities within enterprises in different industries. However, at the same time, information technology has stimulated entirely new forms of collaborative economic activity, such as worldwide research networks, global sourcing arrangements, large-scale development and sharing of databases, new training and education capabilities, rapid-response innovations systems, and alliances and networks of companies. Indeed, the notion of community of practice has been significantly enhanced by, and is becoming increasingly dependent upon, the use of electronic communication systems. Information technology also provides the foundation for Global Information Infrastructure (GII) that is in reality a Global Innovation Infrastructure.

These elements create a framework for analyzing innovation effectiveness: Performance, Behavior, and Technology [Note: See Figure 3]. The new knowledge value proposition emerges to balances these complex, interdependent factors. A focus on one aspect will have an automatic effect on the other elements. Only a balance among the three will enable an enterprise to be centered and capable of managing forward toward sustained prosperity.

Figure 3: Elements of the Knowledge Value Proposition

What follows are some of the items to consider under each management factor. These are intended to provide ideas for discussion. The actual elements will differ from organization to organization, industry to industry, and country to country. However, the universal concept is that a management system requires the balance of all three, and the interrelationship among the factors may be more important than the discrete categories themselves.

- Metrics for investments and profitability; asset identification (i.e. financial, technological, and intellectual); qualitative/quantitative success measures; budget level; resource mix; rewards/incentives; tax structure, and creative financing mechanisms.

Behavior - Learning networks of expertise; system dynamics; reporting relationships; staffing patterns; cultural and cross-cultural aspects; liaison relationships; collaborative strategies; sense of purpose; work imperatives; individual/organizational balance; development plans; learning philosophy; role responsibilities; work design; simultaneous parallel activities; cross-fertilization of ideas; cross-functional teaming; global souring; benchmarking best practices; periodic review and evaluation; and communication strategies.

Technology - Electronic communication infrastructure, intelligence system, service delivery techniques; technology advancements; transformation; shared technology resources; collaborative groupware; workflow documentation, intranets, corporate portals, decision support, computer memory and network management tools.

It is easy to recognize that the behavioral aspects (e.g. psychology, sociology, anthropology, political science, etc.) are the crux of the productivity paradox. This is precisely the driver that has led executives to begin to assess the implications of the human capital as a tangible, measurable asset. How can it be measured and leveraged? In the OECD Observer, a lead article on the topic indicates:

The contribution of "human capital" - workers' know-how - to productivity goes largely unreflected in the statements of companies' income and their balance sheet. The reason is simple: no one knows how to define and evaluate it. How, then, can the costs and benefits of further education and training for upgrading it be measured?

Of course, we have not yet devised appropriate methodologies. There are, however, numerous international conferences on the topic with leadership being taken by accountancy boards and firms, leading research think tanks, (e.g., The Brookings Institute) as well as the U.S. Securities and Exchange Commission. The OECD is even looking at this issue at the macro-level, but the implications are relevant for enterprise managers as well. "Policies which reconceptualize the management of human capital [are] one way of improving decision both on the uses of the asset (stock) and the incremental investments that either maintain or add to it (flow)."

The challenge is how best to improve the signals used to indicate the capabilities of the labor force, which are in constant flux. Compound this with the notion of the difference between tacit and implicit knowledge - a distinction required to better harness the intangible assets of an enterprise, and we have the rationale for an entire new system of innovation performance measurement.

The real problem is one of operational isolation and/or competition for limited resources. To be optimal, the enterprise must function as a system of interconnected actions grounded in a core understanding of corporate values, as well as strategic sense of business purpose, vision, and direction. As organizations' interfaces include a variety of external relationships, the scope of the enterprise expands. The increasing complexity (operating more a system dynamic graphic than a cause-effect diagram) requires that a framework be used to guide resource decision making. It is as different as viewing the world as flat and spherical.

The new knowledge value proposition - interestingly enough - corresponds to the three sub-themes of the knowledge movement. The first is Financial Capital with an intent to calculate and monitor the Intellectual Capital, best exemplified by Leif Edvinsson, Skandia AFS (Sweden), Karl-Eric Sveiby (Australia) and Baruch Lev, New York University (USA). The second is the focus on Social Capital embodying the concepts of the learning organisation articulated by Chris Argyris, Harvard University, Peter Senge, MIT, and Hubert Saint-Onge, The Mutual Group (Canada). The third is the focus on the Technological Capital - IT as knowledge processing - best articulated by Tom Davenport, Peter Keen, and Kent Greenes, SAIC (formerly from British Petroleum - UK).

The most important - and the least understood - may be how to account for the behavioral aspects of the organisation. According to our surveys, culture is by far the most difficult and critical challenge facing organisations today. How does one incentivize a culture of knowledge sharing in an organisation steeped in competitive values and suffering the aftermath of re-engineering and downsizing? This is precisely the dimension that is not usually represented in traditional business planning models and is the rationale for executives to migrate toward a more robust knowledge-innovation strategy approach to the business.

Migrating From Business Planning to Innovation Strategy

Migration from business planning to innovation strategy is inevitable and challenging because it is related to changing the dominant mindsets. As John Maynard Keynes indicated “The difficulty lies, not in the new ideas, but in escaping the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds." Here we discuss the main aspects of this shift in perspective.

Migration implies a sense of journey over time and space, as well as challenge and change. Elaboration of innovation strategy is not a matter of size or scope of the enterprise; it is more a matter of defining an explicit role for knowledge in the business endeavors. The whole organization must be engaged in the process of developing of their Atlas of Innovation, including the mapping, scaling and compass for the enterprise. Compared to financial analysis, there are no ‘generally accepted innovation principles.’ Although structures for innovation can be developed, they are usually too generic to be useful. Instead, they must be custom-made according to the specific needs of each business. Managers should create procedures and enable stakeholders to take part in this process.

The incorporation of knowledge into the structure of business plans can have profound impacts comparable to viewing the world from the Apollo 17. Instead of a focus on specific technologies, products/services and markets, the innovation process could change the platform. Instead of a dominant concentration on existing business and financial metrics, the organization is expected to capitalize upon new opportunities for unarticulated needs and unserved markets. In the late 1980’s, Ken Olsen, founder of Digital Equipment Corporation, said, “No one should lose his or her job; we are not defining the market properly.” Ultimately, the company was locked into its existing technology and thus unable to redirect the competence of the firm to address the rapidly changing needs of the marketplace. Result? Compaq acquired Digital when it should have been the other way around.

Using the metaphor of map-making underlines the specifics of the difference between flat and global thinking. The Knowledge Economy is global in scope. Contrary to popular opinion, it is neither US- nor European-centric. One has only to visit the Global Knowledge Leadership Map <http://www.entovation.com> featuring 70 theorists and practitioners from 40 countries to realize that this knowledge transformation is international. These experts understand that knowledge and innovation are the essence of the whole, although they may not comprehend the scope of the whole. The road-map metaphor illustrates the future may contain elements of the unknown -enlightening and surprising. With robust processes, it will be possible to evaluate and respond to these uncertainties, many of which are opportunities in disguise. In the context of the map, we will need to be concerned as much - perhaps even more - with we do not know, as much what we know.

To carry the analogy further, below [Note: See Figure 4] are listed what might be considered the contrasting elements to make the case for the need for a knowledge-based innovation strategy based upon knowledge. Each process - Business Planning and Innovation Strategy - is drafted below according to the three Atlas variables: Mapping, Scaling and Compass. It should be made clear, however, that this might not be an either/or decision. In fact, much of what has evolved into effective business planning might be married with the newer elements of managing the process.

 

Atlas Element

Business Planning

Innovation Strategy

Mapping

Defines how the business treats financial resources. It is mostly administrative to justify financial resource allocations. Facilitates the optimization of financial resources to maximize goals. Envisions plans as an extrapolation of past performance and product/marketing benchmarking.

Defines how the business treats knowledge as a resource. It is based on managing the knowledge-flow to strengthen innovation capabilities. Facilitates the innovation of broadened goals, where knowledge is treated as a renewable resource. Envisions the process as a learning system for the creation, conversion and commercialization of ideas.

Scaling

Appraisal based upon valuation by imposing generally accepted financial measurements. Financial analysis is the dominant methodology. Used mainly for external reporting. Used intermittently for the quarterly and annual reports. Must be consistent with external "generally accepted accounting principles." Usually based upon observable phenomena. Return on Investment - ROI is a popular criterion, which measures profit generated by the invested capital. Is based on double entry financial record (book) keeping. Documents where you have been.

Appraisal based upon both financial and intellectual capital - i.e., knowledge as a resource. Knowledge valuation is the dominant methodology. Used mainly for external stakeholders. Used systematically as a set of warning signals and guideposts. A common language, standards for assessing knowledge and innovation do not exist. Criteria for evaluating the outcomes of knowledge strategy are works-in-progress. The mapping of innovation of the existing case studies are not broadly discussed. Broader, dynamic measurement techniques are needed. Points where you are going.

Compass

Internal decision-making process to allocate financial resources. Conventional cost accounting is the dominant methodology. It is based on classifying costs under three variables: labor, material and overhead; obviously knowledge is not a variable. Is used mainly for managers and internal stakeholders to make decision. Has direct impact on the efficiency of businesses.

Internal evaluation facilitates decision-making process. Knowledge-Based Cost Analysis is one of the methodologies. Is based on classifying knowledge resources (e.g., organizational memory, knowledge-sharing, value of partnering, etc.), as well as conventional ones. Is used mainly for internal decision-making and external stakeholder interaction. Has direct impact on the performance (i.e., productive growth) of the business.

Figure 4: Contrast between Business Planning and Innovation Strategy

So, an Atlas provides the systems for planning and implementing journeys as well as expeditions. Maps are systematic presentation of the World (or part of it) on a flat surface, although Earth is a globe. Maps show a view of a region, and visually depict its juxtaposition in relation to adjacent geographies. Maps work as taxonomies, demonstrating commonalties between areas. From ancient times, civilization has produced maps to depict the earth distributions geographically. Maps, similar to vision tools, illustrate one's perception of their environment.

For accurate valuation, a map must impose a 'scale of measurement’. Scales are used to define the distance between two points. Scaling makes it possible to plan and benchmark a journey's progress. To make decisions during the journey, we need to evaluate the direction continuously and act on this knowledge accordingly. A compasses indicates the desired direction - which may change - and assists in making real time decisions to change path. In this context the scale and compass work differently, but interdependently. Using the compass involves the proper use of map and scale - incorporating them into the decisions made reach your destination.

Business Planning Implications

Business planning is a methodology to create plans that articulate short- and long-term goals, sources of product and service supply, market and methods, key personnel and their expected contributions to the business, and the various financial aspects (capitalization, cash flow, margins, expected results, etc.). A good business plan is useful as a point of discussion for other stakeholders, including bankers and investors. Recent research, however, shows many successful entrepreneurs did not have a business plan - at least not the kind of business plan that most financial advisors had in mind. Some studies have shown the conventional criteria by which business plans are assessed can be counter-productive when applied to high-growth start-ups.

Business plans, prepared for financial purpose, are organized as follows. 1) Summary, 2) Market analysis, 3) Products and services, 4) Production operations and manufacturing, 5) Management and personnel, 6) Financial data - usually fixed assets such as land, building, equipment, etc. 7) Risk and opportunity. Elements such as human capital are usually recorded as a cost or expense on the balance sheet.

External appraisal facilitates valuation by imposing measurement on business endeavors. The enterprise describes itself as accurately as possible to the external stakeholders such as shareholders, creditors, customers, and regulatory agencies. External parties focus upon quarterly or annual results. Similar to the scaling of an Atlas, the external appraisal reports are intermittent and define the position of a business compared to a period in the past and future projections.

Financial accounting, primarily concerned with summarizing and reporting historical costs in general purpose financial statements, is the main and dominant appraisal methodology for businesses. General-purpose financial statements are prepared in accordance with external standards, which are imposed by the public accounting profession (in the form of generally accepted accounting principles) and by regulatory agencies. Financial statements should be based on observable phenomena. Such information relates to the financial position, liquidity (that is, ability to convert to cash), and profitability.

Return on Investment (ROI) is a popular criterion in the financial analysis. For the shareholders, the most important measure is what they earn after tax in the form of dividends on the invested capital - often shortened as ROE.

Financial record keeping - which provides the information for financial accounting - is based on a double-entry system. Double-entry bookkeeping began in the commercial city-states of medieval Italy and was well developed by the time of the earliest preserved double-entry books, dating from 1340. The Venetian monk Luca Pacioli wrote the first published accounting work in 1494. Although it disseminated rather than created knowledge about double-entry bookkeeping, Pacioli's work summarized principles that have remained essentially unchanged. Peter Drucker (1994) indicates "The accounting system, which is a 500-year-old information system, is in terrible shape."

In addition to external appraisal (financial accounting) businesses use also internal evaluation (or managerial accounting) methods which are concerned with providing information to managers and other persons inside the organization. The internal evaluation reports, which are not generally disseminated outside the company, emphasize factors under the control of decision-makers, which have impacts on the performance of the organization. In this context, internal evaluation reports act like a compass.

Cost accounting is the most common form of the internal evaluation methods. In this method all costs are aggregated into three categories: ‘material’, ‘labor’ and ‘overhead’. Peter Drucker (1995) indicates "Traditional cost accounting, first developed by General Motors over 70 years ago, postulates that total manufacturing cost is the sum of the costs of individual operations. Conventional cost accounting shows only the costs of individual manufacturing operations in isolation.”

Lack of attention to the role of knowledge, as a resource or an independent variable, is the key deficiency of this classical business planning. Indeed, none of the parts of the business planning; classification, external evaluation and internal appraisal are organized to treat and handle knowledge properly. Consequently, the systems cannot use innovation, as the knowledge process. The incorporation of knowledge into the system necessitates a migration to knowledge-innovation strategy, described briefly below.

Implications for Innovation Strategy

The role and importance of knowledge, as a source, has been elaborated in numerous publications. Peter Drucker (1994), underlines that "knowledge has become the resource, rather than a resource, is what makes our society ‘post-capitalist’." He then added (1994) "The comparative advantage that now count is the application of knowledge. The emerging society is one based on knowledge and the knowledge worker” Although he contemplates (1993) "We do not fully understand how knowledge behaves as a resource. We have not enough experience to formulate a theory and to test it. We can only say so far that we need such a theory. We need an economic theory that puts knowledge into the center of the wealth-producing process. Such a theory alone can explain the present economy. It alone can explain innovation.”

A strategy is a deliberate plan of action. An innovation strategy is similar to a road map that assists an enterprise to articulate where it is to go, and organizes the resources to get there. However, there may be no perfect map; and the measuring devices may not be as accurate. A competitor may change the whole landscape even before we reach there. Key to developing an innovation strategy is looking at knowledge as a resource. Knowledge and innovation are the key players in the path of progress. An innovation strategy is also distinct from business planning. For instance business planning is an analytic routine based on the tacit assumption of continuation of current situation (status quo). Innovation strategy, on the other hand, is a synthetic practice based on innovation and uncertainty.

The first step in the articulation of an innovation strategy is the mapping of the organization structure of the entire process. Although such structure may seem arbitrary, an innovation architecture must: 1) facilitate the migration from business planning to innovation strategy, 2) expedite the application of knowledge-sensitive external and internal evaluation methodologies, and 3) elucidate the specific nature of the given business. In this context, a possible mapping of innovation may be organized under four main headings as follows:

Technological Innovation

Social (Human) Innovation

Market (Customer) Innovation

Organization (Leadership) Innovation

The above classification is consistent with Drucker's statement (1974) that "innovation is an economic and social term. Its criterion is not science or technology, but a change in the economic and social environment, a change in the behavior of people, as consumer or producer."

Each of above four groups of innovation has sub-classifications. For instance, the first - Technological Innovation can further be classified into 1. Product; 2. Process; 3. Plant; 4. Equipment; 5. Operation. ` These categories are broader than the traditional classification of technology into product and process. Each of the above sub-classifications can be further subdivided. Product Technological Innovation may be organized into Function, Form and Ergonomics. Such a classification of innovation makes it possible to look at capital differently. In addition to financial capital, our business evaluation might also include, "social-human capital," "technological capital," "customer-market capital," and "organization-leadership capital.”

As early as 1983, W.J. Abernathy suggested a matrix of four types of innovations: Architectural Innovation, Market Niche Innovation, Regular Innovation, and Revolutionary Innovation. Abernathy and Kim Clark in 1988 identified eleven elements of innovation competence: 1. Design/embodiment of technology; 2. Production systems/organization; 3. Skills (labor, managerial, technical); 4. Materials/supplier relations; 5. Capital equipment; 6. Knowledge and experience base; 7. Relationship with customer base; 8. Customer applications; 9. Channels of distribution and service; 10. Customer knowledge; 11. Modes of customer communication. The point is that an innovation schema - however it is defined and classified - is essential to modern business strategy.

Inclusion of knowledge in financial analysis (conventional external evaluation reports) has been the core of the emerging discipline of Knowledge Management, usually referred to as KM. Karl Erick Sveiby, a Swedish writer now living in Australia, is a pioneer in initiating and writing about KM. Sveiby (1997) organizes the intangible (knowledge) assets under three main headings: “Employees Competency” (related to social-human innovation), “External Structure” (related to market-customer innovation) and “Internal Structure” (related to both organization innovation and technological innovation.) Skandia, a Swedish company under the leadership of Vice President Leif Edvinsson, is the vanguard in publishing an annual intangible asset report (appended to the Annual Report) consistent with the methodology originally explained by Sveiby.

Systematic incorporation of knowledge in the internal appraisal methods has become the focus of many knowledge management studies and the theme of international conferences throughout North America and Europe. Peter Drucker (1995) anticipated that "for most knowledge-based and service work, we should, within 10 to 15 years, have developed reliable tools to measure and manage costs and to relate those costs to results."

A method entitled 'Knowledge-Based Cost Analysis' is one of the systematic methods to address this need. In this method, input variables of production are classified as follows:

Knowledge and information: which are generated, developed and applied in a process

Human resources (labor): which are developed and applied in a process

Equipment and machinery: which are utilized in a process

Material, energy and services: which are consumed in a process

In the knowledge based cost analysis, costs are classified into two groups: 'Substituting' and 'Enabling.' Substituting (consuming) costs are related to variables that must be substituted, if the process of production is repeated. So, for each new production replication, similar resources are required so the process can be repeated. Material and energy are mainly related to the substituting costs. If we plan to replicate the production process, equivalent amounts of material and energy are consumed.

Not all production resources are depleted. For instance, as Paul Romer (1993) indicates, an idea (knowledge) can be used over and over again by everyone, provided it is communicated. He considers ideas as the instructions that let us combine limited physical resources in arrangements that are ever more valuable.

Activities of the people in an enterprise may vary from knowledge generation to application or commercialization - the process of innovation. Efforts can be related to improving the capabilities of oneself or the skills of a colleague, as well as improving the general organization of a business. Capabilities that relate to improving skills are traditionally referred to as the ‘learning curve.’ Improving the organization's structure is known as ‘corporate culture.’

Investments in people, usually referred to as human resources, can be broken-down into operations, knowledge generation, skills and organizational development. Costs related to operation can be thought of as substituting costs, since similar operational costs are incurred when performing the same process. However, the costs of knowledge generation and skills- and organization-development, which relate to improving the capabilities of a system, are grouped under enabling. In the same way, maintenance/depreciation of machinery is a substituting cost, while acquiring a machine is an enabling cost.

The structure of conventional (standard) cost accounting has been reserved for the consumable aspects of the production process such as material, energy, operation, and maintenance/­depreciation. However, a new knowledge-based dimension has been added to this system. In the conventional cost accounting procedures, all knowledge endeavors, as well as the cost of utilizing artifacts (depreciation, maintenance, insurance and related taxes) are usually buried under overhead.

Articulating a Knowledge-Innovation Strategy

The first step for an effective innovation strategy is to make the process explicit. It is that simple and that complex at the same time. If the process is not managed systematically, it is left to serendipity. Most organizations expect from innovation to R&D, the function where new ideas are funded. With a global and interdependent perspective of the enterprise, ideas can and must come from every function and external stakeholders as well.

Eric von Hipple (1988) documented that the sources of innovation vary greatly. Some studies replace the manufacturer-as-innovator assumption with the view of the innovation process as predictably distributed across users, manufacturers, suppliers and others. As much as two-thirds of new product ideas come from customers. Organizations are experimenting with various extended enterprises, virtual networks and cyber-companies.

Based upon several years of management systems research and application of core concepts in a variety of academic, industrial and government settings, the following ten dimensions of management strategy [Note: See Figure 5.] have emerged as an excellent way to calibrate an organizations capacity to innovate.

Figure 5: Ten Dimensions of Innovation Strategy

Each of these domains are often managed in isolation - often with their own language, priorities and practices. For instance, there is often little respect found between the finance, human resource and information technology organizations. These functions and business units often compete for limited resources through the budgeting process without a coherent sense of purpose and vision. The results lead to fragmentation, unnecessary duplication, conflict, and underutilized competencies.

What is needed is a dialogue among the principals of the organizations - across functions, business units and managerial levels. An administrative tool is needed to stimulate the strategy formulation process with a focus on the managerial aspects of the firm - not only the financial or technological elements. Remember that all three must be in balance for optimal leverage.

Similarly, business units will compete for resources and not collaborate on their own relative strengths and weaknesses to optimize the results of the organization. Those that do not succeed are vulnerable to being amputated. Unfortunately, the business planning focus to-date - with its primary foci on finances, products and markets - intensified the competition so some business units compete for the same customers.

How can one get started? A Knowledge Innovation™ litmus test is provided below as a sample of questions to be answered for an organization to assess its innovation capacity. There are 70 questions in the full assessment available in hard (paper text) or software application (Amidon 1997). The questions below provide a sample of 10 carefully researched dimensions of innovation and may be answered individually or as a group. Using this as a dialogue tool, participants will gain a clearer understanding of the complementary competencies that can and must be brought to bear:

 

Yes  No    
1  1  1. Has one person been chartered with the overall responsibility to manage the corporate-wide (overall) innovation process?
1  1  2. Are there performance measures - (both tangible and intangible, internal as well as external) - to assess the quality of the organization’s innovation practices?
1  1  3. Do the training/educational programs have provisions to incubate and spin out new products and businesses?
1  1  4. Does the local, regional, or international presence operate as a distributed network of expertise, which learns from, as well as distribute to customers?
1  1  5. Is there a formal intelligence gathering strategy to monitor the positioning of both current and potential competitors?
1  1  6. Does the rate of production of new products and services exceed the industry norms and create new markets in which to excel?
1  1  7. Has a strategic alliance manager been designated to create and manage the network of partnerships and joint ventures to leverage the firm?
1  1  8. Does your marketing image portray an organization with the capacity to create and move ideas into the marketplace to make the firm's customers successful?
1  1  9. Have resources been allocated to articulate a compelling vision internally and share company expertise externally through publications and participation in major forum?
1  1  10. Is the computer/communications capabilities treated as learning tool for internal conferencing and external business leverage on the Worldwide Web?

If seven out of ten questions were answered in the affirmative, it is likely the organization has a good handle on the innovation process and knows how to create an environment for the optimal flow of ideas contributing to the viability of the enterprise. Primarily negative responses to these basic innovation questions should drive an organization to examine its processes for bringing ideas to market and leveraging intellectual capability into the future. Whatever the results, the questions can frame an innovation dialogue.

Behind each of these 10 dimensions are many questions that relate to a given company or industry. If you use a rating scale, say 1-10 on how well the enterprise is doing, inevitably there will be significant differences of opinion. The importance is not in answering a yes or no or even a particular rating. The rationale behind the answer is of most value. From the resultant dialogue, innovative strategies will emerge. This way, executives can tap into the tacit knowledge of employees- thus widening the knowledge base from which business decisions will be made.

Crafting an Enterprise-wide Innovation Vision

Innovation must be in the head, heart, and hands of every participant in the system. It does not mean everyone is an expert technician or marketer. Everyone should have knowledge of the entire innovation system and his/her particular role. There must be a common language and shared purpose, boundaries must fade between functions, sectors, industries, and cultures. There must evolve a basic trust, mutual respect, and collegial competencies; a thirst for learning.

There are ways to change the dimensions of the dialogue from the traditional financial, linear models. Exploring the ten dimensions of innovation provides useful insight. Another view is illustrated with the matrix below [Note: See Figure 6]. Although it may appear as two-dimensional, it can be discussed across functions, business units and geographies. This approach can be mapped into the ten dimensions. As strategies are identified, they can be developed with multiple time frames in mind, such as short-, medium- and long-range. The participants in the process can come from differing managerial levels and or generations, such is the case with the 3-G planning model of Skandia.

That being the case, players at all enterprise level can share these modern management philosophies, and in so doing overcome the barriers and obstacles to progress. Academics, government officials, industrial executives, and non-profit practitioners may all participate in this community of innovation practice. Activities that can be mapped according to the different economic levels, as well as the three elements of the architecture: Performance Metrics, Behavior and Technology - thus resolving the productivity paradox.

Executives should think about their activities according to three time lines: immediate (1 year), medium term (1-3 years), and long term (3-6 years). These can be completed function by function, businesses unit by unit, company to company, sector to sector, and nation to nation. In short, this is the blueprint that could provide a mega-level view to create a coherent, comprehensive and compelling innovation strategy.

Germany will host The World's Fair in the year 2000. Hundreds of theorists and practitioners in the new community of knowledge practice will convene for a ‘Roundtable for Innovators from Around the World.’ Performance metrics, behavioral and technology issues will be shared there. A common language will evolve which promises to converge the foundation of knowledge and process of innovation.

This vision is achievable. It is inevitable some events will prompt a worldwide understanding of the real value of intellectual capital and how it will be put to societal advantage. Given recent initiatives by the European Union, the OECD, and the World Bank, such a vision may be closer to reality than previously thought.

In Conclusion

Just as with the Egyptians, Persians, Minoans, Greeks, Abassynians, and Europeans of times past, the future belongs to those who have the willingness to venture into the unknown. They used their intuition, imagination, sense of adventure, and tools they innovated to explore the environment beyond the limits.

Moving beyond traditional business planning practices will not be easy; the rewards will be great. Today we measure what we can measure, rather than measuring what is important. Now we underestimate the true potential of information technology, knowledge processing and worldwide communications. Today we have little sense of how to measure the true value of social capital, which is far more a function of interaction, interdependence and collaboration. To do so - and understand the relationship among the three - requires multi-dimension visioning and courageous leadership.

The Knowledge-Innovation Atlas scopes the new classification schema, the scaling and measurements systems and the compass to chart new directions. Because something hasn’t been done before is no reason not to innovate. We must learn to create the business plans for emerging markets. Thus, we will unleash the bountiful opportunities afforded the next millennium. We will do so systematically and with renewed purpose.

Although much has been written on knowledge management and the knowledge economy, the reality is we know very little about the real implications of this inevitable transformation. One thing is certain, the journey into the next frontier will bring forth new value for knowledge and the innovation processes in ways unimagined.

[This article was originally published in the 2000 Handbook of Business Strategy, Faulkner & Grey.]

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