Entovation International
Origins of the “Knowledge-Based Firm"
INTEROFFICE MEMORANDUM
TO:  Ken Olsen
DATE: 28 February 1991
FROM: Debra M. Amidon
DEPT: Management Systems Research
EXT: 223-2127
LOC/MAILSTOP: ML03-2/F41
ENET: FORUM
CC: Win Hindle
Distribution Ron Smart
SUBJECT: "Origins of the 'Knowledge-Based Firm'

- ROUGH DRAFT -

What Ken Olsen created in 1957 is historic in industrial management. He brought the research environment of an academic institution into a commercial enterprise. With the organizational insight from General Georges Doriot and the participation of his initial management team, he established a unique organization from which we will describe as dynamic (i.e., the “D-Form”). This is not to diminish his technical contribution to the industry; but, rather, to define and position DIGITAL Equipment Corporation with the managerial leadership which leverages intellectual capital as a strategic resource in global enterprise management.

Since it’s inception, the Corporation has been an enigma organizationally. In some cases, experts refer to “the DIGITAL mystique”. Others define it in simplistic terms as organized chaos…or the chaotic organization. In fact, it is neither. It is a networked, “knowledge-leverage” form of learning organization positioned for 21st century sustained profitable growth. Perhaps DIGITAL would be better thought of as a “knowledge-utility” or a “global innovation system”. It has a managerial foundation that preceded appropriate labels, language, defined concepts and principles simply because it’s origins were so ahead of its time. Now they are more defined.

Over the past few years we have veered from effectively capitalizing on the strength of our corporate managerial jewels. This may be due to the complexity of managing a large-scale enterprise amidst a turbulent evolving global economy. It may be the reality of restructuring amidst imposed resource constraints. Whatever the cause, the result is the same. We have reverted, in many cases, to some of the traditional, hierarchical management practice that hinders the DIGITAL type of “knowledge flow” said to be the competitive advantage of the future.

It is time to reaffirm our roots, including our sense of purpose, in a transformation strategy that will simultaneously preserve the best of our unique competencies and (re) align our strengths. Our vision ought to position us for transitional collaborative leadership. This paper is intended to document the historic role of DIGITAL in establishing the new era of industrial management similar to what Alfred Sloan accomplished at General Motors in the 1920’s. His decentralization defined the “M-form” (multi-divisional) organization. Management Systems Research (MSR) materials have been prepared for internal education and awareness of the correct positioning of DIGITAL within the industry and in history.

This description has been presented to the people on the distribution list of this memo. In various ways they have helped shape what follows. Many believe that an active articulation of our history would create an appropriate and favorable positioning of the Corporation. What follows is the substance of this positioning.

 

The Roots of DIGITAL:

It began in the Lincoln Laboratories of the Massachusetts Institute of Technology. Ken Olsen, then a graduate student, believed that the intellectually creative climate of the research community could be developed within the business context. The search for new possibilities would be pitched against performance in the marketplace, not simply against the laws of physics or the agreements of academic peers. In 34 short years, the Corporation has grown from a $70, 000 venture capital investment into a $12.9B company ranked 27th in the Fortune 50 with 121, 000 employees in over 1200 locations in 84 countries around the world.

The contribution of DIGITAL technology in creating the entire industry of minicomputing is well documented. Other technical impacts include the development of network technology, the rapid evolution to a worldwide full spectrum vendor and the roll played in influencing international standards. Concurrently, the company boasted the largest user society in the industry, which, particularly in the early years, provided an integral interface with leading edge customers who were able to influence product directions.

What is not so well described is the emphasis placed upon the human system, the creation of a learning environment that provided the underpinnings of an extraordinary commitment to knowledge creation. Cross-functional teams were formulated readily to solve particular problems. In 1957 this teaming concept was quite a contrast to the traditional U.S. based hierarchical structure. It had the influence of General Georges Doriot who lectured at Harvard on similar concepts that Edward Demming was forced to take abroad, because his ideas were not appreciated in the U.S.

However, Ken Olsen listened and coupled those quality methodologies with an entrepreneurial agenda that created a dynamic tension in the company. This “entrepreneurial teamwork” is one of the DIGITAL corporate jewels in the management domain. There are several other examples that require a balance in the system to enable managers to allocate resources based upon timely business opportunities.

Change was a given…welcomed by most because it provided an opportunity to develop or leverage learned talents in new ways. Flexibility and adaptability were the by-words for individuals and organizations alike. There was a keen sense of being valued…and valuing…such that a mutual trust was established. Technical risk taking was encouraged; not that all projects succeeded, but, people were rewarded for experimenting with new ideas. An innovative infrastructure was the foundation for success. Competitors and collaborators alike envied this resultant “electric community”.

 

Contrast With The Traditional “M-form” Organization:

DIGITAL’s management philosophy and concepts seem unique in contrast to the traditional organization structure established by Alfred Sloan. The value of “bubble-up” ideas, employee self-direction and knowledge-based decision-making were unusual to say the least. In fact, to describe DIGITAL’s organization as a matrix organization was simplistic.

What we have discovered, years later, is that these origins of DIGITAL set in motion in new management system, which can be described, as dynamic and multi-dimensional. The contrast with the traditional multi-divisional form is striking.

The move from the “M-form” to “D-form” is a paradigm shift, which is fundamental in the natural evolution of management. Given the dynamics of a world economy, the rapid advances in information technology and the increasing reliance on the human system for organizational effectiveness, optimizing the flow of knowledge is a challenge. It is especially difficult in a large scale traditional enterprise. The modern enterprise requires an infrastructure that systematically supports initiatives to maintain the creative, entrepreneurial juices that feed smaller organizations, without yielding to the pitfalls of autonomous units. “Value-creation”- through leveraging interdependent areas of world class expertise- is the essence of the knowledge based firm.

 

Creating a Modern Managerial Foundation

The energizing value of the “D-form” organization is obvious. There are healthy tensions created by the interdependencies between and among functions and business units which must compete and cooperate at the same time. These tensions represent the trade-off decisions made in the allocation of resources (e.g., technical, financial and intellectual). This new dynamic environment requires systematic balance. Any transformation strategy must provide for simultaneous evolution and formulation. In Henry Mintzberg’s terms (1987):

“To manage strategy is to craft thought and action, control and learning, stability and change.”

Organizations evolving from simple hierarchical structures (e.g., functional or even matrix) into global networks of value-adding businesses need to adopt new enterprise management principles. Such principles for decision-making provide guidance for modern management practice in worldwide enterprises. They also appear to be of value to smaller, more localized businesses, even non-profit and volunteer organizations operating with 21st century management.

#1. Capitalize upon Organization Complexity: Simple lines of authority derived from a hierarchical perspective create an illusion of clarity and stability, which does not serve managers well in turbulent business environments. The new principles reestablish simplicity amidst the complexity and provide a value-adding focus within the context of the whole. This enables realistic strategy formulation with a robust vision of future opportunities as well as the flexibility for timely leverage of technological and business breakthroughs.
#2. Optimize the Structural Transformation: Dramatic changes of corporate architectures are rare, put in motion by a series of technological, sociological and even psychological factors. DIGITAL is experimenting with its fourth change, which is a fine-tuning of changes initiated in 1982. Recognizing this concept of organizational life cycle as inevitable and desirable, managers can be more receptive to, and even enhance the changes, once they recognize the natural dynamic nature of the organization.
#3. Create Networks of Value-Adding Business Units: The human network represents the key integrating mechanism to synergize the knowledge of the company, customers, suppliers and other collaborators. The emphasis is on exploiting key interdependencies and linkages between and among units. To operate differently in a dynamic business environment is to miss critical new opportunities and therefore to sub-optimize. Each business must be viewed as a human network and each larger enterprise is a network of businesses.
#4. Drive “Entrepreneurial Teamwork” in a Global Infrastructure: A premium must be placed upon fluid, adaptive and responsive organization capability. Ideally, anyone - anywhere in the DIGITAL global enterprise - can make proposals for new business opportunities and/or be tapped to leverage the initiatives of others. This is the way to exploit the value of a worldwide knowledge network. Computer technology enables the timely flow of information and provides the electronic infrastructure for transnational communications.
#5. Recognize the Knowledge Agenda: The “D-form” organization places a premium on the quality of knowledge contribution. This concept recognizes that information, in and of itself, is not useful until it is embodied in a person’s awareness and related to business imperatives. The essential focus is on accelerating knowledge development, sharing and application. This requires new organization structures, processes and allocations of resources.
#6. Prepare for Knowledge Processing Technology: The computer industry itself is undergoing transformation with the exploitation of integrative technology. Similarly, the role of systems technology represents a dramatic shift from automating/informing to transformating. Managers no longer seek data or information but knowledge, including knowledge in the domain of human affairs (wisdom). “D-form” organizations rely upon the technology for peer-to-peer networking today, but will need even more sophisticated applications for tomorrow’s business world. Thus, the potential demand for knowledge processing capability is enormous.
#7.  Focus on Performance Measures for Effective Business Management: The critical factor in planning and managing a multi-dimensional form of organization is the adoption of system-wide dynamic measures of goodness. They must be complementary between units and motivate managers to contribute actively to leverage the success of one another. Globally, our dynamic utilization of assets can increase the rate of asset growth for customers and all stakeholders. For DIGITAL, it should ensure sustained profitable growth.

 

The Enterprise Management System Architecture (EMS-A):

Our technical architectures have served us well. Numerous functions and businesses have creatively initiated various forms of architectures as a way of framing their work. These have provided structure for technical, business or planning processes. What we supply is an overarching managerial architecture that is simple, but not simplistic, which can harness these interdependent activities into an optimized human and technical system.

The “D-form” organization has been evolving through entrepreneurial initiatives that have generated a healthy flow of ideas. Now we need an appropriate methodology for implementing a more carefully designed management system. The right design will not stifle the imagination of idea proponents. Rather, it will provide ways for decision-making to effectively leverage those initiatives person-to-person, organization-to-organization and country-to-country.

After years of research and re-examination of our own management systems, the following simple, elegant set of architectural standards emerged. In this way we can drive the business performance of the company through the human system and leverage information technology. This architecture can be summarized as a set of interrelated questions:

What will we MEASURE to assess goodness in business results or plans. (ECONOMIC)

How will we STRUCTURE the managerial roles and role relationships. (SOCIOLOGICAL)

What assumptions will we make about the motivation, and problem-solving capabilities of PEOPLE. (PSYCHOLOGICAL)

What cross-organizational managerial PROCESSES will we use to get work done. (MANAGERIAL)

What INFORMATION/KNOWLEDGE processing support systems and applications will we use. (TECHNOLOGICAL)

One must recognize the inter-dependence among this set of architectural factors. In other words, a decision for one factor has an effect on others. To change one factor without adjusting others is to put the system out of balance. Therefore, decision-making becomes difficult and ineffective. This management architecture, if adopted corporate-wide, could leverage the collaborative resources of our world-class business enterprise. The system-ness of the choices has a direct impact on the quality and effectiveness of managers’ decision making. The characteristics of viable enterprise management (decision-making) system based on this architecture, are being developed and described in a series of MSR-Net working papers. (MSR-Net is a global research network with participants both inside and outside DIGITAL, working on the applications and implications of this Enterprise Management Systems Architecture).

In order to expedite the flow of these a new managerial concepts, a “Resource Manual for the Knowledge-based firm” has been drafted. The 10 modules below support the total architecture and provide exposure to the interrelatedness of diverse elements. We invite contributions that further “DIGITALize” generic managerial concepts for implementation.

Module I. DIGITAL’s Current Situation and Historical Background

Module II. Core Values of the DIGITAL Culture

Module III. The Evolving IT Industry

Module IV. Investment Prioritization and the Performance Measures

Module V. Strategic Planning in the Multi-Segmented Firm

Module VI. Knowledge Authority and Decision-making

Module VII. The Networked Organization Structure

Module VIII. Managerial Roles and Processes

Module IX. Individual and Organizational Competencies

Module X. Information and Knowledge Processing Systems

The Manual itself is embedded in a five-stage communication strategy beginning with the launching of the core concepts through executive briefings and culminating in a Forum ’91, the follow-on to the corporate-wide Forum ’86. However, this theme would focus on the Management Agenda and the role of a Transnational, Collaborative, and Knowledge-Based Firm.

 

Defining the Vision: “DIGITAL’s Collaborative Advantage”

Value-chain thinking is very old. Although useful in defining the linear interrelationships of functions, it does not provide a robust framework for an innovation strategy that capitalizes on the strengths of inter-dependent networks of business units. Such a Strategic Business Network (SBN) adds value in product creation, market development and customer partnering. Quality methodologies recognize even further how all functions, or business units, must focus on the customer simultaneously. This new model of customer orientation is well suited to the “D-form” organization, but only if an appropriate framework is used to create a shared mindset among managers.

Current education programs establish DIGITAL’s New Management System throughout the corporation go a long way in shifting the managerial focus. There is a new recognition of the overlapping relationships between product, market and customer thrusts. Once this is realized, together with appropriate cross-functional support, there may be a critical mass of internal executive management ready to recognize the power of the “lotus flower” framework developed at MIT for “Global Innovation Strategy”. This model focuses thinking not only on intra-organization leverages, but additionally on inter-organization (i.e., external alliances/stakeholders) and transnational perspectives as well. The design assumptions of the model focus on two objectives: “real-time innovation” and “global resource optimization”. This is the type of 21st century thinking that goes beyond current integration activities, in ways that will position DIGITAL as the transformed knowledge-based global corporation of the future.

The learning laboratory created as a corporation in 1957 is well positioned, with 34 years of experience, to help customers position themselves for competitive success. This can happen when implementing a dynamic strategy based upon the principles of the “D-form” organization. For several years we have been writing the book, so to speak, on a new management philosophy that is historic in its evolution. Now, many of these concepts have been defined and we have a management architecture. It’s time to leverage our organization insight.

[Please Note: This circulated as an internal memorandum inside Digital Equipment Corporation in 1991 under the name Debra M. Amidon Rogers.]

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