Ayano Hirose

Introduction: Why We Need a New Theory of the Knowledge-Based Firm

We are currently in the midst of great change, a condition which Lester Thurow (2003) called the third industrial revolution. It is a shift towards a knowledge-based economy, where knowledge is the most important resource, superseding the traditional management resources of land, capital, and labor (Drucker, 1993). This has stimulated more active discussion about the theory and practice of “knowledge management.” Yet most firms still have serious difficulty understanding the knowledge resource, and we still lack an effective theoretical framework for understanding the operations of the firm in the knowledge-based economy.

Vision and Driving Objectives: Values for the Common Good

This chapter describes how firms create knowledge to change themselves and their environment, based on their vision and driving objectives. The vision sets the direction for the firm’s strategy and its operations by drawing an image of the future that the firm wants to create. This vision motivates employees and lays the foundation for the firm’s value system, based on defined relationships both inside and outside the company.

The Characteristics of Knowledge

In this chapter, we discuss the nature of knowledge and how it differs from other resources. This will explain why we need a new theory of knowledge and its management. The issue of knowledge in theories of the firm has been addressed mainly in the resource-based view of the firm, where it has been treated as one of the important resources that lead to above average returns (Winter, 1987; Prahalad and Hamel, 1990; Nelson, 1991; Kogut and Zander, 1992; Leonard-Barton, 1992; Teece et al., 1997). The central questions in this view have been concerned with what kind of knowledge resources bring above average returns, how a firm can realize potential profit from the knowledge it owns, and how a firm can protect such knowledge as a resource. Although this view recognizes the dynamic capability of the firm (Teece et al., 1997; Teece, 2007), many of the arguments tend to focus on the utilization of resources, rather than on the dynamics in which the firm continuously builds resources through interaction with the environment. What is missing in the resource-based approach is a comprehensive framework that shows how various parts within and across organizations interact with each other over time to create something new (for a detailed critique see, e.g., Priem and Butler, 2001). The so-called knowledge-based view of the firm (Grant, 1996; Spender, 1996; Nonaka and Toyama, 2005) that grew out of the resource-based view tries to overcome this weakness.

Leading the Knowledge-Creating Firm

In the previous chapter we discussed the dynamic model in which a firm creates knowledge through interactions with its environment. The driver of this entire dynamic process is leadership. Leadership plays a variety of roles in the knowledge-creating process, such as: providing knowledge-vision and a driving objective; developing and promoting the sharing of knowledge assets; creating, energizing, and connecting ba; and enabling and promoting the continuous spiral of knowledge creation through dialogue and practice. At the base of such leadership is phronesis, that is, practical wisdom to make the necessary decisions and take the appropriate action with the right timing to achieve a common good.

Leadership: Fostering Distributed Excellence in the Organization

In previous chapters we have discussed how a firm creates knowledge through dialogue and practice, guided by its knowledge vision and following a driving objective. We have also looked at ba, knowledge assets, and the ecosystem as the foundation for knowledge creation. The question remains: what drives the entire process? We believe it is a leadership capability that can coherently synthesize, direct, and implement the various elements that foster knowledge creation. However, in the knowledge-based firm, leadership is not exclusive to an elite few. It is distributed throughout the organization among individuals who can exercise phronesis to make decisions and act appropriately to each situation to realize a common good. Knowledge-based management requires management of both internal and external knowledge creation activities, case-by-case, because knowledge is created both inside the organization as well as in dynamic interaction with the external environment. In other words, companies exist in an ecosystem of knowledge. Therefore, leaders must be capable of immediate decision-making in response to the ba that continuously emerge and vanish both inside and outside the organization. This would be impossible in an organization where leadership is fixed.

Dialogue and Practice: Leveraging Organizational Dialectics

Breakthrough occurs in knowledge creation not only in the form of radical innovation in a product or service, but also in the form of gradual innovation through everyday practice. In this chapter, we shall examine the operations of the retail companies Seven-Eleven Japan Co., Ltd and Ryohin Keikaku Co., Ltd, where dialogue and practice driven by a shared objective and corporate philosophy have resulted in superb operations that differentiate these companies from their competitors.

The Theoretical Framework

As discussed in the previous chapter, knowledge is created in the dynamic interaction between subjectivity and objectivity. Knowledge emerges from the subjectivity of actors embedded in a context and is objectified through the social process. Knowledge is created from the synthesis of thinking and action by individuals interacting both within and beyond organizational boundaries. This knowledge then forms a new praxis for interaction that becomes the basis for generating new knowledge again, through the knowledge-creation spiral.

Dynamic Knowledge Assets in Process

A person’s cumulative experiences form an archive of personal knowledge. To share and effectively utilize this personal knowledge in an organization, the fluctuating relationships in the organization have to be managed and given direction. Moreover, this shared knowledge becomes an asset inherited by successive generations in the firm.