1 Organizing Processes of Building and Leveraging Knowledge Copenhagen, 1-2 November, 2002 Draft of Friday, 11 October 2002
Replication of Knowledge without Direct Transfer: Firms can Do more than they Know Charles Baden-Fuller Cass Business School, City University, London EC2Y 8HB, England Email:
[email protected] and Henk Volberda Rotterdam School of Management, Erasmus University, 3000DR Netherlands Email:
[email protected],
Acknowledgements: For helpful discussions of our ideas, we acknowledge the assistance and inspiration of many colleagues especially Robert Grant, Gabriel Szulanski and Mary Morgan; and for the data we are very grateful to the executives of the companies involved. They are not responsible for our interpretations.
© C.Baden-Fuller, reserved
2 REPLICATION OF KNOWLEDGE WITHOUT DIRECT TRANSFER: FIRMS CAN DO MORE THAN THEY KNOW
ABSTRACT One of the key challenges that firms face is learning to access knowledge that others possess to build new capabilities and routines. Most of the literature on knowledge transfer has focused on direct processes (Teece, 1976, Szulanski, 2002, Cohen and Levinthal, 1990, Hayes and Clark, 1985, Winter and Szulanski, 2001). But can knowledge also be transferred indirectly by means that are not direct transfer? Historians of technology have argued that replication can take place without direct transfer. In his authoritative account of the American System of Manufacturing (which included mass-production), Hounshell (1984) noted that there were repeated instances such as Ford’s moving production line and the formation of the Colt armoury that produced the famous revolver. But are these instances isolated exceptions? In this article we first theorise how replication can take place without direct transfer. We argue for the importance of recognition that can be stimulated by “dormant-knowledge” (Garud and Nayyar, 1994) or “spatially separated” events. We also argue for attention to context within the organisation, labelled Ba by Nonaka, Toyama and Konno, 2000, and corporate entrepreneurship by Stopford and BadenFuller, 1994. We illustrate our ideas with three cases where knowledge has been replicated without direct transfer and where this knowledge reshaped the recipient organisation. We finally discuss what our findings mean for the theory of knowledge in organisations.
3 REPLICATION OF KNOWLEDGE WITHOUT DIRECT TRANSFER: FIRMS CAN DO MORE THAN THEY KNOW
As we move towards the information society, an increasing number of firms rely on knowledge to create and maintain their competitive advantage. These firms are not just media and software firms, but they include many old-economy manufacturing and service-based firms. Although knowledge does not wear out, it can become outdated, and one of the key challenges that firms face is learning to access knowledge that others posses to build new capabilities and routines. Whether it is to catch-up with fast moving competitors in the same industry, or to leverage knowledge that exists elsewhere in other sectors, this capacity to transfer knowledge poses a significant challenge. An important case occurs where the knowledge transfer is significant and leads to some kind of organisation transformation or reshaping. Most of the literature on knowledge transfer has focused on direct processes. Starting with research into licensing (Teece, 1976) and tracing through work on knowledge movements in mergers and joint-ventures (e.g. Lane and Lubatkin, 1998) to work on direct transfer (Szulanski, 2002) we have learned that there are many factors influencing this process of which a few stand out. These are the absorptive capacity of the receiver (Cohen and Levinthal, 1990), the incentives to adopt (Hayes and Clark, 1985), the status of the provider of the knowledge (e.g. Szulanski, 2002) and the nature of the know-how such as its causal ambiguity (Reed and deFillipi, 1990). Because of the multiplicity of obstacles and factors, writers such as Szulanski (2002) and Winter and Szulanski (2001) have suggested that we focus on the Arrow Core, a measure of the template or minimum knowledge required to effect transfer, and divide the process into stages. These stages, elaborated on later, make a distinction between recognition of the need and the practice of transfer. Can knowledge be transferred indirectly by means that are not direct transfer? In particular, when knowledge transfer results in a new organisation design or form, can the template of what is transferred (the Arrow Core) be an idea rather than a complete recipe? In his authoritative account of the American System of Manufacturing (which included mass-production), Hounshell (1984) noted that Ford’s moving production line (an organisation transformation) was almost certainly inspired by practices in other industries. However, he also noted that there was no evidence that Ford engaged in direct transfer, rather he was “inspired by what he saw”
4 and he “recreated and adapted” the flour milling and other production line based industries that were documented in contemporary magazines. More significant perhaps were Hounshell’s observations (1984: pages 46-50) concerning the Colt armoury that produced the famous revolver. Colt’s approach was remarkable in both its scale and scope. Based on Colt’s own accounts, a British Parliamentary report and many other sources, Hounshell points out that Colt did not gather directly the details of the mass production systems developed to such a fine art by the Federal armouries at Harper’s Ferry. Rather, inspired by their work, Colt set about to design a factory that was in spirit mass-production. Hounshell argues that he achieved considerable success, and although he never adopted the finer details of the American System, he recreated almost all of its aspects without the necessity of direct transfer. Colt can be seen as one of the earliest exemplars of industrial replication without direct transfer. Yonekura (1994) also discusses replication without direct transfer in a much earlier context. He recounts how Oshima Takaato was able to create intricate and advanced kilms to make iron in Japan in 1854 based entirely on reading Dutch text books aimed at a non-technical audience. His achievements were considerable, as it is well known that iron-making technology contains much tacit knowledge and is extremely difficult to replicate. Subsequent efforts by the Japanese government at importing other technology by traditional means of transfer often failed revealing Takaato’s unusual capacity to replicate technology without direct interference. In this article we explore in more detail three cases where replication took place without direct transfer. Each case involved organisation processes and routines. One was an industrial refining process, one was a distribution-logistics process and one was a customer service organisation. In each of the cases, the knowledge transfer reshaped the recipient organisation and led to some kind of new organisation associated with renewal. Our three cases are important for the literature because Rivkin (2001) notes that there are very few carefully documented cases such events, despite their obvious importance. Most instances of imitation or replication assume that some kind of transfer takes place, either of personnel, or of people examining processes, or of some kind of espionage or borrowing of templates. But we first build some theory from observations in the literature.
5 Theory Development An important strand of the knowledge literature is based on the premise that knowledge is a resource that can be modelled as if it has physical properties. Thus, many talk of stocks of knowledge and knowledge flows (Grant, 1996a and b). In addition, knowledge is seen as a depreciating asset if it is not used, and it can be organised, reorganised, and stored (Arrow, 1962). Knowledge can also be lent or borrowed, but unlike physical assets lending and borrowing does not deplete the essence of the knowledge. The physical analogy has limitations; models of knowledge typically recognise that knowledge transfer is difficult (Reed and deFilippi, 1990). Where knowledge is codified in the form of texts or rulebooks, the recipient obtaining copies of the codes can facilitate knowledge transfer. But codes are rarely sufficient. To start, they typically assume a level of knowledge and capability that itself depends on prior detailed knowledge. Moreover, codes are typically incomplete. They do not explain all the nuances and micro details required to make things happen. Much of what is useful is tacit or situation specific or even both. In these instances, knowledge transfer is problematic, and involves an element of development. It cannot be assumed that the knowledge transfer poses a difficulty for all parties or for all kinds of knowledge. As Kogut and Zander (1992) point out, there is a paradox. Where knowledge has been replicated once, perhaps internally in the donor firm or to some licensee (a common case where we wish to copy some know-how) then it can be done again, often with ease. A transmittable template has been identified. Moreover, much knowledge is itself a combination of other pieces of well known knowledge (a point Schumpeter stressed), so replication of a practice can often be simulated as a process of recombination of well known factors. Nonaka (1994) draws on Polyani (1962) when they conceptualise the process of knowledge development as moving knowledge between the tacit and explicit sphere, a spiral that involves processes of socialisation, externalisation, embodying and connecting. This spiral includes processes of transfer, combination and development. Knowledge can be transferred into the system either in a codified or in a tacit form. Critical to the process of knowledge building is the organisation’s routines, contexts and shared values, and Nonaka identifies “Ba”, a particular form of shared context or values, as critical to the effective process (Nonaka et al. 2000).
6 Borrowing from these models, we can breakdown the issue of knowledge replication without transfer into two parts. The first is the stimulus that the organisation gets that provides the trigger about the new knowledge. The second is the set of processes of knowledge development (shared values) that the organisation needs to be able to receive and build the new knowledge.
Recognition and Stimulus Szulanski (2002) noted that in the transfer process locating the idea is a separate process from the other stages. This first stage centres on the idea of recognition, which others such as Hounshell call inspiration. Recognition does not require a high degree of absorptive capacity, rather other factors come into play. These are whether the knowledge is proven to have worked and whether the source of information was perceived as reliable. We identify two likely sources that can trigger knowledge development. There is knowledge that was once used earlier in the past, but whose details may have been lost (dormant knowledge). There is knowledge that exists elsewhere and is currently used either in the same organisation (closely located knowledge) or in rival organisations (distantly located knowledge). Garud and Nayyar (1994) noted that many research-oriented firms had large stocks of dormant knowledge that had been kept “alive”, and that a firm could access this knowledge and exploit it perhaps in new uses not originally conceived. Dormant knowledge has a number of features that overcome the barriers to transfer. The knowledge typically has a known status (it worked well) and was used in a context that was well understood (the organisations routines). However, an open question arises, how much do we need to change? Because knowledge suitable for one era is unlikely to be effective in the next without further development, dormant knowledge may need considerable development to make it useful, so we label it as a “trigger” rather than the knowledge itself. Hypothesis One: Dormant knowledge may be a trigger to knowledge transfer, where the knowledge was once used by the organisation in the past, but has not been used recently. Such dormant knowledge may serve as an inspiration to new knowledge development without all the details of the knowledge being transferred.
7 Knowledge that exists in spatially separated contexts (such as another division or another organisation) and is in current use may not be readily transferable. For one, the managers may be unwilling to give up the tacit codes that surround the activity even when they are in the same organisation. In addition, the context of the use of the processes and the organisation that surrounds them may be so different that direct transfer is costly, time consuming and risky. The donor division may face different customers, be located in a different country, have a different set of organisation values, routines and systems, or even be in a different industry. Once again, we refer to spatial knowledge as a trigger rather than the knowledge itself. Hypothesis Two: Spatially separated knowledge can be a trigger to knowledge transfer, where the knowledge is being used in another location and perhaps in another firm or industry at the current time. Such separated knowledge may serve as an inspiration to new knowledge development without all the details of the knowledge being transferred.
Development and Replication in Broad Scope Our concern in this paper is of replication that involves knowledge that is broad in its scope. Winter and Szulanski, 2001 define broad scope as follows. “A transfer of knowledge is considered to be of broad scope if it creates or greatly modifies the organizational context of the target organisation…. In contrast, a transfer of knowledge is considered to be of narrow scope – even though the effort may be large – if the organizational context of the target organization remains relatively stable” (page 732). In the terminology of Winter (1987) and Rivkin (2001) broad scope is equivalent to high levels of complexity. Thus we can see that broad scope is more than borrowing minor details of a process or purchasing an input, it involves transferring ideas that lead to some kind of organisational transformation. Whether the ideas come from dormant capabilities or spatially separated capabilities, when replication occurs without transfer, the donor’s context is likely to be somewhat different from the recipient. The industry could be different, the customers could be different, and the employees who have to operate the processes may be different. Nonaka (1994) points out that in such cases, the knowledge needs to be developed beyond its original purpose to become useful. He argues that the recipient should have a set of values that incorporate Ba (Nonaka et al. 2000).
8 The organisation renewal literature adds more weight by providing the dimensions of the values required for the development (Chakravarthy and Doz, 1992). Renewal is associated with transforming organisations (Barr, Stimpert and Huff, 1992). It can also involve building new capabilities in the renewing organisation when it borrows from other organisations. Stopford and Baden-Fuller (1994) examined cases of corporate transformation and found the building of new capabilities required corporate entrepreneurship that exhibits five features: ambition, team-working, experimentation, learning and dilemma resolution. Each of these can be related to prior research on capability development. Corporate entrepreneurship is typically required to unlock blockages to capability and knowledge development, such as the core rigidities identified by Leonard-Barton (1992). Bradrach (1997) in his study of replication and adoption of new ideas in the fast food industry noted that franchisees played a key role “that provides a spark of entrepreneurship”. Hypothesis Three: When replicating knowledge without direct transfer to an established firm in an industry, Corporate Entrepreneurship may be the necessary value system for transforming the inspiration or external stimulus to effective capabilities.
It is valuable to single out one particular and important feature of corporate entrepreneurship, ambition. Ambition, often labelled as intent that and has been much discussed by writers such as Hamel (2000). Intent is often ascribed to chief executives and those around them, and a clear and ambitious intent has value in guiding and energising the organisation. Ambition is also related to the concept of dominant logic (Bettis and Prahalad, 1995) or management logic (Dijksterhuis, van den Bosch and Volberda, 1999). This logic provides a focus for the energies of the organisation, allowing it to mobilise its resources in a particular direction. It typically exploits the cognitive frames held by top managers that can be used to locate the context of the knowledge that is being transferred, especially when this knowledge is to have transformation consequences (Porac, Thomas and Baden-Fuller, 1989). If the impact of the knowledge is to have broad scope, then the importance of intent is likely to be great. With broad scope, the organisation needs to be transformed after the new knowledge is built, and this typically requires the energy of the Chief Executive and his or her team.
9 Hypothesis Four: When replicating without direct transfer knowledge that has broad scope, the existence of clear strategic intent or focused ambition at the top of the organisation may be critical.
How does renewal and corporate entrepreneurship related to the ideas of absorptive capacity, a factor often seen as critical in direct transfer? Cohen and Levinthal (1990) emphasise outward absorptive capacity, and most writers have picked up the dimension of need for having the basic competence. But it is not enough to have outward absorptive capacity, for even when the firm does posses competencies, knowledge transfer can be hazardous. There are features such as the Not invented here syndrome can often block knowledge transfer. In many situations, the knowledge that something can be done is often a critical step, and the capacity to create capabilities to resolve problems can be an effective substitute for specific knowledge about a given process. Recreation poses many problems but it does overcome other difficulties such as trying to adjust the solution of others to the particular context. Cohen and Levinthal in their original theorising stress the value of problem solving capability. This “problem solving capability” sits along side and is a partial substitute for knowledge. When replicating knowledge without transfer, a high level of corporate entrepreneurship (a set of values and processes about how to renew) may be the key component of outward absorptive capacity. Indeed, in some cases these may be similar ideas.
RESEARCH DESIGN We illustrate and explore the above ideas using three case studies. We adopted a semi-grounded approach to our research (Isabella, 1990). Such a design is highly appropriate where one seeks examples to illustrate (rather than test) new ideas that are being explored which fill gaps in existing knowledge. Our exploration was originally directed at understanding change processes generally in a number of large complex organisations, and the idea of exploring replication without direct transfer came as a consequence of examining the data. We report here the activities of three firms replicated knowledge without direct transfer. Our discussion aims to capture both the time dimension of the processes of knowledge transfer and subsequent changes, and the cross sectional nature of our
10 organisations. In each firm, interviews were carried out at multiple levels over a period of years focusing on both historical and contemporaneous events. We followed the commonly used procedures of Burgelman, 1994; Isabella, 1990 who have further applied the ideas of Eisenhardt, 1989 and Yin, 1989. Our interviews were semi-structured and aimed at surfacing important events, perceptions, and documenting actions. The vast majority of interviews were tape-recorded, and those of more senior managers were usually transcribed in full. Table One gives more details of the sample, with summary data on the relevant business units and how many people were interviewed. It can be seen that we typically conducted more than 40 interviews over more than one year in each organisation. Our interviews covered many levels and locations: top-level managers (defined from the perspective of the parent), middle level managers (located in the business unit where the actions occurred) and front line managers and operatives. In making these hierarchical distinctions we followed the definitions set out Burgelman, 1983, and Kanter, 1984. It should be noted that in all our cases the interviews took place before the end of the change programmes, so we could undertake some real time observations, and control for some of the dangers of retrospective bias.
TABLE ONE ABOUT HERE
How do we know that knowledge was transferred effectively? In each of our three cases, there was a marked difference in performance between before and after the processes we studied. These differences were evident along two dimensions. The first was the competitive notion, that the economic position of the business had improved as measured by profitability and productivity. These measures cannot be revealed here for confidentiality reasons. The second measure, most relevant to us here, is that new routines and capabilities were adopted. This is dealt with in some detail below.
IDENTIFYING CORE COMPETENCIES, CORE RIGIDITIES AND SOURCES OF NEW KNOWLEDGE We found that top managers were clear that they wished to instil new competencies and to overcome existing rigidities. Using information provided from our interviews, we set out to identify the missing competencies and core rigidities in the chosen
11 business unit prior to the knowledge transfer and change processes, and the summary information is shown in Table Two. In line with the literature cited earlier, this table identifies and classifies the core rigidities along four dimensions: missing knowledge bases, rigidities in technical routines, rigidities in managerial routines and missing embodied values. Our classification parallels that of Leonard-Barton, 1992, who provides a more detailed discussion and justification. However, we go further than Leonard-Barton because we identify where the missing competencies might lie.
TABLE TWO ABOUT HERE
Our three divisions differed quite sharply in the missing knowledge bases and technical skills, and this was to be expected because we had chosen businesses in different industries. Industry boundaries are supply-side determined and by definition relate to knowledge and technical skills. However, there were two common dimensions: all the businesses appeared to suffer from the same managerial difficulties caused by too many hierarchical levels and all managers spoke of the need to introduce new values which parallel ideas of corporate entrepreneurship. It is not surprising that our firms had these common features, its was partly conditioned by our choice of looking at large complex European firms. We use the case of Novotel to illustrate how we reached our classifications. Novotel is the founding division of the Accor Group, and until recently one of the largest and most successful hotel chains in Europe. Following an open-forum among managers of Novotel in the Spring of 1992, senior managers in Accor decide that a change programme should be instigated, which should have as its dual objectives the reduction of costs and the installation of flexibility to increase differentiation. From many interviews, the General Managers of the hotels, along with all the other senior managers of Novotel, agreed that the business had become too inward looking and too inflexible. The organisation had developed serious rigidities, more specifically the business lacked marketing knowledge, operational and strategic flexibility (Second row Table 2). Managers pointed to the existence of technical systems as obstacles to change. One technical system was singled out as a symbolically important, “The Bolts”. This was a 95 item check list for quality management, which opposed flexibility (third row of Table 2). In addition, the organisation faced managerial rigidities. It had become very hierarchical, with many levels inside and above each
12 hotel (fourth row of Table 2). All these things inhibited a desired set of values which they defined and which we called corporate entrepreneurship (Guth and Ginsberg, 1990; Stopford and Baden-Fuller, 1994). This was the ability of employees at all levels to undertake experimental activity to improve the overall position of the hotel within the overall framework set down by top management (fifth row of Table 2). In discussing these deficiencies, senior managers were acutely aware of several paradoxes. Although widespread, the core rigidity was not universal. Debrule and Pelison, the two co-presidents of Accor had founded the hotel chain twenty five years earlier on the principles of entrepreneurship. Many of those who were hired by these two people were still present and talked about the old ways. Interviews made it clear that the desired set of values had existed in the business in the recent past, and were buried deep in the minds of some of the employees distributed around the organisation. Moreover, in a few of the hotels employees held some of the desired values, but none had retained or developed these competencies extensively. In addition, as was pointed out by the top managers, entrepreneurship and flexibility (the desired values and capabilities) existed in another fast-growing division, FormulaOne, which was recently set up to exploit the budget segment of the market. Our data made it clear that in Novotel, dormant capabilities existed from the past and in other divisions. We conducted a similar analysis on our other firms.
KNOWLEDGE TRANSFER AND RENEWAL All of our three cases undertook different paths for change, and we will review them all in turn. We begin by examining Novotel which demonstrate the possibility of remembering “unlearned” capabilities and routines. These will demonstrate our first finding: Organisations can remember past values or routines which have been unlearned, and this can assist the renewal process. In Novotel, the appreciation of vibrant desired capabilities and values in another part of the group was evident from the start, but the realisation that there was a historical dormant capability in the Novotel division only emerged after the decision to start the change programme. In November 1992, the board appointed two-co-presidents: Brizon former head of Ibis hotels, and Giles Pelisson from their New York restaurant chain. Both of the co-presidents had been working in Novotel for a year. Although the co-presidents
13 appointed a new top management team, and reorganised all the hierarchical levels of the organisation over the next two years, almost all the new appointments were made from within the Novotel group. The possibility of directly transferring knowledge from other divisions such as Formula One by means of transfer of personnel was (deliberately) not taken. In addition, most of the work done on planning and executing the renewal process was done from inside Novotel. Only topken reference was made to the Headquarters’ training centre of the Accor group and there appeared to be an explicit against using other parts of the group even though the co-presidents were well aware of the Formula one capabilities, which included vitality and flexibility. Early in the change process in December 1992, the two co-presidents of Novotel hired some anthropologists as management consultants to advise on cultural issues. These consultants wrote a short report, which unearthed and highlighted the importance of the buried values of entrepreneurship and the hidden routine of flexibility in Novotel’s past (something they called the genes). These values and routines had been subsequently suppressed by new routines emphasising hierarchy and procedure, such as the Bolts programme we mentioned. The importance of the consultants’ discovery was critical, and as time progressed the management increasingly relied on it. At a conference in the Spring of 1993, the extended top team reflected on the changes which needed to be made and the findings of the anthropologists, and suggested the constructive slogan Retour vers le Futur (Back to the Future). This label was felt to reinforce the idea of exploiting the historically dormant capability. (In contrast, there was no evidence that anyone was concerned with the spatially separated capability which existed in the FormulaOne division, and no signs that there was any attempt to learn across this boundary.) Interviews with front line managers and operatives (waiters, cooks, cleaners) reinforced the significance of the slogan, and how it contributed to rapid acceptance of the new ways of operating. The speed and progress of transformation was monitored by top management, and in our interviews at six different hotels in three countries we were able to check those perceptions. It was clear that a major transformation had taken place in an organisation employing more than 20,000 people in more than 200 locations. It is impossible to truly answer the “what if” question, in the sense that we cannot truly test how much change would have happened if there had been no
14 reference to “unlearned” capabilities and routines. However, we suggest that the scale and scope of the transformation, (which took place in a very short period of time of two years in so dispersed an organisation) was clearly helped by the ability to refer to the past. Paradoxically, the new procedures although in the spirit of flexibility were not technically all like those which existed in the past. Thus we see that the unlearned values were important where as the detailed knowledge was not relevant here. This had to be learned afresh.
The Refinery In reviewing our other two cases, a second proposition emerges clearly: Senior managers often perceive capabilities in other related divisions but these capabilities are often not directly utilised, and no attempts are made to undertake a process of replication of the values and routines by direct transfer. In the Oil company refinery, a new manager arrived in late 1990. He was the third since 1983. He was told by his local management team that the serious reliability difficulties and the high costs of operations were a consequence of local operating conditions (such as poor site infrastructure and local union practices) and poor design of a new cracker. The poor performance cost the group nearly one hundred million dollars over the two years, 1989 and 1990. Over the previous five years, former site managers and the top team had tried to change routines and behaviours by introducing TQM (a group wide initiative), new equipment and industrial relations initiatives. However, these had demonstrably failed to deliver competitive results. The blockages to change and adopting new routines were so serious that top managers at the worldwide headquarters had openly discussed the possibility of closing the refinery, although the local front line managers had not seen complete closure as a serious threat. The new refinery manager had considerable experience of operating other refineries elsewhere in the world in the group, and had worked in a senior position at the group level monitoring refineries world-wide. From interviews with him, and from those he had worked with before, it was clear that he did not believe that local conditions were exceptional. He identified “root cause analysis” as one of the key missing skills, and the behaviour of the local unions and front line managers’ working practices as an obstacle to progress, see Table 2. (Root cause analysis is a technical
15 procedure which is often used in continuous processes to improve quality and efficiency.) The refinery manager appointed a new engineering manager who also played a crucial role. Surprisingly, this manager did not have a wide experience and it is most notable that the rest of the refinery team was unchanged during the rejuvenation. Following a series of confrontations, first with his management team (in early 1991) and then with front line workers (in late 1991), the refinery manager persuaded his workers to adopt root cause analysis and the related best practices in a systematic manner. A crisis occurred when the refinery appeared to go out of control technically, but the new procedures proved reliable. The key personnel were “astounded” and they were persuaded that the refinery manager’s insistence on adopting the new procedures really did make sense. Interviews with front line managers and operatives revealed that they had seriously underestimated the importance of these better work practices. In 1992, the refinery manager embarked on another change process to reduce manning levels by some 20%. Whilst at first sight it was a different initiative, it had the commonality of reducing manning by integrating maintenance with operations thereby making all front line workers multi-skilled. This elimination of traditional separation of work practices brought the refinery into line with best practice elsewhere in the group. In this case, the refinery manager’s initial belief that local conditions were not exceptional was critical to the whole renewal process. He refused to accept the statements of technical experts who claimed the refinery was different, and insisted that standard routines applied elsewhere (spatially dormant in our terminology) were highly relevant. In forcing these routines onto the local workforce - the top manager did not resort to hiring new staff from elsewhere in the group. Nor did the top manager resort to using other parts of the group to supply “learning”. Since our company had more than 100 refineries world-wide, and since Salomon, a bench marking institute, had ranked several of these refineries as “class of best in the world in the industry” the potential for explicit cross learning was obvious. Several of these refineries could have been used to provide training and leadership for the change programme. What is notable is that the top manager and his team deliberately avoided these routes, but none the less the change was manifestly successful.
16 For example, the world wide headquarters sent an audit team to examine the site, but their recommendations were only partially enforced - and the audit team (which consisted of experts) did not undertake any training for local managers. Instead, the process of change and learning new routines occurred by directed attention to critical points and critical behaviours - getting the workers to “learn and discover themselves”. The top manager believed that “improving the standard procedures” could be done quickly and without risk, and that involving others was generally unnecessary. For example, facilitators of change were used, but typically these facilitators came from outside the industry. In contrast, some of the consultants used in manpower reduction and industrial relations were from the company’s headquarters. Learning to apply root-cause analysis so quickly is exceptional. Root-cause analysis is an element of total quality management, that the US auto firms found so difficult to learn in the 1990s. Although firms such as GM had access to this practice through the Saturn joint venture, GM found it extremely problematic to adopt the practice quickly and effectively. In contrast this oil refinery not only adopted the practice but made it work in a short period of time under the guidance of a single man, and achieved best in class for their refinery as a consequence.
Oil Distribution In the oil company distribution business, the course of change was similar to that of the refinery. The business suffered from too many hierarchical levels in both the drivers and the maintenance departments. The work-practices meant that the drivers did not participate in the routing systems (another department). Maintenance was also compartmentalised. Communication systems were largely absent between lower and higher tiers and the company relied on the Union (see Table Two). Moreover, the culture of the middle and front line managers was “reactive” not entrepreneurial. A new managing director, who was senior to the business unit manager, arrived in late 1991 who was in charge of this and many other divisions. Although he was really a very senior manager, he was unusually active at the front line. He was told by the local distribution management that efficiency gains could be achieved, but that the pace was of necessity slow due to the need to negotiate with unions and due to difficulties in managing the truck drivers. The new senior manager was greatly influenced by his own experience in managing radical change, and by the
17 achievements in another part of his division, lubricants. Although the lubricant’s division had a much smaller, separate distribution business transporting only a small amount in bulk, it had made considerable gains in the recent past, and in his view “showed the way”. The new manager refused to believe that progress in distribution had to be slow. By observing other parts of his empire, he could “see” what was possible, and he encouraged his local team to plan a more radical course of action. Unlike the refinery manager, he did not give guidance as to new routines and knowledge bases, and he did not suggest exemplars for best practice from elsewhere in the group. The distribution management team came up with their own radical solution, which involved eliminating restrictive practices, several layers of management, and requiring drivers to take on junior management tasks. The new ways of working also implied de-recognising the union as a bargaining organisation, something counter cultural to the group but which had been tried successfully in the lubricants business unit. Although the managers of the distribution business refused to acknowledge the fact, there was a great deal of similarity between the proposals for distribution and the practices in lubricants. Even though the managers made no attempt to learn directly, the change was successful. Indeed, some of the degree of the changes went further than was anticipated and those experienced in lubricants. The new ways of working were put to the workforce, who overwhelmingly voted to accept the package which included a small cut in pay. The new practices were successfully implemented with very substantial technical and economic consequences. The financial outcome was dramatic, total costs fell by nearly 30%. Quality measures improved, and our interviews with more than 20 drivers revealed that “things are better now”. The achievements were sufficiently important to cause very positive comment by a member of the group’s main board, who described the actions as “highly significant for the group as a whole”. In the perceptions of top management, the change was much more successful than those at lubricants because there was progress. In our terminology, there was double-loop learning. In this case, the new UK manager’s initial belief that rapid progress was possible was deeply influenced by observing many of the desired shared values (those of corporate entrepreneurship) and competencies (flexible working) which occurred elsewhere in his division (lubricants). However, he rejected the idea of formally
18 importing these competencies, and encouraged a self developed plan, which was subsequently tried and tested in discussions around staff departments. For example, there was no significant hiring into the division. Facilitators for workshops were largely self generated, and it was only in the area of industrial relations and human resource management that others from inside the group were consulted. Interviews with front line managers and operatives confirmed that the solution was perceived to have been locally developed in the business unit and “owned” by them, and that this facilitated quick and effective implementation. Trying to adopt some best practice from elsewhere was perceived as unnecessary.
DISCUSSION We found three organisations that replicated knowledge without direct transfer. That is these organisations did not engage in the normal processes of knowledge imitation and replication discussed extensively in the literature and noted by authors such as Winter and Szulanski (2000) and Rivkin (2001). One of these organisations was inspired by (obtained a simple template) from activities it had undertaken in the past and all three had observed processes at a distance in other parts of their own organisation. The transfer of knowledge was not direct, but rather we observed the concept of spirit or dominant logic (Bettis and Prahalad, 1995, Senge, 1990, Argyris and Schon, 1978). Our managers saw temporal and spatial influences as a stimulus or influence on what they could do; the actual capabilities were re-invented. There were some important influences in our processes. In every case, the leaders of the organisations appeared to have played a critical role. As we noted earlier, this is a form of strategic intent. The source of the knowledge was in every case another part of the organisation (temporally or spatially distant), but its credibility was reinforced by the leaders’ insistence that this knowledge was important and worked. Such insistence went counter to the prevailing beliefs, and in due course of time the new ideas prevailed and became the new way of thinking. Were our organisations perverse by insisting that the opportunity to borrow templates and engage in the usual transfer processes were unnecessary? Given the obvious proximity of the knowledge in each of our cases, this is an important question. Each of our organisations could have easily reached out to the adjoining divisions and engaged in direct knowledge transfer. There was no competitive threat
19 to either side in taking such an action. It did not suffer from any disadvantage identified by Lippman and Rumelt (1982) or Rivkin (2001). We suggest our organisations were quite rational. As indicated in our studies, the profitability of the actions of these leaders is not in doubt. The logic also suggests that they were not so stupid either. When the knowledge to be transferred is complex, direct transfer maybe inefficient and using the spirit may be more important. In capturing much of the knowledge-based literature, Grant (1996a) explains how the critical element of tacit knowledge lies at different levels and in different degrees of codification in an organisation. Mobilising these assets is difficult, even within a unit where they lie. Nonaka (1994) was a pioneer in explaining how tacit knowledge is not transferred directly across teams, but how information is codified and how this process transmits only a part of what is known, and that these parts are often enough to recreate the knowledge into a new context. In his example of the bread making machine (Nonaka, 1991), the knowledge of bread making utilised by the chef was not directly incorporated into the machine, rather the spirit of what he did provided the inspiration for the design of the machine. Grant and Baden-Fuller (1996 and 2004) call this process accessing knowledge, emphasising that direct transfer is often not necessary. Lillrank, 1995, explore this point further in the context of knowledge transfer from Japan to Europe. Again, he finds that attempts to transfer knowledge in detail was often less effective than attempting to capture the spirit and utilise this as a basis for renewal. The idea that it makes sense not to always transfer knowledge directly accords with the theme of other writers. Hamel,1991, and Bleeke and Ernst,1991, point to some of the obvious difficulties of direct learning across external boundaries. More critically Haspeslagh and Jemison,1991, provide an insight into the difficulties of direct internal transfers following mergers (with further confirmation from BadenFuller and Boschetti, 1996). Boone, 1997, provides some data on intra-corporate learning in three multinationals: Unilever, ITT and Cannon, and he shows how direct learning rarely takes place across internal boundaries but that there are cases where activities in one area can be inspirational to another’s activities. Our evidence also suggests that organisations can look to the past to help them create knowledge. Dormant capabilities that lie between core competencies and core rigidities appear to be important. Whereas path dependence is usually portrayed as a
20 constraint to action, and an obstacle to change especially for long lived organisations, our work suggests another less appreciated angle. Past experience can provide a reservoir for change possibilities. Unlearning can be selectively remembered (Hedburg, 1981). This means that history can be reinterpreted, to the organisation’s advantage. Our interviews suggested that in learning from the past or others, transfer of details often does not take place. It seems that seeing what can be done provides the critical stimulus to change. Senior managers, especially, were deeply influenced by the activities in other divisions and the cognitive aspect of “it is possible” was deeply influential. Many of our managers were eloquent on this point. A careful test is needed before we can draw strong conclusions, and we would have liked to undertake a careful cognitive exercise with our managers (along the lines of say Calori et al. 1994). In short, the concept of temporally dormant capabilities deserves special attention. Because our analysis emphasises the importance of spirit and logic in renewal, temporally separated competencies hold a special meaning. Spatial competencies are often only seen by a few, such as senior management. In contrast, (temporally-separated) dormant competencies can be accessed by large numbers in the organisation utilising the myths and stories of past success. Critically, our stories show that the details of what was done in the past may be irrelevant to the current context, especially due to changes in technology and people skills. For this reason, we suggest special place should be reserved for dormant capabilities in future modelling.
CONCLUSIONS The subject of knowledge management has inspired a plethora of writing, yet much remains at a very macro level. Within the literature there is a general presumption that knowledge transfer requires some direct processes and that when knowledge is replicated within organisations a template is used and efforts are directed at moving the detailed knowledge from one place to another. Even in the literature on imitation, especially that which contrasts imitation with replication, there is a presumption that imitation of complex processes requires some crafting or stealing of knowledge. Our opening phrases of the paper made reference to the work of Hounshell (1984), widely acknowledged among Economic Historians and the Historians of
21 Science as one of the experts on the creation and diffusion of knowledge about the American System of production in the nineteenth century. He makes it quite clear that complex knowledge is very hard to replicate under any circumstance and that this replication often takes a great deal of effort. However, he also points out that there have been notable instances where complex knowledge is replicated without direct transfer. Our studies show three modern instances of the same phenomenon. One of them was the replication of the practice of root cause analysis in the refining industry, something that is well known to be difficult. The second was the replication of the practice of effective logistics that has eluded many sophisticated firms. The third was the replication of flexible working and a marketing orientation in a large multinational hotel chain, something that is well known to tax all but the best. We make absolutely no claim that firms in general should seek to replicate without direct transfer, nor can we unravel all of the complexities of why it works in some cases and not in others. We do however note that there appears to be strong equifinality in management. There is more than one way to get to the final conclusion. Our results therefore lend further weight to the observation by Rivkin (2001) that scholars should not place too much weight on the value of knowledge as an asset. In his simulation study of imitation and replication he shows that the holding of unique complex knowledge may not always give rise to strong competitive advantages when imitators can copy at a price. Our work goes one step further. It suggests that holders of complex knowledge should not assume that others cannot copy what they do even when they are not able to either see the process or access it directly. Replication without direct transfer is possible and takes place in an organised fashion, although its frequency is not yet known or documented.
22
TABLE ONE: DETAILS OF SAMPLE AND DATA COLLECTION Parent Company Oil Co Oil Co. Accor Unit which changed UK Refinery UK Novotel Distribution (Europe) Number of employees in the 2,500 1,000 80,000 unit (approximate) Number of persons 10 10 3 interviewed from top management of group* from middle management 10 10 12 from operatives * 25 25 40 Time table of renewal 1992-3 1992 1992-4 Dates of interviews 1992-3 1992-3 1993-4 Notes: * Top management includes the CEO of the business unit where he is also represented at group level. The middle managers include front line managers. The numbers in the categories may not be precise because of difficulties of classification.
23
TABLE TWO: CORE RIGIDITIES, DORMANT CAPABILITIES AND CORPORATE PERSPECTIVES Parent company Change unit Missing Skills and Knowledge
Oil Co UK Refinery Reliability and Root Cause analysis Rigidities of Union rules and Technical Systems lack of knowledge preventing new ways of working Rigidity of Inappropriate Managerial measures and systems over-blown hierarchy Missing Values C.E. especially by junior managers (C.E. = Corporate and operatives Entrepreneurship) Whether Capability No was present historically Location of Other refineries Dormant in group outside Capability where the UK spatially separated Mechanism for Self generated by renewal plant director, cross country teams not used
Oil Co UK Distribution Multi-skilling among operatives
Accor Novotel (Europe) Marketing Multiskilling at all levels.
Union rules and lack of knowledge preventing new ways of working Too many hierarchical levels and focus on wrong measures C.E. especially by junior managers and operatives
TQM and other technical systems
No
Yes, in Novotel’s recent past
UK Lubricants division
Formula One division,
Hierarchy and authority
C.E. at all levels of the unit
Self generated, Appeal to past, Spatial possibilities Spatial possibilities largely ignored largely ignored
24
BIBLIOGRAPHY Arrow, K. (1962) “Economic Welfare and the Allocation of Resources for Invention” in R.R. Nelson The Rate and Direction of Inventive Activity Princeton: Princeton University Press, 609-625 Baden-Fuller, C. and C. Boschetti (1996) “Creating competitive advantage though mergers” in Strategic Management Society Proceedings H. Thomas and D. O’Neal eds, Chichester: Wiley Baden-Fuller, C., and J.M. Stopford (1994) Rejuvenating the Mature Business, Boston: Harvard Business School Press Barr, P.S., J.L. Stimpert and A. S. Huff “Cognitive Change, Strategic Action and Organisational Renewal” Strategic Management Journal vol 13(S) 15-37 Bettis, R.A. and C.K. Prahalad (1995) “The dominant logic: retrospective and extension” Strategic Management Journal vol. 17(1) pp 88-120. Bleeke, J., and D. Ernst (1991) `The Way to Win in Cross Border Alliances'. Harvard Business Review, March-April: 78-86 Boone, P.F. (1997) Managing Intra-Corporate Knowledge Sharing. Rotterdam: Erasmus University PhD. Bowen, H.K., K.B. Clark, C.A. Holloway and S.C. Wheelwright eds. (1994) The Perpetual Enterprise Machine Oxford: Oxford University Press Bradach, J.L. (1997) “Using the Plural Form in the Management of Restaurant Chains” Administrative Science Quarterly vol 42(2) 276-303 Burgelman, R.A. (1983) “A process model of internal corporate venturing in the diversified major firm” Administrative Science Quarterly vol. 28 pp 223-244. Burgelman, R.A. (1994), "Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments," Administrative Science Quarterly , Vol. 39, pp. 24-56. Calori, R., G. Johnson and P.Sarnin (1994) “CEO’s cognitive maps and the scope of the organization” Strategic Management Journal vol 15 (4) : 459-476 Chakravarthy, B.S. and Y. Doz (1992) “Strategy Process Research: Focusing on SelfRenewal” Strategic Management Journal vol 13(S) 5-14 Cohen, W. and D. Levinthal, (1990) “Absorptive Capacity: New Perspectives on Learning and Innovation” Administrative Science Quarterly, vol 35: 128-152 Dijsterhuis, M., Van den Bosch, F & Volberda, H. (1999) “Where do new Organizational Forms come from?” Organization Science 10(5) Eisenhardt, K.M. (1989) “Building Theories from Case Study Research” Academy of Management Review vol. 14, 488-511 Garud, R. and P.R. Nayyar (1994) “Transformative Capacity” Strategic Management Journal vol 15(5) 365-387 Grant R.M. and C. Baden-Fuller (1995) A Knowledge-based theory of inter-firm collaboration” Best Papers of Academy of Management , Vancouver: Academy of Management Grant, R.M. (1996a) “ Prospering in Dynamically-competitive Environments: Organizational Capability as Knowledge Integration” (1996) Organizational Science vol7,4, pp 375-387 Grant, R.M. (1996b) “Toward and Knowledge-based Theory of the Firm” Strategic Management Journal vol 17 (s): 109-122 Grant R.M. and C. Baden-Fuller (2004) Knowledge Access .. Journal of Management Studies Forthcoming Guth, W.D. and A. Ginsberg (1990) “Corporate Entrepreneurship” Strategic Management Journal vol. 11 (Special Issue) 5-15 Hamel, G. (1991) `Learning in International Alliances.' Strategic Management Journal 12: 83103. Hamel, G. (2000) Leading the Revolution Boston: Harvard Business Press Haspeslaugh, P.C. and D.B. Jemison (1991) Managing Acquisitions NY: Free Press Hayes, R.H. and K.B. Clark (1985) Exploring the Sources of Productivity Differences at the Factory Level New York: Wiley
25 Hedberg, B. (1981) “How organisations learn and unlearn” in Nystrom, P., and W. Starbuck (eds.), Handbook of Organizational Design, Vol. 1, New York: Oxford University Press pp 3-27 Hounshell, D.A. (1984) From the American System to Mass Production: 1800-1932, Baltimore: Johns Hopkins Huber, G. (1991) “Organizational Learning” Organizational Science, Vol. 2,1, pp 88-115 Isabella, L. (1990) “Evolving interpretations as change unfolds” Academy of Management Journal, vol. 33: pp 7-41 Kanter, R.M., (1984) The Change Masters London: Unwin. Kogut, B., and Zander, U. (1992) “Knowledge of the firm, combinative capabilities, and the replication of technology” Organisational Science vol. 3 pp 383-397 Lane, P. and M. Lubatkin (1998) “Relative Absorptive Capacity and Interorganizational Learning” Strategic Management Journal vol 19(5) 461-478 Leonard-Barton, D. (1992), "Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development," Strategic Management Journal, Summer Special Issue, Vol. 13, Summer, pp. 111-125. Levinthal, D.A. & J.G. March (1993), "The Myopia of Learning," Strategic Management Journal, Winter Special Issue, Vol. 14, pp. 95-112. Lillrank, P. (1995) “The Transfer of Management Innovations from Japan” Organization Studies vol 16, 971-989; Lippman, S. and R. Rumelt, 1982, Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition Bell Journal of Economics vol 12 418-438 Nelson, R.R. and S.G. Winter (1982), An evolutionary theory of economic change, Cambridge: Harvard University Press Nonaka, I. (1994) “A dynamic Theory of Organizational Knowledge Creation” Organization Science vol 5(1) 14-37 Nonaka, I., R.Toyama and N. Konno (2000) “CECI, Ba and Leadership: A unified Model of Dynamic Knowledge Creation” Long Range Planning vol 33(1): 5-34 Nonaka, I. (1994) “A Dynamic Theory of Organizational Knowledge Creation” Organisation Science vol 5, 14-37; Polanyi, M. (1962) Personal Knowledge Chicago: Chicago University Press Porac, J., H. Thomas and C. Baden-Fuller (1989) “Competitive Groups as Cognitive Communities” Journal of Management Studies vol. Prahalad, C.K. & G. Hamel (1990), "The Core Competence of the Corporation," Harvard Business Review, Vol. 68, pp. 79-91. Reed, R. and R. deFillippi (1990) “Causal Ambiguity, Barriers of Imitation and Sustainable Competitive Advantage" Academy of Management Review vol 15(1) 88-102 Rivkin, J.W. (2001) Reproducing Knowledge Organizational Science vol 12: 274-93 Stopford J.M. & C. Baden-Fuller (1994), "Creating Corporate Entrepreneurship," Strategic Management Journal, Vol. 15, No. 7, pp. 521-536. Szulanski, G. (2002) Stickiness and Knowledge Transfer London: Sage Szulanski, G. (1996) “Exploring Internal Stickiness: Impediments to the Transfer of best practice within the firm” Strategic Management Journal vol 17: 27-43 Teece, D.J. (1976) The Multinational Corporation and the Resource Cost of International Technology Transfer Cambridge, Mass: Ballinger Utterback, Winter, S.G. (1987) Knowledge and Competence as Strategic Assets in D. Teece (ed) The Competitive Challenge: Strategies for Industrial Innovation and Renewal Ballinger, Cambridge Winter, S.G. and G. Szulanski (2001) “Replication as Strategy” Organization Science vol 12 (6) 730-743 Yin, R.K. (1989) Case Study Research: Design and Methods Newbury Park, CA: Sage Publications
