An Atlas for Knowledge Innovation DEBRA M. AMIDON AND DARIUS MAHDJOUBI

To migrate from traditional business

planning, which confines itself to analyzing the

current situation, to planning an innovation

strategy, which incorporates innovation

and uncertainty, you need more than a map-you

need an atlas.

"J 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.)

When the astronauts of Apollo 17 reached the moon, the world saw a grand vision turn into reality. The project 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

use 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.

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.

The new knowledge value proposition, in the context of innova­tion strategy, is the single competence necessary to thrive in the 21st century. A knowledge-innovation strategy has many advan­tages over classical business planning. Fortunately, a concrete map for migration of management processes, which capitalize upon the opportunities afforded in a robust knowledge economy, exists today.

Integrating knowledge as an interdependent variable into con­ventional business methodologies creates a dynamic no less dra­matic than shifting from a flat earth view of the world to a global view. Initially, people saw the world as two-dimensional—similar to how many business managers perceive their business environ­ment today. Design a market matrix, create a balance sheet, and

HANDBOOK OF BUSINESS STRATEGY 95

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 three-dimensional global view encompasses the dynamics of the multiple com­pounding effects of what we might describe as a kaleidoscopic economy. It is not the speed of change of one or many 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 that 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 world maps from 14th century to the present (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.

The growing activity and m o m e n t u m in the knowledge field focuses on m e a s u r e m e n t 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. (See Figure 1, maps 3 and 4.) In fact, the answers to

Success lies in your unique capability, not in the example of others.

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 and use it. This includes the knowledge inside as well as outside 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.

Here, we focus on the structures for innovation strategy, and the deficiencies of today's systems. Innovation strategies mus t migrate and evolve from 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 con-

Debra M. Amidon is the chairman and CEO of ENTOVATION International, Ltd. (Wilmington, MA)—a global innovation research and consulting network linking 60 countries throughout the world. Author of five publications on the topic, including: Managing the Knowledge Assets into the 21st Century (1987); Global Innovation Strategy: Creating Value Added Alliances (1989); Innovation Strategy for the Knowledge Economy: The Ken Awakening (1997); Creating the Knowledge-Based Business (1997); and Collaborative Innovation and the Knowledge Economy (1998). She can be reached at debra@entovation.com.

Darius Mahdjoubi, an industrial consultant for DMA based in Toronto, Canada, has experience in developing and implementing innovation strategies for business, as well as regional systems of innovation. He is author of 'The Mapping of Innovation," a set of integrated reports prepared for "Regional Systems of Innovation," a project supported by Human Resources Development Canada. He can be reached at darius@xvorkmail.com. Copyright 1999 by Debra M. Amidon and Darius Mahdjoubi.

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HANDBOOK OF BUSINESS STRATEGY 97

tributes to eventual enterprise sustainability. The structure of knowledge-innovation strategies pro­vides managers, as well as individual contributors and organizational stakeholders, with tools and methodologies that allow them to 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 The analogies of the atlas (i.e., a system for depict­ing and measuring world views) and road maps illustrate the migration from business planning to a knowledge-innovation strategy. In logic, analog)' 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. In The Knowledge-Creating Company (Oxford University Press, 1995), Ikujiro Nonaka and Hirotaka Takeuchi 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 (see Table 1) 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 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) establishing a compass for direction.

Similarly, business planning represents the process and plans necessary to position a particu­lar enterprise with competitive advantage in a par-

Table 1: Contrasting Atlas Variables with Business Planning and Innovation Strategy

Geographic Atlas

• 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.)

Business Planning

• Is a representation of the process and plans necessary for 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.

Innovation Strategy

• 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.

98 HANDBOOK OF BUSINESS STRATEGY

ticular 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 organizat ion capabil i t ies and f inancial investments, (2) scaling based upon external mar­ket share measurements and technology position­ing, and (3) establishing a compass to allocate internal resources to specific project plans. Ordi­narily, a business plan has no explicit role for knowledge, and the company defines the innova­tion process 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 used 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 i n t e l l e c t u a l cap i t a l of an e n t e r p r i s e — o f t e n described as the difference between book value and market value, and (3) establishing a compass provides a coherent, common vision within which the company can leverage internal and external variables for 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.

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

Innovation strategies must evolve from conventional business planning.

becomes more networked, as people become more empowered and energized, the enterpr ise will become increasingly reliant upon technology. Fur­thermore, 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 outside the firm. Simultane­ously, performance metrics will become more hid­den , i n t a n g i b l e — r e l a t e d to w h a t l e a d i n g 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 learn 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. In "Real Problem with Compa­nies" (Harvard Business Review, September/October 1997), 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 organizations 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.

HANDBOOK OF BUSINESS STRATEGY 99

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 in the Service Society, by the Computer Sciences and Telecom­munications Board and National Press Council (National Academy Press), states: "Information technology has value only if surrounded by appro­priate policy, strategy, me thods for measur ing results, project controls, talented and committed people, sound organizational relationships, and well-designed information systems. The productiv­ity of management is the decisive e lements in whether a computer helps or hurts."

The NRC report notes that on the enterprise level t he re are great difficulties in predic t ing 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 marke t s . These asse ts are also not often reflected in the organization's financial statements or in the nation's accounting system.

The report also indicates that firms have used information technology to increase cross-competi­tion among industries and among individual activi­ties within enterprises in different indus t r ies . 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

The traditional value proposition of cost, quality, and time is just not enough,

electronic communicat ion systems. Information technology also provides the foundation for Global Information Infrastructure (Gil) that is in reality a Global Innovation Infrastructure.

These elements create a framework for analyz­ing innovation effectiveness: performance, behav­ior, and technology (see Figure 2). The new knowl­edge value proposition emerges to balance 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 toward sustained prosperity.

What follows are some of the items to consider under each management factor. These items will 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.

P e r f o r m a n c e . Metr ics 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.

100 HANDBOOK OF BUSINESS STRATEGY

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) 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 the company measure and leverage it? In the April/May 1995 OECD Observer, a lead article on the topic ("Investment in Human Capital," by R. Miller and G. Wurzberg) 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 inter­

national 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 on more a system dynamic than a cause-effect dynamic) requires using a framework to guide resource decision-making. It is as different as viewing the world as spherical instead of flat.

The themes of the new knowledge value propo­sition—interestingly enough—correspond to the three themes of the knowledge movement. The first is financial capital with an intent to calculate and monitor the intellectual capital, best exempli-

Managing culture is by far the most difficult and critical challenge facing firms today.

HANDBOOK OF BUSINESS STRATEGY 101

fied by Leif Edvinsson of Skandia AFS (Sweden), Karl-Eric Sveiby (Australia), and Baruch Lev of New York University (United States). The second is the focus on social capital embodying the con­cepts of the learning organization, articulated by Chris Argyris of Harvard University, Peter Senge of MIT, and Hubert Saint-Onge of 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 of SAIC (formerly from British Petroleum, U.K.).

The most important—and the least understood-aspect may be how to account for the behavioral aspects of the organization. According to surveys (see Creating the Knowledge-Based Business, by D. Skyrme and D. Amidon, Business Intelligence, 1997), managing culture is by far the most diffi­cult and critical challenge facing organizations today. How does one encourage a culture of knowledge sharing in an organization steeped in competitive values and suffering the aftermath of reengineering and downsizing? This is precisely the dimension that traditional business planning models do not take into account, but executives must grapple with the question in order to migrate toward a more robust knowledge-innovation strate­gy approach to the business.

MIGRATING FROM PLANNING TO INNOVATION Migration from business planning to innovation strategy is inevitable and challenging because it involves changing the dominant mindsets. As John Maynard Keynes indicated in The General Theory of Employment, Interest and Money' (Harvest HBJ, 1935), "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."

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 business endeavors. The whole organization must engage in the process of developing an Atlas of Innovation, including the mapping, scaling, and creating the compass for the enterprise. Compared to financial analysis, there are no "generally accepted innova­

tion principles." Although you can develop struc­tures for innovation, they are usually too generic to be useful. Instead, you must custom make them 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 effects, comparable to viewing the world from 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 could capitalize on new opportunit ies for unar t iculated needs and unserved markets. In the late 1980s, 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 U.S.- nor Europe-centric. One has only to visit the Global Knowledge Leadership Map (www.entova-tion.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 that 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 need to be concerned as much with what we do not know, as with what we know.

To carry the analogy further, Table 2 lists the contrasting elements to make the case for the need for a knowledge-based innovation strategy. The table defines each process—business planning and innovation strategy—according to the three atlas variables: mapping, scaling, and creating a com-

102 HANDBOOK OF BUSINESS STRATEGY

pass. Choosing the right strategic planning, how­ever, 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.

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 the 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, demonstrat-

Table 2: Contrast Between Business Planning and Innovation Strategy

Atlas Element

Mapping

Scaling

Compass

Business Planning

• Defines how the business treats financial resources.

• 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.

• 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 - R01 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.

• Internal decision-making process to allocate financial resources.

• Conventional cost accounting is the dominant methodology.

• Is based on classifying costs under three variables: labor, materials, 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.

Innovation Strategy

• Defines how the business treats knowledge as a resource.

• 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.

• 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.

• 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), 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.

HANDBOOK OF BUSINESS STRATEGY 103

ing 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 his or her environment.

For accurate valuation, a map must impose a scale of measurement. Scales help 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, you need to evaluate the direction continuously and act on this knowledge accordingly. A compass indicates the desired direction, which may change, and assists in making real-time decisions to change direction. 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 you make to 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 (see "Entrepre­neurs and Business Plans," by Rom Bryant, Busi­ness Update, 1994).

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 regarding 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 impos-

Compaq acquired Digital when it should have been the other way around.

ing 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. Firms prepare general-purpose financial state­ments 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. Prepar­ers base financial statements 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 recordkeeping—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. In "Infoliteracy" (Forbes ASAP, Sep-

104 HANDBOOK OF BUSINESS STRATEGY

t e m b e r 1 9 9 4 ) , P e t e r D r u c k e r w r i t e s , " T h e accounting system, which is a 500-year-old infor­mation system, is in terrible shape."

In addi t ion to external appraisal (f inancial accounting), businesses use also internal evalua­tion (or managerial account ing) methods tha t provide information to managers and other per­sons inside the organization. The internal evalu­ation reports, which are not generally dissemi­nated outs ide the company, emphasize factors u n d e r t he cont ro l of dec i s ion-makers , wh ich have effects on the performance of the organiza­tion. In this context, internal evaluation reports act as 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. In "The Information Executives Truly Need" (Harvard Business Review, January/February 1995), Peter Drucker writes, "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 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—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 Numerous publications have discussed the role and importance of knowledge as a resource. In Post-Capitalist Society (HarperBusiness, 1994), Peter Drucker emphasizes that "knowledge has become the resource, rather than a resource; it is what makes our society 'post-capitalist.'" He then added, in "The Age of Social Transformation" (The Atlantic Monthly, November 1994), "The compar­ative advantage that now counts is the application of knowledge. The emerging society is one based on k n o w l e d g e a n d t h e k n o w l e d g e worke r . "

Although in "Needed: A New Adam Smith" {Forbes ASAP, March 29, 1993), he contemplates, "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 absolutely accurate. A competi­tor may change the whole landscape even before you reach your destination. 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. Planning 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). Planning an 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, you can organize a possible map­ping of innovation under four main headings:

1. Technological Innovation 2. Social (Human) Innovation 3. Market (Customer) Innovation 4. Organization (Leadership) Innovation

The above classification is consistent with Druck-er's statement 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 c o n s u m e r or p roduce r . " (Management: Task, Responsibilities, Projects, Harper & Row, 1974.)

HANDBOOK OF BUSINESS STRATEGY 105

Each of the above four groups of innovation has sub-classifications. For instance, you can break down the first—Technological Innova­tion—into Product, Process, Plant, Equipment, and Operation. These categories are broader than the traditional classification of technology into product and process. You can further subdivide each of the above sub-classifications. You can organize Product Technological Innovation into Function, Form, and Ergonomics. Such a classifi­cation of innovation makes it possible to look at capital differently. In addition to financial capital, your 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 (see Industrial Renaissance, Basic Books, 1983). In 1988, in "Innovation: Mapping the Winds of Cre­ative Destruction" (Readings in the Management of Innovation, Ballinger Publishing), Abernathy and Kim Clark identified 11 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; and 11. Modes of customer communication. The point is that an innovation schema—how­

ever 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 organizes the intan­gible (knowledge) assets under three main headings: Employees' Competency (related to

Key to developing an innovation strategy is looking at knowledge as a resource.

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 Sveiby explained.

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 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 called Knowledge-Based Cost Analy­sis (Darius Mahdjoubi, "Knowledge-Based Cost Analysis," Presented at the 3rd International Con­ference on Intel lectual Capital, Hamilton, Ontario, 1998) is one of the systematic methods to address this need. In this method, input variables of production are classified as follows:

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

2. Human resources (labor), which are devel­oped and applied in a process

3. Equipment and machinery, which are uti­lized in a process

4. Material, energy, and services, which are consumed in a process

In the knowledge-based cost analysis, costs fall into two groups: substituting and enabling. Substituting (consuming) costs are related to variables that must be substituted, if the process

106 HANDBOOK OF BUSINESS STRATEGY

of production is repeated. So, for each new pro­d u c t i o n r e p l i c a t i o n , s i m i l a r r e s o u r c e s a r e required so the process can be repeated. Materi­al and energy are mainly related to the substitut­ing costs. If you plan to replicate the production process , you consume equivalent amoun t s of material and energy.

The firm, however, does not deplete all produc­tion resources. For instance, as Paul Romer indi­cates in "Ideas and Things" (The Economist, Sep­tember 11, 1993), 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 commercial izat ion—the process of innovation. Efforts can relate 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 tra-

A KNOWLEDGE INNOVATION LITMUS TEST Yes No

1. Has one person been chartered with the overall responsibility for managing the corporate-wide (overall) innovation process?

2. Are there performance measures (both tangible and intangible, internal as well as external) to assess the quality of the organization's innovation practices?

3. Do the training/educational programs have provisions to incubate and spin out new products and businesses?

4. Does the local, regional, or international presence operate as a distributed network of expertise that learns from, as well as distributes to, customers?

5. Is there a formal intelligence-gathering strategy to monitor the positioning of both current and potential competitors?

6. Does the rate of production of new products and services exceed the industry norms and create new markets in which to excel?

7. Has a strategic alliance manager been designated to create and manage the network of partnerships and joint ventures to leverage the firm?

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?

9. Have resources been allocated to articulate a compelling \ision internally and share company exper­tise externally through publications and participation in major forum?

10. Is the computer/communications capabilities treated as learning tool for internal conferencing and external business leverage on the Worldwide Web?

If the firm answered seven out of 10 questions 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 one to 10, on how well the enterprise is doing, inevitably there will be significant differences of opin­ion. The importance is not in answering yes or no or even giving a particular rating. The rationale behind the answer is of most value. From the resulting dialogue, innovative strategies will emerge. This way, executives can tap into the tacit knowledge of employees, thus widening the knowledge base from which the firm makes business decisions.

There are 70 questions in the full assessment available in hard (paper text) or software application (Innovation Strategy for the Knowledge Economy: The Ken Awakening, by Debra Amidon, Butterworth-Heinemann, 1997).

HANDBOOK OF BUSINESS STRATEGY

ditionally referred to as the "learning curve." Improving the organization's structure is known as "corporate culture."

Investments in people, usually referred to as "human resource development," can be broken down into operations, knowledge generation, skills, and organizational development. You can think of costs related to operation as substituting costs, since you incur similar operational costs 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, fall under enabling. In the same way, maintenance/depreciat ion of machinery is a substituting cost, while acquiring a machine is an enabling cost.

The structure of conventional (standard) cost accounting still pertains to the consumable aspects of the production process such as material, energy, operation, and maintenance/depreciation. Howev­er, a new knowledge-based dimension completes

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 you do not man­age the process systematically, it is left to serendipi­ty. Most organizations expect innovation from R&D, the function where new ideas are funded. With a global and interdependent perspective of the enterprise, ideas can and must come from ever)' function—and from external stakeholders as well.

In The Sources of Innovation (Oxford University Press, 1988) Eric von Hippie documented that the sources of innovation vary greatly. Some stud­ies replace the manufacturer-as- innovator assumption with the view of the innovation

108 HANDBOOK OF BUSINESS STRATEGY

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, 10 dimensions of management strategy have emerged as an excellent way to cal­ibrate an organization's capacity to innovate (see Figure 3).

Companies often manage each of these domains in isolation—often with its own language, priorities, and practices. For instance, there is often little respect found between the finance, human resources, and information technology departments. 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 companies need is a dialogue among the principals of the organizations—across functions, business units, and managerial levels. An adminis­trative tool must 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 empha­sis on finances, products, and markets—intensifies the competition so some business units compete for the same customers.

How can you get started? The Knowledge Innovation™ Litmus Test sidebar provides a sample of questions for an organization to answer to assess its innovation capacity. These questions provide a sample of 10 carefully researched dimensions of innovation, which participants may answer individually or as a group. Using this as a dialogue tool, participants will gain a clearer understanding of the comple­mentary competencies that the company can and must bring to bear.

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 or her particular role. There must be a common language and shared purpose, and boundaries must fade between func­tions, sectors, industries, and cultures. A basic trust, mutual respect, and collegial competen­cies—a thirst for learning—must evolve.

There are ways to change the dimensions of the dialogue from the traditional financial, linear mod­els. Exploring the 10 dimensions of innovation provides useful insight. Table 3 illustrates another view. Although it may appear two-dimensional, employees across functions, business units, and

Table 3: Three-Dimensional Transformation Blueprint

Technology

Behavior

Performance

Within the Organization

Intranet

Cross-Functional Integration

Practices

Between Organizations

Internet

Cross-Sector Interaction

Policies

On a Global Scale

Global-net

Regional/lnt'l Collaboration

Standards

HANDBOOK OF BUSINESS STRATEGY 109

geographies can discuss it. You can map this approach into the 10 dimensions. As you identify strategies, you can develop them with multiple timeframes in mind, such as short, medium, and long range. The participants in the process can come from different managerial levels and or generations, such is the case with the 3-G plan­ning model of Skandia (see "How Skandia Gener­ates Its Future Faster," FAST Company, Decem­ber 1996).

That being the case, players at all enterprise lev­els 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. You can map activities 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 (one year), medium term (one to three years), and long term (three to six 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 multi-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." Participants will share perfor­mance metrics, behavioral, and technology ideas. A common language will evolve—one that 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.

Just as with the Egyptians, Persians, Minoans, Greeks, Abyssinians, 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 the tools they created 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 a function of interaction, interdependence, and col­laboration. To do so—and understand the relation­ship among the three—requires a multi-dimension­al vision and courageous leadership.

The Knowledge-Innovation Atlas scopes the new classification schema, the scaling and mea­surement systems, and the compass to chart new directions. The fact that 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 bountiful opportu­nities in the next millennium. We will do so sys­tematically and with renewed purpose.

Although many people have written about knowledge management and the knowledge econo­my, the reality is that 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. •

FURTHER READING Debra M. Amidon, Innovation Strategy for the

Knowledge Economy: The Ken Awakening, Butter-worth-Heinemann (1997).

Debra M. Amidon, Collaborative Innovation and Knowledge Economy, Society of Management Accountants of Canada (1998).

Karl Erik Svieby, The New Organizational Wealth, Managing and Measuring Knowledge-Based Assets, Berret-Koechler Publisher (1997).

Leif Edvinsson and Michael S. Maline, Intellec­tual Capital: Realizing Your Company's True Value, Harper Business (1997).

Thomas Stewart, Intellectual Capital: The New Wealth of Organization, Doubleday/Currency (1997).

110 HANDBOOK OF BUSINESS STRATEGY