The emergence of the Knowledge Economy

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While Knowledge Economy (KE) has emerged as a primary strategic source of business 21st century, contemporary corporate regime in the manufacturing and services sectors alike are beginning to introduce and implement Knowledge Management (KM), a sub-discipline of the KE and completely new concept and method of management. Corporations can certainly benefit from its application for enhanced decision support, efficiency and innovation, thus helping them to realise their strategic mission. However, KM is an emerging paradigm, and not many firms, particularly where concentrated ownership structure is dominant have a clear idea of how to proceed with it. An important way, in which firms have been handling the problem of internally dispersed knowledge, or the double Hayekian knowledge problem, is by decentralizing decision-making through flattening of organizational hierarchies. This process has been given many different names: decontrolling, de-managing, and empowering. All of them refer to the factors of same process: removal of some, or all, layers of middle management and giving employees the power to make some, and in some cases many, decisions. Managers and/or owners voluntarily transfer some power to 'call the shots' to the employees. In other words, the owner 'chooses who gets to be the decision-maker in production, that is, whether the organizational structure will be participatory or non-participatory' (Minkler 1993a, p. 18).

Decentralized firms are participatory in the sense that non-top-management workers participate in the decision-making in the firm. In some cases the decision-making is limited to an employee's own narrow sphere of operations, but in other cases the decision-making granted to employees encompasses even long term strategy. In addition, the proper amount of decision-making decentralization fitting the particular circumstances often cannot be known in advance, but rather must be discovered by the owners/managers through a process of dynamic interaction between the firm and the markets in which it operates.

In the present era, the enormous changes that are reshaping the economy such as increased competition, rapidly evolving technology, more capricious customers, the growth of the internet and other factors [Bennett & Gabriel (1999); Neef (1999)] are driving organisations to proactively manage their collective intellect. Many organisations are transforming themselves into knowledge-based enterprises, in which Knowledge Management (KM) is tacit and explicit.

An interesting example of just such a case can be seen in a 1989 Harvard Business Review article, 'Managing without Managers' by Ricardo Semler, president of Semco S/A, Brazil's which is one of the largest marine and food processing machinery manufacturer. He attempted to explain how radically decentralized managerial structure in his company transformed his business with an edge. It was not a very large company (only 800 employees), and it did not deal in work that most people would think of as knowledge work - it was basically a manufacturing company. Semco reduced 'management levels to three - one corporate level and two operating levels at the manufacturing units' (p. 78): the top level consisted of five 'counsellors' including Semler himself; the intermediate level was formed of heads of eight divisions referred to as 'partners'; the bottom layer consisted of all other employees, 'associates' and 'coordinators'. Though with four titles, Semler formulated a three-tier management system of 'Counsellors, Partners, Coordinators, and Associates. Thus company combined a flat managerial structure with a system of profit sharing. The reason that the employees were allowed to claim a share of the profits was that, though Semler was president of the company, he was not the key and sole decision maker of the company.

Functionally, Semco employees were bound to read and understand the company balance sheets (Semco provided classes to teach them to do so) and to 'question the management decisions that affect future profits' (p. 82). It is because of this that Semler remarked that:

Marketing is everybody's problem. Everybody knows the price of the product. Everybody knows the cost. Everybody has the monthly balance sheet that says exactly what each of them makes, how much bronze is costing us, how much overtime we paid, all of it. And the employees know that 23% of the after-tax profit is theirs. (p. 84).

Semco is, to be sure, an extreme case, but it successfully illustrates the measures that some companies are - successfully - taking to become more and more competitive. If Semco did not actually exist, I am certain that most economists would confidently claim that such an intra-firm management structure is a kind of fairy-tale; however, Semco showed remarkable productivity gains and became the market leader through the implementation of above-motioned strategy of management. The scant existing economic literature on hierarchical decentralization has explained the success of such firms strictly in epistemological terms: 'The primary advantage of participatory organizations may lie in their utilization of dispersed knowledge' (Minkler 1993a, p. 18) where 'decentralized structure produces knowledge that would be impossible to produce in a different organizational structure' (Sautet 2000, p. 127).

From an Austrian point of view, it is striking that it [modern economics of organization] has focused almost exclusively on the negative aspects of decentralization, that is, to the extent that it has treated decentralization in organizations at all. Large firms may confront knowledge dispersal problems of magnitude comparable to those that confront the social planner in a socialist economy...the Hayekian point that decentralization is an effective response to the local emergence of unforeseen contingencies is either neglected or given a static mechanism design interpretation. (Foss 1999, p. 471)

Foss emphasizes the superior 'response to unforeseen contingencies' as the main benefit of decentralized decision-making, an issue not studied much in modern economics, mostly owing to the great difficulty of mathematically modelling dynamic factors in the face of uncertainty. In light of this, it shouldn't be surprising that we find the most fruitful discussion of decentralization of decision-making in management literature, as Foss also recognizes:

There is, in fact, an enormous management literature that explicitly addresses how to handle the knowledge dispersal problems (not just the incentive problems) that exist in, typically, multinational firms. The focus is normally on choosing the right degree of decentralization. The literature explicitly begins by rejecting the idea that top management in large firms, such as [Asea-Brown- Boveri], can simply centralize all the relevant knowledge and issue in a top-down fashion the relevant commands to different business units. This is seen as plainly absurd; and the arguments advanced in favour of this judgment are closely related to Austrian arguments against central planning: the size, complexity, and partially tacit character of the relevant knowledge, in addition to the need for flexibility and local adaptation, makes centralization not only inefficient, but truly impossible. Firms must resort to other means to handle dispersed knowledge. (Foss 1997, p. 187)

Allowing the employees with the greatest knowledge of time and place to make the appropriate decisions will give firms the greatest 'capability to react quickly to change' and 'promote innovation' (Minkler 1993b, p. 569). This response to unforeseen contingencies, noted by Foss as the central benefit of decentralization, becomes more important as a market becomes more rivalrous, and survival no longer depends simply on cost minimization but rather rapid adjustment to unexpected actions by competitors. Minkler explains the benefits of decentralization in the following way: '[A]s global markets demand greater flexibility, on-the-spot decisions become crucial and workers become "knowledge" workers - they come to have decision-making advantages over superiors higher up the hierarchy' (Minkler 1993b, p. 569).

I have shown above that there is an emerging consensus that flexibility, and thus a greater ability to cope with change, is the main benefit of decentralization. This benefit is largely due to the fact that in decentralized decision- making firm knowledge and decision-making are aligned. In addition, such firms are better at spurring innovative activities by their employees, which is conceptually distinct from (though not entirely unrelated to) making the best use individually held knowledge. These benefits have become widely recognized. But the proponents of decentralization (especially Cowen and Parker 1997) tend to emphasize these upsides of decentralization without acknowledging any possible downsides.

Their logic explicitly follows the following pattern: the greatest amount of decentralization in markets is desirable; decentralized firms emulate markets; ergo, the greatest amount of decentralization in firms is desirable. However, this is simply not so. The first reason is theoretical: decentralized firms do not emulate markets - they are distinct institutional forms that, though they may appear so, are not like markets. It should be clear that firms are fundamentally different from markets owing to the fact that they can never fully be an 'order', in the Hayekian sense of an institution featuring a system of rules that do not aim at any one purpose apart from allowing the individuals within the system to achieve their goals. Ultimately all firms have one over-arching final goal - profit maximization. In order to achieve this goal they rely on conscious co-ordination to at least some extent. It is improper to attempt to draw analogies between markets and decentralized firms. The second reason why Cowen and Parker's logic is faulty is an empirical one: if there were only benefits to decentralization, we would observe many more real-world firms featuring radically decentralized decision-making than they actually do. Furthermore, we have seen radically decentralized firms diminish the extent of their decentralization and do very well (Foss 2001c). If decentralization were always superior to a hierarchy, it would be difficult if not impossible to explain such cases.

It should be clear that decentralization entails some costs and that are definitely beneficial to the hierarchical institutional structure. Those benefits follow the traditional Coase/Williamson/Neo-Institutionalism theory: hierarchies can reduce transaction costs due to opportunism and bounded rationality. In broader terms, we can say that hierarchies can effectively create institutional stability and incentive co-ordination. Langlois explains it in the following way: a social institution, then, is a mechanism to reduce the entropy of the environment. The prevalence of such mechanism means: coordination, high payoffs, and, in this context at least, a rigid and predictable pattern of behaviour by both agents (1986b, p. 175).

In other words, Neo-institutionalism have been examining only the ability of firms to reduce the transaction costs of their operations but neglecting to examine their ability to be flexible in the face of market instability and rapid change. It is clear that firms with decentralized decision making are unlikely to have very good transaction-cost-reducing properties, which explains why economists have been so suspicious of - or even hostile to - decentralized forms of institutional structures of firms. But firms with decentralized decision-making exist because their managers are willing to forgo some of that coherence if it will gain the firm better use of dispersed knowledge and greater innovative capabilities. We can go a bit further and also explain the limits of firm operations from the perspective of these tradeoffs. This is nothing new management literature has taken the view for decades that firms are constrained in their size by their ability to handle dispersed knowledge, as Foss points out: Implicitly the knowledge dispersal problem is seen in this literature as determining the boundaries of the firm, for there is a point where the 'loss of control' is so overwhelming that it more than offsets any gains from, say, integrating one more line of business or making one more foreign direct investment. (Foss 1997, p. 187)

Another unique management philosophy is found in the case W.L. Gore Associates evolved from Wilbert L. Gore's experiences personally, organizationally, and technically. Starting from a basement office and spanning the globe, the company has over 650 U.S. patents to its name. The company is known for its unique lattice system of management, repeatedly cited as one of the best 100 companies to work for in the United State. Bill Gore learned the principle of "task force team" while he was employed at the DuPont Company where teams were formed to resolve ad hoc basis to attack problem situations. From this experience, Gore developed and implemented the idea of a lattice organization in Gore Associates in 1967 which he further refined and termed as "cultural principles" in his paper "The Lattice Organization - A Philosophy of Enterprize".

The lattice system of management is based essentially 'to support the acquisition of new knowledge and to enhance the interaction between the workers. The approach chosen is facilitate sharing of those retrieval terms, which members of a community of practise have used to retrieve valuable information (Krohn et al. 1999). By 1965 with 200 employs, Gore found that as his company is growing, efficiency and productivity is declining. So he thought to develop and implement some different and innovative system of management as against the popular pyramid management system for which the company became renowned and recognized. Apart from fears of suppression of creativity and innovation, Gore determined to create his own system of management which is known as lattice system of management based on the philosophy of enhancing ingenuity and overall performance of workers toward a goal. Further, this system focused communication and corporation rather than hierarchy of managements as in the case of Semco mentioned above. Under lattice system of management, in W.L. Gore Associates, every person was equipped with the power of decision making as long as it was fair with a sense of commitment to the company and its workers. However, consultation process was made mandatory in case a decision could potentially cause grave damage or speculated irritable loss to the company and its associates. Further, same system of communication and cooperation was also available to newly employed associate in the company with the effective authority level as all the other workers. One of the most interesting factors was that there were no titles or bosses, with only a few exceptions, and commands were replaced by personal commitments. Thus, under the guidance of a sponsor, new employees were free to start out working in an area best suited to their talent and interest. Under this system, as employee progressed there came more responsibility and were remunerated according to their pro-rata contribution. 'Team members known who is producing and they would not put up with poor performance under the tremendous peer pressure...you promote yourself by gaining knowledge and working hard, everyday...there is no competition, except with yourself (Bill, Phoenix Business Journal, 1986). This resulted in an approach and outcome which was creative, risk taking, and highest level performance. One of the finest examples of this system of management came up Appollo Moon Landing project, where the key people were only with sixth-grade education.

Further, Gore found that under lattice system of management even; organization will be saturated at a point and would begin to decline in effectiveness after reaching about 200 members, primarily due to lack of trust, communication and cooperation which was basic philosophy of the new system of management. Given this premises, Gore with his peers decided to construct another manufacturing facility. As perceived, the new plant helped the firm to regain its productively and creativity, and from that point forward, Gore developed and constructed a new plan with new facility each time the magic number of 200 was reached. Following the implementation of successful model of management over the time, Gore was lauded as a model for management during the 1980s and 1990s. The new system of management resulted in explosive growth at Gore who established manufacturing and sale units in Arizona, Scotland, and Germany, and even launched a venture partnership in Japan. However, it is to be kept in mind that apart from innovation in the system of management, product innovation was equally part of the Gore's success story. For example, Bob, Ph.D in chemistry after joining Gore came to discover that Teflon, a product of the company could be stretched to produced such a material with wide-ranging properties which scientist on the other hand are trying to develop from many years. Under the suitable condition, he was able to stretch and synthesize Teflon from a material that was strong and purposeful as Teflon. Further, he laced it with microscopic holes, the size of which could be adjusted in the manufacturing process. This innovative product breakthrough became momentous for its numerous properties, like, it was able to shed water drops like any other synthetic material and at the same time it was breathable allowing small airborne moisture particles and body heat to move through the fabric (Carney & Gitz 209: 1). In nutshell, the noticeable benefit was that the stretchable Teflon could be used to make waterproof breathable clothing ever in the history (Gore, 1980).

This way, W.L. Gore & associates were able to unprecedented achievement through its history to the unique management structure that empowered company associates worldwide. Today, though the business strategy surrounding the company had shifted dramatically since its founding in 1958, Gore's fundamental ideology set forth by its founder himself prevails. The company is persistent to adhere to its values-fairness, encouragement, holding steadfast to commitments and open communication and cooperation among associates (Gore, Newark DE, 2008). The work environment at Gore promotes hand on innovation, involving those closest to a project in decision-making. This results in teaming of like minded and leadership emergence. While enhancing innovation and competitiveness, diversity at Gore has thus proved an outstanding example of lattice organization with unique and core principles which are catalyst to participation, communication and creativity. The company has been a model of team-based, flat lattice organization that cultivates and fosters personal initiatives without any traditional organizational charts, chain of commands, nor predetermined fixed channels of communication. However, the associates at Gore, while communicating directly with each other, and are supposed to be accountable to the fellow members of their multi-disciplined teams. Thus, Gore did not relied on traditional tight top-down control of workers, rather he focussed organizational culture less commanding and controlling and more and more coordination, communion and decision-making with the team separated with specialization and managed through impersonal measurement and analysis (Laft, 2009:4). Further, problem solving procedure as developed by Gore was quite unique. He took a lenient view regarding the standard procedures applied in traditional corporate management and preferred and encouraged an informal approach to problem solving with a loose network of highly focused, team-oriented professional, however, with no titles and job description as found in traditional management. Thus, each person at Gore interact directly with every other person with no intermediary for problem-solving as may request assistance in problem-solving. However, it is to be noted every associate at Gore has a sponsor who guides him/her in problem-solving and growing contribution who is part of any team or group who formulates their own plans and actions with self-commitment and direct transactions to projects as against the authoritarian hierarchies (Gore, n.d).

With this system of management, company is recognized by its divisional and extreme team structure, organized around products and clients, for instance, fabrics, medical and electronics (Mcshane, et al. 2008:477). Young (2006:66) states that 'almost every aspect of W.L. Gore & Associates is outside the box-from its lateral, or "lattice" infrastructure to table-less meeting rooms to the Gore "beach" Olympics held at recent company convention. It is the king of environment that has enabled the company to keep its figures on creative pulse the world.'

It is submitted that 'Knowledge Management (KM) is the discipline of enabling individuals, teams and entire organizations to collectively and systematically capture, store, create, share and apply knowledge, to better achieve their objectives' (Young, 2008). In line with these basic principles, Semco who performed multiple roles in hyperinflation in 1990, with its innovative management system workers gain greater knowledge of operation with more and more innovative suggestion on how to improve the business. Reformed introduced and implemented known as radical form of industrial democracy and corporate re-engineering during this regime though led to an estimated 65% reduction in inventories with a marked reduction in product delivery times, the product defect rate fell to less than 1%. Later, as the business regime improved, Semco revenues and profits improved dramatically. In the wake of tremendous growth of Semco, Richardo Semler received a great deal of recognition, and he was named as Brazilian business man of the year in 1990 and 1992 and World Economic Forum recognized him as one of the Global Leader of Tomorrow.

On the other hand, the concept of lattice uncovers relational and contextual information by bring best together where workers known as associates are encouraged to communicate directly with each other and at the same time are accountable to the fellow members of their team. Further, product innovation and prototyping is encouraged suitable to the talent of a team or even a team member. With this process and work environment leadership through fellowship emerges frequently. This unprecedented corporate structure and work culture has been remarked to be a significant contributor to associate satisfaction and retention (Hamel et al. 2007). This is also known as fabric of creativity to whom Alan Deutschman describe as 'at W.L. Gore, innovation is more than skin deep: the culture is as imaginative as product' (Deutschman, 2004).

Thus, Knowledge Management (KM) which is a sub-discipline of knowledge economy is completely an innovative system of management. Shanhog (2000) states that 'In the knowledge economy era, the management refers to effectively identify, acquire, develop, resolve, use, store and share knowledge, to create an approach to transforming and sharing of tacit and explicit knowledge, and to raise the emergency and innovation capability by utilizing the wisdom of the team. Since knowledge has become the driving force for social development, the attention of the society to information and knowledge is rising and people's demands for information and knowledge are increasing step by step'. Moreover, in contemporary era, the application of information technology has widened the scope and rational of knowledge acquisition with speed and cost reduction as the knowledge acquired as such is being converted and converged into knowledge warehouses. Such warehouses provide the quickest source of expression, exchange, storing, and acquisition of knowledge in any field. In conclusion, Knowledge Innovation Management is meant to enrich and enlarge the theoretical and practical research and knowledge dissemination so as even nerds can be mavericks: impatient with the standard way of working, however, patient with nurturing ideas and flourishing, fostering, ongoing, persistent and breakthrough creativity, particular to the industry manufacturing and services (Deutschman, 2004).

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