Foreword

Thomas A. Stewart Intellectual Capital: The New Wealth of Organizations

Foreword

Information and knowledge are the thermonuclear competitive weapons of our time. Knowledge is more valuable and more powerful than natural resources, big factories, or fat bankrolls. In industry after industry, success comes to the companies that have the best information or wield it most effectively--not necessarily the companies with the most muscle. WalMart, Microsoft, and Toyota didn't become great companies because they were richer than Sears, IBM, and General Motors--on the contrary. But they had something far more valuable than physical or financial assets. They had intellectual capital.

By "intellectual capital" I don't mean a clutch of Ph.D.s locked up in a lab somewhere. Nor do I mean intellectual property (such as patents and copyrights), though that is one part of intellectual capital. Intellectual capital is the sum of everything everybody in a company knows that gives it a competitive edge. Unlike the assets with which business people and accountants are familiar--land, factories, equipment, cash--intellectual capital is intangible. It is the knowledge of a workforce: The training and intuition of a team of chemists who discover a billion-dollar new drug or the know-how of workmen who come up with a thousand different ways to improve the efficiency of a factory. It is the electronic network that transports information at warp speed through a company, so that it can react to the market faster than its rivals. It is the collaboration--the shared learning--between a company and its customers, which forges a bond between them that brings the customer back again and again.

In a sentence: Intellectual capital is intellectual material--knowledge, information, intellectual property, experience--that can be put to use to create wealth. It is collective brainpower. It's hard to identify and harder still to deploy effectively. But once you find it and exploit it, you win.

You win because today's economy is fundamentally different from yesterday's. We grew up in the Industrial Age. It is gone, supplanted by the Information Age. The economic world we are leaving was one whose main sources of wealth were physical. The things we bought and sold were, well, things; you could touch them, smell them, kick their tires, slam their doors and hear a satisfying thud. Land, natural resources such as oil and ores and energy, and human and machine labor were the ingredients from which wealth was created. The business organizations of that era were designed to attract capital--financial capital--to develop and manage those sources of wealth, and they did it pretty well.

In this new era, wealth is the product of knowledge. Knowledge and information--not just scientific knowledge, but news, advice, entertainment, communication, service--have become the economy's primary raw materials and its most important products. Knowledge is what we buy and sell. You can't smell it or touch it; even that satisfying thud from a slammed car door is probably the result of clever acoustical engineering. The capital assets that are needed to create wealth today are not land, not physical labor, not machine tools and factories: They are, instead, knowledge assets.

Pundits and consultants speak of a new economy and call the change a "paradigm shift"--a term I have just used for the first and last time in this book. The P-word allows us to agree on something, to nod sagely--"Yup, that's what it is all right, a P-shift if ever I saw one"--without bothering to figure out what we're actually agreeing upon. Hip companies call themselves "learning organizations," a vague vogue term for a corporate culture that cherishes continuous improvement--but in 1996, six years after Peter Senge's excellent book The Fifth Discipline popularized the learning-organization concept, participants in a busy Internet forum devoted to subject engaged in a lively discussion about the need to figure out what "learning organization" means. That's typical. For years, I've heard people talk about "the information economy," or "the knowledge era," but did not know what they meant.

I suspected that no one else knew, either, including many of the people doing the talking. What is this great transformation? How does it change the nature of commerce and the task of management? How is it that companies and other organizations manage knowledge? How do they find it, store it, sell it, move it around, keep it refreshed, relevant, and up-to-date? How does the Information Age affect me, personally, in my work and career?

Although the answers to those questions have not been clear, it's obvious that we live in a time of dramatic, fundamental economic change. The signs are as inescapable as neon in Times Square. The comfort of a long career at a big company--gone. The every-other-year promotion from assistant-this to associate-that--gone. The giant corporation, which came into being at the beginning of the Twentieth Century and has dominated its economic life ever since, while not gone, has lost its hold. Two thirds of the companies listed on the inaugural Fortune 500 list in 1954 had either vanished or were no longer big enough to make the list on its 40th anniversary. Between 1979 and 1994, the number of people employed by America's biggest industrial corporations fell by nearly a third, from 16.2 million to 11.6 million. In place of these faltering behemoths are companies like the U.S. subsidiary of Nokia, a Finnish electronics company, which has annual sales of approximately $160 million--and just five employees. Or Nike, a shoemaker that makes no shoes--its work is research and development, design, marketing, and distribution, all knowledge-intensive services--which has $334 thousand in sales for each employee, vs. $248 thousand in sales per employee for the average Fortune 500 company. Or companies like Netscape Communications, whose chairman, Jim Clark, owns stock worth about three quarters of a billion dollars, in a company that didn't exist three years ago.

In a confusing business landscape, it's no wonder management trends and fads come and go as quickly as good witches and bad witches in the Land of Oz. There's reengineering, then there's "beyond reengineering". There's the Third Wave and there's the Second Curve. There's twenty-first century manufacturing and there's post-industrial society. There's the power of leadership and there's the power of followership. There's the virtual corporation and the agile corporation; the web, cluster, and shamrock organizations; the intelligent enterprise and the learning organization. There's even a fad denouncing management fads.

In place of fads, this book offers understanding: A look at what's causing change and what you can do--for yourself, for the company where you work--to prosper in the Information Age.

The idea that a new, knowledge-based economy is emerging has been like a new tennis ball--fuzzy, but with a lot of bounce. As we will see, it's becoming less fuzzy every day, and more tangible. This book will show how, in fact, seemingly vague ideas of "managing knowledge" and "leveraging intellectual capital" can yield results and agenda items that employees, managers, and leaders can do something about--real work, not fancy talk. We'll take intellectual capital and look under the hood, so to speak, to show how the stuff works and how to make it work better. Old-style business organizations don't manage knowledge well--they weren't designed to. Now business must learn to manage knowledge. Someone who knows how to walk and run on land has to learn new skills to swim and dive and get around in water; in a similar way, the skills individuals and companies need to succeed in their new environment, the knowledge economy are, in many cases, different from the ones they are used to.

• We'll learn why most companies don't manage their corporate brainpower--the most important asset they have--and see how untold billions of dollars of revenues and profit await those who learn how to do it;
  
  
• We'll see how intellectual capital can free up other capital, such as equipment, cash, and inventory, liberating financial resources, increasing corporate agility, and dramatically increasing profitability;
  
  
• We'll learn important new principles of managing people in an information economy--so that companies can really mean it when they say "people are our most important asset";
  
  
• We'll see why, when knowledge is power, power flows downstream toward customers, giving them vastly more influence on the companies that sell to them, and we'll see how a company--any company--can reposition itself to share in that new wealth;
  
  
• We'll discover some surprising counterintuitive truths about managing in the Knowledge Era; for example, we'll learn how planned ignorance can sometimes be more valuable than knowledge, and why business leaders, who spend much of their time trying to construct management systems, would do better figuring out ways to make those systems disappear;
  
  
• We'll see why and how new models of organizational design will forever supplant familiar bureaucratic and hierarchical schemes;
  
  
• We'll see how the emergence of a new economy affects careers--for everyone--and what new strategies will help you succeed.

Intellectual assets have always mattered, but not at all as much. The medieval guild, one of the first forms of incorporation, represents one way of managing knowledge assets--when knowledge is scarce, you hoard it, give it an aura of magic and mystery, and bar the inner sanctum to all but a few initiates. It's a form of knowledge management that survives today in contemporary guilds and priesthoods like medicine and the law, the College of Cardinals, and, of course, the corporate computer services department. In 1768, a Swede named J. Westerman wondered why his country's shipyards and ceramics factories were only half as productive as their British and Dutch counterparts. The report of his investigation--called Om de svenske närigarnes undervigt genetmot de utländske dymedelst en trögare arbetsdrift, meaning, of course, "On the Inferiority of Swedish Compared to Foreign Manufacturers Because of a Slower Work Organization"--showed that the Swedes and their competitors used essentially similar machinery. It wasn't fixed assets that gave the Brits and Dutch an no advantage, Westerman found, but the intelligence with which the machines were employed. In this century, the pyramidal corporation and later the invention of the business unit came about to manage knowledge--to collect and interpret financial data and to fund new technologies.

What's new? Simply this: Because knowledge has become the single most important factor of production, managing intellectual assets has become the single most important task of business. It wasn't always so. In 1940, Buckminster Fuller wrote a long article in the tenth anniversary issue of Fortune magazine. It was full of the quirky, marvelous stuff that makes Buckminster Fuller such fun to read: He juxtaposed the production of silk stockings with the number of radios in use with the number of tons of coal shipped with the number of industrial machines on factory floors.... When he'd added it all up, Fuller had demonstrated a fundamental change in what moved the economy. In the late nineteenth century, Fuller showed, the best way to measure economic activity was to look at the use of raw materials--how much coal was mined, how much steel was made. By 1940, that had changed. The measurements that really showed how vigorously the economy was working involved the use of energy: kilowatt hours of electricity produced, gasoline consumed, kilometers traveled by rail or air. Thinking of that time, retired Citicorp chairman Walter Wriston recollected: "When I was a kid in the bank, the key economic indicator we looked at was freight-car loadings." Then he went on: "Who the hell cares about them now? What we need is a way to measure the knowledge we bring to the work we do."

Muscle power, machine power, even electrical power are steadily being replaced by brainpower. Peter Drucker says that the amount of labor needed to produce an additional unit of manufacturing output has fallen 1% a year since 1900, as machines have taken over jobs that muscles once did. After World War II, the amount of raw material needed for each increase in manufacturing GDP began falling at about the same rate. A few years later--beginning about 1950--the amount of energy manufacturers needed began to fall, again at 1% a year for any given unit of additional output. What's taken the place of matter and energy is intelligence. Since the turn of the century, the number of educated workers on company payrolls has risen, according to Drucker, at that same 1% annual rate. We still speak of the United States, Japan, and Western Europe as "the industrialized world," but that is a misnomer. Agriculture, construction, manufacturing, and mining employ fewer than one in four Americans and, as we will see, even those people work principally with their heads rather than with their backs and hands. We are all knowledge workers now, working for knowledge companies.

I first heard the term "intellectual capital" from a sausage-maker. He is Ralph Stayer, the CEO of a Wisconsin company called Johnsonville Foods. In the fall of 1990, he and I got into a wide-ranging conversation about what wealth is. Time was, Stayer said, that natural resources--land, minerals, fisheries--were the most important source of national wealth and the most important asset of corporations. Then capital--money, capital goods like machines and factories--became paramount. Now that was giving way to brainpower, to "intellectual capital." Interesting, we agreed, that this paramount asset isn't tracked by accountants the way land and financial capital are.

I was intrigued; "hooked" is probably a better word. When I first came to Fortune, I knew next to nothing about how to read financial statements, though I had had business experience. People around the office quote Fortune's founder Henry Luce as having said, "It's easier to teach a poet how to read a balance sheet than it is to teach an accountant how to write," and I was the most recent test case. Possibly my ignorance made it easier for me to believe that what is not on balance sheets is more important than what is.

My first exploration of intellectual capital became a brief article in a package of stories about new ideas in business, published in January 1991. Charlie Burck, who edited the piece, suggested I do a longer story, which became "Brainpower," published that spring. A few months later, a Swede who worked for an insurance company named Skandia phoned to say that he was coming to New York and to ask if he could visit me. In my office he handed me his business card. Leif Edvinsson, it read, Director, Intellectual Capital. I was floored. Leif explained that he had been interviewing for a job with Jan Carende, head of Skandia's Assurance and Financial Services division, and had shown "Brainpower" to him, saying, "This is what your company should do: Manage intellectual capital." Carende agreed, and said: "You do it."

There weren't many of us, then, interested in the subject; now it's become a hot subject. My second cover story about knowledge assets ("Intellectual Capital," in October, 1994) got tons a mail--more than any story I'd written before except one. Every day new letters, new phone calls, new questions come from CEOs, managers, consultants, and others: What do you know about knowledge management? How can I find out more? Who is doing interesting work on intellectual capital? Have you got any hard figures about return-on-investment in knowledge assets? If I needed proof that the age of intellectual capital has arrived, it came in the middle of the writing of this book, when I got a phone call from an executive recruiter, who told me that he had established what was proving to be a successful specialty as a headhunter for companies looking for Chief Knowledge Officers and other leaders in knowledge management.

We've come a long way in half a decade, but a longer road lies ahead. This story is still unfolding. Nevertheless, it is possible--and it is time--to make sense of the information economy, to demonstrate how and why knowledge has become the most important asset of a company or of any organization, to show how knowledge can be measured and managed to improve performance, and to reveal how managers and workers--you and I--can thrive in the knowledge era. It's time to knock the fuzz off the tennis ball.

I've tried to do two things here. One is practical. It is, I hope, the principal contribution of this book that it shows how to find, manage, and grow intellectual capital--that it offers a framework upon which business people can build useful and valuable strategies for competing in the Information Age. It's not enough to prattle sagely and sublimely about the knowledge economy: Investors, managers, and individuals need to know what to do about it.

I've tried to help them in three ways. First, because you can't lift a bucket without a handle, this book provides a vocabulary and a structure for working with corporate knowledge and knowledge assets--language, rules, and principles of intellectual capitalism that allow managers to put it into practice. In particular, in Part Two we'll take our working definition of intellectual capital--intellectual material that can be used to create wealth--and open it up to craft an agenda that managers can apply to practical business problems. In addition, throughout the book you will find plenty of examples--stories, case histories--of companies that have successfully identified and exploited intellectual capital. They're the proof of the pudding; they will also, I hope, inspire to readers to see how they can do the same. Third, I've suggested ways in which readers might come up with their own recipes-- approaches and strategies where profit might be found.

I've resisted the temptation to offer simple formulas and checklists. Too many business people--bad business people--want someone to give them formulas and checklists. Too many business books--bad business books--indulge them. This isn't a cookbook. I'm not competent to write one, and neither is anyone else: The whole field of intellectual capital is too new; besides, as we will see, knowledge work and intellectual assets tend to be unique, customized things. I'll count this book a success if it inspires many chefs to come up with ideas far beyond any I could imagine. I recognize that some of you may be impatient types, reading this only because your laptops are out of power and the flight isn't over yet. If you are chiefly interested in the practical stuff of management and careers, you will find most of what you are looking for in Part Two, in the second and third chapters of Part Three, and in the Appendix.

But this book is also, I hope, more than a practical one: an attempt to make sense of the dramatically changing world in which we work. The emergence of the Information Age and the sudden ubiquity of information technology are among the biggest--no, they are the biggest--stories of our time. They are everywhere and affect everything. Jet engines changed transportation, nylon altered clothing, television shook up news and entertainment, and these technologies indirectly affect us all. But computers touch every industry, and change the work of everyone--steelworker, secretary, farmer, financial planner. Not since Edison domesticated electricity has a technology revolutionized life the way this one has. It can prepare an invoice, animate a velociraptor, and sew a seam. The technology of information, a revolution in itself, is only a fraction of the larger revolution , the Information Age.

Even for readers in a hurry there's much to be said in favor of looking at the whole picture. Revolutions--and this is a no-fooling revolution--have consequences that go far beyond anything anyone can predict. Surviving and thriving in such times requires peripheral vision as well as focus, agility as well as power. The better you can understand the large forces--the tectonic plates--reshaping our world, the better you will be able to cope with the surprises they are certain to throw at us. These days, keeping your nose to the grindstone is a big, shortsighted mistake.

By the same token, I hope that those who come to this book motivated by a desire to learn about the larger forces will spend time with the seemingly practical chapters. Like a lot of people who grew up in the 1960s, I once thought business and management were pretty dreary. I had no idea, when I first came to Fortune, how wrong I had been.

Work is where change happens and where it hits. Too much of what passes for discussion of the Great Issues of the Day comes out of the Washington bureaus of newspapers and television networks. That's like trying to make sense of the tide by watching the froth on the wave. It's remarkable, and wrong, that so little of the workaday challenges of men and women finds its way into literature and art or into discussions of public affairs. Back in the 1930s, defending the decision to found a School of Business Administration, Harvard University president Abbott Lawrence Lowell wrote: "The vast bulk of the American people are engaged in business of some kind, and are not to be disparaged therefor ... Anyone who sees in his own occupation merely a means of earning money degrades it; but he that sees in it a service to mankind ennobles both his labor and himself."