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by A l e d a V.

R o t h
Aleda V. Roth is an associate professor at the Kenan-Flagler
Business School of the University of North Carolina at Chapel Hill.
Her co-authoredbooksinclude Competing in World Class Manufacturing,
World Class Banking: Benchmarking the Market Leaders, and
The Management of Continuous Improvement: Cases in
Health Administration.

Achieving Strategic Agility through

ECONOMIESOFKNOWLEDG
"Economiesofknowledge means that the firmisabletouseits business acumen, combined with skilled

people and experience with advanced technologies, to create an organization that consistently identifies,

assimilates, and exploits new knowledge more efficiently and effectively than the competition."

Manufacturers are in the midst of one of the most petitive strength in a combined set of generic capabili­
significant transformations in history. The kaleidoscopic ties, namely quality, delivery, flexibility, and price lead­
nature of the global economy has created an environ­ ership. Managers then have options. They can use one
ment of unprecedented hyper-complexity and dynamic or more capabilities to preempt or imitate fast global
change. So much so that the rules of the competitive competitors. Armed with multiple capabilities, manufac­
game are shifting faster than managers can react to them. turers will be better prepared for the changes ahead.
Moreover, these dynamics bode continuous sea changes Acquiring strategic agility is no easy task. It requires
in work and sources of value-added. Looking to past "economies of knowledge" through accelerated enter­
solutions for rationing resources and controlling costs is prise-wide learning. Economies of knowledge means
not an option. The drivers of change indicate one point: that the firm is able to use its business acumen, com­
Successful manufacturers tomorrow will not look much bined with skilled people and experience with advanced
like those of today. technologies, to create an organization that consistently
Manufacturing pacesetters are seeking new competi­ identifies, assimilates, and exploits new knowledge more
tive weapons. Prominent in the search is strategic efficiently and effectively than the competition.
agility—the capability to produce the right products at O r g a n i z a t i o n a l K n o w l e d g e Drivers
the right place at the right time at the right price. By The quantum need for strategic agility stems from
definition, strategic agility is achievable only with com­ chaotic markets and technological forces. Global markets

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30
in constant flux have become "virtual." At dizzying ing its progress toward strategic agility. Removing the
speeds, customers, suppliers, and competitors swap millstone requires "out-of-the-box" thinking to capital­
boundaries, niches, and roles. It is not uncommon for ize on knowledge creation. World class manufacturers
competitors to serve dual roles as customers or suppliers have succeeded by thoroughly "un-learning" old produc­
as long as it is profitable to do so. The plethora of emer­ tion rules and contextualizing their know-how with post-
gent technologies and customer information bases only industrial, information logic.
fuel the infinite ways of dynamically dicing up the mar­ To turn our organizations upside down and to capital­
ketplace and add to the multiplicity of forms that com­ ize on knowledge, managers must broadly address three
petition can take. questions:
The global stage is set for oppor­ ♦ What are the beliefs concerning the
tunistic firms to engulf their ill-pre­ "[M]uch of what managers know competitive landscape and the differ­
pared prey with no warning. Consider entiating priorities?
the drivers of organizational knowl­ today and the decisions they make ♦ How are work processes modified,
edge: customers, information, speed- are based upon industrial, changed, and evaluated?
to-markets, and technological choices. ♦ How are the sources of value-added
♦ We live in an age of customer mass-production logic. This is a changing?
choice, and today's savvy customers major source of entropy, siphoning Evolving Management
want it all! Worldwide, customers' Perspectives
access to product information and valuable resources and Management debate around these
databases enables them to make more misdirecting talent." questions can benefit by understand­
informed choices. Global customers ing the distinctions among various
are demanding uniformity in product quality and service manufacturing epochs—those strategic moments in
standards. One only has to look at the telecommunica­ which top management perspectives of competitive
tions and electronics industry to understand this per­ capabilities shift radically and require revolutionary
spective. approaches to change. The trajectory of the dominant
♦ Information is becoming a global commodity and alone paradigms of production logic and best practices can be
provides little strategic value-added. Access to the understood by using a strategic map to look back to pro­
Internet and other online services provide information to duction's historical roots and to help recognize its major
the masses. Computer-based commerce, such as electron­ disconnects between today's and tomorrow's passages.
ic data interchange, speeds up order fulfillment cycles. (See Exhibit 1 on page 32.)
Because information is widely available, competencies in Each epoch highlights the time-phased best practices
synthesis and analysis boost the strategic arsenal. of the globally competitive manufacturers in industrial­
♦ Speed-to-market is the rallying cry of world class man­ ized regions. Notably, the outstanding performers,
ufacturers. An estimated one-third to two-thirds of a defined here as "world class," are approaching the 21st
firm's annual sales are derived from products developed century priorities today. The less competitive laggards
within the past two years. On the downside, the same remain vested in the past, where the fundamental
processes that enable rapid new product introduction also premises of management date back to the industrial age
increase product proliferation and process complexity. of Henry Ford and Alfred Sloan.
♦ The array of technological choices available is growing Clearly, within each manufacturing epoch, managers
exponentially. The ability of individuals, organizations, must see things differently in order to manage different­
and even society at large to exploit their potential has ly. To illustrate, consider how long it took U.S. automo­
not kept pace with new technology. As technological tive manufacturers to recognize and respond to the
advancement impinges upon every aspect of daily work, structural change in their markets caused by Japanese
the expertise, spirit, and creativity of people—not capital competition. Why didn't Roger Smith quickly "do some­
and equipment—are the limiting resources. The rapidity thing" different rather than let GM's market share
of change has outstripped traditional methods and defin­ erode? Only fifteen years ago did a handful of world
itions of production. As a result, managers must turn class manufacturers embark upon a journey called lean
upside down the tenets they held in the past about how production, now considered a best practice. Shattering
to organize work, how to share work, and how to strate- old axioms, total quality management and just-in-time
gize. Yet much of what managers know today and the logic are changing management mindsets entirely.
decisions they make are based upon industrial, mass pro­ Industry leaders are now making a call to arms for a
duction logic. This is a major source of entropy, siphon­ new production logic, called agile manufacturing. They
ing valuable resources and misdirecting talent. hope to use their manufacturing capabilities to deluge
Mass-production logic has become a corporate mill­ the marketplace with a wider variety of higher value
stone, weighing down its potential for learning and slow­ products.

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Beyond that is strategic
agility—the ability to leverage
enterprise-wide operations to
turn on a dime, providing the
right product at the right price,
anywhere. In other words, the
pacesetters will transcend the
functional manufacturing
boundaries to develop fluid,
enterprise-wide operations in
order to be globally agile.
Competitive Priorities.
The decision calculus for man­
ufacturing investment choices
is typically associated with
competitive priorities—the
manufacturing-related capabili­
ties that win new customers
and retain them. In a competi­
tive world there is little room
for waste. An emerging body of
research suggests that the dom­
inant set of competitive priori­
ties, especially within the
industrialized countries, is tied
to manufacturing epochs. The
strategic importance of investing in epoch-based capabil­ nologies, knowledge, and skills are dramatically rede­
ities lies in its contribution to building sustainable com­ fined. Moreover, a firm's relative position on the strate­
petitive advantage and superior profitability. gic map determines its potential to leverage generic
Using mass-production logic, investments are made capabilities through operations processes at the site, the
by trading-off competitive capabilities, e.g., quality or business unit, or the enterprise level. For example, man­
cost or flexibility. Following a product life cycle, manu­ ufacturing priorities of quality and delivery are typically
facturing priorities shifted as volume increased, such as implemented at the plant. Here production benefits
from quality to low cost. Lean production logic differs. from more localized process redesign projects that build
Quality, delivery, and costs are viewed as complementary upon its manufacturing process knowledge. By the same
capabilities, not to be traded-off for one another. Within token, integration of business unit processes is necessary
agile manufacturing, flexibility—the ability to make to realize flexibility. Attaining strategic agility means
product variety with high quality and reliable deliveries spanning national boundaries in order to leverage a port­
at a competitive price—is of paramount importance. folio of global assets. To do so, firms must rationalize
Strategic agility requires a metamorphosis from the resources and processes on an enterprise-wide basis.
organization as mechanistic "working machine" to the Process Performance Criteria. Evaluation of opera­
"Knowledge Factory™"—an organic, accelerated learn­ tions process performance varies by epoch as seen in
ing organization that produces shared knowledge as a Exhibit 1. Efficiencies from economies of scale, continu­
key by-product. The conceptual analogy is the way that ous improvement, and quick response are the outcomes
a breeder reactor generates more fuel than it consumes. of mass and lean manufacturing, respectively. With agile
As operations evolve from physical production of prod­ manufacturing, the business unit profits from organiza­
ucts to the manufacture of invisible, intangible assets tional connectivity. Economies of integration, which are
such as services, knowledge, and ideas, work becomes enabled by technology, will enhance manufacturing's
largely cognitive, organic, and virtual. ability to work in tandem with other functions, cus­
Thus with each manufacturing passage, past invest­ tomers, and suppliers.
ments must frequently be treated as sunk costs as tech­ With strategic agility, process performance is based
upon the relative degree of mass personalization—the
ability to provide products and services based upon each
individual customer's specific characteristics, attributes,
needs, and wants. Mass personalization is demarcated

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32
from producing for the needs of "clusters" of customers chaotic tangle of interrelationships and interactions.
within defined market segments. Take, for instance, the Oticon's knowledge workers bring clusters of skills to
personalized production of Panasonic brand bicycles of the job; they bring the intelligence behind the comput­
Japan's National Bicycle Industrial Company. Each bike ers, telecommunications, and automated systems; and
is manufactured to fit the customer's exact height, they dynamically reconfigure themselves into "virtual"
weight, and color preference. Operations must know communities of practice. People co-locate seamlessly
customers very well and become less narcissistic in their between projects and tasks as required. Seamlessly, they
approaches. Evaluation must be based on asking: "What convene, address a problem, and disperse as needed.
can we do for you?" in contrast to "How well are we sat­ The bottom line results are increased profits, productivi­
isfying you?" ty, and innovation.
Sources of Value-Added. The sources of value- A Progression of Knowledge-Based Competencies
added change whenever a dominant paradigm passes As strategic thinkers, managers must understand how
into another epoch. Under mass production, value-added generic factors critical to success arise. By definition,
was achieved by applying capital and muscle power. In these factors are among their portfolios of current com-
the lean era, quality, local information systems such as
just-in-time, and natural workgroups and teams provided
significant returns when properly deployed. As the focus
shifts to information technology (IT) enabled processes,
value-added comes from excellence in supply chain
management and cross-functional teams. Tearing down
functional silos is key to quick response. Agility means
that design engineering and customer services interface
through business process management.
For strategic agility, value is derived from leveraging
enterprise assets worldwide. Recent research on 1,300
manufacturing business units across North America,
Europe, and Japan calls for neo-operations strategy
where superior value is derived from knowledge-based
competencies, e.g., combining IT and state-of-the art
manufacturing processes with technologically competent
workers and intelligent organizations. Without question,
revolutionary—not evolutionary—changes in manage­
ment mindsets and practices are necessary. Managers
must shift their thinking from technology-based compe­
tencies to knowledge-based portfolios—enterprise-wide
intelligent systems and knowledge workers joined in
"communities of practice."
Value is created by knowledge workers (who include
managers, engineers, technicians, and information work­
ers and specialists) employing increasingly powerful, ver­
satile, and user-friendly advanced technologies to
enhance their productivity. The development of com­
munities of practice—a network of knowledge workers
and workgroups who carry out the actual work, whether
or not they formally fit into the proper organizational
boxes—enabled by advanced technology, will be an
essential means of sharing expertise.
Take for instance, Oticon, a Danish manufacturer of
hearing aids. At Oticon there are no "fixed" jobs.
President Lars Kolind is quoted as saying: "In my expe­
rience, it takes a revolution to change a traditional,
machine-like organization into one that has a high level
of flexibility and the ability to advance knowledge."
Within two years, Oticon evolved into a so-called
"spaghetti organization," which Kolind describes as a

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Flexibility shatters organizational boundaries.
Quality and delivery pave the way for flexibility due to
improvements in subsystem predictability and know-
how. Now manufacturers must come to grips with larger,
unwieldy business unit processes. Business process
redesign and innovations take out more organizational
slack. Proverbial fire walls at the boundaries are
destroyed in order to get closer to suppliers, partners,
and especially customers. Flexibility requires an inordi­
nate closeness to customers. Intimate customer knowl­
edge provides opportunities for unprecedented cross-
organizational process integration. Unfortunately, few
companies deliberately build capabilities on long-term
customer relationships.
Price leadership is the final step in the progres-
sion. Price leadership means that the firm has signifi­
cant flexibility in pricing because of lower manufactur­
ing and distribution costs. It occurs only when product
and process innovations reduce costs over a product fam­
petitive capabilities and those needed in the future. ily life cycle and controllable costs are sustainable, or
Empirical evidence supports a new theory of competi­ declining. For global players, total price leadership is all
tive progression. (See Exhibit 2). Accordingly, generic about leveraging the entire enterprise and its network of
capabilities are developed sequentially and are interde­ suppliers, customers, partners, and facility locations.
pendent over time, regardless of intended priorities. Price leadership is not a one-time event but requires a
Roth's theory (1996) explains why generic capabilities clear understanding of enterprise-wide processes under­
observed within manufacturing firms accumulate in a lying quality, delivery, and flexibility.
progression—from quality and then to delivery and then Barriers to Growth in the Knowledge Era
to flexibility and then to price leadership during an inno­ Interestingly, the competitive progression mirrors the
vation cycle. macro evolutionary pattern depicted on the strategic
Quality is first, not only because it is the ante for map (Exhibit 1). Having higher levels of combinative
competing, but because it increases process pre- generic capabilities is the essence of strategic agility, and
dictability and increases organizational learning. the most cost-effective path of accumulating generic
Mastery of total quality management (TQM) as a new capabilities follows from competitive progression theory.
business science and deployment of its principles pro­ Competitive progression theory is the conceptual linch­
vides a foundation for organizational learning. As people pin between manufacturing epochs and the evolution of
are permitted to practice quality in daily work, they gain the enterprise as a whole.
new social skills along with improved functional and Combined competitive capabilities are broadly associ­
technical expertise. TQM requires them to come togeth­ ated with the changing organizational architecture, tech­
er, communicate, dialogue, and share expertise. A quality nological progress, and roles of people—both employees
umbrella can ready the organization for ongoing change. and customers. For example, within a Knowledge Factory,
Delivery reliability expands local process capa- the customer becomes a collaborator in the production
bilities. Fast and reliable delivery is possible only after a process. Customers, supported by intelligent technologies
company can control its product quality. Delivery builds like virtual reality software, participate in the design and
upon product quality by expanding the need to share production of their own goods and services.
technical information and process knowledge cross-func­ The primary barriers to progress toward strategic agili­
tionally and along the supply chain. For reliable delivery, ty are a lack of skilled human resources and manage­
manufacturers must be able to provide the same level of ment expertise to deploy these resources. Technology
support and service worldwide. Increased predictability will not be the issue because all firms will have access to
of distribution processes is essential. Because products comparable technology. The question will be: How do
and services usually have some "local" contents (i.e., we build the thoughtware, and how do we gain the orga­
addressing market-specific, environmental, safety, ener­ nizational knowledge?
gy, and cultural issues), understanding distribution The answer is intuitively simple, but not easy to
processes augments the firm's knowledge portfolio. implement. Firms must work through the competitive
progression faster and, thereby, accelerate the number of
innovation cycles. The Knowledge Factory™ model

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34
ing the organization into traditional methods or manag­
ing by fads. Barriers to developing new managerial com­
petencies are exacerbated by the rapidity of change,
which leaves little time to react, and by the reinforce­
ment of old behaviors by the short-term orientation of
management compensation systems..
In the 1980s, the "best" managers were identified by
their functional expertise such as finance, sales, or pro­
duction, and their ability to "command and control"
their operations. (See Exhibit 3.)
Today, managers need different, broader competen­
cies—business unit process expertise, at the least. They
must understand and value team-based, cross-functional
management. And as firms move to the 21st century
knowledge era, the best of breed managers will need
enterprise process expertise. They must be able to "see
'round the world." Because the bodies of scientific
know-how and technological progress are evolving radi­
cally over time, development of economies of knowl­
shows that this is possible by establishing deliberate edge are critical to managerial prowess. Consequently,
strategies and a predisposition for learning. the investments in management renewal must be an
People Competencies. Managers must realize that knowl­ ongoing process.
edge is a socially constructed phenomena. Learning References
requires collaboration and sharing of insights. Xerox Craig A. Giffi, "The New Manufacturing Strategy," Harvard Business
Pare, for example provides convenient places where peo­ Review, May/June 1994, 154-155.
ple can get together routinely. John Seely Brown of
Polly LaBarre, "The Dis-Organization of Oticon," Industry Week, 18
Xerox calls it the "distributed coffee pot" phenomenon.
July 1994, 23-26.
Communities of practice are self-reinforcing at problem
Piore, M. J. and C.F. Sabel, The Second Industrial Divide: Possibilities for
solving. Employees need to work together, build, and
Prosperity, (New York: Basic Books, 1984).
cross-fertilize the enterprise knowledge bases. Huge
knowledge gaps exist in most organizations as companies Aleda V. Roth and Craig A. Giffi, "Winning in Global Markets: Neo-
using industrial-age logic continue to segregate workers. Operations Strategies in U.S. and Japanese Manufacturing," Operations
Accelerated learning requires deliberate opportunities Management Review, 10:4, 1995.
for face-to-face communication, collaboration, and peri­ Aleda V. Roth, Ann S. Marucheck, Alex Kemp, and D. Trimble, "The
odic co-location. Knowledge Factory for Accelerated Learning Practices," Planning
Management Competencies. The second key to achieving Review, May/June 1994, 26-33,46.
organizational knowledge is through expanded manage­ John Seely-Brown, "Research that Reinvents the Corporation," in The
ment competencies. The industrial logic that brought- Learning Imperative, R. Howard, ed., (Boston: Harvard Business
successful companies to the 1980s was built upon mod­ Review, 1993).
els of functional excellence. Today there is a generation Acknowledgments: The author is most appreciative of the involvement
of managers who are really "incompetent." They remain of all the executives who shared their valuable experiences and
vested in the past. Blind to the sea changes ahead, many insights in the conduct of the field research and especially to Craig
are complacent in their own professional niches and Giffi of Deloitte & Touche, Gary Thompson of Nortel, and Mike
individual comfort zones; others are uncomfortable with Gatling, John Martino, Carlyn Solomon, and Max Bataille of Baxter. I
the new environment; and yet others, fearing the tumult am especially grateful to Robert Badelt for Nortel's sponsorship of the
of downsizing, are playing out an end-game. Ironically, theory development phase of this research in 1992-1993 and his useful
for some of these managers, who excelled by 1980s stan­ comments. An earlier version of the theoretical framework was pre­
dards, the financial signals today still indicate that every­ sented at the Executive Forum on Global Business Reengineering
thing is OK. Yet in the turbulence of the 21st century, sponsored by the CATO Center for Applied Business Research,
major changes will come quickly to the unprepared who Kenan-Flagler Business School of the University of North Carolina at
are waiting for their proverbial "ship to come in" rather Chapel Hill, April 1992.
than swimming out to meet it.
The lack of preparation for the challenges ahead cre­
ates a drag on institutional systems, either by pigeonhol­

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