versus 59 percent in 1990. And the use of across-the-board stock op- tions is spreading far beyond high- tech start-ups (30 percent of the largest companies now offer stock options to almost all employees).

11 high performers, not just A senior managers, are likely to reap a greater share of the wealth of the knowledge economy. But new pay strategies can also create new problems. “There are winners and losers in every change,” says Lawler. “More bargaining for pay and benefits is producing enor- mous discrepancies in how people

“new employment deal.” And only 20 percent of executives thought that employees are very satisfied with the new relationship to their company. Indeed, “there is growing cynicism and mistrust about how wealth is being distributed in the American economy,” says Lawler.

In addition, many retirement plans are giving employees a greater stake in their companies’ success, sometimes by funding the plans with company stock. But that’s a risk if the company fails or the stock loses value, as some retirees have learned the hard way.

More bargaining for pay is producing enormous discrepancies in how people are

rewarded within a company.

are rewarded within a company.” Lawler, director of USC’s Center for Effective Organizations, cites a USC study of new employment practices and attitudes. Seventy- one percent of Fortune 1000 ex- ecutives surveyed believed that most employees understood that individual performance, initiative, and skill building had replaced job loyalty and security-but only 33 percent of companies had formally communicated the terms of the

he free market for talent cre- T ates risks for companies as well as indwiduals. “Labor markets, like all markets, are dynamic,” says Lawler. “As demand changes, a company can end up paying 20 percent higher or lower for certain skills-and can either be stuck with overpaid workers or lose their best people to competitors.”

Furthermore, as responsibility for recruiting and negotiating with

new employees is shifting from human resource staff to the hiring manager, many are entering un- charted waters. “Managers often complain that they don’t get the support they need from their HR staff to put together the right package of pay, benefits, options- everything they need to compete for talent with more entrepreneur- ial organizations,” says Lawler. But he cites nonfinancial incentives that mangers can offer. For many, especially younger people, oppor- tunities for slull buildng, learning, and visibility can be decisive. “Don’t underestimate the value of doing interesting, high-profile work on an important project. Most people realize that what they know ultimately gives them both security and compensation.”

Secrets of Knowledge

Creation rn

arge Japanese companies have L mastered the art of ongoing, organized innovation-notwith- standing the current economic downturn in Japan. And the real innovators are neither front-line workers nor top executives, but much-maligned middle managers.

Spring 1998 59

So says Ikujiro Nonaka, author or coauthor of dozens of articles and books, including T h e Knowledge- Creating Company. His research has influenced business strategists for years, but his recent appointment as a Distingushed Professor of Knowl- edge at the University of Califor-

nia’s Haas School (with a $1 d o n grant from Fuji Xerox and Xerox)

academic and business worlds and the mainstream press. He is also a professor at Hitotsubashi Univer- sity’s Institute of Innovation Re- search in Tokyo.

lems, says Nonaka. But, he adds, innovation “cannot be explained

Most organizations are designed to process information or solve prob-

Tacit knowledge is the key to innovation.

tion processing or problem solv- ing. Innovation can be better understood as a process in which the organization creates and de- fines problems and then actively develops new knowledge to solve them.” The current knowledge- management craze gets them only so far. “All this talk about the im- portance of knowledge,” he writes, “does little to help us understand how knowledge gets created.”

That understandmg is what separates Honda, Matsushita, and Canon, among others, from their global competitors, he says. These compa- nies recognize that there are two

J o s s e y - B a s s Yu b 1 i s h er s Con gra tu 1 ate s

FRANCES HESSELBEIN

and the other recipients of the Presidential Medal qf Freedom, the nation k highest civilian honor:

Arnold Amnson 13mokr Astor Robert Coles Justin l h r t Jr. James Fai-nicr Fred Korematsu Sol Liiiowitz Wilma Mankiller Margaret Mu]-ie Mario Obledo

Elliot Richardson David Rockefeller Albert Shanker Elmo Zumwalt Jr.

“All i!f our honorees,” the President noted, “have helped America to widen the circle c$ democracy- by f ishting f o r human righfx, by righting social wrongs, by empowerin<q others to arhieve, by preserving

our precious environment, by extending peace around the world. [ l h e y l have don? so by risiny in remtlt.kable ways to Americak highest calling, the calling . . . qf artivc citizenship.”-]an. 15, 1998

60 Leader to Leader

form of knowledge: hghly personal tacit knowledge, which includes “subjective insights, intuitions, and hunches . . . deeply rooted in an individual’s actions and experi- ences”; and more tangible explicit knowledge-formal, objective, and quantifiable information, whch can be expressed in product specifica- tions or mathematical formulas. Tacit knowledge is the key to inno- vation, and is more highly valued in Japan than in the West, says Nonaka. Because “new knowledge always begins with the individual,” and learning is a matter of personal mo- tivation, employees’ level of com- mitment largely determines the

organization’s ability to learn and grow.

The task for leaders is to facilitate movement between an organiza- tion’s implicit and explicit bodies of knowledge. For example, build- ing effective teams can trigger socialization-the sharing of tacit knowledge, as happens between mentors and apprentices. And al- lowing for successive rounds of dialogue between teams encour- ages externafization of knowledge- the surfacing of individual, tacit knowledge into more explicit, usable form. Nonaka suggests some creative tools, such as metaphor

and analogy, that can help “express the inexpressible.” For instance, the breakthrough that led to Canon’s development of the first personal copier came when a design team, a t an impasse and relaxing over beers, saw an aluminum beer can as a model for the design of a d s - posable photosensitive drum.

But Japanese companies move innovation beyond the late-night, beer-fueled insights of a design team and into everyday systems. In Japan, for instance, 7-Eleven operates much like an American company, with heavy reliance on training manuals and formal

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procedures (explicit knowledge).Yet its powerfid point-of-sale computer system gives every employee, in- cluding the part-timers, the ability to track detailed sales data and (using their implicit knowledge) to order new products they think will sell, based on their location, weather conditions, or special events. Such hkage of systems and insights is the key to the expansion of an organi- zation’s knowledge base, turning personal hunches into systemic learning that can spiral through a company.

Nonaka also offers cogent sum- maries of Eastern and Western philosophical traditions and man- agement theories-not the stuff of business best-sellers, but essential to

wasteful, it enhances their ability to share ideas and develop fresh perspectives .

His study of organizations leads to the surprising assessment that “middle managers are the key to continuous innovation.” Each of the most familiar organizational models-hierarchical, top-down management, and autonomous, bo ttom-u p manage men t-does certain things well. But none of them facilitates the integration and dissemination of knowledge in all its forms, says Nonaka. H e pro- poses a third way, which he calls “middle-up-down’’ management.

Contrary to the Western view that middle managers are an afffiction

Middle managers are ideally positioned to direct the jaw of ideas and information.

understanding organizational strat- egy in both cultures. Less bound by so-called scientific management theories, for instance, Japanese com- panies create intentionally redun- dant processes, in which teams are given overlapping information, tasks, and responsibdities. While, say, three design teams worlung on the same or similar assignments sounds

to be rooted out, Japanese innova- tors see that middle managers are ideally positioned to direct the flow of ideas and information essential to knowledge creation. They often lead project teams and task forces, and provide a bridge “between the visionary ideals of the top and the often chaotic realities of business confionted by fiont-line workers.”

It is middle managers (or knowl- edge engineers) who must execute the strategic vision of senior exec- utives (knowledge officers), using the expertise of front-line workers (knowledge practitioners).

Senior managers set strategy, direc- tion, and standards. They decide what efforts to develop, based on such measures as cost, return on investment, and-in knowledge- creating companiessuch qualita- tive assessments as:

Does the idea embody the company’s vision?

Is it an expression of top man- agement’s aspirations?

Does it have the potential to build the company’s organiza- tional knowledge network?

But, Nonaka argues, none of these strategic decisions would be possi- ble without the participation of middle managers. They sort, link, and integrate the vast stores of information passing through the company-a model he refers to as the “hypertext organization.” This circular movement of ideas and team members provides the fresh perspectives essential to innovation. And a fresh perspective on the familiar topic of knowledge man- agement is Nonaka’s great contri- bution to organizational leaders. rn