How to stay competitive and innovative in the future – the evolution from Taylorism to Nonaka’s knowledge creation
In the 18th century, Adam Smith laid the foundations of classical free market economic theory. The Wealth of Nations was a precursor to the modern academic discipline of economics. In this and other works, he developed the concept of division of labour and explained how rational self-interest and competition can lead to economic prosperity.
After the 2nd industrial revolution, organizational and management focus to stay competitive and innovative, moved to processes, followed by a mass-production focus after WW1, before people and customers came into the picture. Managing quality and environmental factors received most organizational and management attention at the end of last century.
Before I discuss how companies can stay competitive and innovative in the future, let’s refresh our knowledge about a few important theories that shaped our companies of today.
Which focus will bring us the 4th Industrial Revolution?
1880s – Scientific Management: Competing through process innovation
Scientific management is a theory of management that analyzes and synthesizes workflows. Its main objective is improving economic efficiency, especially labor productivity. It was one of the earliest attempts to apply science to the engineering of processes and to management. Scientific management is sometimes known as Taylorism after its founder, Frederick Winslow Taylor.
- Scientific management evolved in an era when mechanization and automation were still in their infancy.
- The ideas and methods of scientific management extended the American system of manufacturing in the transformation from craft work by humans to mechanization and automation.
- Concerns over labor-displacing technologies rose with increasing mechanization and automation.
1920s – Fordism: Competing on mass-production
Fordism has been described as a model of economic expansion and technological progress based on mass production: the manufacture of standardized products in huge volumes using special purpose machinery and unskilled labor. Major success stemmed from three major principles:
- The standardization of the product (nothing is handmade, but everything is made through machines and molds by unskilled workers)
- The employment of assembly lines, which use special-purpose tools and/or equipment to allow unskilled workers to contribute to the finished product
- Workers are paid higher “living” wages so that they can afford to purchase the products they make
The principles, coupled with a technological revolution during Henry Ford’s time, allowed for his revolutionary form of labor to flourish. His assembly line was revolutionary and his most original contribution to the modern world was breaking down complex tasks into simpler ones, with the help of specialised tools. Simpler tasks created interchangeable parts that could be used the same every time. The major advantages of such a change was that it cut down on the manpower necessary for the factory to operate, and it deskilled the labour itself, cutting down on costs of production.
1930s – Human Relations Movement: Benefiting from employee satisfaction
The human relations movement was founded by sociologist George Elton Mayo in the 1930s following a series of experiments known as the Hawthorne studies, which focused on exploring the link between employee satisfaction/well-being and workplace productivity. Essentially the Hawthorne studies concluded that when employers take an interest in workers and make decisions based on their natural needs and psychological makeup, productivity increases.
- The movement also found that people work best when organised into groups, when they can have effective two-way communication with their leaders.
- And when leaders communicate and share information freely as part of an overall cohesive decision-making process.
The human relations movement is seen as the precursor of the modern human resources function. Before the human relations movement, workers were typically seen as replaceable cogs in organisational systems that put the ultimate value on higher output.
1940s – Post-Fordism: Competing while pleasing customers
Post-Fordism is the dominant system of economic production, consumption, and associated socio-economic phenomena in most industrialized countries since the late 20th century. Post-Fordism brought on new ways of looking at consumption and production. The saturation of key markets brought on a turn against mass consumption and a pursuit of higher living standards.
- Rather than being viewed as a mass market to be served by mass production, the consumers began to be viewed as different groups pursuing different goals who could be better served with small batches of specialized goods.
- Mass markets became less important while markets for luxury, custom, or positional good became more significant.
- Production became less homogeneous and standardized and more diverse and differentiated as organizations and economies of scale were replaced with organizations and economies of scope.
- Mass marketing was replaced by flexible specialization, and organizations began to emphasize communication more than command.
- The workforce changed with an increase in internal marketing, franchising, and subcontracting and a rise in part-time, temp, self-employed, and home workers.
- Following the shift in production and acknowledging the need for more knowledge-based workers, education became less standardized and more specialized.
1960s – Contingency Theory: Incorporating environmental factors
The basic premise of Contingency Theory is that there is no one best way to lead an organization. There are too many external and internal constraints that will alter what really is the best way to lead is in a given situation. In other words, it all depends upon the situation at hand as to what will be the best course of action.
- The contingency theory views organization design as a constrained optimization problem, meaning that an organization must try to maximize performance by minimizing the effects of varying environmental and internal constraints.
- Contingency theory claims there is no best way to organize a corporation, to lead a company, or to make decisions. An organizational, leadership, or decision making style that is effective in some situations, may not be successful in other situations.
- The optimal organization, leadership, or decision making style depends upon various internal and external factors.
1980s – Total Quality Management: Innovating and competing on quality
TQM is considered a customer-focused process and aims for continual improvement of business operations. It strives to ensure all associated employees work toward the common goals of improving product or service quality, as well as improving the procedures that are in place for production. Special emphasis is put on fact-based decision making, using performance metrics to monitor progress. High levels of organizational communication are encouraged, for the purpose of maintaining employee involvement and morale.
- Total emphasizes that departments in addition to production (for example sales and marketing, accounting and finance, engineering and design) are obligated to improve their operations.
- Management emphasizes that executives are obligated to actively manage quality through funding, training, staffing, and goal setting.
TQM efforts typically draw heavily on the previously developed tools and techniques of quality control. TQM enjoyed widespread attention during the late 1980s and early 1990s before being overshadowed by ISO 9000, Lean manufacturing, and Six Sigma.
Now: stay competitive and innovative through knowledge creation
It’s the creation of knowledge!
The society we live in has been gradually turning into a knowledge society. All the data and information that is readily available in most modern organizations amplifies the importance of knowledge and calls for a shift in our thinking concerning innovation in large business organizations, be it technical innovation, product innovation, or strategic or organizational innovation.
It is about how organizations process knowledge and, more importantly, how they create new knowledge in order to stay competitive and drive innovation.
How should companies do this? The Japanese organizational theorist and Professor Emeritus, Ikujiro Nonaka, knows how.
In an economy where the only certainty is uncertainty, the one sure source of lasting competitive advantage is knowledge. Markets shift, technologies proliferate, competitors multiply, and products become obsolete almost overnight. Successful companies are those that consistently create new knowledge, disseminate it widely throughout the organization, and quickly embody it in new technologies and products.
These activities define the knowledge-creating company, whose sole business is continuous innovation. According to Ikujiro Nonaka, a Japanese organizational theorist and Professor Emeritus at the Graduate School of International Corporate Strategy of the Hitotsubashi University:
Management theories view information processing as a problem-solving activity which centers on what is given to the organization, regardless of what is created by information processing. Any organization that dynamically deals with a changing environment should not only process information efficiently but also create information and knowledge.
Innovation, which is a key form of organizational knowledge creation, cannot be explained sufficiently in terms of information processing or problem solving.
Innovation can be better understood as a process in which the organization creates and defines problems and then actively develops new knowledge to solve them. Also, innovation produced by one part of the organization in turn creates a stream of related information and knowledge, which might then trigger changes in the organization’s wider knowledge systems.
An organization should focus on how it creates information and knowledge, rather than how it processes information and knowledge. There are two dimensions that make up knowledge creation theory:
- Epistemological dimension of organizational knowledge creation: a dialogue between explicit and tacit knowledge which drives the creation of new ideas and concepts.
- Ontological dimension of organizational knowledge creation: social interaction between employees that share and develop knowledge.
The way organizations should manage the organizational knowledge creation according to Ikujiro Nonaka, is shown in the following illustration:
A Dynamic Theory of Organizational Knowledge Creation, by Ikujiro Nonaka
The fundamental principle of the knowledge creating organizational design is redundancy: the conscious overlapping of company information, business activities, and managerial responsibilities. Redundancy is important because it encourages frequent dialogue and communication.
- This helps create a common cognitive ground among employees and thus facilitates the transfer of tacit knowledge. Since members of the organization share overlapping information, they can sense what others are struggling to articulate. Redundancy also spreads new explicit knowledge through the organization so it can be internalized by employees.
- The company should organize product-development teams and let them compete. A team is divided into competing groups that develop different approaches to the same project and then argue over the advantages and disadvantages of their proposals. This encourages the team to look at a project from a variety of perspectives. Under the guidance of a team leader, the team eventually develops a common understanding of the best approach. When responsibilities are shared, information proliferates, and the organization’s ability to create and implement concepts, is accelerated.
- Strategic rotation is key to building redundancy, especially between different areas of technology and between functions such as R&D and marketing. Rotation helps employees understand the business from a multiplicity of perspectives. This makes organizational knowledge more fluid and easier to put into practice.
- Free access to company information also helps build redundancy. When information differentials exist, members of an organization can no longer interact on equal terms, which hinders the search for different interpretations of new knowledge.
- No one department or group of experts has the exclusive responsibility for creating new knowledge in the knowledge-creating company. Senior managers (give voice to a company’s future by asking questions), middle managers (orient chaos toward purposeful knowledge creation and provide sense of strategic direction), and frontline employees (immersed in the day-to-day details) all play a part. The value of any one person’s contribution is determined by the importance of the information he or she provides to the entire knowledge-creating system.
How much redundancy is built into your organization?