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 / Winter 2008 /Issue 53(originally published by Booz & Company)


The Practical Wisdom of Ikujiro Nonaka

Thus, Nonaka’s concept of a knowledge-creating company resembles the kind of community in which generosity is prevalent, people feel recognized as distinct individuals, and informal, honest communication is commonplace. When designers of knowledge management systems fail to understand this — when they (consciously or not) treat humans as interchangeable parts, receiving and processing data — their expensive, high-tech systems get ignored. This, in a nutshell, is why so many companies have invested hundreds of thousands of dollars in knowledge management systems that fail to deliver in­novative results.

Given that a quick Google search of both “knowledge management” and “human capital management” yields almost exclusively references to IT, Nonaka’s observations provide a useful corrective. As more and more companies recognize human capital as their primary resource, the concept of a knowledge-creating company becomes particularly relevant. Such a com­pany cultivates tacit knowledge and deliberately harnesses it, often by making it explicit. Nonaka’s concept of tacit knowledge was influenced by philosopher Michael Polanyi (who called it “tacit knowing”) and by Kitaro Nishida, the great Japanese scholar, who in the early 20th century tried to find common ground be­tween Zen practice and Western philosophical thought. Tacit knowledge is a key component of innovation. It includes the unspoken knowledge that people draw on from within themselves: observations, ingrained habits, inspirations, hunches, and other forms of awareness that are typically not written down or codified, but that live in people’s minds and bodies, and give any organization much of its distinctive edge over competitors.

One evocative story from The Knowledge-Creating Company describes the product launch team at Canon Inc. as it struggled to devise an inexpensive, replaceable photocopier drum, which was an essential part of the company’s strategy of besting the Xerox Corporation by producing an inexpensive copier for homes and small businesses. As things stood, copier drums required regular service by trained technicians; only large companies could afford that service. Team leader Hiroshi Tanaka brought in some beer, drained his can, and held it up. “How much does it cost to manufacture this?” he asked the group. His moment of insight, charged with tacit knowledge, inspired the team to come up with a process for building a low-cost disposable aluminum drum.

In Managing Flow, Nonaka and his coauthors de­scribe a process by which any company can apply tacit knowledge. An example is Seven-Eleven Japan (SEJ). Nonaka points out that, although most analyses of the company (for example, a famous HBR case study) have focused on SEJ’s highly developed point-of-sale information management systems, it is the quality of knowledge that makes the company so successful. Staff members in every store, even part-time clerks, are charged with making continual judgments about the value of merchandise to customers: “Is it moving? If not, why are customers rejecting it? And what are the opportunity costs of a customer who is disappointed?” By drawing on the tacit insights of people on the front lines, SEJ gives its staff an incentive to build relationships with customers, whose behavior and comments provide vital knowledge to the company.

Nonaka notes that such processes flourish in orga­nizations led by individuals who embody tacit and ex­plicit knowledge in their own behavior. These “virtuous artisans,” as he calls them, have also been present in Western culture, dating back to Aristotle’s exploration of the idea of phronesis in his work Nicomachean Ethics. Often translated as “practical wisdom,” phronesis is the ethical yet pragmatic frame of mind held by those who can sense the essence of a situation and respond with creative and timely judgments. In Managing Flow, Nonaka quotes Soichiro Honda, founder of the com­pany that bears his name, who once compared business judgment to making a good joke. “You have to grasp the atmosphere of the occasion,” Honda said, “which exists only for a particular moment. A joke is all in the timing, in understanding what the present evokes. To joke is to understand human emotion and be present for it.”

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  1. Aristotle, Nicomachean Ethics, translated by Terence Irwin (Hackett, 1999): Original source on phronesis and other concepts that Nonaka draws upon.
  2. Denise Caruso, “The Real Value of Intangibles,” s+b, Autumn 2008: The case for standards for appraising the worth of nonphysical assets like brands, human capital, and tacit knowledge.
  3. Kevin Dehoff and John Loehr, “Innovation Agility,” s+b, Summer 2007: Knowledge creation lies at the heart of Toyota’s groundbreaking product development process.
  4. Peter Drucker, Adventures of a Bystander (HarperCollins, 1991): Autobiography of the great management writer, with a chapter on the Polanyi family.
  5. Michael Farber, Tom Greenspon, and Jeffrey Tucker, “The Practical Visionary,” s+b, Spring 2008: The new role of the chief information officer may make it easier to implement knowledge management as a process centered in human conversation.
  6. Tim Laseter and Rob Cross, “The Craft of Connection,” s+b, Autumn 2006: Discusses how organizational network analysis is helping companies share knowledge worldwide, one natural broker at a time.
  7. Ikujiro Nonaka and Hirotaka Takeuchi, The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Innovation (Oxford University Press, 1995): Nonaka’s first major inside look at knowledge creation, primarily at Japanese companies.
  8. Ikujiro Nonaka, Ryoko Toyama, and Toru Hirata, Managing Flow: A Process Theory of the Knowledge-Based Firm (Palgrave, 2008): In-depth theory of knowledge-based management with an emphasis on the practical wisdom called phronesis.
  9. Jeffrey Rothfeder, “Jeffrey Liker: The Thought Leader Interview,” s+b, Summer 2008: A lean process expert explains why companies without ba find it so hard to emulate Toyota.
  10. Ikujiro Nonaka’s Web site, Hitotsubashi ICS Business School: Includes a bibliography of Nonaka’s published work.
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