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"Knowledge Works: Managing Intellectual Capital at Toshiba" by W. Mark Fruin

Knowledge Works: Managing Intellectual Capital at Toshiba by W. Mark Fruin (267 pages, Oxford University Press, 1997)

(originally published by Booz & Company)

If the modern American factory has little in common with the satanic mills found in the early days of industrial capitalism, it is still at the bottom of the heap in the hierarchy of today's corporation. In these factories, blue-collar workers, working with their hands, assemble the company's products. Other company buildings, in other cities or countries, house the white-collar workers working with their heads to manage the corporation's other business. Architecture tells much of the story: no one would confuse a corporate headquarters with a production site.

There was a time in the middle decades of this century, notes W. Mark Fruin in Knowledge Works: Managing Intellectual Capital at Toshiba, that blue-collar work was so despised that notions of the future rested on its disappearance. Automation, we hoped then, would virtually eliminate the need for human labor. Those few laborers who remained on the line would have little to do and little control over the production. No one could anticipate that automation would be only part of the picture and that the search for lower-cost labor in lower-wage countries would become a major factor in today's global economy.

Mr. Fruin's main purpose in his ethnographic study of one of Toshiba's electronics and business machine's factories, is to examine why and how the company, along with a few other Japanese industrial companies, have managed to transform some of their factories so that they create "more value than costs" despite being in a heavily competitive business and despite a nearly 80 percent revaluation of the yen since 1980. His research shows that Toshiba has managed to create the kind of factory, or "knowledge works," that some farsighted experts in the United States say will be necessary here to keep us on our economic high road.

Mr. Fruin, Professor of Business Policy and Pacific Rim Research at the University of British Columbia and currently Visiting Professor of Business at Keio University and the University of Michigan, spent six years working in the Toshiba factory at Yanagicho, a neighborhood of Kawasaki City, southwest of Tokyo. As a line worker, he helped assemble copying and automated teller machines. He learned how Toshiba integrated people who work with their hands and those who work with their heads to develop factories with value-added production processes.

The simple act of calling a factory a "knowledge works" has several implications at Toshiba. Most important is that the reproduction of knowledge during the manufacturing process is as valuable as the product that comes off the line. The added value comes from applying the knowledge gained from one product to other projects and producing further innovation without further costs.

The knowledge-works model also implies that factories should be designed around people, not around specialization, as is the traditional factory. Instead, the machines, layout and architecture of the factory should revolve around the worker, who supplies the knowledge that teases out the most from the machines. The Japanese attitude toward employees emerges here and explains why, despite Japan's current economic difficulties, there have been no downsizings and layoffs on the scale of those in the United States. Jettisoning workers is tantamount to emptying a chunk of the company's research and development budget into the Tamagawa River that runs nearby. This factory, which Mr. Fruin says is frayed at the edges and by no means a showcase for Toshiba, does produce innovation.

The key, Mr. Fruin believes, is the plant's high ratio of managers, scientists and technicians to line workers. In one department at Yanagicho, an amazing 85 percent of the staff are what he calls knowledge workers. Toshiba also houses production and design in the same location to encourage creative interaction. Thus Toshiba avoids spending time on wild designs that cannot be executed.

Mr. Fruin acknowledges that his enthusiasm for knowledge works puts him at risk of seeming starry-eyed. As if to counteract that, the book includes a chapter on a failure of sorts. In 1985, Visa International came calling, looking for a company that could develop the technology and make a card with enough power and complexity to keep bank-transaction records, function as a credit card and have an encryption system to prevent fraud. In about 22 months, the Yanagicho factory developed such a smart card. It had a full-function, online-capable, 10-key, integrated-circuit computer with 16K of RAM — all in the size of a credit card. The chapter is a fascinating account of how Toshiba developed its own new technology, modified existing technology from other sources and engineered the card, all the while trying to satisfy its increasingly persnickety client.

In the end, Visa International, which had commissioned the card without a marketing strategy, killed the project, leaving Toshiba, as Mr. Fruin writes, "snookered." Nevertheless, Toshiba realized more than 1,000 patents along the way, and quickly began generating secondary products out of the technology that had gone into the smart card, including handheld terminals now used by train conductors and policemen throughout Japan. Presumably, when the smart card's time comes, Toshiba will be nicely positioned.

The Toshiba-Yanagicho model, though intriguing, may not be easily replicable. Toshiba is a company that has been unusually willing to recreate itself — and to spend what it takes to do so. Thirty years ago its most important products were heavy electronics; its least important, information devices. Today, it is probably best known for its respected laptop computers. Toshiba has been willing to sink capitalization costs into projects — more than $20 million into the smart card project, for example — and to pay the high prices for labor and land. Few companies, in Japan or elsewhere, are willing to mimic Toshiba's "spend-to-grow" approach or its creative dismembering of hierarchy. Readers of Mr. Fruin's book will be inclined to wonder where innovation will come from under other circumstances.

Barbara Presley Noble, the former At Work and Business Book Review columnist for The New York Times, has an M.S. in journalism from Columbia University and was a Knight-Bagehot fellow in business and economic journalism at Columbia.
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