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History Table of Contents
1995 Winter Conference
Winter Conference 1995
The Changing Economy and Knowledge-Based Services:
How Will Canada Succeed?

Implications for Workers and Business

HUGH ARNOLD, Dean of the Faculty of Management,
University of Toronto, and Magna International Professor
of Business Strategy

I'd like talk about some areas in which I believe there are — and some in which I believe that there are not — important distinctions between knowledge-based organizations and others; the distinction most commonly drawn between resource-based and knowledge-based.

There are some important strategic points of differentiation, but some of the positions that have been taken suggesting that knowledge-based organizations require fundamentally different approaches to management, leadership and organization are, in fact, not valid.

Let me start with an assumption that appears in quite a bit of the literature that we read that states that knowledge-based organizations do differ from resource-based and that they, hence, must be managed and structured differently.

There are a variety of dimensions that some have argued require different approaches to managing the knowledge worker and knowledge-based organizations.

Let me just review those briefly, (because) I don't think that these, in fact, characterize knowledge-based organizations.

First, with regard to direction setting.

It's argued that knowledge-based organizations require the generation of a shared sense of vision throughout the organization, rather than the top-down setting of direction often characteristic of resource-based organization.

Second, with regard to thinking and acting, its argued that knowledge-based organizations require more integrated thinking and acting throughout the organization, as opposed to the distinction in resource-based industries that the thinking goes on at the top and the acting goes on down below.

Third, it has been argued that the knowledge-based organization requires more systemic thinking, as opposed to the more atomistic, narrowly focused thinking that goes in the resource-based organization.

Fourth, it's been argued in the knowledge-base organization conflict is resolved through dialogue, discussion and integration, as opposed to the more political processes of decision-making and conflict resolution in resource-based organizations.

Finally, with regard to the role of leadership it's been argued that in the knowledge-based organization the role of the leader is fundamentally different than in the resource-based organization.

It's said that the knowledge-based leader has the task of building a shared vision, empowering and building commitment and enabling good decision making, as opposed to the role of the leader in the resource-based organization of setting the vision, of rewarding and recognizing performance through expectations and making the key decisions and creating the control structures necessary.

The argument has been made that these are two fundamentally different approaches to management and organization that are required for the knowledge-based organization, as opposed to the resource-based.

I don't think that these characteristics that have been put forward as characteristics of the knowledge-based organization, in fact, are restricted to knowledge-based organizations.

My position is that these are, in fact, characteristics of effectively-managed organizations, regardless of whether they are in the resource sector, the knowledge sector, or elsewhere.

But if that position is valid, why has there been this tendency to characterize these different styles of management in the knowledge-based organization, as opposed to the resource-based?

We've tended to observe these types of differences in managerial style, not because there is a fundamental difference between the requirements for effective management in knowledge-based, as opposed to other types of organizations, but because knowledge-based organizations by their nature come into existence within highly-competitive and very turbulent environments in which there are relatively few barriers to entry and have high levels of competition.

Classic resource-based industries have tended to evolve historically in environments in which there are strong barriers to entry.

Hence, (there are) much lower levels of competition.

The types of management and organizational styles that have sometimes been put forward as characterizing resource-based organizations haven't evolved because of their functionality, or their effectiveness, but in fact resource-based organizations as a result of non-competitive environment, or relatively non-competitive environment, have succeeded in spite of the types of organizational structures and management styles that have sometimes been observed to characterize them.

Factors such as the control of raw' materials, the existence of proprietary technology, the existence of high financial barriers to competitive entry, the existence of government regulation — either in the form of tariff or non-tariff barriers, regulatory environment — (have) created environments that have insulated what have been characterized as resource-based industries from competitive pressures.

They've been able to get away with the sort of top-down command and control structures that have often been observed to characterize them.

That has evolved, not because those types of organizational structures and management systems are particularly appropriate, but because their environments have tolerated them and permitted what I would describe as less effective and somewhat dysfunctional structures to exist and characterize those types of organizations over time.

The knowledge-based organization, in general, hasn't been able to tolerate those types of less functional organizational and leadership styles, because of the fact there tend to be no raw materials, other than people, relatively little proprietary technology, few capital requirements and fewer regulatory barriers and, hence, high levels of competition that demand more effective, more innovative styles of organization and management

With the elimination of tariff and non-tariff barriers, with the creation of more competitive environments, we are observing in the knowledge-based sector and now in the more traditional or classic resource-based sector, competitive pressures that are requiring organizations in general — be they knowledge-based, resource-based or others — to adopt more management styles and organization structures that are more capable of capitalizing on all of the expertise, all the resources of the human capital in their organizations.

I want to share some recent experiences we've had at the University of Toronto that influences my perspective on this.

An area that we've been working on developing quite aggressively in the last three years is our non-degree executive programs.

The development of executive education programs is a business that we've been roughly doubling in revenue each year for the last three years.

The largest areas of growth in that are what we refer to as custom programs, where we work with a client organization in partnership to create a learning experience that that organization then has a large cadre of its employees go through. It's a cultural change, as well as a training and development type of activity.

A client that we started working with just over a year ago is Domtar, a classic resource-based industry; control of raw materials, huge financial barriers to entry, but an organization that now, in today's competitive environment, is facing competitive forces that it didn't face in the past

Domtar's had to go through significant downsizing, significant reductions in work force.

When Domtar came to the University of Toronto the types of issues they were interested in addressing were, "how do we generate a more empowered work force, how do we break down the barriers to communication between the different functional silos in the organization?"

About a year earlier we'd started working with another organization, shortly after they were exposed for the first time to a competitive environment as a result of the change in the regulatory structure.

We've just in the past few months started working with Digital in the computer industry.

The striking issue for me is that the types of issue that are most salient to all these organizations are very highly similar.

We don't do the same program, but the kinds of issues they bring to us are almost identical.

It's the facilitation of co-ordination, it's the enabling of people, it's the empowerment of individuals throughout the organization.

The themes are remarkably common, whether we're dealing with the telephone industry, the computer industry, or making paper and corrugated packaging.

With Domtar, the program we do brings together for a week at a time 40 to 50 people from each of their business areas, whether it's fine papers, packaging, their merchant group,

It brings together people from unionized shop floor employees to the senior vice-president and general managers of the organization and gets them working on how they are going to find new ways of capitalizing on their human resources, enabling and empowering their employees.

The list of the characteristics of the knowledge-based organization is exactly what their aspiring towards and what we're working with them to try and help engender. It's forced on them by a new competitive environment that they didn't have to cope with in the past

So, argument No.1 is, I guess, is that what have sometimes been characterized as the managerial organizational and leadership characteristics of the knowledge-based organization, in fact, are the characteristics of the effectively-managed organization regardless of sector.

Further, the increased competitive pressures that organizations face today, regardless of sector, are driving and creating the need for those types of structures and systems which have the common theme of liberating and enabling employees throughout the organization to use their knowledge, to use their skills to contribute to the competitive success of the organization.

That to me is a necessary, but not a sufficient, condition for competitive success. If we focus more exclusively now on the knowledge-based sector.

I think there are, in fact, some differences that characterize that sector.

Part of it relates to the fundamentally important role that people and the capitalization on human talent plays in those organizations.

But, it also relates to what are the sources of comparative or competitive advantage in a sustainable sense for knowledge-based organizations.

I’m going to come back to what may have elements of a self-serving theme, coming from a university.

It seems to me that it is research and investment in research, at both the firm and the societal level, that are fundamental to the competitive success within our country of knowledge-based organizations.

And what does that imply?

It implies the importance of research, I believe, at two levels:

One is internal to the firm; the importance of reinforcing and increasing the level internal investment in research and development within our organization.

I'll argue also what I'll call the external level — external to the firm — the importance at a societal level of ensuring that our investments in research are maintained.

This is the self-serving part of it' but I think it's a valid argument as well, within the context of fiscal restraint that our governments are facing now and will continue to face.

The university sector, I can't speak for the sector, I can speak for my own institution, is strongly supportive of the need for government to get its fiscal house in order.

As institutions that are heavily dependent, although not exclusively dependent, and less so, are heavily dependent upon public support through government and will continue to be, we have a long-term investment in the fiscal soundness of our government

So, at one level we are strongly supportive of the types of actions that are being taken. We also feel that within that context it's important to maintain investments in research.

If we cut back on our investments in research, whether they be at the universities or other forms of research institutions, the potential competitive success of our knowledge-based industries in this country is going to be fundamentally undermined in the medium and longer term.

So there are areas for short term savings, but longer term significant disadvantage.

What does that imply?

Let me make one other comment, before going on to the implications.

We also recognize the fact that we need within the university sector to be more aggressive in terms of attracting our own support

I can use the example of my own faculty where roughly 40 per cent of our budget is now drawn from non-government sources. That's an increasing proportion and that will be characteristic of the university sector over-all.

We recognize that while It's important to maintain social investments in the research infrastructure, that we have a responsibility also to generate resources, either through private donations or through the types of privatized activities that we're engaged in with our various degree and non-degree programs.

But, there's also an implication it seems to me for the need for the knowledge-based organizational sector and private sector and universities and other forms of research institutions to be exploring new forms of collaboration and inter-action.

I think this will be essential.

It will require some ability and willingness to give on both sides, as any alliance does.

We in the university sector cannot simply' say we exist in splendid isolation, we're good at what do on the research side and if you'd like to help support us we'd be happy to have that

We have to be prepared and I think we are exploring new forms of collaborative relationships, new ways of spinning off research expertise, new mechanisms for bringing into the practical world the kinds of research and development that are going on within business schools, within faculties of engineering, within departments of chemistry and physics and so on.

So, the knowledge-based sector is going to require the social investment, as well as the willingness on both the private sector and the university side to explore new forms of collaborative relationship in which none of us is able to simply say, we call the shots because we're best at what we do. Those kinds of new relationships are going to be fundamental

My primary position with regard to management, leadership, organization structure is that the effective organization of today and into the future in the type of highly-competitive, turbulent environment in which we exist is going to characterized by the sorts of management style systems and structures which have sometimes been used to characterize the knowledge-base sector.

If we imagine that the resource-based sector or other service industries can expect to be successful with a traditional hierarchial command and control environment, we're going to be unsuccessful.

I think there's a related point to this.

Sheelagh Whittaker noted that the knowledge-based worker is becoming more broadly prevalent in all kinds of organizations and mentioned the need to avoid elitism, to avoid a sense that the knowledge workers are the elite of the organization and we’ll still have the drudges, the people that do the work.

I'm constantly struck by the organizations that are able, moat effectively, to capitalize on the skills, abilities and initiatives of their lowest level employees — those involved in the provision of service directly to their clients.

I recall a situation in which the CEO of Four Seasons Hotels was asked, "how do you train your employees?

"The lowest level people are the people who differentiate your service and your product in the minds of the people who use it.

"How do you train them what to do to provide the service that is so exemplary'?'

His response was, "we don't train our employees what to do. We train them why.

"If they understand why it's so important to treat our customers in this way, they are more than capable of figuring out how to do it themselves. We don't presume to tell them that"

So, the maid, the door man and so on at Four Season Hotels are in a sense treated as knowledge workers.

They're treated as people with ideas, with initiatives, with things to contribute on their own.

And to me that's further evidence of the importance of the broad implementation of the types of organizational leadership and management practices that have sometimes been thought to characterize the knowledge-based sector that I would argue needs to become much more general throughout society.