Definition of Globalization

Question: What's the truest definition of globalization?
Answer: Princess Diana's death.
Question: How come?
An English princess with an Egyptian boyfriend crashes in a French tunnel,
driving a German car with a Dutch engine,
driven by a Belgian who was drunk on Scottish whisky,
(check the bottle before you change the spelling)
followed closely by Italian Paparazzl,
on Japanese motorcycles;
treated by an American doctor,
using Brazilian medicines.
This is sent to you by an Englishman,
using Bill Gates' technology,
and you are probably reading this on your computer,
that use Taiwanese chips,
manufactured in a joint venture in China,
and a Korean monitor,
assembled by Bangladeshi workers in a Singapore plant,
transported by Indian lorry-drivers,
hijacked by Indonesians,
unloaded by Sicilian longshoreman,
and trucked to you by Mexican illegals.
That, my friend, is Globalization.


Recognizing a Firm’s Intellectual Assets: Moving Beyond a Firm’s Tangible Resources

Recognizing a Firm’s Intellectual Assets: Moving Beyond a Firm’s Tangible Resources


       One of the key trends today is the emergence of the importance of the knowledge worker in today's economy. It is critical for managers to not only recognize the importance of top talent but also the need to leverage human capital in order to innovate and, in the end, to develop products and services that create value.


       This chapter is divided into four sections.


1.                   The first section focuses on the increasing role of knowledge as the primary means of wealth generation in today's economy. After all, in the New Economy a firm's value is based much more on knowledge, know-how, and intellectual assets — not the traditional factors of production (i.e., labor and capital).


2.                   The second section addresses the key resource itself — human capital — the foundation for the creation of intellectual capital. We explore ways in which the organization can attract, develop, and retain human capital as well as the importance of recognizing the interdependence of these three activities. We also address the value of a diverse work force.


3.                   Third, we discuss the critical role of social capital, that is, the network of relationships among individuals. We address both social capital within organizations as well as across organizations. 


4.                   The final section focuses on the role of technology in leveraging human capital. This can range from such basic technologies as email to more complex forms such as sophisticated knowledge management systems. We also discuss how technology can play a key role in electronic teams (or e-teams) and enhance the retention of knowledge in an organization.





  The opening case describes how a licensing and marketing firm, The Wildflower Group, found misfortune by hiring a "star" employee. Although this person was successful in her previous position, she clearly did not "fit" in the new company. She had a bad attitude, strained relationships with fellow employees, and was very disappointed that Wildflower did not have the "comforts and amenities" of a large corporation.

  Eventually, things came to a head and she was, in effect, forced to leave the organization. Clearly, she was unable to leverage her talents in order to create value for The Wildflower Group. And, in the process, she destroyed a lot of the firm's social capital!


q          Is there any way this situation could have been salvaged, or did the "star" employee have to be terminated?




       We begin by providing some figures on how wealth is increasingly dependent on knowledge-based assets. We use a quotation from Hamel and Prahalad to drive home the importance of knowledge, know-how, and intellectual assets in today's economy. The examples of Microsoft's and Merck's knowledge assets are also given.


       To provide some additional "quantitative support" for our arguments, we investigate the tremendous "gaps" between market value and book value — a difference that is considered by many to be an indicator of a firm's "intellectual capital." EXHIBIT 4.1 shows the ratio of market-to-book value for a selected set of companies.


       It is useful to pose the following question; it should elicit some interesting responses:


q          What are the implications of Exhibit 4.1 for today's organizations?


       We then define some of the basic concepts in the chapter:


·                     Human capital is the "individual capabilities, knowledge, skills, and experience of the company's employees and managers."


·                     Social capital can be defined as "the network of relationships that individuals have throughout the organization."


·                     Knowledge comes in two different forms: explicit (easily documented, stored, etc.) and tacit (in the minds of employees and is only shared with their consent).


       It is important to point out that the creation of new knowledge involves the continual interaction of explicit and tacit knowledge. We provide the example of engineers working on computer code. This is also a point at which you may wish to address the critical role of socially complex processes (leadership, trust, culture) in leveraging human capital.


       The SUPPLEMENT below helps to reinforce the importance of top talent in today's organizations and the need to retain that talent.  It raises the concept of "core competents," an insightful contrast to the more commonly known term: core competence.


Winning in the knowledge economy—the importance of core competents


Talented executives will always be in demand and will be able to attract substantial salary and remuneration packages.  In effect, corporate power will be concentrated in the hands of the few.  "What is critical in the firm of the future is not so much the core competencies as the core competents," predicts Jonas Ridderstrale, a professor at the Stockholm School of Economics. "These walking monopolies will stay as long as the company can offer them something that they want.  When that is no longer the case, they will leave."


Ridderstrale points to a growing array of supporting evidence. Bill Gates has reflected that if 20 of Microsoft's key people were to leave, the company would risk bankruptcy.  In a study by the Corporate Leadership Council, a computer firm recognized 100 "core competents" out of 16,000 employees; a software company had 10 out of 11,000; and a transportation group deemed 20 of its 33,000 employees as really critical.


Source:  Crainer, S. & Dearlove, D. 1999. Death of executive talent. Management Review, July-August: 22.


q          What are the implications of these findings for today's organizations?


q          What are the career planning implications for you? (that is, how do students see themselves becoming core competents)




       Organizations must recruit talented people — employees at all levels with the proper set of skills and capabilities coupled with the right values. In this section, we address the hiring/selection, development, and retention processes. EXHIBIT 4.2 illustrates these processes. We suggest the imagery of the three-legged stool.


       We provide the rather humorous perspective of Professor Jeffrey Pfeffer (the San Francisco law firm) to illustrate the interdependent nature of these three activities. It may be useful to ask:


q          Why do many firms devote more efforts to attracting human capital than they do to developing or retaining talent?




       We begin with a quotation from Jack Welch, GE's former acclaimed Chairman and CEO. Then, we question the traditional "lock and key" approach to employee selection and emphasize the importance of employee mindsets, attitudes, and social skills. (It is useful to reemphasize that in today's knowledge economy, the leveraging of human capital is critical — thus, such "soft skills" become more important.)




       This is a phrase that has become more predominant in today's business environment. This point is driven home with the examples of Southwest Airlines, Rosenbluth International (the travel management company), and Microsoft. It may be interesting to pose the following question:


q          Do you think the line of questioning undertaken by Microsoft is a good idea? For Microsoft? For other companies with which you are familiar?


STRATEGY SPOTLIGHT 4.1 discusses the "Bozo filter" that Cooper Software, Inc. uses to screen employees.


q          What are the advantages (and disadvantages) of the "Bozo Filter"?


q          Would it work in other organizations with which you are familiar?


The SUPPLEMENT below should be very useful to students — it should "personalize" some of the discussion on the development and evaluation of human capital. It summarizes the four qualities that Larry Bossidy (former CEO of Allied Signal) looks for when evaluating job candidates. You might consider asking your students:


q          Can these qualities be developed or are they typically inherent in an individual (i.e., a nature/nurture argument)? If so, how can they be developed and nurtured?




         Below are the four key qualities that Larry Bossidy considers when evaluating job candidates:


         THE ABILITY TO EXECUTE: Ideas, analytical capacity, and education are important parts of a leader's makeup. However, just as important is being able to implement those ideas.  There are people who are fulfilled by expressing big thoughts, but you will be better served by hiring people with boundless energy who can execute the thoughts.


         A CAREER RUNWAY:  Good leaders have plenty of runway left in their careers. I like to hire someone for this job and also the next job, never for the person's final position. People with perspective on their jobs give me an indication that they have not only the interest but also the ability to go further.


         A TEAM ORIENTATION:  If someone is able to work through and with other people, he's got better potential then if he is essentially an individual contributor.


         MULTIPLE EXPERIENCES:  I've learned to consider carefully the dynamics of a candidate's past work experiences. People who come from quasi-monopolistic areas often have great difficulty moving into more competitive environments. You have to understand the environment from which you're hiring; some kinds of companies are better than others at developing leaders. To make sure our future leaders have the right experience, I look for candidates who have operated real Profit & Loss units in two or three different industries or companies. That's how great leaders are grown.


Source:  Bossidy, L. 2001. The job of the CEO. Harvard Business Review, 79 (3): 47-49.








       We address the exemplary recruiting efforts of Microsoft. Clearly, this firm goes to great lengths to hire the "best and brightest" in their industry.


Teaching tip:  The adage "hire for attitude, train for skill" can generate some interesting discussion in the class. Some students may argue that in jobs that require high levels of skill such as software development, skills may be more important than attitude. This may be an opportunity to point out that even in jobs that require high skills and relatively low levels of interdependence with others, poor attitude can lead to lack of effort as well as a lack of willingness to learn, excel, and experiment.


       Many companies have found out that their most effective recruiting efforts start closest to home — referrals from their own employees. We provide the example of GE Medical Systems that provides bonuses to employees who refer individuals who are eventually hired.


q          What are the advantages of such incentive programs to provide referrals? Are they done at companies with which you are familiar? Should they be implemented?


STRATEGY SPOTLIGHT 4.2 addresses an interesting perspective on the "war for talent." It points out some of the dysfunctional outcomes that can occur when organizations are overly aggressive in attracting talent.


·                     An invariable emphasis on individual performance (rewarding the individual stars), thereby diminishing teamwork, creating destructive internal competition, and retarding learning and the spread of best practices inside the company.


·                     A tendency to glorify the talents of those outside the company and downplay the skills and abilities of insiders, leading to a loss of motivation on the part of those inside the firm and to their turnover.


·                     The creation of a self-fulfilling prophecy where those labeled as less able become less able because they are asked to do less, given fewer resources, training, and mentoring, and become discouraged—in the process ensuring that the organization has way too many people who are in the process of dropping out of the competitive fray.


q          Do you agree with this perspective? Why? Why not?


q          How can an organization still get "top talent" without falling into such traps?




       Organizations must do more than merely hire top-level talent and expect the skills and capabilities of those employees to remain current throughout their employment. Rather, training and development must take place.


      We provide examples of Solectron, Motorola, and Cinergy.


       The SUPPLEMENT below provides some guidelines/suggestions for enhancing one's career success. Although these points are directed at women managers, they should also apply to men as well. In addition, these issues may spur some lively discussion (such as how much risk one should take, work/life balance, and so on):





         The following suggestions are drawn from Warren Ferrell, author of Why Men Earn More:  The Startling Truth Behind the Pay Gap—and What Women Can Do About It (AMACOM, January 2005). 


1.          Sign up for a job with bottom-line responsibility


       Kathy Vrabeck, president of Activision Publishing, the video-game producer behind Shrek 2 and the Tony Hawk series, believes that this is the advice she could give anyone seeking to earn more money. She had an early glimpse of how this works while at Eli Lilly, when she noticed that R&D was the driving function in pharmaceuticals. At Activision, she's responsible for game development — the function on which the company's success largely depends. According to Vrabeck, "In any company, it's the operating jobs, not the staff jobs that generate revenue. A company's always willing to pay more for people who are willing to take on the responsibility of  a line job and the risk it entails."


2.                                Find a field that entails financial or emotional risk taking


       Most venture capitalists can expect to earn between $100,000 and $300,000 a year, according to Salary.com. (Many, of course, earn far more!) Of course, if they bet the farm on an online pet-food supplier, they also risk losing everything. Currency traders, real-estate speculators, and many sales executives all gamble that they can use their drive and smarts to make a good living. If they're right, they can clean up. If not, they have only themselves to blame. The market pays a premium for such chutzpah.


3.                                Work more hours, more weeks, and more years


       Many may declare: "Enough! Americans already work more hours per year than the rest of the planet!" So true. But if you are willing to be the alpha dog of wage slaves in your industry, you can expect to be rewarded handsomely. The U. S. Bureau of Labor Statistics (BLS) reports that the average person working 45 hours per week earns 44% more than someone who works only 40 hours. Why?  The willingness to work more often leads to jobs that pay more per hour. At the upper reaches of a corporation, this can be significant. Top CEOs generally command pay in the 7-digit range — but they have also typically paid their dues with 15-hour days, six days a week, for an average of 20 years. The road to higher pay is a toll road with no EZ-Pass for the fast lane!


Source:  Tischler, L. 2005. Bridging the (gender wage) gap. Fast Company, January: 85-87.







       The development of human capital requires the active involvement of leaders at all levels. We discuss the broad-based involvement at General Electric. Motorola also is an example where the former Chairman, Robert Galvin, took the initiative in a program to drive home the importance of selected Asian countries.


       The SUPPLEMENT below discusses the key role that Roger Enrico, CEO of PepsiCo, plays in developing top talent at his firm.


Developing top talent at Pepsico


In an 18-month period before becoming CEO of PepsiCo, Roger Enrico spent nearly a third of his time at his houses in the Cayman Islands and Montana. This may seem like a pretty unusual way for the vice chairman of a multi-billion company based in Purchase, New York, to perform his job. However, his job is exactly what he was doing.  And, he was doing it very well. 


In these remote off-site settings, away from the daily demands of making potato chips, selling sodas, and resolving day-to-day problems, Enrico was preparing PepsiCo to survive and thrive in the 21st Century.  He was running his personal "war college" to develop a generation of leaders for PepsiCo. At the end of 18 months, Enrico had prepared 100 leaders as Pepsi's next generation. And, he had fostered some of their best ideas, resulting in an estimated $2 billion in top-line growth.


Source:  Tichy, N. 1998. The Leadership Engine. Plano, TX: Pritchett & Associates: 1-2.




       This brief section addresses some of the challenges associated with transferring knowledge in an organization. It provides the imagery of a "pitcher" and a "catcher" and includes an example of GE Healthcare.




       Whether a firm uses on-site formal training, off-site training (e.g., universities) or on-the-job training, tracking individual progress — and sharing this knowledge with both the employee and key managers — becomes essential.


We provide the examples of Citibank, Arthur Andersen, and SmithKline Beecham (now Glaxo SmithKline). 


It may be particularly interesting to mention SmithKline's "two-plus-two-plus-two" (two business units, two functional units, and two countries) formula for developing people for top management positions. Ask:


q          Should the 2+2+2 approach be used for other large multinational firms?  Why? Why not?




       The primary issue that this section addresses is the 360-degree evaluation system. Such an evaluation approach is becoming more critical given the importance of collaboration and interdependence in today's knowledge intensive organizations. Traditional "top down" evaluation systems evaluate performance from a single perspective and typically do not address the "softer" issues such as social skills, values, beliefs, and attitudes.


       EXHIBIT 4.3 provides an excerpt from General Electric's 360-degree evaluation system. We also mention experiences that managers at Warner-Lambert and Saturn (a division of General Motors) have had with this system.


       STRATEGY SPOTLIGHT 4.3 summarizes General Electric's "Session C" – an integral part of its leadership evaluation and development process.  Ask:


q          How does GE's "Session C" compare to other firms' approach to leadership evaluation and development?



       The SUPPLEMENT below addresses a few of the pitfalls as well as suggestions for making 360-degree evaluation systems work.


Prior to discussing the supplement, it may be interesting to ask:


q          What are some of the pitfalls of 360 degree evaluation systems?


q          What steps should be taken to improve the chance of their success when implemented?


Pitfalls and suggestions for making 360 degree systems work


Some of the pitfalls of 360 degree evaluation systems are:


1.         If a manager's 360 ratings depend on creating a positive or even relaxed climate, these factors may actually detract from work directly geared toward bottom line results.

2.         Organizations may embrace 360 feedback to convey an impression of openness and participation to clients or recruits when, in fact, this is not part of the organization's culture.

3.         Imitating without clearly understanding what other firms have accomplished; or the likely outcomes for one's own firm, may be a questionable strategy.

4.         Even when 360-degree feedback ratings are used strictly for developmental purposes, individuals will tend to modify behaviors in ways to receive more positive ratings.


Some recommendations on making 360 systems work include:


1.         Make consultants/internal champions accountable for results and customization.

2.         Engage in a pilot test initiative.

3.         Create focus groups to identify effectiveness criteria measures.

4.         Evaluate using a pre-post control group design.

5.         Be careful what you measure and how it's used.

6.         Train raters.


Source:  Waldman, D. A., Atwater, L. E., & Antonioni, D. 1998. Has 360 degree feedback gone amok? Academy of Management Executive. 12(2): 86-94.


Teaching Tip: Despite its many advantages, the 360-degree feedback system has some limitations as discussed in the above SUPPLEMENT. Ask the students to think of situations where the application of this tool could lead to dysfunctional consequences and why. Students may come to realize that for the system to work, there has to be better integration between many aspects of the organization such as its culture, leadership, rewards systems, and so on.




            We use the rather colorful imagery of "frogs in a wheelbarrow" to drive home the point that top talent may bolt at any time. Managers have the option of either forcing top talent to stay with the organization via non-compete clauses, golden handcuffs, etc. or providing the type of environment wherein top talent will desire to stay. (We recognize, of course, that employment contracts have their place — but should not be the primary means of the retention of talent.)


            It is worthwhile to note that with economic downturns— such as that following the "dot.com crash" beginning in early 2000 — there are needs for massive layoffs in even the most progressive organizations. Consider how Cisco Systems took an innovative approach to employee retrenchment in the SUPPLEMENT below. Ask:


q          What are some of the benefits of Cisco's approach to downsizing?


q          Should this approach be used in industries where it appears that there will be downsizing for extended periods of time? (Note: It may be helpful to note that there will always be demand for top talent.)


Cisco Systems' innovative approach to downsizing


When Cisco Systems laid off 6,000 full-time employees during the spring of 2001, not all of them were out of a job.  In June, the San Jose network provider launched its Community Fellowship Program, matching 80 of these employees with nonprofit organizations for one-year stints.  Program participants keep one-third of their base salary, all benefits, and receive new, monthly vested options.  At year's end, they'll be considered internal candidates for open positions at Cisco.  In return, Cisco gets to hang on to some of its best people.


Source:  Ullman, E. 2001. Benevolent downsizing. Working Women. September: 18.




       People who identify with and are more committed to the core mission and values of the organization are less likely to stray or bolt to the competition. We provide the example of Medtronic and their motto: "Restoring patients to full line," which helps to reinforce a stronger identity of its employees with the firm.


       We also mention the importance of "strategic intents" and give examples of such firms as Komatsu, Cannon, and Richard Branson's Virgin Group.


q          What are other examples of firms that have successfully strengthened an employee's identification with their firm's mission and values?


The SUPPLEMENT below provides an example of a biotechnology company where the CEO fosters a culture that is based on the passion he has for the firm's mission — curing diseases.




Henri Termeer, CEO of Genzyme, a biotechnology firm based in Cambridge, Massachusetts, regularly meets with people who suffer from the diseases on which his researchers are working. He wants to feel angry about the pain and loss the disease is casing and passionate about the need to find cures. Further, he wants to transmit that passion to those working at his firm. Equally important, he backs his words with actions. Since the company focuses on therapies for rare diseases, the cost of treatment is high. However, Genzyme refuses to let economics get in the way of its commitment to treat the afflicted. The firm literally searches them out in Third World countries for free treatment. By acting on the firm's beliefs, Termeer stirs the passion and engages the energy of Genzyme's employees.


Source:  Bartlett, C. A. & Ghoshal, S. 2002. Building competitive advantage through people.  MIT Sloan Management Review, Winter: 34-41.




       The motivation to work on something because it is interesting, exciting, or personally challenging underlies the importance of intrinsic motivation. We provide quotations from executives from both Gillette and Intuit.


In addition, some leading-edge firms have kept highly mobile employees motivated and challenged by lowering the barriers to an employee's mobility within a company. For example, Shell Oil Company has recently created an "open sourcing model" for talent.




       Clearly, financial rewards are a vital organizational control mechanism (as we will also discuss later in Chapter 9). We refer to an article in Organizational Dynamics to discuss the limitations of money as the most important factor in attracting and retaining human capital. After all, top talent is a highly mobile asset, and such individuals are likely to always be able to attract competing offers — even in relatively tight labor markets.


       The SUPPLEMENT below addresses an insightful perspective on the downsides of stock options as a retention vehicle for top talent. Before discussing, you may wish to ask:


q          What are the advantages and disadvantages of using stock options to retain talent?


Some of the "downsides" of stock options as a retention device


Employee ownership is a great thing — it helps employees to think like owners. But options are not the same as ownership. In real employee stock ownership, employees purchase shares and thus have, to use the colloquial phrase, "skin in the game." They are committed. 


On the other hand, options are given to employees, not purchased. When the stock price goes down, the options are repriced or, now that repricing has become less acceptable to institutional investors, companies issue more options at the lower price, as Microsoft and Amazon.com have done. The potential dilution to earnings is enormous, even if accounting conventions do not yet fully capture the hit.


Additionally, as technology and venture capitalist William Gurley has observed, options encourage a gambling mentality. Go for broke. If there's a win, fine. If there's disaster, move on and try again. That is not the mentality of real ownership.


Source:  Pfeffer, J. 2001. What's wrong with management practices in the Silicon Valley? A lot. MIT Sloan Management Review, 42 (3): 102.


       We close this section with examples of what firms are doing to increase retention through the offering of amenities and flexibilities. We provide an example of USAA, the San Antonio-based insurance and financial services company.


       STRATEGY SPOTLIGHT 4.4 addresses how Dow Chemical evaluates its success in retaining promising managers.




This section addresses diversity in today's workforce today which has become more vital due to demographic trends and the accelerating globalization of business. We address some of the emerging demographic trends which have created a more diverse society.


We then address six areas in which a diverse workforce can improve an organization's effectiveness. The first two of these are what might be considered "inevitability-of-diversity" and the last four are considered "value-in-diversity." These are:


1.                   Cost Argument

2.                   Resource Acquisition Argument

3.                   Marketing Argument

4.                   Creativity Argument

5.                   Problem-Solving Argument

6.                   System Flexibility Argument


STRATEGY SPOTLIGHT 4.5 discusses a firm with a well-recognized exemplary diversity program — Enterprise Rent-a-Car.



*    Are you aware of organizations that have exemplary (or ineffective) diversity programs? If so, what makes them successful (or unsuccessful)?


The SUPPLEMENT below addresses the value of diversity in nationalities and cultures when performing creative activities. But, there it also mentions that people must be on the "same page philosophically" to avoid dysfunctional outcomes and attain integration. One of the basic tenets of organization becomes appropriate, that is the requirement for more differentiation (of ideas) necessitates more integration.




         Leading a high-performing group begins with hiring the right people. If creativity is all about seeing things differently, claims Bob Brunner, a partner at the San Francisco office of the design studio Pentagram (projects have included the stowaway keyboard for PDAs (personal digital assistants) and Callaway's golf-ball packaging), then assembling a group of people who have a mix of nationalities and culture can spark ideas and generate energy. But Brunner contends that "polyglot ferment can turn toxic" if workers aren't on the same page philosophically. "In hiring, it's important to learn what they really believe about design and what drives their work," he says. "Make sure it's in alignment with where you want to go."


Source:  Tischler, L. The care and feeding of the creative class. Fast Company. December: 93-95.





       Successful firms are well aware that the attraction, development, and retention of talent is a necessary but not sufficient condition for creating competitive advantages. In the knowledge economy, it is not the stock of resources that is important, but rather the extent to which it is combined and leveraged.  Thus, the development of "social capital" — friendships and working relationships among talented individuals, helps to tie knowledge workers to a given firm.


       We provide the hypothetical example of two Nobel Prize winning scientists. The point, of course, is that the situation in which there are strong ties among the professionals is the one in which retention is more likely to occur.


       Another way to view these perspectives is drawn from the resource-based view of the firm. Here, competitive advantages that are harder for competitors to duplicate are those that are based on "unique bundles" of resources — which occurs when individuals are actively collaborating and sharing knowledge.


       STRATEGY SPOTLIGHT 4.6 addresses how Nucor, a highly successful steel manufacturer, develops social capital among its employees and manages.


q                    Would such approaches work at organizations with which you are familiar? Why? Why not? (For example, a particular type of culture may be too entrenched.)




       The importance of social ties among talented professionals is creating an important challenge (and opportunity) for organizations today. The phrase: "Pied Piper Effect" has been coined to depict the phenomena in which teams or networks of people are leaving one company for another. Thus, a trend is evolving to recruit job candidates at the crux of social networks in organizations, particularly if they are seen as having the potential to bring with them a raft of colleagues.


       We provide the example of an electronic commerce company called Third Millennium Communications. Additionally, EXHIBIT 4.4 provides a partial listing of companies that have been formed by groups of former Microsoft employees.


       STRATEGY SPOTLIGHT 4.7 discusses the tremendous benefit that Cooley Godward, a law firm, obtained by keeping a positive relationship with one of its lawyers who left the firm. The example stresses the importance of "alumni clubs" for former employees.  Ask:


q                    Would such a program be useful in organizations with which you are familiar?





       To provide balance to the discussion, it is useful to address some of the downsides of social capital. There are primarily two issues:


       First, when people identify strongly with a group they sometimes support ideas that are suboptimal or simply wrong. If there are strong social pressures (such as "groupthink"), people may be hesitant to challenge each other with touch questioning. This prevents them from engaging in "creative abrasion" — a termed coined by Harvard's Dorothy Leonard-Barton — a key means to innovative activity.


       Second, the socialization process whereby individuals are socialized in the norms and values of an organization can be potentially expensive — both in terms of financial resources and managerial commitment. Such expenses should be evaluated in terms of anticipated benefits.





Here, we discuss how technology can be used to leverage human capital and knowledge in organizations as well as beyond their boundaries to include customers and suppliers. We will address both simple and more complex applications of technology as well as how technology can help firms to retain employee's knowledge — even when they terminate their employment.




       Clearly, e-mail is a very effective means of communicating a wide range of information.  It is quick, easy, and almost costless. It can, of course, become a problem if it is used inappropriately (as with the Computer Associates example), but it has its benefits. We provide the perspective of Martin Sorrell, Chairman of the WPP Group, the huge advertising and public relations firm.


Teaching Tip:  Clearly, e-mail can be a double-edged sword. In the chapter we talk of its productivity-enhancing properties. Ask the students how e-mail can end up consuming organizational resources and erode productivity. Further, ask them for suggestions on how an organization can cope with some of these negative aspects and realize the positive potential of e-mail.


We also address how technology can play a key role in helping a firm develop a knowledge sharing network. We provide an example of Buckman Laboratories, a $300 million specialty chemicals company. Ask:


q                    What must Buckman do, other than implementing technology, to make this network effective? (Hint: Mention reward systems, evaluation systems, effective culture, etc.)





       Technology has also enabled professionals to work as part of virtual teams to enhance the speed and effectiveness with which products and services are developed. For example, it helps to accelerate the design and testing of new software modules that use the Windows-based framework as a central architecture.


We discuss the two main ways in which electronic teams are different from traditional teams (geographical separation of team members; communication by electronic communication channels such as faxes, e-mail, etc.).


       The two key challenges of making e-teams effective include: members must identify with who among them can provide knowledge and resources; and leaders must be able to know how to combine individual contributions.


       We then summarize the key findings in a study conducted by Sabre, the large computerized reservation system.  Based on 65 teams, the key attributes of successful e-teams were:


·                     Develop trust based on performance consistency rather than social bonds.

·                     Overcome group process losses associated with virtual teams

·                     Create an environment of inclusiveness and involvement

·                     Identify with members with a proper balance of technical and interpersonal skills

·                     Create proper mechanisms for evaluating team members and providing coaching and support




q                    Have you participated in electronic teams? Have they been successful? Have they conformed to the above five attributes? What other attributes have they had? Did those attributes add to or detract from performance?





There are two different types of knowledge: tacit (embedded in personal experience) and codified (knowledge that can be documented, widely distributed, and easily replicated). A challenge of knowledge-intensive organizations is to capture and codify the knowledge and experience that, in effect, resides in the heads of their employees.


We provide the example of Accenture (formerly Andersen Consulting), which has successfully codified the knowledge of its consultants by storing it in electronic depositories. Thus, the knowledge can be employed in many jobs by a large number of consultants since there are strong similarities across assignments.


For such a system to work, training becomes very important. Using the knowledge management depository, newly hired Accenture consultants work through many scenarios designed to improve business processes.


The SUPPLEMENT below provides some more detailed information on Accenture's knowledge management systems.







Accenture's knowledge management systems


Accenture strives to electronically interlink more than 82,000 people in 360 offices in 76 countries. Its ANET, a T-1 and frame relay network, connects 85 percent of Accenture's people through data, voice, and video interlinks.  ANET permits specialists — by posting problems on electronic bulletin boards and following up with visual and data contacts — to instantly self-organize around a customer's problem anywhere in the world. It thus taps into otherwise dormant capabilities, and vastly expands the energies and solution sets available to customers. The capacity to share in the enormous variety of problems and solutions is enhanced through centrally collected and carefully-indexed subject, customer, and resource files accessible directly via ANET or from CD-ROMs, distributed to all offices. These, in turn, expand the intellectual capabilities field personnel have available to add value for future customers.


Soruce:  Quinn, J. B., Anderson, P. & Finkelstein, S. 1996. Leveraging intellect. Academy of Management Executive, 10 (3): 9.


q          Are there knowledge management systems with which you are familiar? Are they effective?  Why? Why not?


We then discuss the knowledge management system used by Access Health, a call-in medical center. Although it was very expensive to develop, the company's paying customers — insurance companies and provider groups — save money because many callers would have made expensive trips to the emergency room or the doctor's office had they not been diagnosed over the telephone.


STRATEGY SPOTLIGHT 4.8 addresses how Dell Computer's sophisticated knowledge management system is an integral part of its widely admired business model.


The SUPPLEMENT below provides some guidelines on making knowledge management systems effective. Prior to discussing the supplement, you may pose the following question:


q          What are some guidelines on making knowledge management systems effective? (It will be interesting to see what issues are brought up and how they compare and contrast with the supplement)


Making knowledge management systems effective


Persuading people to empty their brains into a knowledge management system isn't easy. Fortune magazine asked some experts how to make it effective. Here are some of their perspectives:


1.                     Create heroes: Build a system that rewards those who share knowledge.

2.                     Follow through: Hire someone to manage and update the system.

3.                     Don't let it be in vain: Make sure employees get something out of it.

4.                     Bring in the boss: Involve upper management to emphasize the system's importance.

5.                     Make it a no-brainer: Design a tool that is easy to use.

6.                     Focus on culture: Foster an environment where sharing information is in vogue.


Source:  Koudsi, S. 2001.  Actually, it is like brain surgery. Fortune, March 20: 234.


NOTE: These issues and others are addressed in the next section with the example of the IAN system at Context Integration.


       The SUPPLEMENT below builds on STRATEGY SPOTLIGHT 4.6 (Nucor) and explains how Nucor also shares best practices to help build new steel mills: (This example helps to point out that knowledge can be shared with a minimum of IT — information technology. It also points out that knowledge sharing practices can be very useful when involving engineers and production workers at the plant level.)





Nucor systematically recycles process innovations from existing plants to new plants. The firm builds or rebuilds one or more mills each year. Rather than rely on outside contractors to build the plant, Nucor assembles a team of engineers from existing mills. This internal group is responsible for designing and managing the construction of any new building or rebuilding project. Furthermore, Nucor hired local workers to construct mills and informed them that they were likely to be recruited later to operate the mills.


Nucor's unique approach has yielded several benefits. First, existing process knowledge was recycled into new-plant design and construction. Second, construction workers knew that they were building the plant for themselves and had a clear incentive to build it well. Third, knowledge of the underlying process technology embedded in the plant design was transferred over in the workers' minds from the construction phase to the operations phase. Fourth, plant start-up expertise emerged as yet another of Nucor's core competencies.


Source:  Gupta, A. K. & Govindarajan, V. 2000. Knowledge management's social dimension:  Lessons from Nucor Steel. MIT Sloan Management Review, 42 (1): 71-80.


The SUPPLEMENT below discusses how Sharp Electronics was able to develop effective knowledge-management software for its front-line sales representatives. The key: the reps built the system from scratch and involvement was a key part of their reward system.




Knowledge management software, which helps call centers deliver consistent answers to customers' questions are typically not very effective. Why? Representatives have to take time out from answering calls to input things they have learned, i.e., putting the "knowledge" in knowledge management. According to Brad Cleveland, who heads the Incoming calls Management Institute: "The software is just a tool. It doesn't do any good unless people across the organization are using it to its full potential."

Sharp Electronics, however, has made theirs work. Sharp's frontline reps built the system from scratch. Also, as Sharp rolled out its network over the past four years, reps' compensation and promotions were tied to its use. As a result, the customer call experience has improved dramatically. Now, the proportion of problems resolved by a single call has increased from 76% to 94% since 2000.

Source:  McGregor, J. 2004. Putting customers first. Fast Company. October: 87.




Turnover, even in the best organizations, is an organizational fact of life. However, many leading-edge firms are devising ways of minimizing the loss of knowledge when employees leave.


Customer relationship management software, for example, automates and provides salespeople access to client histories and groupware applications such as Lotus Notes can standardize interactions and keep records of decisions and crucial contextual information. Also, even simple technologies such as email can help when employees leave an organization. We provide the example of a project manager at Young & Rubicam, a large international advertising firm.


Providing motivation and incentives are also important in making knowledge management systems work. We provide the example of the Intellectual Assets Network (IAN) that was developed at Context Integration, a Web consulting firm.


q                    What do you see as the potential benefits of this network? The downsides?


The SUPPLEMENT points out that employees can be a valuable source of ideas — even after they leave the firm. It is a rather interesting example because the term "don't burn bridges" is usually applied to employees. However, it can also apply to employers!




Despite a period of relentless downsizing in the petroleum industry in recent years, the petroleum industry has recognized the value of its knowledge workers. Typically, firms have treated them honorably, with generous severance packages and encouragement to maintain at least a social relationship with their former employees.


As a result, a whole ecosystem of highly specialized boutique consulting shops has evolved which cater to the industry's specialized technology needs. These shops are often composed of departed employees from a single oil and gas company, with whom they loyally conduct the bulk of their business. For example, Geomechanics International (GMI), founded by Colleen Barton of Stanford, augmented its expertise with the best of Mobil's drilling engineering and geoscience personnel, who departed at the time of the Exxon Mobil merger.


Mobil now uses GMI's technology to minimize rock stress damage to its high-case wells-technology that would not be available without these workers. Similarly, David Lumley of Chevron led his team of 4D imaging experts out the door to found 4th Wave, Inc. The new firm endeavors to develop methods for Chevron (and others) to monitor the real-time movement of hydrocarbons in reservoirs, a potential breakthrough in squeezing several hundred million more barrels of oil out of a large producing field.


Source:  Rajagopalan, B., Peterson, R. & Watson, S. B. 2003. The rise of free agency:  Is it inevitable? Organizational Dynamics, 32 (1): 99.


q                    Do you know of some employees who lost their jobs at a firm but were later hired back as consultants? Did it work out well? Why? Why not?


EXHIBIT 4.5 provides a series of questions that managers should consider in determining (1) how effective their organization is in attracting, developing, and retaining human capital, and (2) how effective they are in leveraging human capital through social capital and technology.








In this chapter, we have emphasized the importance of human capital and how such intangible assets can create the greatest value in today's successful organizations. As we have noted throughout the chapter, attracting top talent is a necessary but not sufficient condition for competitive advantage. It must not only be developed and retained, but also leveraged through the effective use of social capital and technology.


In this section, we briefly address the relevance of leveraging human capital in the process of strategy formulation — for the next four chapters of the book (Chapters 5-8).









Firms throughout the industrial world are recognizing that the knowledge worker is the key to success in the marketplace. However, we also recognize that human capital, although vital, is still only a necessary but not sufficient condition for creating value. We began the first section of the chapter by addressing the importance of human capital and how it can be attracted, developed, and retained. Then we discussed the role of social capital and technology in leveraging human capital for competitive success.  We pointed out that intellectual capital — the difference between a firm's market share and its book value — has increased significantly over the past few decades. This is particularly true for firms in knowledge-intensive industries, especially where there are relatively few tangible assets such as software development.


The second section of the chapter addressed the attraction, development, and retention of human capital.  We viewed these three activities as a "three legged stool." That is, it is difficult for firms to be successful if they ignore or are unsuccessful in any one of these activities. Among the issues we discussed in attracting human capital were "hiring for attitude, training for skill" and the value of using social networks to attract human capital. In particular, it is important to attract employees who can collaborate with others given the importance of collective efforts such as teams and task forces. With regard to developing human capital, we discussed the need to encourage widespread involvement throughout the organization, monitor progress and track the development of human capital, and evaluate human capital.  Among the issues that are widely practiced in evaluating human capital is the 360-degree evaluation system. Employees are evaluated by their superiors, peers, direct reports, and even internal and external customers. Finally, some mechanisms for retaining human capital are employees' identification with the organization's mission and values, providing challenging work and a stimulating environment, the importance of financial and nonfinancial rewards and incentives, and providing flexibility and amenities.  A key issue here is that a firm should not overemphasize financial rewards. After all, if individuals join an organization for money, they also are likely to leave for money. With money as the primary motivator, there is little chance that employees will develop firm-specific ties to keep them with the organization. We also address the value of a diverse workforce.


The third section of the chapter discussed the importance of social capital in leveraging human capital. Social capital refers to the network of relationships that individuals have throughout the organization as well as with customers and suppliers. Such ties can be critical in obtaining both information and resources. With regard to recruiting, for example, we saw how some firms are able to hire groups of individuals en masse who are part of social networks. Social relationships can also be very important in the effective functioning of groups. Finally, we discussed some of the potential downsides of social capital. These include the expenses that firms may bear when promoting social and working relationships among individuals as well as the potential for "groupthink", wherein individuals are reluctant to express divergent (or opposing) views on an issue because of social pressures to conform.


The fourth section addressed the role of technology in leveraging human capital. We discussed relatively simple means of using technology such as e-mail and networks where individuals can collaborate by way of personal computers. We also addressed more sophisticated uses of technology such as sophisticated management systems. Here knowledge can be codified and reused at very low cost, as we provided in the examples of firms in the consulting, health care, and high technology industries. We discuss how electronic teams can be effectively used. Also, given that there will still be some turnover — voluntary or involuntary — even in the most desirable places to work, technology can be a valuable means of retaining knowledge when individuals terminate their employment with a firm.


The final section addressed how the leveraging of human capital is critical in strategy formulation at all levels. This includes the business, corporate, international, and Internet levels.