better management of business assets, resource allocation, general operation, and overall busi- ness performance. All this required the formulation of a clear IC strategy, formulated under the ICM Pilot, which was initiated in 2000 in the polyurethanes business unit. The IC strategy defined Dow’s objec- tives for managing each form of IC, and hence identified what management should focus on for their development: • Human capital. Focus on the Business Management Teams’ alignment of human resources with the needs of each project • Customer capital. Focus on the effectiveness of each business in aligning its customer relationships with the project needs • Structural capital. Focus on building work systems, databases, tools, and practices (for example, technology mapping and valuations) that enhance the competitive assessment capability of the business and hence its competitive performance The IC strategy led and informed the development of various practices, programs, and systems under each of the management stages, as well as an IC measurement system. Dow developed in 1999 a measurement system based both on the Intangible Asset Monitor and Balance Scorecard methods. In addition to the traditional metrics of customer satisfaction and loyalty rates, Near ini- tiated the Human Capital Valuation (HCV) project. The HCV aims at understanding the future value of current employee skills and measuring employee contribution to the success of business projects. While other companies are satisfied with metrics like employee satisfaction, retention rate, and the like, Dow is developing metrics to measure the value added per employee (in line with Sveiby’s work), to better allocate and manage human resources. This in turn will improve project management, improve employee development and satisfaction, and enable getting prod- ucts to the market faster. Following is an examination of Dow’s ICM model presented through the CICM lens. DOW’S ICM MODEL When Dow decided to become a pioneer in the area of ICM, it realized it had to undergo a number of changes first. Unlike Skandia AFS, Dow was established in 1897 with a structured business model that to a great extent followed the old economy organizational models. Before implementing any new initiative, Dow had to make sure that its vision, structure, and culture would not defeat change. Fortunately for Dow, the culture was right with its long-term and his- torical commitment to management of inventions, with the first invention management group being formed as early as 1958, and the first patent department in 1928. Still, Dow lacked a vision to lead the IAM and ICM revolution, and the structure was rigid with too many hierarchical lev- els. To overcome these hurdles, Dow went through two major changes. First, Dow delayered its structure from 14 to 5 levels, from the frontline operators to the CEO. Second, it adjusted its vision to reflect its newly gained insight into the strategic importance of IC. Dow’s vision now included “creating value from our intellectual assets.” This facilitated the perceiving of intellectual assets and capital as enablers of value creation and maximization. Despite the value of this new awareness, more than a progressive vision was needed. Visionary leadership, strategic planning, ICM champions, committed managers and employees, and effec- tive teams and programs were all necessary for the transformation. The vision and the excitement surrounding the potential value of IC inspired Dow’s aggressive high-growth strategy—the New 176 THE THREE STAGES OF INTELLECTUAL CAPITAL MANAGEMENT Value-Growth strategy developed in 1998. Under this strategy, Dow aims at increasing earnings per share by 10 percent, and to have 15 percent of revenue from products introduced in the past five years by 2005. Overall, Dow aims to grow revenue by 6 percent annually to reach $60 bil- lion in 2010. To Dow, ICM was not only the new way of doing business, but the vehicle for cre- ating and sustaining future value. Let’s closely examine the programs that Dow implemented under each of the ICM stages. The Knowledge Management Stage Dow has a matrix organizational structure wherein each business group maintains its autonomy to a considerable extent. As a result, though the KM initiatives are led by the centralized (corpo- rate) top management, the extent of implementation, attention, and resources allocated to this ini- tiative is up to the vice president (VP) of each business group. Dow’s KM system is led by the knowledge management director, who reports to the chief information officer (CIO), and super- vises a group of senior executives that form the KM Group. The KM Group is an 11-member executive team entrusted to manage knowledge across Dow’s 23 businesses, with a budget of $15 million over 5 years. It is responsible for supporting the information stewards, who in turn cham- pion KM initiatives in each of the business groups. The information stewards report to the senior manager of the KM Group and to the VP of each of the business groups. They are supported both by the IT Department KM Program Office and the KM Resource Center, as shown in Exhibit 9.4. The main criticism made against the use of this model is that leadership’s commitment to KM is sometimes diffused by the VP of the business group’s decision to limit the role of information stew- ards. 20 Some information stewards complain that KM is not given priority by certain VPs, resulting in their having two or three roles in addition to KM, spreading themselves too thin to effect the desired changes. 21 Despite this, Dow’s Greg Horvath, senior manager of the KM Group, praises Dow’s model for the liberty it allows each business to adopt the desired change(s) at their own pace. THE PIONEERS OF INTELLECTUAL CAPITAL MANAGEMENT 177 EXHIBIT 9.4 Dow’s Knowledge Management Model IT Department KM Program Office KM Resource Center Information Stewards Senior Manager KM Director CIO Practices, methodologies, strategies IT tools, technological solutions Given the extent of cultural and other changes that KM initiatives require, it seems prudent that the decision to adopt KM is left to the business group, according to its state of readiness and business needs. This, however, places greater pressure on information stewards to act both as leaders of the initiative in the business unit and agents of change for the whole organization. Structure—Communities of Practice and IAM Teams. Dow’s KM system evolved in line with its IAM teams, who operated so much like communities of practice (CoPs). They are formed to satisfy a strategic business need of capitalizing on IC in a defined area of technology from incep- tion through development to commercialization. At the same time, around 80 of the intellectual asset managers are full timers and act as champions for new IAM teams. At Dow, it is not about what you call it but about ensuring that an effective practice is implemented. As Jim Allen, Dow’s KM director, explains, the term knowledge management may fall out of favor, but the practices and strategies of KM will remain “part of the basic strategy and culture of every successful busi- ness.” 22 This statement summarizes to a great extent Dow’s approach to KM—keep it simple and effective by “get[ting] the knowledge from those who know to those who need to know.” The information stewards have formed a CoP that meets regularly to share experiences and best practices. This community is spread over Dow’s 23 business units and global operations, covering services to 50,000 employees. Information stewards form their own committees as well, which meet on a quarterly basis to share knowledge and experience throughout the busi- ness group. A Culture of E-Learning. Dow’s commitment to KM and the value of employees’ knowledge is reflected in many programs that are in place for knowledge sharing and professional develop- ment. Dow professes that it wants its people to have the “freedom they need to succeed,” and hence fosters values of innovation, agility, and individuality. Part of this freedom is to provide employees with the knowledge resources for them to learn and develop. To that effect, Dow cre- ated the award winning learn@dow.now system which offers online continuing education options to its employees worldwide. In 2001 alone, Dow employees completed over 315,000 courses. The e-learning system proved to be very beneficial in addressing employees’ knowledge needs, improving morale, and saving over $45 million in training costs. The Knowledge Base and IT. In building the knowledge base, Dow realized that there are three strategic components that their knowledge base should incorporate. These components include 23 : 1. How do we work? (Relates to overall enterprise computing systems including the com- mon workstation and intranet) 2. How do we make decisions? (Relates to KM, building the knowledge base, and con- necting employees for knowledge-sharing purposes) 3. How do we connect to our customers? (Relates to e-business solutions and systems and the ability to tap into customer capital) The most significant change that followed creating the patent database was the creation of the cor- porate-wide standard workstation. This is the basis of Dow’s IT architecture as it incorporates stan- dard hardware, software, IT solutions and communication tools, and database management systems. This formed part of the knowledge base, which was developed to provide information to employees relating to the decisions they make, and based on their knowledge needs. The main focus is on shifting from “reporting to prediction” in the use of information. This is based on Dow’s belief that to better mine its knowledge resources, information should be used to predict patterns rather 178 THE THREE STAGES OF INTELLECTUAL CAPITAL MANAGEMENT than just provide retrospective data. 24 To that effect a number of information retrieval and visuali- zation tools are provided, including but not limited to patent citation trees and KM tools. The Innovation Management (IM) Stage Dr. Herbert Dow, who founded Dow in 1897, managed the innovation process very much in line with Edison’s model outlined in Chapter 7. In his career of 40 years, Dr. Dow obtained 107 patents, forming the basis of the first products that Dow made. Today, Dow is a global company with 50,000 employees; manufacturing sites in 32 countries; over 2,400 chemical, plastic, and agricultural products and services; and around $35 billion in revenue. Dow’s IM system has evolved immensely from the Edison model to accommodate the network-based nature of innova- tion in the knowledge economy. Here’s how. Structure—Labs as Competence Centers. Dow arranged the skills and competence of its peo- ple across the various business units into competence centers where the skills of every person are known to the lab manager. On determining the critical skills needed for an innovation project, a central department undertakes the responsibility of bringing the right team together. Process ownership is assigned to a central department to maintain consistency and improvement of the process (stage-gate), while team allocation is left to the leadership of every business unit or lab. At Dow Polyplefyn Research Lab, for example, the Tactical Leadership Group is responsible for the management of the innovation portfolio, including team and resource allocation. 25 The Group is made up of senior business managers and scientists. The joint business and scientific leader- ship is used to ensure a balance between administrative and technical considerations. The Group makes decisions as to selection and prioritization of projects, and then assigns a cross-functional, multiskilled team to each project. The 42 Plus Alliances Portfolio. Dow manages external alliances as part of its innovation portfo- lio, with over 42 joint ventures and R&D collaboration agreements with universities, government labs, and independent R&D organizations. When the benefits of collaboration are clear (e.g., increased knowledge and speed to market), Dow does not hesitate to collaborate even with com- petitors. A prominent example of this happened when a research team discovered a process in 1994 to make ethylene propylene diene monomer (EPDM) elastomers, which were already produced by DuPont and others. The process proved to produce high-performance grades with much lower manufacturing costs. The research team sent the samples developed to DuPont for testing and com- parison. On receiving positive feedback from DuPont, Dow decided it could complement its strengths with those of DuPont by working together. Instead of competing in an area where process patents are hard to procure and enforce, Dow formed a joint venture with DuPont to unite their R&D efforts to develop the high-value new process, keeping it secret from other competitors. 26 Innovation Culture and a Central Idea Bank. Being in a technological race, Dow’s innovation strategies seem to be technologically driven. Dow has heavily implemented new innovation prac- tices and tools to perform patent and technical intelligence. Despite their technology-driven strate- gies, however, Dow incorporates employee-driven methods to empower employees, by fostering a strong culture of collaboration and creativity. To be true to its message that employees’ ideas count, Dow established a central idea bank. Though the bank does not actively solicit ideas from employees, it takes those submitted to it from anywhere in the organization very seriously. The ideas are evaluated, filtered, and distributed to the various business units to which they are rele- vant. If the ideas do not fall within the area of a particular business or are not within the strategic THE PIONEERS OF INTELLECTUAL CAPITAL MANAGEMENT 179 plans, the ideas are then referred to the Business Development and Growth Unit for further con- sideration. In all cases, the idea originator has to be notified of the action taken within two weeks, and of reasons for rejection if the idea was declined. Near commented that in fact Dow’s e-commerce business was a result of a noncore idea around which a whole new business was built. The Intellectual Property (Asset) Management Stage Patents and trade secrets constitute Dow’s primary form of IP. When it first started with the IAM initiative, Dow owned a patent portfolio of 29,000 patents. The genius of Dow’s management of its primary form of IP lies in assigning responsibility for sustaining and leveraging different groups of patents to the business that can and does benefit from them most. In turn, this enabled every business to focus on its core technological competencies and develop new related ones to strengthen its competitive advantage and augment its patent portfolio. At the same time, over 100 IAM teams scattered across Dow function to leverage the patented and other technology both inside and outside Dow. Structure—IAM Teams and the Tech Center. During 1992, the Inventions Management Group worked with the business-aligned Patent Task Force to assign primary ownership of each property in the IP portfolio to one of the businesses. Each business unit was required to formulate its patent strategy as part of its business strategy and devise investment plans using the valuation and auditing tools. Consequently, each business unit was required to absorb its respective patents’ costs. In 1993, the IAM teams replaced the Patent Task Force. IAM teams are cross-functional teams formed to manage a part of the portfolio according to the investment plan, with over 500 personnel. The teams are comprised of frontline functional managers and key scientists from within the businesses, who meet two to three times a year to review the portfolio and devise strategies for its management. To support the network of intellectual asset managers, the Global Intellectual Asset Tech Cen- ter was formed in 1995. The Center, managed by Sharon O’riel, oversees matters that include maintaining a Web site and communication network, collecting and disseminating best practices, maintaining the patent disclosure and agreements databases, and providing support to both knowledge and intellectual asset managers. Culture—Patent Talk Equals Patent Friendly. The IP audit and the identification of the key patents for every business immensely affected the IPM culture at Dow. The exercise of identifying such key patents and determining their value to business promoted debate among R&D, manufac- turing, business development, and IA managers, wherein solid understanding and appreciation of the value of patents to business evolved. Leveraging IP Internally and Externally—A Patent Investment Plan. The investment plan addresses the business goals of competitive positioning and commercialization. Under the first use, the business unit addresses how the patent(s) can be used for competitive positioning and enhancing its core competitive advantage with the end goal of strengthening its technological capability. In this light, joint ventures and outsourcing agreements are considered. The second use relates to commercializing the patent through licensing or technology transfer transactions offered to outside parties in cases in which that is not competitively harmful. IAM teams are involved at early stages in negotiations of joint ventures and R&D collaborations. IAM teams initiate negotiations in cases in which they decide that Dow needs to acquire a certain tech- nology or patent to augment its knowledge in a strategic area of business. The IAM teams are also 180 THE THREE STAGES OF INTELLECTUAL CAPITAL MANAGEMENT on the lookout for opportunities to license out any of Dow’s patents. It is reported that Dow’s licensing efforts have resulted in generating an additional $61 million annually. CONCLUSIONS ON DOW Dow’s interest in patent and technology licensing goes beyond its own boundaries, assisting in creating a secondary market for patents and other forms of IP. Dow was one of the very early par- ticipants in online Internet technology exchanges via significant activity with companies like Yev2.com and PLX systems. Near commented that the success in creating a considerable sec- ondary market for IP may open the door for trading in IC—maybe human capital. Near’s work to find ways to measure the contribution of human capital to value creation and future performance may be a crucial step in getting closer to this futuristic vision: a vision that is typical of Dow, where shaping the future is part of what Dow does. NOTES 1 Gordon Petrash, “Intellectual Asset Management at Dow Chemical,” in P. Sullivan (ed.), Prof- iting from Intellectual Capital (New York: John Wiley & Sons, 1998), p. 206. 2 Id., pp. 214–215. 3 Special thanks are due to Jan Hoffmeister, Skandia Group Vice President of Intellectual Capital Management, for his gracious support and assistance with information and advice for the com- pletion of this case study. Thanks are also due to Ann-Charlotte Bredahl of Skandia AFS, Stock- holm, for her invaluable assistance with materials on the application of the Navigator within Skandia. 4 Skandia Assurance and Financial Services was originally established as a division of Skandia AB, a leading Swedish insurance group of companies, established in 1855. Skandia AFS has grown exponentially to comprise most of Skandia, with subsidiaries in 25 countries. 5 From 1991 to 1995, Skandia gross premium incomes rose by 70 percent, again enormously exceeding growth rates of other insurance and financial services companies. 6 Supra note 4, pp. 34–52. 7 C. Bartlett, “Skandia AFS: Developing Intellectual Capital Globally,” Harvard Business School case #396-412 (March 30, 1998), p. 8. 8 1998 Annual Report, p. 11. 9 Bartlett, supra note 7, p. 5. 10 Id., p. 6. 11 See 1994 Annual Report, p. 9. 12 Intelligent Enterprise, Supplement to 1997 Annual Report, p. 12. 13 A trend that is always found in service industries is avoiding the use of the term intellectual property. This is because of the misconception that the term intellectual property refers to patents. As a result, many service organizations are under the wrong impression that they do not need an IPM system since in their business patents have no strategic significance. Despite this, THE PIONEERS OF INTELLECTUAL CAPITAL MANAGEMENT 181 most organizations in the service industry attribute their competitive advantage to a number of strategic IPs, mainly software systems, business prototypes and methods, and a wealth of propri- etary information (i.e., copyrights and trade secrets—and patents in very limited situations). Brands also play a strategic role in the service industry given that trustworthiness plays a major part in the purchasing decision given the intangibility of the service product. 14 Special thanks are due to David Near for his gracious assistance with materials and advice for the completion of Dow’s case study, and for sharing his knowledge and experience of ICM with refreshing enthusiasm. 15 Licensing Executives Society Conference, Atlanta, GA, April 2001, and at Pierce Law on June 6, 2001. 16 Supra note 1, p. 209. 17 Id., p. 210. 18 Supra note 15. 19 Id. 20 See C. Flash, “Personal Chemistry—Dow Chemical’s Information Stewards Are the Catalysts for Sharing across Business Units,” Knowledge Management Magazine, August 2001. 21 Id. 22 R. Whiting, “Myths and Realities—What’s Behind One of the Most-Misunderstood IT Strate- gies,” Information Week, November 1999. 23 D.E. Kepler (Dow), “Data Mining at Dow,” presentation at the CMU Research Corp. “Business Insight Forum,” July 12, 2002. 24 Id. 25 J. Pierce, “The Art of Creating a Flexible R&D Organization,” CHEMTECH Vol. 28, no. 2, 1998, pp. 6–11. 26 Id. 182 THE THREE STAGES OF INTELLECTUAL CAPITAL MANAGEMENT Part Three Step-by-Step Guide to the CICM Model Part Two outlined the changes required to successfully implement the various stages of the CICM model. This part presents a step-by-step guide on how to implement the required changes. How- ever, before implementing any change, it is important to ensure that the organization has first taken some steps that are essential to effect any change. It is essential before implementing any of the programs and practices outlined in Parts Two and Three of this book to formulate a pow- erful vision that leads change, to adopt a business model with a flexible structure, and to ensure that the culture is the right one. These issues are discussed in Chapter 10. But that is not all. Every organization is different, not only in terms of size and industry but in terms of goals and objectives. An organization’s industry and particular strategic goals may require more focus on one of the stages rather than the others. That is when it is important to customize the CICM model by devising an IC strategy. The IC strategy enables the organization to phase out the required changes over the short and long terms, and hence manage resource allocation. Over the short term, the change initiative should focus on the stage at which there are immediate business needs that affect the organization’s performance in its market. Long-term focus should be on the stage that will enable the organization to enhance its future competitiveness and sustain its knowledge resources. Chapter 14 discusses the IC strategy along with the variables that should be taken into account in customizing the CICM model. 10 First Get Your Act Together The business model, vision, and culture of an organization determine the effectiveness of any new change or initiative that the organization tries to introduce. The business model determines the flexibility of the structure, the command and reporting lines, and affects the way the various departments and units communicate and work with each other. A business model that is too rigid or formal, with prominent boundaries between levels and departments, would defeat any intel- lectual capital management (ICM) program. Similarly, vision sets the organizational character and the general state of mind of leadership and management. This infiltrates throughout the whole organization and shapes the attitudes of everyone in the organization toward work, co- workers, superiors, subordinates, partners, and customers. A vision that lacks inspirational power and futurism will take the zeal out of the ICM initiative, which is required to champion what is to many organizations a major change. Closely linked to the vision is the culture of the organization, which affects the way business is done and the values that everyone in the organization adopts and functions by. If these values are contrary to those required for ICM then the ICM initiative may die in its cradle. It is therefore essential before embarking on implementing any ICM stage or program to ensure that the organization has the appropriate business model, vision, and culture in place—in short, to ensure that it has its act together. THE BUSINESS MODEL OF THE KNOWLEDGE ORGANIZATION Mysteriously, many organizations in the knowledge economy changed their organizational struc- ture and business model in similar patterns. The emerging model has two main characteristics: A flexible structure with few layers and a range of networks that include external partners and cus- tomers. The fact that organizations (regardless of size, industry, strategy, and situation) adopted practically the same model—what has been called the knowledge organization model—indicates its significance in enhancing competitive performance in the knowledge economy. Many writings appeared discussing the need to adopt the knowledge organization model, as opposed to models based on the industrial economy’s needs, to effectively compete in the knowledge economy. 1 The knowledge organization model is based on the premise that intellectual capital (IC) is at the core of production, operation, and any critical organizational process. Sveiby explains that the vast growth of business service companies (being close equivalents to knowledge organizations, in his opinion) indicates the preeminence of the knowledge organization model in the knowledge economy. 2 Similarly, Brian Arthur, of the Santa Fe Institute, attributes the success of the knowledge organization model to its agility in dealing with the fast-changing environment by redeploying its knowledge resources to meet new demands or trends. 3 In Arthur’s analysis companies in high-tech industries (computer, software, and biotech) are close equivalents of knowledge organizations. As stressed by Sveiby and Arthur, the knowledge organization model is critical in industries with a high rate of change and hence turbulence (e.g., high tech). Still, the model is of equal 185 [...]... 23–24 15 Id., p 79 16 Credit for research on Southwest Airlines goes to my students Abdulraheem Mohamed, James Hawkins, and Edward Romano in the Fall 2001 class 17 For more details see www.3m.com/about3m/pioneers/fry.jhtml 18 B Hall, “Culture and Values Management: Context for the Development and Management of Intellectual Capital, ” in P Sullivan (ed.), Profiting from Intellectual Capital (New York:... 1998), pp 43–58 19 Id., p 52 11 Implementing Knowledge Management under the CICM Model BACKGROUND The goal of the knowledge management (KM) stage under the Comprehensive Intellectual Capital Management (CICM) model is to manage the knowledge resources of the organization, whether explicit or tacit, and whether generated by human or customer capital, for value creation The main goal is to ensure the... main steps to the formulation of the vision The first step is performed by the leadership where the organizational vision is first formulated The resulting vision should 198 STEP- BY -STEP GUIDE TO THE CICM MODEL then be aligned with that of the key people, or the heads of business units The final step is communicating the vision to everyone in the organization through the necessary changes in culture Step. .. free employee movement in the organization for effective knowledge sharing • Process 7 Design the knowledge base architecture to support knowledge creation, and key business, processes Choose the appropriate IT tools to enable tacit and explicit knowledge sharing STEP- BY -STEP GUIDE The following is a detailed step- by -step guide on how to implement such processes with reference to the relevant practices... respond quickly to market needs Taking this stage to the practical level, the rest of this chapter will first define management objectives that should be set for a KM program, the main processes to implement at the KM stage, and a step- by -step implementation guide MANAGEMENT OBJECTIVES The management objectives of the KM stage are to: • Effect a strategic shift in the way the organization envisions itself... Knowledge Management Implementation Framework IMPLEMENTING KNOWLEDGE MANAGEMENT UNDER THE CICM MODEL 1 97 operationalize them In addition, the model should incorporate a measurement system to monitor results and provide insight for review and adaptation For any KM program, or any ICM initiative, to be successful the alignment of the organizational vision and culture are imperative Therefore, the step- by -step. .. control by management, because once the cultural values are explicit, employees are more aware of what is allowed and expected, and what the organization stands for This leads to the third function of culture, namely, increasing employee loyalty An employee who feels empowered, part of the organizational community, whose contribution is recognized and appreciated, and who is always 190 STEP- BY -STEP GUIDE... 4 Each of the key executives should later act as a champion of the new vision by communicating it to senior and middle management in their respective departments and units as elaborated under Step 3 Step 3: Communicate to All Levels The best way to communicate a knowledge-based vision to all levels of the organization is by periodic (annual) meetings between the key people and their staff to communicate,... drain, problems that result in 202 STEP- BY -STEP GUIDE TO THE CICM MODEL undercapitalization and waste of knowledge resources, as discussed in Chapter 4 In particular, this process is designed to discover: • Available knowledge resources (know what we know): • Stores and sinks of explicit knowledge resources • Expertise and tacit knowledge resources • Hidden and undercapitalized resources (we don’t know... and location of knowledge resources needed to perform the process For example, action or activity D is supported by database 3 and reports 4, both explicit resources, while process C is 206 STEP- BY -STEP GUIDE TO THE CICM MODEL A B D C E 3 1 2 4 5 EXHIBIT 11.2 Knowledge Resources Map supported by resource 2 only Understanding the relationship among the various resources and actions enables a better assessment . adopt the desired change(s) at their own pace. THE PIONEERS OF INTELLECTUAL CAPITAL MANAGEMENT 177 EXHIBIT 9.4 Dow’s Knowledge Management Model IT Department KM Program Office KM Resource Center Information Stewards Senior. CHEMTECH Vol. 28, no. 2, 1998, pp. 6–11. 26 Id. 182 THE THREE STAGES OF INTELLECTUAL CAPITAL MANAGEMENT Part Three Step- by -Step Guide to the CICM Model Part Two outlined the changes required to. www.3m.com/about3m/pioneers/fry.jhtml. 18 B. Hall, “Culture and Values Management: Context for the Development and Management of Intellectual Capital, ” in P. Sullivan (ed.), Profiting from Intellectual Capital (New York: John Wiley