TITLE : KNOWLEDGE-CREATING COMPANY: HOW JAPANESE COMPANIES CREATE THE DYNAMICS OF INNOVATION, THE.

PREFACE

The roots of this book go back 12 years. We were asked by the late Professor William J. Abernathy to submit a paper for the 75th Anniversary Colloquium of the Harvard Business School on the unique features of the new product development process within Japanese companies. The ideas generated in that study became the basis for our 1986 Harvard Business Review article, "The New New Product Development Game." In that article, we used the "rugby" metaphor to describe the speed and flexibility with which Japanese companies developed new products-as in rugby, the ball gets passed within the team as it moves up the field as a unit.

In retrospect, that study had touched on the roots of why Japanese companies became successful in the 1970s and 1980s. Let's continue the rugby analogy and focus our attention on the "ball" to describe what we mean. The ball being passed around in the team contains a shared understanding of what the company stands for, where it is going, what kind of a world it wants to live in, and how to make that world a reality. Highly subjective insights, intuitions, and hunches are also embraced. That's "what" the ball contains-namely, ideals, values, and emotions.

Now, let's focus on "how" the ball gets passed around in rugby. Unlike how a baton gets passed from one runner to the next in a relay race, the ball does not move in any defined or structured manner. Unlike relay, it does not move linearly or sequentially. Ball movement in rugby is borne out of the team members' interplay on the field. It is determined on the spot ("here and now"), based on direct experience and trial and error. It requires an intensive and laborious interaction among members of the team.

This interactive process is analogous to how knowledge is created organizationally within Japanese companies. As we shall see in this book, creating organizational knowledge is as much about bodily experience and trial and error as it is about mental modeling and learning from others. Similarly, it is as much about ideals as it is about ideas.

We contend in this book that Japanese companies have become successful because of their skills and expertise at "organizational knowledge creation." By organizational knowledge creation we mean the capability of a company as a whole to create new knowledge, disseminate it throughout the organization, and embody it in products, services, and systems. Herein lies the roots. Other theories of why Japanese companies have become successful abound, but our explanation hits at the most basic and universal component of the organization-human knowledge.

The study of human knowledge is as old as human history itself. It has been a central subject matter of philosophy and epistemology since the Greek period. Knowledge has also begun to gain a new wave of attention in recent years. Not only socio-economic theorists such as Peter Drucker and Alvin Toffler call for our attention to the importance of knowledge as management resource and power, but also an increasing number of scholars in the fields of industrial organization, technology management, management strategy, and organizational theory have begun to theorize about management of knowledge.

In this book, we take knowledge as the basic unit of analysis for explaining firm behavior. In discussing knowledge in the business organization, this book calls for a fundamental shift in thinking about what the business organization does with knowledge. More specifically, this book starts from the belief that the business organization not merely "processes" knowledge but "creates" it as well. Knowledge creation by the business organization has been virtually neglected in management studies. Years of research on Japanese firms, however, convinces us that knowledge creation has been the most important source of their international competitiveness.

In this book, we classify human knowledge into two kinds. One is explicit knowledge, which can be articulated in formal language including grammatical statements, mathematical expressions, specifications, manuals, and so forth. This kind of knowledge thus can be transmitted across individuals formally and easily. This has been the dominant mode of knowledge in the Western philosophical tradition. However, we shall argue, a more important kind of knowledge is tacit knowledge, which is hard to articulate with formal language. It is personal knowledge embedded in individual experience and involves intangible factors such as personal belief, perspective, and the value system. Tacit knowledge has been overlooked as a critical component of collective human behavior. At the same time, however, tacit knowledge is an important source of Japanese companies' competitiveness. This is probably a major reason that Japanese management is seen as an enigma among Western people.

In this book, we focus on explicit knowledge and tacit knowledge as basic building blocks in a complementary relationship. More importantly, the interaction between these two forms of knowledge is the key dynamics of knowledge creation in the business organization. "Organizational Knowledge creation" is a spiral process in which the above interaction takes place repeatedly.

In the dominant Western philosophy, the individual is the principal agent who possess and processes knowledge. In this study, however, we shall show that the individual interacts with the organization through knowledge. Knowledge creation takes place at three levels: the individual, the group, and the organizational levels. Therefore, our discussion of organizational knowledge creation consists of two major components: the forms of knowledge interaction and the levels of knowledge creation. The two forms of interactions-between tacit knowledge and explicit knowledge and between the individual and thet organization-will then bring about four major processes of knowledge conversion, which all together constitute knowledge creation: (1) from tacit to explicit; (2) from explicit to explicit; (3) from explicit to tacit; and (4) from tacit to tacit.

The goal of this study is to formalize a generic model of organizational knowledge creation. Our discussion will mostly involve Japanese companies for two major reasons. First, Japanese companies provide a most challenging laboratory to develop and test the model of organizational knowledge creation as they have become most competitive over a short period of time. Second, we have been conducting an in-depth investigation of Japanese firms for a number of years. This long history offers a rich data pool for our present intellectual undertaking, which should be shared with Western readers at some point. In short, Japanese companies are analyzed in this book as representative case studies rather than as "success stories."

In fact, some may contend that the recent setback of Japanese companies in international competition could undermine our model. But, faced with the longest and most severe recession in recent history in the early 1990s, we are observing how Japanese companies are trying to break away from what worked in the past and move into new and untried territories of opportunity. The pressure of the current crisis and the need to globalize even further are forcing Japanese companies to turn to a more advanced form of knowledge creation, which we may want to write about sometime in the future.

On a more personal note, the roots of the authors' relationship go back 24 years. The two first met at the University of California, Berkeley, in 1970. Jiro, as Ikujiro Nonaka was called in Berkeley, was finishing up his Ph.D. program in marketing and organizational theory. Hiro, short for Hirotaka, had just started the MBA program. It was an encounter that changed Hiro's life for good. Jiro persuaded Hiro to enter the Ph.D. program in marketing. At Berkeley, both were inspired by the late Dean E. T. Grether, from whom they learned industrial organization. They both minored in sociology, studying under Professors Newly. Smelser and Arthur L. Stinchcombe. Jiro wrote his thesis under P*essor Francesco M. Nicosia and Hiro under Professor Louis P. Bucklm.

Berkeley has had a profound impact on the two of us. The University of California, Berkeley, was founded under the vision to become the, "Athens of the Pacific."" The founding fathers wanted to replicate the Athens of Aristollt and Plato, the Athens of Pericles at Berkeley. The city of Berkeley itself was named after Bishop George Berkeley, an Irish philosopher, who wrote "Principles of Human Knowledge" in 1710. We inherited this philosophical tradition, as evidenced from the ample references made to Greek philosophy and epistemology throughout the book. We also inherited the intellectual tradition of the Berkeley Ph.D. program, which is bent on developing theory. Our attempt to formalize a generic model of organizational knowledge creation is an indicator of this theoretical tradition.

Besides Berkeley, we have something else in common. Both of us had worked in business right after graduating a Japanese university. Jiro worked for an electronics manufacturer for nine years and Hiro for an advertising agency for two years. It is this shared experience that compels us to become practical and seek reality in the front line of business. The case studies in the book are indicators of this practical bent. In this book, we hope to combine our theoretical and practical bents. After all, as in the words of Kurt Lewin, "There is nothing so practical as a good theory."

After leaving Berkeley, Jiro returned to Japan to teach at Nanzan University and later at the National Defense Academy, where he conducted research on contingency theory based on the information-processing paradigm. Hiro went on to teach at the Harvard Business School, where he was exposed to case studies. Their paths crossed again, when Jiro joined Hitotsubashi University in 1982 and Hiro a year later. Ken-ichi Imai was instrumental in recruiting us to Hitotsubashi. Imai, who is now a research director at Stanford Japan Center in Kyoto, was also a co-researcher of the study we conducted for the 75th Anniversary Colloquium of the Harvard Business School.

As you can see, the roots for this book and our personal relationship go back a long time. our only regret is that it has taken us so long to complete this book. Had we done so sooner, we would have been able to show Dean E. T. Grether, who passed away this year, that his two former students are keeping the Berkeley spirit alive across the Pacific, developing new theory out of Japan.

Tokyo December 1994 I. N. H. T.