by A l e d a V.

R o t h
Aleda V. Roth is an associate professor at the Kenan-Flagler
Business School of the University of North Carolina at Chapel Hill.
Her co-authoredbooksinclude Competing in World Class Manufacturing,
World Class Banking: Benchmarking the Market Leaders, and
The Management of Continuous Improvement: Cases in
Health Administration.

Achieving Strategic Agility through

ECONOMIESOFKNOWLEDG
"Economiesofknowledge means that the firmisabletouseits business acumen, combined with skilled

people and experience with advanced technologies, to create an organization that consistently identifies,

assimilates, and exploits new knowledge more efficiently and effectively than the competition."

Manufacturers are in the midst of one of the most
significant transformations in history. The kaleidoscopic
nature of the global economy has created an environ­
ment of unprecedented hyper-complexity and dynamic
change. So much so that the rules of the competitive
game are shifting faster than managers can react to them.
Moreover, these dynamics bode continuous sea changes
in work and sources of value-added. Looking to past
solutions for rationing resources and controlling costs is
not an option. The drivers of change indicate one point:
Successful manufacturers tomorrow will not look much
like those of today.
Manufacturing pacesetters are seeking new competi­
tive weapons. Prominent in the search is strategic
agility—the capability to produce the right products at
the right place at the right time at the right price. By
definition, strategic agility is achievable only with com­
petitive strength in a combined set of generic capabili­
ties, namely quality, delivery, flexibility, and price lead­
ership. Managers then have options. They can use one
or more capabilities to preempt or imitate fast global
competitors. Armed with multiple capabilities, manufac­
turers will be better prepared for the changes ahead.
Acquiring strategic agility is no easy task. It requires
"economies of knowledge" through accelerated enter­
prise-wide learning. Economies of knowledge means
that the firm is able to use its business acumen, com­
bined with skilled people and experience with advanced
technologies, to create an organization that consistently
identifies, assimilates, and exploits new knowledge more
efficiently and effectively than the competition.
O r g a n i z a t i o n a l K n o w l e d g e Drivers
The quantum need for strategic agility stems from
chaotic markets and technological forces. Global markets

Strategy & Leadership M a r c h / A p r i I 1996

30
in constant flux have become "virtual." At dizzying ing its progress toward strategic agility. Removing the
speeds, customers, suppliers, and competitors swap millstone requires "out-of-the-box" thinking to capital­
boundaries, niches, and roles. It is not uncommon for ize on knowledge creation. World class manufacturers
competitors to serve dual roles as customers or suppliers have succeeded by thoroughly "un-learning" old produc­
as long as it is profitable to do so. The plethora of emer­ tion rules and contextualizing their know-how with post-
gent technologies and customer information bases only industrial, information logic.
fuel the infinite ways of dynamically dicing up the mar­ To turn our organizations upside down and to capital­
ketplace and add to the multiplicity of forms that com­ ize on knowledge, managers must broadly address three
petition can take. questions:
The global stage is set for oppor­ ♦ What are the beliefs concerning the
tunistic firms to engulf their ill-pre­ "[M]uch of what managers know competitive landscape and the differ­
pared prey with no warning. Consider entiating priorities?
the drivers of organizational knowl­ today and the decisions they make ♦ How are work processes modified,
edge: customers, information, speed- are based upon industrial, changed, and evaluated?
to-markets, and technological choices. ♦ How are the sources of value-added
♦ We live in an age of customer mass-production logic. This is a changing?
choice, and today's savvy customers major source of entropy, siphoning Evolving Management
want it all! Worldwide, customers' Perspectives
access to product information and valuable resources and Management debate around these
databases enables them to make more misdirecting talent." questions can benefit by understand­
informed choices. Global customers ing the distinctions among various
are demanding uniformity in product quality and service manufacturing epochs—those strategic moments in
standards. One only has to look at the telecommunica­ which top management perspectives of competitive
tions and electronics industry to understand this per­ capabilities shift radically and require revolutionary
spective. approaches to change. The trajectory of the dominant
♦ Information is becoming a global commodity and alone paradigms of production logic and best practices can be
provides little strategic value-added. Access to the understood by using a strategic map to look back to pro­
Internet and other online services provide information to duction's historical roots and to help recognize its major
the masses. Computer-based commerce, such as electron­ disconnects between today's and tomorrow's passages.
ic data interchange, speeds up order fulfillment cycles. (See Exhibit 1 on page 32.)
Because information is widely available, competencies in Each epoch highlights the time-phased best practices
synthesis and analysis boost the strategic arsenal. of the globally competitive manufacturers in industrial­
♦ Speed-to-market is the rallying cry of world class man­ ized regions. Notably, the outstanding performers,
ufacturers. An estimated one-third to two-thirds of a defined here as "world class," are approaching the 21st
firm's annual sales are derived from products developed century priorities today. The less competitive laggards
within the past two years. On the downside, the same remain vested in the past, where the fundamental
processes that enable rapid new product introduction also premises of management date back to the industrial age
increase product proliferation and process complexity. of Henry Ford and Alfred Sloan.
♦ The array of technological choices available is growing Clearly, within each manufacturing epoch, managers
exponentially. The ability of individuals, organizations, must see things differently in order to manage different­
and even society at large to exploit their potential has ly. To illustrate, consider how long it took U.S. automo­
not kept pace with new technology. As technological tive manufacturers to recognize and respond to the
advancement impinges upon every aspect of daily work, structural change in their markets caused by Japanese
the expertise, spirit, and creativity of people—not capital competition. Why didn't Roger Smith quickly "do some­
and equipment—are the limiting resources. The rapidity thing" different rather than let GM's market share
of change has outstripped traditional methods and defin­ erode? Only fifteen years ago did a handful of world
itions of production. As a result, managers must turn class manufacturers embark upon a journey called lean
upside down the tenets they held in the past about how production, now considered a best practice. Shattering
to organize work, how to share work, and how to strate- old axioms, total quality management and just-in-time
gize. Yet much of what managers know today and the logic are changing management mindsets entirely.
decisions they make are based upon industrial, mass pro­ Industry leaders are now making a call to arms for a
duction logic. This is a major source of entropy, siphon­ new production logic, called agile manufacturing. They
ing valuable resources and misdirecting talent. hope to use their manufacturing capabilities to deluge
Mass-production logic has become a corporate mill­ the marketplace with a wider variety of higher value
stone, weighing down its potential for learning and slow­ products.

Strategy & Leadership March/April 1996

31
 Beyond that is strategic
agility—the ability to leverage
enterprise-wide operations to
turn on a dime, providing the
right product at the right price,
anywhere. In other words, the
pacesetters will transcend the
functional manufacturing
boundaries to develop fluid,
enterprise-wide operations in
order to be globally agile.
Competitive Priorities.
The decision calculus for man­
ufacturing investment choices
is typically associated with
competitive priorities—the
manufacturing-related capabili­
ties that win new customers
and retain them. In a competi­
tive world there is little room
for waste. An emerging body of
research suggests that the dom­
inant set of competitive priori­
ties, especially within the
industrialized countries, is tied
to manufacturing epochs. The
strategic importance of investing in epoch-based capabil­ nologies, knowledge, and skills are dramatically rede­
ities lies in its contribution to building sustainable com­ fined. Moreover, a firm's relative position on the strate­
petitive advantage and superior profitability. gic map determines its potential to leverage generic
Using mass-production logic, investments are made capabilities through operations processes at the site, the
by trading-off competitive capabilities, e.g., quality or business unit, or the enterprise level. For example, man­
cost or flexibility. Following a product life cycle, manu­ ufacturing priorities of quality and delivery are typically
facturing priorities shifted as volume increased, such as implemented at the plant. Here production benefits
from quality to low cost. Lean production logic differs. from more localized process redesign projects that build
Quality, delivery, and costs are viewed as complementary upon its manufacturing process knowledge. By the same
capabilities, not to be traded-off for one another. Within token, integration of business unit processes is necessary
agile manufacturing, flexibility—the ability to make to realize flexibility. Attaining strategic agility means
product variety with high quality and reliable deliveries spanning national boundaries in order to leverage a port­
at a competitive price—is of paramount importance. folio of global assets. To do so, firms must rationalize
Strategic agility requires a metamorphosis from the resources and processes on an enterprise-wide basis.
organization as mechanistic "working machine" to the Process Performance Criteria. Evaluation of opera­
"Knowledge Factory™"—an organic, accelerated learn­ tions process performance varies by epoch as seen in
ing organization that produces shared knowledge as a Exhibit 1. Efficiencies from economies of scale, continu­
key by-product. The conceptual analogy is the way that ous improvement, and quick response are the outcomes
a breeder reactor generates more fuel than it consumes. of mass and lean manufacturing, respectively. With agile
As operations evolve from physical production of prod­ manufacturing, the business unit profits from organiza­
ucts to the manufacture of invisible, intangible assets tional connectivity. Economies of integration, which are
such as services, knowledge, and ideas, work becomes enabled by technology, will enhance manufacturing's
largely cognitive, organic, and virtual. ability to work in tandem with other functions, cus­
Thus with each manufacturing passage, past invest­ tomers, and suppliers.
ments must frequently be treated as sunk costs as tech­ With strategic agility, process performance is based
upon the relative degree of mass personalization—the
ability to provide products and services based upon each
individual customer's specific characteristics, attributes,
needs, and wants. Mass personalization is demarcated

Strategy & Leadership March/Apri1 1996

32
from producing for the needs of "clusters" of customers chaotic tangle of interrelationships and interactions.
within defined market segments. Take, for instance, the Oticon's knowledge workers bring clusters of skills to
personalized production of Panasonic brand bicycles of the job; they bring the intelligence behind the comput­
Japan's National Bicycle Industrial Company. Each bike ers, telecommunications, and automated systems; and
is manufactured to fit the customer's exact height, they dynamically reconfigure themselves into "virtual"
weight, and color preference. Operations must know communities of practice. People co-locate seamlessly
customers very well and become less narcissistic in their between projects and tasks as required. Seamlessly, they
approaches. Evaluation must be based on asking: "What convene, address a problem, and disperse as needed.
can we do for you?" in contrast to "How well are we sat­ The bottom line results are increased profits, productivi­
isfying you?" ty, and innovation.
Sources of Value-Added. The sources of value- A Progression of Knowledge-Based Competencies
added change whenever a dominant paradigm passes As strategic thinkers, managers must understand how
into another epoch. Under mass production, value-added generic factors critical to success arise. By definition,
was achieved by applying capital and muscle power. In these factors are among their portfolios of current com-
the lean era, quality, local information systems such as
just-in-time, and natural workgroups and teams provided
significant returns when properly deployed. As the focus
shifts to information technology (IT) enabled processes,
value-added comes from excellence in supply chain
management and cross-functional teams. Tearing down
functional silos is key to quick response. Agility means
that design engineering and customer services interface
through business process management.
For strategic agility, value is derived from leveraging
enterprise assets worldwide. Recent research on 1,300
manufacturing business units across North America,
Europe, and Japan calls for neo-operations strategy
where superior value is derived from knowledge-based
competencies, e.g., combining IT and state-of-the art
manufacturing processes with technologically competent
workers and intelligent organizations. Without question,
revolutionary—not evolutionary—changes in manage­
ment mindsets and practices are necessary. Managers
must shift their thinking from technology-based compe­
tencies to knowledge-based portfolios—enterprise-wide
intelligent systems and knowledge workers joined in
"communities of practice."
Value is created by knowledge workers (who include
managers, engineers, technicians, and information work­
ers and specialists) employing increasingly powerful, ver­
satile, and user-friendly advanced technologies to
enhance their productivity. The development of com­
munities of practice—a network of knowledge workers
and workgroups who carry out the actual work, whether
or not they formally fit into the proper organizational
boxes—enabled by advanced technology, will be an
essential means of sharing expertise.
Take for instance, Oticon, a Danish manufacturer of
hearing aids. At Oticon there are no "fixed" jobs.
President Lars Kolind is quoted as saying: "In my expe­
rience, it takes a revolution to change a traditional,
machine-like organization into one that has a high level
of flexibility and the ability to advance knowledge."
Within two years, Oticon evolved into a so-called
"spaghetti organization," which Kolind describes as a

Strategy & Leadership March/April 1996

33

petitive capabilities and those needed in the future.
Empirical evidence supports a new theory of competi­
tive progression. (See Exhibit 2). Accordingly, generic
capabilities are developed sequentially and are interde­
pendent over time, regardless of intended priorities.
Roth's theory (1996) explains why generic capabilities
observed within manufacturing firms accumulate in a
progression—from quality and then to delivery and then
to flexibility and then to price leadership during an inno­
vation cycle.
Quality is first, not only because it is the ante for
competing, but because it increases process pre-
dictability and increases organizational learning.
Mastery of total quality management (TQM) as a new
business science and deployment of its principles pro­
vides a foundation for organizational learning. As people
are permitted to practice quality in daily work, they gain
new social skills along with improved functional and
technical expertise. TQM requires them to come togeth­
er, communicate, dialogue, and share expertise. A quality
umbrella can ready the organization for ongoing change.
Delivery reliability expands local process capa-
bilities. Fast and reliable delivery is possible only after a
company can control its product quality. Delivery builds
upon product quality by expanding the need to share
technical information and process knowledge cross-func­
tionally and along the supply chain. For reliable delivery,
manufacturers must be able to provide the same level of
support and service worldwide. Increased predictability
of distribution processes is essential. Because products
and services usually have some "local" contents (i.e.,
addressing market-specific, environmental, safety, ener­
gy, and cultural issues), understanding distribution
processes augments the firm's knowledge portfolio.
Strategy & Leadership
34
Flexibility shatters organizational boundaries.
Quality and delivery pave the way for flexibility due to
improvements in subsystem predictability and know-
how. Now manufacturers must come to grips with larger,
unwieldy business unit processes. Business process
redesign and innovations take out more organizational
slack. Proverbial fire walls at the boundaries are
destroyed in order to get closer to suppliers, partners,
and especially customers. Flexibility requires an inordi­
nate closeness to customers. Intimate customer knowl­
edge provides opportunities for unprecedented cross-
organizational process integration. Unfortunately, few
companies deliberately build capabilities on long-term
customer relationships.
Price leadership is the final step in the progres-
sion. Price leadership means that the firm has signifi­
cant flexibility in pricing because of lower manufactur­
ing and distribution costs. It occurs only when product
and process innovations reduce costs over a product fam­
ily life cycle and controllable costs are sustainable, or
declining. For global players, total price leadership is all
about leveraging the entire enterprise and its network of
suppliers, customers, partners, and facility locations.
Price leadership is not a one-time event but requires a
clear understanding of enterprise-wide processes under­
lying quality, delivery, and flexibility.
Barriers to Growth in the Knowledge Era
Interestingly, the competitive progression mirrors the
macro evolutionary pattern depicted on the strategic
map (Exhibit 1). Having higher levels of combinative
generic capabilities is the essence of strategic agility, and
the most cost-effective path of accumulating generic
capabilities follows from competitive progression theory.
Competitive progression theory is the conceptual linch­
pin between manufacturing epochs and the evolution of
the enterprise as a whole.
Combined competitive capabilities are broadly associ­
ated with the changing organizational architecture, tech­
nological progress, and roles of people—both employees
and customers. For example, within a Knowledge Factory,
the customer becomes a collaborator in the production
process. Customers, supported by intelligent technologies
like virtual reality software, participate in the design and
production of their own goods and services.
The primary barriers to progress toward strategic agili­
ty are a lack of skilled human resources and manage­
ment expertise to deploy these resources. Technology
will not be the issue because all firms will have access to
comparable technology. The question will be: How do
we build the thoughtware, and how do we gain the orga­
nizational knowledge?
The answer is intuitively simple, but not easy to
implement. Firms must work through the competitive
progression faster and, thereby, accelerate the number of
innovation cycles. The Knowledge Factory™ model
M a r c h / A p r i l 1996

shows that this is possible by establishing deliberate
strategies and a predisposition for learning.
People Competencies. Managers must realize that knowl­
edge is a socially constructed phenomena. Learning
requires collaboration and sharing of insights. Xerox
Pare, for example provides convenient places where peo­
ple can get together routinely. John Seely Brown of
Xerox calls it the "distributed coffee pot" phenomenon.
Communities of practice are self-reinforcing at problem
solving. Employees need to work together, build, and
cross-fertilize the enterprise knowledge bases. Huge
knowledge gaps exist in most organizations as companies
using industrial-age logic continue to segregate workers.
Accelerated learning requires deliberate opportunities
for face-to-face communication, collaboration, and peri­
odic co-location.
Management Competencies. The second key to achieving
organizational knowledge is through expanded manage­
ment competencies. The industrial logic that brought-
successful companies to the 1980s was built upon mod­
els of functional excellence. Today there is a generation
of managers who are really "incompetent." They remain
vested in the past. Blind to the sea changes ahead, many
are complacent in their own professional niches and
individual comfort zones; others are uncomfortable with
the new environment; and yet others, fearing the tumult
of downsizing, are playing out an end-game. Ironically,
for some of these managers, who excelled by 1980s stan­
dards, the financial signals today still indicate that every­
thing is OK. Yet in the turbulence of the 21st century,
major changes will come quickly to the unprepared who
are waiting for their proverbial "ship to come in" rather
than swimming out to meet it.
The lack of preparation for the challenges ahead cre­
ates a drag on institutional systems, either by pigeonhol­
Strategy & Leadership
36
ing the organization into traditional methods or manag­
ing by fads. Barriers to developing new managerial com­
petencies are exacerbated by the rapidity of change,
which leaves little time to react, and by the reinforce­
ment of old behaviors by the short-term orientation of
management compensation systems..
In the 1980s, the "best" managers were identified by
their functional expertise such as finance, sales, or pro­
duction, and their ability to "command and control"
their operations. (See Exhibit 3.)
Today, managers need different, broader competen­
cies—business unit process expertise, at the least. They
must understand and value team-based, cross-functional
management. And as firms move to the 21st century
knowledge era, the best of breed managers will need
enterprise process expertise. They must be able to "see
'round the world." Because the bodies of scientific
know-how and technological progress are evolving radi­
cally over time, development of economies of knowl­
edge are critical to managerial prowess. Consequently,
the investments in management renewal must be an
ongoing process.
References
Craig A. Giffi, "The New Manufacturing Strategy," Harvard Business
Review, May/June 1994, 154-155.
Polly LaBarre, "The Dis-Organization of Oticon," Industry Week, 18
July 1994, 23-26.
Piore, M. J. and C.F. Sabel, The Second Industrial Divide: Possibilities for
Prosperity, (New York: Basic Books, 1984).
Aleda V. Roth and Craig A. Giffi, "Winning in Global Markets: Neo-
Operations Strategies in U.S. and Japanese Manufacturing," Operations
Management Review, 10:4, 1995.
Aleda V. Roth, Ann S. Marucheck, Alex Kemp, and D. Trimble, "The
Knowledge Factory for Accelerated Learning Practices," Planning
Review, May/June 1994, 26-33,46.
John Seely-Brown, "Research that Reinvents the Corporation," in The
Learning Imperative, R. Howard, ed., (Boston: Harvard Business
Review, 1993).
Acknowledgments: The author is most appreciative of the involvement
of all the executives who shared their valuable experiences and
insights in the conduct of the field research and especially to Craig
Giffi of Deloitte & Touche, Gary Thompson of Nortel, and Mike
Gatling, John Martino, Carlyn Solomon, and Max Bataille of Baxter. I
am especially grateful to Robert Badelt for Nortel's sponsorship of the
theory development phase of this research in 1992-1993 and his useful
comments. An earlier version of the theoretical framework was pre­
sented at the Executive Forum on Global Business Reengineering
sponsored by the CATO Center for Applied Business Research,
Kenan-Flagler Business School of the University of North Carolina at
Chapel Hill, April 1992.
March/April 1996