ABSTRACT:
Illustrates in common sense practical terms how the systemic management of Knowledge Capital can help frame strategy and implementation. Uses as an example how this approach can be used to optimize a key component of the enterprise - its delivery channel. Maintains that the quality of the relationship between business partners, such as the manufacturer and its distributors, determines customer added value. Asserts that this relationship must not be independent, nor dependent, but rather interdependent. Contends that the trust level in such a relationship must be carefully monitored and developed. Details practical ways in which the interdependent balance can be achieved in a manufacturer-distribution chain relationship. Explores the effect of various balance levels on added value to the customer.
The kick-off session of a week-long seminar for experienced distribution agents was the first thing on my Monday morning schedule, and I was ill prepared for the intensity I was about to experience. The session started in typical reserved and polite fashion with discussion of the role of the agent in the firm. It quickly evolved into a genuine and spirited exchange of views. It seemed that every agent had no difficulty identifying problems. They were agreed that they experienced a host of issues but contradicted one another when it came to spelling out what these issues were. It soon became clear that they were speaking of their experience from rather disparate points of view.
We closed the session feeling satisfied that we had covered a wide range of issues with unusual candor - but the contradictions inherent in their complaints kept us from narrowing down on solutions. It was only later that morning that I was able to place the discussion in a knowledge management context and make sense of what we had discussed. Later that day, I returned to the seminar and shared with them the "Knowledge Capital framework" and the concepts which are the basis of this article.
Since that time, it has occurred to me that the underpinnings of our discussions are relevant to all partnering relationships. Such relationships have become increasingly prevalent in the value chain of most enterprises. As the knowledge era gradually transforms the patterns of value creation in our economies, the dynamics observed in this experience are likely to be typical of the relationship between any manufacturer and an associated network of distributors. A "Knowledge Capital Framework" helps us all to map the patterns of value creation and make better sense of the changes that surround us.
This short article attempts to illustrate in common-sense practical terms how the management of Knowledge Capital can help frame strategy and implementation. Optimizing a key component of the enterprise - its delivery channel, is used as an illustration of this approach. The article addresses the following main points:
In current and emerging business contexts our understanding of what creates competitive value for organizations has changed radically. In many cases, the long-term prosperity of an organization now depends to a large extent on its knowledge management capabilities. Knowledge management is the ability to develop, maintain, leverage and renew intangible assets of the kind described by Itami (1987). Such intangible assets are often called Knowledge Capital or Intellectual Capital (Stewart, 1994).
Knowledge management is a very complex and highly dynamic activity. Although efforts are underway to make knowledge management related approaches more practical and measurable (Edvinsson, 1997), the novelty and complexities of the topic have encouraged many vague technological and sociological pronouncements. These typically lack practical rigor, and ultimately serve only to discourage organizations from experimenting with the ideas of knowledge management.
Knowledge Capital is a system composed of three elements; Human Capital; Customer Capital; and Structural Capital. Human Capital is defined as "The capabilities of the individuals in an organization that are required to provide solutions to customers". Structural Capital is defined as "The organizational capabilities of the organization necessary to meet market requirements". Customer Capital is defined as "The depth (penetration), width (coverage), and profitability of the organization's franchise".
These three elements of Knowledge Capital represent and comprise the organization's stock of intangible assets. Value creation takes place as knowledge is exchanged between these three elements. In this context, knowledge management dynamically promotes and facilitates the free flow of knowledge across the enterprise, and serves as the basis for the acceleration of learning and the systematic development of organizational capabilities (Leonard-Barton, 1995).
Value is created with the interaction that takes place between these three elements of Knowledge Capital. For instance, the firm creates value with customers when individual members (Human Capital) interact with customers. The quality of the relationship will determine the impact on the Customer Capital of the firm. The exchange of knowledge serves as the basis for value creation. The overall level of trust in the relationship will determine its bandwidth and the extent of its potential for creating value. A relationship characterized by mistrust will obviously offer a poor platform for interaction, the exchange of knowledge and value creation. As a colleague put it: "the electricity won't arc". Optimal value will be created through the interdependence exercised through a trust-based interaction.
Knowledge is information that has been understood, interpreted and validated in the context of application. As such, knowledge represents a recognized platform for action. Based on this definition, knowledge has to be purposeful and useful. Without these characteristics, we are simply dealing with information. The understanding and interpretation required to derive actionable meaning from information involves both tacit and explicit knowledge. In other words, information is perceived, interpreted, and codified not only through exploration in the light of explicit knowledge, but also through "lenses" which are the tacit-knowledge assumptions of an individual or an organization. This is why it is also essential that the explicit and tacit dimensions of organizational knowledge be developed in a complimentary manner (Nonaka and Takeuchi, 1995)
Knowledge has to travel through an organization's value chain in order to bring value added. The value chain is comprised of the components that actually bring the value to the customer-. For example, the design phase; the product development phase; the manufacturing phase; and the marketing and the /distribution phases. The distribution channel is one of the key elements in the value chain of most organizations. In fact, the relationship between a manufacturer and its distribution agents constitute a significant part of their respective Structural Capital. In other words, their economic value depends to a significant extent on how effective they are at partnering.
Although all elements of the value chain are important, the distribution system becomes key in a market place where the quality of the relationship with the customer determines to a large extent the value perceived by the customer. A whole host of studies both within and across companies have demonstrated a strong connection between the quality of the relationships, customer satisfaction, the durability of the relationship and the resulting profitability.
Recent research (Hall, 1995) has also shown that the values of customers are fast evolving with the emergence of the knowledge era. These new values are related to diversity, adaptability, learning and partnership. Not only do customers want respect, they want to deal with people who will partner with them, and will demonstrate a stake in helping them realize their aspirations. Increasingly they are looking for commitment, trust, and a sense of ownership for the outcomes of a transaction. They want to learn with every transaction in order be become more knowledgeable and self-reliant.
The pervasive technology that now serves as the platform for most transactions has brought us mass customization. Having experienced the benefits of solutions that are tailored to fit readily into their context, customers are no longer satisfied with the simple purchase of a product. The increasing value customers attribute to customized solutions, and to relationships based on mutual commitment and trust, gives a great deal more leverage to the distribution component of the value chain. This will in part explain why "disintermediation" between the manufacturer and the customer has been given such a high level of attention in the market place.
Increasingly value is created at the customer interface, where the needs and aspirations of customers form the basis for shaping solutions. This is why trust and the quality of the relationship with the distribution agent have acquired so much importance in the value chain. If they are unable to partner effectively, it will be difficult for distributors to instill a strong sense of trust and partnership with customers. This is key to the efforts of a firm to continue improving its Customer Capital on a sustained basis. For as a result of every transaction with customers, the Customer Capital of the enterprise either is enhanced or depleted. This places distribution at the centre of the firm's capability to create value.
There is an undeniable link between the attitude of the "distribution" agent and the satisfaction of the customer. On the basis of this correlation it is reasonable to assert that customers will have a high level of satisfaction if the "distribution" agent shows commitment and a sense ownership for the outcome of the transaction. This becomes even more significant when considering that the "distribution agent" represents the "prism" through which the customer perceives the firm. This points to the link between the quality of the distribution/customer interface and the quality of the partnership between the manufacturer and distribution. One can only assume that the relationship between distribution and customers will be negatively impacted by a poor partnership between manufacturer and distribution.
All of this re-affirms that the market-place created by the emergence of the knowledge era will make it increasingly critical to proactively manage the partnership between the manufacturer and its distribution channel. We can't escape the fact that both are part of the value chain required to bring value to the customer. This interdependence has not been well understood in the past and has led to practices that have limited the value offered to the customer. As a result, the economic performance of all those involved in the value chain has been less than it could be. We need to re-think the way we have managed this relationship; we need to think in terms of Knowledge Capital (especially Customer Capital), Knowledge Management and Value Added.
In order to optimize value, we have to adopt a different perspective on the manufacturer-distribution channel relationship. Too often this relationship has become counter-dependent, where those who should be partners question everything the other is doing. From a business perspective, this means that one party actively denies the value that the other party brings. In addition, the first party always has to second-guess the other as to motive because they believe they are being taken advantage of. This is a very dynamic state and goes back and forth. For example, in the petroleum industry, independent dealers may sell gasoline and get a percentage of the margin. But when oil companies are constantly squeezing the margins, the relationship becomes counter-dependent; a lot of very good dealers are destroyed that way
The solution is to strive for an optimal point of balance between dependence and independence. A certain amount of independence is required, but an excessive level of independence on the part of the distribution agent will place the relationship with the manufacturer in jeopardy. As the relationship evolves with very limited possibilities for synergy, both parties become unwilling to invest in building the partnership. Under such conditions, the relationship between manufacturer and distribution can only create limited value.
At the dependent end of this spectrum, the distribution agent relies so heavily on the manufacturer that they do not have the drive or the initiative to forge ahead and create their own markets. Over time, they cannot avoid resenting the restraints imposed by the relationship. Their expectations are such that they cannot possibly be met. Eventually, they are likely to feel victimized by the manufacturer as. The negativity of the relationship and the resulting frustrations cannot help but affect customer relationships.
In the end, both the manufacturer and the distribution agent pay the price for these unhealthy relationships. The optimal balance point resides where distribution agents assume the responsibility for their business results, and the quality of their relationship with customers, without unduly relying on the manufacturer. This is also where the distribution agent recognizes the need to work closely with the manufacturer in order to make the most of the possibilities and the constraints that characterize all interfaces with customers.
The optimal point is one of interdependence, were both parties realize that their relationship will produce the most value through close collaboration. This is the place on the dependence/independence spectrum where it is recognized by both the manufacturer and the distribution agent that they are partners in a value chain ultimately dedicated to bring solutions to the customers.
It is essential to the success of the partnership that attention be given to ensuring that the partnership is kept in balance within a competitive market place. The joint value proposition offered by the partners must be seen as offering superior customer-perceived value. In this light, their agreement must be kept flexible, and modified as the market place evolves, and places new requirements on the solutions required. Similarly, the contribution and rewards of each partner must be carefully kept in balance. If the partnership becomes unbalanced in the respective benefits accrued, or uncompetitive in its cost structure, resolution will often be imposed in a manner that negatively affects the relationship. This happened recently when the two major Canadian airlines arbitrarily reduced the commission paid to travel agencies.
Successful partnerships are based on interdependent relationships where those involved have the confidence and the sense of responsibility to take self-initiated action to correct issues and tackle challenges as they emerge. They are also relationships where the respective contributions of the partners to the value chain are fairly taken into account.
It is critical to realize that distribution networks can only develop a healthy interdependence when there is a high-trust climate. From a manufacturer's perspective, one way to overcome counter-dependency is to be trustworthy, to work and look for congruence. A good manufacturer would select distributors that are congruent with the manufacturer's values and perspective on the customer, because this common perspective represents the foundation on which the relationship will be soundly established and grow with time. A misalignment of values, vision and strategies between manufacturer and distribution agent will inevitably undermine the Customer Capital of the firm.
Distribution agents, who tend to gravitate towards the dependent end of the spectrum, will become counter-dependent when the level of trust declines. With independent distribution agents, the manufacturer will tend to take steps that gives them greater control on the relationship as trust goes down.
When a manufacturer has already a distribution network that's old and established, and is set in these patterns, the way to revitalize them is to focus on the customer. The manufacturer should sit down with the distributors and talk actively about the customer and the value being created for the customer. All too often when the manufacturer sits down with the distributors they are talking all the time about the arrangements between the two of them.
What they must focus on is Customer Capital, and the deeper knowledge of the customer, without defensiveness around whom "owns" the customer. The notion of "owning" the customer is largely a fallacy: the reality is that no-one owns the customer. The customer will go where they perceive greater value as they define it. When both the manufacturer and the distribution agent truly focus on the interest of the customer, they discover their true common interests and common perspective. In a sense, when counter-dependence is evident, it is because such an exchange is seen as a zero-sum game where the competing interest of the two partners becomes all that is seen. The question to be considered by the parties is "How can we work together to create more value in our (combined) value chain than any competitor can create?".
For similar reasons, the surprisingly common confusion around "Who is the customer?" can be harmful to the common perspective required on the part of both the manufacturer and the distribution agent. The answer to this question has to be clear: the customer is the one who purchases and pays for the solutions offered. This is an important distinction: it is confusing and potentially dysfunctional to consider the distribution agent as the customer. The answer is straightforward: the distribution agent is a partner in the value chain dedicated to creating value for the customer.
A manufacturer's attempts to exercise undue control over the distribution system often results in bringing a high level of counter-dependence. One party's efforts to maintain control of what is, in essence a partnership, will tend to push the other parties toward independence. These counter-acting movements from dependence to independence will also systematically sap the level of trust.
Positions at either the independence or the dependence end of the spectrum will typically prevent a more healthy level of interdependence. In other words, when one partner becomes highly dependent on the other, that party cannot readily become truly interdependent. This is because issues won't be brought out, the partnership will be degraded in subtle ways, and value added will also be minimized since one partner is in a rather compliant mode. In fact, in the long run, high levels of dependence are more likely to evolve toward counter-dependence. Unfortunately, independence also evolves toward counter-dependence over time, because at some point for example one party says "Why are you doing your own thing out there? You're treating me as a nobody. Why would I keep investing in this relationship if you're not recognizing the value I bring?"
Customer preferences are changing faster and faster. The manufacturer needs "a clear line of sight" to the customer and cannot afford to be blinded by a distribution network that does not allow for some level of transparency onto the customer and market dynamics. In fact, it is in the interest of the distribution agent to benefit from a manufacturer that responds with agility to changes in customer preferences. Customers respond to the perception of superior value, and that superior value comes from receiving products and services from the manufacturer, and having them delivered through the distribution network in an effective, convenient, efficient manner. When the value chain is segmented - for example, saying it's only the end that owns the customer - this blinds the manufacturer and prevents it from having a clear view of the customer. Customers will go where they perceive value on a long-term basis. When people don't have the value chain in mind, invalid questions emerge, such as "Who owns the customer?" The fact is, the customer is always searching for what they perceive to be short- or long-term customer perceived value. And that's what they're loyal to. They're not loyal because an organization has a certain brand; although they attribute value to the brand.
Customer loyalty is a questionable idea; customers will perceive value from the total package they get, both the quality of goods they get and the service they get in the process of delivering those goods. If these two factors are in congruence with one another, and it's perceived they're working well and there's a high level of trust between the distributor and the manufacturer, then the customer gets a sense of high level of trust. But if distributors, who are the intermediaries, lower the trust level, the end result is that both distributors and manufacturer lose in that transaction.
The interdependence must be between the people in the distribution channel (dealers, distributors, and brokers) and the manufacturer, although that could be further refined. But let's say we focus on interdependence in the distribution network and the manufacturer. What tends to happen is that people in the distribution network are in general closest to the customer, and are most tugged by customer requirements. If the manufacturer is not listening well to what the distribution network is saying, there's going to be a lot of static in the relationship because the distribution arm feels that the client is asking for something and the manufacturer can't give it to them. This lack of communication leads to sub-optimizing the whole value chain. The best way for the manufacturer to reach the customer is through the distribution channel.
It is critical to monitor and maintain the relationship in a dynamic balance where the interdependent mode prevails. This is best realized through the management of both tacit and explicit knowledge. The effective management of knowledge can play a critical role in accelerating organizational learning provided that it is leveraged to deal with the counterproductive aspects of organizational mindsets and patterns that have been established over time.(Smith and Saint-Onge, 1996).
Such counter-productive mindsets and patterns may have inserted themselves to create imbalances in the relationship between manufacturer and distributor. The signs of such imbalance can be relatively easily detected. Perhaps the most prevalent of these signs is when there is evidence that issues are not dealt with in a timely fashion between different segments in the value chain over a long period of time. This becomes apparent when one hears things such as: "I brought up that issue five years ago and nothing has been done about it". This is a telltale sign that people are not hearing one another and that there is considerable value leakage in the chain. A sign of a healthy balance would be a high level of trust: "We are better than anybody else around because of what we can achieve together". This is where partnership territory lies; it's the realization that together with our level of partnering we can do things that couldn't be done otherwise.
Another sure sign of imbalance manifests itself when distributors, from a counter-dependent position, say to customers: "That manufacturer has no idea, and if I wasn't there to make sure you're getting the right thing, it sure wouldn't work". Such an invalidation of the relationship is often fueled by the mistaken belief that the distributor "owns" the customer and that this kind of pronouncement will reinforce the attachment of the customer to the distributor. Unfortunately, the end product of such an approach is to destroy Customer Capital for both the manufacturer and the distributor.
A certain level of accountability must be brought into the system in order to avoid such difficulties. In this context, it is in the interest of both manufacturer and distributor to undertake the joint measurement of customer attitude and commitment. Knowledge management tools should also be put in place to identify, track and resolve issues in a timely fashion. The timely resolution of one issue after another will contribute in a significant manner to create a climate of trust where partners will increasingly feel comfortable in exercising a certain level of "constructive contention" to resolve issues.
When trust is neutral, the relationship will tend to gravitate to independence. People will work together but they won't optimize value with one another because they do their own thing without taking into account the requirements of others for optimizing value. For example, in a dependent state, the dealers or distributors would say "I need to have this from the manufacturer. They need to give me this and if I don't get this I can't do anything. The manufacturer never listens to me, and the firm is doing its own thing". Now, the independent person says, "I don't care what they do, as long as I get my stuff. I can deal with my own customer. Frankly, I don't even tell my customer where I get products. I handle the transaction totally independent of who the manufacturer is and it doesn't matter because I don't use the clout of the manufacturer". This is not healthy.
What we need are people who have a sense of ownership for the transaction, but also still a certain sense of independence. We need to move to mid-point on the dependence axis. We also need to have people who understand that they must to take into account the manufacturer's specifications and limitations, in terms of costs and ability to manufacture product, ability customize, and so forth. In other words, each person has to work with the other so that there is mutual understanding.
Another technique for managing counter-dependencies is what might be called "communicating without noise". When there is noise in a counter-dependent state, all the manufacturer gets is, "You guys are no good, it doesn't matter what you do, they're not giving me the true goods on the customer, all they're giving me is self-interested stuff I can't meet in any event". That leads them to disregard the information they could obtain.
In this case, the trust level must be elevated to remove the noise from the communication that needs to take place for clean interdependence. How can the trust level be elevated to eliminate the noise? The precursor to working interdependently and collaboratively is development of good sharing, listening, and trust. Those are absolute precursors; the ability to sit down and talk in a way that one party recognizes that the other is out there to do the right thing. That is, there is a prevailing belief that everybody is out there to do the right thing.
The application of organization learning principles (Senge, 1990) would lead to the timely resolution of issues in the relationship and challenges encountered in the market place. A knowledge management system should be put in place that ensures the systematic building of feedback loops with regards to issues related to both the business and the relationship. This would allow for sharing one another's dilemmas, difficulties, and issues, in such a way that the manufacturer hears the customer's perspective through the distributors. Similarly, this has done in such a way that the distributors hear the manufacturer's perspective to allow them to translate this to the customer in a value-adding manner. One can only gather Customer Capital to extent that the distributors are representing positively the manufacturer, its products and its services with the whole idea of building
The most effective way to foster a durable sense of partnership is to explore together the possibilities that can be realized with a high level of partnership. This has to be done in an atmosphere where there is true listening and a commitment to find win-win solutions. These discussions have to focus not on the problems but on the possibilities. It has to be in the vein of genuine dialogue supported by positive inquiry of one another. This will result in a genuine understanding of one another's needs, capabilities and aspirations. It will also make it possible to elevate the discussions to finding the possibilities that can only be found with interdependence.
These dialogues become the means through which the tacit knowledge of the organization is renewed and aligned. The values and the principles enacted at the customer interface are re-affirmed. A vision of how customer both partners serve customers is put in place with full ownership by all those involved in the value chain. Such dialogues are typical of organizations dedicated to the use of Action Learning principles and methods (Smith and Peters, 1997) in promoting collaborative learning and reflection.
The close partnership between the manufacturer and its distribution agents is particularly characteristic of relationships that will need to be built throughout the value chain of our enterprises. As globalization trends increase pressures to adopt world class standards of performance and innovation, partnerships will become the predominant approach for optimizing value creation.
The ability to partner then becomes one of the core capabilities of most organizations. The leanings we can gather to enhance the relationship between manufacturer and distribution not only will serve to leverage the value of the firm at the customer interface but will point to the kind of leadership approach we need to develop in order to ensure that we optimize the value that can be created through effective partnering relationships.
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Senge, P, The Fifth Discipline, Doubleday Currency, New York, 1990
Smith, P.A.C. and Saint-Onge, H., The Evolutionary Organization: Avoiding A Titanic Fate, The Learning Organization,, Vol. 3, No. 4, 1996
Smith, P.A.C. and Peters, V.J., Action Learning: Worth a Closer Look, Ivey Business Quarterly, Vol. 62, No. 1, Autumn, 1997
Stewart, T.A., Your Company's Most Valuable Asset; Intellectual Capital. Fortune, October 3, 1994
Hubert Saint-Onge is Professor of Knowledge Management, Canadian School of Management, and Senior Vice-President, Strategic Capabilities at The Mutual Group. In this position Hubert is responsible for the strategic integration of business plans in people management systems with the technology architecture and infrastructure. One of the key elements of his mandate is to facilitate the leveraging of the firm's businesses through the systematic application of knowledge management and learning organization principles. Hubert was previously Vice-President, Learning Organization and Leadership Development for the Canadian Imperial Bank of Commerce. He has an international reputation as an expert in organizational learning and knowledge management, and is in constant demand as a a speaker on these subjects. Hubert holds an Honours BA in Political Science from York University, and an MA in Political Science with specialization in international economic integration. He can be reached at Tel: (519) 888-3629; Email: Hubert.Saint-Onge@themutualgroup.com