This book is about a process that sounds abstract and yet is concrete, practical, and profoundly important - managing a firm's knowledge assets. Companies, like individuals, compete on the basis of their ability to create and utilize knowledge; therefore, managing knowledge is as important as managing the finances. In other words, firms are knowledge, as well as financial institutions. They are repositories and wellsprings of knowledge. Expertise collects in employees' heads and is embodied in machines, software, and routine organizational processes. Some of this knowledge and know-how is essential simply to survive or to achieve parity with the competition. However, it is core or strategic capabilities that distinguish a firm competitively. Management of these strategic knowledge assets determines the company's ability to survive, to adapt, to compete. Drawing on managers' experiences - both successes and failures - from a number of firms in various manufacturing industries, I have tried to show how through systematic decision making and actions, both routine and strategic, core technological capabilities can be built and changed.

The focus herein is on companies whose core capabilities are technology-based - i.e., on organizations that compete on the basis of technological advantage (rather than, say, personal services, access to natural resources, artistic talent, or distribution rights). These strategic technological capabilities are organic systems of interdependent dimensions that are created over time and can be sustained over time. They are not easily imitated, transferred, or redirected on short notice. And as bodies of knowledge, core capabilities cannot be managed in the same way as are the tangible assets of the firm.

Managing knowledge is not a simple task, and despite our national proclivity for sound bites, this is not a quick-read book. Nor is it a "how-to" book, with recipes for instant success (although there are many implications for managerial action). In order to manage knowledge assets, we need not merely to identify them but to understand them - in depth - in all their complexity: where they exist, how they grow or atrophy, how managers' actions affect their viability. We also need to understand the manager's role in designing an organization for learning, for continual renewal.

Companies survive on their ability to adapt when necessary, and it is increasingly necessary for them to do so. Successful adaptation is not, however, a chameleonlike response to the most immediate stimuli - a quick switch to a new enterprise or an impulse acquisition. Rather, successful adaptation seems to involve the thoughtful, incremental redirection of skills and knowledge bases so that today's expertise is reshaped into tomorrow's capabilities. Of course, companies do sometimes require a dramatic shift in priorities and/or leadership: progress need not be plodding. The point is that successful adaptation builds thoughtfully from where we are. Because we cannot foresee the future, we can prepare for it only by planning for continuous rejuvenation of a firm's strategically important knowledge assets - its core capabilities.

Preface ix


Introduction xi

PART ONE: THE NATURE OF CORE CAPABILITIES AND RIGIDITIES

1 Core Capabilities 3

2 Core Rigidities 29

PART TWO: KEY INNOVATION ACTIVITIES

3 Shared Problem Solving 59

5 Experimenting and Prototyping 111

7 Learning from the Market 177

PART THREE: GROWTH AND RENEWAL

9 Continuous Wellsprings 259

Notes 269

References 295

Index 321

About the Author 335