The Strategic Downside of Downsizing

Organizations lose critical knowledge they didn't know they had

Seymour Siegel, PhD

The knowledge that terminated employees take with them may erode competitive advantage.

As companies try to cope with the economic downturn by cutting jobs and encouraging retirement, they often trade one problem for another. How do you cut people without losing critical knowledge - not only now, in the hopefully better times in the future? Cutting jobs may, or may not, be a good economic decision in difficult times. But it is more than an economic or human resource issue. It is a strategic one.

Essential Elements of Strategy

The essential elements of strategy include:

Positioning the organization in the external world,
Making choices about industries in which to participate and the products and services to offer,
Obtaining and allocating resources to achieve the chosen position, and
Providing value to the customer.

If this is executed well, it should create value for the other stakeholders, including shareholders. From the 1960's through the 80's this meant a focus on an industrial structure perspective, including Michael Porter's Five Forces model of low-cost producer versus differentiation and the idea of managing a portfolio of businesses. Then, in the late 80's, the popular perspective changed to a focus on a resource-based view of the firm.

A strong argument can be made that in the 21st century the strategic emphasis must change again. All discussions of strategy formulation agree that concentration on internal forces alone is inadequate, if not dangerous, to the construction of an effective, winning, competitive strategy. The reality of competition is that it now includes globalization, digitalization and the Internet, the need to manage a combination of virtual and traditional organizations, and an emphasis on continuous change and evolving technologies. All of this is taking place in the context of an aging population in the economically developed countries and youthful populations elsewhere. But potentially the most important strategic change is the increasing awareness of the importance of ideas and other intellectual capital as perhaps the critical element in the strategic arsenal.

Effective use of knowledge assets will be the battlefield for competitive advantage in the 21st Century. Strategic thinking and operational implementation must focus on managing the creation, capture, and communication of knowledge in the organization. This process first demands that managers understand the nature of knowledge - how it is created, transferred, and embedded in products and services. This understanding cannot be just a theoretical grasp of the issue. It needs to include a deep appreciation and vision as to how knowledge can be utilized to provide competitive advantage and profits.

What Is Knowledge?

The most difficult part of knowledge management may be to define what is meant by the word "knowledge." It is one of those words that everyone knows - but most cannot really define. Like pornography, they just "know it when they see it," or at least they think they know it. Some of the definitions that have been used in management literature include:

The grasp of relationships which relate facts to one another (Fohl)1·

The understanding of relationships within information that predict outcomes from given inputs (adapted from Bohn)2 ·
The fact or condition of knowing something with familiarity gained through experience or association. (Webster's dictionary)·

The ability to use information to make predictions. It differs from "facts," which are the result of observations, and from "information," which is a categorization of facts with a meaning attached. (adapted from der Hertog and Huizenga)3

Although there are differences in these definitions, there are some strong agreements as well. It is clear that knowledge is not just a collection of facts. To "know" requires both an understanding of relationships and the ability to use facts and information to make predictions and new connections. It is the management of these attributes of knowledge that leads to building competitive advantage.

Explicit and Tacit Knowledge

As has been commonly recognized since the work of Nonaka and Takeuchi4, it is critical to recognize the distinction between explicit and tacit knowledge. Explicit knowledge is that which can be codified or written down. Tacit knowledge is more difficult both to define and to capture. It is what we know without being aware that we know it. In many cases, it is what makes explicit knowledge work. A written recipe for making yeast bread is explicit knowledge. Knowing just how to knead the dough, when it has been kneaded enough, when it is ready to shape, etc., is tacit knowledge, and it comes from experience, from working with an expert, and from unconsciously using a wide range of physical motions. You may have tried to follow the directions for some activity and been very frustrated because the instructions seem to leave out some important steps. Something is missing. The person who wrote the instructions did not leave out the necessary data deliberately. It is just that in the process of trying to codify the procedure, some part of that procedure was the author's tacit knowledge that he or she did not transform into the explicit procedure.

This brief description illustrates two important difficulties that managers have in capturing tacit knowledge and codifying explicit knowledge. The first difficulty is that no form of knowledge can be completely articulated. The very process of placing tacit knowledge into a formalized explicit expression changes it. Words or other symbols are chosen to describe the procedure or the event or the response, but words are rarely totally adequate. The words bring their own baggage and transform the message. Unless the recipient of the message shares the same understanding of what the words mean in this kind of context, the message may be distorted. Translation of a document from one language to another is an obvious example, especially when the second language does not have an exact equivalent word or set of words for a key concept.

The second difficulty comes from the fact that tacit knowledge resides in the brain in such a manner that we do not know what we know. The nature of question that is asked will determine the answer. That is, we understand the observations we make within some framework or paradigm that we tacitly apply. This paradigm filters the information so that what is noticed is what is consistent with that paradigm. Substitute a different paradigm or way of looking at things, and we may well draw different conclusions from the same information.

The difficulties in managing knowledge, then, mandate that management must start with the understanding that knowledge is not a product. It is a human process.

(For a more extended discussion of tacit knowledge and how it can be transferred, see previous GBR articles: Sherman, Planning in a Complex World," and Sherman and Lacy, "Teambuilding.")

Knowledge Management in a Shrinking Organization

The strategic thrust of the innovative company in the 21st Century is to position the organization to create, capture, and commercialize knowledge into products, services, and markets faster, better, and more effectively than its competition. This is what enables the firm to create new markets and obtain high margins - to maximize economic rents. This must be an ongoing process since it is hard to keep knowledge private for any significant period of time. The good news is that, managed correctly, knowledge growth can be an exponential process: the growth of knowledge depends on the amount of knowledge already present in the organization. What changes is the context in which the knowledge is utilized.

But if knowledge growth can be exponential, it is also true that the loss of key knowledge may create real havoc with your ability to operate strategically. Since key knowledge resides in individuals, if the firm is contemplating laying off people, it behooves management to understand what kind of knowledge is critical for executing its strategy and to know where that knowledge resides. This includes tacit knowledge as well as explicit knowledge. Otherwise it may well be that some of the people who are laid off or who accept that golden handshake will take certain kinds of knowledge with them that can seriously impact the ability of the organization to meet its strategic goals.

If you have already been consciously managing your knowledge assets through such processes as cross training, building a database of explicit knowledge, rewarding teamwork, cooperation and the sharing of information, and working to surfacing tacit knowledge through socialization, you are likely to be a step ahead of other firms should you have to cut jobs or encourage retirements. If you have not been doing this, it is certainly worth the effort to do as much as you can before some very important assets are encouraged to leave.

Ideas for Consideration

All of this suggests there are some basic steps that need to be taken before downsizing begins. For that matter, these are steps that are valuable even in good times. In boom times, some of your most valuable employees may leave voluntarily for greener pastures. If you acquire another company, frequently the most valuable assets you are buying are the human assets, but without careful managing, some of them may choose to leave. Or in combining two organizations you may offer the "wrong" person the golden opportunity to leave. Managing your knowledge assets is important in any economic environment.

Therefore:

Determine what knowledge is strategically critical for the success of your business. Make sure you don't lose that knowledge. Try to surface tacit understandings of the nature of your business and industry and make them explicit. Use different paradigms. Ask the question in various ways. What technical, scientific or process information do you absolutely have to have? What knowledge about the industry and competitors? About customers?

Find out who actually has this knowledge. Some of it may reside in individuals who do not realize that they have it, let alone understand that what they know is unique. The job title may not always be the best indicator of who knows what, particularly when it comes to organizational culture, customer preferences, and other human data. Think about the administrative assistant who deals with people on the phone, the logistics manager who understands how to service difficult customers, etc.

Try to be sure that the people with key knowledge are not among the ones that are in line to be laid off. Or, if you are offering a golden handshake to encourage some retirements, look for ways to encourage the people whose knowledge you really need not to accept that handshake. Consult with your human resources specialists, however, to be sure that you are not in violation of company policy, union contracts, or laws that may stipulate how lay-offs are to be handled. You do not want to gain a tacit understanding of anti-discrimination lawsuits!

If you cannot keep the people with the knowledge, at least try to keep the knowledge. Consciously try to surface and transfer tacit knowledge. Capture informal information and consider whether it is part of useful knowledge or not.

Capture, codify, and store the knowledge you have surfaced in ways and in places where those who will need it can easily access it. This is one area where technology can be very helpful. Databases, portals, and other technologies can help organize the information and make it easily accessible to those who will need to use it. Some people who have experience in this area suggest creating communities of practice that both determine what knowledge is important for their area and how it can best be handled. Think about whether you want to create smaller databases that address these communities or put all of the data in one huge data base. The types of information collected and stored may include documents, numerical data, video-taped interviews, summaries of exit interviews, etc.

Consciously try to figure out how things actually get done in your organization now, and who is central to that process -- and who can slow things down. This process again may require you to try to make explicit some implicit or tacit knowledge. It actually is a useful exercise in any environment, not just when you may be faced with downsizing.

Remember there is a difference between strategically important knowledge and non-essential knowledge. The firm actually may be better off if some traditions and outdated views of the competitive world are forever lost. But you need to know the difference.

Managing is not an easy process. In a knowledge-based world, it is even more difficult because you have to manage that most difficult aspect of your organization - the people. Yet, these are the assets that you need to give you a strategic advantage in an increasingly complex world. Don't discard them unnecessarily.

1. Fohl, T. (2000). Innovation Management Network, vol. 7 (44), July 31,2000 (http://mint.mcmaster.ca )

2. Bohn, R. (2000). Innovation Management Network, vol. 7 (31), June 14,2000 (http://mint.mcmaster.ca)

3. der Hertog, J.F., and Huizenga, E. (2000) The Knowledge Enterprise: Implementation of Intelligent Business Strategies. London: Imperial College Press.

4. Nonaka, I., and Takeuchi, H. (1995) The Knowledge Creating Company, New York: Oxford University Press.