MANAGEMENT TOOLS & PRACTICEREADINGS
PART 3
MANAGEMENT TOOLS & PRACTICE – READINGS, PART 3.
Readings from Internet sources referred below.
Collected, selected and elaborated for SZIF KÖF, by vjudit@agistra.hu, Spring Semester, 2001.
CONTENTS
THE ESSENCE OF MARKETING MANAGEMENT ....................................................... 2
The Marketing Process ...................................................................................................................... 2
The Marketing Manager's Tasks........................................................................................................ 3
The Marketing Mix............................................................................................................................ 3
The Environment ............................................................................................................................... 3
PRODUCT POLICY ...................................................................................................... 4
BENCHMARKING & BEST PRACTICES ...................................................................... 5
A Book Review.................................................................................................................................. 5
FRANCHISING: THE BASICS ...................................................................................... 6
An Overview ...................................................................................................................................... 6
What Is Franchising ........................................................................................................................... 7
The History of Franchising ................................................................................................................ 8
KNOWLEDGE MANAGEMENT.................................................................................. 10
Developing a Context ...................................................................................................................... 10
Data or Information? ....................................................................................................................... 10
Associations ..................................................................................................................................... 11
A Continuum ................................................................................................................................... 12
Extending the Concept..................................................................................................................... 12
Knowledge Management: Bah Humbug! ........................................................................................ 13
The Value of Knowledge Management ........................................................................................... 13
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THE ESSENCE OF MARKETING MANAGEMENT
In this article we will attempt to define and explain the following:1
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The marketing function
The nature of the marketing process
The tasks of the marketing manager
The marketing mix: Product policy, Pricing policy, Distribution policy and Market
Communications (promotion) policy.
Environmental influences
Marketing is primarily based on identifying or creating a need among consumers, and then
developing a product or service to satisfy that need. The marketing function is concerned with the
management of that marketing. It has to be managed in a way that allows the enterprise to achieve its
objectives, namely to make money. The marketing function therefore concerns all the management
activities performed in transferring the products and services of the enterprise to the consumer.
Spend a few minutes jotting down what activities you think need to occur during the marketing
process which enables the transfer of products or services from the enterprise to the consumer. You
should have come up with some of the following on your list:
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studying the market to determine what the consumer needs;
developing a product or service to satisfy that need;
deciding on an affordable price for the product;
informing consumers about the product (advertising);
making the product easily available, i.e. distributing it to places where consumers can obtain it.
keeping a close watch on the environmental factors influencing the performance of the product.
THE MARKETING PROCESS
During the marketing process, the enterprise's product is transferred from the enterprise to the
consumer. The marketing process therefore involves a transaction between two separate parties - the
marketer or enterprise and the consumer. The consumer has a need and the resources (money) to
fulfill that need, while the marketer has the product to fulfill the consumers' need. In exchange for
providing the product, the marketer/enterprise receives money from the consumer and so achieves the
enterprise's objective of making a profit.
Let us try to understand this process using Thabiso Mofokeng's enterprise called Learning Nation
Building Contractors. People need houses in which to live and Thabiso's enterprise builds houses. A
win-win situation emerges. Thabiso builds cost-effective (the building of quality houses with as little
money as possible) houses and makes a profit. People pay for these houses and have a basic need
fulfilled. Thabiso's business can now continue building other houses and people can now concentrate
on fulfilling other needs. It is important to understand that both the marketer and the consumer must
gain from this relationship. Otherwise, the enterprise will close down or the consumer's needs will not
be adequately fulfilled.
1
This site was designed, built & is maintained by All Things Digital - Internet Architects
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THE MARKETING MANAGER'S TASKS
During this marketing process, the activities that make up the marketing function occur (see answers
to the first Activity ). The task of the marketing manager is to make decisions about these activities.
He/she has to:
Draft a marketing programme for the enterprise. This programme sets the marketing goals and
objectives for the enterprise. Usually, the objective of an enterprise is to make a profit. The marketing
programme states clearly what the enterprise wishes to achieve with a particular product (its goals).
Thabiso's goal is to make money by building cost-effective homes for the community.
Devise a marketing strategy. This strategy is the enterprise's plan of action; it states how the
enterprise will achieve its goals. For this, the marketing manager has to:
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Choose a particular target market. The target market is a homogeneous group of people ie a
group of people with similar needs (also referred to as a market or a market segment). The
product is aimed at them, and they will buy it if it meets their requirements. Thabiso's target
market is people who have no homes. This includes people who are currently living in backrooms,
hostels or shacks.
Develop the optimum marketing mix. The marketing mix is a combination of the four
marketing policy instruments: the product policy, pricing policy, distribution policy, and market
communications policy.
Monitor the environment. The environment within which the enterprise operates must be taken
into
consideration by the market manager.
Exercise: List the target market of some of the well-known enterprises.
THE MARKETING MIX
For an enterprise to make money, it has to market need-satisfying products at prices that consumers
can afford. The products have to be available at places where consumers prefer to buy them.
Consumers also have to be informed about the availability of those products. The marketing manager
therefore has to make four types of policy decisions:
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Product policy, which deals with the choice of the product, its design, packaging and trademark.
Pricing policy, which deals with the setting of a price for theproduct and the adjustment of the
price to suit the changing market.
Distribution policy, which deals with the paths or channels through which a product travels in
order to get from the enterprise to the consumer.
Market communications policy, which deals with informing the consumers about the product.
This could take the form of advertising, personal selling, sales promotions or publicity.
Together, these four marketing instruments make up the marketing mix. The marketing manager
uses them together to enable the enterprise to make a profit. We will cover each of the marketing
instruments in more detail in articles that follow.
THE ENVIRONMENT
The marketing manager has to keep a careful watch on the environment within which the enterprise
operates. There are several variables (factors) such as the economic climate of the country, the
competition, the behaviour of consumers, which could affect the performance of a product on the
market. These variables fall into three categories:
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Manageable variables. These are variables that the marketing manager can control, and change
to suit his/her purposes because they are directly under his/her authority. They are within the
marketing department of the enterprise. Examples are management of the marketing function, the
marketing objectives, etc.
Semi-manageable variables. These variables do not fall under the direct control of the marketing
manager, but they can be influenced by him/her, because they are within other departments of the
same enterprise. Examples are the management functions of purchasing, production, financing
etc.
Non-manageable variables. These variables are outside the enterprise and therefore the
marketing manager has no control over them at all. Examples are the market, competition,
legislation (local and foreign laws), consumers' choices and preferences, etc. For example, we all
know that April is a very important month for our country. We also know that there is a massive
housing shortage. If violence increases, this would limit Thabiso's ability to build houses and
people's need for houses will be temporarily shelved. However, if violence decreases, people will
want houses to be built and Thabiso will be willing to build more houses.
A way of dealing with non-manageable variables such as competition and consumers' choices and
preferences is for the market manager to make his/her product the most attractive there is on the
market. This is why it is essential for the marketing manager to use all the marketing instruments in a
way that would attract consumers to the product, and make a profit for the enterprise.
PRODUCT POLICY
If we put the question, is the product mix right for the market and for the company, the high incidence
of new product failures suggest we neglect the consumer at our peril! We should have the necessary
techniques and planning tools to explore how to fulfil the consumer requirements by our product. To
gain it, we should analyze the consumer requirements and, the business performance of our company.
A Product Audit may be necessary to determine our strengths/weaknesses with the respect to market
requirements and competitive conditions. A Product Audit should analyze and evaluate the following
factors of our product:
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Market share and, % of company sales
Consumer likes/dislikes
Sales trend and seasonality
Contribution and, fits into firms product mix
Degree of facility useage
Return on investment
Based on the results of our Product Audit we may improve the product position by further efforts:
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Extend our market surveys to gain a consumer oriented research study and,
Maximize return on investment by a well-oriented product development, price policy and selling
practice.
If we should decide about new products, we should answer the following questions:
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Has profitable growth potential of existing products been fully explored?
Is company dependant for profits on one or two products only?
Do we have the resources to mount a successful new product programme?
Will other products have to be dropped to make way for new ones?
What is the companies’ basic attitude to new products?
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In order to build positive and market-efficient management considerations, the marketing manager
first of all must address himself to the market place. To decide rationally, he/she should be aware of
attitudes within the company to growth versus quality. After this step, the marketing manager should
appreciate the contribution the various products make to the health of the company. His/her options
should not be limited by what has happened before, he/she should regard to the future needs and
opportunities, as well. The following question is, if the products are marketed as effectively as
possible? To answer this question, we detailed should analyze strengths & weaknesses of own and
competitor products. Check if products are ore are not oversupported.
In the course of new product developments, managers should be prepared to experiment the market
chances and, parallelly, the production circumstances. The main tools of it are the group discussion
and, the market screening. We should test the following characteristics of our product:
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Market size, market growth and, the level of competition
Degree of exclusivity and, manufacturing ease
Margin level
Fitting of distribution channels into market chances
Finally, several relevant placement tests, a final check and screening of market, technical, economic
and financial factors regarding to the given product serve the market success of a well built-up
product policy.
BENCHMARKING & BEST PRACTICES
McNair, C.J. – Kathleen Leibfried, K. (1992): Benchmarking: A Tool for Continuous Improvement .
Oliver Wight Publications
A BOOK REVIEW
Benchmarking has become a key tool for improvement and productivity. Leading businesses want to
retain their status as „best-in class” and other businesses want to achieve that status.
Benchmarking brings up a variety of emotions in organizations. Some fear it as mysterious and/or too
complicated to be useful. Some excuse themselves from the need citing their already excellent
practices and outcomes or the lack of relevance of their industry to another. But the authors' easy-toread style and thorough explanations and examples give real meaning and understanding to the
benchmarking opportunity.
As McNair and Leibfriend point out, benchmarking is a never-ending process used to give real
meaning to the intent of continuous improvement, making changes, and protecting stakeholders'
interests. Once started, the competitive piece of human nature often kicks in, challenging managers to
develop ways to be the best -- either against themselves and past performance, or against other
companies. This book provides a great deal of information in benchmarking and is useful to all
readers interested in the subject, no matter at what stage of a benchmarking effort -- beginner to leader
of complex projects.
The authors explain the elements of benchmarking simply and clearly, emphasizing that a company
must thoroughly analyze its practices within a particular functional area to determine its current
practices. Following this internal assessment, the organization finds other companies to assess who
are achieving notable results in that particular function. The difference between how they're operating
now and the best results achievable in the particular function provides "the gap" that must be
overcome. The information provides material for goal-setting, with better ideas about how to achieve
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them. Once established, goalsetting and achieving can become contagious, spinning into an
improvement mode that explains how organizations can make quantum leaps in operation -- far
surpassing the incremental improvements they might make on their own.
Detailed case studies are offered on such companies as Avon, Exxon, and Janssen Phamaceutica to
illustrate benchmarking projects. The emphasis is on how these companies use benchmarking to gain
real results and new knowledge.
The authors explain the basics of benchmarking by casting it in terms of philosophy, perspective,
objectives, targets, and defining features." They discuss eight steps in benchmarking -- initial problem
solving; open communication; analysis and justification; communication and education; pilot testing;
development of detailed plans for complete implementation; development of new performance
measures; and recalibration of performance and benchmarking to determine parity and superiority."
Many think that benchmarking is an exercise in analysis and numbers. This book provides a greater
understanding of the "people" aspect of benchmarking. The authors note that critical factors in
engaging employees in benchmarking success include defining the objectives of the benchmarking
process, having the willingness to accept criticism, and wanting to learn. Finally, McNair and
Leibfriend emphasize that benchmarking can spark action and create a learning organization that can
lead to superiority and achievement of competitive advantage.
FRANCHISING: THE BASICS
Our Workbook Series is designed to educate individuals who are interested in learning all about selfemployment in their own franchised business. Our educational programs do not take into
consideration any specific type of franchise, franchise relationship or structure, but rather looks at
self-employment as a sequential process. This is the "core" architecture for how franchising operates.
This workbook provides a nuts and bolts discussion of franchising what it is, how it works and its
advantages and disadvantages.2
AN OVERVIEW
"Franchising", quite simply is a method of doing business. It is an alternative, for many executives, to
expand their companies without having to incur the costs of building or staffing business locations.
Through the years it has proven to be a very effective way to build a "chain" or "distribution network"
comprised of many small business owners all operating under a "common banner" or name..
For instance, the McDonalds Corporation relies on independent business owners to make sure their
hamburgers and other products reach consumers in a consistent manner. Sir Speedy's retail locations
are owned and operated by independent business owners and not employees. The same is true for
many other companies, including Burger King, Holiday Inn, Boston Market, ServiceMaster and so on.
The list of companies who utilize franchising, as a means of growing their businesses, is impressive
with many other well-known companies you would recognize instantly. Consider this, the chances of
these companies raising enough money and hiring enough quality people, to expand their companies
on their own, is highly unlikely. In fact, the only way some of the world's greatest companies have
been able to expand is because they have franchised their businesses. In turn, they have created
2
Source: www.franchisecentral.com/page2.html
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business opportunities for individuals, interested in self-employment, which under normal
circumstances would never have been made possible.
In its simplest form franchising consists of two business groups: the franchisor (the company doing
the franchising), and the franchisee (the independent business owner who buys a franchise).
The franchisor is the company who has developed a successful business and wants to or needs to
expand it, but cannot do it all on their own.. The franchisor may have a very successful business but
may lack sufficient money, or people, or time to expand the business as fast as they would either like
or is necessary, due to competition. Therefore, "franchises" are created and are marketed to
franchisees, people like yourself who are interested in self-employment, who acquire the rights to
duplicate the franchise company's business.
These franchises can come in many business structures such as single-unit franchises which give an
individual the right to develop and operate an individual location to multi-unit or territorial franchises
which allow for the development of larger regions, of the business,
Franchising is not limited to specific industries or business types. It is used by thousands of
companies in over forty different industry groups or sub-groups. It is a very powerful way to expand a
business and the growth or speed in which a company can grow can be very significant.
Franchising has created many huge success for both Franchisors and their Franchisees. However, it is
not right for everyone and you must understand everything you can about it before you make the
significant decision to become a franchisee of someone else's business system.
WHAT IS FRANCHISING
Franchising has been described as a relationship between a company, doing the franchising, and an
independent businessperson, in which the businessperson receives a limited "license" to certain rights,
characteristics and elements, of the business. In many cases this includes the identity, imagery and
operating experiences, of the company doing the franchising.
Essentially, the company who owns or has developed a business or product (the franchisor) grants to
others (the franchisees) the ability to offer, sell, or distribute the products or services, which are
closely associated with the franchisor's business system, trademark, service mark, trade name logo,
advertising formats, or any other commercial symbol.
Business Format Franchising, is the more commonly used form of franchising in today's business
environment. Under business format franchises, franchisees purchase essentially a "clone" of the
franchisor's business and agree to follow pre-set specifications in its operation.
Franchise ownership can take a number of forms. In addition to the familiar single-unit arrangement,
some franchise companies offer Area or Multi-unit Franchises, where the franchisee is expected to
develop multiple facilities, in a specific marketplace.
Others offer master franchising or sub-franchising agreements under which a franchise owner in turn
offers or sells "sub-franchises" individual units to others. These franchise owners normally receive a
percentage of all of the fees which are paid to the franchise company by their sub-franchises.
According to the United States Federal Trade Commission Rule on Franchising (1979), a franchise
relationship exists when the following three (3) elements co-exist in the business relationship:
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The company doing the franchising:
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Grants a limited right to use their tradename, servicemark, logo or other advertising symbol,
Sells the rights to use "systems" or "methods", associated with operating the "core" business, and
Receives a payment in return for granting these rights.
In the case where the franchise company is also a manufacturer, the franchisee may only be
purchasing rights to distribute specific products, without association with the parent company's name
and identity.. Beverage companies, oil companies, and automobile manufacturers, because of the
nature of their business relationship with their bottlers and dealers, are considered part of a segment
of franchising known as Product Franchising. Using the example of General Motors, their individual
dealers market only Buick or Oldsmobile cars, without associating with General Motors
You might be interested to know that when anyone quotes or report on the scope and successes of
franchising, the figures do include the significant contribution of the beverage, oil and automobile
manufacturing industries.
THE HISTORY OF FRANCHISING
Many people ask, "Where did it all start?" However, few really know the answer. The original
concept of franchising actually began centuries ago. The Pope, in an effort to collect taxes, allowed
certain people the right to gather his due within a given geographical area. These "collectors" were
allowed to keep a sizable portion of what they collected, and would remit the balance to the Pope.
Hence, the very first franchise relationship of record.
During the Civil War, the first modern franchise was developed when the Singer Sewing Machine
Company established a system of loyal dealers worldwide to market their sewing machines. Since that
time, other aggressive companies have employed the franchising methods to expand into markets that
would otherwise be unreachable because of the high costs and risk factors involved in massive
expansion.
The modern era of franchising began in the 1950s when Ray Kroc, a milkshake machine salesman,
first discovered a San Bernadino, California drive-in restaurant operated by the McDonald brothers.
Impressed with the crowded parking lot and the tasty french fries, Kroc bought the rights to franchise
the business, and went on to build one of the most successful companies in the history of American
business. And he did it through franchising.
The reasons for franchising in those days were no different than they are today. Expansion of any
business is risky and requires significant investments of capital and human resources (people) to run
the locations. If a company lacks the money, required to penetrate new markets effectively, or the
people it takes to run new locations they will seek alternatives to growth, which is what franchising is.
Franchising limits the risk factor of growth, allows expansion to occur without the vast amounts of
operating capital, and potentially creates an attractive profit picture, for the franchise owner, at the
unit or operating level.
Franchising bridges the gap for the small business person to own his or her own business. It allows for
the creation of business opportunities while doing it "under the banner and guidance" of a larger
organization. This relationship helps ensure the potential success of the small businessperson because
of joint cooperation, with other franchisees and the franchise company, in the areas of:
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Purchasing, of products or raw ingredients;
Advertising;
Decision Making, problem-solving and networking;
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Training;
Research and Development, and;
Much more.
These, along with many others, are clearly advantages otherwise unavailable to the individual,
independent businessperson. Additionally, proponents of franchising further proclaim, "there is no
form of compensation greater than that of proprietorship." It is an established fact that company
managers and employees do not exhibit the same degree of motivation as the person who has both
income and investment to lose should the operation not succeed.
As a result, the success stories are endless. McDonald's, Burger King, HFS, Midas, Culligan, Century
21, Singer Sewing Machine, Kentucky Fried Chicken, General Motors, and Coca-Cola are only a few
of the most visible examples. Today, doctors, dentists, opticians, attorneys, accountants, salespeople,
and most other types of operations you can imagine are profiting from expansion via the franchise
method.
The benefits to be gained through the proven method of franchise expansion are a matter of history.
Correctly designed and implemented, franchising allows for successes to occur, which might not have
happened otherwise. During his testimony before the Senate Small Business Hearings in 1970, John
Brown Jr., then of "Kentucky Fried Chicken," estimated that, at the time, over $400 million dollars
would have had to be spent to build the number of stores which they had under franchise at that time.
According to statistics provided by the International Franchisee Association, franchising represents
well over a third of our nation's gross retail sales. The Naisbett Group, in a 1990 research study,
commissioned by the International Franchise Association, indicated, "If the present trend continues, it
is predicted that within five years franchising could account for up to 50% of all US retail sales."
The development of modern day franchise techniques have also enabled many US companies to
penetrate the distant international markets which were previously beyond reach. Here are some of the
industries where franchising has proven to be effective are as follows:
Accounting and Tax Services
Greeting Services
Advertising Services
Hairstyling, Haircare and Cosmetics
Automobile Rental and Leasing
Health Aids and Services
Automotive: Muffler Shops
Laundry and Dry Cleaning
Automotive: Transmission Repair
Lawn, Garden Care and Florists
Building Products and Services
Motels, Hotels and Campgrounds
Burglar and Fire Prevention
Pet Products and Services
Business Products and Services
Photo, Framing and Art
Carpet, Drapery and Upholstery Cleaning
Printing and Copying Services
Cleaning Products and Services
Rental Services
Employment and Personnel
Real Estate Services
Entertainment
Retail, General
Food: Convenience Stores, Shops and Supermarkets
Retail: Clothing and Shoes
Food: Donut, Bakery and Cookie Shops
Retail: Computer, Electronics and Video
Food: Restaurants and Quick Service
Retail: Telephone, Products and Services
Furniture Refinishing and Repair
Schools and Education
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KNOWLEDGE MANAGEMENT
Emerging Perspectives. Outsights – written by Gene Bellinger. Summary. 3
Knowledge management is the hottest subject of the day. The question is: what is this activity called
knowledge management, and why is it so important to each and every one of us? The following
writings, articles, and links offer some emerging perspectives in response to these questions. As you
read on, you can determine whether it all makes any sense or not.
DEVELOPING A CONTEXT
Like water, this rising tide of data can be viewed as an abundant, vital and necessary resource. With
enough preparation, we should be able to tap into that reservoir -- and ride the wave -- by utilizing
new ways to channel raw data into meaningful information. That information, in turn, can then
become the knowledge that leads to wisdom. Les Alberthal[alb95]
Before attempting to address the question of knowledge management, it's probably appropriate to
develop some perspective regarding just what this stuff called knowledge, which there seems to be
such a desire to manage, really is. Consider this observation made by Neil Fleming[fle96] as a basis
for thought relating to the following diagram.
DATA OR INFORMATION?
A collection of data is not information. •A collection of information is not knowledge. •A collection
of knowledge is not wisdom. •A collection of wisdom is not truth. The idea is that information,
knowledge, and wisdom are more than simply collections. Rather, the whole represents more than the
sum of its parts and has a synergy of its own.
We begin with data, which is just a meaningless point in space and time, without reference to either
space or time. It is like an event out of context, a letter out of context, a word out of context. The key
concept here being "out of context." And, since it is out of context, it is without a meaningful relation
to anything else. When we encounter a piece of data, if it gets our attention at all, our first action is
usually to attempt to find a way to attribute meaning to it. We do this by associating it with other
things. If I see the number 5, I can immediately associate it with cardinal numbers and relate it to
being greater than 4 and less than 6, whether this was implied by this particular instance or not. If I
see a single word, such as "time," there is a tendency to immediately form associations with previous
contexts within which I have found "time" to be meaningful. This might be, "being on time," "a stitch
in time saves nine," "time never stops," etc. The implication here is that when there is no context,
there is little or no meaning. So, we create context but, more often than not, that context is somewhat
akin to conjecture, yet it fabricates meaning.
That a collection of data is not information, as Neil indicated, implies that a collection of data for
which there is no relation between the pieces of data is not information. The pieces of data may
represent information, yet whether or not it is information depends on the understanding of the one
perceiving the data. I would also tend to say that it depends on the knowledge of the interpreter, but
I'm probably getting ahead of myself, since I haven't defined knowledge. What I will say at this point
is that the extent of my understanding of the collection of data is dependent on the associations I am
able to discern within the collection. And, the associations I am able to discern are dependent on all
3
Source: Gene Bellinger, www.outsights.com/systems/kmgmt/kmgmt.htm
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the associations I have ever been able to realize in the past. Information is quite simply an
understanding of the relationships between pieces of data, or between pieces of data and other
information.
While information entails an understanding of the relations between data, it generally does not
provide a foundation for why the data is what it is, nor an indication as to how the data is likely to
change over time. Information has a tendency to be relatively static in time and linear in nature.
Information is a relationship between data and, quite simply, is what it is, with great dependence on
context for its meaning and with little implication for the future.
Beyond relation there is pattern, where pattern is more than simply a relation of relations. Pattern
embodies both a consistency and completeness of relations which, to an extent, creates its own
context. Pattern also serves as an Archetype with both an implied repeatability and predictability.
When a pattern relation exists amidst the data and information, the pattern has the potential to
represent knowledge. It only becomes knowledge, however, when one is able to realize and
understand the patterns and their implications. The patterns representing knowledge have a tendency
to be more self-contextualizing. That is, the pattern tends, to a great extent, to create its own context
rather than being context dependent to the same extent that information is. A pattern which represents
knowledge also provides, when the pattern is understood, a high level of reliability or predictability as
to how the pattern will evolve over time, for patterns are seldom static. Patterns which represent
knowledge have a completeness to them that information simply does not contain.
Wisdom arises when one understands the foundational principles responsible for the patterns
representing knowledge being what they are. And wisdom, even more so than knowledge, tends to
create its own context. I have a preference for referring to these foundational principles as eternal
truths, yet I find people have a tendency to be somewhat uncomfortable with this labeling. These
foundational principles are universal and completely context independent. Of course, this last
statement is sort of a redundant word game, for if the principle was context dependent, then it couldn't
be universally true, now could it?
ASSOCIATIONS
So, in summary the following associations can reasonably be made:
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Information relates to description, definition, or perspective (what, who, when, where)
Knowledge comprises strategy, practice, method, or approach (how)
Wisdom embodies principle, insight, moral, or archetype (why).
Now that I have categories I can get hold of, maybe I can figure out what can be managed. My
example uses a bank savings account to show how data, information, knowledge, and wisdom relate
to the principal, interest rate, and interest.
Data: The numbers 100 or 5%, completely out of context, are just pieces of data. Interest, principal,
and interest rate, out of context, are not much more than data as each has multiple meanings which are
context dependent.
Information: If I establish a bank savings account as the basis for context, then interest, principal,
and interest rate become meaningful in that context with specific interpretations.


Principal is the amount of money, $100, in the savings account
Interest rate, 5%, is the factor used by the bank to compute interest on the principal.
Knowledge: If I put $100 in my savings account, and the bank pays 5% interest yearly, then at the
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end of one year the bank will compute the interest of $5 and add it to my principal and I will have
$105 in the bank. This pattern represents knowledge, which, when I understand it, allows me to
understand how the pattern will evolve over time and the results it will produce. In understanding the
pattern, I know, and what I know is knowledge. If I deposit more money in my account, I will earn
more interest, while if I withdraw money from my account, I will earn less interest.
Wisdom: Getting wisdom out of this is a bit tricky, and is, in fact, founded in systems principles. The
principle is that any action which produces a result which encourages more of the same action
produces an emergent characteristic called growth. And, nothing grows forever for sooner or later
growth runs into limits.
If one studied all the individual components of this pattern, which represents knowledge, they would
never discover the emergent characteristic of growth. Only when the pattern connects, interacts, and
evolves over time, does the principle exhibit the characteristic of growth.
Note: If the mechanics of this diagram are unfamiliar, you can find the basis in Systems Thinking
Introduction.
Now, if this knowledge is valid, why doesn't everyone simply become rich by putting money in a
savings account and letting it grow? The answer has to do with the fact that the pattern described
above is only a small part of a more elaborate pattern which operates over time. People don't get rich
because they either don't put money in a savings account in the first place, or when they do, in time,
they find things they need or want more than being rich, so they withdraw money. This depletes the
principal and subsequently the interest they earn on that principal. Getting into this any deeper is more
of a systems thinking exercise than is appropriate to pursue here.
A CONTINUUM
Note that the sequence data -> information -> knowledge -> wisdom represents an emergent
continuum. That is, although data is a discrete entity, the progression to information, to knowledge,
and finally to wisdom does not occur in discrete stages of development. One progresses along the
continuum as one's understanding develops. Everything is relative, and one can have partial
understanding of the relations that represent information, partial understanding of the patterns that
represent knowledge, and partial understanding of the principles which are the foundation of wisdom.
As the partial understanding becomes more complete, one moves along the continuum toward the next
phase.
EXTENDING THE CONCEPT
We learn by connecting new information to patterns that we already understand. In doing so, we
extend the patterns. So, in my effort to make sense of this continuum, I searched for something to
connect it to that already made sense. And I related it to Csikszentmihalyi's interpretation of
complexity.
Csikszentmihalyi provides a definition of complexity based on the degree to which something is
simultaneously differentiated and integrated. His point is that complexity evolves along a corridor and
he provides some very interesting examples as to why complexity evolves. The diagram below
indicates that what is more highly differentiated and integrated is more complex. While high levels of
differentiation without integration, promote the complicated, that which is highly integrated, without
differentiation, produces mundane. And it should be rather obvious from personal experience that we
tend to avoid the complicated and are uninterested in the mundane. The complexity that exists
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between these two alternatives is the path we generally find most attractive.
What I found really interesting was the view that resulted when I dropped this diagram on top of the
one at the beginning of this article. It seemed that "Integrated" and "Understanding" immediately
correlated to each other. There was also a real awareness that "Context Independence" related to
"Differentiated." Overall, the continuum of data to wisdom seemed to correlate exactly to
Csikszentmihalyi's model of evolving complexity. I now end up with a perception that wisdom is sort
of simplified complexity.
KNOWLEDGE MANAGEMENT: BAH HUMBUG!
When I first became interested in knowledge as a concept, and then knowledge management, it was
because of the connections I made between my system studies and the data, information, knowledge,
and wisdom descriptions already stated. Saying that I became interested is a bit of an understatement
as I'm generally either not interested or obsessed, and seldom anywhere in between. Then, after a
couple months I managed to catch myself, with the help of Mike Davidson[dav96], as to the
indirection I was pursuing.
I managed to survive the Formula Fifties, the Sensitive Sixties, the Strategic Seventies, and the
Excellent Eighties to exist in the Nanosecond Nineties, and for a time I thought I was headed for the
Learning Organizational Oh's of the next decade. The misdirection I was caught up in was a focus on
Knowledge Management not as a means, but as an end in itself. Yes, knowledge management is
important, and I'll address reasons why shortly. But knowledge management should simply be one of
many cooperating means to an end, not the end in itself, unless your job turns out to be corporate
knowledge management director or chief knowledge officer. I'm quite sure it will come to this, for in
some ways we are predictably consistent.
I associate the cause of my indirection with the many companies I had been associated with in the
past. These companies had pursued TQM or reengineering, not in support of what they were trying to
accomplish, but as ends in themselves because they simply didn't know what they were really trying to
accomplish. And, since they didn't know what they were really trying to accomplish, the misdirection
was actually a relief, and pursued with a passion--it just didn't get them anywhere in particular.
According to Mike Davidson, and I agree with him, what's really important is:




Mission: What are we trying to accomplish?
Competition: How do we gain a competitive edge?
Performance: How do we deliver the results?
Change: How do we cope with change?
As such, knowledge management, and everything else for that matter, is important only to the extent
that it enhances an organization's ability and capacity to deal with, and develop in, these four
dimensions.
THE VALUE OF KNOWLEDGE MANAGEMENT
In an organizational context, data represents facts or values of results, and relations between data and
other relations have the capacity to represent information. Patterns of relations of data and
information and other patterns have the capacity to represent knowledge. For the representation to be
of any utility it must be understood, and when understood the representation is information or
knowledge to the one that understands. Yet, what is the real value of information and knowledge, and
what does it mean to manage it?
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Without associations we have little chance of understanding anything. We understand things based on
the associations we are able to discern. If someone says that sales started at $100,000 per quarter and
have been rising 20% per quarter for the last four quarters, I am somewhat confident that sales are
now about $207,000 per quarter. I am confident because I know what "rising 20% per quarter" means
and I can do the math.
Yet, if someone asks what sales are apt to be next quarter, I would have to say, "It depends!" I would
have to say this because although I have data and information, I have no knowledge. This is a trap that
many fall into, because they don't understand that data doesn't predict trends of data. What predicts
trends of data is the activity that is responsible for the data. To be able to estimate the sales for next
quarter, I would need information about the competition, market size, extent of market saturation,
current backlog, customer satisfaction levels associated with current product delivery, current
production capacity, the extent of capacity utilization, and a whole host of other things. When I was
able to amass sufficient data and information to form a complete pattern that I understood, I would
have knowledge, and would then be somewhat comfortable estimating the sales for next quarter.
Anything less would be just fantasy!
In this example what needs to be managed to create value is the data that defines past results, the data
and information associated with the organization, it's market, it's customers, and it's competition, and
the patterns which relate all these items to enable a reliable level of predictability of the future.What I
would refer to as knowledge management would be the capture, retention, and reuse of the foundation
for imparting an understanding of how all these pieces fit together and how to convey them
meaningfully to some other person.
The value of Knowledge Management relates directly to the effectiveness with which the managed
knowledge enables the members of the organization to deal with today's situations and effectively
envision and create their future. Without on-demand access to managed knowledge, every situation is
addressed based on what the individual or group brings to the situation with them. With on-demand
access to managed knowledge, every situation is addressed with the sum total of everything anyone in
the organization has ever learned about a situation of a similar nature. Which approach would you
perceive would make a more effective organization?
And, if you think this is simply a fantasy, just drop by OutSights and consider the reality we're in the
process of creating.
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