Organizational intelligence: a broader framework for understanding knowledge

On the Horizon

ISSN: 1074-8121

Article publication date: 1 December 2002




Halal, W.E. (2002), "Organizational intelligence: a broader framework for understanding knowledge", On the Horizon, Vol. 10 No. 4.



Emerald Group Publishing Limited

Copyright © 2002, MCB UP Limited

Organizational intelligence: a broader framework for understanding knowledge

William E. Halal

Keywords: Intelligence, Knowledge management, Organizations

Abstract Organizational intelligence (OI) provides a conceptual framework that sketches out the cognitive functioning of modern organizations, thereby providing insights into the effective use of knowledge. The framework also lends itself to measuring "organizational intelligence" (OIQ), much as human intelligence is measured by IQ. One insight this approach offers is to see that knowledge management (KM) is limited to the memory function, while OI is a broader concept that encompasses all aspects of organizational cognition. The column concludes by noting that knowledge is likely to become implicitly used as an integral function of more organic institutional systems.

Our previous column showed that knowledge may be crucial in today's economic system, but it is not likely to be "managed" to a great extent. Rather, it will arise out of organic institutions that implicitly create and facilitate knowledge. Let us now move to a broader framework that articulates this view more fully – the concept of "organizational intelligence".

While organizations have been viewed previously as collections of tasks, products, employees, profit-centers, and processes, today they are seen as intelligent learning systems composed of educated people using complex information networks to adapt to a turbulent world. One of our biggest challenges today is to create this new breed of intelligent institutions specifically designed for a knowledge economy.

Under a grant from the National Science Foundation, my associates and I charted the cognitive functioning of intelligent organizations using a review of the literature and interviews with scholars and corporate knowledge officers (CKOs). Guided by studies of human intelligence, we developed a conceptual framework defining the cognitive functions performed by various organizational features. Just as human intelligence is measured using IQ, we hope in time to develop a system for measuring organizational intelligence (OI) – "Organizational IQ" (OIQ). Imagine knowing that GM has an OIQ of 85, IBM is rated at 105, and Microsoft at 120. Further imagine that this metric is used to diagnose specific management functions and suggest needed improvements.

Figure 1 outlines our understanding of the cognitive structure of OI, and Table I shows its equivalence to human intelligence. Let us begin at the bottom of Figure 1 to briefly explain how we think organizations behave cognitively.

Information technology (IT) plays a limited role

One of our most striking conclusions is that IT plays a limited role in OI. Larry Prusak of IBM put it well: "Dumping technology on a problem is rarely effective." The roaring advance of IT does seem destined to create fully-automated "e-organizations" in five to ten years, which should raise efficiency to unprecedented levels. But sophisticated information systems are useful only insofar as they support the cognitive subsystems comprising OI, which we will examine below. The most brilliant IT means little unless it fosters entrepreneurship, collaboration, and other forms of problem solving.

Cognitive subsystems determine intelligence

Just as human problem solving is composed of several facets, such as "emotional intelligence" as well as "rational intelligence," the problem-solving capacity of organizations seems to be determined by five "cognitive subsystems" shown in Figure 1. Each subsystem serves an essential, distinctly different purpose in the organization's cognitive functioning. Organizational structure fixes who is authorized to make what decisions using which types of information. The cultural subsystem filters out noise and focuses attention on values and norms that guide action. Stakeholder relations determine the extent to which information is exchanged between interest groups. Knowledge management (KM) affects what is stored in the organizational memory. Strategic processes determine how all this information leads to action. Collectively, these different types of cognitive capability create OI.

Note that only one subsystem involves KM. To the best of our understanding, the other four are roughly as crucial as KM, and some seem to be more important. Thus, the OI framework clarifies the limited role of "managing" knowledge. KM is mainly related to the memory function, while intelligence includes all problem-solving capacity. Let us examine two subsystems more fully – structure and stakeholder relations – because they are changing profoundly with impacts that are not well understood.

Bottom-up structures harness knowledge from within

Hierarchy limits decisions to higher levels, but decentralized organizations use employee knowledge to manage operations directly, quickly, and effectively. For instance, MCI, Xerox, and Johnson & Johnson are "bottom-up" companies that organize employees into self-managed teams that are free to choose their co-workers, methods, and other actions. Many companies attribute economic costs and benefits to operating units, even converting staff units into profit-centers that operate as "suppliers" or "consultants" serving internal "clients."

The resulting "internal markets" offer the same benefits as external markets: better decisions based on price information, creative entrepreneurship, accountability for results, and so on. ABB's 4,500 independent profit centers have become a model of internal markets. Of course, markets permit mistakes and risk. But this is usually considered a fair price for the enhanced intelligence they offer.

Stakeholder alliances harness knowledge from outside

The other crucial subsystem – stakeholder relations – is also especially important because it links the organization to its external power centers. Conflict with customers, suppliers, and other interest groups usually blocks and distorts communication channels, whereas good working relations enhance the vital flow of crucial issues, valuable ideas, and other forms of strategic knowledge.

For instance, the rush to strategic alliances has been driven by the mutual exchange of technology, access to markets, or other forms of knowledge, even among competitors. Trusting client relations permit better understanding of how to improve sales. Microsoft forms an economic ecosystem that draws suppliers, manufacturers, and distributors into a cluster of cooperating firms. GM Saturn unites all these groups into a complete "corporate community" that works together very effectively.

Why all this sudden cooperation? It is now clear that knowledge increases when shared, making cooperation economically efficient. Stakeholder collaboration is not "social responsibility" or "business ethics," therefore, but a competitive advantage.

Leadership, strategy, and learning direct action

The five subsystems making up OI are relatively enduring, much like IQ in humans. Collectively, they can be thought of as making up the intellectual power of organizations, the "engine" that drives adaptive problem solving. The higher the level of OI, the greater this intelligent power.

The role of leaders can be seen as directing this intelligent power into action. In other words, leaders "engage" the "engine" of this organizational "vehicle" and "steer" it into the future. In contrast with the relatively fixed nature of OI, leadership and strategy are dynamic factors because they can be changed at will. Lois Gerstner quickly redirected the slumbering intelligence of Big Blue on taking office.

This also helps us better understand organizational learning. Learning can be achieved by training, but it is most effective through action. Training lacks the immediacy of problem solving and may not suit future needs. But when one is engaged in solving a tough issue there is little doubt that important lessons have been gained.

In contrast with this "single-loop" learning, "double-loop" learning occurs when leaders decide that the intellectual engine is inadequate. Unlike human IQ, OIQ can be raised if time and effort are devoted to restructuring the cognitive subsystems.

We should note the subtle but powerful role played by the informal organization: unofficial leaders, bootleg practices, communication grapevines, and the other hidden but omnipresent realities of work life. Just as that teeming world of the subconscious mind prevents humans from behaving in an entirely rational fashion, so do these messy aspects of the informal organization often subvert formal directions.

This illustrates the powerful insights of comparing organizational intelligence with human intelligence. Human action is the outcome of an everpresent battle between the rational control of the ego and the confusing impulses of the id, while in organizations a similar conflict occurs between formal leaders and the informal underground. Reconciling these two sets of demands is a heroic task, to be sure. But to miss this insight is to engage in the fantasy that action is a strictly rational matter.

Intelligence must fit its environment

To fully grasp the complexity of OI, we finally turn to the relationship between intelligence and its environment. At the strategic level, leaders direct OI to solve problems presented by new competitors, technology, and so on. But higher OI does not necessarily improve performance, any more than a high IQ ensures success in life. Rather, it is the fit between OI and environment that determines performance.

To illustrate, McDonald's probably has little need for highly educated workers, entrepreneurial structures, collaborative stakeholders, and sophisticated knowledge repositories. Raising this company's OI would waste resources because McDonald's faces a relatively simple task environment of making hamburgers.

Increasing the volume, velocity, and value of knowledge

IQ accounts for roughly 50 percent of human success, and we think something similar is true of OIQ; roughly half of corporate performance seems attributable to OI with the rest determined by dynamic factors. Just as people may not use their intelligence to succeed for various reasons, organizations often do not employ their intelligence because they lack good leaders, clever strategies, or a compatible environment.

Measuring the components of OIQ can also determine their relative contribution to performance, thereby providing detailed diagnostics showing which systems are strong or weak. A low OIQ could thus be traced to some particular problem, such as a hierarchical structure, suggesting precise improvements.

This framework also suggests how institutions can cope with a turbulent world. To manage exploding complexity and constant change, progressive corporations and governments are moving decision making downward to free up the skills and creativity of countless ordinary people. Meanwhile, a burst of collaboration is increasing the flow of knowledge among differing groups that once were isolated or even viewed as incompatible. Clever leaders, therefore, should rise above the fray to focus on cultivating this flowing web of information and directing it more effectively.

These trends may in time fan an explosion of knowledge that had heretofore lain dormant. As more intelligent organizations release raw energy from countless small nodes in today's growing economic networks, and as increased connectivity enhances its speed and value through endless exchanges, a wave of innovation may build toward a critical mass that drives transformation throughout the social order. Obviously, the somewhat chaotic nature of organic systems presents dangers that we have not examined in this short column. But the resulting gains in velocity, volume, and value of knowledge could electrify the globe.

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