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Nonaka & Toyama 2007 ICC D
Nonaka & Toyama 2007 ICC D
Nonaka & Toyama 2007 ICC D
371–394
doi:10.1093/icc/dtm014
Advance Access published June 11, 2007
1. Introduction
The purpose of the firm is to create value. To do this, a firm has to offer either a
unique product/service or a price that is cheaper than competitors so that customers
will pay more than the cost of producing the product/service. It sounds simple,
but we all know it isn’t.
We are still far from understanding how firms create value because strategic
management scholars keep looking for that elusive “right answer.” They continue to
build more and more precise theoretical frameworks to help a firm logically deduce
one universal strategy, testing these frameworks with empirical data to explain and
predict the firm’s activities. Certainly, strategic analysis can explain, in hindsight,
how a firm has created value. It may also be able to tell a firm where it might find
value, or provide a checklist of the issues it should be aware of so it doesn’t lose that
value to others. But it cannot specify exactly how a firm finds a way to create value by
finding an unfulfilled customer need or a new way of fulfilling an existing need, such
as with new technologies or a new combination or application of existing
technologies.
Part of the reason for this difficulty is that value creating strategies are perceived
and created by human beings. Value can be created when one person perceives and
interprets reality differently from others, indicating a new unseen opportunity.
ß The Author 2007. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved.
372 I. Nonaka and R. Toyama
In other words, value can be created from insight. Only the customer who perceives
such a new product or service as valuable will pay a price for it. And since customers
differ from each other and they keep changing, there is no one “right answer”
or “cold truth” to what a particular customer or segment of the market considers
valuable.
The rationalistic approach to strategy has resulted in strategic theories that exist
apart from the realities of business because they obscure the most significant
reality—that strategy is a dynamic process created and practiced by human beings.
While parts of strategic management theory have become more precise, more prac-
titioners have come to feel that it has nothing to do with their reality and they
strategic planning formula. They believe that the right “rules” will naturally lead to
the right strategy, and as long as the inputs are correct any gaps between theory and
practice are considered the fault of practitioners who are unable to fully utilize the
theory. But the particular situations that practitioners face everyday are not just
“initial conditions.” They are real problems, which change day-to-day and have to be
dealt with by practitioners when they plan, modify, and put their strategies into
practice. In these situations, there is no time to do detailed analyses of the envi-
ronment or resources; nor is there any guarantee that general rules that applied in the
past will still apply.
Some management theorists discuss the problem of viewing strategic planning
insight of managers, but he doesn’t explain how managers find that position.
The resource-based view of the firm can explain, in hindsight, how resources
determined why a firm adopted a certain strategy (and why it was successful or
unsuccessful), but it cannot predict a firm’s future strategy based on the resources
it currently holds. Even two firms with exactly the same resources and operating
in exactly the same environment will not necessarily choose the same strategy.
The resource-based view has not given a clear answer to the question of how a firm
combines and utilizes its resources and how it decides what resources it will need
in the future.
Answering this criticism, Teece et al. argue that firms create value with their
Honda created and accumulated the resources and interacted with the environment
to realize this goal. It was a dynamic process that could not be predicted by
rationalist theories of strategy based on static analyses of the environment and the
firm’s resources.
To realize their vision, firms create and utilize resources and interact with the
environment through the knowledge-creating process. To understand the dynamic
process in which strategy is built and practiced, we need a theory of the knowledge-
based firm that is up to the challenge of explaining how firms perceive and interpret
realities, manage interactions, both inside and outside the organization, and
synthesize various subjective interpretations into a collective knowledge that is then
SECI process. Knowledge Assets are the inputs and outputs of the SECI process, and
a firm creates knowledge through interactions with the Environment as an ecosystem
of knowledge and multi-layered Ba.
In this model, a firm pursues its vision and driving objective, which leads to
creation of new knowledge through practice and dialog in interaction with the
environment. But what is the key resource that enables this process? The capability
to coherently direct, synthesize, and implement the elements that foster knowledge
creation is accomplished by leadership.
Leadership in a knowledge-creating company is not about fixed administrative
control. It is a flexible and distributed leadership, where the leader is determined by
particular context per se. Since it is knowledge to serve the “common good,” it
implies an affinity with universal principles. According to Dunne (1993), phronesis is
characterized as much by perceptiveness with regard to concrete particulars as it is by
knowledge of universal principals. As actions originate from particular situations,
phronesis is the ability to synthesize a general, universal knowledge with the particular
knowledge of a concrete situation.
In leadership, phronesis is manifested in the capacity to choose the appropriate
goals and to successfully devise means to reach them (Halverson, 2004). Phronetic
leaders use their sense of the details to “see” or “feel” the problems of their organi-
zations as solvable within local constraints, and they are able to develop successful
1
For an early application of the concept to political and military leadership, see Nonaka et al. (2005)
and for strategy and management in general see Nonaka and Toyama (2005b).
2
Our work on this topic is still in progress and further research is required.
380 I. Nonaka and R. Toyama
where people at various organizational levels are able to exercise phronesis in their
own situations.
a position to beat out the Big Three US auto manufacturers who opposed the new
law. But Honda engineers objected to Souichiro suggesting that what they wanted
was to develop an engine that fulfilled their social responsibility as an automobile
company to reduce harmful emissions. They said they were doing it for children.
As the story goes, Souichiro was so ashamed of himself when he heard this that he
decided it was time to retire (Nonaka, 1985).
It is this kind of value of the common good that gives a firm an absolute value
to pursue that is a goal in itself. It is not simply a means to achieving profit
enhancement, which is the goal implicitly set by conventional management scholars
in their theories of the firm. In his introduction to Metaphysics, Aristotle writes,
Being able to imagine others’ emotions and the consequence of the actions of oneself
and others is important to building and managing ever-changing contexts.
To do this, one needs an ability to “read” a situation and adapt to it quickly.
Since phronesis is the ability to make a decision that is suitable for each situation,
one has to be able to quickly recognize a situation and understand what is required
in that context. Souichiro Honda once said: “Joking is very difficult. You have to
grasp the atmosphere of the occasion and the opportunity. It exists only for that
particular moment, and not anywhere else. The joke is in the timing and it doesn’t
work at any other moment . . . . To joke is to understand human emotion” (Honda,
1963, pp. 56–57).
the forest and the trees simultaneously, that is a phronetic experience. Phronesis
enables one to perceive beyond the ordinary to see essence.
3.3.4 The ability to reconstruct the particulars into universals and vice-versa
using language/concepts/narratives
Traversing between the particular and the universal requires an ability to concep-
tualize and articulate subjective, intuitive ideas in clear language, link these “micro”
concepts to a macro historical context and convincingly articulate them as vision
and scenario for the future. In this process, both vertical methods of deductive and
inductive reasoning, as well as horizontal methods of expression such as metaphor,
3.3.5 The political power to realize concepts for the common good
It is not enough to identify essence, share it, and communicate it to others. One must
also be able to bring people together and spur them to action, combining and
synthesizing everyone’s knowledge and efforts in pursuit of the goal. Strategy is not
just a written plan, but something that is actualized through practice. To mobilize
others to achieve the common good, phronetic leaders must choose and utilize the
means suitable to each particular situation, including sometimes Machiavellian
means, where shrewdness and determination can help to achieve “the good” result
(Badaracco, 1997).
While it is difficult to provide an ideal example, we can say that the probable
up the development of better products, and withdrew the company from several
unprofitable businesses. Throughout this process it was critical that he maintain
close communication with the front line and the labor union. In his description
of the effort to lead the transformation, Mitarai says that it is the frequency of
communication that is key to persuade and convince others to take active part in the
transformation (Mitarai and Niwa, 2006). In addition to his annual office and
factory visits which take about one month for him to complete, he meets with about
800 managers and with the labor union every month to discuss the current important
topics and management policies.
The team did not solicit the views either of Honda people working in Europe or
others knowledgeable about the European market, because they wanted to directly
observe the various situations of users without any preconceptions. Through such
dialog and practice, distributed phronesis at Honda is cultivated and distributed.
3
Walton (1998, 2006) argues that since it is quite different type of inference from deductive
syllogism, it should be called practical reasoning rather than practical syllogism.
Strategic management 387
achieve the objective through hypothesis building and testing (Josephson and
Josephson, 1994). Furthermore, as the process develops through practice, the ability
to synthesize antinomy improves in dynamic interaction with the environment.
We can see this process in action at Toyota Motor Company. For example, the
conflict between cost and quality is a typical antimony confronting all companies.
One potential solution is to seek a compromise between price and quality that is
acceptable to customers. At Toyota, instead of accepting the constraints as given
and simply seeking an optimum solution under those conditions, they began by
questioning the constraining conditions. They questioned what they needed to be
done right now to achieve their ideal level of quality and cost, and then synthesized
4
From the company’s annual reports.
Strategic management 389
in dialogue with store owners and employees and give them advice on ordering stock
and store planning and management. This close interaction not only gives local
employees access to the company’s broader knowledge base, but gives field
counselors the opportunity to absorb localized knowledge about customer pre-
ferences in context-specific time frames. Field counselors can also identify innovative
ideas in particular stores and disseminate them to other stores and regions through
their regional managers who act as key points of knowledge sharing throughout the
organization.
Employees are also encouraged to think from a larger perspective than the parti-
cular situation they are facing. “It’s not good if you just see a tree and not the forest,”
to exchange knowledge and develop tactics for implementing those strategies at the
local level. These weekly gatherings are costly. SEJ spends more than 18 million
dollars annually on travel, lodging, and related costs. The importance of these weekly
meetings cannot be explained by simplistic economic rationale. While some of the
information could be shared through information technology, the company
recognizes that only physical interaction enables the sharing of tacit knowledge
through dialog.
Operational methods at SEJ illustrate that in the knowledge creating company,
strategy is not created out of a logical analysis of a firm’s resources and environment.
It is created out of the ability to interpret the environment and resources both
4. Conclusion
This article claims that effective strategic management requires distributed phronesis.
Strategy is not created from the logical analysis of environment and a firm’s
resources. It is created out of one’s existential belief or commitment to a vision of the
future, the ability to interpret one’s environment and resources subjectively, and the
interaction between subjectivity and objectivity. And these abilities need to be dis-
tributed among organizational members rather than just held by a selected few in top
management.
Strategy as distributed phronesis emerges from practice to pursue “common
goodness” in each particular situation. A firm is not merely a profit-pursuing entity,
but an entity that pursues universal ideal and particular reality at the same time.
It is an entity that pursues idealistic pragmatism, which synthesizes the rational
pursuit of appropriate ends, whose appropriateness is determined by ideals (Rescher,
2003). By pursuing such ideals everyday through the SECI process, in a specific and
dynamic context, knowledge is created and refined to become wisdom.
To build and practice such a strategy, one has to know what is “good” (ideal),
and make judgments in particular situations (practice) to realize such goodness.
Such phronetic capability has to be shared collectively with organizational members,
not just by one phronetic leader in order for strategy to be implemented. Building
such organizational phronesis helps a firm become a resilient organization which can
proactively deal with any environmental changes to realize its idealistic vision.
Acknowledgement
The authors want to thank David Teece and Josef Chytry for many helpful
comments, and acknowledge the contribution of Susan J. Bigelow as editor of this
article.
392 I. Nonaka and R. Toyama
References
Aristotle, Nicomachean Ethics (translated by Sarah Broadie and Christopher Rowe). Oxford