The Wise Company

The Wise Company Plot Summary

Introduction

How do organizations create and utilize knowledge effectively in today's rapidly changing world? This question lies at the heart of understanding sustainable competitive advantage and organizational resilience. The theory of knowledge creation and practice presented here offers a dynamic framework that transcends traditional views of knowledge management by emphasizing the continuous interplay between tacit and explicit knowledge across multiple organizational levels. At its core, this theoretical approach addresses several fundamental questions: How does individual knowledge transform into organizational capability? What processes enable the creation of new knowledge rather than merely transferring existing information? How can leaders foster environments where knowledge creation flourishes? By examining the spiral process of knowledge conversion, the importance of shared contexts, and the role of practical wisdom in leadership, we gain structured insights into how organizations can systematically innovate and adapt. This framework not only explains knowledge creation mechanisms but also provides practical guidance for leaders seeking to build wise organizations capable of continuous renewal and meaningful contribution to society.

Chapter 1: The SECI Spiral: Knowledge Creation Through Conversion

The SECI Spiral Model represents a dynamic process of knowledge creation through four continuous modes of knowledge conversion: Socialization, Externalization, Combination, and Internalization. This model explains how tacit knowledge (personal, context-specific) and explicit knowledge (codified, transmittable) interact and transform through social processes to create new knowledge within organizations. In Socialization, individuals share tacit knowledge through direct experiences, apprenticeships, and informal interactions. Externalization converts tacit knowledge into explicit concepts through dialogue, metaphors, and formal articulation. Combination systematizes and applies explicit knowledge by reconfiguring existing information into more complex knowledge systems. Internalization embodies explicit knowledge as tacit operational knowledge through learning-by-doing and practical application. The integration of phronesis (practical wisdom) into this model adds a crucial ethical dimension. Phronesis serves as the central driving force that guides the knowledge spiral toward the common good. Unlike technical knowledge (know-how) or scientific knowledge (know-why), phronesis represents "knowing-what-should-be-done" in specific situations. It enables leaders to make prudent judgments based on values and ethics, not just efficiency or effectiveness. This enhanced model operates across three dimensions: epistemological (knowledge conversion), ontological (individual to organizational knowledge amplification), and temporal (timely action in specific contexts). As knowledge spirals upward through these dimensions, it becomes increasingly refined and embodied throughout the organization. Consider how Japanese companies like Toyota continuously improve their processes through kaizen practices—workers share tacit knowledge, articulate improvements, combine them with existing systems, and internalize new approaches, all guided by a sense of what constitutes good manufacturing. The SECI Spiral with phronesis integration explains why some organizations can sustain innovation while others become stuck in knowledge accumulation without meaningful action. When leaders embody practical wisdom, they can navigate the inherent contradictions of organizational life—stability versus change, efficiency versus creativity, short-term versus long-term thinking—and make judgments that serve both organizational interests and the broader social good.

Chapter 2: Ba: Creating Shared Contexts for Knowledge Integration

Ba represents a shared context in which knowledge creation and integration flourish through human interaction. More than just a physical space, ba encompasses the relationships, shared experiences, and mental frameworks that enable people to develop common understanding and create new meaning together. It provides the foundation where individuals can transcend their limited perspectives and engage in collective knowledge creation. The concept of ba operates across multiple dimensions. Physical ba might be a meeting room, factory floor, or informal gathering space where face-to-face interaction occurs. Virtual ba includes digital platforms, communication systems, and shared databases. Mental ba consists of shared experiences, ideas, and values that connect people conceptually. What transforms any space into a true ba is the quality of relationships and commitment of participants who share a purpose and actively engage with each other to create something new. Ba functions as both an incubator and container of knowledge. At Eisai pharmaceutical company, researchers studying Alzheimer's disease created a powerful ba by spending time with dementia patients and their families. This shared context allowed them to develop deeper understanding that transcended clinical data, ultimately influencing how they approached drug development. Similarly, Shimano created various external ba—from German universities to European racing teams to American mountain biking trails—enabling employees to gain mutual understanding about bicycle racing and develop innovative components that transformed the industry. The effectiveness of ba depends on several factors: openness to diverse participants, appropriate timing, commitment of members, and a shared sense of purpose. When Fast Retailing holds global conferences bringing together 4,000 employees, CEO Tadashi Yanai creates a ba where everyone can align with the company's mission to "democratize clothing." In the aftermath of Japan's 2011 earthquake and tsunami, Joi Ito and his associates rapidly formed a virtual ba that brought together global experts to develop radiation monitoring solutions when official systems failed. These examples demonstrate how ba enables organizations to transcend boundaries, integrate diverse knowledge, and create innovative solutions to complex problems.

Chapter 3: Phronesis: The Driving Force of Organizational Wisdom

Phronesis, or practical wisdom, represents the ability to make prudent judgments and take appropriate action in specific situations based on values, experience, and moral discernment. Unlike theoretical knowledge or technical skills, phronesis enables leaders to determine what is good and right in particular contexts, and to act accordingly. It combines ethical understanding with practical effectiveness—knowing both what should be done and how to accomplish it. This form of wisdom has three essential qualities that distinguish it from other types of knowledge. First, phronesis is oriented toward the common good, focusing on what benefits not just the organization but society as a whole. Second, it is inherently timely, allowing leaders to make contextually appropriate judgments in the moment rather than relying solely on predetermined rules. Third, phronesis is fundamentally people-centered, recognizing that knowledge creation and practice occur through human relationships and communities. In organizational settings, phronesis serves as the driving force that propels knowledge creation upward along the ontological dimension. Leaders with practical wisdom can envision futures that transcend narrow organizational interests, make timely judgments amid uncertainty, and cultivate communities of knowledge practitioners united by shared purpose. At Eisai, CEO Haruo Naito demonstrated phronesis by redefining the company's mission around human health care, focusing on patients rather than physicians, and committing resources to understanding dementia patients' experiences firsthand. This wisdom-driven approach expanded the company's knowledge creation beyond developing medications to building supportive communities for patients and families. The relationship between phronesis and knowledge creation becomes clear when examining how organizations move beyond single cycles of knowledge conversion to create upward spirals that engage broader communities. Without the moral purpose and future orientation that practical wisdom provides, organizations may become "SECI-stuck"—efficiently converting knowledge but failing to transcend their boundaries or contribute meaningfully to society. Leaders with phronesis, by contrast, create contexts where knowledge creation serves higher purposes, drawing more people into the process and expanding both the scale and quality of knowledge practice over time.

Chapter 4: Six Leadership Practices of Wise Companies

Wise leadership transcends conventional management approaches by integrating ethical judgment with practical effectiveness. Unlike leadership models that focus primarily on results or charisma, wise leadership emphasizes the ability to make good judgments in complex, ambiguous situations while maintaining a commitment to both organizational success and societal wellbeing. This form of leadership develops through experience, reflection, and the cultivation of specific practices that enhance moral discernment. The foundation of wise leadership lies in the ability to judge goodness—to determine what actions serve both the company and society rather than privileging one over the other. Leaders like Tadao Yoshida of YKK Corporation exemplify this through philosophies such as the "Cycle of Goodness," which holds that "no one prospers without rendering benefit to others." Similarly, Fast Retailing's Tadashi Yanai emphasizes that companies must earn profits while contributing to society, stating that "if companies aren't improving society in some way, society will quickly shut them down." These leaders recognize that pursuing the common good isn't merely idealistic but essential for sustainable success. Wise leaders also demonstrate the ability to grasp the essence of situations quickly, seeing beyond surface details to understand underlying patterns and principles. This capacity often develops through bodily experience and attention to detail, as illustrated by Soichiro Honda's practice of crouching beside racetracks to feel the vibrations of motorcycles and assess their performance. It also involves empathizing with customers, understanding universal truths from particular cases, and maintaining both simplicity and concentration amid complexity. Leaders like Steve Jobs and BALMUDA's Gen Terao cultivated this ability through disciplined attention to both sensory experience and abstract principles. Experience plays a crucial role in developing wise leadership, particularly experiences of adversity and failure. Many exemplary leaders—from Walt Disney to Sam Walton to Soichiro Honda—faced numerous setbacks before achieving success. These experiences taught them resilience and humility while deepening their understanding of what matters most. Other pathways to wise leadership include writing down principles drawn from life experiences, pursuing excellence relentlessly, and engaging with liberal arts and humanities to develop broader perspectives. Organizations like Toyota and Honda preserve their founders' wisdom by documenting their sayings and stories, creating repositories of practical wisdom that guide future generations of leaders.

Chapter 5: Pursuing the Common Good as Organizational Purpose

Pursuing the common good represents a fundamental orientation that distinguishes wise organizations from those merely focused on profit maximization or shareholder value. This approach recognizes that organizations exist within broader social contexts and bear responsibilities that extend beyond economic performance. When companies embrace the common good as their purpose, they create sustainable value by aligning organizational success with societal wellbeing. The concept of common good transcends traditional notions of corporate social responsibility by embedding ethical considerations into the core business model rather than treating them as peripheral activities. Leaders who embrace this orientation make judgments about what is good not only for the company but for customers, employees, communities, and future generations. This perspective transforms how organizations approach strategy, innovation, and day-to-day operations. Wise organizations demonstrate this commitment in various ways. YKK Corporation's "Cycle of Goodness" philosophy—"no one prospers without rendering benefit to others"—guides everything from pricing policies to environmental practices. Fast Retailing pursues its mission to "democratize clothing" by making high-quality apparel accessible to everyone while implementing initiatives like hiring people with disabilities (over 8% of its workforce) and collecting used clothing for refugees worldwide. These examples show how pursuing the common good becomes integrated into core business activities rather than existing as separate charitable endeavors. Crisis situations often reveal the depth of an organization's commitment to the common good. After Japan's 2011 earthquake and tsunami, companies like Fukushima Yakult and Yamato Transport prioritized community needs over short-term profits. Yakult immediately assured employees' jobs, used delivery centers as temporary shelters, and provided free water and food to customers. Yamato Transport instructed employees to help wherever needed without worrying about costs, later donating 40% of annual profits to rebuild affected regions. These actions demonstrate how wise organizations respond to extraordinary circumstances by prioritizing human welfare while maintaining long-term viability. The pursuit of the common good requires cultivating specific organizational capabilities: developing ethical sensitivity to recognize moral dimensions of business decisions, fostering moral imagination to envision alternatives beyond conventional approaches, and building moral courage to act on principles even when facing pressure to compromise. Organizations that develop these capabilities create cultures where ethical considerations become integral to decision-making at all levels, enabling them to navigate complex challenges while maintaining integrity and purpose.

Chapter 6: Embracing Contradictions for Innovation and Growth

Contradictions, rather than obstacles to be eliminated, represent powerful sources of innovation and organizational renewal when properly embraced and synthesized. Wise organizations recognize that opposing forces—such as efficiency versus creativity, centralization versus autonomy, or tradition versus change—can generate productive tension that drives growth and adaptation. By engaging with contradictions dialectically rather than seeking false compromises, organizations can discover novel solutions that transcend apparent limitations. The dynamic nature of contradictions manifests in several patterns within innovative organizations. Toyota Motor Corporation exemplifies this approach by actively cultivating seemingly opposing practices: moving slowly yet taking big leaps, practicing frugality while splurging on key investments, maintaining hierarchy while encouraging employees to push back, and growing steadily while fostering a sense of paranoia. Rather than viewing these as inconsistencies to be resolved, Toyota recognizes them as complementary forces that create a state of "continuous disequilibrium" conducive to innovation. This perspective enables the company to adapt to changing circumstances while maintaining its core identity. Effectively managing contradictions requires specific capabilities and practices. Dialectical thinking—the ability to see "both/and" rather than "either/or"—allows leaders to synthesize opposing perspectives into higher-order solutions. Fast Retailing's Tadashi Yanai articulates this approach when he states that "a company grows by resolving contradictions" and that "there is opportunity in contradictions." Similarly, Toyota's "middle-up-down" management process enables the organization to reconcile the idealistic visions of top management with the practical realities faced by frontline workers, creating solutions that neither could develop independently. The capacity to embrace contradictions becomes particularly valuable during periods of disruption and uncertainty. When Japan Airlines faced bankruptcy, Chairman Kazuo Inamori had to simultaneously cut costs while improving service quality—a seeming contradiction that required fundamental rethinking of operations. In the aftermath of Japan's 2011 earthquake and tsunami, companies like Yamato Transport had to balance regulatory compliance with humanitarian needs, often making judgment calls that prioritized human welfare over established procedures. These examples illustrate how contradictions, when approached with wisdom rather than rigid thinking, can become catalysts for innovation that serves both organizational and societal needs.

Summary

The essence of organizational wisdom lies in the dynamic synthesis of knowledge creation and ethical practice, where tacit and explicit knowledge continuously interact through social processes that spiral upward from individual insights to societal contribution. This theoretical framework reveals how organizations transcend mere efficiency to achieve sustainable innovation and meaningful impact through the interplay of structured knowledge conversion processes, shared contexts for human interaction, and leadership guided by practical wisdom. The implications of this approach extend far beyond conventional knowledge management, offering a pathway for organizations to thrive amid complexity and change while contributing to the common good. By cultivating practices that embrace contradictions, create shared contexts for knowledge integration, and develop leaders with practical wisdom, organizations can build the capacity for continuous renewal and ethical judgment. In a world of accelerating change and interconnected challenges, this integration of knowledge and wisdom provides not just competitive advantage but the foundation for organizations that enhance human flourishing and address society's most pressing needs.

About Author

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Ikujiro Nonaka

Ikujiro Nonaka was a Japanese organizational theorist and Professor Emeritus at the Graduate School of International Corporate Strategy of the Hitotsubashi University, best known for his study of knowledge management.

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