In today's rapidly changing and unpredictable business landscape, traditional approaches to management and strategy are no longer sufficient. "The Wise Company" by Ikujiro Nonaka explores how businesses can thrive in this new environment by cultivating wisdom and practical knowledge throughout their organizations.
Nonaka argues that companies need to move beyond relying solely on data and analytics, and instead develop a deeper understanding of their customers, employees, and society as a whole. By embracing concepts like phronesis (practical wisdom) and ba (shared context), wise companies can make better decisions, innovate more effectively, and create sustainable value for all stakeholders.
This book builds on Nonaka's influential work on knowledge management, updating it for the challenges of the 21st century. It offers a compelling vision for how businesses can become more adaptable, purpose-driven, and socially responsible.
The Three Main Challenges Facing Companies Today
Nonaka identifies three key problems that modern businesses must overcome to succeed:
1. Over-reliance on Explicit Knowledge
Many executives place too much emphasis on hard data, numbers, and analytical formulas. While this explicit knowledge is important, it often lacks context and can lead to overly simplistic solutions. For example, market research data might tell an auto company what price points customers prefer, but it says little about the overall experience and features they desire.
Explicit knowledge is also limited in helping companies navigate change and uncertainty. To truly understand social phenomena and emerging trends, leaders need to go beyond the numbers and develop tacit knowledge through personal experience and deep customer insights.
2. Lack of Future-Oriented Thinking
To become both successful and sustainable, companies need to think carefully about the future they want to create. This means recognizing that businesses are social entities with real impacts on society and the environment.
Nonaka shares the story of Soichiro Honda, founder of Honda Motor Company. When developing low-emission engines, Honda initially framed it as a competitive challenge to beat other automakers. However, when he learned his engineers saw it as a way to create a better world for their children, he realized they had the right perspective. This led Honda to refocus the company's mission on social good rather than just beating the competition.
3. Need for Wise Leadership
The final challenge is developing leaders who can contextualize information, make sound judgments, and take decisive action. Wise leaders are able to:
- Understand the nuances of the current situation
- Consider long-term consequences
- Balance business success with social responsibility
- Offer superior value to customers
- Lead in an ethical, morally responsible way
These leaders cultivate practical wisdom throughout their organizations, enabling companies to thrive amidst uncertainty and rapid change.
The Philosophical Foundations of Knowledge Practice
To understand how companies can cultivate wisdom, Nonaka explores ideas from philosophy that inform the concept of "knowledge practice" - putting knowledge into action to achieve positive outcomes.
Aristotle's Concept of Phronesis
The ancient Greek philosopher Aristotle developed the idea of phronesis, which roughly translates to "practical wisdom." This involves:
- Understanding the current context
- Making sound ethical judgments
- Taking action to benefit society
Phronesis goes beyond just having knowledge - it's about knowing how to apply that knowledge effectively in specific situations. This aligns closely with the skills needed by wise business leaders.
Phenomenology and Pragmatism
Later philosophical traditions built on these ideas:
Phenomenology (e.g. Martin Heidegger) emphasized how our actions in the present shape the future. It highlighted the importance of tacit knowledge gained through subjective experience.
Pragmatism (e.g. John Dewey) focused on the connection between knowledge and action. It argued that the best way to gain practical knowledge is through direct engagement with the world.
These philosophies reinforce the idea that wise leaders need to be present, engaged, and attentive to the experiences of customers and employees. By deeply understanding the current context, they can make better decisions about how to shape the future.
The Importance of Societal Impact
Another key thinker who influenced Nonaka's concept of the wise company is Karl Polanyi, an economist who emphasized the interconnection between business and society. Polanyi recognized that companies are social institutions whose actions influence society, just as societal changes affect businesses.
This perspective challenges the common capitalist view that companies should focus primarily on creating shareholder value. While profitability is important, Nonaka argues that truly wise companies consider their impact on society as a core part of their mission.
The Dangers of Short-Term Thinking
When leaders fixate on quarterly profits and stock prices, it's easy to make decisions that boost short-term results at the expense of long-term sustainability. Actions that temporarily increase shareholder value may end up harming society, which ultimately hurts the company as well.
Fast Retailing: A Case Study in Societal Focus
Nonaka highlights Fast Retailing (owner of UNIQLO) as an example of a wise company that prioritizes social good alongside profits. CEO Tadashi Yanai believes that enduring companies must live in harmony with society.
Some of Fast Retailing's initiatives include:
- The All-Product Recycling Initiative, which collects used clothing for reuse and recycling
- The 10 Million Ways to HELP Project, donating 10 million pieces of clothing annually to refugee families
By considering societal needs, Fast Retailing builds goodwill and ensures its long-term sustainability. After all, it's society as a whole - not just shareholders - who ultimately determine a company's fate.
Grasping the Essence Through Personal Experience
A key skill for wise leaders is the ability to quickly assess situations, identify core issues, and take appropriate action. This requires going beyond surface-level data to truly understand the essence of a problem or opportunity.
Nonaka argues that personal experience and careful attention to detail are crucial for developing this capability. He illustrates this through the story of Gen Terao and the development of Balmuda's revolutionary toaster.
The Power of a Perfect Piece of Toast
As a teenager traveling alone in Spain, Terao had a transformative experience eating a perfectly toasted piece of bread in a small bakery. Years later, when his company was struggling financially, a similar moment at a company barbecue sparked the idea to create the world's best toaster.
Terao's personal experiences with exceptional toast gave him insight into the sensory and emotional impact that seemingly simple products can have. This tacit knowledge drove him to pursue excellence in a way that pure market research never could.
Attention to Detail in Product Development
Balmuda's toaster development process showcased the importance of hands-on experience and meticulous attention to detail:
- The team tested thousands of slices of bread
- They discovered the importance of adding water to recreate the grilled bread experience
- They fine-tuned temperature, moisture levels, and other variables
This intensive process resulted in a $200+ toaster that became a worldwide sensation. By focusing on creating the perfect toast experience rather than just an improved appliance, Balmuda tapped into deeper customer desires.
The success of this project demonstrates how personal experiences and obsessive attention to detail can lead to breakthrough innovations that resonate with customers on an emotional level.
The Crucial Role of Human Interaction
While individual experiences are important, Nonaka emphasizes that wisdom emerges through human interaction and the exchange of ideas. He introduces the Japanese concept of ba, which refers to a shared space (physical, virtual, or mental) where people can come together to generate and share knowledge.
Creating Ba in Organizations
Wise companies cultivate various forms of ba to encourage the flow of ideas:
- Informal settings like company picnics or after-work gatherings
- Formal meetings and collaborative workspaces
- Virtual platforms for remote collaboration
The key is to create opportunities for people to interact, share experiences, and build upon each other's ideas.
Case Study: Safecast's Virtual Ba
After the 2013 Fukushima nuclear disaster, a group of volunteers quickly formed the Safecast organization to collect and publish radiation data. They used online collaboration tools to coordinate efforts, share expertise, and adapt to rapidly changing circumstances.
This virtual ba allowed Safecast to harness diverse knowledge and respond effectively to a complex crisis, demonstrating how shared spaces for interaction can lead to innovative solutions.
Practices for Fostering Ba
To create effective ba in your organization:
- Maintain an open-door policy to encourage information flow
- Practice radical honesty and transparency
- Establish a shared purpose that all employees can commit to
- Mix formal and informal interaction opportunities
- Leverage both in-person and virtual collaboration tools
By intentionally creating spaces for knowledge exchange, wise companies can accelerate innovation and build a more adaptable organization.
Communicating Purpose Through Storytelling
Having a strong sense of purpose is essential for wise companies, but that purpose must be effectively communicated throughout the organization. Nonaka highlights the power of storytelling and metaphor as tools for wise leaders to share their vision and align their teams.
The Art of Rhetoric
Effective communication requires understanding both your message and your audience. People respond well to stories that appeal to:
- Logic - presenting clear, rational arguments
- Emotions - connecting on a personal, feeling level
- Ethics - addressing moral and values-based concerns
Ernest Shackleton's Compelling Recruitment
The explorer Ernest Shackleton demonstrated the power of concise, honest storytelling in his famous recruitment ad for a dangerous Antarctic expedition:
"Men wanted for hazardous journey. Small wages, bitter cold, long months of complete darkness, constant danger, safe return doubtful. Honour and recognition in case of success."
This brief message appealed to logic (clear description of challenges), emotion (promise of adventure), and ethics (honor and recognition). It generated thousands of responses despite the obvious dangers.
The Power of Metaphor
Metaphors can make complex ideas more relatable and memorable. Michimasa Fujino, CEO of Honda Aircraft Company, used a marathon metaphor to keep his team motivated during the company's long journey to profitability:
He described focusing on telephone poles along the route, telling himself to just make it to the next pole, then the next. This made the daunting overall distance feel more manageable, just as breaking a long-term business goal into smaller milestones can maintain motivation.
Storytelling Best Practices for Leaders
To effectively communicate purpose through stories:
- Understand your audience's desires and concerns
- Appeal to logic, emotion, and ethics
- Use vivid, relatable metaphors
- Be concise and memorable
- Connect individual actions to the larger mission
By mastering the art of storytelling, wise leaders can inspire their teams and create a shared sense of purpose throughout the organization.
The Strategic Use of Politics
While the term "Machiavellian" often has negative connotations, Nonaka argues that wise leaders sometimes need to use political tactics to rally and motivate their companies. He suggests a more nuanced interpretation of Machiavelli's ideas, focusing on adaptability and achieving higher goals rather than pure self-interest.
Machiavelli Reconsidered
Scholar Richard Samuels points out that Machiavelli's ideal prince:
- Isn't necessarily evil
- Isn't opposed to pursuing the greater good
- Is willing to adapt to changing circumstances
- Believes the end can justify the means (if the end is morally sound)
This perspective aligns more closely with the flexibility and pragmatism needed by modern business leaders.
Shackleton's Motivational Tactics
During his Antarctic expedition, Ernest Shackleton used subtle psychological techniques to maintain morale:
- When he noticed someone was unwell, he'd order hot milk for the entire crew
- This allowed him to address health issues without singling anyone out or lowering group morale
Steve Jobs and the "Reality Distortion Field"
Apple co-founder Steve Jobs was famous for his ability to motivate people to achieve seemingly impossible goals. His biographer Walter Isaacson described this as a "reality distortion field" - an intense focus and charisma that could make others believe in unlikely outcomes.
When searching for a specific type of glass for the iPhone, Jobs learned about Corning's dormant "Gorilla Glass" project. Despite being told it was impossible to produce at scale in six months, Jobs simply said, "Get your mind around it. You can do it." His unwavering belief helped make it happen.
The Ethics of Leadership Politics
While these examples show how political maneuvering can be effective, wise leaders must use such tactics ethically and in service of a greater good. The key is to:
- Maintain a strong moral foundation
- Focus on achieving positive outcomes for the organization and society
- Be adaptable and pragmatic in approach
- Use influence to inspire and motivate, not manipulate
By thoughtfully applying political skills, wise leaders can navigate complex situations and rally their teams to achieve ambitious goals.
Distributed Leadership and Knowledge Sharing
For a company to truly embody wisdom, it can't be concentrated solely at the top. Wise leaders actively work to distribute leadership and share knowledge throughout the organization.
The Importance of Mentorship and Apprenticeship
Nonaka emphasizes the need for companies to practice mentorship and apprenticeship. This allows tacit knowledge - the kind gained through experience that's difficult to codify - to be passed on to the next generation of leaders.
Honda's Distributed Wisdom
Returning to the story of Soichiro Honda, we see how his engineers had internalized the company's values and mission. When they explained that they were developing low-emission engines to create a better future for their children, Honda recognized that they were ready to lead the company forward. He had successfully distributed his wisdom throughout the organization.
Toyota's "Ring of Power"
Toyota provides another example of distributed leadership in action:
- Responsibility for quality is given to team members at all levels
- Instead of a strict chain of command, they have a "ring of power"
- Titles and ranks are less important than ideas and problem-solving ability
- Everyone is empowered to question superiors or find their own solutions
CEO Akio Toyoda explains that having multiple leaders is essential for navigating a complex, changing world. No single person can consider all the factors needed to make good decisions in every situation.
Benefits of Distributed Leadership
By sharing tacit knowledge and empowering employees at all levels, wise companies:
- Develop a deeper bench of future leaders
- Increase organizational agility and responsiveness
- Tap into diverse perspectives and ideas
- Create a more engaged and motivated workforce
- Ensure the company's values and mission persist beyond any single leader
Implementing Distributed Leadership
To foster distributed leadership in your organization:
- Create mentorship programs that pair experienced leaders with up-and-coming talent
- Encourage job rotations to broaden employees' perspectives
- Implement decision-making processes that value input from various levels
- Recognize and reward leadership behaviors at all levels of the company
- Invest in training and development programs that build leadership skills broadly
By cultivating wisdom throughout the organization, companies become more resilient, innovative, and prepared to face an uncertain future.
Recap: Key Ideas for Building a Wise Company
As we've explored throughout this summary, creating a wise company requires a multifaceted approach that goes beyond traditional business strategies. Let's recap some of the core principles:
Balance explicit and tacit knowledge: While data and analytics are important, don't neglect the deep understanding that comes from personal experience and customer empathy.
Consider societal impact: Recognize that your company is part of a larger social ecosystem. Pursue strategies that create value for both shareholders and society as a whole.
Cultivate practical wisdom (phronesis): Develop leaders who can understand context, make ethical judgments, and take decisive action.
Create spaces for interaction (ba): Foster formal and informal opportunities for employees to share ideas, experiences, and insights.
Master the art of storytelling: Use compelling narratives and metaphors to communicate your company's purpose and align your team.
Use political skills ethically: Apply influence and motivation techniques in service of positive goals for the organization and society.
Distribute leadership: Share knowledge and decision-making power throughout the organization to build resilience and adaptability.
Stay present and attentive: Encourage leaders at all levels to deeply engage with customers, employees, and societal trends.
Think long-term: Balance short-term results with sustainable, future-oriented strategies.
Embrace continuous learning: Foster a culture of curiosity, experimentation, and knowledge-sharing.
Conclusion: The Path Forward for Wise Companies
In an era of unprecedented change and uncertainty, the need for wise companies has never been greater. By moving beyond a narrow focus on profits and embracing a more holistic view of business success, organizations can become more resilient, innovative, and socially responsible.
The journey to becoming a wise company is ongoing and requires commitment at all levels of the organization. It involves rethinking traditional management practices, cultivating new leadership skills, and staying deeply connected to the needs of customers, employees, and society as a whole.
As you apply these principles to your own organization, remember that wisdom is not a destination, but a continuous process of learning, adapting, and striving to create positive impact. By embracing this mindset, companies can navigate the challenges of today's business landscape while building a more sustainable and purposeful future.
The wise company of tomorrow will be one that can balance profitability with social responsibility, leverage both data and human insight, and empower leaders at all levels to make sound decisions in the face of complexity. By following the guidance outlined in "The Wise Company," organizations can begin their own transformation towards greater wisdom, resilience, and long-term success.