The Generative Cycle: Linking Knowledge and Relationships

“The essence of strategy is the way a company defines its business and links together the only resources that really matter in today’s economy: knowledge and relationships or an organization’s competencies and customers.”

R. Normann and R. Ramirez1

Let us assume that mastering the capabilities to learn and to collaborate — to manage knowledge and relationships — is the foundation for competitive success in the future. Where should we turn for guidance in developing these skills? Which are the benchmarks, the best-practice leaders in the “knowledge” business, the firms whose source of competitive advantage resides in their capacity to tap the collective intelligence of members and to work together to create value for customers?

Those firms, we argue here, are professional service firms (PSFs); they are lawyers, accountants, doctors, consultants, and investment bankers. The best of them have been working for decades, honing exactly the skills that large, mainstream business organizations are increasingly eager to add to their repertoire. While these high-performing PSFs may not represent today’s business, they do represent tomorrow’s. They represent the kinds of “inverted organizations” that have captured managers’ interest.2 With their flat structures, service-oriented workforce, and participative decision processes, PSFs can provide a model toward which larger, more hierarchical organizations can turn for guidance as they become leaner, quicker, and more flexible. PSFs represent a pure form of “knowledge-based” business when many leading business theorists are arguing that the management of collective knowledge and the ability to work together to translate that knowledge into customer value are the critical competencies for the future.

We recently visited three leading professional service firms, each privately held partnerships recognized as outstanding performers in investment banking, law, and medicine, respectively.3 With a cross-section of partners, we discussed each firm’s approach to sustaining competitive advantage in an increasingly turbulent marketplace. We left these conversations believing that the organizations had mastered the capabilities for collaboration and learning that created value for the firms beyond the value of each individual’s skills. Those capabilities would allow them to sustain their success despite the significant changes in each field and provide a needed prototype for all organizations struggling to enhance and utilize their knowledge to broaden and deepen their customer relationships.


1. R. Normann and R. Ramirez, “From Value Chain to Value Constellation: Designing Interactive Strategy,” Harvard Business Review, volume 71, July–August 1993, p. 65.

2. J.B. Quinn, Intelligent Enterprise (New York: Free Press, 1992).

3. The three firms that we will discuss participated in our study on condition of anonymity. All three are recognized as outstanding performers by both industry experts and competitors.

4. P. Senge, “The Leader’s New Work: Building Learning Organizations,” Sloan Management Review, volume 32, Fall 1990, pp. 7–23.

5. D. Leonard-Barton, Wellsprings of Knowledge (Boston: Harvard Business School Press, 1995).

6. For a more in-depth discussion of single- and double-loop learning, see:

C. Argyris, Strategy, Change, and Defensive Routines (Marshfield, Massachusetts: Pitman Publishing, 1985).

7. Leonard-Barton (1995).

8. G. Day, “The Capabilities of Market-Driven Firms,” Journal of Marketing, volume 58, October 1994, pp. 37–52.

9. M. Iansiti, “Shooting the Rapids: Managing Product Development in Turbulent Environments,” California Management Review, volume 38, Fall 1995, pp. 37–58.

10. Leonard-Barton (1995).

11. M. Porter, The Competitive Advantage of Nations (New York: Free Press, 1990).

12. Quinn (1992).

13. H. Mintzberg, “Crafting Strategy,” Harvard Business Review, volume 65, July–August 1987, pp. 66–75.

14. J.B. Quinn, P. Anderson, and S. Finkelstein, “Managing Professional Intellect: Making the Most of the Best,” Harvard Business Review, volume 74, March–April 1996, pp. 71–80.

15. We borrowed the term “community of practice” from learning theorists Lave and Wenger who define it as “an activity system about which participants share understandings concerning what they are doing and what that means in their lives and for their community. Thus they are united in both action and in the meaning that that action has, both for themselves and for the larger collective.” (p. 98) See:

J. Lave and E. Wenger, Situated Learning: Legitimate Peripheral Participation (Cambridge, England: Cambridge University Press, 1991). See also:

T.A. Stewart,“The Invisible Key to Success,” Fortune, 5 August 1996, pp. 173–176; and

B. Manville and N. Foote, “Harvest Your Workers’ Knowledge,” Datamation, July 1996, pp. 78–81.


The authors gratefully acknowledge the support of Judy Rosenblum. From our collaborative work together, the initial development of the model presented here evolved.