We couldn’t really critique the details of the operation. But we could get a sense of the strengths and weaknesses of the operation from seeing the condition of the facility and the knowledge that the manager demonstrated as he or she walked us from point to point. We also got a sense of the workforce and the level of teamwork. Most of all, however, we got an orientation that we could match to the financials we had sitting back on our desks. The tour made the numbers for inventory and property, plant and equipment come alive for us.

Today, when we visit a factory, there are many more computers on the floor than there were when we started our careers in the early 1980s. Of course, many companies that we visit today don’t have even have manufacturing plants—they make their money selling their knowledge directly or through services. No matter what kind of company we visit today, there is always a point in the tour when we walk through a series of offices and the best the manager can do is point out what the people do in one or another group of cubicles. Most of the time, a very big part of the story is out of view, inside the computers on the shop floor or in the sea of cubicles.

The computers are the hub, of course, of the knowledge side of the business. And they are (often literally) like a black box. We cannot easily see what is inside them. So our old technique of a plant tour isn’t as helpful as it used to be. We still do it because it is a way of engaging management in telling their story, seeing how they interact with their people as they walk around, and getting a sense of how the operations work.

Frankly, the financial statements aren’t much help either. As we’ll show you in this and coming chapters, the knowledge side of the business is also invisible in the financial statements. This means that it’s not just the computers that are “black boxes”; the companies that use them are equally mysterious. Managers and stakeholders can usually describe the essentials of how the company makes money and what some of their key strengths are, but most cannot draw you a model of how they do it. This is a critical gap that holds back both internal and external conversations. That’s why the starting point for most IC work is to just get a basic list and model of the key components of human, relationship and structural capital.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.

This question is all the more acute given my post on Friday about the need to give away knowledge. This fact means that focusing exclusively on how you get paid will force you to miss some of the critical knowledge that distinguishes your organization.

In most cases, your customer is “buying” the whole package whether they pay for it or not, just as Google’s advertising are buying access to the users of the free service. So to understand Google’s search business or your own, you have to understand more than just the knowledge for which they get paid.

To identify the full picture of your critical knowledge, it is helpful then to move beyond the concept of products and services and ask three questions.

1- What Are Your Core Competencies?

To understand why your customers do business with you, it is helpful to first look deeper inside the organization. Competencies are a good place to start. Competencies are families of knowledge that are shared and captured within your organization. They represent knowledge that helps you do what you do.

Some competencies are common across all the players in an industry. Airlines, for example, need to have competencies in managing fleets of planes, reservation and routing systems. But not all airlines share Southwest’s competence at developing an empowered workforce focused on the customer—a factor that has helped Southwest compete on both price and service. You will see in future postings that all companies have a unique set of competencies that distinguish them.

2-What Is the Problem You Solve?

Next, you want to move outside your organization and shift to a (maybe the) critical perspective for any strategic business decision—that of your current and prospective customers. Seeing yourself in their eyes is an important reality check and keeps the exercise connected with your everyday business. We recommend doing this with a good cross-section of your team.

This is unique to each situation. You may provide a product or service that is a component of your customer’s value creation process. They may be outsourcing a function that they used to perform themselves and think that the cost or the quality would be improved by using a firm more expert in that function. It may just be a question of focus or interest—they may not want to bother with creating an internal equivalent to the solution you provide.

Most of the time, companies answer this question too narrowly, defining the problem as the product or service they provide rather than looking at the problem from the customer’s perspective. A classic example is railroads that thought they were in the railroad business rather than the transportation business. A great recent example we heard on the radio was the growing sales of milk shakes by fast food restaurants. The reason wasn’t because Americans suddenly developed a taste for milk shakes but, rather, that more and more people commuting in their cars were discovering milk shakes as a neat way to eat breakfast in their cars on the way to work. The problem from the customers’ perspective wasn’t finding the ideal milk shake, it was finding a breakfast that wouldn’t spill on their work clothes in a moving car.

3-Why Do They Choose You?

Of course, the obvious next question is how well you solve the problem for your customer. This may address how you stack up against the competition but it also gets to the second set of questions about how you do what you do. This is more of an internal question. What makes your organization different? This speaks to specific areas of expertise that help you not only solve today’s problems but continue to innovate new solutions to tomorrow’s problems.

Sun’s CEO, Jonathan Schwartz, told a story in an entry on his blog on March 11, 2009, about how he closed a deal with a client for a million dollar contract for support on free software. He teased the customer at the closing, reminding him that the software was free. But the customer was willing to pay because it meant that he could call Sun’s people, including Schwartz, if there was a problem with his implementation. His problems cost much more than the million dollar price tag. Sun’s knowledge was a great insurance policy.

Make sure you know why your customers buy from you.

From Intangible Capital: Putting Knowledge to Work in the 21st Century Organization

* Environmentally-conscious construction

*Ongoing recycling

*Solar panels for energy generation

*Upscale restaurant with a menu that has a wide range of prices

*Plenty of free covered parking

Do I sound like a commercial? No, I sound like a satisfied customer. We should all take the time to acknowledge the products and services that make us stop and think – we need to ask ourselves what they did to set themselves apart and then take that vision as we look to our own business.

In my area of the building, called ExecuSuites, my neighbors are software companies, medical billing firms, law offices, CPAs, marketing firms, consulting firms and not-for-profits. We have a great setup but not that different from other buildings like this. So, what makes this property so different?

In addition to building an office, my landlords have succeeded in building a community. There is a monthly newsletter sharing not only news of the building, but also news of the companies inhabiting the ExecuSuites space. There are frequent breakfasts and coffees to give the neighbors a chance to meet one another. These allow small business owners a valuable networking opportunity as well as a chance to gain support from their neighbors.

At the end of the day, tenant retention will be higher because tenants will not only be evaluating rental rates when renewing, but also including the value of being part of a community. Community is a concept that is getting more and more attention in today’s 2.0 world.

My building is a great example of how community can enhance a business that many others would consider to be a commodity (office space). How could you create a community for your customers and change the rules of the game in your market?