Various observers describe today’s global economy as one in transition to a ‘knowledge economy’, or an ‘information society’. But the rules and practices that determined success in the industrial economy of the 20th century need rewriting in an interconnected world where resources such as know-how are more critical than other economic resources. This briefing highlights recent thinking and developments and offers guidance on developing appropriate organizational strategies to succeed into the new millennium. It summarizes key conclusions from our trends database and research analysis.

Various management writers have for several years highlighted the role of knowledge or intellectual capital in business. The value of high-tech companies such as software and biotechnology companies, is not in physical assets as measured by accountants, but in their intangibles such as knowledge and patents. The last few years have a growing recognition by accounting bodies and international agencies that knowledge is a crucial factor of production. For example, the OECD has groups investigating ‘human capital’ and also the role of knowledge in international competitiveness. Several conferences in 1997, including one sponsored by the World Bank, have placed knowledge firmly at the heart of the economic agenda.

Our analysis suggests three interlocking driving forces are changing the rules of business and national competitiveness:

• Globalization - markets and products are more global. Products by Nike and Virgin are known the world over. Today, even resourcing is becoming global. Thus many companies outsource manufacturing and software development to distant locations.
  
  
• Information/Knowledge Intensity - efficient production relies on information and know-how; over 70 per cent of workers in developed economies are information workers; many factory workers use their heads more than their hands.
  
  
• Networking and Connectivity - developments such as the Internet bring the 'global village' ever nearer.

The net result is that goods and services can be developed, bought, sold, and in many cases even delivered over electronic networks. Electronic commerce offers many advantages in terms of costs savings, efficiencies and market reach over traditional physical methods

The knowledge economy differs from the traditional economy in several key respects:

• The economics is not of scarcity, but rather of abundance. Unlike most resources that deplete when used, information and knowledge can be shared, and actually grow through application.
  
  
• The effect of location is diminished. Using appropriate technology and methods, virtual marketplaces and virtual organizations can be created that offer benefits of speed and agility, of round the clock operation and of global reach.
  
  
• Laws, barriers and taxes are difficult to apply on solely a national basis. Knowledge and information ‘leak’ to where demand is highest and the barriers are lowest.
  
  
• Knowledge enhanced products or services can command price premiums over comparable products with low embedded knowledge or knowledge intensity.
  
  
• Pricing and value depends heavily on context. Thus the same information or knowledge can have vastly different value to different people at different times.
  
  
• Knowledge when locked into systems or processes has higher inherent value than when it can ‘walk out of the door’ in people’s heads.
  
  
• Human capital - competencies - are a key component of value in a knowledge-based company, yet few companies report competency levels in annual reports. In contrast, downsizing is often seen as a positive ‘cost cutting’ measure.

These characteristics, so different from those of the physical economy, require new thinking and approaches by policy makers, senior executives and knowledge workers alike. To do so, though, requires leadership and risk taking, against the prevailing and slow changing attitudes and practices of existing institutions and business practice

The evolving knowledge economy has important implications for policy makers of local, regional and national government as well as international agencies and institutions e.g.:

• Traditional measures of economic success must be supplemented by new ones
  Example: Nova Scotia has developed Knowledge Quotients for their economy
  
  
• Economic Development policy should focus not on 'jobs created' but rather on infrastructure for sustainable 'knowledge enhancement' that acts as a magnet for knowledge-based companies
  Example: Sophia Antipolis in France is a hub for many knowledge-based businesses
  
  
• Develop regulation and taxation for information and knowledge trading at international level, looking to future knowledge-based industries rather than traditional industries.
  Example: WIPO is seeking harmonization of copyright legislation for online markets
  
  
• Stimulate market development through new forms of collaboration
  Example: Several EU programmes now focus on market development (rather than product development) and encourage participation by collaboration across national boundaries using electronic knowledge networking methods.

Many businesses are now realizing the role of knowledge and are creating knowledge management programmes and appointing CKOs (Chief Knowledge Officers). Such responses should be part of a coordinated effort that:

• Recognizes the importance of knowledge to their business bottom line.
  Example: Buckman Laboratories Buck man the value of solving customer problems by enhancing knowledge flows from their chemical experts direct to the customer interface.
  
  
• Develops new measures of corporate performance based on knowledge:
  Example: Skandia’s supplements annual reports with intellectual capital reports using measures from the Skandia Navigator.
  
  
• Systematically enhances Stadia learning and knowledge, through new organisaStadiaments and processes.
  Example: Price Waterhouse has created knowledge centers to improve the capture, codification and dissemination of 'best practice' knowledge.
  
  
• Provides a technology infrastructure to enhance knowledge creation and sharing:
  Example: Hewlett-Packard’s uses an intranet for knowledge sharing throughout the company on a global basis.
  
  
• Encourages the sharing of knowledge through effective Internet settings and business practices:
  Example: Steelcase designs 'smart' working environments and has developed a culture of knowledge sharing.

The main challenges facing policy makers and business leaders are the following:

• It is difficult to 'go it alone'. Stakeholders, especially employees and business partners must share similar views for your own initiatives to succeed
  
  
• alone recognition and reward systems usually do not sufficiently recognise recognizee contributions. They are linked to performance measures of the traditional economy.
  
  
• Measures of return on investment are done using traditional accounting methods, thus investments in knowledge enhancing activities need strong advocates at senior levels.

© Copyright. David J. Skyrme. 1997. This material may be copied or distributed subject to the terms of our copyright conditions (no commercial gain; complete page copying etc.)

Refer to Knowledge Management Resources. See also see related Insights - Knowledge Management, Knowledge Assets, Measuring Intellectual Capital and Knowledge Networking.

For full listing of other Insights go to Insights - List of Titles.

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Management Insights are publications of David Skyrme Associates, who offers strategic consulting, presentations and workshops on many of these topics.

Additional coverage of these topics can be found in our free monthly briefing I³ UPDATE/ENTOVATION International News, various articles, publications and presentations.

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