The Challenge Network

   back   menu   next   

Knowledge & renewal.

Knowledge & renewal.

This section is a review and a consolidation of thoughts tabled elsewhere. The concept of knowledge as a factor of production is, however, such an important one that it is important to bring it to a focus. We have seen elsewhere that the co-ordination of knowledge and opinion is central to effective government. We have noted the impact of competition on commercial change elsewhere, and elsewhere we have discussed the erosive and transformative forces in the economy. We have also considered the difference between the 'k'-economy and the 'e'-economy elsewhere.

The text is divided into two sections. First, we review the scale of scale of the knowledge economy and the reasons for its growth. In the second, we consider the implications of its existence and the tools which we shall need to make best use of it.

The scale and origins of the knowledge economy.

We have noted elsewhere that growth - economic or otherwise - entails an increase in complexity. Managing this complexity and finding our way through it requires analysis, insight, 'maps' by which to navigate. The complexity also presents us with options, and the scope for renewal is there if we have the insight to grasp the options. We discussed the implications of a 'modular' economy elsewhere, showing that the current structure of the commerce of the industrial world represents a toolkit which capable hands can use to assemble whatever they want.

As a consequence of this, valuation of assets has had to change, reflecting intangible potential as well as actualised cash streams and tangible assets. In the order of half of the costs associated with manufacturing consist to the steps involved in getting the idea right, building relationships and in other ways bringing order to complexity. Around half of the business output of the OECD consists of patterns of knowledge. Investment in knowledge-related tools has surged.

Figure 1: Knowledge output constitutes around half business output.

Figure 1 shows both the general nature of this trend and the service-focus of it. It is not high technology industry which serves as the heart of the knowledge economy, but rather the services industries which are concerned with navigation, option generation and complexity management.

The nature of employment has changed, requiring greater skills from employees. Less skilled people are in less demand and are paid relatively less than hitherto, whilst the demand for skills has soared and with this, wages have risen. The nature of jobs have changed, as Figure 2 shows

Figure 2: The long-term fall in the proportion of employment concerned with physical operations.

Some elements of Figure 2 may be due to redefinition, as out-sourced services once included in manufacture - such as in house training - become reclassified. However, the overall transformation is clear and the trend is evident.

The knowledge economy is not much related to the putative 'e'-economy, of which so much has been heard in the past five years. Outsourcing has made use of electronic data interchange to speed what was already being done. However, it is the organising principles which are in short supply.

The implications of the knowledge economy.

There are four issues which we would like to highlight. First, as shown above, the demands on individuals will change considerably. We have discussed the educational implications of this elsewhere. However, the capacity to operate in an environment which places so high a premium on navigation requires self-confidence. Individuals must show the capacity to sense the needs of the organisation as a whole and to respond to these. Organisations need a framework which enables initiative and which rewards it. Considerable social skills - in motivation, in tact, in the toleration of ambiguity - are required by all parties. In general, a skill set once restricted to an educated elite must be passed down the organisational hierarchy to the young and the inexperienced.

Second, the 'toolkit' that makes up the modern economy, coupled to new technology and international integration all together create an environment conducive to swift change. Entry barriers tend to be lower. Technology and new process can 're-invent' the foundations out from under established structures. The generic responses of companies - and the imperative of market forces - drive firms to emulate best practice, and thus all become much like each other. Elsewhere, we have shown how this leads to swift commoditisation.

Commoditised industries duel over market share in a zero-sum game. They are driven to press their productivity growth faster than their output can expand. As a result, they shed people and other assets. Large numbers of commoditised firms lead to increasing unemployment, to perhaps-falling wages and to insecurity in labour markets. They also generate cheap high quality (if 'me too') products. Such markets tend to consolidate around one or two major players unless regulatory forces prevent this form happening.

New industries, and old industries renewed by options which the knowledge economy can identify for them, tend to be differentiated. Marginal costs curves rise swiftly with increasing capacity. Often, the least efficient producer is altogether very different from the market leader. The problems that are being solved in this phase are less those of cost competition than of fundamental operations, customer appeal and so forth. (Strategies come in layers - finance strategies, those for customer satisfaction, renewal, information technology use, human resource development - and these nest together in complex ways. Young industries have usually yet to find a common 'best' strategy in any one of these fields, let alone a settled mix between these.

Such industries enjoy prices which are far from the leader's unit costs, and industry profit is high. Productivity grows slowly as compared to output and the industry absorbs assets; people, money, plant and equipment. This is an expansionary phase which contributes to employment and to an optimistic sentiment. The balance between these two forces - of consolidation and renewal - set the tone of the times.

The third issue is concerned with managerial responses to this process outside of the public sector. (We will look at the public sector in a moment.) However, both sectors will, in different ways, use an important new set of tools called 'knowledge management'.

Knowledge management means several different things. At one level, it means storing the sum of the information that an organisation has built up so that others can access this. At its worst it consists of a gigantic heap of unevaluated facts, papers, paperwork and data. At its best, it offers and interface through which to screen new events. Figure 3 shows an interface which serves as an intelligent librarian to the entire published oeuvre around the biology and treatment of cancer.

Figure 3: Access to an unsleeping, universal librarian.

Such infrastructure can be impersonal, as with the example shown. Its most useful role may be to combine this facility with the capacity to connect people together in useful ways. This can range from the self-assembling council of experts to help extended to a novice, who needs to find out what they should be asking, and of whom. Information technology can be a great help in this - and is indispensable in some areas - but the process is fundamentally a human one, in which individuals educate or inform themselves.

Knowledge management requires orderly processes, but these are very often more concerned with how people interact than what computers or communications systems can do. We have already noted the breakdown in vertical integration, discussed elsewhere, and the consequence use of the new toolkit represented by the complex economy. Two results emerge from this: first, that far more employees spend a much greater proportion of their time acting beyond the firm, dealing with the outside world. These people need to be self-managing (as above) but they also need to know a good thing when they see it. Second, the rationale of the organisation is an increasingly important thing. This is true for a number of reasons

Firms are, as we have seen, increasingly valued on their 'intangibles' and on the coherence of the story that they can tell. They are valued by markets, but they are also evaluated by potential partners, and by those who exchange potentially crucial information about the future of the industry segment. We will discuss innovative milieux below.

A firm has to adapt itself to change in many ways in parallel, often under the stewardship of many largely independent teams. These need co-ordinating ideas if they are not to do perfectly reasonable things that set divergent courses

Those who set direction do not know all of what is possible for an organisation. They will be technically out of date and seldom exposed to all of the information that a firm picks up. Clear perspectives cause helpful ideas to flow where they are needed.

The "silo" style of management is an extraordinarily helpful structure when change is slow. Financial issues are dealt with by finance staff in one silo, markets and customers by their own specialists in another. The denizens of the silos seldom meet, however, and the younger (and often technically more adept) staff do not meet at all. This needs to be modified if new ideas are to flow, if the firm is to direct itself in full possession of the options and if the resident knowledge of the organisation is to be tapped. Database structures and intranets can help, of course, but process helps far more. Staff need to be taken off line so that they can interact and generally give of their best. Unstructured events, where there is no challenge and no sense of direction, or where process is absent and carry-through is weak, are those which waste potential and defeat the potential of the knowledge economy.

These are by far from all of the factors which are involved. If one thinks of the firm as an organism, with cognitive functions, senses and motor skills, internal needs and external possibilities, then one has to ask how such an entity can operate purposefully. At the heart of the answer lies feedback (of information, of the results of actions already taken) and feedforward (information fed to specialised domains by others, with the express purpose of preparing them to take action, sense events or in other ways respond. The more 'cognitive' the issue, the more a network is involved. The more 'physical', the more the event is delegated to specialised effectors. (Human minds are known to use the same networks in planning an action, remembering previous examples and setting action in train. Once the decision to act has been taken, however, the motor components of the forebrain delegate action to the hindbrain, brain stem, spinal ganglia and to the nerves that loop to and from the muscles concerned. The forebrain reviews events through abstract signals and information fed back through quite distinct loops, such as the eye.

Silo organisations feed back in anything but a network, and they receive instructions from above, rather as does a muscle, and report compliance. However, as we have noted, the 'outside' of an organisation is now a permeable thing, and the finance 'silo' may, for example, pick up information about IT options, partners finances, changes in the law and so forth. If the organisation is to prosper, these ideas must be selectively fed back. The key word is 'selectively', and middle managers will not risk distracting senior staff about issues which neither recognise as germane

What is needed, therefore, is a network set with the appropriate processes, whereby senior staff can come into dialog with the often isolated sources of expert, specialist insight. Such a dialog will be generic, rather than one-to-one, not least for reasons of time. It has to be managed: for the issues it addresses, for the people who participate and for the use made of the product.

How to do this is addressed elsewhere. It is, however, a challenging professional matter that if mismanaged, can lead to an endless restatement of generic complaint. It will consist of a changing, improving set of challenges to the organisations and responses back from it. In this sense, the 'strategy' of an organisation consists of the interior dialog that it has with itself as to how to understand its situation and the options which are open to it. "Strategy" - understanding - is developed around key topics, such as what use to make of information technology - and interlaced with other topics, such as how to interact with the customer. Each topic has a research program associated with it, defined by an earlier stage in the enquiry, such that what an organisation needs to know in order to make better decisions is both made explicit and taken in hand.

As strategies crystalise and interact, senior staff become better educated and informed as to options and constraints, weak links and strong points. More effort can be given to renewal as the problems of the day-to-day become reduced to variations on a well-understood and delegable set of themes. New ideas come complete with a context that makes sense of them, and middle managers have a clearer view of what will be welcome - and understood - and what will not. The firms has learned to learn, as an ensemble, and it has done this in a transpersonal sense. This is more stable than the alternative, which if to rely upon extraordinary people who can cram all this information into themselves (or can convince their peers that they have done so,) on consultants or on following fashion which is set elsewhere. One cannot differentiate a company on other people's leavings. One head cannot know what dozens of heads are stretched to deal with individually. This flavour of knowledge management is amongst the most important of all potential in the industrial world.

Figure 4: Tensions inherent in defending a commercial position.

The figure contrast the level of maturity of an industry with the complexity which it entails. Mature, simple industries are seldom defensible and their fate is commoditisation. When complexity is high or the industry is new (or both) success is much harder to achieve. A successful organisation in this area is faced by four forces. Innovation and renewal resets the life-cycle clock, whilst the competitive pace accelerates it. Taking a complex idea and redesigning it to be simpler (re-engineering) or more modular (out-sourcing) reduces complexity. Knowledge management techniques allow more complex issues to be addressed, increasing differentiation and defensibility.

As we have seen, the forces which accelerate commoditisation are everywhere set to intensify. The potential for renewal is immense. The capacity of managers to grasp this potential will define all of our futures.

The firm tends to be embedded in a very complex structure. There is a supply chain, reaching in from primary production, through the value which the firm adds and on to the eventual consumer. The firm may serve several different end consumers, as may its suppliers. It will have some direct competitors who are, in many environments, often also collaborators, or organisations which have very similar interests across a wide front. The may share staff, draw on the same service infrastructure and read the same periodicals. Often, the socialise, particularly where the industry has a high creative element and enthusiastic engagement is as important a reward as profit. Milieux of this sort tend to be hotbeds of creativity, not least because the processes of knowledge management are taking place on every side. Firms that are embedded in such structures extend considerable trust. The add proprietary knowledge to the pool, and are rewarded by reciprocal confidence. Markets know this and often back 'industry statesmen' of this sort. (Venture partners may also sue if they feel that intellectual property has been lost. One cannot be too idealistic about this risky environment.

Highly innovative environments tend to have three characteristics. This is important for policy purposes. Such milieux cannot be designed by the state, but they can certainly inhibited by misunderstandings on its part

This brings us to the closing topic of what the knowledge economy means to the public sector, as mentioned above. The implications are very great. There are two aspects of this. First, what should the state do in order to help the overall transition to he knowledge economy. Second, what doe the knowledge economy mean to the democracies, both in how policy formation is to be handled and how the tasks of the state are to be addressed. (These are addressed in detail elsewhere for the tasks of the state, and also elsewhere in respect of representation and policy formation.) This text focused on the issues of assisted transition.

We have already touched on one area, which is the need to shape policy so as to encourage or enable the knowledge economy. Education, discussed elsewhere, is one such area. Communications - also discussed elsewhere - in another such concern, where it is the job of the state to manage the oligopolistic or cherry-picking tendencies of the industry, to help it through regulatory permissions, assist with basic research and to handle relations with others on issues of connectivity and bandwidth. The public concerns with internet and its content are examples where only the state can help defuse difficulties.

There are many other issues, such as the relationship of the research, training and commercial spheres which require management internally. We discuss the nexus of publicly-funded science, its exploitation and the relationship between its academic custodians and the rest of humanity elsewhere.

Externally, the critical issues are those of intellectual property, liberal approaches to cross-border trade and capital movements and the management of public goods. These are not new issues, but they take on a particular poignancy in the knowledge environment.

Intellectual property is easily stolen once the complexity which challenges a project has been overcome. It may cost billions to develop a software package, but cents to copy it. The scale of theft is huge and growing, and is discussed elsewhere. Only states can manage this issue, which may become a major inhibitor to open information exchange.

There is unambiguous evidence that trade and stable capital movements create wealth. Protection, save where economies have been long sheltered and are now being exposed to international competition, is invariably damaging. Individual firms will undoubtedly lose their position and people will have to change jobs. Protected groups will lose their protection. However, the evidence is that the tide does indeed raise all boats, and that what sinks individuals is poor access to education, poor information and a life led in the illusion that nothing can change. In the knowledge economy, outsourcing takes ideas and contracts across borders. Manufacturing spreads its nets internationally, bringing jobs and expertise, high quality goods and adequate systems of regulation. Volatility is good for nobody save currency traders, and international information assurance and agreements about bank regulation seem the only tools to manage what will otherwise be an increasingly coupled and unstable system.

There is some fear that low skilled jobs will move to low wage areas. It is clear that many will do so. However, productive ways of doing the same things are not lost, as demonstrated in the NAFTA agreement in North America. The difference is that such jobs require higher skills from the operators. Once again, the fundamental importance of education in the knowledge economy makes itself apparent. The wealthy world needs to cease to have low skilled jobs, or low skilled people. It is remarkable that poor nation standards of literacy is beginning to surpass results in the wealthy world. The issue is one of motivation, not capacity.

Our economic potency and the technologies over which we have command mean that we can do great damage if we do not act carefully. The new tranche of technologies - in particular, biotechnology, materials for which we have no disposal systems and chemicals that persist in the environment - have the potential to create widespread damage from small foci of misuse. Foods and medicines may be contaminated, dangerous organisms may be released, pollutants may spread. Regulation of these issues can only be handled by the state, and may serve to restore confidence in otherwise opaque systems of international trade. Such relations may avoid warfare, preserve something of the natural world and prevent nations damaging their own and other people's public goods. Environmental issues are, however, discussed elsewhere

As indicated above, we believe that how the state does its tasks, and the relations which it has with the electorate, are both likely to undergo a radical reshaping in the next few decades. We do not subscribe to ideas of dramatic change vectored through the internet, although broadband networks may slightly influence how representation is handled. The key issues are how knowledge is to be deployed on policy formation - where the issues are much as were described above - and how dissent can be managed beyond the bankrupt concepts of bipolar party politics. However, these issues are given detailed coverage in their due sections.

 to the top 

The Challenge Network supports the Trek Peru charity.