Paper On Knowledge economics dynamics

Alfredo Barriga Cifuentes October 2009

INDEX Abstract ..................................................................................................................................... 3 Knowledge in the scope of the present paper ............................................................................ 4 Knowledge dynamics as a resource in society and businesses .................................................... 4 Education for knowledge citizens ............................................................................................. 11 Knowledge as an economic resource........................................................................................ 12 What differs in Knowledge and Industrial Society as related to business .................................. 19 Business in Knowledge Society is intense in know-how......................................................... 19 Creativity is the productivity of Knowledge .......................................................................... 20 Businesses are consumer-oriented in Knowledge Society ..................................................... 20 The added value of people in businesses in a Knowledge Society ......................................... 22 Motivation at work is how value thrives in businesses in a Knowledge Society ..................... 23 The extended corporation is part of business in a Knowledge Society ................................. 25 Businesses in Knowledge Society follow Schumpeters destructive creation and Nashs equilibrium, but in collaborative environment ...................................................................... 26 The backbone of Businesses in the Knowledge Society lie on the Net and ICTs ..................... 27 A proposed knowledge-based organization ecosystem Model.................................................. 28 Transition from industrial-based Business model to knowledge-based business Model ............ 30 Conclusions .............................................................................................................................. 31 BIBLIOGRAPHY ......................................................................................................................... 33

Abstract
Knowledge Society, though it has been in the speech of politicians, business people, business writers and some academics, is still a very new concept. What is it? How does it work? In what does it differ from Capitalist Society? Which are the new dynamics it brings? What are its features and characteristics? What are its challenges? It would exceed the scope of a paper to answer thoroughly all these questions, even from a limited perspective. It is possible, nonetheless, to make a general framework that could otherwise be used for further study. For the purposes of this paper, we do not intend to embrace all the aspects of Knowledge Society, but rather the ones that deal with economics dynamics, and especially, with business. Being still an ambitious goal, it is the one that this paper, certainly humbly, tries to achieve. We do not either try to make scientific explanations and formulations around knowledge society and knowledge economics, since this paper is more descriptive and speculative, given the novelty of the theme. We nonetheless apply common sense and common knowledge proper of our science. The Knowledge Society is a new system, one that will replace the Industrial Society and Capitalism. Capital is not the key issue: knowledge is. As Knowledge becomes accessible by all, and is not exclusive, a new economic dynamics generates. Society becomes more knowledgeable and shapes in a different manner the way relations are conducted. That in the end helps economies and democracies get stronger, as the power shifts to consumers and citizens. In the backbone of the Knowledge Society lies the Information and Communications Technologies and the Internet, as the infrastructure where Knowledge Society needs to live and grow. This in turn breaks down frontiers and draw cultures nearer. Knowledge in itself becomes a resource of the system and a factor of production, one that increases over time and is not exclusive but rather leveraging: knowledge becomes leveraged as people learn to communicate and work in networks. People, as the sole generator of knowledge, become a factor of production as well, and with it, a whole new scope of management comes into place, which has to address the key issue: how to make people generate valuable knowledge inside the organization. This new trio of factors people, knowledge, ICTs replace in importance the trio of Industrial Society that of land, labour and capital, and are in the core of the value creation based on knowledge. We have elaborated a model of what we name Knowledge Ecosystem that explains the dynamics of this value creation. We have described how this trio affects public policies and economic issues in a country. We also describe how businesses work in a Knowledge Society as compared to Industrial Society, and refer to real cases to argue our points of view. Our main conclusion is that, even though Knowledge Society is in its beginnings, it brings too many new paradigms that need to be addressed immediately, if not through a scientific approach, at least with a logical approach, as the scientific embodiment will come about as it has in most prior economic philosophies.

Knowledge in the scope of the present paper

Knowledge is defined by the Oxford English Dictionary as (i) expertise, and skills acquired by a person through experience or education; the theoretical or practical understanding of a subject, (ii) what is known in a particular field or in total; facts and information or (iii) awareness or familiarity gained by experience of a fact or situation. There is however no single agreed definition of knowledge presently, and there remain numerous competing theories. Management guru Tom Davenport once put it as information combined with experience, context, interpretation, and reflection. We think it to be something else. Knowledge is not data, nor is it information. Data is a representation of an event. For example, the GDP of Chile grew 5% as compared to last years 4% is data. But if you put this data in front of a fisherman in the extremities of Chile, he will not understand it. That makes the difference to what we name information. Information for us is Data in a context where it can be understood. Yet, still it is not knowledge. Knowledge for us is information that can be transformed into value. That is why we think that Knowledge System and Knowledge Economy are terms that have a real meaning. For the scope of the present paper, Knowledge simply exists. It is not a creation1, but rather something that lies in the innermost nature of all things, and as such is, in my opinion, a part of ontology. It comes about as the result of a thinking process in the minds of people. Then it is delivered in the form of ideas: written, talked of, or drawn, in such a way that it can be understandable and apprehended by the many. Knowledge may reveal or unveil itself, as happened with the famous anecdote of Newtons apple, or be discovered after a long process, as happened with Einsteins famous formulae on relativity, or be acquired as part of experience. In the end, it comes forward as the outcome of a process between persons and knowledge in itself. It is there. Aristotle says we suppose ourselves to possess unqualified scientific knowledge of a thing, as opposed to knowing it in the accidental way in which the sophist knows, when we think that we know the cause on which the fact depends, as the cause of that fact and of no other, and, further, that the fact could not be other than it is. Now that scientific knowing is something of this sort is evident witnesses both those who falsely claim it and those who actually possess it, since the former merely imagine them to be, while the latter are also actually, in the condition described. Consequently the proper object of unqualified scientific knowledge is something which cannot be other than it is2. For the purposes of this paper, however, and accordingly to what was said above, knowledge in a Knowledge Society comprises both meanings, the scientific and the sophist. This is so because of the dynamics of Knowledge Society, as it will be described later: knowing accidentally is also part of the dynamics Knowledge Society brings about.

Knowledge dynamics as a resource in society and businesses

The first thing that is remarkable in this new concept of Knowledge Society, focusing in economics and business, is that it is seen as a resource quite different from the Aristotelic conception or the definition of the term according to the Oxford Dictionary. According to Peter Drucker, it is the

1 2

i.e. something that is conceived from blank Aristotle, Posterior Analytics, Book 1 part 2 4

resource: That knowledge has become the resource rather than a resource is what makes our society post-capitalist. It changes, fundamentally, the structure of Society. It creates new social dynamics. It creates new politics3. In his book, Drucker describes in a very straightforward way how this happened. It began with Capitalism converting itself in a system. It brought first the Industrial Revolution thus bringing knowledge from the scope of being to the scope of doing, and making therefore knowledge a resource focused on tools, processes and products. It brought later the Productivity Revolution that put the focus of knowledge as a resource on work. And lately, it brought in the Management Revolution that puts the focus on knowledge in itself. This conception, however, focuses solely on business. It may refer to a knowledge-driven business conception, but not to a Knowledge Society. Knowledge, therefore, to become an economic system, must also embrace the rest of the society. Put in other terms, Drucker refers to supply side, but to talk properly of Knowledge economics, there must also be a demand side to the concept. Knowledge must also be at least a part of societys dynamics. And at present, it is. When Drucker wrote his book, Internet existed, but the World Wide Web (referred from now on indistinctively as the Net) did not. Drucker describes in his book how a series of tools, combined with theoretical knowledge and entrepreneurship, ended up in inventions that had a profound impact in the Society, thus creating a new dynamic and, finally, a new system. Nowhere can this idea be more properly applied than to the invention of the World Wide Web, which put together millions of people around the globe in less than 10 years, unleashed and revolutionized new ways of communicating, socializing and interfacing. Up to then, knowledge economics, as described by Drucker, was a matter discussed of and lived by an elite, that of the managers and knowledge workers inside a working and business environment. The World Wide Web incorporated the whole Society to the knowledge dynamics, and has been the primary invention that has made the Knowledge Society and the Knowledge Economy - possible. People all around the world use the same interface, the same processes, and the same tools, to interact between each other. They have equal access to information, data and the stock of knowledge. Mostly, for free. They can produce and distribute knowledge of their own. Again, mostly for free. Being producers as much as consumers of contents and knowledge the so called prosumer - is totally new as a concept in business literature. Therefore, a second remarkable thing about knowledge economics is that the primary resource the one that gives its name to the system is accessible in almost unlimited amounts by any who knows how to use the tools, and mostly for free. In the Industrial Society, all the factors of production land, labour and capital were limited and exclusive: if one had it, someone else could not have it. Knowledge knows not of such restrains: it is always growing. It can be shared by many without diminishing the value of none. In fact, as later will be seen, it can even enhance the value of the ones who share it when they share it, as opposed to use it alone, and in the process, it can revalue itself by this interaction. None of this existed inside the dynamics of the Industrial Society.

Peter Drucker, The Post Capitalist Society, Butterworth-Heinemann Ltd., 1993, pages 40-41 5

It is not strange therefore that the access to knowledge in the form or access to broadband - has been set upon as a primary goal for Governments as a means of incorporating the country to the Knowledge Society or the Information Society named one way or the other so that all people benefit of its opportunities and a digital divide which would discriminate people connected to the Net, who have access to its benefits, from people not connected, who would be held apart is avoided. This sole fact shows that Knowledge Society and Knowledge Economy is on the Government agenda and is part of public policy making. Not so much part of Academia, for the time being, and incredibly as it might seem. It took a long time to the author to find anything serious about the subject, let alone contact any of the few authors existing none focused in knowledge economy itself, but rather on sidelines that help knowledge economy occur, like innovation. The European Union, for instance, under the Lisbon Strategy aims to transform itself in the most dynamic and competitive knowledge-based economy in the world by 2010. It was relaunched in 2005 and refocused on the creation of growth and jobs. A recent study4 stated that the massive adoption of broadband in some European countries under the policies undertaken by the Governments of the said countries in close collaboration with private sector, provided process improvements of 5% and 10% to labour productivity in the manufacturing and services sectors; accelerated and automated information flows between companies, enabling an increased specialization in knowledge-intensive activities, generating a displacement of 725,000 jobs per year in Europe from traditional economic sectors to the business services sector, while at the same time creating 440,000 jobs in the business services sector and 549,000 jobs in other sectors in innovative knowledge-oriented activities. All of which, bottom line, resulted in a growth of the European Gross Value Added (GVA) of 82.4 bn per year (+0.71%) in 2006. Drucker says in his book that what made the Capitalist a system were not so much the inventions of the tools that it brought through, but the speed that those tools were adopted globally5. Yet, it was nothing compared to the speed in which the World Wide Web was adopted globally. Through it, new ways of doing business came forward business models impossible or unthought-of only years before the invention of the Net. Corporations were launched and in few years were valued at billions of dollars in the stock markets6. Never had that happened before, and it has become hard data. The huge mortality of businesses that happened with the bubble burst was not the end of the new paradigms, just the natural selection of the businesses fit for them, and was something that also had happened before in the Industrial Society. Moreover all of a sudden, Governments all around the world began to incorporate public policies for adoption of broadband7, for smarter uses of ICTs8, for reducing the digital divide inside their countries, etc. Knowledge Society might have not been talked of in Academia for now, but it is there.

Martin Fornefeld, Gilles Delaunay, Dieter Elixmann: The Impact of Broadband on Growth and Productivity. A Study on Behalf of the European Commision, 2008 5 Op cit, Chapter 1, From capitalism to knowledge society 6 Examples: Google, Amazon, AOL, Facebook, Skype, YouTube 7 For example, the EEC Broadband for All policy dating from 2006, or the OECD 2004 Recommendation of the Council on Broadband Development 6

From our perspective, Knowledge Society is shaping itself as a System, just as Capitalism was, by the interaction of three resources, which somehow resemble the three resources assigned to the Capitalist Society. Alike the factors of production known to the Capitalist System were Land, Labor and Capital, we think that People, Knowledge and ICTs are the factors of production to Knowledge Society. How is that? For a Knowledge Society to transform itself into an economic system, the basic dynamics is in the creation of value from knowledge. This happens by the interaction of people and knowledge itself as a resource that also creates value for the same people in the form of human capital. The tool that makes this possible is the Information and Communication Technology, giving birth to the knowledge worker:

Paul M. Romer, in his New Growth Theory identifies creativity as the new factor of production. But creativity does not come from nowhere: it comes from people. Factors of production deal with things existing, like was the case with land, capital or labor. People exist previously. Knowledge exists previously. ICTs exist previously. Creativity is something that comes from a process: in itself, it is a process. Of course, the more creative people are, the more productive or competitive they become, and as a whole, the environment where they live. In a way, factors of production and resources become blended. In the end, this is rather a sophist discussion than a practical one. People produce knowledge using their existing knowledge, their creativity, their personal values, and the tools needed to access and produce it. Knowledge becomes value and wealth when used and applied by people, and it is leveraged when the tool for the generation and diffusion of the value created is ICTs.

Acronym for Information and Communication Techonologies 7

Why people? It is people who discover knowledge, as defined previously, existing in reality, in values, in things, in thoughts anywhere. Knowledge is a resource but also the transforming driver to more knowledge, in an everlasting value creation cycle that materializes in higher human capital, more products and services, more value creation. The process by which people interact with, and develop knowledge, empower the same people as to their intellectual and human capital, in a way we describe later. No longer is it labour the important factor, but people with all its complexity and potential. This happens because, as we explain bellow, knowledge, as a resource, resides in people, who develop it, hold it, and take it with them. That people and knowledge become a resource, is a new idea in economic thought. Why Knowledge? For Drucker, Knowledge is the only meaningful resource today9. The traditional factors of production land (i.e. natural resources), labour and capital have not disappeared, but become secondary. They can be obtained and obtained easily, provided there is knowledge. And knowledge in this new meaning is knowledge as a utility, knowledge as the means to obtain social and economic results. These developments are responses to an irreversible change: knowledge is now being applied to knowledge. This interaction of knowledge coming from people and people empowering themselves through knowledge is what creates the knowledge worker and the knowledge manager inside business environments. Drucker in his book describes some of the characteristics of the knowledge worker and of the knowledge manager, who make the System a Knowledge Economy10: Knowledge workers own the means of production, that is, their knowledge Machine operators in the factory [in the Capitalist Society] did as they were told. The machine decided not only what to do but how to do it. The knowledge employee may need a machine whether a computer, an ultrasound analyzer or the astronomers telescope. But neither of them tells knowledge workers what to do, let alone how to do it. Without this knowledge, that is the property of the employee, the machine is unproductive The worker under capitalism was totally dependent on the machine. The knowledge worker is interdependent with the tools of production (like computers, ultrasound analyzer or telescope) and the machine is dependent on the employee, not the other way around Workers throughout history could be supervised. They could be told what to do, how to do it, how fast to do it, and so on. Knowledge employees cannot, in effect, be supervised Loyalty of the knowledge worker cannot be obtained by the paycheque. It has to be earned by proving to knowledge workers that the organization which presently employs them offers them exceptional opportunities for being effective and performing

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Op cit, page 38 Op cit, page 58 8

Drucker especially describes how this new dynamics has changed the meaning and the role of management: When I first began to study management a manager was defined as someone who is responsible for the work of subordinates. A manager, in other words, was a boss, and management was rank and power But by the early 1950s, the definition had already changed to a manager is responsible for the performance of people. Now we know that this also is too narrow a definition. The right definition is a manager is responsible for the application and performance of knowledge.11 As Leibold, Gilbert & Probst put it, we are at a juncture in the era or organizational leadership in which the traditional Sloan, Taylor and Ford approaches can no longer cope with the exploding opportunities afforded in a global economy in rapid transition12. Looking closely to knowledge-driven companies like Google, Facebook, Microsoft, IBM, General Electric or JP Morgan, all what is said above becomes self-evident. Especially in the businesses that lay around the Internet as a platform or in ICT applications which are essentially knowledge production businesses in a professional - successful companies have successful managers who have learned how to make knowledge be transformed from a resource to a product or service, and have been able to create an environment where knowledge workers boost their performance working both individually and as team13. Especially in those areas, the triangle of People, Knowledge and ICts as primary tool, work harmonically into producing value. It might be argued that this only applies to ICTs and Internet-based businesses, but not to the rest of the activities and businesses, and therefore, it cannot be sought of as an economic or social system. Drucker, in effect, does not confine as seen from quotes above- the tools of production to ICTs. But the trend is that increasingly all devices used by knowledge workers are developing interfaces towards ICTs and especially the Internet where knowledge stays. That Information and Communication Technologies have become increasingly the backbone of social and economic activity is what makes Society a knowledge one, because that is the vehicle of universal access to the one important resource that gives its name to the Society. All what is in the Net is a huge stock of knowledge, information and data. Of course, knowledge may be produced outside the Net and without need of a computer. Still, it must be distributed quickly enough as to make it work and used in order to find its true potential value. In other terms, the Society that works networked and plugged on the Net is one step further than one who is not connected to the Net, as the Industrial Society worked. If it was otherwise, why would all countries in the OECD foster so persistently the deployment of broadband for all citizens and organizations? Networking is, as will be discussed later, another remarkable feature of Knowledge Society, which makes value production faster, bigger, easier and more efficient. Likewise, businesses that work connected are one step further than those who do not work

Op cit, page 40 Leibold, Marius; Gilbert, J.B.; Probst, Michael Gibbert: Strategic Management in the Knowledge Economy, Publicis Corportae Publishing Second Edition, 2005 13 Ref. for example to IBM in FATHER, SON & CO. My life at IBM and beyond, Thomas Watson Jr, 1990. Or, Hard Drive: Bill Gates And The Making Of The Microsoft Empire, James Wallace & Jim Erickson, 1993 9
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connected. The differences of a Knowledge economy with the Capitalist or Industrial economy are discussed later, where the clue role played by ICTs will become more apparent. As said above, the access of the non-business community or the society to the Net becomes an important part of the Knowledge Society as much as of the Knowledge Economy. It creates a new market. It creates new figures, such as the commented prosumer. Both businesses and market coexist in a new worldwide dimension, a digital one, by which all can access all, creating a totally new social and economic dynamic which is still in its beginnings. Through this connection the non-business people become and create a new market, with a different profile to the one exhibited up to now. The way this new market acquaints its needs, looks for information, makes decisions, and carries them on, changes. And this creates new opportunities and challenges, both for businesses and market alike. The sole fact that ordinary people can have unlimited access to information and knowledge practically for free, changes the nature of how things work though, paradoxically, not the underlying hypothesis of modern economics: on the Net, equality of access to information becomes real, not just hypothetical. Bill Gates called it Capitalism without friction14, though it is far more than that. It is a new System, as much as Capitalism was a new System different from Mercantilism. But on the Net it does happen that there is freedom of concurrence, equal access to information and freedom of competence. Legislation pertaining activities that happen on the Net go far beyond actual facts, and there is wide consensus that the role of Governments is to foster on the one hand and harmonize on the other what takes place on the Net, leaving private sector to lead. Thus, a truly free market which is more hypothetical than real outside the Net - becomes a reality on the Net. Intellectual capital becomes paramount in Knowledge Economics, and thus happens therefore with Intellectual Property Rights, which is challenged perhaps as never had been before. Some believe that free intellectual property (as the shareware computer program or the Open Source concept proves) is unavoidable. Patents over knowledge are each time more vulnerable, and what happened in the software industry many years ago, when the inventor of the first spreadsheet was denied the patenting of his invention, might show what is to come. Intellectual Capital, derived from knowledge development and knowledge management would be, according to Leif Edvison and Michael S. Malone, the explanation why market capitalization of corporations differs so much from book value. That difference is not a constant. Some companies simply are valued at many times the value their Balances show and it doesnt necessarily have to do with the industry or economic sector where they are placed. It is not a phenomenon attributable only to high-tech corporations or those in the NASDAQ. Even between companies that are in the same market, with the same products and results alike, the ratio market cap/book value differs. Why? Edvison and Malone say it is because the market is able to value the Intellectual Capital, which is not incorporated to the Balance sheet. And that capital is the outcome or the impact of knowledge development we do not see knowledge as a creation, as explained before and knowledge management.

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Gates, William: The New Road Ahead, Mac Graw Hill, 1995 10

Knowledge is inherent to know how. But in know-how there are two parts: know, and how. The first is accessible through the Net. Its the second the one that counts, both in the developing of new knowledge and the use of the existing one something that always creates new knowledge as well. So, its how I use knowledge what becomes important and not the possession of or access to knowledge in itself. How I use it for achieving my goals, for increasing my performance, for growing as a human being is what matters to me and leads my acts. And if that is the case, the homo sapiens of this new Society is definitively different in its ways than what it used to be, because in Capitalism access to the resources was the key issue. People living in a Knowledge Society require different skills, and that in turn means a different education. The way people are educated today is unfit to what people will need for their every day living in a Knowledge Society. Therefore, new ways in education become one of the biggest challenges of the Knowledge Society, because up to now knowledge was itself the objective of education, and all of a sudden, it has become a resource, the resource. Therefore, before we discuss on how Knowledge economics work in business, we must stop a while into education for a Knowledge Society.

Education for knowledge citizens

Swedish Professor Win Veen, of the Faculty of Technology, Policy and Management at Delft Technological University introduced the concept of Homo Zappiens in his book Homo Zappiens, Growing up in a digital age15. The concept, by the way, comes from the activity of zapping through different contents with a remote control, a reaction that happens due to the fact that there are numberless choices that can be accessed immediately, and the consumer wants to take a pick at all of them before deciding which to take. A child or young person at this time is able to interact with many stimuli at the same time. That is multitasking. Therefore, at home the student has the focus and latent attention level continuously switching: listening to favorite music, while chatting, while surfing the Net, while doing Math homework. At school, nonetheless, the education methodology is based on monotasking: teacher speaks, students listens, makes questions, is answered, makes activity, ends activity, gives results. The student at home works mainly with iconic skills, yet at school it is text skills that make the basis of education. The approach of education process is linear, whereas while interacting inside the Net it is non-linear. At school the student must process information that comes in a continued form, whereas on the Net information is processed discontinuously. All this puts a challenge to the education process, since in the future the student will carry most of its activity on the Net. There is also a different approach as to the ways the media is used in the learning process. At school books is the main media for learning. At home, games and applications in a computer and the net are the main media. Books require interpreting; games and applications, configuring. In Books, all words and activities are of the same importance not meaning they are of the same value whereas in the games and applications there are different paths and opportunities that can be chosen. The book is static, the game is dynamic. The book is an object; the game is both an object and a process. The book is there always for the same end, whereas games and applications have multiple ends. The book is a one way communication; games are community based communications. With a book the reader is a spectator; with the game the player is immersed and

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Vim Ween and Ben Vrakking, Network Continuum Education, 2006 11

the person, transported. There have been recently pilot programs that incorporate games with computers Online in learning processes, like the one that took place in Chile inside the Enlaces Program, with heartening results, though no escalation up until now. Therefore, this new homo zappiens learns in a different way that the traditional homo sapiens. The reference framework is digital and multimedia oriented. The new student uses Menus, keywords and tags as references, and relies on challenge, creativity and self esteem. For homozappiens the Net is an extension of the self. Sharing is winning a new paradigm to which we will refer later when discussing knowledge economics in businesses. Services are personalized yet another paradigm of knowledge-based markets. Personal references come from peers on the Net, and organization matters all things that matter as well in knowledge business, as will be seen. Professor Veen concludes that for a creative knowledge intensive society a creative education is needed, one based on trust, challenge, self direction (which is in line with what Drucker says of knowledge worker), relevance, immersion, passion and talents. Return on talent is a concept that has been talked of recently16, and one that might become increasingly important as knowledge becomes the main resource therefore, the main asset and knowledge, as said above, comes from interaction of people with knowledge. Those countries where this issue is addressed properly first will definitively have a competitive edge over those countries that do not. The what might be clear, but the how is the big challenge to come. Underdeveloped economies may become developed and leaders - just by making the right decisions in this matter.

Knowledge as an economic resource

Considering knowledge as a resource from the macroeconomic point of view has consequences worth studying. What does that mean? How does it affect economics as Science? How does it affect the design and deployment of economic policies for the creation of wealth, the betterment of people, and the increase in income? What new dimensions does it bring about and what needs to be measured that has not up to now? Up to now, most countries who have been investing aggressively in transforming their economies from industrial-based into Knowledge-based economies are doing so solely on will and beleif. They simply believe it the right thing to do, though they did not have studies or figures to support their policies when the policies started. Just recently have the figures began to pour, as was shown above in the case of Europe, or the USA. When I attended my Economics Classes at college, I remember Economy being defined as the management of scarce resources. If knowledge has become a resource, and there is unlimited access to it, as much in scope as in quantity and quality, it might very much happen that, in a near future, we begin to study the management of unlimited resources rather than scarce. The stock of knowledge is accessible on the Net. More than 200 million questions are made daily to the Net17, giving millions of possible results to those queries. Whatever one may ask, at least thousands of

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http://www.joesantana.com/take_charge_of_your_return_on_talent.htm Ref: Google 12

answers become accessible. So again, it is not so much a matter of access to the resource as to knowing what to do with it once accessed. But that is just an anecdote. What is clear is that, if knowledge becomes a resource as much as a product it follows that the economic wealth of a Nation will depend on how well it performs in developing and using knowledge for value creation. And that again puts the focus on the three pillars of knowledge for value creation: people, access to knowledge stock and ICTs. Putting natural resources and Capital to work in order to attain growth and produce wealth was the big issue in the Capitalist system. Putting talents to work for the same goal is the main issue for Knowledge system. This implies finding the talents of the country, developing them as much possible to their full potential, and allocating them where they can produce more, yet earning better income. Put in simple economic terms: a Nation where people work in what they like most and have better skills will be more competitive. It is self evident and common sense that the GDP of an imaginary Nation where that was obtained would be far higher than with the actual economic paradigms. How can that be proven is a different matter, and exceeds the scope of this Paper. What becomes apparent is that if knowledge is the main resource for the development of a Nation, education becomes an economic concern in a Knowledge Society, a status it did not have until now it was mainly a social concern. And that, as Drucker would point out, changes social dynamics and creates new politics. If in Knowledge Society knowledge is the main resource, and knowledge comes from the people that live in a country, what growth potential does the country have? How much wealth can the combined neurons of all people employed in what they have better skills and like more produce? The challenge behind these two questions is huge, and puts the focus on the main issue for the knowledge economics of the future: developing the knowledge resources of the country. The biggest challenged issue is the economy development policies. Up to now, there were ways to measure up and find the return on investments of things physical that had to do with the development of the economy. But we do not have ways to measure the return on capital invested in making people use better their intelligence, which is what would make the resource grow, and hence the economy grow. The issue that in Knowledge Society the prime raw material, knowledge, comes from people, not natural resources or things that can be measured means that not much can be done in economic terms under present economic theories. The main concern in economic terms will become to produce knowledge which transforms into value and wealth for the Mation, and that can only come from knowledgeable people. Yet, just investing more money in education does not mean automatically that knowledge will grow, though it should. What is clear is that quality of education is basic for economic growth in a Knowledge Society. The ideas discussed above deal precisely with this issue, which was not part of Economics until the appearance of Knowledge Society. Return on investment in education will be part of Knowledge Economics, as will be also the allocation of knowledgeable resources people where they can perform better. And that means finding out for each one what natural skills and what natural likes she or he has, making them
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apparent and helping the market be able to match knowledge necessities with knowledge availabilities. Not only education becomes an economic concern. As said above, the productivity of knowledge depends upon other things, on creativity. Ceteris paribus, between two Nations with the same initial Capital stock, population, education, and natural resources, the one more creative will be more competitive. But how can creativeness be measured? Some use investment in R&D as a means of measuring. Others use number of patents per 1,000 inhabitants. We find none of them good enough, because when creativity becomes a general attitude of people, the outcome doesnt depend so much on money spent or inventions patented. Most creative ways of life will go unpatented, and yet, that Nation will be more competitive. R&D will not be seen as special work out of the ordinary, but as fact of everyday life. All people will conduct his or her personal R&D. Which in fact, many already do. The thing is, at present we do not have a good way to measure creativeness, and most certainly creativeness will lead to bigger return and productivity on knowledge, and therefore, to bigger value creation and wealth. Put in simple economic terms: a more creative Nation will produce more knowledge with less money. In microeconomic terms, we believe creativeness is the productivity of knowledge. Creativeness is to Knowledge Economics what Productivity was to Industrial Economy. We write more about that later. Knowledge jobs are better paid for than industrial or agricultural jobs. Knowledge jobs are intense users of ICts. When using ICTs, thanks to the Net, knowledge workers become ubiquitous. And that in turn brings in changes that may affect the whole economy of a country, as much as its labor legislation. It brings in new opportunities as much as new challenges, and can make a Nation aspire to becoming developed in a shorter time. This is so because with knowledge jobs the work can be done outside the organization premises. In fact, entire processes can be and are outsourced in other countries. Up to now, the most globalization could help in an Industrial Society was that organizations could allocate whole business units in other countries with cheaper or better transformation costs. But it had never happened that processes could be split and allocate each piece in different countries. In California, for example, people taking a scanner or an X-Ray will go to a Hospital to do so, but with an ICT technology called RIS/PACS, the results will be digitalized in a server and accessed by a radiologist living in Bangalore, India far cheaper than a North American radiologist. A European Engineering company can hire engineers in Chile to work in an International Engineering Contract, in the stage of design. This new paradigm receives the name of Business Process Outsourcing (BPO), and it is a thriving industry worldwide. This is a product of the Knowledge Society. In Chile, total BPO sales have come to 1 billion dollars in less than 5 years. It took nearly 20 years for the renamed Chilean wine industry to get to that amount. Worldwide, the BPO market in 2005, according to a study conducted by the Gartner Group, was worth US$122 to US$154 billions. According to the latest prediction, this market could reach US$450 billion by year 201218.

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John NelsonHall at http://www.nelson-hall.com/service-line-programs/bpo-marketdevelopment/?avpage-views=article&id=62422&fv=1 14

Labour, therefore, is no longer attached to a place, but rather to a process, which may be run from anywhere in the world and can be split into pieces. This simply means one can live in one place and work in another. A whole country, like a Caribbean Island, could make its economy thrive by providing good access to broadband and inviting knowledge workers to establish there bringing along their income with them. Knowledge labour on the one hand becomes immaterial and crosses borders. And it can also change the ways it is paid for. In an industrial Economy, when processes had to go in paper and attached to the industrial cycle, people needed to go to the office to do their work. The key issue for performance and productivity was symmetric relationship: all had to be there so the process could work. Therefore, paying hired people had to do with presence. All the legislation and the decision making on labour in the industrial-based business models have to do with hours of presence at the premises. Now, with knowledge-based processes, the key issue is deliverables. Which means more and more people will become independent contractors of different companies without necessarily having a job. Therefore, economic policies regarding work will have to incorporate the fact that works no longer mean contracts based in hours of presence in the premises, but rather based in deliverables, and develop a way of measuring employment in this new way. The backbone of Knowledge Society on the other hand becomes the Net and ICTs. It follows then that those Nations with bigger IT savvy will be more likely to use the backbone productively and therefore be more competitive worldwide. That idea is behind much of the broadband and ICT policies that the leading broadband nations have implemented. Japan, for example, aims to have 100% of the population with broadband by the end of 2010, with access to multiple devices not only computers and 20% of their population teleworking by the same year19. Up to now we have discussed what is needed to produce knowledge in the source. But that is not enough to create value. Knowledge comes in the form of ideas, which are expressed in words, images, voices. Therefore it follows the better a country is in expressing ideas, the more competitive it will be. The degradation in the use of language via its simplification, or the incorrect usage of terms then becomes a liability for the productivity of a Nation. Culture becomes not an aspiration issue for Knowledge Nations but rather a necessity. Use of language the tool to express ideas behind knowledge becomes a factor of productivity of knowledge. Knowledge comes from people, but better and bigger knowledge comes from people networking. And BPO, as one of the big issues that may transform the way businesses and economies are run, definitively means networking. Networking on the Net has brought about an interesting discussion: is Metcalfes law applicable to the Knowledge Economy? Metcalfe's law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system. It characterizes many of the network effects of communication technologies and networks such as the Internet, social networking, and

19

The new IT reform strategy, en varios sitios como http://www.dosite.go.jp/e/ja/jst/jst_nirs2006.html 15

the World Wide Web. It has been argued upon and there is no consensus whether the relation is a square or a logarithmic. But the concept remains in essence the same: the value of the Net is higher than the value of the sum of elements that constitute the Net. If applicable to Knowledge Economics, it would mean that a Society working networked would produce bigger value than not connected on the Net. Is that true? Through the Net a country can definitively be more efficient. Processes which out of the Net mean loss of time especially when related to moving papers or bureaucratic processes can be done Online and save millions of man-hours to the Economy. This applies in the relations between organizations (public or private) and citizens. Lorenzo Madrid has studied this phenomenon in a paper20.

Source: Presentation on Interoperability, courtesy of Lorenzo Madrid

Processes inside the Governments were designed regarding the needs and particularities of each department. They do not have a transversal view. Hence, people and organizations need to go to various government departments to carry one process. Many times, part of the process is to gather information inside one Governmental office as an input to the Governmental office who owns the process, instead of taking the information directly. To that effect, there is actually a worldwide movement towards interoperability the ability to connect different data services inside Government and make processes run faster, with less errors and above all, with less lost hours of citizens and businesses. Municipalities of all around the world addressed this issue at Stockholm and concluded that the one of the next concerns for their e-government services is to

20

Lorenzo Madrid: The Economic Impact of Interoperability, 2005 16

redesign their processes citizen-oriented. Lorenzo Madrid21 developed a Model that evaluates the impact of interoperability, according to the number of transactions made with Governmental agencies and the minutes required for each transaction. In broad terms, the impact varies from 0.04% to 3.00% of the GDP. But it also affects relations between private sector and people (Business to Consumer or B2C). The banking system is a good example. As former CEO John Reed of Citibank once put it, modey is information in movement. Therefore, modern banking organizations are primarily knowledge organizations, whose factory processes are knowledge processes. For instance, transactions made Online are up to 90% cheaper than conducted through a brick-and-mortar Bank Agency, and also save millions of hours of customers from a nationwide perspective. Therefore, public policies that foster the use of electronic transactions can make a whole economy more efficient. And it also affects relationships between organizations, but that will be discussed later. All in all, an economy that works networked on the Net is more productive and competitive than one that doesnt. The Metcalfe Law applies, though perhaps not with exactly the same formula. The following figure shows this interdependence:

Source: Presentation on Interoperability, courtesy of Lorenzo Madrid

Another paramount change that is coming to reality with the deployment of the Net as the marketplace is the dematerialization of products and services, which will also have impact on Knowledge Economics.

21

Op cit 17

As soon as the Uruguay Round was finished, it became obsolete. That is because many of the items agreed upon in the General Customs Agreement transformed from material to digital especially contents (music, video, texts). All of a sudden billions of dollars could be acquired and delivered directly through digitalized means away from customs, and nearly impossible to track. This brought into discussion a series of issues affecting customs, taxation and money movements from one country to the other. During the first years, the Clinton administration proposed, and got, a moratorium of the taxation issue in sales on the Net. The idea was to watch and see before making any laws enforceable, so as not to interfere with the new paradigms emerging and the new economy forming. It might have been a bit hypocritical approach, considering that taxes were in fact charged for sales on the Net, and that United States was the biggest seller of goods through the Net hence, the main tax gatherer. Most countries did not pay much attention to this issue. The Author proposed a 5% universal tax on Internet transactions to be divided evenly between the seller and buyer country, during the WTO Summit at Seattle, back in 199922, which was not considered, though it brought the attraction of the press. This issue is no longer one to postpone, since it will affect the economies in two ways, as more and more products become dematerialized: 1. It will make those countries with higher value added tax less competitive for sales on the new world market, on the Net 2. It will make those countries that produce contents more vulnerable due to piracy. This is perhaps the reason behind the intellectual property rights being so much stressed by USA and Europe in Free Trade Agreements with developing Nations. There is another aspect dealing with the demand side of the economy. In a Knowledge Society consumers are more knowledgeable. Hence, they buy in a more informed way. By means of Social networking, they also have a stronger word in the market. They can denounce bad practices from companies, and make an impact on their sales. In the end, there is a shift of the Balance of power as will be seen more deeply after from the corporations to the market. But the main economic effect is that this new dynamics pushes towards better products and services inside the economy, since the asymmetry of information that existed before the Net existed is replaced by thorough information to and from the market. Therefore, the Nation which better develops the digital markets will foster a more competitive economy. Finally, another characteristic of a Knowledge Economy that may have an impact on Public Policies is the capital investment issue. All Governments have to allocate scarce financial resources in places where they deem the impact on the quality of life for citizens will be better, and where the development of the Nation is better served. Throughout the Industrial era it was the idea of Governments that the Wealth of the country had to come from fostering industry based economies. Such was the approach of most of the so called economic miracles as Japan, Korea or

22

http://news.bbc.co.uk/2/hi/business/544725.stm 18

Germany. Today the approach of the same countries is focused on Knowledge Society. Knowledge based economic cells need less capital expenditure in order to become sustainable. Therefore, allocation of State monies for fostering economic activity is more efficiently spent in knowledge based initiatives than in other sectors of the economy, provided the risk of the investment is the same. There is a lot of arguing around the idea that knowledge-based businesses are more risky than businesses in the rest of the economic sectors, but that has not be shown yet with serious studies. Mortality of new businesses in knowledge-based industries could prove a good figure if it was published. Anyhow, a Nation that fosters knowledge-based business initiatives will be more efficient in resource allocation, since these industries are less capital intensive than alternative ones, and will have a bigger impact on the economy of the country. In conclusion: 1. Knowledge Society brings in a new Economic System where new ways of measuring need to be developed in order to design, implement and track Economic Policies that affect the development of Nations, Public finances and the mobility of work. 2. Knowledge Economics incorporate new elements and concepts for which existing Economic Theories have no explanation, and which will become increasingly important for the growth of the Economy of countries. 3. Common sense and reasoning can give many of the features and characteristics of the Knowledge Economy, enough to have basic Public Policies that foster Knowledge Society development

What differs in Knowledge and Industrial Society as related to business

After analyzing the impact of Knowledge Society in National Economy we will now analyze its impact in Businesses. For knowledge, becoming a critical resource has also changed the way business is designed and conducted. We will describe what differences there are in general terms and in relation to the value chain with the Industrial-based Business Models, where most of the paradigms being used in Business now-a-days still lie. Business in Knowledge Society is intense in know-how Businesses in Industrial Society were intense in Capital, whereas in Knowledge Society they are intense in know how. This in turn means knowledge-based businesses require less capital than industry-based businesses to create the same market value, and require less time to achieve the same turnover. This has happened with most the companies which have arisen around the digital revolution. Google was launched in 1998 by two people. Only eight years later it was in the Stock Market, valued over 100 billion dollars. Skype was formed by one programmer who wanted to communicate via computer with friends around the world without paying phone calls. In only four years more than 100 million subscribers around the world made Skype one of the biggest voice services worldwide. E Bay bought it for 2.5 billion dollars that fourth year of existence. Facebook was launched by a student who was upset with the social networking he was using. In only three years, more than 200 million people all around the world were using the platform, and though Facebook is not traded, the private investments undertaken by the likes of Microsoft valued the company over 30 billion dollars last year. This had never happened before in Industrial Economy.
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The center of production in Industrial Society is the factory, for which access to money is the prime issue. Having the latest machinery available is central to having a competitive edge in this case. The center of production in Knowledge Society is people thinking, for which State-of-the-Art know how is what makes the difference in competitive terms. Behind Googles advertising machine there is code and know how, especially data intelligence. Before Google, the dominant player in the search engine industry was Yahoo! Google, in fact, was a late comer, but revolutionized the whole concept of searching on the Net, just by applying the same knowledge in a more creative way. Creativity is the productivity of Knowledge This takes us to the idea of knowledge productivity, defined above as creativity. Creativity is what makes knowledge yield more. Given two companies with the same means of production and the same know how, the one that is more creative will have bigger returns of the two. It is the way, the how of knowledge application. And in the process, a new state-of-the-art is created. With creativity, knowledge always steps to a next stage. Creativity makes knowledge perform better. Say M is means of production (infrastructure, explicit know how of processes, market, suppliers, etc.) Say R1 is the expected result of using M Say R2 is the real result using M

We could then measure creativity factor as Cr = (R2 - R1)

M
Businesses are consumer-oriented in Knowledge Society The whole idea behind Industrial Society is that of massification of production to attend a massive market. Before Industrial revolution, when someone wanted a suit he would go to a Taylor. But a Taylor had a big limitation in the number of pieces he could produce. On the other hand, each piece would be one unique according to the needs of each particular customer. Industrial Revolution brought the concept of standardization, which brought in mass production, reducing costs and prices, and making in the way products accessible to parts of the society that were not attended before, or could not afford to pay for them. Productivity Revolution inside the Industrial Society brought a huge increment on the production productivity of the workers inside a factory, allowing big increases in wages paid to industrial workers. The better conceptualization of the idea behind can be taken form Henry Ford: I must pay good salaries to my workers in order that they in turn can buy my cars. That would have been impossible without making the work of those workers far more productive. Ford could pay more and have his workers buy his cars because he had done and redefined his duty as entrepreneur, finding the way to make labor productivity so much higher by the improvement in manufacturing processes. But in doing so, the market grew. Therefore, a new dynamics was generated by which leveraging the productivity of workers higher wages could be paid and workers with higher wages could have
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bigger purchasing power that in turn would transform in bigger sales of the companies that paid them more. Economic and wealth growth could follow. Fords lesson, by the way, has not yet been understood by entrepreneurs around the World one hundred years after it was formulated, giving place to a never ending cycle of stagnation and bad income distribution in their economies. Economies based on low wages might have their days counted as we enter the Knowledge Society, where the key issue is value added from knowledge rather than from machines which can be bought. Market is massive in the Industrial Society. The business cycle consists of the business organizations trying to understand what people want and making massively products that fit the most of them, following Gauss normal distribution. Marketing focuses in transactions, trying to sell each year more units than the year before. Market share is obtained by pursuing selling more units that satisfy in average more people. Marketing cannot be done in a one-to-one basis, simply because there is no information available, and to gather that information is too expensive as to make it worth doing. Marketing people who still work under the Industrial Society business models rely on massive tools like massive advertising. Even when they develop electronic commerce projects, they still think in terms of industrial marketing, and send massive e-mails promoting exactly in the same way they do offline. Market is personal in the Knowledge Society. The upcoming of the Internet and of E-Commerce allowed businesses to have what they could not afford in the Industrial Society: information of consumers on a one-to-one basis at a very low cost, which allows them to offer each client what she or he needs. Instead of market share, the idea behind is wallet share. Businesses like Amazon.com rely on their ability to make clients devote each year a bigger part of their wallet to the products and services sold under the marketplace of Amazon.com. To some extent, the stock market value of Amazon.com is the probability the stock market is assigning the company of achieving its goal. The more people buy in Amazon, the bigger the market value. To make it more apparent, if Amazon.com were able to take 100% of the wallet of all its customers, its market value would be that of a country of 20 million people. Perhaps a good example can help understand better the difference between the industrial approach and the knowledge approach to the market. Take Dell Computers compared with any other typical computer producer, like HP or Acer. All of them attend the same market, with more or less the same products, but have a different Business Model. The customer value proposition of Dell is a computer of your liking put in your home at the price of an off-the-shelf computer. The other companies customer value propositions differ very little from the right computer for the right person at the right price. Dell has direct information of the market on a one-by-one basis, even before people by its computers. The rest of the industry must gather information through indirect channels, i.e. distribution retailers. As people compose their computers in Dells Web Site, Dell can also tell which the big trends in what the market wants are. In the end, the Gauss distribution curve remakes itself, but in Dells case this is done directly by and from the market itself. Industrial Society was born product-oriented, since the big revolution it brought was the massification of manufacturing that allowed smaller costs and prices. It evolved into a market21

oriented approach by which, using marketing tools, companies intended to understand the needs of the market and attend them with their products and services. But mostly the marketing tools are used to convince the market to buy the product being manufactured and sold by the company. It still is a product-oriented business model. Knowledge Society on the contrary is customeroriented, because it has access to the information of the customer. In a way, Knowledge-based business models have knowledge of each customer, whereas Industry-based business models at most have knowledge of the whole market, and that makes a difference in the way business is understood and conducted. Likewise, costumers in a Knowledge based business model have better understanding of products offered to them by different brands and are more knowledgeable as consumers. Buying on the Net is mainly a rational process: people gather information for different alternatives and compare features as much as prices, and them make a meditated choice. It is very seldom that impulsive purchasing takes place on the Net. That is not so when off the Net, where many marketing campaigns focus in making the product desirable by stimulating the potential buyers impulses. For the Industrial Society, the value added was at the factory, in the infrastructure. In the Knowledge Society, the value added is in the service, in the way products are delivered and in the knowledge applied on the particular needs of the customer. What was value added in Industrial Society is just commodity in the Knowledge Society. As discussed before, it is not so much a matter of what is done which is answered with infrastructure- as of how it is done which is done with service. The added value of people in businesses in a Knowledge Society In an Industrial Society the industrial processes were what gave the competitive edge. In the Knowledge Society its the administrative and managerial processes what will give the competitive edge. In an Industrial Society knowledge resided in the machine. In the Knowledge Society its in the worker where knowledge resides. Therefore, in Industrial Society the worker attended the machine, whereas in the Knowledge Society its the other way around. Consequently, in the Industrial Society, if a worker went, nothing happened, since knowledge was in the factory. Unlikely, in Knowledge Society if the worker leaves his or her knowledge leaves. It was simple to replace a worker in the Industrial Society and it is not so simple in a Knowledge Society. It can be done, by the way, using ICTs with which knowledge is stored in ICTs and processes are taken electronically. There is a natural alignment in Knowledge Society between the dynamics of value creation of workers and of employers, which did not exist before. Up to now, the focus was on return on capital, and therefore, intellectual growth of the people involved in the value cycle was not an important issue. Once admitted that knowledge is the main resource this changes completely. For an organization whether a business, governmental or non profit knowledge becomes the origin of value and knowledge generators become the factory. The intellectual growth of people working in the organization becomes therefore a critical issue for growth of the company. Moreover, creativity is 100% a human feature. Machines cannot be creative in the sense a human can be. This leaves looking at people in a very different way than in the Industrial Society.
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Is the market ready to work with this new paradigm? Are organizations within a country prepared to put their money in searching for knowledge generators and allocating them properly? We have not found yet evidence to support the statement. Head hunting industry, on the one hand, still uses the same paradigms for searching and hiring people. Resumes are still oriented to what the candidate did, rather to what the candidate likes or is good at. Typical tests still focus on psychological matters which have little to do with the intellectual potential or the ability to create knowledge. At most, they look at how well would the candidate fit in a team. Organizations, on the other hand, are looking for knowledge generators that graduate from college, but they are not aware that knowledge allocation may start far away from that moment ideally, it should start at school. Unlike in the Industrial Society, where the manufacture of means of production for value creation were in another industrial organizations, in Knowledge Society the manufacture of means of production for value creation are part of the organization: people. Resource allocation in Industrial Society was something that could be objectively determined. Resource allocation in Knowledges Society prime factor of value generation will have to be done until better practices are developed by trial and error. Perhaps the best comparable process in actual life is the configuring of the best soccer team. Soccer players combine physical skills with knowledge. The coach, as another knowledge producer, must combine the proper people in the proper post in the proper moment, according to a changeable environment. He must continuously evaluate the situation (the market, to use the comparison properly) and adjust the players (means of production) to win the game. Microsoft Corporation, until recently, had developed an approach which considered finding the right person for the right assignment in the right moment. Every year it would place its goals, one by one, and then would look for the best team possible to achieve the goal. Not the whole team, just the leaders, who would in turn look inside the organization for the rest of the team to assemble, thus was taking the role of the coach of the soccer team comparison. Curiously, there is a very old organization which works this way everywhere in the world: the Army. The Army is composed of different units with defined objectives, missions and goals. But missions are understood in two ways: as the permanent reason why of the institution, or as a temporary goal to achieve. Around this second term, whenever a mission is created, it is assigned to a leader and an ad hoc structure is created. Once the mission is accomplished, the structure is dissolved and each of the members of the team is assigned to another mission or goes on with ordinary work. This model fits better in knowledge-based businesses. It requires managers knowing people very well, but what else can be expected from managers, once settled that knowledge is the main resource and that people in a team are the knowledge generators? This issue will certainly mean modifications in the curricula of Business Administration degrees and MBAs. Motivation at work is how value thrives in businesses in a Knowledge Society Bottom line, what was said before of a country will be fully applicable for a business: businesses will have to learn to put people to work where each of them has better skills and more affinity for
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the job. Managers will have to learn how to work with motivation for working. And perhaps the Theory of Motivation at Work teached by Professor Juan Antonio Perez Lopez at IESE Business School will be a source of inspiration on how to succeed on this task. For Professor Perez Lopez there are three reasons why someone would want to work. The first is due to the results the work will have for oneself. This reason, not being part of doing the work but of results from the job for me is named by Professor Perez Lopez as extrinsic motivation. The second motivation by which one would work has to do with work in itself: it is due to the rewarding aspects the work in itself has for oneself. This is named intrinsic motivation. The last reason is due to the results the work will have for others. It is due to the rewarding aspects for oneself that come from seeing the effect the work done has for other people. This motivation is named transcendental motivation23. The manager of the Knowledge Society will have to learn how to work with a combination of all three motivations. According to Professor Perez Lopez, a manager who works mainly with extrinsic motivation behaves as an Executive. The organization perhaps will be effective, but it will not be efficient. People will stay on for the pay or the fear of losing the job. Creativity in such an environment is certainly poor unless as used to defy the system. Therefore, long term knowledge value creation will also be poor, and a business run that way will necessarily become unproductive. A manager which works with intrinsic motivation behaves, according to Professor Perez Lopez as a Director. The organization will be effective and efficient. This is where people will be organized according to where personal skills and likings fit better, since the principal motivation is work in itself. It should create the optimal organization of the Knowledge Society, and yet, it does not. Why? Because even though someone would be working in the work best skilled and best liked for, that does not constitute per se a reason to stay in the organization. There might be other organizations that offer something else and better, inasmuch as though it would seem this environment to be ideal for working. In fact, knowledge workers, as noted by Drucker, would have less loyalty and change more of job than their previous industrial peers. A manager which works with transcendental motivation behaves, according to Professor Perez Lopez, as a Leader. A leader who is able to project the sense of mission and vision of the organization to the workers and make them share that mission and vision, making it part of their own mission and vision in life. A leader makes people be identified with the culture and values of the organization, and makes people want to be part of it. This in the end carries the biggest chances of creating value from knowledge in the long term, since it is focused in aligning the meaning of life for its workers with the mission of the organization. In such an organization people give the very best of themselves by finding a meaning for their work that aligns with a meaning for their lives.

23

Prez Lpez, Juan Antonio: Teora de la accin humana en la accin de las personas, Rialp 1991. 24

An Executive works with incentives and penalties to make people work. A Director works with organizational skills to make people work, finding the best team. A leader works with values to make people work. Anyone working needs at least a minimum of extrinsic motivation, but once that covered, the productivity of the worker and we are talking in terms of creativity depends much on the intrinsic and transcendental motivations. Thus the Theory of Motivation at Work of Juan Antonio Perez Lopez is part of Knowledge Economics. The extended corporation is part of business in a Knowledge Society To some extent, customers and suppliers have been always regarded as external to the organization in the Industrial Society. They are seen as part of the value chain, but not as part of the organization. This has changed with the upcoming of the Net and the evolution of new business models for business applications over the Net. The new approach of Knowledge-based businesses is that of the extended corporation, which perhaps was fostered through the concept of extranet that arose around the Net which incorporated customers as well as suppliers into processes of the corporation, as opposed to the intranet, which only incorporated people of the corporation. The extended corporation means the sharing of data and knowledge by the corporation, its suppliers and its customers. We already described how knowledge of customers needs is fostered by interaction with each customer through the Net. More knowledgeable customers, on the other hand, can better describe their needs and the key issues for decision making in purchasing any given product or service. But where this new paradigm is more apparent is in the supply-chain side. When knowledge becomes the resource, the knowledge of suppliers becomes part of the value chain of the corporation in the very same way as the knowledge of workers is part of the value chain of the corporation. The Net has helped to develop a common platform for processes, by which the process is transversal and run as one same process for the corporation and its suppliers alike. Processes in an Industrial Society except for the Japanese model - had physical and mental desks that separated suppliers from corporations. Those have been laid with Knowledge business models. Now suppliers are part of the corporations own process. This new phenomenon has been described by Choucri et al in a book written in 2007 as Virtual Extended Corporation24 Take Dell for example. Once a client buys a computer, the parts and pieces of that computer are accumulated and the sum of parts and pieces are transformed in a procurement order to the suppliers for the next production process, thus reducing investment in working capital. Each supplier is knowledgeable of the inner process of the corporation, and becomes part of it. Dell in fact chooses the suppliers in terms not only of price which is important but not the issue as was

24

Nazli Choucri,Dinsha Mistree,Farnaz Haghseta,Toufic Mehzer,Wallace R. Baker: Mapping sustainability: knowledge e-networking and the value chain, 2007, Springer 25

typical in Industrial Society but of knowledge of their products and capacity to develop whatever betterments are needed to attend what the end customer needs. The suppliers are the experts in each part and piece of a computer. Dell is the knowledge integrator in words of its Founder that makes it possible for end customers to have a computer designed at their exact taste. In Chile, there is a very good case in a Beer Company named CCU. CCU decided to incorporate the lupulus supplier into its industrial process of beer elaboration. Lupulus is the prime element for brewing beer. The selected supplier was in charge that there would always be lupulus in the premises of CCU according to the manufacturing plan. It would be its duty to make sure the supply was always at hand. It would be paid for the real monthly consumption of lupulus by CCU. This allowed CCU to lower its financial costs and reduce its working capital. Yet, that was only a first stage. The real knowledge stage came when it proposed its supplier to help in brewing a better beer with fewer input against a better price of lupulus per unit. All won with this knowledge-based model: the supplier, CCU and the consumer of CCUs beers. These are the type of changes knowledge-based models are bringing into businesses. Businesses in Knowledge Society follow Schumpeters destructive creation and Nashs equilibrium, but in collaborative environment In Industrial Society and in economics so far any given product has a market price which is single and determined. The amount of units the market is willing to buy at that price is also determined. Therefore, the total business value is fixed, and what happens then is an economical dynamics by which each part participating in the value chain tries to take the bigger bite of the cake. It all comes down to power games. Analyzing competition, suppliers, customers and government as competitors for the fixed value is then the logical approach to business strategy. Porters five forces make sense in that environment. But that scenario misunderstands knowledge dynamics. The first thing is, there is no such thing as equilibrium. Knowledge dynamics is essentially dynamic! Since knowledge is the main resource and factor, the inputs are not commoditized, but continuously evolving. A price is just a reference. Once we admit that each customer can have its own singular needs satisfied by what is offered, products are no longer a commodity, but a service which is valued by many more factors than just physical features or price. Perhaps the best economic theory that explains this new dynamic is one which was postulated in the first middle of the 20th century by Joseph A. Schumpeter. Instead of competence in prices, corporations compete in innovation to acquire a temporal monopoly or dominant player position. Once that happens, the incumbent is challenged new corporations trying to break the dominance by innovating on what already exists. When they succeed, a new incumbent takes the place of dominant player, until it is beaten by a new challenger with new innovation (creative destruction). The Market therefore characterizes by a sequence of temporary unstable equilibriums, in which competing for innovation is the main driver. Since innovation is clearly a product of knowledge, this theory fits with Knowledge Economics. One clear example where such dynamics happen is the Broadband Industry, where different technological platforms compete continuously for better performance at lower costs and prices for an increasing market.
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Yet, in Knowledge Economics there are other instances where even competitors share knowledge. It has been described as co-opetition by Authors Barry J. Nalebuff and Adam M. Branderburger25. It happens when sharing knowledge gives the co-opetitors a new state-of-the-art or a new business model that will put them in a better position than the one they would have competing directly. Since the output of the co-opetition agreement becomes input to the value creation of each of the participants, it is then when cooperation stops and competition starts. Again, it is not knowledge in itself which was generated in cooperation but what to do with it what makes the difference. This model has been observed in the software industry around the called open source model. The model states that the code for software must be opened to the community in order to use it for new applications or to make improvements in it. The incomes come from the support and upgrades of new applications, but all share the basic platform and collaborate in betterments of it. When betterments are done, all the community which will compete otherwise will be benefited from it at no cost. Linux operating system is a clear example of this model. The best theory applicable to this reality could be John Nashs equilibrium, but referred to cooperative systems instead of non-cooperative systems. We believe the win/win solution is higher in the first case, out of common sense: when working cooperatively competitors work on net, and the Metcalfe principle applies. That is, they will reach a better or more valuable knowledge base than when acting on there own, because more points of view will be tested and brainstormed. Once the new base knowledge of the competitors is reached becoming a new knowledge in itself that will benefit all participants they will compete in the applications of this new base knowledge. The backbone of Businesses in the Knowledge Society lie on the Net and ICTs Once and again during the description given in this section, we have referred to knowledge being generated, knowledge being accessed, knowledge being storied. Since knowledge is immaterial, the working tool that fits its nature is ICTs, and the environment where it can grow and develop itself is on the Net. Information and Communication Technologies are to Knowledge Society what the factory was to Industrial Society: its backbone. Value is created by knowledge applied by people using ICTs. Of course it can be used by people without the need of ICTs, but because knowledge is unlimited and immaterial its with ICTs how it can be accessed and widespread in a most efficient way today. In knowledge-based businesses ICTs are becoming the tool: for acknowledging the reality of the business, for finding the value creation, for evaluating the performance of the organization, for supervising the activities, for communicating, for process betterments. New categories of ICTs have thrived in the past 20 years: ERP (Enterprise Resource Programming), Electronic Workflows, CRM (Customer Relationship Management), BPM (Business Process Management), BI (Business Intelligence), MI (Market Intelligence), to name a few. All of which focus on giving tools for knowledge generation or giving tools for knowledge storage.

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Co-opetition, Currency Books, 1996 27

With ICTs organizations can find out which processes can be bettered and how; which workers perform better in which jobs and why; which type of customers are more attractive; which suppliers are more valuable (and not necessarily cheaper); which are the things where the corporation is more knowledgeable (which is its core knowledge) and how to transform it into income or objectives achieved, etc. It even can help define mission, vision and focus. It becomes therefore the platform over which the Knowledge Society operates.

A proposed knowledge-based organization ecosystem Model

How does knowledge come about in an organization and in the Society? How do the dynamics of knowledge work? Knowledge needs to be created and widespread. How does it happen? It also needs to be storied, where later it can be retrieved. How is it possible? Based on all the descriptions done, we have elaborated a Model which explains as best as possible all these issues and is described in the following figure:

Knowledge must be generated in order to exist; it must be managed in order to perform and it must be stored in order to endure and be accessed. Therefore, there are three environments in what we call the Knowledge Ecosystem: Generation, Management and Storage. The dynamics inside the environments and between them can be seen in the figure and are described now. People working in the organization generate knowledge through their experience, their imagination, their creativity and their ideas previously existing inside them. These ideas are affected by peoples scale of values (what is important in their lives; which is their cosmic vision; what their moral values are, etc.). On this last issue, there are those who believe (free thinkers)
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those spiritual matters limit knowledge generation, and others who believe (theists) those spiritual matters focus knowledge generation. Anyhow both agree spiritual values affect knowledge generation. Or, different ethics applied to knowledge may take to different results, ceteris paribus. Why do people generate knowledge? We find the Theory of Motivation at Work of Professor Perez Lopez, described before, to be the answer. That is, knowledge generation and work motivation have the same type of triggers, because in a Knowledge Society knowledge generation is the work. People may want to generate knowledge because it will make them rich or famous (extrinsic motivation). They might want to do it because they love the object of knowledge they are generating (intrinsic motivation). Or they might want to generate it just for the sake of people or the betterment of the world, with no other reward in mind (transcendent motivation). Or a mix of some or all of them. The point is knowledge generation has a motivation behind. It does not come out of the blue. It follows then that motivation is important for knowledge generation. As already discussed, creativity is a driver of knowledge value creation. We even defined it as knowledges productivity. Imagination helps provide meaning to experience and understanding to knowledge. Creativity is fueled by the process of either conscious or unconscious insight. It is therefore fueled by imagination. For knowledge to become value added inside an organization there must be a methodology. It can be a different one for each type of knowledge or each knowledge process. It can be agreed upon by consensus or reached to as part of an analytical or synthetic process. And for knowledge to become value there must be management of knowledge: on how to generate value, how to widespread the knowledge and how to store the knowledge thus generated. Knowledge in an organization is useless unless it is stored somehow. This is the only way for example that, if a knowledge worker leaves the organization, at least part of the knowledge created in interaction with the organizations environment will not be lost. Moreover, this is the best way the organization can accrue knowledge, make it grow. ICTs are the platform, or the infrastructure, or the factory that allows this to happen. Knowledge is retrieved by a pull process just as it is published under a push process from and to ICTs. There are a certain set of rules for making this happen as part of the management environment of knowledge which we name as knowledge metaphysics. They deal with the organization culture, its ways of understanding leadership, its mission, and its vision. They deal also with the structure of the organization: who does what and how and why. How work is organized to produce value arising from knowledge. So for making knowledge be generated and create value all of these elements must interact harmonically. This is the new dynamics, in our opinion, that Knowledge Society brings on businesses. It puts the focus on knowledge generation, management and storage to create value seamlessly. It makes knowledge be used as the resource.

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Transition from industrial-based Business model to knowledge-based business Model

Industrial Society put the emphasis on industrial processes, first regarding use of machines that brought the Industrial Revolution - and then the organization of work which brought the Productivity Revolution that made Marxist conceptions wrong - which are also knowledge processes in a way. But as Drucker points out, the Knowledge Society puts the emphasis in managing knowledge in itself. As corporations still use the Industrial Society paradigms (industrialbased business models), it is fit to ask how they can evolve into knowledge-based business models. As seen before in the comparison of business under an Industrial Society and a Knowledge Society, in a Knowledge Society know how is what matters most. It is the factor used more intensely. That know how affects the way relations of the business with the rest of the value chain are carried out. Value comes from knowledge, and therefore the value chain can be thought of as a knowledge chain. Instead of thinking in terms of aggregate, big figures under the concept of market, the organization needs to think in terms of customers, and incorporate them into the knowledge cycle. Instead of thinking in terms of supply chain the organization needs to think of suppliers as business partner, and incorporate them into the knowledge cycle. For understanding their core business, organizations must understand the core knowledge of the industry, and find where they are singular, where they have an edge-competing knowledge. It may come from many different sources: knowledge of customers, knowledge of processes, knowledge of the industrys dynamics, knowledge of value creation, knowledge of a particular approach of a solution, etc. Perhaps a good existing example of a transition from an Industrial-based business Model to a Knowledge-based Business Model is what took place at once-omnipresent IBM, the mammoth of computing until the early 90s, when in the term of a few years it went from being the dominant player in the industry world wide to near bankruptcy, and transformed itself from a manufacturing company to a services one. The key issue, from our perspective26, was that the course of actions IBM undertook willingly or unconsciously, we do not know meant a change of paradigm by which it focused on its core knowledge to define its future, and determined they were the best knowledgeable company in the world to deal with the use of ICTs in big corporations. Consequently income and profits lifted from manufacturing towards consulting. Corporate cultural issues as the not invented here lead way to whatever is better for the customer, even if it is not IBM brand. The primary objective became finding ICT solutions for customers which could enhance its market value or acquire a competitive edge in their business. From selling machines they switched to selling solutions. In less than 8 years, a loss of over 8 billion dollars transformed in a profit of almost 8 billion dollars. IBM leveraged its awesome experience of 80 years dealing with big corporations all around the world with the need to incorporate ICTs as a competitive strategic tool for their businesses. That was where IBM found it was singular, where it found itself confident to be the best-of-the-breed in the knowledge cycle of the industry.

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We wrote a case on this transformation, in Spanish, for Universidad Adolfo Ibez 30

The main lesson of IBM is that existing modern corporations which were built under industrialbased paradigms need to reinvent themselves on knowledge-based paradigms, and the first issue to address is: which is our core knowledge? Next, they need to create new products and services that derive from their core knowledge. Thirdly, they need to create knowledge processes and a knowledge platform where the knowledge processes will take place. Fourth, they need to make flexible their organizations and allocate people according to their knowledge, skills and likings for generating knowledge capital. Finally, they need tools to measure and use knowledge capital as it accrues. The value chain has shifted from an industrial-based one where key issues were capital expenditure, mass production and markets to a knowledge-based one where the main issue is converting knowledge into business. The success cases of some Internet-based companies show that the competition is not between big companies and small companies but between fast companies and slow companies. Fast companies may start small and get big very fast, challenging well established big companies in few years. Skype, with its peer-to-peer voice application, jeopardized a whole world industry devoted to international communications in only three years, just by applying knowledge to an existing program and to a business model which leveraged the potentials of the Net. Google transformed itself in the biggest advertising agency in the world by reinventing the business model towards a win-win environment (Google charges customers that advertise in the Search portal only when the advertising is clicked upon: instead of charging for people to see the ad, it charges for people to getting inside the store). Yahoo! had been the biggest in the search engine up until then, but had not innovated in the business model of advertising. Once and again, its understanding how to apply knowledge to knowledge what is making the forerunners of the Knowledge Society become successful. It is, as Drucker states, a Managerial revolution, which yet changes the same concept of what managing means.

Conclusions
Knowledge Society is just shaping itself. It will bring in new theories on how economies and businesses work, let alone how society works. It will bring therefore new questions, new challenges and new opportunities. Many paradigms of actual Economy will remain untouched. Others will need revision. Others will be left away. And new paradigms will arise. With the use of common knowledge in its actual state-of-the-art we can begin to understand what Knowledge Society is and how it works, what becomes important and what needs to be done to address it. We still have much work to do into transforming this common knowledge into scientific knowledge, as the economic science has evolved into being. Knowledge has become a resource and a factor of production. Since it is generated by people, people also have become a resource and a factor of production. And Information and Communication Technologies have become the platform or backbone through which knowledge is generated, widespread and storied. As a factor of production, knowledge is almost unlimited and always growing, which is totally different from the limited or scarce resource dilemma existing in the Industrial Society. Access to
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it is very cheap, and Governments all around the world are designing and deploying programs for universal access to broadband as a means to give access to all people to the benefits of Knowledge Society. The way people interact in the new Knowledge Society will change the way they must be prepared for living in it, which places serious challenges in the educational models. Education in itself becomes an important part of knowledge economies and Public policies, as a driver for productivity as well as for personal and national wealth. The issue governments around the world will have to address will change in a Knowledge Society. The economic wealth of a nation will depend largely on how it performs in developing value using knowledge, and uses of knowledge tools such as the Internet and ICTs, which will in turn stress the development of human resources in the Nation. The emergence and increasingly use of the Net for electronic commerce and electronic business will shift the power from governments to markets and knock down national frontiers. Competitive economies will rely on different issues than they have up to present, many of them difficult to measure, and economic policies will have to address those issues. Networking will become an important factor for wealth and value creation. Transforming into developed nations will become more accessible for developing economies, but also more demanding and difficult. Corporations and organizations will have to shift from industrial-based business models to knowledge-based business models, which will take them to understand better the knowledge value cycle of their industry. They will have to extend their organizations to both suppliers and customers, in order to create more valuable products and services. This will affect the way they place their mission and achieve it; the way they are organized; the way they relate with customers, suppliers and competitors. Intrinsic, extrinsic and transcendent motivation in the organization will become an important part of value creation. Management and storage of knowledge will become a central part of the organization. Consumers and citizens alike will acquire greater power with the social networks and their more knowledgeable behavior on the Net. This will make economies and democracies stronger. The knowledge society changes fundamentally the structure of Society. It creates new social dynamics. It creates new politics. In the end, it creates a new system. Alfredo Barriga October 2009

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BIBLIOGRAPHY
Amidon, Debra & Davis, Bryan Elliot: Triple Knowledge Lens: Intangible Performance for Knowledge Innovation Zones, 2006 Drucker, Peter: The Post Capitalist Society, Butterworth-Heinemann Ltd., 1993 Edvinsson, Leif & Malone, Michael S.: Intellectual Capital, HarperCollins, 1997 Foss, Kirsten & Nicolai: Knowledge-Based Approach: An Organizational Economics Perspective, Department of Industrial Economics and Strategy, Copenhagen Business School, WIP, revised july 1998 Leibold, Marius; Gilbert, J.B.; Probst, Michael Gibbert: Strategic Management in the Knowledge Economy, Publicis Corportae Publishing Second Edition, 2005 Prez Lpez, Juan Antonio: Teora de la accin humana en la accin de las personas, Rialp 1991. Watson Jr, Thomas: FATHER, SON & CO. My life at IBM and beyond, Bantam, 1990 Wallace, James & Erickson, Jim: Hard Drive: Bill Gates And The Making Of The Microsoft Empire, HarperCollins, 1993

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