Idea 26 - The knowledge economy (50 Management ideas you really need to know)



Idea 26 -  The knowledge economy

As usual, Peter Drucker was on the case before anyone else. In the late 1960s he coined the term 'knowledge economy', predicting that the spread of information would cause major changes in society. What management had to do, he said, was to boost the productivity of 'knowledge work' and the 'knowledge worker'.

Academics and statisticians - who want to measure it - have yet to agree on exactly what the knowledge economy is. Some say it is a group of specific industries, such as high-tech manufacturing, computing and telecommunications. Others argue that knowledge permeates all industries. The Organisation for Economic Cooperation and Development (OECD) takes the middle road with a definition that includes high- and medium-tech manufacturing, knowledge-intensive service industries such as finance, insurance and telecoms, followed by business services, education and health.
The layperson could do worse than the following definition, offered by the Work Foundation, a British NGO: 'The knowledge economy is what you get when you bring together powerful computers and well-educated minds to meet an expanding demand for knowledge-based goods and services.' However you define it, the developed world is clearly turning into one. Economists, taught that labour and capital were the principal factors of production, will tell you that knowledge is replacing labour as a major wealth creating asset. As an asset, it has the attractive benefit of not deteriorating in value when it is used. In fact, sharing it can enhance its value.

OECD economies are almost all seeing rising shares of national income produced by knowledge-based industries, alongside a higher proportion of the workforce in knowledge-based jobs and companies using technology to innovate. Depending on your definition, the knowledge economy already accounts for more than half of the economy and employment in many of these countries.
Knowledge has always been an economic force, but its power has been leveraged by information and communication technologies (lCT) that can slice it and dice it, extrapolate it and move it around very quickly. Knowledge-based firms, in the narrow sense, are combining the new lCT with new science and technology to create new products for more affluent, more educated consumers.
Adding value Knowledge - the right kind of knowledge - adds value. It can lead to better decisions, encourage insight and innovation, and raise productivity. In innovation, it can create competitive advantage in various ways - knowledge networking can help to speed up and improve new product development, for example. Sharing best practice around the company can cut costs and raise quality. So in a globalizing and increasingly competitive economy, with fragmented and dispersed know- how, there is a growing need to husband and manage this elusive resource.
Even in businesses that don't see themselves as particularly knowledge- intensive, knowledge is becoming a strategic issue - how to acquire it, develop it, share it and keep it. The result is the relatively new discipline of knowledge management (KM). More companies are appointing chief knowledge officers, particularly in the US, where every government agency has had to appoint chief information officer (who performs a similar role) since 1996. Knowledge management is careful to distinguish between knowledge and information, pointing out that not all information is knowledge and not all knowledge is valuable. Some consultants distinguish between 'explicit' and 'tacit' knowledge. Explicit knowledge is found in databases and filing cabinets - it can be captured, documented and stored away. Tacit knowledge is inside people's heads, and involves intangibles like experience, judgement and intuition. People are the key to KM - knowledge creation depends on human interaction - and IT-led KM projects tend to fail.

Valuable knowledge resides in different parts of the organization. There's vital knowledge of customers, of processes and products, as well as knowledge in relationships and in organizational memory. There is also the creation of new knowledge. KM uses various methods to create, organize, share and use all of this, including training and the company intranet, alert systems and creativity tools.
There is a steely side to this. If knowledge is inside people's heads, it can walk out of the door and not return - and it does this all the time. Talented employees may be lured away by competitors; older staffs retire. In a downsizing world, people are shown the door. So a KM priority is to extract knowledge from those heads and preserve it within the organization somehow. One of KM's tensions is how to encourage knowledge to flow freely while controlling and securing it at the same time. The knowledge economy and its moving parts will be getting more attention from the business improvement industry in future. For much of the second half of the 20th century, the bulk of management's effort to improve focused on manufacturing. Managers and their consultants worked hard and inventively to make things more efficiently. They have been so successful at this that there is not much left to do. All those years of experience and of adopting best practice means that the chances of sustaining competitive advantage through manufacturing efficiency are virtually nil.
More efficiency The next phase was to look for greater efficiencies in services and business processes. This led to techniques like business process reengineering and enterprise resource planning, supported by heavy doses of information technology. Here too the spread of best practice has limited any future potential for competitive advantage. So
attention has finally turned to knowledge.

Management consultants McKinsey & Co have drawn a distinction between transformations (making or growing things) and transactions (services, trade, most knowledge work). The firm then subdivides transactions into routine transactions and tacit interactions, which rely heavily on judgment and context. It believes that few companies have yet done much to differentiate themselves by increasing the productivity of those tacit interactions.
Reference: 50 Management Ideas You Really Need to Know

Book by Edward Russell-Walling

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