The Wealth of Knowledge: Intellectual Capital and the Twenty-first Century Organization - Couverture souple

Chapter 1

The Pillars of the Knowledge Economy

We are confronted with insurmountable opportunities. Walt Kelly

Consider a key. Dig into your pocket or purse, pull out your key ring, and examine one of the keys--car key, house key, office, mailbox, trunk-in-the-basement key. I'm looking at the key to the door of my office, a piece of silverish metal about two and a quarter inches long; the name of the manufacturer, Corbin, is stamped on the end where my fingers grip it. A key is a physical object. It has size, mass, specific gravity. It can be dropped, lost, bent, hung on a hook.

A key contains information as well as molecules. The serrations along the top of the business end of the key--if you traced them onto a sheet of graph paper, they would resemble the electrocardiogram of a man with not long to live--are a code. They instruct one lock, and only one lock, to open; the lock has a matching set of cuts and ridges that order it to yield to one key, and only one key.

Keys used to be heavier and less intricate than the one in your hand (You can put it away now). That is, they were more massive and less knowledge-intensive; my father-in-law owns a large, rusty, old iron key, about eight inches long, that he uses as a doorstop. The oldest known key is a big wooden bar from which pins stick up like the bristles of a sparse brush. The pins match holes on a wooden bolt that secured a door in the ancient Assyrian city of Nineveh some 4,000 years ago. The fancy, gorgeous locks and keys of the Middle Ages and Renaissance were more show than security; their ingenious metalwork elegantly obscured the fact that picking them was child's play. That changed in the late eighteenth century, when an Englishman, Joseph Bramah, revolutionized locksmithing by manufacturing devices of unprecedented intricacy--that is, by increasing their information intensity. More than half a century passed before anyone managed to pick a Bramah lock.

If you're traveling as you read this, you might have in your pocket a little plastic card that is also a key, the key to your hotel room. The code, the instructions--the knowledge content--of this key reside in the magnetic stripe on one side. When you checked in, the clerk at the front desk stuck the card into a small device and typed in a code matching one that had been set for the lock in the door of your room. You can't see the code; if you compare two card keys, you can't tell if they are for the same or different locks. These keys can also hold a lot more information. They can tell time; if you ask for a late checkout, you might need to present your key to have an extra hour or two added to its clock--alternatively, the clerk might reset the clock in the lock on the door. Similar keys can carry money: The MetroCard in my wallet, which unlocks the turnstiles of New York City's subway, contains $13.50 as I write this, I believe, but no one can tell how much value is stored in it just by looking, any more than you can see the code on a hotel-room key. Before MetroCards, I filled my pocket with subway tokens; I could feel their weight and hear their jingle. If I put more money in my MetroCard, I notice nothing.

In mechanical keys, the physical object and the information are one and the same. The code is literally cut into the metal, visibly and inseparably. If you skip town with a metal hotel-room key in your pocket and the lock is not changed, you could return and unlock the door. That's not so with card keys. Signs outside aluminum smelters warn visitors to remove their credit cards and hotel keys: The magnetic field created by the electricity that pulses through these factories will wipe the cards clean. The hotel-room card will no longer open the door after you check out: The lock will have been changed--physically it will be untouched, but its information component will be new.

Keys are a metaphor that helps to describe how the so-called new economy--the Information Age, the knowledge economy--differs from the old one. Fundamentally, the twenty-first-century economy is one of ever-increasing information intensity. Like keys, the economy is packed with more and more knowledge--data, interpretation, ideas. As with keys, it's the knowledge itself that is valuable--value resides in the code in the magnetic strip, not the plastic. And this valuable knowledge exists independently of whatever physical carrier it's in at the moment: key, Web site, Palm Pilot.

The Information Age isn't just a slogan but a fact; the knowledge-based economy is, indeed, a new economy, with new rules, requiring new ways of doing business. The case for the existence of a new economy has been made and proven beyond the doubt of all but an unreasoning few; I don't propose to remake it here.

The knowledge economy stands on three pillars. The first: Knowledge has become what we buy, sell, and do. It is the most important factor of production. The second pillar is a mate, a corollary to the first: Knowledge assets--that is, intellectual capital--have become more important to companies than financial and physical assets. The third pillar is this: To prosper in this new economy and exploit these newly vital assets, we need new vocabularies, new management techniques, new technologies, and new strategies. On these three pillars rest all the new economy's laws and its profits.

KNOWLEDGE IS WHAT WE BUY, SELL, AND DO

You awaken in the morning when the clock radio turns on, giving you the news and your morning's share of $73 billion in annual advertising spending. Your toothpaste, the product of millions of dollars of research and development and further billions of marketing expenditure, is, on a cost basis, more than 50 percent knowledge. The newspaper on your doorstep, if it is this morning's New York Times, contains about 150,000 words, about as many as a fat book. The microwave oven in which you heat your coffee contains a microprocessor.

Drink your coffee, eat something, get dressed. The car you are about to enter, which uses more computing power than it took to put a man on the moon, is an infotainment pod. Automobile companies are stuffing as much intelligence into their machines as they can. Cars now know how much fuel you have and calculate how far you can drive before sputtering to an ignominious halt. They know where you are, and can give you directions and a map to where you want to go. The information-infused car, with voice-activated Internet access, real-time traffic information, and the ability to diagnose breakdowns and notify emergency services automatically in case of accident, will offer a new income stream to automakers and their suppliers. Stuffing cars with smarts, says Ford's CEO, Jacques Nasser, "is about shifting competitive advantage from hard assets to intangible assets."

Knowledge and information are embedded in every product we use, more and more. Your telephone stores dozens of phone numbers, remembers the last one you dialed, records messages from people who called when you were out, and reveals the phone numbers of people who called and did not leave a message. Today's jetliner contains, in addition to sophisticated computers and communication systems in the cockpit, more than a thousand microprocessor chips. What used to be an almost entirely physical experience--the transport of your molecules from here to there in the company of a stewardess whose own molecules were attractively arranged, and with passably edible food--has become e-mail and news and movies and phone calls and computer games and cuisine that resembles nothing found in nature. Airlines' spending on in-flight entertainment and communications septupled from 1992 to 2000 and now totals about $2.25 billion a year.

It has become traditional in books about knowledge and knowledge management to spend several pages defining knowledge and distinguishing it from data, information, and sometimes wisdom. I feel no need to inflict any such rumination on you, dear reader; dictionaries and common usage are good enough. But it is--I have always maintained--important to make a distinction between data and information, on the one hand, and knowledge, on the other.

Data and information are smaller than knowledge and, if it exists, wisdom. They are also different in kind. In computerese, eight bits equal one byte. But eight--or zubleteen zillion--bits of information do not equal a byte of knowledge. Knowledge is not a sum but a summation, a relation. Data and information plug into knowledge: They are tiles in a mosaic, but they are not its design. Bits of data and information--facts, factoids--can be startling or telling or important, but they're not like knowledge.

Knowledge involves expertise. Achieving it involves time. It endures longer than information--sometimes forever. To be knowledgeable, to know a subject, is something different from and greater than knowing a fact or possessing a lot of information about something.

It is impossible, however, to make a clear distinction between information and knowledge that works for a very large group. This is because one man's data can be another man's knowledge, and vice versa, depending on context. Your deep expertise in accounting, metallurgy, or literature may be an interesting tidbit to the person you sit next to at dinner tonight. Therefore what's information and what's knowledge depends on context.

If this were a study of epistemology or information theory, we might want more precise definitions, but it's not and we don't.

If I return to the office after a few days away, the stack in my in-box is noticeably shorter than it was when I returned from trips five years ago--and the amount of weightless e-mail is much greater. (Approximately 610 billion e-mails are sent per year, of which at least a third are cc'd to me.) In supply chains, information replaces inventory. Inventories held by manufacturers of durable goods--about $300 billion on average--would be $115 billion greater if they needed to carry as much stock as they did in 1988. Manufacturing companies are creating "virtual assembly lines"--electronic models of the real thing--so as to test factory layout before a real one is built. Their value was described by Ford Motor Company engineer Mark Phillips: "It means we can eliminate a whole phase of building prototypes in the metal, as well as design a production line which we know is going to work before we start building it"--a substitution of knowledge artifacts for physical objects that is worth some $200 million a year.

Elsewhere knowledge makes physical objects lighter. A sleek Nokia 8860 mobile phone not only knows things unimaginable to your grandmother's rotary phone, but, at 4.2 ounces, weighs a fraction as much. Buildings, like phones, are lighter and smarter. Compare a stony, cathedral-like H. H. Richardson building from the nineteenth century to the airy, cathedral-like new airports in Denver or Hong Kong or Oslo. These buildings weigh less per cubic meter--they have more science in them and less stone. The architects who design them have all kinds of specialized expertise that architects a century ago didn't need. (Whether they have Richardson's aesthetic sense is another question.) The buildings are stuffed with intelligent systems for heating, security, and the like, and threaded through with fiber optics and telecommunications cables.

And, of course, we buy and sell knowledge itself. We produce an extraordinary amount of the stuff--annual worldwide production of new information is somewhere between 700 and 2,400 terabytes, each terabyte being the equivalent of a million ordinary books. Sure, a lot of it is garbage, but there's no reason to think the ratio of wheat to chaff is any worse (or any better, for that matter) than it ever was. Much of this production is never sold: For example, only a fifth of the information produced on paper can be found in books, newspapers, and periodicals; the rest is office documents. Indeed, while the production of information (including film, photographs, Web pages, and music) is growing at about 50 percent a year, household consumption remains roughly constant at about 3,400 hours a year--there are only so many hours, after all.

These numbers, astounding as they are, describe only documents, photographs, X rays, films, broadcasts, and other artifacts; they do not include information and knowledge bought in the form of services from lawyers, psychologists, tax accountants, physicians, or consultants; nor do they include knowledge bought (via tuition or taxes) from schools and universities.

In 1999, knowledge was America's most valuable export--the country took in $37 billion in licensing fees and royalties, vs. $29 billion for aircraft. "The most important basis for creating value in the economy [is] the process of creating value from information, throughout and across the economy," said Robert J. Shapiro, undersecretary of commerce for economic affairs in the Clinton administration. Perhaps the most telling and relevant evidence for this statement is found in corporate charts of account. Look at the sales side first. One of the most dramatic changes at General Electric during the tenure of CEO Jack Welch was the company's realization that it could sell services as well as products--not just financial services, via GE Capital, but knowledge-intensive service for products, such as repairs for aircraft engines and installation for magnetic resonance imaging machines. Says Welch: "As recently as 1995, when this initiative was launched, GE derived $8 billion a year in revenues from product services. In 2000, this number will be $17 billion." Product service revenues grew 18 percent annually, vs. 11 percent for GE as a whole. The other side--spending--shows the same pattern. Corporate capital spending--for all equipment, from trucks to desk chairs, from buildings to laptops, from machine tools to Learjets--totaled $870 billion in 1997. Nearly half of that--$407 billion--was spent on information technology and software. Add $144 billion of corporate spending on research and development and some $55 billion for training, and you have a "knowledge capital budget" that's 20 percent greater than the budget for all other capital items combined. In 1999, Genentech, the biotech company, spent $367 million on R&D, almost four times its spending for capital equipment ($95 million). Pharmaceutical maker Pfizer invested $2.8 billion in R&D vs. $1.6 billion for property, plant, and equipment. Even for old-economy stalwarts, knowledge expenditures are extraordinarily high; in 2000, Procter and Gamble spent $1.9 billion to acquire knowledge via research and development and $3.7 billion to disseminate knowledge via advertising, while paying $3 billion for property, plant, and equipment. Finally, we can gain some sense of how much knowledge people buy and sell by the amount of it that's stolen. The cost to U.S. corporations of misappropriated intellectual property--purloined secrets, infringed patents, and the like--is estimated at $250 billion a year.

Add it all up--apples, oranges, pomegranates, and banana skins--and you come to the inescapable conclusion that more and more of what we buy and sell is knowledge. Alan Greenspan, chairman of the Federal Reserve Board, has estimated that the U.S. GDP, if it could be gathered together and weighed, would tip the scales at about the same amount today as it did a hundred years ago. But its real value, adjusted for inflation, is more than twenty times what it was. The difference does not come from atoms and molecules--it comes from intangibles. But the difference--in health, in wealth, in living standards--is tangible indeed.

In Thomas A. Stewart’s bestselling first book, Intellectual Capital, he redefined the priorities of businesses around the world, demonstrating that the most important assets companies own today are often not tangible goods, equipment, financial capital, or market share, but the intangibles: patents, the knowledge of workers, and the information about customers and channels and past experience that a company has in its institutional memory. Now in his new book, The Wealth of Knowledge, Stewart--widely acknowledged as the world’s leading expert on working with intellectual capital in today’s knowledge economy--reveals how today’s companies are applying the concept of intellectual capital into day-to-day operations to dramatically increase their success in the marketplace.

Arguing that companies can make untold millions of dollars by managing knowledge more effectively--and save millions more--Stewart offers executives and managers compelling accounts of how leading companies around the world are successfully tackling the practical issues involved in today’s knowledge economy. The heart of the book is a revolutionary 4-step preocess that shows how to put intellectual capital to work to improve performance and profitablity, as well as manage knowledge processes. He goes on to discuss how companies can better utilize their current assets and enhance their knowledge resources for the future. Questioning many of the assumptions that have ruled business in the twentieth century, he addresses such critical and fundamental issues as why companies exist, how they should be organized and how people should be compensated. With his customary fearlessness and foresight, he plunges into the thick of the controversial arena of measuring and accounting, as well-an increasingly difficult task when a corporation’s assets are intangible.

The Wealth of Knowledge not only sets out the latest thinking in creating and managing knowledge assets, but provides a detailed course of action for corporations trying to navigate their way in the world of knowledge economy.

From the Hardcover edition.