Competing in the Knowledge Economy : The Knowledge Value Chain (KVC)

Recently I met with a team of senior research scientists from a major US corporation.  Known for its innovativeness, its products are used by most of us.

I thanked them for their creativity, perseverance, and hard work.  Then I told them the bad news (which was actually why I’d been invited)…that other people had figured out how to “reverse engineer” all their hard work, and produce look-alike products being sold as “same as PRODUCT”, or “as good as PRODUCT”, or even as PRODUCT itself.

Innovation is hard work.  It can take years of research, experimentation, testing, and development to bring a new product to market.

Because accounting works the way it does, these costs can be “capitalized” as an asset, then amortized over the economic life of the product.  This asset is called “intellectual property”(IP), and it’s literally the coin of the realm in the Knowledge Economy.

In the United States, IP is protected by law as patents, trademarks, trade secrets, and copyrights.  In fact, it’s so fundamental to our economy that it’s mentioned in the Constitution.  In other countries, laws and enforcement vary widely.

What follows began as an article I drafted five years ago, shortly after a client asked us to look into trading irregularities in their product.  The situation has not changed significantly since then.  The only substantive thing that needed revising is the estimated amount of economic damage from “brand piracy”…upward…a telling commentary on how pervasive and intractable this problem is.

Game change

Sometime late in the 20^th Century, counterfeiting made the leap from currency to everyday products.  Now the Golden Age of product counterfeiting is upon us.  No longer confined to knockoffs of luxury watches and handbags, product counterfeiters have moved aggressively into items as diverse as pharmaceuticals, cigarettes, auto and aircraft parts, entertainment products, and software.

For illustration purposes only

Leading brands tend to be the targets.  For example, the heart drug Lipitor and Marlboro cigarettes have consistently been the targets of counterfeiters.  (In both cases, the manufacturers, Pfizer and Altria, respectively, have successfully taken actions against the offenders.)

Readily-available technologies such as digital scanners and cameras allow near-perfect copies of product packaging, labels, and printed materials to be made, very inexpensively.  Some production technologies, such as pill-making machines, can be bought inexpensively on the second-hand market.  Good copies are almost impossible to detect without laboratory tests.

A source of funds

For illicit operators, the economics are very attractive.  A carton of premium-priced cigarettes that retails for $75 in New York City can be copied for less than $5, then shipped for even less, yielding a gross margin around 90 percent.  No marketing or R&D costs are incurred, and no taxes or duties are paid.  The normal wholesale and retail distribution channels may even be involved as unwitting accessories.

This economic engine is reportedly being used by terrorist and outlaw groups—including Al Qaeda and Eastern European organized criminals—to fund their activities.  And because many legitimate U.S. and European manufacturers now outsource much of their production to countries where intellectual property (IP) laws are weak and/or not rigorously enforced, there are enhanced opportunities to exploit these de facto loopholes.

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We’re living amidst a paradox in our relationship to information.  A recent University of California study finds that the average American consumes information for nearly 12 hours daily, sucking down about 34 GB during that time.  Yet, we are continually surprised by stock market crashes, assets bubbles…and who knows what next.

We suffer from a quantity-relevance gap with regard to information.  Simply put, the voluminous information we have is not always the information we most need.   As a result, “data overload” or “information anxiety” are maladies that many of us experience often.

Part of the problem is the escalating proliferation of information sources.  This started back in the last decades of the 20^th century when the number of magazines and TV channels began growing exponentially.  And the subsequent growth of the Internet in general, and of social media in particular, makes that pale by comparison.

You might explain this by saying that a household—being the smallest type of organization—is especially inept when it comes to information usage, and assume that larger organizations would have figured it all out by now.  But in my experience they suffer from the same kinds of problems, often compounded by being scaled up and highly complex.

Large organization C-level decision makers typically report that they have to make bigger decisions, in shorter time frames—and have less than they would prefer of the information to do so rationally.

Not enough information?  When companies spend on average more than 5% of revenues on information??  How is this possible???

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Happy New Year!  Loyal readers will notice the new look, feel, and features of this site.  I want to acknowledge the talents and hard work of our developer, Tyler Gore, in making this all happen.

We’re also re-positioned the site.  It started life as a commercial site for the Knowledge Value Chain® and related activities.  While the KVC remains our “sponsor”, we feel that there is a higher purpose to be served.  Namely, observing and helping to foster an understanding of the massive economic shifts that we are now experiencing worldwide…in ways that we hope are informed, insightful, interesting—and most of all, useful to our readers.

Our economy has changed

What is the “knowledge economy”?  The term dates back over forty years to 1968, when management thinker Peter Drucker described it in detail in the chapter of the same name in his book The Age of Discontinuity.  In his words,  “From an economy of goods, which America was as recently as World War II, we have changed into a knowledge economy…The productivity of knowledge has already become the key to productivity, competitive strength, and economic achievement.”

Drucker goes on to say that, where the center of the American work force had until that time been the assembly-line factory worker, “Today the center is the knowledge worker, the man or woman who applies to productive work ideas, concepts, and information rather than manual skill or brawn” [my emphasis].  That general description probably applies to most of you reading these words.

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