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

In my recent post Surfing the value waves I mentioned having purchased an iPad. Here’s the value calculation that drove me to buy it.  Of course it’s cool and fun—but does it make economic sense?

It first occurred to me in discussions with my wife—who wants a big, flat, thin TV like all our friends have—that we could EACH get an iPad, skip the TV, and pocket the change.  The iPad is not quite “there” in terms of programming, but for what I mainly watch (movies and sports), it’s halfway there (the movies half.)  TVs have gotten so cheap, this was actually about break-even—so there wasn’t a lot of change to pocket.

In this sense the iPad (and the Internet in general) is a textbook example of a disruptive rival to the TV—not as good in many respects, definitely cheaper—but with the future potential to knock the whole competitive game into a different orbit.

But then I started adding up the other gadgets that an iPad could replace.  I should mention that while I do not own all of these, as a “weekend warrior” musician and photographer, I own more than most people.  Your mileage will probably vary.

• Digital wallet for photos – $400
• Voice recorder – $200
• Point-and-shoot camera – $200
• My PDF library – printing costs maybe $50/year
• iPod – $250
• Guitar tuner – $30
• Electribe drum machine – $400
• Hand-held navigator – $150
• E-book reader – $170
• Netbook – $400
• Laptop – $800

TOTAL $3100

Books and movies regrettably continue to hang in at roughly equivalent prices to their hard-copy counterparts, so again this is around break even.  (Were this value balance to shift in favor of virtual formats, there would be a massive shift toward those formats.)

Even leaving out the TV, and even based on the most expensive iPad model (which is not the one I own), that would be a 374% return on my investment.  Hmm, let me check whether my 401(k) did that well recently.

Every student of strategy textbooks will recognize the iPad as a substitute for these other gadgets—though it’s a new product category, it serves the same needs or wants with a somewhat different technology.

Though I’ve focused here on economic benefits, “Value” is not just about saving money. My earlier post on The Value Wheel mentions other ways to create value. Here, for example, there’s the convenience of not having to lug around of all these gadgets, my printed PDF library, electronic books I may have purchased, and so on.

My point is not that you too should buy an iPad.  My point is that if you work in a business, your customers are evaluating your products just the way I did—including which alternatives they might choose.  Your product or service should “surf the value waves” like the iPad does.  What other products can YOUR product displace?  Conversely, who can displace YOUR product?

And if you’re an investor, think about how these value waves will affect a company’s products and its overall value—its stock price, for example. I’d recommend, for example, that if you’re invested in any companies that rely heavily on any of the “endangered economic species” categories I mention above, you re-evaluate those soon.  The value waves are slowly but surely moving away from them.

DISCLOSURE:  I hold a small position in Apple stock.

One recent Tuesday (June 29^th) first thing I got a very excited e-mail from my marketing colleague and friend Professor Plum.  “Did you see the thing in the [NY] Times about the Russian spies who were arrested?”  (Indeed, I had read it earlier with great interest.)  “I know one of those guys, Don Heathfield…he works with a business development firm I’m also working with.”

Interesting coincidence.  Being the research guy I am, I looked up Heathfield and found that his company had a product FutureMap that sounds similar in some respects to a product we’ve been working on at TKA—something to monitor trends and events that could affect a company.  I emailed my futurist colleague and friend Colonel Mustard a link with a “Check this out!” subject line.

Within five minutes Mustard called me back.  “You’re not going to believe it, but I know one of these guys—Donald Heathfield.  I met him through the World Future Society.  He was always asking me for introductions, and to have my clients try out his software.”  We had a rollicking conversation during which Mustard pointed out the many things in Heathfield’s story that didn’t quite add up.

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Picture in your mind your organization’s typical customer or client.  Now picture the moment that customer purchases your product (or service).  Each transaction with that customer is preceded by some calculation—whether rigorous or informal— that your product is “worth it” compared to alternative solutions.  This worth-it-ness is called your product’s value proposition.

The sum of each of those value calculations over time is essentially your customer relationship with that customer.  In turn, the sum of all your customer relationships is pretty close to the value of your whole enterprise.  Each happy (successful) company starts with a happy (satisfied) customer—and the ability to scale that happiness across many customers.

Let me illustrate.   Apple (AAPL), in the waning days of a prolonged economic downturn, reported selling 3 million iPads (at $500+) in its first three months, and that same number of iPhone 4s (at $200+) in its first one month.  Millions of people (including me) made a decision to part with their hard-earned money, and possibly forego other purchases, to have one of these tools/toys (tooys?)

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We’re obviously very proud of our KVC model.   We think it helps explain a lot of the mystery surrounding “how to compete in the knowledge economy.”

But the KVC is more than just a theoretical framework.  At TKA, we use it every week as a tool to solve live client problems.  In our offices, we have a one-of-a-kind KVC whiteboard that helps us understand and solve these problems.   We’ve a developed a structured technique called Value Alignment™ that helps us identify a client’s distinctive sources of value, and bring them in line with the current needs of the market.

Here’s a photo of the whiteboard at the end of a typical session.  The client was in this case designing an information-based product offering, and TKA was helping him to determine with some precision HOW and FOR WHOM value was to be created.

In this case, the client liked what he found so much that he included it in his pitch to his investors.  He could demonstrate exactly where his proposed information product fit into his customers’ value proposition.

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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.

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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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