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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Why doesn’t early warning work?  While it’s a good idea in theory, in practice it seldom seems to have its intended effect.  In every major intelligence failure I’ve looked at, there were clear, credible early signals—and even explicit warnings—that tragically remained unheeded.  Why is this, and what can we do about it?

For example, in the recent meltdown of the US real estate market, and much of the world economy with it, there were lots of warning signs.  Some of these were very explicit and very public.  To name a couple:

• The FBI’s 2006 published report warning of widespread fraud in the US residential mortgage market, which backed the mortgage-back securities market that subsequently collapsed
• Yale Economist Robert Shiller’s testimony before Congress in September 2007 that housing prices were dangerously overinflated, and that their imminent collapse would cause significant damage to the economy.

Downtown New York City - September 11, 2001 9:45am

In another example, leading up to the bombing of the World Trade Center towers in New York City in 2001, there were many events that could have been read as “feasibility tests” for 9/11.  There is a chapter (“Foresight—and Hindsight”) in the 9/11 Commission Report that catalogs the missed signals and other structural conditions that might have prevented the attack.  In retrospect, there seems to have been a straight-line connection between:

• The February 1993 truck bombing of the WTC North Tower
• The August 1998 bombings of the US embassies in Nairobi, Kenya and Tanzania
• The October 2000 bombing of the USS Cole.

Our persistent inability to read and act upon clear signals in time is not a recently development.  In the most-examined intelligence lapse in modern history, the December 1941 bombing of the US fleet at Pearl Harbor, Congress demanded to know what had happened.  Hearings were held, and enough testimony produced to fill nineteen volumes.  I recently read the excellent 1962 one-volume condensation, Pearl Harbor:  Warning and Decision by Rebecca Wohlstetter.

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It’s not the latest Halloween ritual (sorry, couldn’t resist), but rather the basic choice every investor, corporate executive, analyst must make in forecasting what’s most likely to come next.

If you had been paying attention in March, you could have made 48.2% since then on your investment in the DJIA index.  If you did, congratulations—but don’t spend the money just yet.

With some of the world’s major stock markets up by over 50% in six months, it’s clear some kind of serious rally is under way.  But is it a trend—a genuine rally that signals a bottom, and an end to this long recession?  Or is it just a tick—a “sucker’s rally” that gives everyone false hopes before plunging us to even greater depths?

So far, in some respects the stock market is behaving like it did during 1929-30.  In the figure below, you see where we are now compared to where “we” were in 1930.  (The numbers are accurate, however the timelines are not drawn to scale.)  Then, as now, we lost about 50%, then in short order gained about 50%.  (Note to poets:  This does NOT put us back to where we were, but rather at 75% of that.)

Now some are forecasting that the next bull market is already under way, and that DJIA will double from here, putting it well over 25,000.  That the recovery, in other words, will be V-shaped, as shown by the dotted gray line.

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When asked to name his favorite kind of music, pioneering jazz musician Louis Armstrong is said to have replied, ”There are only two kinds of music, good and bad.  I like good music.”

You could say the same about information—there are fundamentally only two kinds, good and bad.

According to one definition (“Intelligence:  An Economic Good” by Mark Jensen), good information is defined as being timely, objective, usable, accurate, and relevant to whatever decision it is supporting.   It’s not the same as “good news”—good information can be favorable or unfavorable—but solely by virtue of its being “good”, it’s essential to decision-making.

To the extent information doesn’t adhere to most or all of the above criteria, it is “bad” information.  The problem is, it’s often hard to tell the difference between the bad and the good.

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Still more ideas from the SCIP annual conference in Chicago…

When I work with internal corporate practitioners of intelligence or research, one of my first recommendations is to run their operation as if it were a stand-alone business.  That is, with clients (managerial decision-makers), suppliers (databases, contractors, etc.), and possibly even rivals of their own-both internal and external.  This helps them determine where the value for their clients is, and how to maximize that value.

Few of the internal practitioners I’ve met charge back for their services—so they are essentially “free” to their users on a transactional basis.  In those rare cases where there is a charge-back system, there is a market value assigned to the function.  People either pay for the service at the quoted price, or they do not.  The user is the judge of what value is received, and whether it was “worth it”.

However, absent this market mechanism—which has its own drawbacks—there is no direct measure of value for intelligence.  There must be some proxy for it—typically informal conversations or a survey at budget time to the effect—Is this function worth its salt, or not?

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Last week I went on vacation with my “lifemate” Ellen and the rest of my immediate family.  We were on Cape Cod, MA, which is a pretty sophisticated area as far as vacation spots go, so I had assumed that there would be good Internet connections.

Wrong.  No Wi-Fi signals, only one bar (at best) of cell phone, and my cell-powered wireless WAN working only briefly on one very stormy morning.  (Thanks, Verizon!)

I started thinking maybe Ellen planned it this way.  Instead of reading various chat boards, calling people, and posting to my blog, I actually talked to my family and read some of those heavy paper things—oh right, books.

Ellen claims that “vacation” means not only do you vacate your usual PLACE, you also vacate your MIND—and that you can’t do that while constantly being on the phone and the Internet.  So I think she secretly engineered this—to save my sanity.  It’s scary to go “off the grid” for even several hours, let alone several days as I did.  There are stages:  first you panic, then you get angry…but then you start to care less and less, and so on.  Eventually, you settle into a deeper zen-like level based more on the sunsets and the tide patterns than on the latest news morsel.  I wouldn’t want to live there, but it sure is a nice place to visit.

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More ideas from the SCIP09 conference in Chicago…

I’ve worked a lot during my career with business-to-business publishing and information services clients—and consider myself in that business as well.  There are basically two business models for this kind of information—customized and syndicated.

Customized information is that which is developed—often at great effort and expense—and which is highly tailored to the needs of a very small audience or number of “users”.  A consultant’s report is a good example.

Syndicated information is that which is developed—again often at great effort and expense—but that is intended to meet the needs of a much wider audience.  A magazine or a mass-appeal web site are good examples. Read the rest of this entry »

Ideas from the SCIP09 Conference in Chicago…

When I was in business school, my dean (William Donaldson—who earlier in his career had founded the brokerage firm Donaldson, Lufkin, and Jenrette) had several homespun sayings that would guide those of us who knew him.  One of these was “You have two ears and one mouth—you can’t use them both at the same time, and you’d be wise to use them in that proportion.”

Listen more, talk less—what a concept!  When you get to be an “expert” in something, it’s too easy to talk without listening, thereby limiting your flow of new information to your own direct experiences.

Last week I attended the annual conference of the Society of Competitive Intelligence Professionals in Chicago.  I had given lectures and workshops for many of their recent conferences, but this time my role was different.  This time, instead of being the “expert”, my job was to moderate and guide a discussion (”Active Dialog”) of the intelligence practitioners in the room.

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