Piercing the Enterprise Bubble


Harkness Tower, Yale

A few weeks ago I attended a reunion at my alma mater, Yale University.  As they always do, Yale offered up some of its most articulate faculty and administrators to describe the current state of affairs at the University.

The array of talent, initiative, and innovation on display was dazzling.  By the end of the two days, many of those of us who attended college decades ago were ready to sign up for another round — things have changed that much in the interim.

The Yale bubble

One surprisingly interesting session featured current administrators and faculty commenting on the current state of the University.  One dean mentioned what she calls the Yale bubble. It seems that students expect, and routinely receive, such high levels of performance from themselves and from the institution that they experience culture shock when they step outside its boundaries.

As one current student put it, “At Yale, it can be easy to get absorbed in our work, our activities, and friends. It can be easy to surround ourselves with a nice little Yale bubble.”  She goes on to describe how she and some of her friends broke out of that bubble to raise money for a disaster relief effort after a hurricane in the Philippines.

More recent events could be interpreted as showing the downside of the Yale bubble — a potential loss of balance and perspective as to what really matters.

Corporate culture — for better and for worse

Every enterprise creates its own nexus of practices, protocols, traditions, mythologies, and values — strands that together weave the fabric we call corporate culture. When you count over 300 years of history, $24 billion in the bank, and US presidents and other world leaders among your alumni, as Yale does, it’s easier than average to pull this off.

But every enterprise builds this cultural bubble, whether intentionally or not, and whether successfully or not.  It’s an essential part of what binds people to the enterprise — and thereby to each other — in collective pursuit of some common goal.

In some cases the enterprise bubble is “bubble-istic” — fluid, transparent, and porous.  It alternately expands and shrinks to fit new circumstances.  It is welcoming and inclusive.

In other cases, the enterprise bubble is made of steel and concrete.  It is hard, inflexible, exclusionary, and restrictive.  (North Korea might fit this model, for example.)

The cognitive perimeter

Screen Shot 2015-12-03 at 2.51.53 PM

In my experience, the enterprise bubble is typically more perceptual than anything more tangible.  It defines a cognitive perimeter within which our perceptions of, and assumptions about, the world reside comfortably.  It encourages us to look within the enterprise for answers to our questions and solutions to our problems.

The bubble renders it convenient to ignore things — people, ideas, events — in the ecosystem beyond that perimeter.  Within our bubble, these “outside” factors are easily be dismissed as “not us, not ours, and not relevant to us.”

Expanding the cognitive perimeter of the enterprise (the dotted white line in the figure above) is a result of both (1) technical expertise in so doing, and (2) attitudinal openness to seeing things as those outside our bubble see them.  The organizational “blinders” in most cases are far more limiting than the technological barriers.

Drucker and Sun to the rescue

When Sun Tzu spoke nearly 2500 years ago about The Art of War, he put the Self-Other duality at the center of the cognitive universe. He spoke specifically of the competitive benefits of integrating knowledge of the Self with knowledge of the Other.  (“Knowing the other and knowing oneself, in one hundred battles no danger.”)

Sun may have been speaking literally of an individual warrior, but his writings have largely been understood by modern readers as referring to groups of purposeful individuals — to enterprises, in other words.  Sun was essentially describing the need to look beyond our cognitive bubble to see the competitive world around us as it is — not as we imagine it or wish it to be.  This “outside awareness” is both an individual capability and a management practice.

The modern commentator Peter Drucker used the term “significant Outside” in essentially the same way in describing the information leaders need.  Drucker observed that value originates with customers — outside the enterprise — and that this should remain our primary consideration in the design of enterprise knowledge.  (“The starting point [for management information] has to be what customers consider value.” – Management Challenges for the 21st Century)

How can you escape the bubble?

Looking inward is something all organizations do routinely (whether effectively or not).  Who is working on what?  Who is having success?  How can we collaborate to work better?  Will our stock go up? Most of us are avid practitioners of Sun’s “Self”.

It is the rare organization that is the is the dedicated practitioner (let alone master) of Sun’s “Other”.  We climb into our bubbles too easily, where everything is comfortable and makes sense.  Then we are surprised when the ecosystem intrudes on our bubble — as, sooner or later, it always does.

How do you avoid this? The red arrows in the figure represent information about the ecosystem, of three major types — inbound, internal, and outbound.  If the enterprise bubble is perceptual, our momentary “escapes” from it must likewise be perceptual.  We must see clearly the driving elements in the competitive ecosystem outside our enterprise bubble.

Rigorous observation of competitor activities and intentions is in theory one way to transcend the bubble — but in practice too often it gets mired in minutiae and loses the overall direction and flow of what is happening in the competitive ecosystem.  As a consequence, competitor information is often not translated into decisions and actions, but rather just adds to the background noise.

Bioplastics Drivers 120715

Industry Drivers Mapping - Bioplastics

One technique we are using is Value Ecosystem Mapping, so that management and employees can see physically what their competitive ecosystem looks like (as in the example at left).

Ecosystem mapping starts interesting conversations that can lead to a reassessment of competitive strategies.  It also fosters the penetration of enhanced competitive awareness to operational levels in the enterprise — where strategies either become results, or go to die.

Whatever Happened to Knowledge Management?

That was the title of a talk I gave recently to a group of graduate students at the Palmer School of Library and Information Science.  It may have seemed that I was just trying to be provocative — but in fact, I was genuinely interested in finding the answer.

I think I now finally have.

KM 1.0 arrives

When I launched my company in 1996, Knowledge Management in its modern form had just arrived on the scene.  Books by Tom Stewart and Tom Davenport and Larry Prusak had begun to revitalize a field that had its roots back in the 1960s with Fritz Machlup and Peter Drucker.

Having been a researcher all my career, I was so excited by the potential of this approach that I described my company by the tag line “The Knowledge Agency”. That seemed to resonate with people, so I eventually adopted that as our main trade name, with a registered mark to go with it.

The curtain closes

At one point I brought on a former colleague who had previously been with a global technology company prominent in KM.  “Ron,” I asked him, “don’t tell me anything proprietary, but am I basically right that KM is the greatest thing since the Beatles — and that we’re all going to have a lot of fun and make a lot of money?”

“I hate to break this to you,” was his unexpected response, “but they’re dis-investing in KM.  It didn’t work for them — they couldn’t make enough money at it.”

I soldier on

I went back to rethink my goals several times over, each time coming to the same conclusion — that KM was (and is) something badly needed that will have a major impact if executed well.

But I noticed that, more and more, in my consulting practice I was being called on to diagnose and fix KM approaches that, once implemented, had failed to meet their original goals.  These were in some cases multi-million dollar efforts that ended up not being integrated into the entity’s work flow, and therefore did not provide sufficient ROI.  This happened so often that I began informally referring to myself as “Dr. Know.”

Other views

It seemed that other people were having the same experience.  I began to hear of enterprise-wide KM efforts that were severely cut back or even eliminated.  (Bear in mind that this headed into the “dot-com” stock market bust of 2000.)

Tallies started appearing that showed the number of KM projects that had failed.  One of these papers starts by pointing out bluntly that, “Many of these costly, information-laden efforts are doomed.”  The aggregate failure rate of KM projects was discouragingly high, pegged by various observers at somewhere between 50% and 70%.Google trends KM

Interest in KM among business leaders seemed to wane as it gradually transitioned from “promising new approach” to “something we tried, that didn’t work.”  (See the Google Trends chart above showing relative number of searches on “knowledge management,” a gross indicator of the subject’s relevance to the general population.)

The view from the academy

Paradoxically, my academic colleagues would during this same time claim that KM was continuing to grow as a discipline and was stronger than ever.  Indeed, the evidence supports this, with the number of scholarly articles about KM more than doubling between 2000 and 2008 (as shown below).KM articles

You’ll note that the trends in the business and academic worlds were negatively correlated. This apparent contradiction took me a while to understand.  Then, when working with Columbia University’s IKNS program, I came across an analysis that seemed to break the paradox.

Unraveling the knot

Donald Hislop, a senior lecturer at Loughborough University, had assembled Knowledge Management in Organizations, a comprehensive book of readings and sources that Columbia was using as a text.

Hislop points out a study by Serenko et al. that looked at trends in the proportion of KM articles written by practitioners (as opposed to by academics) — finding that while in the period 1994-98 that figure averaged more than 30 percent, by 2007-08 it had declined to just 10 percent. Practitioners just seemed to lose interest in KM.

Big consulting firms (Hislop names McKinsey, BCG, KPMG, Deloitte, EY, and PwC) had together played a leading role in the launching of KM during the late 1990s — they promoted it, they issued white papers, surveys, and books on it.

But by the time Hislop analyzed the web sites of these six firms in 2009, he found no evidence that they were still promoting KM services.  Hislop’s findings, in other words, were consistent with my own ad hoc observations.


I’ve worked inside two of these firms, and it’s with great respect that I note that one of the corporate competencies they have tuned most finely is knowing what their clients want and need.  They are highly invested in that.  I deduced that these firms’ client organizations had found that KM didn’t get them the results they expected.

Hislop offer several potential reasons for this apparent loss of interest in KM among corporate practitioners (prefaced by his disclosure that the evidence is largely anecdotal and inconclusive):

  • KM surveys tend to focus on implementation issues (“how to?”), rather than first gauging the level of interest in KM (“why?”)
  • KM activities now may not be labelled as such, but may be just part of the way things are being done
  • KM now may be less visible than the high-profile, expensive efforts of two decades ago
  • Business KM practitioners in general don’t find academic KM studies useful — these studies don’t provide enough realistic answers for practitioners’ in-the-trenches challenges

Knowledge is not an island

My own experiences toiling in the “emergency rooms of KM projects” are partly what inspired me to develop the KVC framework.  In short, the core problem of many of these failed efforts is that they consider Knowledge apart from the context of the everyday challenges and core activities of the enterprise.

Thus Knowledge does not feed into Value directly.  If this happens on a sustained basis, knowledge initiatives will not produce value, and will eventually wither and be cut back during the next economic downturn that inevitably comes.

Knowledge is not an island, complete unto itself; it must produce “insight” among decision makers — followed quickly by innovation and/or other benefits and results for the sponsoring organization.

Wired to fail

Most KM projects that fail do so because failure is built into their DNA.  They are, from their earliest stages, divorced from the economic and competitive realities of the enterprise, its leadership, and its management.

Knowledge projects conceived and/or executed in a “value vacuum” are wired to fail.  They cannot possibly succeed — no matter how richly-funded or well-staffed— because they do not fully consider the user/consumer of the knowledge.  When they do not understand the user’s business challenges, they cannot understand how knowledge can positively address those challenges.

Worst of all, they sometimes attempt to engage the user as non-value-added resources (for example, in providing data input, when users should be doing what they are best at and what they are paid to do.)

The way forward

KM’s core mission needs to be about real people doing real jobs more effectively and efficiently.  Its tenets need to be tangible, empirical, and grounded in the sometimes-mundane realities of organizational life.  To the extent it meets these conditions, KM will succeed as an essential business discipline.

Conversely, to the extent KM’s core mission is to create elegant abstract models and frameworks, it may succeed in the “Ivy Towers” — or may eventually end up as anodyne intellectual musings, a modern version of medieval scholasticism.

But in either of these latter cases it would fall far short of realizing its potentially huge impact in the world of enterprise and in society at large.

Knowledge is Power — NOT!

Knowledge is power. All of us know this slogan.  Those of us in the knowledge professions use it when needed as a banner of professional pride and aspiration.

It sounds reassuring, and probably had major validity when Francis Bacon coined it nearly 400 years ago during the Enlightenment.

The problem is — it simply is not true.  In terms of the politics of the modern organization, KNOWLEDGE IS NOT POWER.  Or, in mathematical terms:

knowledge power intel a

Please read on to find how I reached this conclusion, and what its implications are.

Production and use

I created the Knowledge Value Chain® framework in 1996 to address what I had seen as a persistent and critical gap throughout my career — that the production of knowledge on the one hand, and its use or application on the other, were largely treated and managed as separate and distinct functions.  I came to believe this shortcoming was key to many knowledge/ intelligence malfunctions, and starting giving talks about knowledge-value chains being broken.

The KVC model has two halves — the PRODUCTION half (Data-Information-Knowledge), and the USE half (Decisions-Actions-Value).  In an ideal situation, the two halves work together as a seamless ‘engine’ of organizational awareness.

Two tribes

On the ground, though, things are much different.  The two halves of a knowledge process typically operate independently of each other — sometimes with the most fragile and random connections.

If you were an anthropologist (and sometimes it helps), you’d say that each half is inhabited by a native ‘tribe’, each very different from the other.  We’ll call the inhabitants of the Production half the ‘Knowledge’ tribe, and those of the Use half the ‘Power’ tribe.  The two tribes are very different from each other in most respects;  they have substantially different training, careers paths, pay grades, incentives, and organizational perspectives.

They dress differently too, so you can spot them coming down the hall.

The ‘Knowledge people’ (we’ll abbreviate them as ‘Ks’) include IT people, market researchers, competitive analysts, special librarians, research scientists — each of whom in turn has their own sub-specialized formal training and ‘culture’.

The ‘Power people’ (‘Ps’) — executives and decision-makers — tend to have significant experience working in the trenches of the business, which may (or may not) be accompanied by credentials like MBAs and/or other leadership experience (in the military, for example).  Formal training here is less important as a qualification than are experience and accomplishments.

The Knowledge-Power gap

KVC Triangle FNL_RGB topLike boys and girls lined up at a seventh-grade dance, the Ks and the Ps do not naturally mix socially with their counterparts.  They tend to be more comfortable with ‘their own kind’, though there are exceptions — and even some people who cross over from one to the other side during their careers.

In general, though, there is a gap between Ks and Ps — sometimes a large gap.  My colleague and friend Mark Little, former president of SCIP, was explaining to his Board of Directors what market research and competitive intelligence do.  He used the KVC model to illustrate this — but he tore the triangle in half at its middle, to illustrate how far distant the two pieces are.  KVC Triangle FNL_RGB bottomMark claims that in many organizations, it’s more accurately a gulf than a gap.

Intelligence is the conversation

Intelligence sits between the Ks and the Ps and (at best) mediates between them.  Intelligence is the conversation between the two tribes — knowledge users and producers.  This is one of the reasons intelligence is challenging to manage — it represents the interface between these two very different corporate cultures.

In fact, when TKA did research on the ‘fail points’ in the KVC as companies actually used it, the intelligence interface was one of the two most common problem areas.  (The other was at the top of the chain, in defining the Value proposition itself.)

Civil wars

As with many cultural divides, each side of the K-P gap has an innate skepticism of the other.  This must be managed lest it become the source of manifest dysfunction.  On the one hand, Ks tend to be ‘thinkers’ — more intellectual, and often openly disdainful of what sometimes seems to be anti-intellectualism among the Ps.  “They go on gut feel, they shoot from the hip, they don’t care about evidence or intelligence” — you often hear these kinds of critiques.

This is buttressed with folk wisdom like the whispered put-down: “There are three kinds of intelligence clients:  those who don’t read; those who won’t read; and those who can’t read.”

The Ps are often called executives — literally, people who execute, who get things done.  They take pride in their intuitive sense of what’s going on, which typically comes from personal relationships built over an extended time.  One senior sales executives recently told us, “I collect my own intelligence…by getting together on Friday afternoon for beers with my buddies in our distribution channel.”

We know better

It’s nearly impossible to get better, fresher intelligence than this ‘view from the trenches’ if you’re sitting behind a desk reading a computer screen.  The Ps sense this, and that’s why the Ks have a perennially tough sell.  “I just searched the Internet, so now I know more about your business than you do” is not a message welcomed in most executive suites — though it’s the implied working premise of many knowledge disciplines.  And may in fact have much validity to it.

Ps may see the Ks as overly cautious, pessimistic, prone to excessive cogitation and deliberation, not team players — and (let’s face it) just too junior to know what’s really going on.  That’s if the Ks are responsive and professionally competent.

And if by chance they are not, you could add arrogant, out-of-touch, expendable, and more unprintable things to the list of adjectives.

The biases of each side are correct — partly.  The whole process works best when — really only works if — (1) each tribe understands the other and (2) the two actively work together.  Dysfunctional or divisive relationships between Ks and Ps leads to non-optimal outcomes for all.

Less is more

One of the most common mistakes that Ks make in producing intelligence is inappropriate overdelivery.  Their intention is usually good, and the accompanying (usually tacit) meta-conversation goes something like:  I’ve really done my homework. I’m going to give you everything I found that might even remotely be relevant, so that you can then decide what’s most important to solving your problem.

In fact, the words “Give me everything on…are in my experience the most common words introducing Ps’ information requests.  My own research shows that this is usually because Ps don’t know exactly what they are looking for, but are reluctant to admit as much.

When faced with the mountain of data that results, the same meta-conversation in the P/user’s mind goes quite differently. They ‘hear’ the K/producer saying: I can’t discriminate between what’s relevant and important, and what’s not.  Or, worse:  I have made little attempt to understand what your business problem is. Or, even worse:  I have no concept of the value of your time.

In intelligence, less is always more if — and this is crucial — it’s the right stuff.  This keeps the signal-to-noise ratio high.  Once that ratio drops, the credibility of the producer can be damaged, sometime severely.

Knowledge and intelligence:  what’s the difference?

In everyday language, most of us use the terms Knowledge, Intelligence, Information, and even Data somewhat interchangeably.  No less than Sherman Kent, the founder of modern intelligence analysis, begins his seminal 1949 book Strategic Intelligence with the words, “Intelligence is knowledge.”

The KVC model, however, draws clear distinctions among these various aspects or phases of the intelligence process.  Not because we’re semantic nit-pickers (though maybe we are) but because we believe that understanding how each phase works distinctly — and how to make the transformation from each phase to the next — are essential to effectively managing the entire process.

Knowledge is (in KVC-speak) defined as the end result of a process of data collection and analysis within a knowledge worker, but before it’s communicated to a client/decision-maker.  Intelligence is defined as that same knowledge after being communicated to someone with the power (i.e., authority, budgets, etc.) to act upon it.

Knowledge becomes intelligence when — and only when — it’s transmitted to someone who can act upon it to create value.  In this sense,we could say that KNOWLEDGE + POWER = INTELLIGENCE.

knowledge power intel

In researching this post I found that, though often attributed to Bacon, the words “knowledge is power” have not yet been definitively located by any scholar researching his writings (which were mainly in Latin.)  Thomas Hobbes, who served for a time as Bacon’s secretary, did say “The end of knowledge is power…the scope of all speculation is the performing of some action or thing to be done.”

But the words omitted in reducing to the slogan “knowledge is power” are key to Hobbes’ meaning — which seems to be that knowledge is an avenue to power, not its equivalent.  In this sense he is anticipating what Peter Drucker said three and a half centuries later: “The purpose of information is not knowledge.  It is being able to take the right action.”  (Management Challenges for the 21st Century.)

Intelligence is the dialogue between Knowledge and Power. The intelligence process and its practitioners form the bridge across the often-perilous Knowledge-Power gap.  As such they represent the key link in the Knowledge Value Chain. TKA’s KVC diagnostics locate gaps and fail points in your process, and offer options to fix them.

Competition: the Wonder Drug for Health Care

Bubble chartOne broad goal for US health care that most of us can agree on is the need to rationalize and reduce overall costs. As a society, we can meet this goal — but only if we ensure that the health care industry remains competitive in each of its component sectors.

Competition update

Unfortunately, in key sectors this goal remains distant — one that in some cases we are even moving away from. Here’s some of what’s happening in three of the largest sectors:

Pharmaceuticals. Most of the profits here are made in branded drugs, where prices are significantly higher than in the corresponding generics.  Some of these drugs generate revenues in the tens of billions of dollars each year.  When a period of patent protection expires, these revenues typically fall drastically (the ‘patent cliff’).

Certain pharma companies have begun to pay generics manufacturers not to produce a generic version, which presumably would erode the branded version’s profitability.  Such ‘pay for delay’ seems on the face of it to be designed to discourage competition, and has the net effect of keeping drug prices relatively high.  The US Supreme Court has apparently reached the same conclusion, and on June 17 ruled that these agreements could be pursued by the Federal Trade Commission as anti-competitive. Whether or not FTC enforcement will follow through remains to be seen, but it’s a step in the right direction.

Hospitals and doctors. There is a consolidation wave under way in the medical provider market.  Small medical practices are being bought by larger ones, which in turn are being bought by hospital systems.  Small hospital systems are being bought by larger ones.  The really large ones can grow by accessing the capital markets.  According to research conducted by The Knowledge Agency®, there are at least seven publicly-traded hospital systems in the US, two of which (HCA and Community Health Systems) each manage more than 100 hospitals. Two others (Tenet and Vanguard) have just announced an intention to merge.

Several studies have concluded that the more concentrated a local health care market becomes, the less competition there is, and the higher provider prices tend to go.  This is the natural consequence of having monopoly or oligopoly ‘pricing power’ in a given marketplace.

Accountable Care Organizations (ACO), a key element in the Affordable Care Act’s quality initiatives, involve creating alliances between medical practices and hospitals.  Some observers believe this too will cause these provider sectors to in effect become more concentrated, further reducing competition and pushing costs higher.

Health insurance. Here the news is somewhat better for consumers.  On May 30 the White House released an initial analysis showing that when the health insurance exchanges open in January 2014, individual policy holders in many states will have more choices than they do currently.  This, coupled with the feature and price transparency promised by these electronic ‘marketplaces’, should create greater competition and resulting downward pressure on prices.

With competition reduced or just being introduced, most health sectors do not experience the natural downward pressure on prices that more rigorous competition would create. As a result, US personal health expenses have risen an average 5.6% more than general inflation annually during the past decade.

The buck stops…where?

Where does the ultimate market-based control of health costs lie? Theoretically the money trail ends with the payers — the government and private insurers.  This implies that they will act as the ‘guardians of value’ to keep provider costs down and quality up.

And to some extent insurers try to do this.  But too often they reach limits in negotiating with doctors and hospitals, especially ‘must-have’ ones without whom a given health plan is less saleable.

Consequently, private insurers have tended to pass along many provider cost increases in the form of higher plan premiums.  United Health, the largest private insurer, recently announced 2014 increases of 25-50% on small groups, and more than 100% on individuals.  State regulators have in some states negotiated these increases downward, and the US Department of Health and Human Services has said that it will review any annual increase in excess of 10%.  However such negotiations and reviews are largely non-binding.

That leaves the government itself, mostly Medicare for seniors (federal) and Medicaid for the needy (federal and state). Reimbursement rates here are the benchmarks against which private-plan costs are judged. These were cut by 2% in April as part of the federal budget ‘sequester’, and the trends are toward even lower payments.

Employers to the rescue

Since more than half the US population (170 million people) are covered under employer-sponsored health plans, employers represent perhaps the best non-government hope of slowing the upward cost spiral. Some have been making significant moves in this direction.  Recently the Catalyst for Payment Reform (CPR, get it?) was organized by a group of large employers to address this issue. Among other things, CPR publishes an annual scorecard as we begin to move toward value- or results- based payments (now at 11% of all health payments.)

Regrettably, employers have options other than fighting for lower health insurance premiums. Some of these involve shifting a growing portion of the financial burden back to their employees through higher deductibles, higher co-payments, and innovations like co-insurance (where the insured is responsible for a percentage of the cost, not just a fixed co-pay).  One large pension system (Calpers) has begun a program of paying fixed amounts for a given test or procedure, with employees responsible for the balance.

Trump card

One option open to employers is potentially even more disruptive of the status quo. While many employers remain committed in principle to offering health insurance to their employees, a key test of their commitment will come in 2014. That’s when businesses will begin to have the option of no longer offering insurance, and instead letting their employees buy individual policies on the new state exchanges.

Greater ‘consumer engagement’ in health care and how it’s paid for are here to stay, and consumer price resistance may in the end be the whip that drives costs lower. But this will be more difficult to achieve without a public policy that consistently fosters free, transparent competition as a foundation.

CHART:  TKA analysis from US Center for Medicare and Medicaid Services data

Addendum 7/31/13:  My biggest challenge in originally drafting this post was that with each iteration, new information had to be integrated.    I had no reason to think this would stop when I hit ‘publish’.  Yesterday the two largest US hospital systems Community Health Systems (CYH) and Health Management Associates (HMA) announced their intention to merge, creating the first US hospital chain with more than 200 hospitals.  As noted above, we expect this wave of consolidation to continue, and possibly accelerate.

Counterfeits: the golden age

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 is 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 20th 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.

Brand piracy

This hijacking of brand identities for illicit gain is known as “brand piracy”.  It costs legitimate manufacturers around $600 billion per year, according to the International Chamber of Commerce—though by definition, no one can precisely measure the extent of the problem.  Typically, a target company is not even aware it’s being victimized.  Counterfeiting is a slow bleed on a company’s revenues and reputation that only occasionally erupts into adverse newspapers headlines. (Google on “counterfeit” plus the name of your favorite brand to see if it is known to be a target.)

Counterfeits in some categories (such as luxury goods) are relatively harmless, though rarely up to the quality standards of the genuine article.  In other sectors, however, counterfeits can be dangerous, or even deadly—like the fake cell phone batteries that explode in your face without warning, or counterfeit auto brake shoes made from sawdust.  One of the most widely pirated products, pharmaceuticals, is certainly in this latter category.

The role of the Internet

The Internet has enabled a global black market for counterfeit goods that allows brand pirates to operate efficiently and in secret, bypassing all government quality controls and standards, and eluding taxing authorities.  In a market such as pharmaceuticals where prices are unregulated in some countries (including the U.S.), and regulated in most others, the Internet functions as a massive “arbitrage” market.  Goods intended for more-regulated markets are diverted into less- regulated markets where they command higher prices.

The Internet is not the only way that compromised products—those that are counterfeit, stolen, or diverted—enter the distribution chain.  But the Internet is by far the fastest-growing outlet for illegitimate goods.  Since it operates direct-to-consumer, the Internet bypasses the validation mechanisms of traditional channels—basic thing like knowing whom you’re trading with.

Brand pirates may be as highly organized and sophisticated as any legitimate business.  They use the Internet to take orders, coordinate production and subcontracting, and manage logistics and shipping.  Their operations are often geographically dispersed to evade detection.

What can be done?

U.S. federal agents have conducted successful interdiction efforts in several categories, including cigarettes, pharmaceuticals, and recorded entertainment—but they cannot keep up with the cascading levels of illicit activity.  Governments in places like the Far East, where much of the activity originates, may be similarly well-intentioned, but are ill-equipped to deal with the problem on a pre-emptive basis.

Companies, whether acting alone or in concert as an industry, need to take the initiative to manage this threat for themselves.  A successful mitigation  effort must include four key elements:

  • Intelligence programs include the systematic monitoring of brand-relevant Internet activities.  This is best accomplished by human analysts working with intensive technology support.  It should be accompanied by initiatives to acquire and test suspect product.
  • Internal coordination requires the creation of an internal anti-counterfeiting team, typically including representatives from brand management, legal counsel, and corporate security.
  • External coordination may involve on- and off-shore federal agencies (including regulatory, law enforcement, and taxation), local and municipal authorities, and even international agencies such as Interpol.
  • Countermeasures include legal initiatives such as cease-and-desist letters and DMCA takedown notices, as well as the law enforcement actions mentioned above.  Communications and educational initiatives also should be created to inform retail consumers and distribution channels on to how to recognize and report possible counterfeit products.  Technologies to better identify legitimate products can also be effective.   These include active identification (radio frequency ID, for example), passive identification (such as holograms), and “track and trace” systems that integrate several technologies.

Are you at risk?

How can you tell if you’re being targeted?  Start by answering a few simple questions:

  • Is my product a brand leader?
  • Is it relatively high value?
  • Does it ship relatively easily?
  • Do we outsource substantial amounts of the manufacturing?
  • Are we failing to act aggressively on the problem?

If you answered “yes” to even one or two of these, you’re potentially a target.   Take the next step by developing a couple of basic metrics:

  • What is the potential level of loss exposure for my brand?
  • What level of activity does there appear to be that targets my brand?
  • What is the trend in activity levels?

If the indications are high here as well, then begin to formulate a mitigation plan as described above.

The Knowledge Agency®, sponsor of this site, offers intellectual property tracking and metrics services. Contact us for more information.

Sorry, the Rolex pictured at the top is not for sale from us.  Google “BUY ROLEX” and you’re sure to find it.

Knowledge Value Chain®

“It is only in respect to knowledge that a business can be distinct, can therefore produce something that has a value in the market place.”

PETER DRUCKER, Managing for Results

Your enterprise — business, government agency, NGO, even your family or household — has as its ultimate purpose or mission producing value — benefits, outcomes, and results in some specific form, for example:

  • Profits and shareholder returns – if you are a business
  • Patient health and outcomes – if you are a medical provider
  • A better world, in some specific way – if you are a social enterprise or NGO
  • Satisfied customers and clients – in all cases
  • Productive and fulfilled employees – in all cases

Venn dIn order to achieve that purpose, and all the goals that support it, your organization takes actions that are based on group decisions.  The best decisions — those that produce optimal outcomes — are typically those that are based on the best knowledge (i.e., the most timely, most accurate, most relevant, etc.)

In short, there are direct linkages between (1) how your organization produces value and (2) how it acquires and processes knowledge — that is, how it “thinks”.

What is the value of knowledge?

We believe that knowledge is integral to value — and that understanding and managing enterprise knowledge enables you to unlock value within your organization.  Our work builds upon more than a half-century of scholarly research by Machlup, Drucker, Winter and others that supports this conclusion — as well as our results from working with clients.

The Knowledge Value Chain® (KVC) is a structured framework for understanding, accelerating, and optimizing the stepwise transformation of your data into knowledge and intelligence, and finally into outcomes and operating results. Within your organization, this transformation typically happens in the form of knowledge-based processes — business strategy, market research, corporate intelligence, knowledge management, special libraries, and even R&D and legal research.

Those processes occur within a value context — that is, they incur costs and produce benefits.  While the costs are usually pretty clear, the benefits often are not — and consequently the opportunities for producing even greater value are often overlooked.

The value chain

If you’re a business executive or analyst, you may know about the value chain, a useful analytic framework applied by Harvard professor Michael Porter at the enterprise level. But did you know that it can also be applied to knowledge work itself — the processes of business research, analysis, and intelligence?

KVC Triangle

We’ve pioneered ways to do that — and find they open doors to breakthrough improvements in those processes. The KVC methodology manages knowledge production and use as a specialized type of manufacturing process. This simple innovation allows us to adapt management techniques and ROI metrics derived from traditional manufacturing — total quality management, for example — to optimize and otherwise improve knowledge-based processes.

How does optimizing knowledge help you compete better?

“Optimizing enterprise knowledge” may sound esoteric or even mysterious at first — but it has a direct effect on your organization’s competitive performance.  Better knowledge helps you win.

Management thought-leader Peter Drucker consistently maintained that knowledge is the single most important factor driving the competitiveness of an enterprise, an industry — even an entire nation.  He was among the first to realize that knowledge is neither a theory, nor a nice-to-have luxury — it’s a need-to-have mission-critical resource that you must manage effectively in order to compete optimally.

Is competitive advantage sustainable?

There’s ongoing debate among strategy scholars as to whether sustainable competitive advantage exists outside the picture-perfect world of business textbooks. We don’t see it in our world.  Like cold fusion and perpetual motion, it’s interesting to hypothesize about — but it’s not real.

In our experience, advantages in the real world remain largely anecdotal and contingent. They buy you less time than they once did; they erode quickly.

This is not due solely to “disruptive technologies,” nor is it anything new.  As Drucker pointed out in Managing for Results — arguably the founding text on business strategy, “Any leadership position is transitory and likely to be short-lived. No business is ever secure in its leadership position.” Since Drucker wrote that more than a half-century ago, history has consistently supported his observation — though market dominance is now measured in years, instead of in decades as previously.

Remember former category leaders MySpace, America Online, Sears Roebuck, Revlon, and Borders? The list goes on…

Knowledge:  the sustainable advantage

There, however, is one exception to this general rule.  It has been our experience that the only competitive advantage that can (with some effort) be sustained comes from (1) acquiring enterprise knowledge better and faster, and (2) converting that knowledge into results better and faster, than your rivals.  We call these combined capabilities knowledge advantage; it’s a source of strategic advantage that is, by definition, self-renewing and resilient.

How do you maximize knowledge advantage?

For more than two decades, we have been working on ways to achieve knowledge advantage for our clients.  The KVC framework summarizes our experiences, and builds on the core insight that knowledge is not a cost — it’s an investment.  Whether you are a knowledge producer (analyst) or a knowledge user (decision maker), once you internalize this insight, your challenge then becomes maximizing your return (ROI) on that knowledge investment. The KVC methodology guides you in doing this using various process diagnostic and optimization techniques.

How are organizations using the KVC?

The KVC framework is being applied in a range of ways. Its original application was in professional development for knowledge, research, and intelligence practitioners — still one of its primary use cases.  The KVC has been presented in business lectures, webinars, workshops, and clinics on four continents, and more recently in the academic world.

But our best ideas usually come from working with our clients.  They have consistently challenged us to apply the KVC in innovative ways, for example:

  • Research design and management.  The KVC can be used, not only to execute research projects and functions, but also to plan and manage such activities.  TKA has done this at the enterprise level, as well as at the department and project levels.
  • Workflow improvement. A major pharmaceutical company used the KVC to integrate the flow of product intelligence across R&D and sales teams. This resulted in a knowledge re-purposing that increased productivity and competitive effectiveness.
  • Business process improvement.  A global information and media firm integrated KVC-based metrics directly into a Six Sigma process improvement initiative that includes their corporate intelligence function.  This resulted in a more efficient and effective intelligence process.
  • Business model innovation.  A web-based information aggregator used the KVC to demonstrate how its information product would offer value to customers and generate revenue.  The result formed a key element of pitch presentations to potential investors.
  • Senior team awareness. A pharmaceutical research organization uses the KVC to educate their senior management and Board of Directors — intelligence users — about the process by which intelligence is produced.
  • Management education. Columbia University has used our Knowledge Value Chain® Handbook as a required text in its innovative M.S. in Information and Knowledge Strategy program.
  • Career enhancement.  Knowledge, intelligence, and research professionals tell us that applying the KVC has helped them differentiate themselves in their own career development.
  • Program evaluation.  A global NGO is using the KVC to optimize its program evaluation policies and practices.

How can knowledge optimization work for your organization?

But our organization isn’t primarily in the information business — isn’t that really your target?  How does any of this relate to OUR business?

In any modern organization, we all use information (to a greater or lesser extent) to “compete in the knowledge economy”.  Some of TKA’s clients are, for example, pharmaceutical companies whose products are molecules and compounds that require significant investments in high-level knowledge (in the form of R&D) to discover, develop, produce, and sell.  Effective use of knowledge as an economic resource is key to their business model, even though they don’t sell knowledge directly — as a consulting firm or law firm does, for example.

And if you compete in one of these latter “knowledge-as-a-service” industries, or any number of other knowledge-centric businesses, the knowledge-value linkage is nothing short of mission-critical for you.

The Knowledge Value Chain® Handbook is a quick, cost-effective way to acquire the essentials of the KVC methodology that organizations worldwide are using.  Get your copy now so you can begin to use the KVC to achieve better results.

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