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

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 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 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 determine with some precision HOW and FOR WHOM value was to be created.

He liked what he found so much that he used it in a pitch to investors.  Using the KVC, he could graphically map exactly where and how his product fit into his customers’ value propositions.

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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 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.

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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 a day, sucking down about 34 gigabytes 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 up-scaled 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.

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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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