On Knowledge Economics Dynamics

8/3/2019 On Knowledge Economics Dynamics

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Alfredo Barriga Cifuentes

October 2009


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INDEX

Abstract ..................................................................................................................................... 3

Knowledge in the scope of the present paper ............................................................................ 4

Knowledge dynamics as a resource in society and businesses .................................................... 4

Education for knowledge citizens ............................................................................................. 11

Knowledge as an economic resource ........................................................................................ 12

What differs in Knowledge and Industrial Society as related to business .................................. 19

Business in Knowledge Society is intense in know-how......................................................... 19

Creativity is the productivity of Knowledge .......................................................................... 20

Businesses are consumer-oriented in Knowledge Society ..................................................... 20

The added value of people in businesses in a Knowledge Society ......................................... 22

Motivation at work is how value thrives in businesses in a Knowledge Society ..................... 23

The extended corporation is part of business in a Knowledge Society ................................. 25

Businesses in Knowledge Society follow Schumpeters destructive creation and Nashs

equilibrium, but in collaborative environment ...................................................................... 26

The backbone of Businesses in the Knowledge Society lie on the Net and ICTs ..................... 27

A proposed knowledge-based organization ecosystem Model .................................................. 28

Transition from industrial-based Business model to knowledge-based business Model ............ 30

Conclusions .............................................................................................................................. 31

BIBLIOGRAPHY ......................................................................................................................... 33


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Abstract

Knowledge Society, though it has been in the speech of politicians, business people, business

writers and some academics, is still a very new concept. What is it? How does it work? In whatdoes it differ from Capitalist Society? Which are the new dynamics it brings? What are its features

and characteristics? What are its challenges? It would exceed the scope of a paper to answer

thoroughly all these questions, even from a limited perspective. It is possible, nonetheless, to

make a general framework that could otherwise be used for further study. For the purposes of this

paper, we do not intend to embrace all the aspects of Knowledge Society, but rather the ones that

deal with economics dynamics, and especially, with business. Being still an ambitious goal, it is the

one that this paper, certainly humbly, tries to achieve. We do not either try to make scientific

explanations and formulations around knowledge society and knowledge economics, since this

paper is more descriptive and speculative, given the novelty of the theme. We nonetheless apply

common sense and common knowledge proper of our science.

The Knowledge Society is a new system, one that will replace the Industrial Society and Capitalism.

Capital is not the key issue: knowledge is. As Knowledge becomes accessible by all, and is not

exclusive, a new economic dynamics generates. Society becomes more knowledgeable and shapes

in a different manner the way relations are conducted. That in the end helps economies and

democracies get stronger, as the power shifts to consumers and citizens.

In the backbone of the Knowledge Society lies the Information and Communications Technologies

and the Internet, as the infrastructure where Knowledge Society needs to live and grow. This in

turn breaks down frontiers and draw cultures nearer.

Knowledge in itself becomes a resource of the system and a factor of production, one that

increases over time and is not exclusive but rather leveraging: knowledge becomes leveraged as

people learn to communicate and work in networks.

People, as the sole generator of knowledge, become a factor of production as well, and with it, a

whole new scope of management comes into place, which has to address the key issue: how to

make people generate valuable knowledge inside the organization.

This new trio of factors people, knowledge, ICTs replace in importance the trio of Industrial

Society that of land, labour and capital, and are in the core of the value creation based on

knowledge. We have elaborated a model of what we name Knowledge Ecosystem that explains

the dynamics of this value creation. We have described how this trio affects public policies and

economic issues in a country. We also describe how businesses work in a Knowledge Society as

compared to Industrial Society, and refer to real cases to argue our points of view.

Our main conclusion is that, even though Knowledge Society is in its beginnings, it brings too many

new paradigms that need to be addressed immediately, if not through a scientific approach, at

least with a logical approach, as the scientific embodiment will come about as it has in most prior

economic philosophies.


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Knowledge in the scope of the present paper

Knowledge is defined by the Oxford English Dictionary as (i) expertise, and skills acquired by a

person through experience or education; the theoretical or practical understanding of a subject,(ii) what is known in a particular field or in total; facts and information or (iii) awareness or

familiarity gained by experience of a fact or situation. There is however no single agreed definition

of knowledge presently, and there remain numerous competing theories. Management guru Tom

Davenport once put it as information combined with experience, context, interpretation, and

reflection. We think it to be something else. Knowledge is not data, nor is it information. Data is a

representation of an event. For example, the GDP of Chile grew 5% as compared to last years 4%

is data. But if you put this data in front of a fisherman in the extremities of Chile, he will not

understand it. That makes the difference to what we name information. Information for us is

Data in a context where it can be understood. Yet, still it is not knowledge. Knowledge for us is

information that can be transformed into value. That is why we think that Knowledge System and

Knowledge Economy are terms that have a real meaning.

For the scope of the present paper, Knowledge simply exists. It is not a creation1, but rather

something that lies in the innermost nature of all things, and as such is, in my opinion, a part of

ontology. It comes about as the result of a thinking process in the minds of people. Then it is

delivered in the form of ideas: written, talked of, or drawn, in such a way that it can be

understandable and apprehended by the many. Knowledge may reveal or unveil itself, as

happened with the famous anecdote of Newtons apple, or be discovered after a long process,

as happened with Einsteins famous formulae on relativity, or be acquired as part of experience. In

the end, it comes forward as the outcome of a process between persons and knowledge in itself. It

is there.

Aristotle says we suppose ourselves to possess unqualified scientific knowledge of a thing, as

opposed to knowing it in the accidental way in which the sophist knows, when we think that we

know the cause on which the fact depends, as the cause of that fact and of no other, and, further,

that the fact could not be other than it is. Now that scientific knowing is something of this sort is

evident witnesses both those who falsely claim it and those who actually possess it, since the

former merely imagine them to be, while the latter are also actually, in the condition described.

Consequently the proper object of unqualified scientific knowledge is something which cannot be

other than it is2. For the purposes of this paper, however, and accordingly to what was said

above, knowledge in a Knowledge Society comprises both meanings, the scientific and the

sophist. This is so because of the dynamics of Knowledge Society, as it will be described later:

knowing accidentally is also part of the dynamics Knowledge Society brings about.

Knowledge dynamics as a resource in society and businesses

The first thing that is remarkable in this new concept of Knowledge Society, focusing in economics

and business, is that it is seen as a resource quite different from the Aristotelic conception or the

definition of the term according to the Oxford Dictionary. According to Peter Drucker, it is the

1i.e. something that is conceived from blank

2Aristotle, Posterior Analytics, Book 1 part 2


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resource: That knowledge has become the resource rather than a resource is what makes our

society post-capitalist. It changes, fundamentally, the structure of Society. It creates new social

dynamics. It creates new politics3. In his book, Drucker describes in a very straightforward way

how this happened. It began with Capitalism converting itself in a system. It brought first the

Industrial Revolution thus bringing knowledge from the scope of being to the scope of doing,

and making therefore knowledge a resource focused on tools, processes and products. It brought

later the Productivity Revolution that put the focus of knowledge as a resource on work. And

lately, it brought in the Management Revolution that puts the focus on knowledge in itself.

This conception, however, focuses solely on business. It may refer to a knowledge-driven business

conception, but not to a Knowledge Society. Knowledge, therefore, to become an economic

system, must also embrace the rest of the society. Put in other terms, Drucker refers to supply

side, but to talk properly of Knowledge economics, there must also be a demand side to the

concept. Knowledge must also be at least a part of societys dynamics. And at present, it is.

When Drucker wrote his book, Internet existed, but the World Wide Web (referred from now on

indistinctively as the Net) did not. Drucker describes in his book how a series of tools, combined

with theoretical knowledge and entrepreneurship, ended up in inventions that had a profound

impact in the Society, thus creating a new dynamic and, finally, a new system. Nowhere can this

idea be more properly applied than to the invention of the World Wide Web, which put together

millions of people around the globe in less than 10 years, unleashed and revolutionized new ways

of communicating, socializing and interfacing. Up to then, knowledge economics, as described by

Drucker, was a matter discussed of and lived by an elite, that of the managers and knowledge

workers inside a working and business environment. The World Wide Web incorporated the whole

Society to the knowledge dynamics, and has been the primary invention that has made the

Knowledge Society and the Knowledge Economy - possible. People all around the world use the

same interface, the same processes, and the same tools, to interact between each other. They

have equal access to information, data and the stock of knowledge. Mostly, for free. They can

produce and distribute knowledge of their own. Again, mostly for free. Being producers as much

as consumers of contents and knowledge the so called prosumer - is totally new as a concept

in business literature.

Therefore, a second remarkable thing about knowledge economics is that the primary resource

the one that gives its name to the system is accessible in almost unlimited amounts by any who

knows how to use the tools, and mostly for free. In the Industrial Society, all the factors of

production land, labour and capital were limited and exclusive: if one had it, someone elsecould not have it. Knowledge knows not of such restrains: it is always growing. It can be shared by

many without diminishing the value of none. In fact, as later will be seen, it can even enhance the

value of the ones who share it when they share it, as opposed to use it alone, and in the process, it

can revalue itself by this interaction. None of this existed inside the dynamics of the Industrial

Society.

3Peter Drucker, The Post Capitalist Society, Butterworth-Heinemann Ltd., 1993, pages 40-41


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It is not strange therefore that the access to knowledge in the form or access to broadband - has

been set upon as a primary goal for Governments as a means of incorporating the country to the

Knowledge Society or the Information Society named one way or the other so that all people

benefit of its opportunities and a digital divide which would discriminate people connected to

the Net, who have access to its benefits, from people not connected, who would be held apart is

avoided. This sole fact shows that Knowledge Society and Knowledge Economy is on the

Government agenda and is part of public policy making. Not so much part of Academia, for the

time being, and incredibly as it might seem. It took a long time to the author to find anything

serious about the subject, let alone contact any of the few authors existing none focused in

knowledge economy itself, but rather on sidelines that help knowledge economy occur, like

innovation.

The European Union, for instance, under the Lisbon Strategy aims to transform itself in the most

dynamic and competitive knowledge-based economy in the world by 2010. It was relaunched in

2005 and refocused on the creation of growth and jobs. A recent study4 stated that the massive

adoption of broadband in some European countries under the policies undertaken by the

Governments of the said countries in close collaboration with private sector, provided process

improvements of 5% and 10% to labour productivity in the manufacturing and services sectors;

accelerated and automated information flows between companies, enabling an increased

specialization in knowledge-intensive activities, generating a displacement of 725,000 jobs per

year in Europe from traditional economic sectors to the business services sector, while at the

same time creating 440,000 jobs in the business services sector and 549,000 jobs in other sectors

in innovative knowledge-oriented activities. All of which, bottom line, resulted in a growth of the

European Gross Value Added (GVA) of 82.4 bn per year (+0.71%) in 2006.

Drucker says in his book that what made the Capitalist a system were not so much the inventions

of the tools that it brought through, but the speed that those tools were adopted globally5. Yet, it

was nothing compared to the speed in which the World Wide Web was adopted globally. Through

it, new ways of doing business came forward business models impossible or unthought-of only

years before the invention of the Net. Corporations were launched and in few years were valued

at billions of dollars in the stock markets6. Never had that happened before, and it has become

hard data. The huge mortality of businesses that happened with the bubble burst was not the

end of the new paradigms, just the natural selection of the businesses fit for them, and was

something that also had happened before in the Industrial Society. Moreover all of a sudden,

Governments all around the world began to incorporate public policies for adoption of

broadband

7

, for smarter uses of ICTs

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, for reducing the digital divide inside their countries, etc.Knowledge Society might have not been talked of in Academia for now, but it is there.

4Martin Fornefeld, Gilles Delaunay, Dieter Elixmann: The Impact of Broadband on Growth and Productivity.

A Study on Behalf of the European Commision, 20085

Op cit, Chapter 1, From capitalism to knowledge society6 Examples: Google, Amazon, AOL, Facebook, Skype, YouTube7

For example, the EEC Broadband for All policy dating from 2006, or the OECD 2004 Recommendation of

the Council on Broadband Development


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From our perspective, Knowledge Society is shaping itself as a System, just as Capitalism was, by

the interaction of three resources, which somehow resemble the three resources assigned to the

Capitalist Society. Alike the factors of production known to the Capitalist System were Land, Labor

and Capital, we think that People, Knowledge and ICTs are the factors of production to Knowledge

Society. How is that? For a Knowledge Society to transform itself into an economic system, the

basic dynamics is in the creation of value from knowledge. This happens by the interaction of

people and knowledge itself as a resource that also creates value for the same people in the form

of human capital. The tool that makes this possible is the Information and Communication

Technology, giving birth to the knowledge worker:

Paul M. Romer, in his New Growth Theory identifies creativityas the new factor of production.

But creativity does not come from nowhere: it comes from people. Factors of production deal with

things existing, like was the case with land, capital or labor. People exist previously. Knowledge

exists previously. ICTs exist previously. Creativity is something that comes from a process: in itself,

it is a process. Of course, the more creative people are, the more productive or competitive they

become, and as a whole, the environment where they live. In a way, factors of production andresources become blended. In the end, this is rather a sophist discussion than a practical one.

People produce knowledge using their existing knowledge, their creativity, their personal values,

and the tools needed to access and produce it. Knowledge becomes value and wealth when used

and applied by people, and it is leveraged when the tool for the generation and diffusion of the

value created is ICTs.

8Acronym for Information and Communication Techonologies


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Why people?

It is people who discover knowledge, as defined previously, existing in reality, in values, in

things, in thoughts anywhere. Knowledge is a resource but also the transforming driver to more

knowledge, in an everlasting value creation cycle that materializes in higher human capital, more

products and services, more value creation. The process by which people interact with, and

develop knowledge, empower the same people as to their intellectual and human capital, in a way

we describe later. No longer is it labour the important factor, but people with all its complexity

and potential. This happens because, as we explain bellow, knowledge, as a resource, resides in

people, who develop it, hold it, and take it with them. That people and knowledge become a

resource, is a new idea in economic thought.

Why Knowledge?

For Drucker, Knowledge is the only meaningful resource today9. The traditional factors of

production land (i.e. natural resources), labour and capital have not disappeared, but become

secondary. They can be obtained and obtained easily, provided there is knowledge. And

knowledge in this new meaning is knowledge as a utility, knowledge as the means to obtain social

and economic results. These developments are responses to an irreversible change: knowledge is

now being applied to knowledge.

This interaction of knowledge coming from people and people empowering themselves through

knowledge is what creates the knowledge worker and the knowledge manager inside business

environments. Drucker in his book describes some of the characteristics of the knowledge worker

and of the knowledge manager, who make the System a Knowledge Economy10:

Knowledge workers own the means of production, that is, their knowledge Machine operators in the factory [in the Capitalist Society] did as they were told. The

machine decided not only what to do but how to do it. The knowledge employee may need a

machine whether a computer, an ultrasound analyzer or the astronomers telescope. But

neither of them tells knowledge workers what to do, let alone how to do it. Without this

knowledge, that is the property of the employee, the machine is unproductive

The worker under capitalism was totally dependent on the machine. The knowledge worker isinterdependent with the tools of production (like computers, ultrasound analyzer or

telescope) and the machine is dependent on the employee, not the other way around

Workers throughout history could be supervised. They could be told what to do, how to doit, how fast to do it, and so on. Knowledge employees cannot, in effect, be supervised

Loyalty of the knowledge worker cannot be obtained by the paycheque. It has to beearned by proving to knowledge workers that the organization which presently employs them

offers them exceptional opportunities for being effective and performing

9Op cit, page 38

10Op cit, page 58


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Drucker especially describes how this new dynamics has changed the meaning and the role of

management: When I first began to study management a manager was defined as someone

who is responsible for the work of subordinates. A manager, in other words, was a boss, and

management was rank and power But by the early 1950s, the definition had already changed to

a manager is responsible for the performance of people. Now we know that this also is too

narrow a definition. The right definition is a manager is responsible for the application and

performance of knowledge.11 As Leibold, Gilbert & Probst put it, we are at a juncture in the era

or organizational leadership in which the traditional Sloan, Taylor and Ford approaches can no

longer cope with the exploding opportunities afforded in a global economy in rapid transition12.

Looking closely to knowledge-driven companies like Google, Facebook, Microsoft, IBM, General

Electric or JP Morgan, all what is said above becomes self-evident. Especially in the businesses that

lay around the Internet as a platform or in ICT applications which are essentially knowledge

production businesses in a professional - successful companies have successful managers who

have learned how to make knowledge be transformed from a resource to a product or service, and

have been able to create an environment where knowledge workers boost their performance

working both individually and as team13. Especially in those areas, the triangle of People,

Knowledge and ICts as primary tool, work harmonically into producing value.

It might be argued that this only applies to ICTs and Internet-based businesses, but not to the rest

of the activities and businesses, and therefore, it cannot be sought of as an economic or social

system. Drucker, in effect, does not confine as seen from quotes above- the tools of production

to ICTs. But the trend is that increasingly all devices used by knowledge workers are developing

interfaces towards ICTs and especially the Internet where knowledge stays. That Information

and Communication Technologies have become increasingly the backbone of social and economic

activity is what makes Society a knowledge one, because that is the vehicle of universal access to

the one important resource that gives its name to the Society. All what is in the Net is a huge stock

of knowledge, information and data. Of course, knowledge may be produced outside the Net and

without need of a computer. Still, it must be distributed quickly enough as to make it work and

used in order to find its true potential value.

In other terms, the Society that works networked and plugged on the Net is one step further than

one who is not connected to the Net, as the Industrial Society worked. If it was otherwise, why

would all countries in the OECD foster so persistently the deployment of broadband for all citizens

and organizations? Networking is, as will be discussed later, another remarkable feature of

Knowledge Society, which makes value production faster, bigger, easier and more efficient.Likewise, businesses that work connected are one step further than those who do not work

11Op cit, page 40

12Leibold, Marius; Gilbert, J.B.; Probst, Michael Gibbert: Strategic Management in the Knowledge Economy,

Publicis Corportae Publishing Second Edition, 200513

Ref. for example to IBM in FATHER, SON & CO. My life at IBM and beyond, Thomas Watson Jr, 1990. Or,

Hard Drive: Bill Gates And The Making Of The Microsoft Empire, James Wallace & Jim Erickson, 1993


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connected. The differences of a Knowledge economy with the Capitalist or Industrial economy are

discussed later, where the clue role played by ICTs will become more apparent.

As said above, the access of the non-business community or the society to the Net becomes an

important part of the Knowledge Society as much as of the Knowledge Economy. It creates a new

market. It creates new figures, such as the commented prosumer.

Both businesses and market coexist in a new worldwide dimension, a digital one, by which all can

access all, creating a totally new social and economic dynamic which is still in its beginnings.

Through this connection the non-business people become and create a new market, with a

different profile to the one exhibited up to now. The way this new market acquaints its needs,

looks for information, makes decisions, and carries them on, changes. And this creates new

opportunities and challenges, both for businesses and market alike. The sole fact that ordinary

people can have unlimited access to information and knowledge practically for free, changes the

nature of how things work though, paradoxically, not the underlying hypothesis of modern

economics: on the Net, equality of access to information becomes real, not just hypothetical. Bill

Gates called it Capitalism without friction14, though it is far more than that. It is a new System, as

much as Capitalism was a new System different from Mercantilism. But on the Net it does happen

that there is freedom of concurrence, equal access to information and freedom of competence.

Legislation pertaining activities that happen on the Net go far beyond actual facts, and there is

wide consensus that the role of Governments is to foster on the one hand and harmonize on the

other what takes place on the Net, leaving private sector to lead. Thus, a truly free market which

is more hypothetical than real outside the Net - becomes a reality on the Net.

Intellectual capital becomes paramount in Knowledge Economics, and thus happens therefore

with Intellectual Property Rights, which is challenged perhaps as never had been before. Some

believe that free intellectual property (as the shareware computer program or the Open Source

concept proves) is unavoidable. Patents over knowledge are each time more vulnerable, and what

happened in the software industry many years ago, when the inventor of the first spreadsheet was

denied the patenting of his invention, might show what is to come.

Intellectual Capital, derived from knowledge development and knowledge management would be,

according to Leif Edvison and Michael S. Malone, the explanation why market capitalization of

corporations differs so much from book value. That difference is not a constant. Some companies

simply are valued at many times the value their Balances show and it doesnt necessarily have to

do with the industry or economic sector where they are placed. It is not a phenomenonattributable only to high-tech corporations or those in the NASDAQ. Even between companies that

are in the same market, with the same products and results alike, the ratio market cap/book

value differs. Why? Edvison and Malone say it is because the market is able to value the

Intellectual Capital, which is not incorporated to the Balance sheet. And that capital is the

outcome or the impact of knowledge development we do not see knowledge as a creation, as

explained before and knowledge management.

14Gates, William: The New Road Ahead, Mac Graw Hill, 1995


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Knowledge is inherent to know how. But in know-how there are two parts: know, and how.

The first is accessible through the Net. Its the second the one that counts, both in the developing

of new knowledge and the use of the existing one something that always creates new knowledge

as well. So, its how I use knowledge what becomes important and not the possession of or access

to knowledge in itself. How I use it for achieving my goals, for increasing my performance, for

growing as a human being is what matters to me and leads my acts. And if that is the case, the

homo sapiens of this new Society is definitively different in its ways than what it used to be,

because in Capitalism access to the resources was the key issue. People living in a Knowledge

Society require different skills, and that in turn means a different education. The way people are

educated today is unfit to what people will need for their every day living in a Knowledge Society.

Therefore, new ways in education become one of the biggest challenges of the Knowledge Society,

because up to now knowledge was itself the objective of education, and all of a sudden, it has

become a resource, the resource. Therefore, before we discuss on how Knowledge economics

work in business, we must stop a while into education for a Knowledge Society.

Education for knowledge citizens

Swedish Professor Win Veen, of the Faculty of Technology, Policy and Management at Delft

Technological University introduced the concept of Homo Zappiens in his book Homo Zappiens,

Growing up in a digital age15. The concept, by the way, comes from the activity of zapping

through different contents with a remote control, a reaction that happens due to the fact that

there are numberless choices that can be accessed immediately, and the consumer wants to take

a pick at all of them before deciding which to take.

A child or young person at this time is able to interact with many stimuli at the same time. That is

multitasking. Therefore, at home the student has the focus and latent attention level continuously

switching: listening to favorite music, while chatting, while surfing the Net, while doing Math

homework. At school, nonetheless, the education methodology is based on monotasking: teacher

speaks, students listens, makes questions, is answered, makes activity, ends activity, gives results.

The student at home works mainly with iconic skills, yet at school it is text skills that make the

basis of education. The approach of education process is linear, whereas while interacting inside

the Net it is non-linear. At school the student must process information that comes in a continued

form, whereas on the Net information is processed discontinuously. All this puts a challenge to the

education process, since in the future the student will carry most of its activity on the Net. There is

also a different approach as to the ways the media is used in the learning process. At school books

is the main media for learning. At home, games and applications in a computer and the net are the

main media. Books require interpreting; games and applications, configuring. In Books, all words

and activities are of the same importance not meaning they are of the same value whereas in

the games and applications there are different paths and opportunities that can be chosen. The

book is static, the game is dynamic. The book is an object; the game is both an object and a

process. The book is there always for the same end, whereas games and applications have

multiple ends. The book is a one way communication; games are community based

communications. With a book the reader is a spectator; with the game the player is immersed and

15Vim Ween and Ben Vrakking, Network Continuum Education, 2006


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the person, transported. There have been recently pilot programs that incorporate games with

computers Online in learning processes, like the one that took place in Chile inside the Enlaces

Program, with heartening results, though no escalation up until now.

Therefore, this new homo zappiens learns in a different way that the traditional homo sapiens.

The reference framework is digital and multimedia oriented. The new student uses Menus,

keywords and tags as references, and relies on challenge, creativity and self esteem. For homo-

zappiens the Net is an extension of the self. Sharing is winning a new paradigm to which we will

refer later when discussing knowledge economics in businesses. Services are personalized yet

another paradigm of knowledge-based markets. Personal references come from peers on the Net,

and organization matters all things that matter as well in knowledge business, as will be seen.

Professor Veen concludes that for a creative knowledge intensive society a creative education is

needed, one based on trust, challenge, self direction (which is in line with what Drucker says of

knowledge worker), relevance, immersion, passion and talents. Return on talent is a concept

that has been talked of recently16, and one that might become increasingly important as

knowledge becomes the main resource therefore, the main asset and knowledge, as said

above, comes from interaction of people with knowledge. Those countries where this issue is

addressed properly first will definitively have a competitive edge over those countries that do not.

The what might be clear, but the how is the big challenge to come. Underdeveloped

economies may become developed and leaders - just by making the right decisions in this

matter.

Knowledge as an economic resource

Considering knowledge as a resource from the macroeconomic point of view has consequences

worth studying. What does that mean? How does it affect economics as Science? How does it

affect the design and deployment of economic policies for the creation of wealth, the betterment

of people, and the increase in income? What new dimensions does it bring about and what needs

to be measured that has not up to now?

Up to now, most countries who have been investing aggressively in transforming their economies

from industrial-based into Knowledge-based economies are doing so solely on will and beleif. They

simply believe it the right thing to do, though they did not have studies or figures to support their

policies when the policies started. Just recently have the figures began to pour, as was shown

above in the case of Europe, or the USA.

When I attended my Economics Classes at college, I remember Economy being defined as the

management of scarce resources. If knowledge has become a resource, and there is unlimited

access to it, as much in scope as in quantity and quality, it might very much happen that, in a near

future, we begin to study the management of unlimited resources rather than scarce. The stock of

knowledge is accessible on the Net. More than 200 million questions are made daily to the Net 17,

giving millions of possible results to those queries. Whatever one may ask, at least thousands of

16http://www.joesantana.com/take_charge_of_your_return_on_talent.htm

17Ref: Google


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answers become accessible. So again, it is not so much a matter of access to the resource as to

knowing what to do with it once accessed.

But that is just an anecdote. What is clear is that, if knowledge becomes a resource as much as a

product it follows that the economic wealth of a Nation will depend on how well it performs in

developing and using knowledge for value creation. And that again puts the focus on the three

pillars of knowledge for value creation: people, access to knowledge stock and ICTs.

Putting natural resources and Capital to work in order to attain growth and produce wealth was

the big issue in the Capitalist system. Putting talents to work for the same goal is the main issue

for Knowledge system. This implies finding the talents of the country, developing them as much

possible to their full potential, and allocating them where they can produce more, yet earning

better income. Put in simple economic terms: a Nation where people work in what they like most

and have better skills will be more competitive. It is self evident and common sense that the GDP

of an imaginary Nation where that was obtained would be far higher than with the actual

economic paradigms. How can that be proven is a different matter, and exceeds the scope of this

Paper.

What becomes apparent is that if knowledge is the main resource for the development of a

Nation, education becomes aneconomic concern in a Knowledge Society, a status it did not have

until now it was mainly a social concern. And that, as Drucker would point out, changes social

dynamics and creates new politics.

If in Knowledge Society knowledge is the main resource, and knowledge comes from the people

that live in a country, what growth potential does the country have? How much wealth can the

combined neurons of all people employed in what they have better skills and like more produce?

The challenge behind these two questions is huge, and puts the focus on the main issue for the

knowledge economics of the future: developing the knowledge resources of the country. The

biggest challenged issue is the economy development policies. Up to now, there were ways to

measure up and find the return on investments of things physical that had to do with the

development of the economy. But we do not have ways to measure the return on capital invested

in making people use better their intelligence, which is what would make the resource grow,

and hence the economy grow.

The issue that in Knowledge Society the prime raw material, knowledge, comes from people, not

natural resources or things that can be measured means that not much can be done in economicterms under present economic theories. The main concern in economic terms will become to

produce knowledge which transforms into value and wealth for the Mation, and that can only

come from knowledgeable people. Yet, just investing more money in education does not mean

automatically that knowledge will grow, though it should. What is clear is that quality of education

is basic for economic growth in a Knowledge Society. The ideas discussed above deal precisely

with this issue, which was not part of Economics until the appearance of Knowledge Society.

Return on investment in education will be part of Knowledge Economics, as will be also the

allocation of knowledgeable resources people where they can perform better. And that means

finding out for each one what natural skills and what natural likes she or he has, making them


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apparent and helping the market be able to match knowledge necessities with knowledge

availabilities.

Not only education becomes an economic concern. As said above, the productivity of knowledge

depends upon other things, on creativity. Ceteris paribus, between two Nations with the same

initial Capital stock, population, education, and natural resources, the one more creative will be

more competitive. But how can creativeness be measured? Some use investment in R&D as a

means of measuring. Others use number of patents per 1,000 inhabitants. We find none of them

good enough, because when creativity becomes a general attitude of people, the outcome doesnt

depend so much on money spent or inventions patented. Most creative ways of life will go

unpatented, and yet, that Nation will be more competitive. R&D will not be seen as special work

out of the ordinary, but as fact of everyday life. All people will conduct his or her personal R&D.

Which in fact, many already do. The thing is, at present we do not have a good way to measure

creativeness, and most certainly creativeness will lead to bigger return and productivity on

knowledge, and therefore, to bigger value creation and wealth. Put in simple economic terms: a

more creative Nation will produce more knowledge with less money. In microeconomic terms,

we believe creativeness is the productivity of knowledge. Creativeness is to Knowledge Economics

what Productivity was to Industrial Economy. We write more about that later.

Knowledge jobs are better paid for than industrial or agricultural jobs. Knowledge jobs are intense

users of ICts. When using ICTs, thanks to the Net, knowledge workers become ubiquitous. And

that in turn brings in changes that may affect the whole economy of a country, as much as its labor

legislation. It brings in new opportunities as much as new challenges, and can make a Nation

aspire to becoming developed in a shorter time. This is so because with knowledge jobs the work

can be done outside the organization premises. In fact, entire processes can be and are

outsourced in other countries. Up to now, the most globalization could help in an Industrial

Society was that organizations could allocate whole business units in other countries with cheaper

or better transformation costs. But it had never happened that processes could be split and

allocate each piece in different countries.

In California, for example, people taking a scanner or an X-Ray will go to a Hospital to do so, but

with an ICT technology called RIS/PACS, the results will be digitalized in a server and accessed by a

radiologist living in Bangalore, India far cheaper than a North American radiologist. A European

Engineering company can hire engineers in Chile to work in an International Engineering Contract,

in the stage of design. This new paradigm receives the name of Business Process Outsourcing

(BPO), and it is a thriving industry worldwide. This is a product of the Knowledge Society. In Chile,total BPO sales have come to 1 billion dollars in less than 5 years. It took nearly 20 years for the

renamed Chilean wine industry to get to that amount. Worldwide, the BPO market in 2005,

according to a study conducted by the Gartner Group, was worth US$122 to US$154 billions.

According to the latest prediction, this market could reach US$450 billion by year 201218.

18John NelsonHall at http://www.nelson-hall.com/service-line-programs/bpo-market-

development/?avpage-views=article&id=62422&fv=1


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Labour, therefore, is no longer attached to a place, but rather to a process, which may be run

from anywhere in the world and can be split into pieces. This simply means one can live in one

place and work in another. A whole country, like a Caribbean Island, could make its economy

thrive by providing good access to broadband and inviting knowledge workers to establish there

bringing along their income with them.

Knowledge labour on the one hand becomes immaterial and crosses borders. And it can also

change the ways it is paid for. In an industrial Economy, when processes had to go in paper and

attached to the industrial cycle, people needed to go to the office to do their work. The key issue

for performance and productivity was symmetric relationship: all had to be there so the process

could work. Therefore, paying hired people had to do with presence. All the legislation and the

decision making on labour in the industrial-based business models have to do with hours of

presence at the premises. Now, with knowledge-based processes, the key issue is deliverables.

Which means more and more people will become independent contractors of different companies

without necessarily having a job. Therefore, economic policies regarding work will have to

incorporate the fact that works no longer mean contracts based in hours of presence in the

premises, but rather based in deliverables, and develop a way of measuring employment in this

new way.

The backbone of Knowledge Society on the other hand becomes the Net and ICTs. It follows then

that those Nations with bigger IT savvy will be more likely to use the backbone productively and

therefore be more competitive worldwide. That idea is behind much of the broadband and ICT

policies that the leading broadband nations have implemented. Japan, for example, aims to have

100% of the population with broadband by the end of 2010, with access to multiple devices not

only computers and 20% of their population teleworking by the same year19.

Up to now we have discussed what is needed to produce knowledge in the source. But that is not

enough to create value. Knowledge comes in the form of ideas, which are expressed in words,

images, voices. Therefore it follows the better a country is in expressing ideas, the more

competitive it will be. The degradation in the use of language via its simplification, or the

incorrect usage of terms then becomes a liability for the productivity of a Nation. Culture

becomes not an aspiration issue for Knowledge Nations but rather a necessity. Use of language

the tool to express ideas behind knowledge becomes a factor of productivity of knowledge.

Knowledge comes from people, but better and bigger knowledge comes from people networking.

And BPO, as one of the big issues that may transform the way businesses and economies are run,definitively means networking. Networking on the Net has brought about an interesting

discussion: is Metcalfes law applicable to the Knowledge Economy?

Metcalfe's law states that the value of a telecommunications network is proportional to the

square of the number of connected users of the system. It characterizes many of the network

effects of communication technologies and networks such as the Internet, social networking, and

19The new IT reform strategy, en varios sitios como http://www.dosite.go.jp/e/ja/jst/jst_nirs2006.html


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the World Wide Web. It has been argued upon and there is no consensus whether the relation is a

square or a logarithmic. But the concept remains in essence the same: the value of the Net is

higher than the value of the sum of elements that constitute the Net. If applicable to Knowledge

Economics, it would mean that a Society working networked would produce bigger value than not

connected on the Net. Is that true?

Through the Net a country can definitively be more efficient. Processes which out of the Net mean

loss of time especially when related to moving papers or bureaucratic processes can be done

Online and save millions of man-hours to the Economy. This applies in the relations between

organizations (public or private) and citizens. Lorenzo Madrid has studied this phenomenon in a

paper20.

Source: Presentation on Interoperability, courtesy of Lorenzo Madrid

Processes inside the Governments were designed regarding the needs and particularities of each

department. They do not have a transversal view. Hence, people and organizations need to go to

various government departments to carry one process. Many times, part of the process is to

gather information inside one Governmental office as an input to the Governmental office whoowns the process, instead of taking the information directly. To that effect, there is actually a

worldwide movement towards interoperability the ability to connect different data services

inside Government and make processes run faster, with less errors and above all, with less lost

hours of citizens and businesses. Municipalities of all around the world addressed this issue at

Stockholm and concluded that the one of the next concerns for their e-government services is to

20Lorenzo Madrid: The Economic Impact of Interoperability, 2005


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redesign their processes citizen-oriented. Lorenzo Madrid21 developed a Model that evaluates the

impact of interoperability, according to the number of transactions made with Governmental

agencies and the minutes required for each transaction. In broad terms, the impact varies from

0.04% to 3.00% of the GDP.

But it also affects relations between private sector and people (Business to Consumer or B2C). The

banking system is a good example. As former CEO John Reed of Citibank once put it, modey is

information in movement. Therefore, modern banking organizations are primarily knowledge

organizations, whose factory processes are knowledge processes. For instance, transactions

made Online are up to 90% cheaper than conducted through a brick-and-mortar Bank Agency, and

also save millions of hours of customers from a nationwide perspective. Therefore, public policies

that foster the use of electronic transactions can make a whole economy more efficient. And it

also affects relationships between organizations, but that will be discussed later.

All in all, an economy that works networked on the Net is more productive and competitive than

one that doesnt. The Metcalfe Law applies, though perhaps not with exactly the same formula.

The following figure shows this interdependence:

Source: Presentation on Interoperability, courtesy of Lorenzo Madrid

Another paramount change that is coming to reality with the deployment of the Net as the

marketplace is the dematerialization of products and services, which will also have impact on

Knowledge Economics.

21Op cit


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As soon as the Uruguay Round was finished, it became obsolete. That is because many of the

items agreed upon in the General Customs Agreement transformed from material to digital

especially contents (music, video, texts). All of a sudden billions of dollars could be acquired and

delivered directly through digitalized means away from customs, and nearly impossible to track.

This brought into discussion a series of issues affecting customs, taxation and money movements

from one country to the other.

During the first years, the Clinton administration proposed, and got, a moratorium of the taxation

issue in sales on the Net. The idea was to watch and see before making any laws enforceable, so

as not to interfere with the new paradigms emerging and the new economy forming. It might have

been a bit hypocritical approach, considering that taxes were in fact charged for sales on the Net,

and that United States was the biggest seller of goods through the Net hence, the main tax

gatherer. Most countries did not pay much attention to this issue. The Author proposed a 5%

universal tax on Internet transactions to be divided evenly between the seller and buyer country,

during the WTO Summit at Seattle, back in 199922, which was not considered, though it brought

the attraction of the press.

This issue is no longer one to postpone, since it will affect the economies in two ways, as more and

more products become dematerialized:

1. It will make those countries with higher value added tax less competitive for sales on thenew world market, on the Net

2. It will make those countries that produce contents more vulnerable due to piracy. This isperhaps the reason behind the intellectual property rights being so much stressed by USA

and Europe in Free Trade Agreements with developing Nations.

There is another aspect dealing with the demand side of the economy. In a Knowledge Society

consumers are more knowledgeable. Hence, they buy in a more informed way. By means of Social

networking, they also have a stronger word in the market. They can denounce bad practices from

companies, and make an impact on their sales. In the end, there is a shift of the Balance of power

as will be seen more deeply after from the corporations to the market. But the main economic

effect is that this new dynamics pushes towards better products and services inside the economy,

since the asymmetry of information that existed before the Net existed is replaced by thorough

information to and from the market. Therefore, the Nation which better develops the digital

markets will foster a more competitive economy.

Finally, another characteristic of a Knowledge Economy that may have an impact on Public Policies

is the capital investment issue. All Governments have to allocate scarce financial resources in

places where they deem the impact on the quality of l ife for citizens will be better, and where the

development of the Nation is better served. Throughout the Industrial era it was the idea of

Governments that the Wealth of the country had to come from fostering industry based

economies. Such was the approach of most of the so called economic miracles as Japan, Korea or

22http://news.bbc.co.uk/2/hi/business/544725.stm


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Germany. Today the approach of the same countries is focused on Knowledge Society. Knowledge

based economic cells need less capital expenditure in order to become sustainable. Therefore,

allocation of State monies for fostering economic activity is more efficiently spent in knowledge

based initiatives than in other sectors of the economy, provided the risk of the investment is the

same. There is a lot of arguing around the idea that knowledge-based businesses are more risky

than businesses in the rest of the economic sectors, but that has not be shown yet with serious

studies. Mortality of new businesses in knowledge-based industries could prove a good figure if it

was published. Anyhow, a Nation that fosters knowledge-based business initiatives will be more

efficient in resource allocation, since these industries are less capital intensive than alternative

ones, and will have a bigger impact on the economy of the country.

In conclusion:

1. Knowledge Society brings in a new Economic System where new ways of measuring needto be developed in order to design, implement and track Economic Policies that affect the

development of Nations, Public finances and the mobility of work.

2. Knowledge Economics incorporate new elements and concepts for which existingEconomic Theories have no explanation, and which will become increasingly important for

the growth of the Economy of countries.

3. Common sense and reasoning can give many of the features and characteristics of theKnowledge Economy, enough to have basic Public Policies that foster Knowledge Society

development

What differs in Knowledge and Industrial Society as related to business

After analyzing the impact of Knowledge Society in National Economy we will now analyze its

impact in Businesses. For knowledge, becoming a critical resource has also changed the way

business is designed and conducted. We will describe what differences there are in general terms

and in relation to the value chain with the Industrial-based Business Models, where most of the

paradigms being used in Business now-a-days still lie.

Business in Knowledge Society is intense in know-how

Businesses in Industrial Society were intense in Capital, whereas in Knowledge Society they are

intense in know how. This in turn means knowledge-based businesses require less capital than

industry-based businesses to create the same market value, and require less time to achieve the

same turnover. This has happened with most the companies which have arisen around the digitalrevolution. Google was launched in 1998 by two people. Only eight years later it was in the Stock

Market, valued over 100 billion dollars. Skype was formed by one programmer who wanted to

communicate via computer with friends around the world without paying phone calls. In only four

years more than 100 million subscribers around the world made Skype one of the biggest voice

services worldwide. E Bay bought it for 2.5 billion dollars that fourth year of existence. Facebook

was launched by a student who was upset with the social networking he was using. In only three

years, more than 200 million people all around the world were using the platform, and though

Facebook is not traded, the private investments undertaken by the likes of Microsoft valued the

company over 30 billion dollars last year. This had never happened before in Industrial Economy.


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The center of production in Industrial Society is the factory, for which access to money is the prime

issue. Having the latest machinery available is central to having a competitive edge in this case.

The center of production in Knowledge Society is people thinking, for which State-of-the-Art know

how is what makes the difference in competitive terms. Behind Googles advertising machine

there is code and know how, especially data intelligence. Before Google, the dominant player in

the search engine industry was Yahoo! Google, in fact, was a late comer, but revolutionized the

whole concept of searching on the Net, just by applying the same knowledge in a more creative

way.

Creativity is the productivity of Knowledge

This takes us to the idea of knowledge productivity, defined above as creativity. Creativity is

what makes knowledge yield more. Given two companies with the same means of production and

the same know how, the one that is more creative will have bigger returns of the two. It is theway, the how of knowledge application. And in the process, a new state-of-the-art is created.

With creativity, knowledge always steps to a next stage. Creativity makes knowledge perform

better.

Say M is means of production (infrastructure, explicit know how of processes, market,suppliers, etc.)

Say R1 is the expected result of using M Say R2 is the real result using MWe could then measure creativity factor as Cr= (R2 - R1)

M

Businesses are consumer-oriented in Knowledge Society

The whole idea behind Industrial Society is that of massification of production to attend a massive

market. Before Industrial revolution, when someone wanted a suit he would go to a Taylor. But a

Taylor had a big limitation in the number of pieces he could produce. On the other hand, each

piece would be one unique according to the needs of each particular customer. Industrial

Revolution brought the concept of standardization, which brought in mass production, reducing

costs and prices, and making in the way products accessible to parts of the society that were not

attended before, or could not afford to pay for them. Productivity Revolution inside the Industrial

Society brought a huge increment on the production productivity of the workers inside a factory,allowing big increases in wages paid to industrial workers. The better conceptualization of the idea

behind can be taken form Henry Ford: I must pay good salaries to my workers in order that they in

turn can buy my cars. That would have been impossible without making the work of those

workers far more productive. Ford could pay more and have his workers buy his cars because he

had done and redefined his duty as entrepreneur, finding the way to make labor productivity so

much higher by the improvement in manufacturing processes.

But in doing so, the market grew. Therefore, a new dynamics was generated by which leveraging

the productivity of workers higher wages could be paid and workers with higher wages could have


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bigger purchasing power that in turn would transform in bigger sales of the companies that paid

them more. Economic and wealth growth could follow. Fords lesson, by the way, has not yet been

understood by entrepreneurs around the World one hundred years after it was formulated, giving

place to a never ending cycle of stagnation and bad income distribution in their economies.

Economies based on low wages might have their days counted as we enter the Knowledge Society,

where the key issue is value added from knowledge rather than from machines which can be

bought.

Market is massive in the Industrial Society. The business cycle consists of the business

organizations trying to understand what people want and making massively products that fit the

most of them, following Gauss normal distribution. Marketing focuses in transactions, trying to sell

each year more units than the year before. Market share is obtained by pursuing selling more

units that satisfy in average more people. Marketing cannot be done in a one-to-one basis, simply

because there is no information available, and to gather that information is too expensive as to

make it worth doing. Marketing people who still work under the Industrial Society business

models rely on massive tools like massive advertising. Even when they develop electronic

commerce projects, they still think in terms of industrial marketing, and send massive e-mails

promoting exactly in the same way they do offline.

Market is personal in the Knowledge Society. The upcoming of the Internet and of E-Commerce

allowed businesses to have what they could not afford in the Industrial Society: information of

consumers on a one-to-one basis at a very low cost, which allows them to offer each client what

she or he needs. Instead of market share, the idea behind is wallet share. Businesses like

Amazon.com rely on their ability to make clients devote each year a bigger part of their wallet to

the products and services sold under the marketplace of Amazon.com. To some extent, the stock

market value of Amazon.com is the probability the stock market is assigning the company of

achieving its goal. The more people buy in Amazon, the bigger the market value. To make it more

apparent, if Amazon.com were able to take 100% of the wallet of all its customers, its market

value would be that of a country of 20 million people.

Perhaps a good example can help understand better the difference between the industrial

approach and the knowledge approach to the market. Take Dell Computers compared with any

other typical computer producer, like HP or Acer. All of them attend the same market, with more

or less the same products, but have a different Business Model. The customer value proposition of

Dell is a computer of your liking put in your home at the price of an off-the-shelf computer. The

other companies customer value propositions differ very little from the right computer for theright person at the right price. Dell has direct information of the market on a one-by-one basis,

even before people by its computers. The rest of the industry must gather information through

indirect channels, i.e. distribution retailers. As people compose their computers in Dells Web

Site, Dell can also tell which the big trends in what the market wants are. In the end, the Gauss

distribution curve remakes itself, but in Dells case this is done directly by and from the market

itself.

Industrial Society was born product-oriented, since the big revolution it brought was the

massification of manufacturing that allowed smaller costs and prices. It evolved into a market-


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oriented approach by which, using marketing tools, companies intended to understand the needs

of the market and attend them with their products and services. But mostly the marketing tools

are used to convince the market to buy the product being manufactured and sold by the company.

It still is a product-oriented business model. Knowledge Society on the contrary is customer-

oriented, because it has access to the information of the customer. In a way, Knowledge-based

business models have knowledge of each customer, whereas Industry-based business models at

most have knowledge of the whole market, and that makes a difference in the way business is

understood and conducted.

Likewise, costumers in a Knowledge based business model have better understanding of products

offered to them by different brands and are more knowledgeable as consumers. Buying on the Net

is mainly a rational process: people gather information for different alternatives and compare

features as much as prices, and them make a meditated choice. It is very seldom that impulsive

purchasing takes place on the Net. That is not so when off the Net, where many marketing

campaigns focus in making the product desirable by stimulating the potential buyers impulses.

For the Industrial Society, the value added was at the factory, in the infrastructure. In the

Knowledge Society, the value added is in the service, in the way products are delivered and in the

knowledge applied on the particular needs of the customer. What was value added in Industrial

Society is just commodity in the Knowledge Society. As discussed before, it is not so much a matter

ofwhatis done which is answered with infrastructure- as ofhowit is done which is done with

service.

The added value of people in businesses in a Knowledge Society

In an Industrial Society the industrial processes were what gave the competitive edge. In theKnowledge Society its the administrative and managerial processes what will give the competitive

edge. In an Industrial Society knowledge resided in the machine. In the Knowledge Society its in

the worker where knowledge resides. Therefore, in Industrial Society the worker attended the

machine, whereas in the Knowledge Society its the other way around. Consequently, in the

Industrial Society, if a worker went, nothing happened, since knowledge was in the factory.

Unlikely, in Knowledge Society if the worker leaves his or her knowledge leaves. It was simple to

replace a worker in the Industrial Society and it is not so simple in a Knowledge Society. It can be

done, by the way, using ICTs with which knowledge is stored in ICTs and processes are taken

electronically.

There is a natural alignment in Knowledge Society between the dynamics of value creation of

workers and of employers, which did not exist before. Up to now, the focus was on return on

capital, and therefore, intellectual growth of the people involved in the value cycle was not an

important issue. Once admitted that knowledge is the main resource this changes completely. For

an organization whether a business, governmental or non profit knowledge becomes the origin

of value and knowledge generators become the factory. The intellectual growth of people

working in the organization becomes therefore a critical issue for growth of the company.

Moreover, creativity is 100% a human feature. Machines cannot be creative in the sense a

human can be. This leaves looking at people in a very different way than in the Industrial Society.


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Is the market ready to work with this new paradigm? Are organizations within a country prepared

to put their money in searching for knowledge generators and allocating them properly? We

have not found yet evidence to support the statement. Head hunting industry, on the one hand,

still uses the same paradigms for searching and hiring people. Resumes are still oriented to what

the candidate did, rather to what the candidate likes or is good at. Typical tests still focus on

psychological matters which have little to do with the intellectual potential or the ability to create

knowledge. At most, they look at how well would the candidate fit in a team. Organizations, on

the other hand, are looking for knowledge generators that graduate from college, but they are not

aware that knowledge allocation may start far away from that moment ideally, it should start at

school.

Unlike in the Industrial Society, where the manufacture of means of production for value creation

were in another industrial organizations, in Knowledge Society the manufacture of means of

production for value creation are part of the organization: people. Resource allocation in Industrial

Society was something that could be objectively determined. Resource allocation in Knowledges

Society prime factor of value generation will have to be done until better practices are

developed by trial and error.

Perhaps the best comparable process in actual life is the configuring of the best soccer team.

Soccer players combine physical skills with knowledge. The coach, as another knowledge

producer, must combine the proper people in the proper post in the proper moment, according to

a changeable environment. He must continuously evaluate the situation (the market, to use the

comparison properly) and adjust the players (means of production) to win the game.

Microsoft Corporation, until recently, had developed an approach which considered finding the

right person for the right assignment in the right moment. Every year it would place its goals, one

by one, and then would look for the best team possible to achieve the goal. Not the whole team,

just the leaders, who would in turn look inside the organization for the rest of the team to

assemble, thus was taking the role of the coach of the soccer team comparison.

Curiously, there is a very old organization which works this way everywhere in the world: the

Army. The Army is composed of different units with defined objectives, missions and goals. But

missions are understood in two ways: as the permanent reason why of the institution, or as a

temporary goal to achieve. Around this second term, whenever a mission is created, it is assigned

to a leader and an ad hoc structure is created. Once the mission is accomplished, the structure is

dissolved and each of the members of the team is assigned to another mission or goes on withordinary work. This model fits better in knowledge-based businesses. It requires managers

knowing people very well, but what else can be expected from managers, once settled that

knowledge is the main resource and that people in a team are the knowledge generators? This

issue will certainly mean modifications in the curricula of Business Administration degrees and

MBAs.

Motivation at work is how value thrives in businesses in a Knowledge Society

Bottom line, what was said before of a country will be fully applicable for a business: businesses

will have to learn to put people to work where each of them has better skills and more affinity for


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the job. Managers will have to learn how to work with motivation for working. And perhaps the

Theory of Motivation at Work teached by Professor Juan Antonio Perez Lopez at IESE Business

School will be a source of inspiration on how to succeed on this task.

For Professor Perez Lopez there are three reasons why someone would want to work. The first is

due to the results the work will have for oneself. This reason, not being part of doing the work

but of results from the job for me is named by Professor Perez Lopez as extrinsic motivation.

The second motivation by which one would work has to do with work in itself: it is due to the

rewarding aspects the work in itself has for oneself. This is named intrinsic motivation. The last

reason is due to the results the work will have for others. It is due to the rewarding aspects for

oneself that come from seeing the effect the work done has for other people. This motivation is

named transcendental motivation23.

The manager of the Knowledge Society will have to learn how to work with a combination of all

three motivations. According to Professor Perez Lopez, a manager who works mainly with extrinsic

motivation behaves as an Executive. The organization perhaps will be effective, but it will not be

efficient. People will stay on for the pay or the fear of losing the job. Creativity in such an

environment is certainly poor unless as used to defy the system. Therefore, long term knowledge

value creation will also be poor, and a business run that way will necessarily become

unproductive.

A manager which works with intrinsic motivation behaves, according to Professor Perez Lopez as a

Director. The organization will be effective and efficient. This is where people will be organized

according to where personal skills and likings fit better, since the principal motivation is work in

itself. It should create the optimal organization of the Knowledge Society, and yet, it does not.

Why? Because even though someone would be working in the work best skilled and best liked for,

that does not constitute per se a reason to stay in the organization. There might be other

organizations that offer something else and better, inasmuch as though it would seem this

environment to be ideal for working. In fact, knowledge workers, as noted by Drucker, would have

less loyalty and change more of job than their previous industrial peers.

A manager which works with transcendental motivation behaves, according to Professor Perez

Lopez, as a Leader. A leader who is able to project the sense of mission and vision of the

organization to the workers and make them share that mission and vision, making it part of their

own mission and vision in life. A leader makes people be identified with the culture and values of

the organization, and makes people want to be part of it. This in the end carries the biggestchances of creating value from knowledge in the long term, since it is focused in aligning the

meaning of life for its workers with the mission of the organization. In such an organization people

give the very best of themselves by finding a meaning for their work that aligns with a meaning for

their lives.

23Prez Lpez, Juan Antonio: Teora de la accin humana en la accin de las personas, Rialp 1991.


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An Executive works with incentives and penalties to make people work. A Director works with

organizational skills to make people work, finding the best team. A leader works with values to

make people work.

Anyone working needs at least a minimum of extrinsic motivation, but once that covered, the

productivity of the worker and we are talking in terms of creativity depends much on the

intrinsic and transcendental motivations. Thus the Theory of Motivation at Work of Juan Antonio

Perez Lopez is part of Knowledge Economics.

The extended corporation is part of business in a Knowledge Society

To some extent, customers and suppliers have been always regarded as external to the

organization in the Industrial Society. They are seen as part of the value chain, but not as part of

the organization. This has changed with the upcoming of the Net and the evolution of new

business models for business applications over the Net.

The new approach of Knowledge-based businesses is that of the extended corporation, which

perhaps was fostered through the concept of extranet that arose around the Net which

incorporated customers as well as suppliers into processes of the corporation, as opposed to the

intranet, which only incorporated people of the corporation.

The extended corporation means the sharing of data and knowledge by the corporation, its

suppliers and its customers. We already described how knowledge of customers needs is fostered

by interaction with each customer through the Net. More knowledgeable customers, on the other

hand, can better describe their needs and the key issues for decision making in purchasing any

given product or service.

But where this new paradigm is more apparent is in the supply-chain side. When knowledge

becomes the resource, the knowledge of suppliers becomes part of the value chain of the

corporation in the very same way as the knowledge of workers is part of the value chain of the

corporation. The Net has helped to develop a common platform for processes, by which the

process is transversal and run as one same process for the corporation and its suppliers alike.

Processes in an Industrial Society except for the Japanese model - had physical and mental

desks that separated suppliers from corporations. Those have been laid with Knowledge business

models. Now suppliers are part of the corporations own process. This new phenomenon has been

described by Choucri et al in a book written in 2007 as Virtual Extended Corporation24

Take Dell for example. Once a client buys a computer, the parts and pieces of that computer are

accumulated and the sum of parts and pieces are transformed in a procurement order to the

suppliers for the next production process, thus reducing investment in working capital. Each

supplier is knowledgeable of the inner process of the corporation, and becomes part of it. Dell in

fact chooses the suppliers in terms not only of price which is important but not the issue as was

24Nazli Choucri,Dinsha Mistree,Farnaz Haghseta,Toufic Mehzer,Wallace R. Baker: Mapping sustainability:

knowledge e-networking and the value chain, 2007, Springer


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typical in Industrial Society but of knowledge of their products and capacity to develop whatever

betterments are needed to attend what the end customer needs. The suppliers are the experts in

each part and piece of a computer. Dell is the knowledge integrator in words of its Founder

that makes it possible for end customers to have a computer designed at their exact taste.

In Chile, there is a very good case in a Beer Company named CCU. CCU decided to incorporate the

lupulussupplier into its industrial process of beer elaboration. Lupulus is the prime element for

brewing beer. The selected supplier was in charge that there would always be lupulus in the

premises of CCU according to the manufacturing plan. It would be its duty to make sure the supply

was always at hand. It would be paid for the real monthly consumption of lupulus by CCU. This

allowed CCU to lower its financial costs and reduce its working capital. Yet, that was only a first

stage. The real knowledge stage came when it proposed its supplier to help in brewing a better

beer with fewer input against a better price oflupulus per unit. All won with this knowledge-based

model: the supplier, CCU and the consumer of CCUs beers. These are the type of changes

knowledge-based models are bringing into businesses.

Businesses in Knowledge Society follow Schumpeters destructive creation and Nashs

equilibrium, but in collaborative environment

In Industrial Society and in economics so far any given product has a market price which is

single and determined. The amount of units the market is willing to buy at that price is also

determined. Therefore, the total business value is fixed, and what happens then is an economical

dynamics by which each part participating in the value chain tries to take the bigger bite of the

cake. It all comes down to power games. Analyzing competition, suppliers, customers and

government as competitors for the fixed value is then the logical approach to business strategy.

Porters five forces make sense in that environment.

But that scenario misunderstands knowledge dynamics. The first thing is, there is no such thing as

equilibrium. Knowledge dynamics is essentially dynamic! Since knowledge is the main resource

and factor, the inputs are not commoditized, but continuously evolving. A price is just a reference.

Once we admit that each customer can have its own singular needs satisfied by what is offered,

products are no longer a commodity, but a service which is valued by many more factors than just

physical features or price.

Perhaps the best economic theory that explains this new dynamic is one which was postulated in

the first middle of the 20th century by Joseph A. Schumpeter. Instead of competence in prices,

corporations compete in innovation to acquire a temporal monopoly or dominant player position.

Once that happens, the incumbent is challenged new corporations trying to break the dominance

by innovating on what already exists. When they succeed, a new incumbent takes the place of

dominant player, until it is beaten by a new challenger with new innovation (creative

destruction). The Market therefore characterizes by a sequence of temporary unstable

equilibriums, in which competing for innovation is the main driver. Since innovation is clearly a

product of knowledge, this theory fits with Knowledge Economics. One clear example where such

dynamics happen is the Broadband Industry, where different technological platforms compete

continuously for better performance at lower costs and prices for an increasing market.


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Yet, in Knowledge Economics there are other instances where even competitors share knowledge.

It has been described as co-opetition by Authors Barry J. Nalebuff and Adam M. Branderburger25.

It happens when sharing knowledge gives the co-opetitors a new state-of-the-art or a new

business model that will put them in a better position than the one they would have competing

directly. Since the output of the co-opetition agreement becomes input to the value creation of

each of the participants, it is then when cooperation stops and competition starts. Again, it is not

knowledge in itself which was generated in cooperation but what to do with itwhat makes the

difference. This model has been observed in the software industry around the called open source

model. The model states that the code for software must be opened to the community in order to

use it for new applications or to make improvements in it. The incomes come from the support

and upgrades of new applications, but all share the basic platform and collaborate in betterments

of it. When betterments are done, all the community which will compete otherwise will be

benefited from it at no cost. Linux operating system is a clear example of this model.

The best theory applicable to this reality could be John Nashs equilibrium, but referred to

cooperative systems instead ofnon-cooperative systems. We believe the win/win solution is higher

in the first case, out of common sense: when working cooperatively competitors work on net, and

the Metcalfe principle applies. That is, they will reach a better or more valuable knowledge base

than when acting on there own, because more points of view will be tested and brainstormed.

Once the new base knowledge of the competitors is reached becoming a new knowledge in

itself that will benefit all participants they will compete in the applications of this new base

knowledge.

The backbone of Businesses in the Knowledge Society lie on the Net and ICTs

Once and again during the description given in this section, we have referred to knowledge beinggenerated, knowledge being accessed, knowledge being storied. Since knowledge is immaterial,

the working tool that fits its nature is ICTs, and the environment where it can grow and develop

itself is on the Net.

Information and Communication Technologies are to Knowledge Society what the factory was to

Industrial Society: its backbone. Value is created by knowledge applied by people using ICTs. Of

course it can be used by people without the need of ICTs, but because knowledge is unlimited and

immaterial its with ICTs how it can be accessed and widespread in a most efficient way today.

In knowledge-based businesses ICTs are becoming the tool: for acknowledging the reality of the

business, for finding the value creation, for evaluating the performance of the organization, for

supervising the activities, for communicating, for process betterments. New categories of ICTs

have thrived in the past 20 years: ERP (Enterprise Resource Programming), Electronic Workflows,

CRM (Customer Relationship Management), BPM (Business Process Management), BI (Business

Intelligence), MI (Market Intelligence), to name a few. All of which focus on giving tools for

knowledge generation or giving tools for knowledge storage.

25Co-opetition, Currency Books, 1996


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With ICTs organizations can find out which processes can be bettered and how; which workers

perform better in which jobs and why; which type of custom

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