In Search of Knowledge Capital: The Shifting Economic Landscape

WISE WORDS

Suppression of human potential is the destruction of the glory of God.

We are endowed with intelligence, creativity, spiritual gifts and natural abilities. We are expected to use them, to pour them out in service to others. Answers are about the past; abilities are about the future.

People have seen things, heard things, experienced things, and such things remain in their minds. These things breed fear, worry and a desire for knowledge.

Growth is the expansion of knowledge capital. The expansion of the core know-how capital is the key measure of growth. Volume, turnover or financial assets growth can be a dangerous strategy.

In this economy where the only certainty is uncertainty, the one sure source of lasting competitive advantage is knowledge capital. When markets shift, technologies proliferate, competitors multiply and products become obsolete almost overnight, successful companies are those that consistently create new knowledge, disseminate it widely throughout the organisation, and quickly embody it in new technologies and products.

DEDICATIONS

My children: Agnes, Julian Jabulani and Thabani Gerald. My grandchildren: Moses, Fhenna , Jonathan, Edna and Mary. To my beloved son, Thabani, whose quiet spirit and disciplined life has made me a proud father. You have true potential and a hidden ability in your life. I am convinced that you will help change the world for the better. Remember, always believe the dream in your heart and never doubt your ability to achieve your goals. May your full glory be manifested in your generation and beyond. To my grandson, Moses, your perseverance makes me a proud grandfather. You will achieve great things in life. To my children and grandchildren, you must be aware of your God-given potential, purpose and promise.

Some people make things happen, some watch things happen, while others wonder what happened Knowledge is the currency of tomorrow’s wealth

"Il y a des gens qui font des choses, il y a des gens qui regardent les autres faire des choses, et d’autres qui se demandent ce qui s’est passé. La connaissance est la devise de la richesse de demain."

"Sommige mense laat dinge gebour, ander kyk toe laat dinge getour, terwyl ander wonder wat getour het, kennis is die geldeenheid van more se welvaart."

"Abanye abantu benza izinto zenzeke, abanye babukele izinto xasisenzeka, abanye bothuswa kokwenzekileyo, ulwazi bubutyebi bangomso."

"Batho ba bang ba etsa ditho, ba bang ba shebella ha ho etswa ditho, ha ba bang ba makatswa ke ditho tse etsahetseng, tsebo ke lefa la kamoso."

"Bantu bena bachita zintu zichitike, wena bawona zintu zichitika, benanso badabwa kuti kwachitikanji, nzeru ndi nfuma yamawa."

"Watu wengine wanafanya vitu kufanyika, wengine kuangalia vitu kufanyika, wakafi wengine wanashangaa kinachofanyika, hakiri zinatakiwa kusaidiwa kwa kesho."

Life is a daring adventure or nothing. Life is about learning, and learning is about adventure. True intelligence is about the joy of learning rather than the fear of failing.

ABOUT THE AUTHOR

Jonathan has been active as a consultant, mentor and coach to small and medium business enterprises, as well as provincial and institutional government agencies. As a mentor and coach, he was linked to mentoring programmes of various organisations. Jonathan runs Sabatha & Associates, and Sabatha Capital Ventures (Pty) Ltd. Sabatha’s game is business advisory services, investments, international trading, and consulting. Sabatha & Associates helps to effectively create sustainable economic opportunities by helping clients understand market economics and by transferring skills in financial literacy, entrepreneurship and business ethics. Its objective is to elevate the financial well-being of entrepreneurs to become business people. Mr Sabbatha’s commitment is to building value through learning, knowledge and financial intelligence.

His research and knowledge interest is in knowledge management, investments, issues of faith and issues of life. He also has an interest in small business development and support. Jonathan is knowledge-driven. He has a principle-oriented personality profile. He acquires, perceives, values and uses knowledge, and makes decisions based on his belief systems. His belief systems are constantly being tuned and fed with more information and knowledge in order to satisfy the need to make a thorough judgment. Jonathan holds degrees from West Virginia University, USA and University of Stellenbosch, South Africa.

Use Concepts in this Book: Student/Manager/Practitioner

"A wise teacher does not bid you to enter the house of his wisdom, but rather leads you to the threshold of your own mind."

Kahlil Gibran

Look for (or make) opportunities to practice with classmates, friends or colleagues about what you read and learn in the book. Being able to talk or practice the concepts and techniques of knowledge management demonstrates how much you have learnt and uncovers things you haven’t yet understood fully. It also gives you valuable practice for class and the business world. The concepts must be tied to reality; thus, demonstrate concepts, tools, techniques and practices. They should incorporate a proven learning system, which integrates pedagogy with concepts and practical applications.

We should understand that modern management requires the practical implementation of knowledge and skills learnt, not the regurgitation of theory. There are many benefits to this approach. The first is that the learner takes responsibility for the learning process – and, in so doing, has more control of personal development. Secondly, learning is enhanced by applying knowledge to real problems – creating deeper understanding. Conscious awareness and application of the learning process to real business problems helps to create enhanced team learning and understanding – and more successful solutions as a result.

Knowledge consists of truths and beliefs, perspectives and concepts, judgments and expectations, methodologies and know-how. Knowledge is a tool by which we either act or gather new knowledge. The most effective way for individuals and teams to learn is by doing. This has seen the emphasis in education shifting more towards perceptions, creative thinking and learning. There is a need to create a learning space that promotes growth-producing experiences for students and practitioners. The impact of the cognitive, emotional and physical stimulated together can shift a student’s perspective in a way that a focus on the cognitive part alone cannot. Conversational learning, acting and reflecting, feeling and thinking, and influencing allows students and practitioners to discover new ways of seeing the world while gaining knowledge. Without the application of knowledge, students and managers will struggle to adapt to an ever-changing workplace.

JM Sabbatha

Preface

"Real knowledge is to know the extent of one’s ignorance."

Confucius

In Search of Knowledge Capital is for students, managers and executives, and knowledge practitioners who seek insights into the concepts of learning, intellectual capital development, and knowledge management. This book explains concepts, theories and knowledge management techniques that provide the foundation for learning, creativity and knowledge development. The purpose of the book is to provide a thorough and informative perspective on the learning and creative practices of knowledge management. It has the depth and frameworks to provide a foundation for ideas and knowledge development.

Knowledge management is related to the concept of intellectual capital, which is considered to be a most valuable resource for organisational competitiveness. The key concept for all levels of a business organisation is the idea of competitiveness and the systematic exploitation of the knowledge that gives it competitive advantage. The corporate world is becoming a very different place. Information technology has transformed the economic landscape. International boundaries have faded as businesses take on a more global perspective, and information technology has made communication easier and decision-making quicker.

The emphasis on knowledge creation, development, organisation and leverage will continue to be the prime focus for improving society. Knowledge management is a strategic portfolio management responsibility based on learning functionality, sharing knowledge and experience in organisational collaborative learning mechanisms.

As knowledge increasingly becomes the key strategic resource of the future, it becomes relevant to develop a comprehensive understanding of knowledge processes for the creation, transfer and deployment of this unique asset for competitive advantage.

This book, consisting of 14 chapters, focuses on clarifying the challenges, issues and priorities of knowledge management and learning, and provides suggestions for practical solutions that can help guide organisations interested in furthering knowledge and intellectual capital development – enabling them to work more efficiently, thereby advancing knowledge and learning. It puts together cultures, behaviours and work environments that must be integrated with technology for effective knowledge development and management. The book is for the constantly changing economic environment.

TABLE OF CONTENTS

Wise Words

Dedications

About the Author

Use Concepts in this Book: Student/Manager/Practitioner

Preface

Introduction

Knowledge Economy

Knowledge

Intangible Assets

Enterprises

Conclusion

The Era of the Knowledge Economy

Introduction

Definition of Knowledge Economy

The Difference between Old and New Economy Stocks

The Shifting Economic Landscape

Knowledge Capital

Knowledge Worker as a Value Creator

Knowledge as a Capital Resource

Shifting Strategic Attention

The Nature of Corporate Competitive Advantage

The Changing Basis of Competitive Success

Conclusion

Knowledge

Introduction: What is Knowledge?

Theories of Knowledge

Epistemology

Belief

Truth

Branches or ‘Tendencies’ within Epistemology

Methods of Obtaining Knowledge

Conclusion

Learning

Introduction

Some Terms and Concepts

Information

Knowledge

Explicit Knowledge

Tacit Knowledge

Differences with Explicit Knowledge

Transmission Models for Tacit Knowledge

Examples of Tacit Knowledge

Approaches to Capturing Tacit Knowledge

Tacit Knowledge in Organisations

Articulation

Methods, Rules, Beliefs and Theories

Knowledge and Theory

Theories, Methods and Domains

Mental Models

Mental Models and Reasoning

The Process of Learning

Basic Principles for Effective Learning

Data, Information, Knowledge and Wisdom

Categories of Knowledge

Gaining Knowledge through Learning

Intellective and Agentive Knowing Dimension

Personalising Learning

Implication for Knowledge Work

Integrating Learning and Knowledge Infrastructure

Action Learning and Knowledge Sharing

Cycles of Knowledge

Conclusion

Creativity

Introduction

Creativity and Innovation

Blocks to Creativity

Nature of Organisational Creativity

Investing in Organisational Creativity

Knowledge as a Creative Resource

Creativity and Passion

Managing Organisational Creativity

Managing Creative People

A Creative Organisation

A Caring and Supportive Environment

Conclusion

Creative Techniques for Strategists

Introduction

Creativity Techniques

Dialogue

Criticism

Communication

Persuasion

Social Exchange Theory

Conclusion

Innovation

Introduction

Creativity

Innovation

Innovation as a Process

Managing Innovation

The Ability to Innovate

Innovation Networks

Strategy for Innovation

Managerial Implications of Tacit Knowledge on Group Innovation

Society

Measures for Innovation

Conclusion

Knowledge and Knowledge Management

Introduction

The Concept of Knowledge and KM taxonomies

Data to Information to Knowledge

A Derivative of Theory, Information and Experience

Tacit Knowledge

Taking a Flight to Hong Kong

Data to Knowledge

Is this Information Relevant?

Information Flow vs. Knowledge Flow

Classifying Knowledge

Enterprise Knowledge

Enterprise Knowledge Management

Three Fundamental Steps of Learning

Corporate Culture

Summary

Conclusion

Approaches to Knowledge Creation

Introduction

Contrasting Views on Knowledge Creation

Approaches to Knowledge Management

Knowledge Worker Productivity

Implications for Management

Organisational Learning and Knowledge Creation

Networks of Practice

Communities of Practice

Communities of Practice Compared to Functional or Project Teams

Communities of Practice versus Communities of Interest

Communities of Practice and Knowledge Management

Factors of a Successful Community of Practice

Actions to Cultivate a Successful Community of Practice

Knowledge Generation

Knowledge Agents in Organisations

Conclusion

Knowledge Management

Introduction

History

Dimensions of Knowledge

KM Strategies

Motivations

Knowledge Networks and Communities of Practice

A Few Foundation Principles and Building Concepts

Knowledge-Focussed Strategy

The Social Nature of Knowledge and Learning

Implications for Organisations and Practitioners

Stages of Development

Cultures of Learning and Sharing

Conclusion

Knowledge Management Systems

Introduction

Resource-Based View of the Firm

Value of a Firm

Intellectual Capital

Human Capital

Organisational Culture

Qualities of Excellence in Innovative Companies

Structural Capital

Technologies

Knowledge Modelling

Creating Intellectual Webs

Relational Capital

Customer Capital

Understanding how Customers Make their Choices

The Relevance of Managing Intellectual Capital

Conclusion

Managing Knowledge Capital

Introduction

Tacit Knowledge

Knowledge Management and Core Competencies

Managing Know-How Capital

Developing an Entity to Success

The Personnel Administration

The Core

Converting Knowledge into Business Ideas

Combining Knowledge with Financial Capital

The Pro-Team

Knowledge Life Cycles

Entrepreneurial Business Development

The Strategies for Growth

Knowledge Work

Challenges for Management

The Professional and Managerial Know-How

Culture

Conclusion

Africa – Competitive Disadvantage

Introduction

Obstacles to the African Renaissance

Africa

The Government

Appropriate Government Policy

Corporation and Nation Government

Knowledge-Based Economy

New Mindset

Leadership

The Rule of Law

Public Office

Creating Value through Business and Social Sector Partnerships

How Education and Training Affect the Economy

South Africa

Conclusion

Wise Words

What Now?

Introduction

Communication

Social Media

Possibilities of Social Media

What Next?

And Then?

How Now?

Principles of Business Ethics and Conduct

Conclusion

Glossary of Terms

References

Chapter One

Introduction

We should tell others what we know. There should be a history, so that other people can learn from it. Each of us must leave something behind to make easier the path of those who follow us.

This chapter discusses the ethos of the new economic dispensation. It took man thousands of years to move faster than the speed of a galloping horse. It then took less than a century to move faster than the speed of a train. From there, it was only a few decades to move faster than the speed of sound. The world is changing at the speed of light. Gone are the days when a global market was the preserve of a privileged few first-world companies such as Coca Cola, Sony and General Motors. The global village has arrived alive. Today, satellites, faxes, cell phones, emails, the internet, Twitter, Facebook, video conferencing, virtualisation, cloud computing and other technologies offer value for businesses. They enable us to send our voices, our images, our ideas and our money at the speed of light. The planet has been reduced to the size of a computer screen and the artificial borders that we once called nations have, for all intents and purposes, evaporated. In the new century, it seems clear; those borders will serve little purpose except for the sake of nostalgia and, perhaps, the retelling of history. This introduction highlights the ethos of a new economic reality.

Since the mid-1980s, the value of international trade has grown twice as fast as the value of the world’s output of goods and services. International financial transactions have grown about twice as fast as trade. Markets for derivative financial instruments (futures, options and more exotic securities) have grown more rapidly than have markets for the stocks and bonds that ostensibly underlie them. Information about money has become more valuable than money itself. The intangible economy is now arguably of equal or greater size than the tangible economy. Systems formerly made up of rules, regulations and procedures are being replaced by requirements for flexibility and customer service, resulting in personal initiative, empowerment and greater levels of individual decision-making. To achieve this, it is important to better understand human behaviour and some of the things that impact our actions and reactions.

Leading academics and knowledge practitioners in developed nations have been studying how firms can influence knowledge creation and its use, and how this can influence a firm’s competitive advantage in the marketplace. There were notable contrasts between the aim of nurturing the process of knowledge creation and that of managing and measuring knowledge use – given the complexity of knowledge itself.

Knowledge Economy

The late 20th century saw the shift into what academics and practitioners called the knowledge economy. However, the shifts into the global economy saw economies converging. Firms are globalising and competition is fierce. Information and knowledge are, therefore, valuable assets. Knowledge capital is considered to be the means of wealth creation and competitive advantage.

The increasing liberalisation of markets coupled with the creation of new markets for intermediate products is stripping firm-level competitive advantage back to its fundamental core: difficult to create and difficult to imitate intangible assets. To a growing number of companies, knowledge management is more than just a buzzword or a sales pitch; it is an approach to adding or creating value by more actively leveraging the know-how, experience and judgment resident with and in many cases, outside of an organisation. The implications from the above indicate that, whether in high-tech, service or traditional industries, the role of knowledge as a primary driver of wealth and development is being increasingly recognised. At least three related issues stand in the way of full knowledge utilisation: firstly, conceptualisation and measurement of knowledge capital as a primary organisational asset; secondly, the integration of knowledge capital into the strategic management process; and thirdly, the development of organisational forms and processes that facilitate the use and development of knowledge.

While leading-edge firms are already wrestling with these issues, advances in theory and research are still needed to help develop appropriate responses and provide frameworks that will help spread these approaches. In doing so, advances may also be made that allow for the recognition of the central role of collaboration in the knowledge process. The great hope, of course, is that greater capacity to collaborate will allow companies to be more agile. In complex, dynamically changing and highly competitive environments, business agility is the single largest risk and opportunity facing global organisations. However, to many organisations, that hope for greater agility and breakthrough performance has yet to be realised.

Knowledge

Knowledge is not easily accessible to everyone. A company’s culture and values play a decisive role. It is no secret that the most valuable competitive intelligence and knowledge comes overwhelmingly from within one’s own organisation and from one’s own people. One research study, for example, found that two thirds of managers got their information and knowledge from face-to-face meetings or phone conversations. This book explores deliberate efforts to maximise an organisation’s performance through creating, sharing and leveraging knowledge and experience from internal and external sources to deliver competitive advantage. Knowledge is experience, ways of working, concepts, beliefs or principles – all of which can be learnt, communicated and shared.

New types of learning and development are needed, such as ‘just in time’ information and analysis coaching, learning how to learn, continuous learning, and personal development techniques that are tailored to skills while tackling issues of immediate strategic concern. The competitive environment today is characterised by a concerted effort by corporations to harness the knowledge and intelligence of employees for sustainable competitive advantage. Academics, practitioners, consulting and software companies are advocating several concepts and processes. However, no one process, concept or term, let alone software package, has yet been developed that can adequately integrate the various approaches.

Understanding how knowledge is created in the organisation and who is involved in creating it requires systems, structures and environments that best support knowledge creation and use. Knowledge supports innovation. Innovation can affect competitive advantage. An innovation orientation asserts that customers will prefer those products and services that generate the greatest interest and provide the greatest performance, features, quality and value for the money.

Intangible Assets

Intangible assets are resources under the control of an enterprise that are typically non-physical and not of a monetary nature, and that are critical for the success of the business. These resources include things such as brand image, customer and employee loyalty, quality of business relationships, social standing, competence of the workforce, improvements in internal structures and processes, and social citizenship. Intangible assets may be converted to other types of value (e.g. products or services). Intellectual capital is another term for intangible assets and collectively refers to all resources that determine the value and the competitiveness of an enterprise. As such, it includes as subsets the attributes that concur to building all financial statements as well as the balance sheet.

There are three types of intellectual capital: human, structure and customer capital. The characteristics of these intangible assets and their implications to management will be discussed. Research has shown that these assets complement each other and, managed properly, they are a source of competitive advantage. There is ample indication that much of the achievement in the recent past has come from anticipating and creating customer wants. It, therefore, appears quite likely that there will be dwindling opportunities to sustain competitive advantage by attempts to interpret and respond to customer wants.

Enterprises

Industrial competition is advancing from being between individual companies to being between extended enterprises, in an environment that is agile, constantly changing in unpredictable directions. This development, in turn, is having a profound effect on management and structure both within and between companies, because the extended enterprise has evolved into a single system with real-time interactions between companies. This interactive inter-corporate system is dynamic; that is, unpredictable accelerations and decelerations of work processes are the norm in that ‘system’. The individual enterprise has to deal with rapid and unpredictable change.

To emphasise that the interactive and dynamic nature of the company is fundamentally different from the traditional corporate structure, a new term has been coined, reflecting the international and interactive nature of the company in the culture of the internet, the enterprise. There have been movements from a system of companies managed in isolation and assumed to behave in a static manner, to a system of real-time interactive companies or enterprises, in a dynamic system.

The modern world exhibits behaviour that is unpredictable and rapidly changing. The flows of goods or services – hence, of the ensuing money flow and the enabling knowledge flow – are not smooth; pulses and accelerations occur continuously. Some of the concepts behind such analyses of the flow of material may be extended to analysis of the flow of knowledge and its link to the flow of money.

This economy is not about information only. It is about knowledge capital, a new currency that has in all purposes replaced money as the measure of wealth. Knowledge doesn’t become effective until you apply wisdom to affect change. Taking into account the magnitude of the impact of knowledge as an organisational resource and factor input calls for uniquely adequate approaches, tools and mechanisms to enable organisational competitive performance in future.

A widespread restructuring of companies and industries to suit the ethos of the new economy is needed. A possible implication for the future is a shift in the balance of power from financial capital to knowledge capital. Knowledge workers are becoming increasingly powerful at all levels of society and traditional manufacturing industries have to adopt knowledge-oriented strategies to survive. Unions will undergo a major transition following falling membership; self-employment increases. Business ethics and corporate culture become key management tools, and so on. Knowledge-oriented industry managers hunger for ‘globalisation’. Key ratios about the employees rather than financial capital give a better insight into companies: personnel turnover rate, market value per employee and added value per employee.

Conclusion

Knowledge has always been important in our lives. This is an old-new thing. Strategies for creating and managing knowledge capital are required. A successful strategy requires an understanding of the unique value that will be the source of an organisation’s competitive advantage. This strategy needs to be linked to the company’s knowledge. Types of knowledge can be categorised and approaches to managing knowledge selected.

In this new knowledge economy where the only certainty is uncertainty, the one sure source of lasting competitive advantage is knowledge capital. When markets shift, technologies proliferate, competitors multiply and products become obsolete almost overnight, successful companies are those that consistently create new knowledge, disseminate it widely throughout the organisation, and quickly embody it in new technologies and products.

Chapter Two

The Era of the Knowledge Economy

"The only way to make sense out of change is to plunge into it, move with it, and join the dance."

Allan Watts

Introduction

We are in a new era. We are in the era of the knowledge economy. We are in the knowledge space. The world of the intangibles. The knowledge space maps the flow of knowledge capital. Knowledge capital is the resource. Institutions, organisations, and markets should create knowledge capital and use the flow of knowledge capital to transact and conduct activities. They should create or acquire and apply knowledge capital to achieve goals and competitive advantages. Organisations should choose competitive strategies rooted in their competitive advantages. Institutions, organisations, and firms should construct organisational forms such as alliances and knowledge networks. Knowledge capital offers the potential for sustainable growth, so knowledge capital is resource space. Using resources in productive ways leads to the creation of intellectual capital and wealth. Therefore, knowledge capital is the currency of wealth creation. Increasing returns to knowledge capital is the basis of evolving systems of knowledge capitalism. An organisation should perceive its knowledge space as advantage space. Therefore, knowledge capital can be used in a firm’s overall strategy, namely to develop a value-creating sustainable competitive advantage. Strategic positioning is combining competitive advantages in unique ways to achieve organisational goals. Competitive advantage creation is achieved by reconfiguring organisation structure to obtain benefits from the internalisation advantage, the rate of knowledge acquisition, and appreciation to derive benefits from owning intangible assets.

Definition of Knowledge Economy

A knowledge economy is a system of consumption and production that is based on intellectual capital. The knowledge economy commonly makes up a large share of all economic activity in developed countries. In a knowledge economy, a significant part of a company’s value may consist of intangible assets, such as the value of its workers knowledge (intellectual capital). However, generally accepted accounting principles do not allow companies to include these assets on balance sheets. Investopedia explained that, in the knowledge economy’, lesser-developed countries tend to have agriculture, or agriculture- and manufacturing-based economies, while developing countries tend to have manufacturing- or manufacturing and service-based economies, and developed countries tend to have service-based economies. Most countries’ economies will consist of each of these three major categories of economic activity, but in differing proportions relative to the wealth of that country. Examples of knowledge economy activities include research, technical support and consulting.

The Difference between Old and New Economy Stocks

Old-economy stocks represent large, well-established companies that participate in more traditional industry sectors and have little investment or involvement in the technology industry. These old economy companies’ business activities dominated the economic landscape before the dotcom era of the late 1990s ushered in an entire industry of new, high-growth companies. Old economy stocks typically exhibit relatively low volatility and usually pay consistent dividends, as they operate in mature industry sectors that do not always offer new investment potential for a company’s cash. In contrast, so-called new economy stocks are heavily involved in the technology sector and the more successful companies are able to build value at markedly higher growth rates. Good examples of new economy stocks would be companies whose primary operations are involved in ecommerce or technology-based activities, such as Google, eBay, Cisco, MTN and Intel. These companies generally operate in significantly different business environments than old economy stocks and their stocks are generally more volatile. New economy stocks tend not to pay dividends, opting to reinvest their cash into business expansion.

Old and new economy stocks differ not only in their business activities, but also in the way they are valued by the market. Valuations of new economy stocks tend to see stronger volatility, since their business models are not as stable as old economy stocks and are generally found in relatively new industries. On the other hand, old economy stocks tend to be valued based on more stable business models and less robust growth expectations, resulting in less variance of analyst expectations and more accurate earnings estimates. Generally speaking, when analysing a new economy company, more focus is placed on growth expectations and earnings estimates several years down the road, which are much more difficult to predict when a company does not have a lengthy track record. Also, new economy stocks, even those that already turn consistent profits each quarter, tend not to pay out dividends to their shareholders, opting instead to reinvest earnings into business operations, as they are much more likely to capitalise on high-growth opportunities than old economy companies in mature industries are.

Due to the relatively strong impact future earnings estimates have on new economy stocks, these types of companies are moderately more prone to overvaluation than well-established companies are. The dotcom bubble of the late ’90s saw an explosion of new economy companies with seemingly limitless potential. Many glamorous tech stocks with no earnings to their name were driven up in price to very high levels as the market became overly exuberant about the sector’s prospects, only to fall back down to much lower price levels as the bubble burst. Facebook is an example. However, these stocks continue to be more volatile than old economy stocks, and often exhibit higher P/E ratios as well, since they are expected to grow at relatively faster rates in the future than the old economy companies.

The Shifting Economic Landscape

The economic landscape has undergone fundamental change, triggered largely by economic deregulation in the final decades of the past century and the transforming power of information technology. In the face of these forces, companies are restructuring in ways that have a radical effect on risk and on return on capital. In this new economic order, companies are moving away from growth-restricting vertical integration in favour of specialisation along resource lines. Companies are re-engineering and reconfiguring into three types: product development; infrastructure and logistics; and customer-facing. Each of these business types has a different tangible or intangible asset profile. Whereas an infrastructure business may be capital-intensive in a conventional way, the main asset for product development is likely to be intellectual property, and, for the customer-facing business, brand equity. Moreover, the span of resource control increasingly extends beyond conventional ownership to include extended supply and networks of complementary businesses. The potential for economies of scale in manufacturing, for example, is largely exhausted and excellence in manufacturing has been widely duplicated. So, manufacturing production has become a commodity. Increasingly, a company such as Ford, for instance, must look to innovation and to developing brand equity to build competitive advantage. As a result, Ford sees little use in owning manufacturing assets and pushes manufacturing assets to third parties. Technology allows Ford to manage these network relationships tightly and efficiently.

A prevalent feature of the modern economy is the shifting of asset ownership out of the corporation by using leasing, factoring, franchising and similar contractual devices. Since these arrangements often replace borrowing, a financial motive for off-balance sheet financing may be to flatter the debt ratio, leading many governments to require companies to bring ‘off-balance sheet’ assets back into the balance sheet. Rules that limit the use of operating leases are also in line with the practice of financial analysts in capitalising operating leases. A very different motive for off-balance sheet financing is to shift out assets that others may have greater competency in managing, and that are not strategic resources of the business. Outsourcing is not new. Companies frequently lease services if they do not wish to maintain in-house skills. What has changed is the growing willingness and energy with which companies are applying this logic to reconfiguring their resource systems, and the use of networks, rather than ownership-like contracts, to provide resources. Airlines, for example, have long mixed outright ownership with capital leasing and operating leasing of planes. Some operate a number of routes through franchised affiliates. As independent airlines, their assets do not appear on the franchiser’s balance sheet. Planes are clearly core assets to airlines. Nonetheless, planes are not a strategic resource for an airline; airlines all use much the same planes and planes are in competitive supply. A list of resources that confer competitive advantage to airlines would include control of sites and slots, reputation for safety and service quality, membership of strategic alliances, code-sharing arrangements and reservation systems. None of these appear in balance the sheet.

Knowledge Capital

We have seen in the recent past the enormous transformation taking place not only in the corporate world, but also in the wider social realm. One manifestation that seems to be particularly important is that knowledge, not labour, raw material or financial capital, is the most important resource for individuals, businesses, governments and society at large. Knowledge capital is the resource, rather than a resource. In view of its impact, it doesn’t seem surprising that the business management realm is now addressing the relative importance of knowledge capital for corporate competitiveness. Sustainable company performance is increasingly based on corporate knowledge assets. Their systematic management appears as top priority on managerial agendas in the new millennium. The emphasis above has caused a dramatic increase in management interest in knowledge capital and its management.

Researchers, practitioners and scholars alike pursue inquiries in the learning organisation, intellectual capital, managing and measuring intangible assets, organisational learning, organisational knowledge creation, and the knowledge worker, etc. That’s because the knowledge economy – the flood of information coming at lightning speed – really is changing almost everything. How we buy, how we sell, what we make, when we make it, what we value and where we live. Information is now the driver of wealth creation and those who have it (knowledge workers) are the keys to this new way. This highlights the fact that wealth is being created in an entirely new way. Wealth, jobs and competitive advantage are no longer primarily a matter of machines and tools, but of brains and harnessing those brains. The old economy was about ‘congealed resources’ – a lot of materials held together by a bit of knowledge such as a dishwasher or a table. The new economy is about ‘congealed knowledge’ – a lot of intellectual content in a ‘physical slip case’, such as software; the value is not the diskette itself, but the brainpower you access when you buy it.

Thus, the knowledge people have and how they apply it to their work creates value and competitive edge. The knowledge capital, or intellectual capital, of the company has become the most important aspect of the business. Understanding, growing and managing intellectual capital are the most important jobs managers have no matter the size of the business. Knowledge capital has become a primary ingredient of what we make, do, buy and sell. As a result, managing it – finding and growing intellectual capital, storing it, selling it and sharing it – has become the most important economic task of individuals, businesses and nations. The primacy of brainpower is evident everywhere. The knowledge economy will transform the old and reduce its relative importance, but will not kill it. Success in a knowledge-based economy depends on new skills and new kinds of organisation and management. A new era is upon us. Call it the service economy, the information age or the knowledge society. It all translates to a fundamental change in the way we work. Long-held assumptions about jobs and careers, the skills needed to succeed and even the relationship between individuals and employers – all these are being challenged. Knowledge capital, as much as financial capital and energy, has become