Knowledge-based economies

Prologue

Finally Apple announced its “netbook”, the iPad.

Apple has an impressive track record in marketing its own products, and keeps using the same approach.

Or so it seems.

As Microsoft before, Apple keeps being a follower who sits on the side, observes what others are doing, and then builds something that restructures the best of what is available.

The added twist: Apple integrates everything within a package to lock the customers into the e-commerce side of Apple.

It might be just by accident- but every new product release is prepared by a campaign based on leaks and rumors- sometimes denied with a straight face just few days before the announce.

But Apple is not an old-style computer company, as used to be IBM, creating and producing in-house almost every component used in its own products (with the conspicuous exception of MS-DOS, of course!).

I remember that my first Mac in 1991 was a Powerbook 100- i.e. a desktop Macintosh that had been re-assembled and re-packaged by Sony into a portable computer.

While Apple’s strategy has been called “control freak” or “paranoid” from outsiders, it is actually the most appropriate for a company that keeps in house mainly knowledge-based activities.

Introduction

The inspiration for this article came from a twitter-war between some of my online friends, siding either with Nokia or with Apple in their fight about who should license what.

The last round? Apple asking US Courts to block the sale of Nokia products in the USA (as a side-effect of Nokia request that Apple licenses its innovations that have been allegedly used for the iPhone etc).

Inspiration, I said.

The real issue is: are our business development and FDI (foreign direct investment) attraction models, created for an industrial era, sustainable when we shift toward a knowledge economy based on the WTO legal framework?

If you are too lazy or busy to read the article…

Obviously, my answer is: no.

Inside the article, few examples and ideas, using Nokia and Finland as a starting point on the issue.

Comments or suggestions? Send me a message on twitter or Facebook.

Building a knowledge-based company

Actually, this is not really something new.

If you see a company, think in terms of its value chain.

To make it simpler: the A to Z of your product or service- from what is needed to produce what the company delivers to its customers, to the final consumption (and, hopefully, the careful disposal of any “leftovers”).

In Hollywood, as many scriptwriters who signed in the past for a share of the profits discovered, it was quite common to split the A to Z in subsets, all belonging to or associated with the main company (maybe via an holding company).

Why? Because the contract was signed with one of the companies.

But all the costs related to production, marketing, promotion, distribution, etc were billed from the other companies.

Wiping out the profits that were supposed to be given to the creative parties (it was called “studio accounting”).

Boring? Watch the 1970s movie “The Producers” to see how it is supposed to work…

But it was interesting in the 1980s to read studies about apparel (such as Benetton) or automotive and electronics companies “outsourcing”, by applying a twisted edition of the same approach.

The concept? Keep the design and marketing coordination inside, and externalize everything, either to subsidiaries or by outsourcing/subcontracting.

The benefit? Increased flexibility, cultural focus (removing the HR nightmare of keeping motivated both “creatives” and “shopfloor” employees under the same roof).

The short-term risk? Losing the connection with the production and the customers, and churning out innovations that are simply redundant.

While missing real opportunities for cheaper and faster innovations originating from either the shopfloor or the customers.

An example? Just read the recent articles about what happened to the robots when a production line in the automotive industry was relocated from France to China.

A knowledge-based company: long-term risks

I wrote above on the “short-term” risks.

The long-term risks?

Certainly losing the control of the production processes and the associated IPR.

As some companies in the jewelry industry in Italy discovered when they externalized production and design processes for mass-market jewelry to China.

It is no secret: the incumbent uses its own market presence and investment in technology and processes to create artificial barriers to the entry of competitors.

Ensuring to protect the market long enough to recover the investment, but also to generate further revenue for a “war chest”, should a new entrant try to compete.

If your company becomes “virtual” (see the material that I published online from 2003 until 2005, in Italian and English, on BusinessFitnessMagazine.Com), your only defence is constant innovation, coupled with innovative marketing to generate a “consumer economy”, instead of relying on a “replacement economy”.

It is an old story: a consumer economy requires that people and companies buy and replace equipment and material not based on need, but based on the perception of needs.

Therefore, you do not just replace items that are beyond repair, or whose repair costs would exceed the replacement cost, but you also adapt to what your peers are doing.

If you want: consumers innovate their consumption habits not because they need to, but because they are subject to peer pressure. And this pressure is stronger in our highly urbanized societies.

And here comes the real risk: if you “dematerialize” your company, your own suppliers are the source of your products and services, and are the real engine of the innovation.

Eventually, a shrewd wannabe competitor will cherry-pick between your suppliers the best, and maybe ask them to become involved in a new product or service offer, with better conditions.

Some companies try to prevent this by writing non-competition or non-disclosure agreements in contracts, but it is, frankly, a waste of time.

A spin-off could redevelop best practices or products in a “white room” environment (i.e. without any connection with the original company).

Then, your competitor would be able to enter the market with an “innovative” product that is nothing more than the “best practice” product.

With an added value: as they will not have your existing customer base, they will be unrestrained by your need to keep your existing customers happy, with a bloated product or service portfolio that represents the history of your company.

But eventually they too will become an incumbent: and this is the beauty of a knowledge economy.

It requires knowledge-based organizational structures.

Or: a “creative destruction” development cycle, where a company does not grow around a product or service.

Instead, a unit is built around a product, grows, while keeping tab on all the best practices and aggregate knowledge, and then it is dissolved.

Look around you: except the few “brand” companies (Apple, Nokia, etc) the knowledge economy increased the mortality rates of companies, as their suppliers and subcontractors are dissolved and re-assembled as and when needed.

Virtualize your economy

Moving from companies to countries, the issue is different.

If you are in Europe, you probably remember the brouhaha about the “Bolkenstein Directive”.

I will steer away from the subject- but search in Google to find some information about the issue, and make up your own mind about what “virtualization” could entail for our social structure.

One of the reasons why I was interested in the quarrel “Apple vs Nokia” (or Nokia vs Apple) is that both come from highly innovative economies- I am referring to California and Finland.

The scary difference is when you look at the size of the company vs the host country.

Despite the recent turnover contraction, Nokia had a turnover in 2008 of over 50 bln EUR (69 bln USD at the rate published in the balance sheet).

Its home country has a GDP roughly the double of that amount.

I would not even dare to comment on that number.

I assume that whoever is reading could simply consider the string of facts.

A single company that virtualized itself (despite 1/3 of the staff still being based in Finland) and generates most of the income outside the country represents the 50% of the GDP of a developed country economy.

When does a knowledge-based company cease to belong to a country?

And how do you manage the relationship between a virtual company and a state?

But with virtual companies, you do not even need anymore computers or offices.

You can get temporary offices, keep all your data on the “cloud” computing platform (e.g. Amazon’s S3).

And a relocation is potentially a matter of hours, not years.

The interesting issue with knowledge economies?

If you analyse how they negotiate with potential foreign investors… it seems that they are often stuck in the industrial era.

Virtualize your government

Or, at least, your government bureaucracy.

The concept and practice of “e-government” received a significant push from the OECD in late 1990s, but it is still a work-in-progress.

The real risk is that moving online or on computers what used to require a large staff will increase red tape, instead of reducing it.

Why?

Because adding one page to your dossier was quite expensive, when everything had to be processed manually.

But adding a new data requirement when everything is electronic, and the real cost is on the (business or private) producer seems to be painless and inexpensive- and keeps the bureaucrats busy and needed (no government layoffs).

As I said above, from recent issues (e.g. GM and its offsprings) it seems that the only side that has not yet evolved is the management of foreign direct investment.

Often, it becomes sheer subsidizing by the host governments to the (temporary) relocation of facilities.

Which means: unless your country operates as a sovereign fund, or you hold a “golden share”, if your economy relies on a small, restricted number of companies that are highly depending on trading, do not bank on their tax revenue to sustain your welfare system- or recover your explicit or implicit subsidies.

Because while it can be true that the coffers (and the welfare and educational system) “seeded” the building of the company- your country is not a shareholder.

Therefore, all the “goodwill” embedded in the original, “systemic” seeding could be wiped out by simply relocating few key people- as soon as enough of the physical assets are already relocated in a low-welfare, low-tax country.

What does this imply?

Probably, countries should act more like sovereign funds, adopting a venture capitalist approach that considers direct and indirect subsidies for what they are: an investment to develop the local economy.

If you ask to any company that set up a production facility in Asia from the 1960s on (not just in China), you will hear a common theme- they weren’t just asked how many jobs they would create, but also to carry out IPR transfer to help create a layer of local industrial/research capabilities.

Expanding the knowledge economy could generate significant savings, moreover if the same approach (designing new processes around the new capabilities) is adopted also by the states.

And, of course, redesigning also the legal framework associated with the processes (still so XIX century).

But while a company has no national allegiance (except when they wrap themselves in the flag to get subsidies from their “home” country), a country cannot relocate.

It is nice to talk with people from the government side using the “lingo” coming from the private sector- but way too often they forget that the underlying organizational structures and “assets” are different.

A company can relocate its headquarters from US to the Middle East after swimming in US-government contracts, but if Nokia were to relocate elsewhere, Finland would still be between Sweden and Russia, and across the waters from Estonia.

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