Donlon, J. P., Chief Executive (U.S.)
For every $100 invested in shares of Microsoft or Intel, only about $1 represents physical assets. Clearly, the real value of today's companies is not captured in traditional net worth accounting.
n his influential 1992 book, The Twilight of Sovereignty, former Citicorp chairman Walter Wriston observed that "the new source of wealth is not material, it is information, knowledge applied to work to create value." John Seely Brown, Xerox's chief technology officer, argues that we are moving from a production economy to a digital economy where instead of transforming material, companies are transforming knowledge. He sees three manifestations of this: Leaming will replace unlearning; instead of making products, most will make sense to the customer; and instead of whitecollar or blue-collar workers, we all may be wearing T-shirts. So what is this "knowledge economy" that management pundits and the business press claim will reshape corporate fortunes? And how can business leaders make use of it?
There is a fundamental confusion about what is meant by "knowledge." Skandia, the Swedish financial services firm, defines knowledge capital as the sum of human capital, the combined knowledge and skills of one's employees, together with the values and culture of the company; and structural capital, the hardware, software, brands, patents, and structural capabilities that support one's employees and customer relationships.
"If information is unorganized data, undigested observations, and facts," Harlan Cleveland wrote in The Knowledge Executive, "knowledge is organized information, internalized by me with everything I know from experience or study or intuition, and therefore useful in guiding my life and work." Knowledge is integrated with everything you know in such a way that it guides one's action. It confers advantage by enhancing one's ability to take action. Knowledge capital depends on people to create it, but also for a management process to harness it in some value-creating way. Participants in the following roundtable, held in partnership with Arthur Andersen, more or less embraced the latter meaning. Simply, knowledge is a resource that enables other things to happen.
Unlike other assets, knowledge doesn't diminish with use, The greatest cost is in its creation rather than its distribution. Users can benefit from knowledge as well as increase its value through contact and adapting it. Harvard Business School's James Brian Quinn writes that "the capacity to manage human intellect-and to convert it into useful products and services-is fast becoming the critical executive skill of the age." The question roundtable participants wrestled with is, how is this best done? One can create knowledge hoping that transfer mechanisms will take it from individuals to groups. At Enron, for example, CEO Ken Lay says that in the energy industry one must always be prepared to reinvent the business. He thinks in the next 10 years, more than half of Enron's revenue will come from lines of business it does not have today. Lay tries to maintain a knowledge sharing environment where lines of communication are open and new ideas are given a wide berth-even if many don't work out.
Arthur Andersen's Steve Samek believes that CEOs must ask themselves, which assets are driving the value today that perhaps you didn't recognize before? As Pat Sullivan of ICM Group adds in the following discussion, these assets by themselves are insufficient until they are harnessed to complementary hard assets and a process that converts an innovative idea into a salable product or service. If the necessary process or structure is not present to do this, consider an alliance with a company that can offer one.
DATA INTO KNOWLEDGE Steve Samek (Arthur Andersen): The bottom line question is, what is the embedded knowledge capital in your business and how can you convert it to a real revenue stream?
For some companies that have done recent acquisitions, the largest asset on the balance sheet may be intangible. …