The Holy Grail of the Knowledge Economy: Structural Capital
Posted by Michael Oleksak on June 28, 2010 · Leave a Comment
If you understand human and relationship capital, you can start a business. If your business creates value for your customers, you can earn a good living. But you will never grow large or particularly rich with just these two kinds of knowledge assets. This is because the real promise of the knowledge economy comes in the creation of structural capital, that is, knowledge that gets captured and institutionalized in an organization.
When people say that “all our assets walk out the door at night” they are showing their ignorance of structural capital. A really successful business has standardized processes and shared knowledge that stay in the company when people go home at night. Some, but far from all, structural knowledge can be protected legally and will become intellectual property. But, at this point, that distinction isn’t important. First you want to understand how structural capital is formed and managed.
Before we move forward, let us admit that structural capital, like so many of the terms used in intangibles management, has a branding problem. We can’t tell you how many consultants and businesspeople have told us, “We can’t use that phrase in front of my clients/managers,” fearing that they would draw blank stares. We use the phrase because it’s the phrase used in the literature and it is actually a nice description of what it is: knowledge that has been captured and becomes part of the organization. It is the infrastructure of the knowledge factory that is your intangible capital.
In our experience, businesspeople have no problem with the term when it is used to explain the potential within their organization. We recently had this kind of experience with a management team. We had been hired to help them think about how to scale their organization. They already had offices all across the country but they had only tapped a small portion of their potential market. We came up with a summary that showed that they had strong competencies and strong relationships. But the structural capital was weak. The General Manager got it immediately and asked us to do a structural capital gap analysis. Not only did he understand the concept, he packaged it for us as a new offering for our firm!
Once you understand the concept of structural capital, we think that you will embrace it too. Having said all that, our advice is to use a name that resonates with your individual organization. Choose one that works: structural knowledge, organizational knowledge, knowledge infrastructure, organizational capital or anything else that works. The important thing is to get beyond the name and get people in your organization to focus on the concept.
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Because the truth is that structural capital is the Holy Grail of knowledge economy. It is the way that your organization captures knowledge and makes it re-usable. Remember what we said in Chapter 1 about how knowledge is an infinite asset? It is through structural capital that you can realize this promise and make your business scalable.
Watch in the coming days for discussion of the four basic forms of structural capital: culture, organizational knowledge, intellectual property (IP), and processes. Please know that there is a lot of overlap between these forms. Organizational knowledge, for example, can be converted to process and may even be protected as IP. We make the distinction mainly to be able to talk about specific characteristics of the individual forms even though all structural capital is, at its roots, captured knowledge of one form or another.
Knowledge is a fundamentally different kind of economic asset
Posted by Michael Oleksak on May 24, 2010 · Leave a Comment
You have probably heard of the the Knowledge Era. You know that we shifted from the Industrial to the Knowledge Era sometime in the recent past. What you may not understand is the implication of this shift for economics–and for your own organization.
The big difference comes from this simple fact: Knowledge is infinite. Yes, you heard me correctly. Knowledge is an infinite asset. Giving it away or selling it does not diminish your supply of knowledge. This infinite nature of knowledge conflicts with one of the most basic assumptions of the economics that most of learned in school: the concept of scarcity which says, “If you have 100 shirts and sell one, your inventory decreases.” Knowledge assets do not follow this basic principle.
Take software for example. If your company writes a knowledge product like a piece of software, you can sell that software for an infinite number of times without running out of software. If you deliver the software via a disk, you may run out of disks but that does not mean you ran out of software. The value of your software is not diminished just because you sell it to a lot of people. In fact, your software will probably improve over time because you can make revisions based on the experience of your users. That means that the more users, the greater the potential for the software to actually improve over time.
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Economist Paul Romer is one of the first proponents of New Growth Theory that tries to address the fundamental challenges to traditional economics that have arisen in the knowledge economy. He explains that if you have a scarce, physical resource, pricing will be driven up by that scarcity. The value of knowledge is different. It is more about utility. Romer says that the value of a knowledge asset “is proportional to the size of the market in which you can sell it.”
This is a really important concept. If you master it, this is the idea that will separate you from all other companies in your field. It is the challenge for which your company will be striving from this day forward. What Romer is telling us is that knowledge (not just software) does not become an economic good until it solves a problem in a way that people are willing to pay for the solution. Once you identify a solution, then the only limit to the value of that knowledge is how many people need the solution. Put another way, there are no physical constraints to the value of knowledge; the only limit is demand.
It sounds obvious. And not that different than physical goods. People only buy something they need or want. But you can run out of physical goods. You don’t run out of knowledge. Plus, there’s the fact that knowledge is a very malleable product. It can be shaped into so many forms that there are many more possibilities for getting paid. And it’s more scalable. As long as you can continue to provide value, there are no limits to scaling your business based on the economics of knowledge. The key to this is intangible capital management, learning to built structural capital that embodies the best thinking and knowledge of your organization, your people and your external partners.
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