Design firms for the knowledge economy

Human society has transformed over centuries from an agrarian economy to an industrial economy, and to today’s knowledge economy. Firms in a knowledge economy differ in a number of ways from those in the industrial economy.

Some of the major distinguishing features include the significant role played by knowledge in the creation of value, the use of technology and less use of capital, high competence of workers, and low commoditisation of the workforce.

Additionally, industrial economy firms themselves are increasingly displaying knowledge economy characteristics, particularly due to the use of technology.

However, despite these shifts in the character of what determines value creation, firms still adopt earlier era design features that may no longer be relevant. What kind of adaptive measures must firms take to truly reflect the underlying changes in what drives value creation? Some examples are outlined below.

Shared ownership of capital In the manufacturing paradigm, setting up a new plant involved significant capital investments in infrastructure.

This meant that the ownership of the firm (rightfully) was concentrated in the hands of the ‘capitalist’ (ie the supplier of financial capital), since it was he who was taking the biggest risk in the enterprise.

In a knowledge economy paradigm, the most important asset of the firm is its human capital, and other forms of capital investment have a relatively smaller part to play. This means that employees need to have a significant ownership of the equity of the firm. Unfortunately, this has taken off only in select industries, where the linkage between human capital and value creation is indisputable, for instance in the technology industry.

Cooperative decision making If one were to combine a highly skilled workforce, with the kind of distributed ownership described above, then it would be important to understand how decisions are made in knowledge-based organisations.

Here, a cooperative model may make sense, where democratic principles are applied at all levels of the organisation to take key decisions.

The quality of decisions taken in such a system may well improve, given that an owner mindset is very different from an employee mindset. There may still be a somewhat flat hierarchy in place. However, decision making will include both top-down and bottom-up features.

Individual freedom In the traditional economy, many tasks performed by the workforce were fairly repetitive and mechanical.

This resulted in policies that aimed to increase standardisation and efficiency, and reduce flexibility. However, this paradigm fails when applied to contexts where creative thinking forms the basis of value creation.

Hence, people policies need to reflect a high level of individual freedom and autonomy. Notions like measurement of working hours and highly codified job descriptions will have to be given up in favour of more flexibility, and what may, at times, seem like chaos.

Smarter idea The firm’s design must allow for continuous creation of intellectual capital as a source of competitive advantage.

This is because the speed of obsolescence in a knowledge economy is very high, and only determined by the speed at which someone else can come up with a smarter idea.

The response to this rapid obsolescence must be a proactive approach to creating new wealth creation ideas in preparation for the irrelevance of existing ideas. In traditional economy firms, scale allowed for some degree of complacence because as one attained a certain size, the barriers to entry for competition simply became stronger. However, in a knowledge economy, sources of advantage – like market share, economies of scale, and barriers to entry – may only be of ephemeral consequence.

It could be argued that a knowledge-based firm is the highest stage of evolution of the enterprise, since in its ideal form, it allows for its participants’ recognition and reward for unique talents (versus standardised or mechanical skills). One may recall that in addition to exploitation, alienation of the workforce through the loss of meaning was a major criticism offered by communism to capitalism.

Gradually changing A knowledge economy firm, perhaps, has the best potential to overcome these shortcomings. We may well be at only the early stages of a true knowledge-based economy, but the texture of the firm is gradually changing. A timely recognition of these shifts and the implementation of adaptive measures will be important. This will accelerate our progress towards the ideal of what an organisation should be – an engine that can deliver value to stakeholders (owners, customers and society), and fulfilment to its people.

(The writer is a corporate strategy professional.)

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