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Achieving European Competitiveness in a Knowledge Based Economy

BT Chief Knowledge Manager

"A knowledge driven economy is one in which the generation and exploitation of knowledge has come to play the predominant part in the creation of wealth" (UK Department of Trade and Industry)


The European Round Table (ERT) is a group of 47 leaders of major European companies covering 18 European countries with a combined turnover greater than 800 billion Euros. Together they employ nearly 4 million people worldwide. In October 1999, key managers from ERT companies involved in all aspects of knowledge management met for a two-day workshop on managing in the new economy. Hosted by BT at their Adastral Park research laboratory, these senior managers believed that knowledge management and the emerging knowledge economy were of such importance for the continued competitiveness of Europe that a paper should be prepared for the ERT and used to help influence Key European bodies and business. The following are the conclusions following interviews with these key knowledge leaders, discussions with leading experts and gurus from academia, companies around the world and the lead members of ERT who guided the develop of the recommendations.

1. Introduction

The traditional industrial economy model and paradigms are being challenged and rewritten because of some fundamental changes in the marketplace:

  • New production, communication and information management technologies
  • Globalisation of the market place and the removal of trade barriers.
  • Openness and availability of information creating more demanding and discerning customers
  • All three previous drivers creating a fourth, the ever increasing speed of change and complexity of market dynamics and solutions.

Success in the new economy is based on creating and exploiting knowledge and innovation faster than your competitors. In this economy knowledge is the main source of wealth for regions, nations, enterprises and people.

This new knowledge economy is based on economic values far removed from those of the industrial economy. Value has shifted towards intangibles and in particular towards increasing value by incorporating knowledge into services and products.

Once you take out the traditional Industrial age balance sheet items such as stock, cash, Debtors, buildings etc, you will find more than 50% of the market valuation of most listed stock market is attributed to non tangible assets. Assets such as: Brand, customer base, their profile and relationship, intellectual capital and capability of the people. The key now is how to assess the value and actions to take to develop and exploit the value of these intangible assets. Winning enterprises are those best able to harness the benefits and opportunities of IT, capitalise on their knowledge base, and move at the speed of the market. Europe is lagging significantly behind the US in seizing these opportunities and in managing and exploiting the wealth of knowledge that it has. Europe must now define its own path towards a new competitive agenda - or lose out.

The main driver this century to improve productivity and business performance has been mechanisation. Large Corporates thrived by employment of mass production techniques, and systemisation of processes which ensured an average annual 3-4% productivity improvement. However from the 1960's onwards productivity growth has slowed steadily, 80% of jobs are in the services and solutions sector not in traditional production. Productivity here is growing at less than 1% annually. This is because the new source of productivity and competitiveness is knowledge. The need to create, share, re-use and exploit scarce knowledge such as customer contacts and preferences, solutions development and reuse, innovation and creativity. This is currently largely being sought through the use of new technologies. Digitising transactions and allowing the customer to control these transaction on line is an example of a quick win. For example a traditional teller transaction in the states costs $1.07, on line it costs 1 cent. BT has enabled its customers to manage its friends and family selection on line reducing costs from an average £1.20 a time to 18 pence. However further success in exploiting technology and knowledge lies in the development of new skills, development of collaborative behaviours and cultures, increased freedom and support to risk take and other so called soft issues.

The ERT companies have recommended two key areas Europe needs to address quickly and is working with the European Commission to help address them.

2. Two Key Areas for European Wide Action

New Economy Financial and Business models: The new fast moving networked environment of collaboration and co-operation requires new financial and business models. These new models need to be developed and evaluated to ensure that they support and value creativity and innovation and that they predict where investment of risk/venture capital is required to enable innovation to be brought to market.

These models need also to enable the valuation and exploitation of intellectual capital.

People and Social attitudes: Companies, and their people, need to recognise the shift from entitlement to employability and develop partnerships with individuals to increase their capability, whilst at the same time leveraging their full potential. The social culture in Europe has attributes such as 'it is bad to fail, knowledge is my power base, success or making money is anti-social'. These inhibit the knowledge economy.

3. The knowledge Based or Networked Organisation

In the knowledge economy the traditional factors of production - machinery, labour and capital - have ceased to be the primary assets. The new assets and driving forces for companies are the ability to innovate, create new products and exploit new markets - through exploitation of people's skills and knowledge and of interactive information technology. This new economy is customer driven - whoever owns and satisfies the customer interface wins! Large corporate are increasingly struggling to deliver solutions and services through wholly owned resources. Increasingly partnerships and networking through a virtual value chain is the answer. The impact on Corporates is clear. In the United States, 30 years ago, two thirds of workers were employed in these large Corporates or in national/local government. Now two thirds are employed in small to medium sized enterprises and Corporates have radically downsized and continue to refocus their business strategies and resources.

"In the knowledge economy speed of product development and penetration will be critical as will the ability to partner. The ability to attract potential partners will be influenced by perceived ability to unlock expertise." (GKN)

The knowledge economy requires not only strong and flexible customer relationships, but also strong and flexible relationships with other organisations - partners, suppliers, and emerging e-businesses and in some circumstances, with direct competitors. Strong and flexible business networks are required; networks in which each participant can contribute to the value chain in the areas in which they can be market leaders. Companies will, increasingly need to identify and focus on doing what they are world class at and partnering with centres of expertise and knowledge in those parts of the value chain that they do not have world beating competence in. In BT they have launched a Knowledge Network called Mobility Leaders. Joint Ventures, wholesalers, retail businesses, mobile phone producers and network operators can join and they trade knowledge! For example new mobile network start ups in Asia_Pacific can draw on the knowledge and expertise of BT Cellnet, Nokia, Ericcsons and others to avoid classic pitfalls in developing networks, avoiding fraud and attracting business thus minimising costs of repeated mistakes. Each member provides the knowledge which underpins their particular world class capability.

4. Mastering change

Achieving networked businesses and the essential value shifts requires the ability to operate flexibly in a very fast-moving marketplace. The ability of individuals to acquire new skills and capabilities is key.

"Europe must develop its skills in faster responses, customer orientation and speed in adapting to market conditions"
(Thyssen Krupp)

The current culture in Europe punishes failure, frowns on success and making money and fosters the concept that knowledge is power.

To thrive, organisations need to create an environment in which knowledge is valued, people are encouraged to create and share knowledge, and knowledge is used innovatively for the benefit of customers. Knowledge management practice must simply become good management practice.

"The knowledge economy is one in which organisations profit by proper creation, management and distribution of knowledge" (BT)

In compiling this report, we found that within ERT companies there are already many initiatives with a knowledge focus - all designed to increase corporate capability and competitiveness. However, there are also many challenges and opportunities still to be addressed.


5. ERT research - key findings

Through interviews with ERT executives and other experts in Europe and the US, we have identified a number of challenges and opportunities that may prove to be key drivers in either helping or hindering European efforts to compete effectively in the new economy.

European challenges and opportunities
Culture Europe's multi-cultural society is a key strength. Cultural diversity can lead to greater flexibility and the ability to utilise different views and opinions to stimulate ideas and innovation, solve problems and increase learning. This is one area in which Europe has clear advantage over the US, and perhaps one reason why some new US e-business, software, telecommunications and technology companies are driven to make inward investment in Europe. Europe must grow its culture to encourage risk taking, learning from failure, celebrate business success and foster knowledge sharing.
Education & IT literacy "The knowledge economy in Europe is evolving at a slower pace than in other regions of the world, Europe is therefore at a competitive disadvantage" (BT)
The rapid development and adoption of new information and communications technologies in the US gives it a competitive advantage over most nations. On the other hand, the US often overemphasises the technology itself rather than the development of the skills, competencies and mindsets to use the technology to greatest advantage. Opportunities for Europe centre on stimulating the widespread adoption and use of technology (particularly in areas such as mobile communications where it has a strong market lead) whilst at the same time ensuring that the excellent educational and training infrastructure in Europe provides people with high levels of IT and information literacy.
Open markets - regulation and trade liberalisation European society is seen as socially progressive with well respected legal processes. However a highly restrictive regulatory regime operates in many of the areas which are essential to supporting an emerging knowledge economy. Where regulations have been eased (such as in the telecommunications sector), business has flourished. Many organisations, including ERT, have already identified the need to address the regulatory barriers and urged the European Union to liberalise international trade, which would help European e-businesses develop.
Organisation change Traditional business models within Europe must change to allow migration and adaptation to the knowledge economy. Organisations will need to develop more flexible boundaries to accommodate exchanges of information, frequent movement of staff and new, closer working relationships with partners, suppliers and customers. They will need to find new ways of working that enable rapid problem-solving and innovation, and allow the demands of the market to set the pace.
European challenges and opportunities
Partnerships Europe is a world leader in creativity and innovation but poor in exploitation. Few systems are in place for business, academia, investors and government to capture and exploit the stream of new ideas and products that emerge each year. There is an urgent need to stimulate partnerships, both within and between organisations - public and private - that could become the generators of future intellectual capital, the very asset needed to drive greater European competitiveness. Openness and flexibility need to be seen as assets, not dangers.
Financial and business models The European financial market is very large and sophisticated. Compared to the US, however, it has a poor record of supporting risk-based entrepreneurship. Moreover, in a world where change is both rapid and unpredictable, conventional approaches to valuing businesses and justifying investments are no longer sufficient. Meanwhile, shareholder capital is draining from established enterprises to the new dotcoms. European companies urgently require new models for the valuation and exploitation of internal and external intellectual capital. Such models could be used to manage the investment process including when and how to make available risk/venture capital to support innovation.
Employability vs. entitlement The power in the product value chain has moved from the manufacturer to the customer. A similar shift of power is evident in the job market. Currently employers in Europe are witnessing the emergence of a "free agent" workforce of specialist staff, at once more flexible and more demanding, who may not ask for security of tenure, but do expect the personal and financial rewards associated with specialised, challenging work. Their career growth may not be based wholly on salaried remuneration within a single company, but on a mix of business ownership and in-company experience. In order to remain competitive, organisations will have to adapt both to attract and accommodate such key but potentially short-term employees.
Simultaneously, both workers and their employers need to adapt to the challenge of continuous developments in technology and the workplace, requiring a commitment on both sides to "lifelong" learning. Employees must be ready and motivated to constantly upgrade their skills to meet demands, while employers must provide appropriate learning opportunities.

6. Recommendations

Time is against Europe. This project has identified key challenges facing Europe as it moves to greater participation in the knowledge economy. If Europe is to succeed in exploiting the immense opportunities and benefits this can bring, a number of outstanding issues need to be addressed by government, academia and business. It is recommended that the knowledge economy becomes a major focus for European Businesses, Governments and Academia to address by;

Europe Wide Actions

New Economy Business Models - The speed of change, the time to market, and the product life cycle are key issues for all companies. Governments, Companies and their partners need to change their structures, processes and capabilities to meet these challenges. New business models that value intellectual assets must be created.
a) ERT will establish a community of company experts focused on knowledge economy awareness, the new business paradigms and related issues. To research, share experience and communicate findings to ERT and to the new European Sponsored KM Forum by end 2000. Collaboration with the European Commission, European Parliament, national governments, academia, start-up and European research bodies is strongly recommended.

b) The outcome of this "knowledge-sharing initiative" should be compiled into an official ERT Report for 2001 aimed at stimulating action from European leaders and policy makers.

Knowledge Economy Culture and People - Employees and employers need to shift mindsets from focussing on rights and tenure to focussing on employability and capitalising on knowledge. The new employment culture will be based on self-initiative where employees commit their talent to create value in exchange for the opportunity to develop their capabilities and their employability.
a) The ERT knowledge-sharing initiative will research guidelines for a new model for the employment contract, one that involves changing corporate values, culture, and reward systems, encourages life-long learning and fosters a more flexible relationship between people networking inside and outside the organisation. A model that is committed to increasing the employability of people, whilst also leveraging their capabilities.
b) ERT develops recommendations and guidelines for education and employment policy that can be shared across ERT and with governments and EU bodies.

European Business and Worker Recommended Actions

a) Increasingly organisations cannot control and deliver world class products, solutions and services on their own. Businesses need to identify where there true centres of excellence are, focus on developing the knowledge and capabilities to continually develop their productivity and competativeness in these areas and seek to partner with suppliers of excellence in those areas they cannot truly resource and manage competitively themselves.
b) There are four key business questions to succeeding in the new economy that managers need to address. 1. What is my unique and competitive value proposition and what is the knowledge I must create, manage and exploit to continually outperform my competitors in these areas? 2. How can I manage my business performance and reward/correct my people's performance against the requirements identified in point one? 3. How do I create a culture, the leadership and environment that enables the creativity, collaboration, innovation and continual learning to thrive? 4. How do I develop the systems, structures and technologies to allow easy identification of and connections to the knowledge and information both in the company and across the networks and partnerships?
c) How do I, as an individual, ensure my knowledge and capability is kept up to date, valued and valuable to the business and to the marketplace I wish to be employed in?