Creating Value in the Network Economy (The Harvard Business Review Book) by Don Tapscott (Editor), Tapscott

From the Publisher

The Harvard Business Review has led the way in helping executives in every industry adapt to the rapidly evolving network economy. Don Tapscott, bestselling author of The Digital Economy, collects the best articles from the Review into a resource for business leaders who want to understand how their businesses can create value and profit from the new economy. A rich mix of ideas and insights, Creating Value in the Network Economy explores all aspects of the networked business world, from the importance of trust in the virtual organization to the changing nature of customer relationships to new ways that companies can generate value through their intellectual assets. The contributors include many of the leading names from the digerati: Regis McKenna, John Hagel, Stan Davis, Jeffrey Rayport, and John Sviokla, as well as the incomparable Charles Handy. Tapscott's thought-provoking introduction highlights the key themes and unites the articles into a complete picture of the issues business must address to survive-and thrive-in the networked world. Creating Value in the Network Economy helps us to see and understand the new and still-emerging customs, social norms, laws, and institutions that surround the creation of wealth in the network economy.

Booknews

Organizes 12 articles reprinted from the into a framework to help managers understand the new dynamics of value and wealth in the networked world, and radically rethink the way wealth is created within their organizations. Annotation c. Book News, Inc., Portland, OR (booknews.com)

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Table of Contents

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2. The Coming of Knowledge-Based Business

A tire that notifies the driver of its air pressure and a garment that heats or cools in response to temperature changes are early versions of knowledge-based, or "smart," products already on the market. Diapers that change color when wet and tennis rackets that glow where they strike the ball would be smart versions of other common products.

These products are smart because they filter and interpret information to enable the user to act more effectively. Smart products, created by knowledge-based businesses, can be identified by a variety of char acteristics: they are interactive, they become smarter the more you use them, and they can be customized. We will discuss these and other characteristics, but we are sure that many more will become apparent as the knowledge era generates more such products.

Consumers become learners when they use smart products, which both oblige and help them to learn. Businesses will move toward making their offerings smarter because they will profit from doing so. When their customers use those products, they will be engaging in an educational process.

Seeing customers as learners requires a major change in thinking. But over the next two decades, businesses will come to think of their customers as learners and of themselves as educators. They will promote the learning experience for profit, and their customers will profit from that experience.

In the years ahead, people's use of knowledge-based products both as consumers and on the job will becritical to their economic success. The value of a business will be similarly determined: businesses that are based on providing information to customers will do better than those that are not, and businesses that know how to convert information into knowledge will be the most successful.

From Data to Information to Knowledge

Changing technology is driving the next wave of economic growth. To take advantage of that growth, we will have to apply not only new technology but also new thinking. First and foremost will be our ability to understand the shift in the economy from data to information to knowledge.

Data are the basic building blocks of the information economy and of a knowledge-based business. Or, as Robert Lucky, a former director of AT&T Bell Laboratories, says, they are the "unorganized sludge" of the information age. In the early years of this economy, we focused on data that came to us in four particular forms: numbers, words, sounds, and images. What we did with those data-how we processed, stored, or otherwise manipulated them—determined their value.

Information is data that have been arranged into meaningful patterns. Numbers are data; a random number table is information. Similarly, sounds (converted into notes) are data that can be arranged in an infinite number of systems to produce the information we call music. Whether a piece of music becomes the stuff of knowledgewhether, that is, it enables those who hear it to learn—depends not only on the composition but also on the skill and purpose of the performer. For a beginning pianist, a halting rendition of a waltz can be a learning experience. The same waltz performed by a virtuoso can be a source of knowledge for his or her audience.

The importance of data as an economic factor first became apparent in the 1950s and 1960s, when room-sized computers made it possible to collect, sort, and store vast amounts of data, which then had to be programmed by users to produce information. With the advent of electronic computers, including the microprocessor and standard software, that process became more sophisticated and more useful, to the point where the information a business produced often became more valuable than the business itself. Computer-generated airline guides and reservation systems such as American Airlines' SABRE are wellknown examples of information that often is more profitable than the businesses it was created to serve.

Yield management is another example of how information can enhance or even transform a business. In the airline industry, yield management allows carriers to maximize revenue on a fixed asset by varying prices-which is why there can be 20 different prices for the coach seats on a single Right. In agriculture, yield management can provide benefits for the farmer-and it created a new business for tractor manufacturer Massey Ferguson.

Farmers used to guesstimate the average yield of an entire field, but with Massey Ferguson's yield mapping system they can practice smallscale farming on a large scale and maximize the yield of each square yard in every field. The system links the farmer's tractor to a satellite based Global Positioning System, which records the latitude, longitude, and yield of every square yard. The traditional harvesting operation does not have to change in any way. The data are automatically sent to the farmer's desktop computer, which generates yield maps showing where variations are above or below target. Armed with this specific information, the farmer can investigate selected areas and pinpoint the reasons for the variations (soil compaction or nutrient imbalance, for example), quantify them in financial terms, and find out if it is economical to implement remedies. Soil sampling, for example, can be much more selective than it is using traditional random methods. Today this knowledge-based system is being used to provide a competitive edge. In the future, it may be worth more than Massey Ferguson's primary business.

As these examples suggest, businesses that generate information often begin as adjuncts to the "real" work of the company, and the information seems nothing more than a by-product of the core business. Over time, however, the importance of the information increases, until the value added by its content outweighs the value of the original business itself.

Now the process of change is about to take place again. As an economy, we are on the cusp of the transition from information to knowledge, with knowledge meaning the application and productive use of information.

An intuitive way to appreciate the difference between information and knowledge is to substitute the word data every time you see or hear the word information. Chances are it won't feel right. A chief information officer, for example, has a very different role and set of responsibilities than a data processor has. Data today are commodities, neither as powerful nor as valuable as the information derived from them. Within a decade, we will feel the same kind of resistance if we try to substitute information for knowledge, because knowledge will have superseded information just as information has now superseded data.

The shift from a data to an information economy involved two sequential developments, one technological and the other behavioral. AMR Corporation (the holding company of American Airlines) used its technological expertise to diversify into myriad information activities ranging from handling medical and insurance claims for the Travelers Corporation and Blue Cross Blue Shield to managing the Warsaw airport for the Polish government. Only after technology had led the company into new lines of business did the people involved realize that those businesses would call for different ways of managing and organizing.

The shift from information to knowledge, however, is giving rise to a different phenomenon: awareness of the value of knowledge is exceeding the ability of many businesses to extract it from the goods and services in which it is embedded. How can businesses, for example, extract the knowledge value from a pair of socks, a home mortgage, an electric bill, or a foreign exchange credit? Those that can figure it out will derive as much power and profit as data and information brought in their turn. But to do so, they will have to understand the basic elements of knowledge-based business...