#590       Innovative Leader        Volume 12, Number 12                        December 2003

The Knowledge Revolution
by Noel M. Tichy, Ph.D.

Dr. Tichy is director of the Global Leadership Partnership in the University of Michigan Business School.  He is author of The Cycle of Leadership:  How Great Leaders Teach Their Companies to Win (HarperBusiness, New York, 2002). 

We are living in a revolutionary era.  The hardware era is giving away to the software age, and as a result, the economic and social landscape of the world is undergoing seismic changes.  The world is also struggling with massive geopolitical turmoil, as evidenced in the 9/11 attacks, not only in the Mideast but around the world.  Right now, more than fifty ethnic wars are occurring.  We are entering a twenty-first century where our optimism must be tempered with the realities of a very uncertain and violent world.

Times of transformation like this are always messy.  Inevitably, they involve errors and excesses.  As corporate leaders and investors grapple for new and better ways to deploy assets, the pendulum swings too far and it suddenly reverses course.  One day Ariba was planning to double in size from 2,000 to 4,000, practically the next day it was laying off 35% of its workforce.  All over Silicon Valley the story was repeated.  For many entrepreneurs, dreams of hypergrowth suddenly morphed into nightmares of sudden death.  In the “old economy,” companies such as Procter & Gamble, General Electric and Charles Schwab, got caught in the recoil as well.

In our eagerness to move ahead, we tend to forget that while some things change, not all things change.  Human nature does not change.  Business cycles still happen.  People still get greedy, or overexcited.  They get carried away with their own press clippings and fall under the spell of their own hubris.  They go to excess.  So we experience booms and busts that cloud the overall picture.  But through these cycles, the world sometimes does move on to new trajectories.  And despite the messiness of the locomotion, we are clearly on a new trajectory now, as biotech and digital technologies alter the landscape of business and everyday life.

There are many ways to describe the challenges that leaders face in the new millennium.  Peter Drucker talks about an era of overwhelming information, in which both enterprises and individuals will have to learn to organize information as their key resource.  Experts talk about networking and the ability to create and manage alliances as core competencies in a fluid world.  Lester Thurow sees a knowledge economy in which genetic engineering, new materials, robotics and other knowledge-based technologies will have increasingly profound impacts.

All of these things, and many others, are true.  Like the industrial revolution, the knowledge revolution is reordering the ways that people relate to one another and to work.  The instant availability of information has broken down the walls separating individuals, institutions and economies.  Intangibles have replaced physical goods as the primary source of customer value.  And the brains and energy have replaced plant and equipment as the resources most critical to producing that value.

Further, in an always-on, 24/7 world, everything is constantly in motion.  Not only are there new technologies, new applications and new effects every day, but our vantage point changes each moment as we get deeper and deeper into the new territory.

During the tech-stock boom in the late 1990’s, the old, the physical and the predictable lost value, while investors clamored for the new, the virtual and the volatile.  Solidly profitable industrials were squeaking out price/earnings ratios in the single digits, while IPO’s with no profits in sight pulled down price/revenue multiples in the hundreds.  It appeared that start-ups were about to take over the world.  Then in March 2000, the bubble burst.  Wall Street did a 180 degree turn, and almost overnight tech stocks went from darlings to dogs.

In the euphoria that led up to the spring 2000 sell-off, a lot of entrepreneurs were able to attract investors with nothing more than hope and hype.  These ventures were among the first to die when the capital markets tightened.  A lot of other companies that had good ideas but bad timing or bad management also got squeezed out.  And even many of the fundamentally sound and profitable companies in the e-commerce and high-tech sectors saw their valuations fall by 50% or more.  But the fact that the capital markets overinflated a lot of prices in the late 1990’s and then overcorrected in 2000 doesn’t mean that it was all just Tulipmania.

The fact is that the world has been fundamentally changed by information technology.  Quick reversals in the capital markets are simply emblematic of the new environment.  The new reality, in which all companies are going to have to compete, is one of constant communication, continuous transformation and rapid-cycle change.  In technology, customer markets and the labor market, as well as in the world requires dealing with change.  It requires recognizing shifts and mobilizing networks of smart, energetic people to react quickly and intelligently.

It’s a New Game for Everyone

In this new knowledge-based economy, it’s clear that the practices, systems, policies and mind-sets that won in the old industrial economy will not do the job.  So leaders, whether they are starting with four friends in the basement or as the head of a corporation with hundreds of thousands of employees, must build, or rebuild, teams that can win in the new game.

It’s as if the International Olympic Committee has just invented a new sport for the next round of game.  There are no world-class players yet, but in a very short time competitors will have to develop the needed skills.  For the leaders of companies like GM, P&G and Kodak, the challenges are obvious.  Like overweight, out-of-shape athletes, they need to develop agility, flexibility and speed.  Meanwhile, new upstart high-tech companies may have agility, flexibility and speed, but they are like preadolescent kids.  Most of them are skinny, weak and totally out of control.  They may have moments of dazzling brilliance, but neither the muscle nor the discipline to go the distance.

So, it is no forgone conclusion, as many believed in the late 1990’s, that the scrappy start-ups will emerge as the winners in the new millennium while the old behemoths face extinction.  And it’s not the other way around, either, as investors were betting by the spring of 2001.  Experience, marketplace recognition and financial resources won’t automatically assure that the older established companies will be able to absorb or knock off all of the new entrants.

Rather, the issue is going to be who is best at generating knowledge, harnessing the energy of workers and making sure that it is targeted to the most productive uses.  The winners in the future will be organizations that are big, fast and smart.  The challenges that leaders will face along the road to building such organizations will depend on where they are starting.  But at the end of the day, whether a three- or 300,000-person organization, they will need the same qualities to win.

The Destination

The ultimate destination for all leaders is sustainable value creation.  This is reflected in the value of assets over time.  Are the people, capital, information and technology worth more today than yesterday?  For publicly traded companies, this is reflected in the long-term market capitalization of the company.

What is new and makes this particularly tricky in today’s world is that sustained value creation requires an organization to be both big and fast.

Jack Welch went on a twenty-year journey to try to make GE a “big company with the soul of a small company.” 

Until now, most leaders have been willing to settle for making a trade-off between big and fast.  In fact, the principles of good management taught in the leading business schools prescribe layers of controls that increase with size of the organization.  The best managed companies have been considered to be those with the best controls.  But today, the trade-off between speed and scale is no longer acceptable.  To be a winner, a company must have both.