The (Validated) Knowledge Economy

Peter Drucker coined the term Knowledge Economy some time ago. For one of the main business thinkers of the XXth century knowledge, work, productivity and innovation are tightly related : “Knowledge is the main source of wealth. Applied to the tasks we know it becomes productivity. Applies to new tasks, it becomes innovation.”

That was in 1969 (in his book The Age of Discontinuity according to Wikipedia). There are two ways to put this definition in perspective. The first one is to say : “What a visionary” – I know : I haven’t stop since I’ve started this blog. The second one is to ask : “Well, there has been a couple of changes in the business world for the last 10 years, let alone the last 45, is that definition still relevant ? Is that link between knowledge and value creation still solid?”.

The latter is the aim of this blog post. The answer is “not quite” and here’s why.

ICT, GPT and GDP

In The Second Machine Age, Eryk Brynjolfsson and Andrew McAfee promote Information and Communication Technology (ICT) to the rare status of General Purpose Technology. Broadly speaking, GPT are universal and pervasive technologies that transforms the way we do business and generate growth. Former GPT are the steam engine, electricity and the LOL cats (not sure about last one, let me check).

The problem with ICT is that most of their actual applications in the public area are free : think of Wikipedia, Open Source software, online communities etc … As a result, the impact of ICT on the GDP is rather meaningless compared to other GPT. As the book quotes “ICT falls short in terms of impact on GDP”.

Now this is not to say that ICT has no value for the people. It is extremely satisfying to connect with the people we know, like and love on online communities. We can exchange information, knowledge and LoL cats and foster virtually this feeling of belonging. Yet : it has only marginal impact on GDP and growth.

One could even argue that it destroys value : ask music industry, hotel industry with the advent of the likes of Airbnb or taxi drivers with the one of Uber.

ICT, Knowledge and Validated Knowledge

With the advent of social software and online communities the link between ICT and knowledge has became more and more obvious. Or rather more and more appealing. Yet, as the section above tends to prove, that very knowledge does not necessarily transform into GDP and therefore has no significant impact on the economy.

In The Lean Start-Up Eric Ries coined the term Validated Knowledge. Validated Knowledge is built on an hypothesis that has proved to be valuable in terms of business through a quick experiment. This is the the Build, Measure, Learn loop, a modern adaptation of the seminal PDCA loop of Deming and Shewart. This is business practice adopted by the web giants (GAFA) and the recommended practice to grow Startups, and the very heart of Lean management Toyota has been practicing for the last sixty years or so.

An example of a standard knowledge validation method in the online business world is the A/B testing. Test 2 different designs on 2 populations and check which is the one bringing the better engagement. If DesignA makes 10% people buying your product while DesignB makes 20%, you have validated the fact that Design B generates twice more revenues than DesignA, regardless if Design A comes from a superstar Designer and Design B from an intern.

Validated Knowledge and the role of management

This notion is unvaluable in a world where anything is rated as knowledge : tips read in a an online forum, pieces of information harvested from social networks, best practices taken from books or conferences, certifications in any discipline, recommendations from high flying consultants. None of this is validated knowledge unless it has a direct link to YOUR business results.

Toyota has proved with their irresistible success, that this is the role of the management to ensure the company develop people so they can validate knowledge, day in, day out. How do you validate your company knowledge ? How do you relate your company knowledge to your revenues of this year or this month ?

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