“Intellectual Capital: the New Wealth" Summary of Selected Chapters

Chapters 1-3 of “Intellectual Capital: the New Wealth of Organizations”
by Thomas A. Stewart

Summarized by: SDTalisayon

1. The Knowledge Economy

Compared to 19th century industrial England, new information economy is another revolution, “a sudden, radical, or complete change... a basic reorientation” according to Webster.

  • GDP from agricultural had shrunk: 40% in 1869 during the Civil War to 14% at the end of World War I, to 1.4% today
  • Similarly, industrial workforce had shrunk:
    • US manufacturing workforce shrunk from 34% of total workforce in 1950 to 16% today
    • GE factory in Louisville, Kentucky built for 25,000 workers in 1953 now has only 10,000
    • Volkswagen had downsized by one-third.
  • ...And the share of the service sector had grown:
    • 34.5% of 1958 US GNP from the information sector estimated by economist Fritz Machlup of Princeton
    • 46% of 1967 US GDP estimated by Marc Porat

“Intangibilization”: The information or “knowledge content” of most, including industrial, products have increased:

  • The typical aluminum beer can is 25% knowledge, coming from R&D.
  • Netscape Navigator software downloaded to millions of computers via the Internet is practically all knowledge and no materials.
  • Microsoft billionaires own no factories.
  • CNC (computer numerically-controlled) machine tools has built-in microprocessors.
  • More than 50% of the cost of petroleum is information (in exploration, drilling, etc.).
  • Boeing 777 has 3 on-board computers and only 2 engines.
  • Value of microchip production had exceeded the value of steel production, and cost of materials is a tiny fraction of the cost of a chip
  • About 80% of the cost of a Levi Strauss jeans is knowledge
  • 44% of American Airline’s 1995 profits came from its innovative airline reservation system, Sabre.
  • During the Vietnam War, 15% of US military personnel had no high school diploma, now the figure is 0.7%; and the 1991 Gulf War is an example of information-intensive warfare.
    “Manufacturing is dematerializing”
    “Even money has dematerialized” 
    gold --> gold standard ($35 per ounce) --. US$ delinked from gold --> electronic money flows

2. The Knowledge Company

2a. Companies are increasingly information intensive.

Illustrative case: InterDesign a Solon, Ohio company designing and producing plastic household items:

  • Growth in the past 14 years: employment 3x, office space 5x, sales 8x, but megabytes computer memory 30x
  • Orders were received by:  mail (in 1970s) --> 800 number --> fax --> EDI (in 1991)
  • More employee time released for designing/innovating new products

Since 1982, annual expenditure for traditional capital goods is steady at $110 billion BUT
annual expenditure for computers and telecommunications alone had grown fast: $49 billion in 1982 --> $86 billion in 1987 --> $112 billion in 1991 --> continuing upwards

“If R&D investment begins to surpass capital investment the corporation could be said to be shifting from being a place for production to being a place for thinking.” -- Prof. Fumio Kodama, Saitama University

2b. ICT increases business productivity (e.g automation), but furthermore, can be made into a business in itself.

  • In 1993 ROI on computer equipment is 10x ROI on other capital equipment, according to MIT economists Erik Brynjolfsson and Lorin Hitt
  • Replacing costly inventory with information management:
    • Toyota’s kanban or just-in-time supply of parts
    • GE Lighting closed 26 of its 34 warehouses since 1987
    • Hallmark Cards developed an electronic kiosk that can print custom greeting cards in front of the customer
    • Blockbuster Video can download and write a movie into a DVD for a buyer on the spot
    • Electronic banking is reducing the need for physical cash in circulation
  • Running simulation models, e.g. in petroleum exploration
  • Mining valuable data about consumers and their personal preferences
  • IBM makes more money selling computer services than computers themselves
  • Ryder (a truck rental company) also sells logistics management expertise
  • Electricite de France, a power utility company, also sells its expertise helping build and manage power companies in other countries.

2c. Information takes an economic life of its own.

  • Decoupling of information flows from material flows, and information itself is managed separate from material flows
  • Production used to be geographically integrated in one place --> production is now often geographically dispersed and integrated informationally
  • Managing information require new mindsets
  • The new knowledge company has become a different kind of creature:
    • In 1996 market to book value ratio has increased to 100:23 for IBM, and 100:1 for Microsoft
    • Even in manufacturing and mining companies, ratio had changed from 100:62 in 1982 to 100:38 in 1992
    • Visa International, processing over $300 billion per year, has practically no tangible assets
    • Businesses are moving from asset-owners to asset-renters

3. The Knowledge Worker

3.1 From hands to minds: routine, manual work is disappearing due to automation, while information-intensive work is increasing:

  • Telephone operators decreased from 244,000 in1983 to 165,000 in 1994.
  • Bank tellers and secretaries are disappearing.
  • Jobs working with things or low-skill jobs dropped from 83% of the labor force in 1900 to 41 percent in 2000, while knowledge jobs increased from 17% to 59%, according to Stanford Prof. Stephen Barley.
  • In 1972 two-thirds of Corning employees used chiefly their hands and worked on things, today two-thirds chiefly use their minds and work with concepts, data and information.

3.2 Knowledge workers are commanding greater pay.

3.3 Changes in management

  • From Taylorism (command-and-control, narrow and precise job descriptions, emphasis on efficiency and output, assembly line, standard parts, mass production, adversarial labor-management relations) to autonomous, empowered knowledge workers.
  • More humane: from forcing workers to fit the machinery, to adapting the machine to the knowledge worker.

Illustrative case: GE factory in Bayamon, Puerto Rico

  • Flat organization: only 3 layers in the bureaucracy, no middle level supervisors, no staff, less managers 
  • A learning organization: workers discuss and decide on productivity improvement measures; they rotate jobs to learn different phases of production and how they can be better coordinated, reward system is based on learning rather than on seniority