Disruption in Knowledge Businesses

You may have noticed that record labels, newspapers and book publishers have been going through a bit of turmoil recently.

The common thread among them is that they are information-based industries – and by extension, they are knowledge-based industries.  The dilemma facing such industries is that information distribution costs are falling to $0, which blows away many of the protective barriers in these industries.

And it’s not just music, news and books.  Greg Satell outlines how similar issues are affecting marketing.  And last week I gave a keynote address at the ALIAOnline Conference (check out the other speakers!) where I discussed the impact of cheap distribution on the business models of higher education and libraries.

Part of that talk included this:

AASCU Talk – Tim Kastelle from Tim Kastelle on Vimeo.

But What is a Knowledge Business?

All in all, you can see why it’s an interesting time to be in the knowledge business.  It’s much safer to be in an industry based on physical stuff, right?

I’m not so sure.

A couple of weeks ago I brought in the car that Nancy got last year for its first service.  It was a demo model so we ended up with a few extra features that we normally wouldn’t have bought, including Audi’s GPS system.

One of the things that we noticed almost immediately was that the maps in the GPS were at least two years out of date.  The Go Between Bridge was completed a couple of years before our car was built, but it still doesn’t show up on the map – which leads to some comical views:

That’s a shot Nancy took from passenger seat while I drove us across the bridge.  The car thought we were swimming.

My (perhaps naive) idea was that GPS software would just get updated when I brought the car in for service.  That’s how knowledge industries work, right?

Nope.  Audi wants to charge $508 for a software update.  And with the rate of new road construction around here these days, that will need to be an annual charge if we want to keep our route planning up-to-date.

Compare that to what I can get on my phone, for free.  This is Google Maps showing a tunnel that was opened less than three months before I took this shot:

Take a look at all those connecting roads – you can see why it’s pretty useful to have this included on the map!

Audi apparently doesn’t realise that they’re in the knowledge business now too.  And you might think that this only applies to overpriced features that don’t make much sense to buy in the first place.  But what happens to their exorbitant parts prices once 3D printing is widespread and easy?

Then they’ll start gaining some insight into what’s going in the other knowledge businesses right now.

We’re All in the Knowledge Business Now

In many of his talks on innovation Keith Smith opens with a picture of the control for a space shuttle launch, followed by a shot of the control room for a modern mine.  You can’t tell the difference between the two. Keith’s point is that even industries that are thought of as having a pretty low level of knowledge content are increasingly knowledge-intensive.

So dealing with the issues facing music, education, news etc. will become important for nearly everyone.  Most will go through the four stages of dealing with disruptive innovation: ridicule, aggression, bargaining, and getting smashed like a bug.

How can we avoid that last step?  There are a few important keys:

• Build skills in business model innovation.  Moving into the knowledge business requires new business models.  Your value proposition changes, which means that most of the rest of the business model will need to change as well.  We know from the example of the record industry that putting up barriers to new models and hoping that your competitive advantage will persist is delusional thinking.  Better to build the business model innovation skills that you will need to adapt.
• Create value propositions based on aggregating, filtering and connecting.  To innovate your business model, you must be clear about where you adding value.  Three things create value from knowledge – aggregating it into one source, filtering so that people find the knowledge most useful to them, and connecting by developing novel connections between ideas, and connecting ideas to people to help them spread.
• Co-create value with customers.  The extractive models used by most automotive companies don’t work very well in knowledge-based industries. Rita McGrath addresses this well in a great post on business models in music:
  

  Perhaps the most significant uber-trend for music, as well as for many other industries, is that consumers are looking for complete and rewarding experiences, not just to buy a product. That live show that is surrounded by community-creating social media and personal connections afterward; that helps people feel part of a ‘tribe’ and that gives them a lift in everyday life is what will increasingly determine who is going to get those new revenue streams; and who is going to be sitting there mourning the demise of the way it used to be.

• Start relaxing your hierarchy. As you co-create value with customers, and start collaborating more widely, it becomes difficult (impossible?) to continue to manage the same old way. Jon Husband consistently writes well on this topic – advocating a shift from hierarchy to wirearchy – a more networked structure. Here is what he said in a post today:
  

  We need to revisit the fundamental principles of work design AND the basic rules used to configure hierarchical organizations in which the primary assumption is that knowledge is put to use in a vertical chain of decision-making.

  I am not arguing that we need to replace hierarchy holus-bolus. Rather, I am suggesting that the capabilities of information systems combined with social computing capabilities and two decades of experience with team development and organizational development processes can permit centralization (read hierarchy) where and when necessary, and networked configurations where and when necessary … both centralization and decentralization.

  He also points out that building a tolerance of uncertainty and ambiguity is essential.

I spent last week working with a corporate client dealing with this exact problem.  We mapped out their current business model and their target model, then talked about how they’re planning to make that transition.  It is not easy.  I hope they make it though – they are in an old industry – one that’s been bricks and mortar for millennia.

If they are realising that they are actually a knowledge business, it won’t be long before we all realise it.