A company’s competitive advantage increasingly derives from `knowledge stock’ – which relates to the know-how of the firm, and which resides in the heads of its employees and managers. It also resides in patents, copyright, design and the systems of the firm. And it resides in franchises that a firm builds up, such as Vodafone.
The establishment of this value does not derive from capital investment. It derives from research and development, such as that carried out by Glaxo, Microsoft, or Symbian. It derives from the know-how of the firm’s genes,as seen with a firm such as Goldman Sachs. It derives from losses as a firm establishes a franchise such as those established by Vodafone, BSkyB or cable companies. Today, value derives from intellectual ownership or knowledge assets.
In Britain we have not understood this and are failing to invest in those intellectual assets. Why?
The challenge for Britain is to participate in this third economic revolution. We led the agrarian and industrial revolutions, but we are following rather than leading this third, knowledge-based revolution. We have not yet grasped the significance, the scale and the import of the revolution which is under way. We cannot name one Microsoft, one Intel or one Amgen yet in Britain.
In France and Germany, there is much endeavour focused at fruitless protectionism rather than embracing change as the core process. I have often felt in Europe that I am walking backwards into the future.
Over recent years, I have spent much time in Tokyo, Taipei, Boston, San Francisco or Palo Alto. What does Europe feel like from those countries? Like the Greeks to Rome in 50 BC. And how is Britain seen from Palo Alto? Boring and quaint.
That’s the conservatism of Europe, as seen by these more dynamic economies. To demonstrate, here is some of the language used by the new, knowledge-based companies in America: `Product space; crossing the chasm; geek; displacing the old paradigm; virtual operation; mice in free space.’
Weird, but don’t sneer. The significance of this `geek-speek’, of this new language, is that it is created to describe a new order and new ideas. It shows the fertility of that environment. In contrast, listen in Europe, and you hear a vernacular of `market share, conglomeration, the merging of tired old brands in a declining spirits trade’; of `services and monopolisations’. This is the language of yesterday. We need to change the language of how business, policy-makers and government talk about the economy.
Big business and the City are dominated by accountants and the ethic of risk management. We are still in the post-Hanson era of cutting, merging, downsizing; cost removal and R&D removal.
The story of GEC over the past 25 years is a testament to control and risk management and a damning indictment of the failure to grasp opportunity. And today, we have this extraordinary volte-face, where the defence business is demerged and the cash mountain is used to pay enormous sums for rather small data-communications and network companies. Far better for GEC to have created them.
And Hanson destroyed Eveready, the world leader in batteries, by using it as a cash cow by cutting marketing, removing R&D and generating great profits in the short term. The City cheered, but the battery market was a great growth and development opportunity and it is now owned by Duracell and others.
Big business in Britain has cut R&D spending to 1.9% of GDP so that we are now at the bottom of the international R&D scoreboard. We have eschewed the concept of business creation; or, as with GEC, the idea of organic development. Many of the boardrooms of big business have followed policies of destroying rather than creating knowledge-based assets. This must change.
David Potter is chairman of Psion. This is an excerpt from a lecture delivered at 10 Downing Street on 27 May. The full text can be found at: www.number-10.gov.uk at the news centre, under `Features’.