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Knowledge Profiteering

Knowledge Profiteering

Think knowledge management is a fad? Savvy entrepreneurs of this century and last have proved its value time and again Management guru Peter Drucker predicted the future importance of the knowledge worker more than 30 years ago, but the knowledge profiteer (KP) has been around for generations. Instead of just dealing with information, KPs make deals using information. Consider the likes of 19th century financier Nathan Rothschild and inventors Cyrus McCormick and George Westinghouse, as well as their contemporary KP counterparts Microsoft's Bill Gates and information magnate Michael Bloomberg. All have made fortunes using knowledge. Although these successful entrepreneurs shared several traits -- a bottom-line focus, the ability to see the world in concrete terms and the drive to dominate a market -- they achieved their knowledge-derived wealth through different means.

Rothschild used knowledge as intelligence. McCormick and Westinghouse plied it to persuade. Gates developed tools for managing knowledge. And Bloomberg created a successful knowledge product. Executives who view knowledge management as a grand abstraction can learn how to capitalise on their knowledge by studying these proven methods of knowledge profiteering.

First, Intelligence

In 1815, the Battle of Waterloo launched one of the greatest profiteering gambits in history. As legend has it, Nathan Rothschild planted contacts equipped with carrier pigeons across Europe, hoping to hear the outcome of the battle before any of his merchant banking competitors in London. Knowing that he received the first word on Wellington's victory, Rothschild proceeded to dump all of his British-backed government securities on the market, making it appear as if Britain had lost. Not wanting to get caught short, all of his competitors likewise unloaded their securities. As soon as Rothschild saw the market bottom out, he bought back every piece of paper at fire sale prices and made a killing. What made Rothschild tick? How did this legendary KP consistently win in market after market? He saw pure knowledge as intelligence, a profit lever that he could use to control a market. The brilliance behind Rothschild's approach was that he could never be sure where the winning piece of information would come from, so he needed a lot of it. He had to sift through piles of data before he would commit his fortunes to so large a bet.

Can executives learn from Rothschild in today's market? Alex Mandl would say so. Mandl, formerly the executive thought most likely to succeed Robert Allen as AT&T's CEO, left that organisation to become an entrepreneur and launched a much smaller telecom company, Teligent, in Vienna, Virginia. In an interview in USA Today, Mandl noted that "It's very refreshing to have information coming to you in a raw, unmitigated way. In a very large company, information tends to get filtered and massaged." Of course, as any executive with an overflowing in box can attest, there's a flip side to stockpiling information. In order to turn a data stream into profitable knowledge, KPs need to remain focused on the right details. Warren Buffett is a leading example. Called the greatest investor of all time by many, Buffett first targets industries he understands.

Aside from looking for effective management, he seeks certain characteristics, including strong cash flow, low capital requirements and the ability to control prices in the market. Although there may be oceans of other information flooding the market about these target companies, Buffett analyses only the most important pieces; then he places his often successful bets.

Not all KPs are household names. A pharmaceutical company learned that its rival was threatening to roll out a "me-too" product. If the senior product manager had listened only to news reports and industry rumours about the competitive threat, he would have prematurely launched a marketing campaign, leaving nothing in the company's war chest should the rival's product hit the market at a much later date. My company worked with him to reality-test the rumours.

Because the rival needed to stockpile a certain number of pills to achieve the predicted national rollout, we focused on two pieces of intelligence: the plant's employment levels and the import of raw materials used to make the finished pills. By analysing this data, we disproved the rumours. As a result, our client held its advertising and promotional dollars in reserve until the competitor's actual rollout, when it deluged the market with promotional price cuts and special offers. This KP not only held the rival at bay but severely impaired the competitor's potential growth.

The Persuaders

Long before Vance Packard described the power of advertising to America in the late 1950s in his best-seller The Hidden Persuaders, there were other KPs who used particular pieces of knowledge to convince a market to buy a certain product or service. In 1851, Cyrus McCormick decided to take his new reaping machine out of the Crystal Palace exhibition to a farm in Essex, England.

According to reports, he harvested 74 yards in just 70 seconds, many times faster than any other means available to 19th century farmers. McCormick invented the reaper, but his demonstration of its value as a profit engine sold it to the world. As the London Times observed, "The reaping machine has carried conviction to the heart of the British agriculturist." At the dawn of the age of electricity, George Westinghouse, the air brake inventor, promoted alternating current because it could carry power at distances far greater than direct current. Thomas Edison, inventor of the light bulb, generator and electrical generation station, advocated direct current. Westinghouse knew that the success of such a project had to factor in distance if large populations were to be served efficiently.

This "War of the Currents," as the newspapers labelled the dispute, ran for nearly a decade. Edison attacked Westinghouse's alternating current as unsafe and even deadly. "A purveyor of death," he called it, because of its use in electrocutions. But Westinghouse had economics on his side; by touting the superior efficiency of AC, Westinghouse convinced appliance manufacturers and electrical infrastructure suppliers-and ultimately consumers-that it would be cheaper to use his method. By 1900, the "war" was over with most electrical equipment producers making equipment using alternating current.

The Battle over Knowledge Tools

In the same way that Westinghouse used knowledge to convince a market, Microsoft, Sun Microsystems and Apple have battled over which company can produce the best knowledge tool. This time the tool itself is the conveyer of knowledge. Whoever wins this battle is likely to win the knowledge war. Bill Gates understands that, as does the Justice Department. To see how important the knowledge tool is to Gates, just look at what he did a few years ago. In 1994, Netscape surprised Microsoft when it entered the market and turned the information business on its ear. Gates quickly realised that should he lose the inevitable browser battle, he might as well pack it in. If Netscape became the conveyer for information, it might well depose Windows (just as Windows effectively vanquished Apple's operating system only a few years ago). Within four months of Netscape's IPO, Microsoft announced that it had totally reorganised its portfolio to meet or beat Netscape in nearly every part of its business.

Microsoft understands that in order to build a knowledge-based empire, it first needs to have the tools in place. Own the platform and you can also own or control much of the content. Offering knowledge products is the next step for Microsoft, which has already begun the foray with the introduction of its CarPoint Web site (www.carpoint.msn.com), an online automobile sales database that Forrester Research predicts will earn $100 million by 2001. Microsoft's education and games business was expected to earn $US300 million in 1998, according to BusinessWeek.

Knowledge as Product

No individual has succeeded at knowledge profiteering in the knowledge-as-product realm more than Michael Bloomberg. He recognised that the financial industry was mired in information overload and created a valuable knowledge product, the Bloomberg terminal, to deliver investment insights in an easy-to-use package. "Our product would be the first in the investment business where normal people without specialised training could sit down, hit a key and get an answer to financial questions, some of which they didn't even know they should ask," Bloomberg wrote in his 1997 biography. "To this day, we still don't have a competitor." Although his statement may seem self-serving, it's essentially accurate. In the mid-1980s, Bloomberg foresaw the need for real-time trading information that was easy to manipulate. Although several Web sites, database vendors and brokerage houses have begun to offer similar products, none yet offer the same power and added value. Consider Bloomberg's price position and how his knowledge product continues to succeed where others have failed. Not even 10 years ago, an information broker would have charged over $50 to retrieve a Securities and Exchange Commission 10-K (annual) report.

Today, anyone who is even moderately computer literate can locate and download the same document via the Internet for free. Quite a difference. While Bloomberg charges a premium to deliver similar raw data, his product also allows the user to massage the data in many creative-and profitable-ways. (For example, users can create charts and graphs to show changes in a stock's position.) This "massageability" translates into real value for the Bloomberg user, a value worth a high price.

Profiteering Lessons

Rothschild, McCormick, Westinghouse, Gates and Bloomberg represent a class of entrepreneurs who saw knowledge as a means to accumulate wealth. They translated this somewhat vague concept of knowledge into specific, operational terms. Knowledge as investment news. Knowledge to persuade investors. Knowledge to lock up a market. In the age of celebrity entrepreneurs, can corporations learn lessons from these knowledge profiteers? Some already have. For example, American Airlines pioneered the use of a corporate database as both a knowledge product and a knowledge tool. By creating the Sabre System, it turned its reservation system into an industry knowledge standard that nearly all travel agents had to use. US Robotics, maker of the fast-selling PalmPilot, has produced the first popular personal digital assistant and has hundreds of software developers creating products compatible with its knowledge tool. Dow Jones, not resting on its laurels as publisher of The Wall Street Journal, began aggressively enhancing its online news service over a decade ago, making it one of the most popular in the business. While scores of other news services exist, Dow Jones remains on top because few match its timeliness and global coverage.

Still, most corporations have not learned the knowledge profiteering lessons well enough, often failing to adopt the single-mindedness and tenacity demonstrated by KPs over the centuries. The successful KP sees beyond the gimmickry, bells and whistles that attract us to the latest software or networking packages. While all this technology is wondrous and ever more powerful, technology in and of itself does not generate profit unless it becomes an indispensable tool for managing knowledge. Knowledge profiteers clearly understand that technology that does not help them create a knowledge tool to win a market is a waste of time. Years from now, when our great-grandchildren benefit from technologies not yet conceived, knowledge profiteers will still thrive. And they'll do it by taking on the knowledge world on the same terms -- their own.

The Secrets of Knowledge Profiteers

Four methods of applying knowledge for financial gain 1. Apply knowledge as intelligence. Use market knowledge, or intelligence, to take advantage of business opportunities. Like this morning's stock quotes, these competitive insights have a short shelf life. Act quickly on market knowledge to beat the competition.

2. Use knowledge to persuade. Publicise powerful pieces of information to create demand.

3. Control the knowledge platform. Create the knowledge real estate everybody must use. For example, operating systems do not create information; they store and share information. But by owning the operating system you can become a very powerful and wealthy landlord. Just ask Bill Gates.

4. Sell knowledge as a product. Although knowledge products have existed for centuries in the form of encyclopedias and other reference sources, twentieth-century KPs can create technology products that standardise whole bodies of knowledge. KPs who offer their products on the Web can instantly hook large populations of customers.

Leonard M Fuld is president of Fuld & Co, a competitive intelligence research and analysis firm in Cambridge, Massachusetts

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More about American AirlinesAT&TBloombergCarpointDow JonesForrester ResearchMicrosoftMSNSabre CorpSecurities and Exchange CommissionSun MicrosystemsTeligentUS RoboticsWall Street

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