The world is being redesigned. Information and communication technologies are changing the structure and composition of global commerce and industry. This is a new economy anchored on the powers of microprocessors.
Today, the classical economics theories of factors of production and comparative advantages of nations are still relevant. However, a new concept has evolved to diminish their impacts in international market.
As we globalize and Internet penetrates across the world, factors of production can be fused with ease using technology in what I will call ‘knowledge cluster’. That has been the business philosophy of outsourcing. You can buy any knowledge irrespective of distance and integrate it locally in your process.
Likewise, the sources of fund have become global and local capital is not that very important. So, local unavailability of capital may not be a limitation to a bright business idea.
If you are looking for labor, you can easily access a pool anywhere on earth through the internet. Land has since diminished to be a major factor in location and localization of firms since many firms are knowledge firms and do not need land to exist.
Salesforce displaced GM in the Dow Jones Industrial Average. Google has since disrupted old established industries, primarily by competing with Algorithms, Knowledge, and Information (AKI). It matters not they may not have large land mass. With AKI, they can win any battle because that is what matters.
Algorithm provides the intellectual base to compete. Information helps firms to stay focused on what customers want, especially in web based firms. The algorithms provide the means to process the information. When the information is available, knowledge is built to develop strategies in the market place.
Today, we have grid computing and cloud businesses and progressively transitioning to physical asset-less enterprises. Certainly, we will still have businesses that support the computer powers that power firms, but it is possible that major firms can exist virtually in this age.
This observation advances the notion made in old classical economics theories. For the fact that the world is more accessible, the notion of comparative advantage while important is not potent as it used to be. In the old days when some of the theories were formulated, manufacturing dominated with minimal service industry.
Instead of obsession on comparative advantage, firms must focus on core competence. The latter is internal while the former in most cases is external. You do not have to focus on making chocolate because your country produces cocoa, but you must develop a better production system that makes your chocolate production lean and nimble to be competitive, irrespective of your location.
In all these dynamics, what is changing the concepts is knowledge as a factor of production. Knowledge redesigns the mix and opens up new issues in business strategy and marketing.
Without being a knowledge economy, Angola cannot focus on developing oil drilling technologies despite the need for it. Whereas Japan could develop the technologies and sell to them, though, it has minimal local needs for those technologies. As Japan modernizes its technologies, it understands that its competition is not coming from Angola, but say Germany.
So, it is important to understand that some of the theories developed in the agrarian and industrial age are not relevant today. The textbooks must be modernized and students must be brought up to date accordingly.
Competition today has assumed more amorphous forms owing to the drastic impacts of technology in shaping the tastes of consumers. And one thing that is central to this taste is information.
This information changes everything. Unlike the saying: ‘you cannot eat your cake and have it’; I know that information is non-rival. In other words, the consumption of information does not exclude another person from consuming it. That you read a story online does not prevent another person from reading it.
This concept is a key fundamental change to the old marketing and sales strategies. When you sell your cocoa to one customer, it prevents you from selling the same cocoa to another customer. But in this area, that whole concept has since been diminished.
A newspaper can make its online content free and anyone can read it. While not selling it directly, someone reading that article brings revenue through a third party arrangement based on how many people visit that site. The focus is to get more people to consume more information on the site because it creates value for them.
But there is another caveat to this: why information is non-rival, it has time content. That is why information is physical since it costs something to produce it. In other words, information is not free and it has an element of time. Think about it: does it matter today if a newspaper has a heading that says: Obama wins the Presidency.
Sure, that information is not useful because it is not timely. This becomes more interesting when you trade on stocks. A piece of information can make someone rich (say, insider trading) and that is why SEC will pursue people that partake in insider trading because the value of that information becomes so useful than when it is in public domain. The difference between the same information is time. When everyone has the information, it becomes less valuable. This clearly shows the physical nature of information as it can lose value with time.
As technologies transform the global economy, knowledge will become so important. After all, this is a knowledge century. The transformative value of commercial assets which for some firms is information will continue to change marketing and competitive strategies. Understanding these changes will make a firm adapt, evolve and survive this innovation economy.