[MUSIC] In this segment, we're going to talk about how the business world is changing. And that's a, kind of a favorite topic for, for anybody in the world of, of academia, in the world of consulting, in the world of business to the think about. I'm going to give you a particular point of view on, on this issue. It may not be a point of view which is 100% defensible, but I prefer to deliberately kind of put a stake in the ground here and say here is an interesting angle. Rather than just simply starting with the obvious point. So let, take a look at this this chart which shows the Exponential growth in something. and, you know, we could play a game kind of guessing what this is a measure of. It turns out it's a measure of the build up in credit default swaps in the period leading up to the financial crisis. Now you may not know what a credit default swap is, it turns out most of the banking world didn't know what a credit default swap was either, and that was part of the problem. They were financial instruments, clever financial instruments. Which ended up creating many of the problems which led to the collapse of the financial market in 2008. And the, the point that I'm trying to make is that the banks were, were, were doing their best, they were dealing in a kind of a, in a traditional risk management way with stuff that they did not understand that they could not control. And while these credit default swaps were growing in exponential volume, the banks were using their very traditional ways to try to keep track of this. And not surprisingly that led to trouble. And indeed it, it's not just credit default swaps, there's any number of things from numbers of gene sequence to microprocessor speed, which are changing in exponential ways. And of course are fundamentally upsetting the way that business is done. And, and there is a kind of a, an underlying theory here, the theory of accelerating returns, if you like, which says that everything happening in the business world is just happening faster than it used to. And of course that is useful at one level, but it's also a bit worrying because ultimately accelerating returns can't go on forever because at some point exponential growth becomes vertical. And it also isn't very useful. Because there are many things in the business world which are not changing. There's stuff which is changing very rapidly. There's other stuff which is not changing. So, I don't dispute, for a second, that all this stuff is happening. We need to figure out ways of changing more rapidly, as the business world changes. As technologies change the way that we, we have to work. But I also want to make a slightly different point, which is that we can be a bit more thoughtful about the particular ways that the business world is evolving. And to do that, we actually have to take a brief look into the past. Take a look at this chart, which simply shows two eras, the Industrial Era and the Knowledge Era. Now we know from the way that we've read, read and written the books, the, the industrial era started roughly speaking at the end of the 19th century, and it went on until roughly the 1960s, 1970s. That period, of course, is the period in which knowledge work started to really accelerate. And Peter Drucker, the famous management guru, was the first person to coin the term knowledge worker. And, he basically identified this as a trend in the 1970s, and it's been growing ever since. So, increasingly, today everybody would agree that we are in the Knowledge Era, sometimes called the Information Era, but let's call it the Knowledge Era for our purposes. What is the knowledge era? It's an era in which essentially knowledge and information are the resources on which competitiveness is created. Now, take a look at that chart, showing the Industrial Era giving way to the Knowledge Era. And we can see sort of that infection point, roughly speaking in the 60s and 70s. And what is useful to say is, what happened in that period, whereby the Industrial Era gave way to the Knowledge Era? And my answer to that question is the following. Let's take the scarce resources of the industrial era, and let's look at what those were. Well, if you've ever studied economics, you'll know that the basic kind of economic factors of production are labor and capital. Economic theory has been built on the idea that what companies do is they take labor and they take capital and they transform it into outputs that people want to spend money on. So the scarce resources of the industrial era were labor and capital. And it was companies in that era were incredibly successful. Because they were able to essentially you know, make use of those resources in effective ways to create outputs which were, which people wanted to buy. Now, in the transition from the industrial era to the knowledge era, both of those scarce resources arguably became less scarce. Okay? So what you have to say to yourself is, what happened to the world as labor and capital became actually kind of more commoditized. And what were the scarce resources that were required to be successful in that world where labor and capital were, were less important. Now let me be clear that I don't mean for a second that labor and capital became unimportant, I just mean that competitive advantage for companies was no longer attributable to managing those things well, they became a necessary rather than sufficient condition of success. And the argument goes as follows, you take, first of all you take capital. What does a world look like in which companies are so obsessed with squeezing every last return on their invested capital out of a company. What are the things that they miss? And it turns out there's actually a very clear cut answer. The, the car industry in that era was the biggest industry by a long way. Far and away the biggest single industry, roughly a sixth of all jobs in the industrial world were actually related to the car industry, back in the 70s. You take the car industry. You look at what happened there with the Toyotas and the Hondas, essentially taking leadership away from the traditional General Motors, Fords, Volkswagens, and Mercedes. And what happened in that era, was that the Fords and the General Motors of this world. They became so obsessed with the return on invested capital that they became squeezed, they became very, very short-term in their thinking. And as a result, they lost sight of the bigger picture, they lost sight of the issues around what their customers actually wanted to buy. They lost sight, if you like, of issues around quality. And in a world where you focus too much on return on invested capital making money. You miss the information that enables you to make the right decisions. So the first part of the argument, is that, essentially, the transition to the knowledge era, was a transition whereby invest capital became less critical. Capital still matters, but less critical. And information became the scarce resource on which far sighted companies actually succeeded. Toyota became incredibly good at figuring out how to use information to make their products high quality and more customer friendly.
