This is a much-used phrase in modern management/economic terminology. But what does it mean? To most I suspect the initial thought is; IT, information technology. Then they think of the digital economy, computers, The Internet and ever more rapid access to information. It is conceived as being about processing information. With such a perspective they will fail to perceive the real implications of the knowledge economy. If it is only considered to be about IT, it is inevitably seen as an infrastructure issue supporting the existing organisation. But in reality the message from the knowledge economy is about structuring for a different future: A future where the organisational structures of the past cannot survive.

Let me illustrate what I mean.

I worked for a company that manufactured "fine chemicals". I was often asked if we could give visitors a tour of our facility. But what was there to show? Smart laboratories with scientists handling tiny amounts of chemicals. Computers and much complicated equipment were everywhere. But visitors want to see action. A factory is where things are made, things move and action is the visible sign of productivity. Time and motion are the measure. In the £150M of products produced at this particular site there was none of this action to demonstrate. The activities which visitors hoped to see matched their concept of industry. They were features of the industrial society but they were not appropriate measures of the emerging knowledge economy.

Here was a typical product that we manufactured. A little brown glass vial. It contained a small amount of a white chemical. The vial cost 1p. The powder cost 20p. The two together sold for £750! What was the £749.79 for? That was for the knowledge that was also in the bottle. The intangible asset the bottle contained resulted from the intellectual capital of the company. This was a knowledge intensive company operating in the knowledge economy and the product was the way we delivered knowledge to the market.

Perhaps you might think the example to be overstated or exaggerated. Well let us look at it from a completely different perspective. That company's net assets were about £900M. Its market capitalisation was about £2B. The stock market valued the company at 2 times its net assets. They valued its intangibles more than the physical assets. But what were these intangibles? They were the company's intellectual capital, based on people, knowledge, systems and organisational intelligence. These were not features crafted from superior management practices, but simply the essential ingredients for successful competition in the knowledge economy. To be honest the management of the company was no more aware of the concept of intellectual capital than the average. The market the company operated in dictated the processes for business growth and survival. Management responded.

Another feature of the knowledge economy is what Brian Arthur calls increasing returns. The more you know the more there is to find out. For companies operating in traditional industrial sectors, consuming material resources and competing for market share, the more they do the less there is to still to gain. As finite resources are consumed expansion must slow. As market share becomes dominant the incremental cost of gaining still more makes it uneconomic. They suffer from diminishing returns. As mentioned already this does not apply to the knowledge economy where opportunity expands even faster than the knowledge itself. I will illustrate the significance of this by way of some examples in drug therapy.