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THE KNOWLEDGE SUPPLY MODEL:  A FRAMEWORK FOR DEVELOPING EDUCATION AND TRAINING IN THE NEW ECONOMY.

(Burton-Jones,A.(2001) The Knowledge Supply Model: A Framework for developing Education and Training in the New Economy', Education and Training,43:4/5, 225-232).

Abstract

The increasing economic importance of knowledge is redefining firm-market boundaries, work arrangements and the links between education work and learning.  This article proposes a new framework: the Knowledge Supply Model, which helps individuals, firms and learning institutions understand the dynamics of change and emerging patterns of knowledge demand and supply in different sectors of the economy.  It also assists learning institutions to tailor their products and services to the needs of knowledge consumers.

Introduction

‘Knowledge itself is Power’ said Francis Bacon, and how right he was.  Since the first of our ancestors discovered how to turn a stone into a tool, the human race has been shifting from reliance on muscle power to mental power.  In the early 1970’s the economist Daniel Bell forecast a post-industrial age in which knowledge would become the basis of economic growth and productivity, and jobs growth would occur mainly in white collar and professional occupations [1] .  Events have proved him right.  Across the western world, employment in blue-collar jobs has suffered as white-collar jobs have boomed.  US college graduates reportedly earn nearly three times the annual salaries of their compatriots with lower secondary qualifications [2] .  Meantime stock markets are recording ever higher values for firms with strong intellectual as distinct from physical assets.  By the mid 1990’s for example, Microsoft already had a market capitalisation three times that of General Motors, while its physical assets were a mere 5 percent of the industrial giant’s.  As Peter Drucker summed it up, knowledge has become the only factor of production that matters.  We are moving into an era of ‘knowledge capitalism’. 

In the new knowledge-based economy, individuals and firms must focus on maintaining and enhancing their biggest asset: their knowledge capital.  While it is clear that the demand for education and training will increase, it is not clear how the new economy will change how individuals and firms should best attain their educational objectives and how learning institutions can best satisfy the demand for knowledge. 

To understand the implications of knowledge-driven change on the nature of education and training, we need to have an understanding of the economy from a knowledge perspective. This paper describes a new conceptual framework: the Knowledge Supply Model, that helps individuals, firms, and learning institutions understand the different demands for knowledge in different sectors of the new economy [3] .  It also helps identify opportunities for learning institutions to better tailor their products and services to the changing needs of the knowledge consumer. 

The Knowledge Supply Model

The Knowledge Supply Model identifies four factors as critical in shaping firms’ choice of internal or external sources of knowledge supply, and suppliers’ fit with particular groups or markets:

1.      Knowledge Characteristics: the inherent characteristics of the knowledge required, such as tacitness/explicitness, complexity, structure, and scope.

2.      Firm Specificity of Knowledge: the extent to which the required knowledge is specific to functions or processes that are unique or restricted to a few firms.

3.      Value of Knowledge: the importance of the required knowledge to the firm’s strategy and/or operations.

4.      Level of Suppliers’ Knowledge: suppliers’ ability to provide the required amount/depth of knowledge. 

The model provides a typology of knowledge suppliers in the economy and shows how they are distributed in the firm and in the market.  The model divides knowledge suppliers into seven generic groups, each group representing a different source of supply, or ‘knowledge market.’  Three groups of knowledge suppliers are internal to the firm and four are external to the firm. 

Internalised Suppliers

The Core group comprises firms’ most knowledgeable workers, responsible for high-level knowledge integration and for the overall direction and coordination of firms’ activities.  Such functions necessitate high levels of generic, specialised knowledge as well as extensive firm specific knowledge of a strategic nature.  The Core group’s knowledge is highly valuable in terms of its power to influence firms’ activities.  To provide a practical example, the Core group in a law firm would be the partners of the firm.

The Associate group provides knowledge required for controlling the key operational functions of the firm such as marketing, finance, production, and R&D.  Such functions require considerable generic, specialised knowledge but this knowledge is typically more narrowly based than that of the Core group.  The Associates’ firm specific knowledge also tends to be restricted to their areas of functional specialisation.  An important characteristic of the Associate group is that the firm normally admits only a small number of them into the core of the firm.  There is therefore often a healthy degree of competition between the Associates.  Again, taking the law firm as an example, the Associates would be the range of legal staff occupying positions from first year lawyers beginning their bar exams, to senior legal staff members vying for partnership positions. 

The main role of the Peripheral group is to manage the interface to external suppliers and customers, and to support internal functions where the level of firm specific knowledge required prevents them being externalised.  Such functions typically require much firm specific and tacit knowledge of the firm’s day-to-day operations but comparatively low levels of specialised knowledge.  In the law firm example, the Peripheral group would include legal secretaries, filing staff, librarians, caterers, security, IT support staff, and a host of other staff necessary for keeping the business running, but whose knowledge is not core to the business. 

Externalised Suppliers.

Flexihire workers mainly supplement workers employed in the firm’s internal Peripheral group.  Flexihire workers typically support maintenance, administration, and similar functions requiring moderate to high levels of firm specific knowledge, but low levels of specialist knowledge.  The value of their knowledge to the firm is generally low.  Flexihire covers part-time, casual and temporary workers involved in direct employment relationships with firms.  Such workers are typically dependent on one, or a few, firms for income.  Firms on the other hand usually have a large pool of such workers to call upon. Extending the law firm example, Flexihire workers may include legal librarians or filing staff whose knowledge is specific to that firm (or at least the legal sector) but the firm has put on to temporary employment because they no longer require their duties full time.   

Mediated Services supplement workers in both the Peripheral and Flexihire groups and provide similar support functions.  A distinguishing characteristic of Mediated services is that workers’ services are delivered to the firm through an independent intermediary agency.  Mediated service suppliers include staffing service agencies as well as providers of full outsourcing services.  Functions handled by staffing services are typically those that require knowledge that is explicit, non firm-specific, and based on knowledge of standardised products or services, such as popular accounting software.  As a result, the firm usually does not need access to the same individual worker on each hiring occasion.  In the context of our law firm, mediated service suppliers could include temping agencies from which the firm hires its secretaries.  It could also include IT outsourcing providers if it decides to outsource its IT function. 

Dependent contractors typically handle functions requiring significant levels of tacit, explicit and firm specific knowledge that the firm would normally internalise but which, for strategic reasons, it decides to source from outside its borders.  Dependent contractors tend to exhibit high levels of skill and the value of their knowledge to the firm is similarly high.  In comparative terms the levels of knowledge possessed by this group tend to be higher than Flexihire workers but less than Independent contractors.  Dependent contractors are characterised by their dependence on a relationship with one or a few firms for income.  Members of this group include individual contractors, franchisees and preferred suppliers.  In the legal industry, Dependent contractors include highly qualified scientists who mainly work for one or a few law firms to assist them with examining evidence, but whose expertise is so great that they can operate from their own consultancy practices.  Specialist copy-editors often have a similar relationship, contracting with one or a few book publishers.

Independent Contractors provide expert support to key functions of the firm and other professional services that require high levels of specialised knowledge, but low levels of firm specific knowledge.  Independent contractors are highly skilled and their knowledge is similarly highly valued by firms.  They are characterised by their lack of reliance on any particular firm for their major source of income.  Members of this group include sole contractors, and networks comprising a mixture of individual contractors and micro firms.  Independent contractors for example include expert IT consultants whose knowledge is not specific to the legal industry, but whose specialist IT knowledge makes them attractive to legal firms, as well as other firms across a range of industries.

Alliances between firms are increasingly used to facilitate acquisition of, or access to complementary knowledge resources.  The contractual basis of collaboration ranges from formal joint ventures where knowledge supply is effectively internalised, to preferred supplier and project-based alliances where knowledge is supplied through dependent or independent forms of external contracting.

Anticipating Future Change

In addition to providing a typology of knowledge supply, the Knowledge Supply Model also helps us predict the direction of change in the new economy.  Knowledge-based theory of the firm predicts that highly tacit and firm specific knowledge will remain in the firm [4] .  Specific knowledge in the periphery of the firm however is progressively being reduced by increases in automation through information technology [5] .  Many new enterprise wide systems such as SAP R/3 for instance, force organisations to adopt standard “best-practice” processes.  While specificity of knowledge will decline in overall terms due to the adoption of IT, firms’ dependency on the tacit and specific knowledge of its Core group is expected to increase, as this will be the basis of firms’ differentiation from their competitors. 

The predicted direction of change within the firm therefore, is one of progressive distillation of knowledge resources, characterised by erosion of the Peripheral group, renewal of the Associate group, and expansion of the Core group.  The more knowledge intensive a firm’s activities, the higher will be the percentage of workers in the Associate and Core groups.  It is notable that highly knowledge intensive organisations, such as IT and biotechnology firms and professional services firms tend to have a higher proportion of workers in the Associate and Core groups than firms of a similar size in older, physical resource dependent industries. 

Changes can also be predicted in the knowledge groups beyond the borders of the firm.  Flexihire arrangements can be expected to continue growing in the short-term, as firms continue to shed full-time employees from the Peripheral group.  As the size of the Flexihire workforce increases however, and firms’ Peripheral functions become increasingly standardised, Mediated services are likely to make inroads into the Flexihire market and to a lesser extent to attract Independent contractors who require assistance in marketing their personal services.  Mediated service suppliers will increasingly offer firms the advantages of economies of scale, and both firms and workers the benefit of efficiently matching supply and demand.

On present trends, all forms of contracting can be expected to grow at the expense of direct employment. Dependent contracting appears likely to grow faster than Independent contracting in the short-term.  The basis for this prediction is that increasing numbers of experienced workers have been externalised in recent years.  Most of these ‘corporate castoffs’, many of them mature aged workers, are likely to prefer a dependent relationship to the risks involved in an independent contracting role.  Firms are also more likely to foster relationships in which they retain a degree of control.  Longer term however, independent contracting can be predicted to catch up, as Dependent contractors begin to see the benefits of greater autonomy. 

Implications for Firms

In the new economy the smartest firms will survive.  Investments in education and training however must match firms’ knowledge needs.  The progressive shift within firms, from dependency on academically acquired knowledge to knowledge gained on the job is well attested to nowadays and is reflected in the concepts of Mode 1 and Mode 2 knowledge suggested by Gibbons et al [6] .  This trend supports the direction of change predicted by the Knowledge Supply Model, towards firm dependency on ever increasing levels of tacit and firm specific knowledge.  Members of the Core and Associate groups, however, will need to maintain their levels of generic functional knowledge as well as firm specific knowledge.  Apart from keeping abreast of new knowledge in their particular disciplines in order to operate effectively in the firm, Associates in particular will need to be equipped to move out as well as up.

An important characteristic of the Associate group in the professional services industry, for example, is the provision of high quality generic training to assist Associates find equivalent employment if they choose to leave the firm and move into industry.  It is generally believed that firms voluntarily choose to fund the training of their Associates because it ensures high quality consistent education across staff, some of whom will one day be admitted to the Core group.  It also guarantees loyalty by the Associate to the firm over the training period (normally one or more years) over which time the firm can evaluate whether the Associate is suitable for promotion to the Core group.  Firm support for generic professional qualifications is standard for instance in the legal and accountancy professions.

Based on knowledge-based theory of the firm, competitive advantage comes from the integration of disparate specialised tacit and firm specific knowledge [7] .  Based on this theory, it can be argued that providing generic knowledge to the Core and Associate groups is a competitive necessity, but will not provide a competitive advantage.  For the Associate group and particularly the Core group, it will be critical for firms to ensure their staff are trained in firm-specific knowledge and that they are provided with learning experiences conducive to the acquisition and transfer of tacit knowledge.  A further important implication of knowledge integration is the need for specialists to become more conversant with each other’s disciplines in order to be able to transfer knowledge effectively between each other.  Cohen and Levinthal for example, have shown the importance of adequate prior domain knowledge in individuals ability to absorb new knowledge [8] . This puts a further onus on firms to ensure that their workers receive training not only in their own functional areas but also acquire a better understanding of each other’s disciplines.

These various issues raise the question of how firms should develop an optimal education and training program.  For the provision of generic knowledge, it appears that educational institutions such as universities or professional training institutes are the most appropriate source.  This does not mean that the delivery of this training is dependent on these institutions.  Firms, for example, could arrange for staff to complete distance-based or e-learning programs. 

For the provision of tacit and firm specific knowledge however, it is not clear that external learning institutions will be capable of providing the necessary training.  For this type of training, other methods must be investigated.  One option is for firms to develop collaborative relationships with educational institutions that enable the institutions to provide, if not fully firm specific, at least more industry specific training.  Ford, GM and Chrysler for example, in conjunction with industry and union representatives and a local university, have established the Michigan Virtual Automotive College, to raise levels of industry specific education among automotive industry workers [9] .

Other methods are for firms to implement their own internal learning programs designed to foster the transfer and development of specialised tacit knowledge.  Such initiatives could include formal mentoring, coaching, story telling, simulation of on the job tasks and encouraging the development of communities of interest and practice.  Firms could, for example, designate each member of the Core group as mentors for one or more members of the Associate group.  In addition, firms could establish story telling sessions where experienced staff assemble to discuss assignments and lessons learned ‘on the job.’  The management consulting firm McKinsey, for example, formed internal groups of experts called ‘practices’ to collect and distil experience gained in particular fields, such as manufacturing and energy, and to communicate industry and project specific knowledge to others in the firm [10] .  Xerox Corporation, having discovered its reps’ habit of exchanging information about issues discovered while maintaining photocopiers, facilitated the practice by providing network infrastructure and tools for recording and disseminating their experiences.  The payback from nurturing these informal exchanges of tacit, on the job knowledge across the corporation, has reportedly saved Xerox $100 million a year in maintenance costs [11] .

While learning institutions may not have a direct role in providing internal firm specific training, there are great opportunities to assist firms in creating their own programs.  Organisations will increasingly need expert assistance for example in learning how to establish, maintain, and monitor coaching schemes, conduct story telling sessions, abstract and disseminate lessons learned on the job, and create learning and knowledge sharing communities.

Another approach to resolving firm specific educational needs has been to establish corporate universities.  Firms as diverse as Motorola, Disney Corporation, Pfizer and BT have for example followed this route.  Where the training is naturally highly firm specific, there is less need for external involvement.  In other cases however, where a mix of generic and firm specific training is involved and external accreditation is important, then collaboration between firms and educational institutions is likely to be a better route.  British Aerospace for example have chosen this approach in linking with a number of UK Universities to both deliver and accredit training from its ‘virtual university’ [12] .  Such approaches also offer opportunities to improve cross-disciplinary and multidisciplinary training for existing firm staff, by communal enrolment in particular courses.

Other stakeholders in the firm must also see the benefit of firm specific training.  Unions, for instance, if they are to remain viable are likely to have vastly different roles in the future than today.  To ensure their members are valuable to the firm, unions should ensure that their members in the Associate and Core groups gain the appropriate mix of generic and firm specific knowledge.  Conversely, for staff in the periphery, it would be more appropriate for the union to facilitate access to generic, non-firm specific training, so as to ensure that when staff are externalised, their knowledge and skills will be valued in the external market. 

Implications for individuals

Individuals must first decide to which knowledge sector they wish to belong.  The Flexihire market can be particularly unattractive for example, therefore individuals in that group should decide whether they wish to move back into the firm or whether they would prefer a more secure position in the market.  To move back into the firm, they will need to obtain more firm specific training.  Firm or industry tailored training programmes would be most beneficial in this instance.  If they wish to move into the market however they would need to deepen their non-firm specific knowledge.  Joining Mediated service suppliers such as staffing services agencies, for instance, could provide increased stability to their career and less dependence on their former employer.  Staffing agencies such as Manpower, Adecco and Kelly Services are nowadays multibillion dollar global players and staffing services is one of the fastest growth industries in the world [13] .  There is a great opportunity for education and training institutions to partner with Mediated service suppliers to train individuals in generic skills demanded by the market. 

As with individuals in the Flexihire group, those working via Mediated services providers must determine whether they wish to remain in the market or whether they wish to gain more firm specific knowledge and return to regular employment.  If they decide to remain in Mediated services, these individuals must ensure that they remain up-to-date with the generic knowledge demanded by the market.  It will be necessary for them to continually upgrade their skills.  IT contract staff, for instance, must ensure that they keep up with new versions of programs and computer environments to ensure that their knowledge is still current.  Fortunately, it is likely that most Mediated service suppliers will realise the demand for continual training among their workforces and will either develop or align with learning educational providers capable of delivering the required training and qualifications.

Unlike individuals in the Mediated services sector, Dependent contractors must continue to develop firm and industry specific skills.  Preferred learning institutions for this market will be those that can tailor their programmes to these firms and industries.  For many Dependent contractors, firms will see that it is in their best interests to fund training for these individuals.  In the legal firm cited above, for example, law firms may provide short courses in legal evidence for the scientists, whom they rely on to provide them with expert opinions in relation to evidence.  In the case of McDonalds, its Dependent contractors are its franchisees.  McDonalds has realised that providing detailed training in McDonalds’ unique business methods and processes provides a benefit for both itself and its franchisees through its famous Hamburger Universities.  Unfortunately, such win-win situations do not always exist in the Dependent contracting market.  In some instances, particularly where there is competition among Dependent contractors for supplying the same firm, the firm may not need to invest in training for those contractors.  In these instances, the contractors may have to fund their own training or else move back into the firm. 

While Dependent contractors require firm or industry specific training, Independent contractors require to keep their generic skills at the ‘cutting edge’.  This involves frequent interaction with learning institutions to deepen their area of specialisation.  As a result, Independent contractors may choose to undergo ongoing training from several educational institutions over their working lives.  The Internet and advances in e-learning now allow Independent contractors to search more widely than before, to find the educational institution that best meets their requirements.

To maintain their positions in the market, Dependent and Independent contractors must also increase their tacit knowledge.  While e-learning programs provide a flexible and potentially tailored training environment, they are generally not considered as effective as face-to-face teaching in imparting tacit knowledge.  Given the predicted growth in demand for such knowledge, particularly among contractors, there would appear to be a parallel market emerging alongside e-learning, for more personalised, face to face learning.  Where specialist tacit knowledge is required, an expanding role can be envisaged for instance for retired professionals to provide mentoring services to contractors and to staff in the firm.  Work experience acquired over a lifetime can thus be reused on a cost effective and flexible basis to the benefit of all parties.  Other methods of acquiring tacit knowledge are through social networks and communities of individuals with common professional interests. 

One of the main implications of the knowledge economy for individuals in all knowledge sectors will be choosing among the many educational offerings available.  There is an opportunity therefore for specialist Mediated service suppliers to provide new services, to assist individuals in the tasks necessary for finding, choosing, enrolling, and completing educational courses.  Such organisations could perform comprehensive searches (potentially global searches) of training options available, analysis and (potentially) ranking of training programs (e.g. in terms of quality and cost), matching of programs to individual requirements, and services to reduce the administrative overhead for individuals in enrolling and completing their courses.  Another area of demand in the new economy will be for funding for education and training.  One of the services offered by intermediaries, for instance, could be specialist finance packages to assist individuals pay for their education and training.

In a market where the number and variety of training programs and qualifications are rapidly increasing, another valuable role for intermediaries is to assist with accreditation of qualifications.  Many countries have now developed National Qualifications Frameworks that allow learners to accumulate credits towards achievement of qualifications over time and at their own pace.  Learners are assessed against nationally agreed standards.  The standards are typically prepared by expert groups in consultation with relevant stakeholders from different learning areas, industries and government.  Credits can be accumulated from different educational centres or in the workplace and contribute to a single qualification.  Only accredited organisations are able to assess learners’ performance against standards and to award qualifications. 

Summary

Education and training is set to be one of, if not the biggest growth industry of the knowledge economy.  The Knowledge Supply Model outlined in this article helps firms and individuals understand the implications of the new economy and determine how best to achieve their educational objectives. 

It enables firms to understand better the dynamics affecting knowledge demand and supply and thus to optimise their investments in both acquiring and developing knowledge internally, and accessing it externally.  Similarly, understanding the growing importance of firm specific and tacit knowledge as well as cross disciplinary knowledge transfer, can help firms design more effective learning programs and make better choices regarding educational suppliers and use of technologies. 

For individuals, understanding the nature of knowledge demand should help them to plan their careers, whether they intend to stay within the firm or chart a more independent course in the market.  Understanding the characteristics of different knowledge markets will suggest in turn the type of education and training likely to benefit workers most in the long term.  For those in the Peripheral and Flexihire Groups, engaging in appropriate learning programs will be critical to expanding their career options.  Mediated service providers can play an increasingly important role in assisting with both career counselling and training for members of these groups.  Dependent and Independent Contractors will also need to engage in continuous learning in order to maintain their market appeal.  As well as e-learning for generic subjects, personal mentoring, coaching and social networking will be increasingly used to acquire tacit skills.

The Knowledge Supply model also helps learning institutions understand the differences in demand among market sectors, and highlights opportunities for further expansion and growth of these enterprises.  It is particularly useful for identifying where mechanisms may be required to smooth the transitions between formal education, informal learning and work.  Such mechanisms may range from collaborating with industry groups to develop tailored educational programs, to partnering Mediated service providers and to providing expert assistance to firms on specialised aspects of learning and knowledge transfer.

As working and learning become synonymous, firms, workers, educators and intermediaries will all have to adopt new roles and develop new strategies.  Understanding the dynamics of knowledge demand and supply should assist all the actors in navigating the knowledge markets of the new economy.

Based on an article which originally appeared in the Journal ‘Education and Training’ April 2001

Copyright Burton-Jones & Associates 2006
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