Secrets To Regional Prosperity Revealed!

Teambuilding for Capital Access and Competitive Advantage

2008-03-29T14:42:00Z

Lately, I’ve been thinking a lot about the things we need to make regional economies competitive and successful. During my frequent conversations with regional economic and political leaders, the thing that gets top billing more than any of the others is the need for capital. They are faced with multiple problems, trying to juggle a myriad of conflicting priorities. So one of the first things they want to know, when we start talking and agreeing about the need for technology infrastructure to improve regional service delivery, cooperation, and cluster advancement, is “Where’s the money going to come from?”

When I hear that, I encourage my colleagues to take a step back. Sure, capital is crucial and accessing it will take new approaches to old problems. But regions need to start by thinking about their capacity to get a collection of regional interests working together as a team. Some brainy folks at Pepperdine University, W. Scott Sherman and Miriam Lacey, have published a great article (Link to Article) about employing one of my favorite subjects – tacit knowledge – to facilitate innovation and problem solving through effective team leadership.

Regions and their leaders need to realize that the capital exists. It’s available. Getting it is a matter of regional interests working together toward a common purpose, sharing knowledge, and making choices that mitigate risks. Teambuilding is the way to go, because as Sherman and Lacey say:

Teams are more effective than individuals at generating new answers to difficult or novel problems.

Teams generate new knowledge by combining the explicit and tacit knowledge of individual team members.

Teambuilding techniques that improve the ability of team members to transfer, capture, and combine tacit knowledge into new knowledge may be a source of sustained competitive advantage. (Another one of my subjects!)

So, let’s look in-depth at what I see as the three major trends that are impacting regions’ ability to access capital, and how teambuilding could help them overcome their challenges. These three trends are:

1. Increasing globalization: Competition between regions globally now means that regions require quality infrastructure in order to attract and retain much-needed investment

2. Decentralization of responsibilities across regional stakeholders: This is often not matched to delegation of authority or accountability or resources

3. An increasing number of low-income residents and low wage jobs: Their contribution to the regional economy and tax base rarely matches their use of regional services

I suspect you’ll agree that to respond to these challenges, regions need to be transformed. They need to become proactive infrastructure developers, rather than passive service providers. And to do that, I think stakeholders and leaders in each and every region that wants to remain competitive need to develop a culture of cooperation and collaboration based on structured mechanisms for performance management and measurement. They need to start thinking of themselves as a team, with a team’s understanding of the strategies, roles and responsibilities they’ll employ to win the economic game based on the mutual respect of each player.

As a first step, they need a winning strategy: a regional economic development strategy that incorporates the means of financing a given region’s long-term infrastructure objectives. The strategy must clearly articulate how a region will prioritize their investments relative to their current and future revenue streams. Even so, current tax revenue, use charges, or ad-hoc external grants alone cannot bridge a region’s infrastructure deficits in any reasonable manner. Clearly, for virtually all regions, the backlog in necessary infrastructure creates funding challenges for local leadership.

So as a team, they’ll need to establish a task force that includes experts and practitioners from the private sector, financial institutions, banks, and development agencies. The task force’s job would be to analyze and share knowledge of regions which have successfully mobilized long-term private capital and the governance frameworks needed to facilitate infrastructure development. Their main objective is to leverage the financial and non-financial assets of the region so as to access resources from both the public and private sectors.

What that task force will find and have to grapple with, of course, is the fact that region’s have been dealing with some significant challenges and limitations when it comes to financing infrastructure. But I am convinced that these challenges and limitations are surmountable. Let’s delve into them for a moment.

Long-term debt is clearly required because most infrastructure assets -- especially technology infrastructure investments, such as communication, information and transaction management -- provide benefits over time and across city, county, and state boundaries. For the required sustainability of infrastructure investments, the link between a region’s technology infrastructure needs and private capital has to be strengthened. Policies to strengthen this link need to be based on the region’s decentralization systems and the region’s specific stage of financial market development.

For most regions, the sources of municipal debt have been limited usually to governments, government-owned financial institutions, or finance raised on the basis of guarantees issued by the city, county, or state. However, larger regions can raise debt for infrastructure by accessing capital markets based on credit ratings through issuing various debt instruments on a non-guarantee basis. Small and medium regions have been pooling financing needs, a practice to which markets have responded.

Financial institutions that lend to regions are making efforts to become more market- oriented by mobilizing private capital for public infrastructure. These developments have yet to be institutionalized in most regional economies, and are not mainstreamed into the regions’ investment process.

To facilitate more market-based financing, concrete actions from the regions are needed:

From the lenders’ perspective, constraints include the lack of a transparent accounting system, near absence of collateral, and project revenue streams which rarely match commercial debt obligations or costs.
From the standpoint of regions, significant impediments include the high transaction costs of commercial finance, the absence of a level playing field in terms of fiscal incentives for municipal debt, and limited experience of lenders/rating agencies in structuring security mechanisms that are not based on traditional instruments such as collateral or guarantees.

Regional-level policy actions include establishing a governance framework for debt administration; rule-based and predictable revenue transfers; and a deepening of the capital markets by encouraging liquidity. These must be predicated upon responsibilities for modern accounting systems, specified cost recovery mechanisms (grounded in the contracts with stakeholders), and regional benchmarks for measured performance. Identifying an economic strategy comprised of agreed-to regional internal actions and demonstration of a clear revenue stream provides the capital access for regions to negotiate with private capital and commercial finance.

Obviously, there is a clear need for defining governance frameworks for regions and their development partners in formalizing finance strategies relevant to infrastructure investments, especially technology infrastructure.

Key to this approach is the application of team-building principles and the pursuit of self-interests. These attributes are based upon local demand and local capacity relevant to the region’s industry clusters, occupational clusters, communities, and networks that have the capacity to manage money and pursue profits through their commercial activities. A regional approach to help communities manage and mitigate the risks of their development projects, including political and financial risks, allows for the achievement of greater scale and economic impact. The outcome of this approach would be precedent-setting for most regions when it comes to the management of economic development policies and practices for the public, academic, and private sectors.

Regional Prosperity: Leveling The Economic Playing Field, Part III

2008-02-11T19:21:00Z

In part II of this blog series, I stated:

Innovation, imitation, and the thundering herd of entrepreneurship are what propel virtually all competitive industry clusters. While the success of an individual firm may depend on its ability to protect its own technological advances, new products, or designs, the success of a cluster depends on the opposite: knowledge diffusion (through access to new innovations and information, and spin-offs of new enterprises). Clusters force competing members within the cluster to continually improve and innovate in order to maintain their advantages over imitators. Organizations live or die by their corporate strategy and their ability to innovate.

Over the past decade, there has been much talk and general agreement about the importance of innovation in our economy. No one argues that it is crucial for propelling American business forward and ensuring an enterprise’s competitive advantage on the global economic playing field. Yet there has been little discussion or insight on how to stimulate it. This must change. The majority of important, economy-enhancing innovations are generated by mid-market businesses. The problem lately is that many of these businesses have been too busy just trying to survive, let alone drive innovations to market as swiftly and often as possible.

With this blog I want to help change that. I want to help drive innovation and improve its foundations in a healthy commercial environment. I’ll delve into operational factors that, once improved through regional cooperation and collaboration, can enhance the underlying conditions we need for accelerated commercial innovation and sustained competitive advantage, for individual enterprises, their industrty clusters and the region as a whole.

Here’s the fundamental problem I want to address: Innovation and growth require capital. For any firm, the lowest-cost capital is cash flow from operations. But the economic inefficiencies of transaction management create competitive pressures for the firm in the form of price and margins; these in turn inhibit its ability to maximize cash flow from operations and limits its access to external capital sources. Lack of such capital naturally limits the growth of the firm, the industry cluster in which it participates, and the region-at-large.

First, Some Edification: In my last post in this series, I described three types of knowledge workers: tacit, transformational, and transactional. Now let’s build upon this by defining two types of knowledge: explicit and tacit.

1. Explicit knowledge can be shared or gained through written means, without interpersonal interaction.

2. Tacit knowledge is typically disseminated through personal or social interactions and is not easily expressed in writing. Interestingly, a person may not know that he or she possesses tacit knowledge until called upon to use it.

I also said that today's most valuable workers engage in business activities that economists call “interactions." The broadest definition of an interaction is the searching, coordinating, and monitoring that are required to exchange goods or services. Complex interactions typically require workers to make informed decisions or educated guesses with ambiguous information. These people (such as administrators, doctors, engineers, judges, lawyers, managers, mediators, nurses, salespeople, etc.) often need to draw upon their tacit knowledge.

All commerce is facilitated through communication. In this sense, you can think of communication as a confluence: the convergence of tacit knowledge, complex interactions, and transactions. Strategic options reside within communication of complex interactions among multiple systems. Formal and informal communication among those who hold tacit knowledge can bring new insight and understanding to a firm or economic region in ways that significantly shape strategic thinking and future success.

An illustrative example is multi-party transaction management for processing payments related to products or services. A typical transaction management approach involves the automatic processing of payments to multiple parties with payment chains extending through intermediary sellers. In some instances, an intermediary seller contracts with a buyer for goods and/or services, and further contracts with one or more performing sellers (e.g., suppliers) for the provision of the goods and/or services. In these instances, funds designated to the buyer (e.g., from a buyer's account or credit line) are transferred to the performing seller or parties in a manner commensurate with the contract between the intermediary seller and the performing seller or sellers. Additional funds are transferred from the buyer to the intermediary seller commensurate with the contract between the buyer and the intermediary seller, less any amount paid to the performing seller or sellers for a particular transaction or event.

Here’s a familiar example of an enterprise that engages regularly in such multi-party transactions: Ticketmaster. Ticketmaster is an intermediary seller who has multiple contracts with the buyers and sellers of services. The individual buyer, who is attending a concert; the venue, that is both a buyer and intermediary seller of the provisioned services; the promoter, who is another intermediary for the performing seller; and the performing seller, the band putting on the concert. In this example the only party who has visibility to the knowledge across multiple systems is Ticketmaster. They are the only party that knows what acts are performing at what venues when, what inventory (seats) is available, and for how much.

Regional Industry Clusters Could Learn a Thing or Two from Ticketmaster

There is an inherent opportunity surrounding the management of multi-party transactions. The innovation that is Ticketmaster dramatically lowered transaction costs and increased margins for the thousands of businesses participating in the industry’s multi-party transactions. This in turn frees up capital, time, and human resources among those businesses, making them more flexible and responsive to changes in the marketplace. They have the room to become more innovative themselves.

How does this relate to innovation and regional prosperity? This is how: Most regions have not realized that economic organization can be proactively managed through an appropriate mix of contracting activities and technology infrastructure. For our purposes -- to drive prosperity within a region -- we need such a model of regional collaboration that encourages sufficient innovation to support emerging and growth industry clusters. Policies formulated by individual firms or industry sectors alone are not sufficient to overcome region-wide deficiencies in cluster development. Public sector and economic development policy and strategy must be married to industry policy if clusters are to grow and prosper within a region.

So, we’re going to talk about the elements of effective business and organizational management that can directly impact an industry cluster’s capacity for sustaining innovation and competitive advantage. These include:

Improving the sharing of tacit knowledge and regional understanding of complex interactions through strategic thinking, rather than strategic planning

Organizing business processes and managing transaction costs to improve economic organization and drive industry cluster development

Recognizing and managing patterns of inter- and intra-firm transactions and the relationships that propel them

Leveraging technology infrastructure to free up time and capital by supporting complex interactions, transactions, and contract management

1. Improving the sharing of tacit knowledge and regional understanding of complex interactions through strategic thinking, rather than strategic planning

Strategy is typically viewed as the pursuit of business outcomes, rather than a process unto itself. But have you noticed that many successful entrepreneurs have ignored conventional strategic planning processes? I think one reason for this trend is that to plan strategically you must assume a linear activity based on connecting past, present, and future performance in a stable environment. As I suspect you know, the nature of today’s dynamic business environment is anything but! It’s no wonder that many organizations have abandoned strategic planning.

Instead, today’s more innovative firms have replaced strategic planning with strategic thinking. This is a shift to a process-based view of strategy.

Strategic thinking involves the search for emerging patterns of system interactions not previously apparent or obvious. These patterns of interactions can be leveraged by a firm -- or a region -- through the application of resources within the firm’s or region’s environment. This is why you’ve been hearing such buzz-phrases as core competencies and the resource-based view of the firm in today’s business lexicon.

To initiate an organizational or regional shift to such a process-based view of strategy, I encourage business and regional leaders to focus on the processes inherent in tacit knowledge interactions and resulting transactions. This can be your first step toward developing and implementing a regional strategy that supports the formalization of a sustainable competitive position for your region and its industry cluster firms. Encouraging more efficient and effective sharing of tacit knowledge and related complex interactions is a practical means for bringing structured mechanisms to formalize innovation and transactions which drive regional prosperity.

2. Organizing business processes and managing transaction costs to improve economic organization and drive industry cluster development

Business organizations can realize competitive cost advantages through organizing production and transaction exchange. Through the appropriate structure of activities, relationships, and complex interactions between firms, businesses can stimulate important strategic decisions in organizational innovations. As with Ticketmaster, history is abundant in examples in the role of organizational innovations contributing to the success of particular businesses and industries. Understanding why businesses organize as they do is important for the development of sound public policies towards economic organization and stimulating economic activity.

Transaction cost economics, a subset of institutional economics, is a body of research that explains the perspective of contracting and economic organization arrangements adopted by societies and business to govern economic activity in the pursuit of competitive advantage and wealth. The central tenet of transaction cost economics is simply that business will adopt the most efficient and lowest cost transaction alternative available to them.

The problems of economic activity organization always arise wherever the benefits of economic specialization lead to trade. Industry cluster development is no different. Trade requires the need to coordinate complex interactions and transactions. As long as there are profits to be had from trade, the parties involved have an incentive to coordinate and collaborate.

Transaction costs can best be defined in terms of such activities as bargaining, contracting, and monitoring of performance; in other words, activities in which they engage as a consequence of the need to coordinate activities among buyers and sellers. These activities are not directly related to production.

Excess transaction costs can be attributed to two types of human nature:

1. Individuals who intend to act in a rational manner but are hampered by their limited knowledge, foresight, skill, resources and time.

2. Individuals who have a propensity to behave opportunistically. This behavior includes the willingness to renege on promises, cheat on agreements, ignore ethical responsibilities, circumvent rules, search out loop holes, or otherwise exploit vulnerabilities of a trading partner to gain economic advantage.

In either case, excess transaction costs depress economic activity and the firm’s or region’s capacity for innovation. To accelerate industry cluster development, business and regional leaders need to match organizations through properly aligned and structured interactions and transactions, governed by appropriate structures and competencies which focus on cost management.

How can you positively influence the dynamics of the two types of human nature described above? Certainly, businesses have formal codes and norms of behavior that can be enforced through the authority we ascribe to our institutions and organizations. I also want to encourage readers to also pay special attention to informal social networks. These social networks are extremely capable of creating transaction rules that establish norms and standards for individual behavior within the group, while clarifying the risk of being ostracized for violations by said group. When it comes to pursuing and maximizing interacting firms’ shared economic objective -- that is, wealth -- informal social networks must be embraced and proactively managed.

3. Recognizing and managing patterns of inter- and intra-firm transactions and the relationships that propel them

Inter-firm transactions are a firm’s explicit and implicit contracts. They consist of the firm’s assets and mechanisms to handle information, manage risks, and exert control. Intra-firm transactions are consolidated ownership of these organizational assets in the hands of one firm in service to multiple firms. Vertical integration of these assets allows for flexibility in economic activity, along with cost containment and economies of scale associated with transaction costs that are not directly related to production.

Vertical integration and transaction cost considerations in the development of a firm’s or region’s skilled labor has important ramifications to the competitive market position and prosperity of each. Acquiring transaction-specific knowledge comes with high switching costs. It is not easily transferable and, as such, it is a source of sustainable competitive advantage when combined with economies of scale. Know-how and cost structure cannot simply be transferred from supplier to supplier like an operations manual. High switching costs combined with first-mover advantage holds the greatest opportunity for regions, their industry clusters, associated firms, and skilled labor to erect competitive barriers and achieve prosperity.

With our focus on maximizing the opportunities inherent in sharing tacit knowledge and facilitating complex interactions, stimulating innovation logically requires investment in relationship management capability. The structure of vertical relationships between buyers and sellers is strongly affected by the importance of the relationship, and the investment they collectively put into the relationship in pursuit of their joint wealth.

Strategic thinking is an exercise in understanding tacit complexity -- a combination of tacit knowledge, complex interactions, and transaction management. Pattern recognition is dependent upon the definition of complex interactions which requires strategic thinking combined with tacitly-held knowledge of multiple systems across firms. Entrepreneurs holding such tacit knowledge are often able to detect emerging patterns that are not obvious to the casual observer. But because this detection ability is based on tacit knowledge, these entrepreneurs are equally as often unable to communicate these patterns to others.

The ability to recognize and communicate patterns of complex interactions and transactions across systems is complicated further because communities of practice rarely extend beyond their own system boundaries. For example, in the business world the supply chain associated with one finished product may contain hundreds or thousands of components, manufactured in several countries by a hundreds of manufactures and sold to thousands of end-users. And because tacit knowledge is often isolated in one person, one system, or another, significant interactions across multiple systems often go unobserved.

Thus, the ability of the individual firm to pursue the internalization of this transaction management approach is cost prohibitive and not probable. The investment and administrative burden in activities which are not directly related to the firm’s production and which are not strategic to the firm are given the lowest priority by management. Management has a strong disposition toward external sourcing of non-core activities because of cost, time, and risks. Acquiring the skilled labor, technology, knowledge, equipment, and facilities creates traditional business risks associated with uncertainty that an individual firm cannot adequately address. The firm is left to absorb the economic inefficiencies of fragmented external solutions or existing internal capabilities.

This is why I think a regional approach to structuring complex interactions to take advantage of the coordinating properties of hierarchies and the ability of the firm to reduce costs and risks is a sound public sector policy pursuit.

In a sense, you could say that it’s time for regional leaders to start thinking strategically and facilitating relationships and economies of scale across their regions and industry clusters.

4. Leveraging technology infrastructure to free up time and capital by supporting complex interactions, transactions, and contract management

What if instead we started looking to technology and the automated analysis of which it is capable? In recent years, networking and data storage have been revolutionized by large-scale data collection methods, faceted classification, and categorization. Large knowledge repositories and databases are now available that store, sequence, structure, and map vast amounts of information that is not easily analyzed by humans.

The scale and nature of the available data has stimulated research in automated analysis methods and pattern recognition. Analytical methods have proven to be quite effective at processing vast amounts of market, competitive, and business data to create intelligence for informed decision making. Virtually all industry sectors have been impacted: financial markets, banking, insurance, manufacturing, transportation, logistics, and the supply chain.

Structured innovation mechanisms for tacit knowledge workers must be supported and leveraged to drive innovation. This requires that their time be freed from transformational and transactional work if they and their firms are to innovate and leverage the knowledge of multiple systems relevant to the existing and emerging industry clusters. Therefore, public sector and economic development policy for regions must embrace a strategy that includes the facilitation and acceleration of global commerce through the development and deployment of technology infrastructure to support complex interactions, transactions, contract management, and informal social networks because these activities are beyond the reach of most firms operating on their own.

While the post-industrial economy emerges and online markets continue to rapidly evolve, automation advances are required due to the complexities and business risks involved in commerce transactions. Today regions lack the critical capability necessary for managing complex interactions or online transactions. Innovation will continued to be driven by the skilled labor associated with tacit knowledge workers. Innovation mechanisms must be managed as part of public sector and economic development policy. (The Dubberly Design Office as part of a project at the Institute for the Creative Process at Alberta College of Arts and Design in Canada has developed what we consider to be an excellent model of innovation; see link.) Innovation Model

In Summary

To obtain regional value from complex interaction investments, regions must be able to monitor and support business transaction quality in a simple way that doesn't add to the complexity of the technology infrastructure. Complex interaction management promises to be sustainable basis for regional economic development policy. Competitive regions, industry clusters, and businesses require a technology infrastructure robust enough to audit, track, and trace transactions from beginning to end, examining how these transactions affect all parties, applications and systems they touch. Our objective must be to detect emerging patterns quickly -- before they adversely affect industry clusters, levels of service, or users’ experience.

Today most regions are struggling with their economic development policy. To move forward, they must creatively and cost-effectively brand their region based on existing and emerging industry clusters. Concurrently, they must raise awareness and understanding in the marketplace about tacit knowledge workers, complex interactions, and transaction management. They must be prepared to assume the region's logical and rightful role as a leader in this area. Understanding that clusters are of value to regions only matters if such knowledge leads to measurable actions that grow economies and raise standards of living. Successful efforts to leverage industry clusters and the complex tacit knowledge interactions which support them can generate sustainable regional competitive advantages. Regions that pursue this strategy with appropriate public and economic development policy can expect an increasing standard of living for its citizens.

Coming Soon: Encouraging Innovation and Competitive Advantage through Team-building

Regional Prosperity: Leveling The Economic Playing Field, Part II

2008-01-23T19:05:00Z

Committed regional leadership can overcome institutional fragmentation, build community capacity, improve public-sector service delivery and attract private investment through the regional deployment of low cost technology infrastructure. With advanced market intelligence, regions can leverage economic incentives to make smarter investments in smarter growth, retaining and attracting businesses that are growing in high-wage jobs.

Acknowledge Your Regional Strengths and Weaknesses

Practical and prudent economic development strategies start with an objective assessment of regional strengths and weaknesses. This regional assessment must be put into a broader context to support regional planning relevant to other competing regions and macro market forces to establish a basis to compete for the region's industry clusters.

To this end, regional leadership must understand and acknowledge their economic playing field if they hope to win the race to economic prosperity. Some of these ideas were published by the Financial Times in an article on current market trends called "Plot Your Course For The New World." (See link) Financial Times

Author Ian Davis (Worldwide Managing Director of McKinsey & Company) outlined major trends that every region would be well advised to understand and acknowledge. Your region’s standard of living depends upon your community’s ability to:

1) Navigate and respond to macro market trends and conditions,

2) Incorporate and synthesize knowledge into the regional planning activity, and

3) Secure category leading positions for existing and emerging industry clusters.

The Macro Trends That Demand A Regional Response Are:

"Centers of economic activity will shift profoundly, not just globally but regionally. As a consequence of economic liberalization, technological advances, capital market developments and demographic changes, the world has embarked on a massive realignment of economic activity."
"The consumer landscape will change and expand significantly. Almost a billion new consumers will enter the global marketplace..."
"Technological connectivity will transform how we live. The technology revolution is at an early stage. We are learning how to make the best use of IT in the design of processes and in developing and accessing knowledge...”
"The battlefield for talent will shift. Changes in the nature of labor and talent will be far more profound than the widely observed movement of jobs to low-wage countries. The shift to knowledge-intensive industries highlights the importance and scarcity of well trained talent…”
"The role and behavior of business will come under increasing scrutiny.”

These trends, combined with regional issues like the mushrooming cost of public sector support services and flat or decreasing public sector revenues, mandate a public sector response. Regional leadership must make dramatic productivity gains or watch as the regional standard of living declines. An aging population with an increased demand for services combined with decreasing revenues will require new levels of efficiency, creativity and innovation from the public sector. A strategic response must be found - and soon - if we are to live up to social obligations. Without significant productivity gains, the pension and health care burden and the cost of service delivery will create an unmanageable budget problem for most states and regions.

The Good News – Opportunity In New Global Industry Structures

The good news is that the current transition to a post-industrial economy has created new global industry structures and regional opportunities for high wage job growth and prosperity. These new structures are a market response to the updated regulations, new technologies, and innovative non-traditional business models that are flourishing. Within virtually all sectors, industry structure extremes have emerged with a few major players on one end, a narrow middle market, and a thundering herd of smaller, innovative fast-moving players on the other end.

Regional industry clusters, and the winning companies that take advantage of these new structures and new-found productivity gains, are capitalizing on these transformations to the benefit of all regional citizens.

Knowledge production, access, distribution, and ownership are the new powers in our post-industrial economy. We are seeing the rise of community approaches to knowledge development and retention as communities, not individuals, become responsible for innovations. Open source cooperation has exploded software development, manufacturing and design. All three have been leveraged by communities with the will, capacity and knowledge to be competitive. Regions face the extreme choice of either proactively learning how to leverage these structural advantages to the benefit of its citizens, or being paralyzed by indecision in the face of information overload.

Ubiquitous Access To Information Has Changed The Economics Of Knowledge

An almost infinite amount of information is now available instantaneously. The vast amount of information exceeds an individual's ability to absorb and utilize it all. Knowledge is increasingly available and specialized. Units of production have shifted from a resource based industrial economy to an information based knowledge economy. Knowledge and innovation are the driving forces of economic growth, social development, and job creation. In this context the promotion of knowledge transfer has become a priority for public and economic development policies.

Today's most valuable workers engage in business activities that economists call “interactions". The broadest definition of an interaction is the searching, coordinating, and monitoring that is required to exchange goods or services.

Complex interactions typically require workers to make informed decisions or educated guesses with ambiguous information. These people (such as administrators, doctors, engineers, judges, lawyers, managers, mediators, nurses, salespeople, etc.) often need to draw upon personal experience, which economists call "tacit knowledge". Given the current transition to a post-industrial economy, we have adopted (for all occupations) three general categories of "knowledge workers" based on intellectual activity. These are:

Tacit Knowledge Worker: People who deal with complex interactions. Tacit knowledge is knowledge that people carry in their minds and is difficult to access. Tacit knowledge workers are people who may not necessarily be aware of the knowledge they possess or understand how valuable it is to others. Tacit knowledge is considered more valuable because it provides context for people, places, ideas, and experiences. Effective transfer of tacit knowledge generally requires extensive personal contact, trust and a structured organizational framework.

Transformational Knowledge Worker: People who extract raw materials or convert them into finished goods. These people typically deal with nonagricultural labor such as assembly, construction, manufacturing, mining, operating production lines, running heavy equipment, etc. Effective transfer of transformational knowledge generally requires documentation, training, and standardized operating procedures.
Transactional Knowledge Worker: People who deal with routine interactions or transactions. These workers perform tasks that are primarily repetitive and routine in nature but occasionally use complex information to make independent decisions. Routine interactions include accounting work, auditors, chemists, clerical, IT specialists, technicians, etc. Companies have and will continue to automate or eliminate these routine interactions because most of what these people do can be standardized and automated: the proven and established tools of productivity improvement. The balance of these interactions will continue to relocate to low labor cost regions, globally.

Tacit knowledge workers are the primary force in determining which regional economies are successful and which are not. They are the key source of growth in most organizations. Innovative marketing approaches, new products and services, and new business models all come from tacit knowledge workers. So if you want your economy to grow, your region better be proactively managing your tacit knowledge workers!

Industry cluster development has become the de facto standard for economic development policy. It is now universally accepted that successful regional economies are specialized to some degree. Even the most diversified regions are home to industries that are found in higher concentrations than in other places.

No region can be outstanding at producing everything - especially less favored regions. Successful regions develop strengths and focus innovative capacities on specific types of industry sectors, or clusters. Clustering provides firms with access to more suppliers and specialized support services, skilled labor pools and the inevitable knowledge diffusion that occurs when people interact. Tacit knowledge labor pools and specialized industry clusters must be proactively managed if regions are to sustain a growing standard of living for its citizens.

This imperative is especially true in less-favored regions impacted by:

A vague understanding of industry and occupational cluster development
Historic under-investment in physical and technology infrastructure
A lackluster public and economic development policy and
Ignoring the major macro economic trends and market forces

The growth of cluster development begins with recognizing that industry and occupational clusters are based on systemic relationships among firms and individuals. Clusters are geographically bound, defined by distance and the time that people are willing to commute for employment. This obviously depends on transportation systems and traffic, but also involves cultural influences, family and social demands.

Industry clusters have life cycles, which progress from:

1) Emerging, which can be generated by innovations, or inventions, to

2) Growth, where markets have developed to attract imitators and competitors that stimulate entrepreneurship, to

3) Mature, which is when the processes or services have become routine, and costs become the primary basis to compete, to

4) Decay, when the products or services become fully replaceable by lower cost or more effective market alternatives.

The life cycle of industry clusters is best illustrated by a bell curve measuring Gross Metropolitan Product (GMP) Growth (The one year percentage change in the per capita dollar value of all final goods and services produced in the metropolitan area) and time. See Figure 1 below:

Figure 1: Industry Cluster Life Cycle

Innovation, imitation, and the thundering herd of entrepreneurship are what propel virtually all competitive industry clusters. While the success of an individual firm may depend on its ability to protect its own technological advances, new products or designs, the success of a cluster depends on the opposite -- knowledge diffusion (access to new innovations and information, and spin-offs of new enterprises). Clusters force competing members within the cluster to continually improve and innovate in order to maintain their advantages over imitators. Organizations live or die by their corporate strategy and their ability to innovate. Organizations, like clusters, are either growing or decaying. The only debate is the length in time of the life cycle.

Clusters are not defined by organizational membership. Clusters are defined by relationships that are self-selecting based on how individuals, employers, and institutions define their missions, establish trust, and produce access to tacit knowledge of technologies, markets, and opportunities to network, and to aggregate interests and needs.

The most successful clusters build structured mechanisms that can speed the movement of ideas, innovations, and information for commercialization from firm to firm throughout the regional economy. The responsible parties for collecting and disseminating knowledge are the gatekeepers, brokers, and intermediaries that provide the value embodied in social capital that is vital to cluster growth and competitiveness.

As stated earlier, the most important competitive advantage a cluster has is its skilled labor pool of tacit knowledge workers and the competencies they embody. Learning and knowledge transfer is the lifeblood of tacit knowledge workers and industry clusters. The skills and knowledge of the work force is at the top of the list of businesses’ requirements. Today virtually all business is dependent upon technology. Business needs highly skilled, educated, and talented employees. While other cluster inputs such as raw materials, parts, suppliers, and services can be easily sourced globally; the work force remains a local resource constrained by reasonable commuting patterns. Changing demographics and preferences only reinforce the critical nature of a skilled labor supply and tacit knowledge workers.

A history of regional under investment can limit clusters in less favored regions from gaining new, or holding onto existing, cluster competitive advantages -- including its skilled labor. Most under investment can be traced to:

Weak physical and technology infrastructure
Lack of access to capital
Diminished innovation mechanisms
Regional insularity and isolation
Low skilled/educated work force and
Overly mature or hierarchical industry structure

The effects of historic under investment in infrastructure are social, technological, and economic exclusions. Social exclusion exists in regions with large, isolated, underprivileged and undereducated populations; technological exclusion exists in regions with poor access to sources of technology and benchmark companies; and economic exclusion is a result of weak links to benchmark regions and markets.

Infrastructure deficits create an uneven economic playing field for regions and inhibit capital investment. Clusters live or die with the entrepreneurial and innovative abilities of its tacit knowledge workers and companies. The development and commercialization of new ideas requires technical resources and capital. But capital markets often prefer innovative companies to mature and low technology companies and regional innovation centers over more remote places that are difficult to monitor and assist.

Fragmented institutional structures must be overcome to support successful cluster development. Clusters depend on regional institutions for information and help with technology assistance, economic analysis, brokering, workforce development, and education and training within their industries. Most regions have an institutional framework for some services, but few have an explicit economic development focus. Even fewer have meaning performance measurements in place to ensure accountability.

Less favored regions must acquire the resources and expertise to target clusters; to become the centers of excellence that attract talent, resources, and other companies. Technology infrastructure is the foundation for building industry cluster-based economies, and its absence is a death knell for growing clusters. Technology infrastructure is a fundamental utility to support the operation and lower the cost structure of industry clusters.

While social capital is the medium that transports information within a cluster, competitiveness is highly dependent on an ability to import new information and ideas from greater distances. The most successful clusters have lead firms that are part of global networks and are exposed to global market opportunities, and employ people who are active in international professional associations. These firms regularly benchmark themselves against the best practices anywhere. Because knowledge in general comes from a very diverse set of sources, the wider the net, the more likely a greater knowledge base will be accessed. Poorer and peripheral regions have limited access to these benchmark practices, innovations, and markets. Without wider access, companies are limited to learning only within their regional borders and have a difficult time achieving any sort of competitive position.

Companies do not consider locating or expanding in communities where skill levels are low and work force development programs do not match employers' needs. Even in tight labor markets, firms will try to import workers before they are willing to take a chance on hiring inexperienced local workers, except to fill low-skill positions. This disconnect becomes mutually reinforcing. With no opportunities to gain experience and skills, the work force remains a liability, not an asset.

Regional prosperity depends upon cluster development, tacit knowledge workers and infrastructure investment. Understanding that clusters are of value to regions only matters if that knowledge leads to measurable actions that grow economies and raise standards of living. Successful efforts to leverage industry clusters and the complex tacit knowledge interactions which support them can generate sustainable regional competitive advantages. Regions that pursue this strategy with appropriate public and economic development policy can expect an increasing standard of living for its citizens.

Regional Prosperity: Leveling The Economic Playing Field

2008-01-11T13:45:00Z

At Magnale we are passionate about delivering practical solutions to complex commerce problems in order to address the under-served needs of regions and their businesses. To this end we enjoy advocating our position on key industry topics while engaging in meaningful conversations in an open and direct manner. Our insights and observations are based on market intelligence and analysis that is generally not available to regions or their small and mid-size businesses. We are committed to connecting you to resources, people and opportunities you didn’t know were there by providing you better intelligence about your industries and market. This post outlines the challenges faced by your region and offers practical advice to address these challenges for our collective benefit.

The growing economic gap in prosperity performance between regions is damaging to the U.S. national economy as a whole; as it means that these regions are not realizing their potential. It also results in reduced quality of life for people in these poorer regions where not only low productivity but also reduced standards of living i.e. poverty, unemployment and ill health are concentrated.

The federal and state governments have done a good job by acknowledging the scale and persistence of this regional prosperity gap and have made attempts to reduce the gap between regions. The regions themselves currently have a vague understanding of this growing economic disparity and its impact on regional standards of living.

We are concerned that not enough has been done to adequately address this growing economic disparity between regions that “have” and those that “have not”.

Creating the fundamentals for smarter investment in smarter growth requires a regional economic development strategy that is specific to the attributes and nuances of the regional economy relative to existing and emerging industry and occupational clusters.

Measuring performance is critical to the establishment of economic strategy, policy and investment success. Tough decisions about regional priorities require local political leadership that is all too often well intentioned but lacks the resources and information to make fully informed decisions.

The profit system cares little about regional or local political motivations. The private sector pursues profit and its self interests wherever it can find them; thus the mobility of labor and the enterprise is at an all time historical high.

We believe that the single most important priority for regional leadership is to make sustainable improvements in the economic performance of their region to reduce the gap in prosperity between their region and competing regions. The starting point is to define measures of successful performance and reporting progress against pre-established regional targets. Measures relative to retaining, and attracting businesses within the regions existing and emerging industry clusters should be given emphasis.

Regions need to make tough decisions about their priorities including:

• The ability to recognize the unique attributes and differences of their region by accessing regional comparison data to prioritize the regional economic agenda for high wage job growth. This is important to developing a regional economic strategy specific to each region; versus the current federal and state approach of developing policies for the benefit of all regions;

• Acknowledging that the performance measures needed to tackle unemployment or high wage job growth need to be different in areas where there are lots of jobs versus places where job opportunities are few and far between;

• Ensuring that the physical and technology infrastructure fundamentals for growth i.e. transport, research and development investment and collaboration between the private, academic and public sectors are formalized and in place now as a prerequisite building block to regional prosperity;

• Establishing Public Private Partnerships with adequate powers and resources to serve the public good, manage physical and technology infrastructure and costs, and mitigate risks.

The current indicators for measurement of regional prosperity against targets are inadequate and poorly distributed among regional citizens. In addition, comparison data for regional competitive analysis is virtually nonexistent within most regions. As a starting point we recommend a handful of key performance measurements be adopted by each region and be published to the general population, they are:

Gross Metropolitan Product (GMP): The per capita dollar value of all final goods and services produced in the metropolitan area in one year.

GMP Growth: The one year percentage change in the per capita dollar value of all final goods and services produced in the metropolitan area.

Knowledge Economy: The percentage of the workforce employed in knowledge-intensive occupations.

Knowledge Workers (Young): The percentage of the population ages 25-34 with a bachelor’s degree or higher.

Long-term Employment Growth: The five year percentage change in total employment.

Long-term Wage Growth: The five year percentage change in average annual wages.

Poverty Rate: The percentage of the population with income in the past 12 months below the poverty level.

Short-term Employment Growth: The one year percentage change in total employment.

Short-term Wage Growth: The one year percentage change in average annual wages.

Unemployment: The rate of unemployment in the metropolitan area.

Unemployment Change: The one year absolute change in the rate of unemployment.

In a democracy, it is necessary to have clear and accurate information, so that informed decisions can be made. It has become clear that information about the economies of the U.S. regions is limited and poorly distributed. Not only does this mean that regional policy decisions are being made on the basis of inadequate information, it also undermines the regional government’s approach towards monitoring performance against targets and the accountability associated with performance monitoring.

Trade and industry sector policies have insufficient capacity to respond to differences between regions. The regions need to increase and align public policy with industry policy, recognizing that some policies will not be appropriate in some regions. Regional administration of national and state policies is not the same as a regional response with economic strategies based on regional competitive analysis.

National and state policies to support investments in innovation are not reducing regional disparities, as they are available to all regions. The gap between regions affects everybody. Not only do people in the less prosperous regions have fewer opportunities where they live and suffer from lower standards of living, worse health and greater deprivation; they are increasingly suffering from congestion, unaffordable housing and diminishing public sector support services.

The gap between regions is persistent and increasing. Reducing this gap could improve everyone’s quality of life. The federal government has made significant progress over the past several years in acknowledging the extent of differences in prosperity between regions and beginning to think about how the gaps can be closed. The federal government has even begun to promote regional thinking. However, to reduce the gap in prosperity measurements between regions, significant actions and difficult regional decisions are needed.

The current approach of federal and state policies for the benefit of all regions will not reduce differences between regions. The regional and local governments need to enable regional differentiation of national and state policies.

If the least prosperous regions are to begin to catch up with the more successful regions, greater emphasis will need to be placed on their development; in particular putting in place the fundamentals for sustainable economic growth.

Mainstream policies such as transport, physical and technology infrastructure, culture and research and development need to be assessed for their regional impact.

Regional bodies need access to powers and resources adequate to the scale of their tasks. The actions of a wide range of state and regional government departments affect the chances of regional disparity being addressed. Tackling regional disparities should be a responsibility across state, region and local government departments, not simply those departments with traditional responsibilities for the economy and regional policies. “Mainstreaming” regional economic development policy is critical to addressing the challenges we face. Regional actions to be considered:

• Facilitate networking and collaboration between regional stakeholders in business, academia and government within competitive industry clusters.

• Enhance communication among regional governments, economic development agencies, chambers of commerce, workforce development boards, and other regional leaders.

• Ensure that an adequate workforce is available to support existing and emerging industries.

• Increase the attainment of undergraduate and graduate degrees in science, technology, engineering, and mathematics in regional universities and colleges.

• Enhance community involvement by raising public awareness of regional plans and programs as developed by regional leaders and stakeholders.

• Enhance or establish partnerships between regional businesses and research institutions, universities, and colleges.

• Improve the transfer of technological innovations from universities and research centers to the regional marketplace.

• Increase the competitive position of existing and emerging industry clusters within the region.

• Promote small and mid-market business development, helping entrepreneurs and enterprises with technical and financial assistance.

• Increase the availability and use of venture capital.

• Increase the number of federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SBTT) awards received by the region’s businesses.

Committed regional leadership can overcome institutional fragmentation, build community capacity, improve public-sector service delivery and attract investment through regional deployment of low cost technology infrastructure. With advanced market intelligence, regions can leverage economic incentives to make smarter investments in smarter growth, retaining and attracting businesses that are growing in high-wage jobs.

Commerce: The Rules Of The Game Have Changed, Part III

2008-01-03T13:39:00Z

With the New Year upon us, we at Magnale find ourselves optimistic about our collective prospects for 2008. This is our third and last post in this series, Commerce: The Rules Of The Game Have Changed. This post completes our contextual framework for a shared community understanding. It is our hope that the observations and insights outlined in this three part series serves as a community call to action and a foundation for development of a Regional Strategic Action Plan for your regional communities.

Our community call to action is based on our optimism and understanding of the opportunities available to our nation's regions. Our optimism is tempered by the practical realities of our situational analysis of the national economy:

Over the next 10 to 20 years the nation’s economy and the federal government is facing a gauntlet of dire economic challenges that we are ill-equipped to address... static revenue, an aging population, crumbling infrastructure and increasing program costs like Medicare to name a few.
Regions will be forced to manage their own destiny with little help from the federal government to support local initiatives.
Most states will continue to struggle with budget priorities, rising cost of service delivery, and limited resources to support the current market transition to a post-industrial society.
Given the mobility of labor and the enterprise they will continue to locate (at an accelerating pace) to the regions where it is most advantageous and in their best interests.
Commerce will continue to aggregate to regions of specialization because of structural cost advantages and economic incentives.
Regions will continue to struggle with budget priorities, rising cost of service delivery and maintaining standards of living for their citizens.
Regions will continue to compete against regions, globally.
The current class segregation among the nation’s regions is accelerating resulting in regional economic disparity the likes of which we have never experienced.
The market shift to a Post-Industrial society leaves behind an unprepared workforce to compete in a knowledge based economy.

The harsh reality of our economy is that the current transition creates great opportunity for those few enlightened regions to manage abundance while it leaves the other regions to deal with the issues of scarcity and a diminishing standard of living. The current market opportunities require aggressive regional leadership to navigate the structural shift to a Post-Industrial economy to create an increasing standard of living as measured by per capita income but time is of the essence.

We are not worried about the $9 trillion national debt*, or the $200 billion annual budget deficit, estimated. What keeps us up at night is the increasing ratio of these numbers to the gross domestic product (GDP). As a nation, we are mortgaging our equity to satisfy short term debt obligations. This is not sustainable.

According to Congressional Budget Office (CBO) the nation’s debt, currently about 40 percent of the GDP, will grow to 2 to 5 times the GDP over the next 20 years. Medicare spending alone will represent in excess of 10 percent of GDP.

As an optimist, the pending crisis can be prevented. It is generally recognized by leading economists and the Federal Reserve that if the federal government did nothing to curb spending, it can keep the nation’s deficit and debt manageable through tax increases. Our tax rate is well below other leading industrialized nations.

The bad news, given that the political planning horizon is the next election cycle; none of the practical or prudent solutions are likely to happen. When have you last seen a major political candidate campaign on a platform of raising taxes, or reducing services, or cutting assistance to the elderly, or rationing health care?

The consequence of doing nothing is dramatic. If the global markets lose faith in the U.S. economy, the U.S. government won’t have buyers of debt and won’t be able to borrow money to finance current operations. The government will have two choices:

Default on the debt, or
Print money and cause runaway inflation.

The financial markets will experience a dramatic correction, currency value will decrease dramatically, and a severe recession will be followed by several years of slow growth and a national reduction in our standard of living.

What to do???

You need to win the economic development race, securing a category-leading position for your top industries before anyplace else does. You need to leverage your region’s unique strengths, capitalizing on them faster and at lower cost to drive high-wage job growth. You need to attract and retain businesses and professionals that can grow your industry and occupational clusters with innovative products and services. And you need to develop the community capacity to get your best minds working together – from among your region’s businesses, entrepreneurs, government officials, chambers of commerce, academic institutions, and economic and community development agencies. If your best minds can’t collaborate, they can’t innovate. And if they can’t innovate, your region loses.

Look to the public-private partnership (PPP) model to deploy technology infrastructure and access capital that can help drive a regional approach to economic and community development to support your existing and emerging industry and occupational clusters. Address the unmet needs of your businesses, including technology assistance, risk mitigation and access to private and public capital, data, intelligence, and tools to grow your strengths -- faster and at a lower cost.

You need to recognize that in a Post-Industrial Society the structure of power has fundamentally changed. The resources to drive regional prosperity are knowledge and capital. The central dominant figures that hold this power are individuals, scientists, and researchers. The universities and research institutions now play a critical role in regional prosperity. Education, mobilization, and cooptation are now the primary means of access to power to drive regional prosperity.

Community Capacity must now be pro actively managed. There are four interdependent categories of capital that define community capacity:

Human Capital: education, skills, experiences, and abilities of local residents to meet workforce needs.

Social and Cultural Capital: ability and willingness of residents to work together to solve problems or create opportunities.

Physical Capital: sewer systems, transportation systems, business property, developable land, technology infrastructure, and other community infrastructure to facilitate investments in current and future industry sectors.

Financial Capital: municipal budgets, income of residents, access to loans and grants, operating funds, and other such resources to entice investment in the community and its physical capital.

We can overcome institutional fragmentation, build community capacity, and improve public-sector service delivery through regional deployment of low cost technology infrastructure. With a shared technology infrastructure integrated with advanced market intelligence, we can leverage economic incentives and structural cost advantages to make smarter investments in smarter growth, retaining and attracting businesses that are growing in high-wage jobs.

We need to challenge ourselves to once again dream big dreams, exciting dreams and challenging dreams. Only these dreams, filled with passion and purpose, give meaning to life. Only these dreams that motivate us and move us to action truly matter. Only the really big dreams ever unite us in solidarity to achieve great things.

These observations and insights need to be at the forefront of any regional strategic discussion; our point is... what choice do we have?

* Edited from original post which had a misprint.

Commerce: The Rules Of The Game Have Changed, Part II

2007-12-21T13:30:00Z

Magnale is not shy when it comes to advocating our primary objective… to engineer and support distributed commerce networks which drive regional prosperity. This blog is committed to developing a contextual framework for a shared perspective to enable you to contribute to your region. We welcome your insights and observations in developing this shared perspective.

We encourage and support those few individuals and regions that find the ability in themselves to make a positive difference in the lives of others. At this point I am reminded of one of my favorite quotes:

“Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.”
Margaret Mead, US anthropologist (1901 - 1978)

Margaret Mead was a distinguished anthropologist, intellectual, and scientist who indeed, changed the world. She taught generations of Americans about the value of looking carefully and openly at other cultures to better understand our own culture here in the United States and the complexities of being human.

Margaret Mead had a unique ability to blend knowledge and action but she was not without her detractors. Time Magazine named her "Mother of the World" in 1969. In the political realm she served as a diplomat to many presidents. She had a great interest and concern about the role of science and technology in world politics.

We at Magnale stand on the shoulders of greatness. We find inspiration in the work of other thought leaders who have distinguished themselves and found success. Success achieved through hard work, the will to advocate their position, and the capacity to overcome their naysayers.

Regional prosperity is an obtainable objective for most regions. Regional prosperity is measured by an increasing per capita income for its citizens, high wage job growth above the national average, and thriving niche industry and occupational clusters.

The world of commerce and economic development has changed dramatically in the past twenty five years. Structural shifts in the global market structure have impacted virtually every business, state, county, city, and region.

During this time period the public sector response was to create an economic development organization to attract and retain existing firms, and create new jobs from within the region with varying degrees of success. No area could take its future for granted; as a consequence economic incentives were born. A new regional competition ensued, a constant fight to attract, retain, and create decent jobs. During this same time period a significant economic disparity has grown between U.S. regions due to regional leadership, will, community capacity, and community response to these structural shifts in the market.

Many leading economists including Andrew Reamer, Metropolitan Policy Program, Brookings Institute have reported these macro structural shifts. I paraphrase here to summarize:

Markets went from being national to international in scope, enabled by technological innovations in transportation and communication, and by institutional innovations such as global trade agreements, multi-national corporations, and complex, geographically dispersed supply-chains.

Financial and physical capital became highly mobile. Firms now readily disperse operations across the nation and the world; for many operations, place is increasingly irrelevant. In industries that compete on the basis of cost, developing nations have had a clear advantage in the market place. American firms in these industries find it in their interest to shift American jobs off-shore.

Productivity in many industries, particularly manufacturing, has skyrocketed - we can make more goods with far fewer people. The productivity of one manufacturing worker in 2005 was 410 percent of that of a worker in 1960, and 240 percent of a worker in 1980.

With global competition, off-shoring, productivity increases, and greater wealth for many, less of our economy is focused on producing goods than ever before.

Mergers and acquisitions, and the resulting non-local leadership, have greatly lessened the commitment that firms have to remaining in particular places.

Firms’ ability to create and bring to market innovative products and services has grown substantially. The result is increased competition around product and service attributes, and so greater industry volatility.

The intensity of competition has greatly increased from decades past. The structure of America’s economic base was once largely oligopolistic. That is, in any one industry, a handful of firms controlled the market, prices were stable and sufficiently high, and union power was such that large numbers of relatively uneducated workers could move into the middle class. With global competition and substantially greater productivity, the wages and numbers of jobs available to workers in such industries have declined dramatically.

“Regions are currently experiencing what economist Joseph Schumpeter, 60 years ago, called ‘creative destruction’. In a world of creative destruction, regional economic stability requires creating defensible market niches, ones that cannot easily be replicated in another location.”

In this post-industrial economy, given the international structure of markets and that cost of communications, technology, and capital have been equalized across international borders, regions are now limited in their basis from which to compete to drive prosperity. In fact, regions only basis from which to compete is from a combination of market access, structural cost to include infrastructure and taxation, labor, and innovation driven by tacit and explicit knowledge management. We point out those regions that do not develop this basis to compete as applied to niche industry and occupational clusters are destined to see declines in population, jobs, and stagnant or decreasing per capita income.

In the field of knowledge management the concept of tacit knowledge refers to a knowledge which is only known by an individual and that is difficult to communicate. Knowledge that is easy to communicate is called explicit knowledge. The process of transforming tacit knowledge into explicit knowledge is known as codification or articulation. Tacit knknowledge is a crucial input to the innovation process. A regions ability to innovate depends on its capacity to retain and grow it’s level of tacit knowledge.

Andrew Reamer in his congressional testimony outlines these points and the regional needs of development organizations, he states that these organizations need access to: (see Congressional Testimony)

Current, accurate information regarding the region’s economic performance and structure;

The expertise to determine the implications of this information for a realistic regional strategy;

Knowledge about how to create and sustain defensible industry and occupational clusters;

Knowledge about the various building blocks that make for a competitive economy -- workforce development, technology transfer, infrastructure development (including telecommunications), entrepreneurship, and venture capital;

The expertise to create and sustain useful social networks within industry clusters, among entrepreneurs, and other key sectors that promote innovation, knowledge sharing, and new business relationships; and

Knowledge of how to learn what businesses need to be successful (and stay in the region) and how to help them get it.

We found Andrew Reamer’s testimony to be extremely insightful and right on point.

Social Networks and tacit knowledge are the life blood of industry and occupational clusters and take variations of three different forms*:

Centralized Decentralized Distributed

* Source: Barbasi, Albert-Laszio, The New Science of Networks, Perseus Publishing, 2002

As stated in the beginning of this post … Our primary objective is to engineer and support distributed commerce networks which drive regional prosperity. Distributed networks of tacit knowledge workers within niche industry and occupational clusters are the most defensible in support of sustained regional prosperity.

Magnale has leveraged our understanding of commerce, market structure, social networks, and geographically dispersed supply-chains to provide CommerceAuthority the only Web-based system engineered to equip a region’s businesses, governments, and academic institutions to overcome institutional barriers to regional competitiveness.

Concerned citizens, businesses and regions now have a practical, and cost effective means to address institutional fragmentation and the under-served needs of industry and occupational clusters to create high wage jobs and regional prosperity.

With this far reaching post I will leave you with a profound passage that touched me for its relevancy to our community and the subject matter of this blog. It was written by Stephen J. Novak whom I do not know. Given the spirit of the season I quote it here for your consideration.

“The paradox of our time in history is that we have taller buildings but shorter tempers, wider freeways, but narrower viewpoints.

We spend more, but have less. We buy more, but enjoy less. We have bigger houses and smaller families, more conveniences, but less time.

We have more degrees, but less sense, more knowledge, but less judgment, more experts, yet more problems, more medicine, but less wellness.

We’ve added years to life not life to years. We build more computers to hold more information, to produce more copies than ever, but we communicate less.

Say a kind word to someone who looks up to you in awe, because that little person soon will grow up and leave your side.

Give time to love, give time to speak, and give time to share the precious thoughts in your mind.”

Happy Holidays!

Commerce: The Rules Of The Game Have Changed

2007-12-14T13:30:00Z

To the casual observer Magnale’s primary objective to serve as an intermediary in support of regional prosperity may appear to be an overly idealistic notion … To get disparate groups from the public sector, private sector, and academia to collaborate to establish and support distributed commerce networks, which create regional prosperity is just too unrealistic. This post is an effort to convince you otherwise.

As stated in our last post, our intent with this blog is to create a contextual framework of understanding for our community as we apply and integrate technologies within our CommerceAuthority technology infrastructure.

To accomplish this objective requires our community share an intimate understanding of the nature of power and self-interests within the profit system. The current state of social, economic, and political transition manifests itself in the differences between the state of how power is held in society and the economy (the nature of the system) and who holds power (the individual or group) this is shown in the following tables developed by Harvard economist Daniel Bell:

	Pre-Industrial Society	Industrial Society	Post-Industrial Society
Resource	Land	Machinery	Knowledge
Social Locus	Farm Plantation	Business Firm	University Research Institute
Dominant Figures	Landowner Military	Business People	Scientists Researchers
Means Of Power	Direct Control Of Force	Indirect Influence On Politics	Techno-Political Forces Franchises Rights
Class Base	Property Military Force	Property Political Organization Technical Skill	Technical Skill Political Organization
Access	Inheritance Seizure By Armies	Inheritance Patronage Education	Education Mobilization Cooptation

Class Base denotes not a specific group of persons, but a system that has institutionalized the ground rules for acquiring, holding, and transferring differential power and its attendant privileges. In the U.S. society today, there are three modes of power and social mobility:

	Pre-Industrial Society	Industrial Society	Post-Industrial Society
Base of Power	Property	Politics	Position Skill
Mode of Access	Inheritance Entrepreneurial Ability	Machine Membership Cooptation	Education
Social Unit	Family	Group/Party	Individual

It is Magnale’s position that every region in the U.S. is in a state of transition relative to this economic system structure and that policy must be aligned to manage this transitional state within the context of the existing and emerging industry and occupational clusters. For policy context there has been three main phases and time periods of Research and Development relative to product and service innovation driven by distinct attributes:

Individual Innovators -- Who Drive High-Tech Innovations -- 1850’s to early 1900’s
Organized Large Scale Research -- Industrializing Innovation, Cold War, Big Science -- 1900’s to 1989
Global Networks of Innovation -- 1989 through 2020

For these classes of technology development, the evolutionary patterns of technical and market risk over the relevant development life cycle can and do result in inadequate investment at key points in the life cycle. This under investment results from a much wider set of economic conditions (market failures or structural problems) than commonly believed.

Specifically these market failures or structural problems can be categorized by:

Technical complexity: The need for multiple disciplines to be combined within one organizational structure to conduct R&D.
Time: The negative effect on investment decision making associated with excessive discounting.
Capital intensity: The effect on risk assessment of the capital intensity of many research processes (i.e., the cost of these processes, especially as a percentage of a firm’s R&D portfolio).
Economies of scope: A broad and uncertain scope of potential market applications for many of the most important emerging technologies.
Spillovers: A tendency for excessive “leakages” or “spillovers” of the technical knowledge produced by individual companies to others that did not contribute to the research.
Infra-technologies and standards: Public good character and low visibility that cause inadequate investment.
Market segmentation: The emergence of sophisticated users who demand sets of performance attributes that cannot be provided by existing industrial R&D capabilities.

Three particularly important negative impacts of these market failures are:

1. Corporate investment decision dysfunction with respect to longer-term, complex, and multi-disciplinary technology research. Underinvestment is particularly pronounced in the early phases of the R&D life cycle, which most strongly exhibit the investment barriers resulting from the intrinsic technical risk of the technology and its mismatches with existing corporate strategies and competences.

2. Excessive compression of R&D life cycles with resulting disincentives to undertake long-term, high payoff research. Global competition is forcing shorter total product life cycles which, in turn, are forcing corporate R&D portfolios to overemphasize product-line extensions and incremental process improvements. In general, less market risk is assumed by the private sector.

3. Failure to project access to the markets for increasingly system-based technologies. Many of today’s most important technologies have complex system structures, which require equally complex interfaces to enable market entry by small and medium businesses and system optimization by users.

Without the needed technology infrastructure, inefficient industry structures evolve. Given the nature of technology market failures and the significance of rectifying them, the two major R&D policy issues facing the U.S. economy today are:

1. Understanding and providing appropriate policy responses for the early phases of technology research. Efficiently bridging the widening gap between federally funded basic research and industry-funded applied research and development — this does not require large amounts of funding. However, this funding for generic technology research is essential to lowering the substantial technical and market risks typical of early phases in a technology’s life cycle and must be available when the window of opportunity is open. All industrialized nations have or participate in industry-government partnerships of various forms to provide this essential category of technology infrastructure.

2. Identifying and providing technical infrastructures needed by technology-based industries. The needs for these infrastructures vary over the typical technology life cycle and have strong public good content, thereby requiring effective government support. As with generic technology, research support for the needed range of infra-technologies requires relatively modest amounts of funding focused on existing and emerging industry and occupational clusters within the specific region.

This funding must not only be adequate, but it needs to be directed to unique capabilities that can achieve the large economies of scale and scope that characterize this type of technology infrastructure and that can also efficiently diffuse it to industry, standards organizations, and other regional users.

The major technology trends identified here obviously have implications for the amount and type of technology infrastructure needed to achieve steady, high rates of economic growth to support high wage jobs.

Equally important, technology trends interact with corporate strategy, industry structure, and government policy (in particular, policies that provide technical infrastructure at the various phases in a technology’s life cycle). Technology trends or trajectories, once established, can have dramatic effects on a number of industries or even sectors of the economy in terms of both rate and directions of growth. Hence, early evaluation of the multiple trajectories afforded by the timely development of generic technology and supporting infra-technologies is essential.

Bell emphasized that the changes effected by a post-industrial society cause a disconnect between social structures and culture. Most of today's unique modern regional problems can be generally attributed to the effects of the post-industrial society. These problems are particularly pronounced where free trade and the free market dominate. They can include economic inequality, the outsourcing of domestic jobs, etc.^[1]He argued that post-industrialism would be dominated by information-led and service-oriented business and that the post-industrial society would replace the industrial society as the dominant economic system. There are three components to a post-industrial society, according to Bell:

a shift from manufacturing to services
the centrality of the new science-based industries
the rise of new technical elites and the advent of a new principle of stratification

We at Magnale share this perspective.

Economist Jared Bernstein reported disturbing trends yesterday, that by 2005, the average post-tax household income of the bottom fifth of the U.S. was $15,300, the middle fifth: $50,200, and the top 1 percent: $1.1 million. "Such concentration of income is unsustainable in a democratic society," concludes Bernstein. (See link for complete posting). Jared Bernstein Post

We also share this perspective.

Much has been written about the “haves” and the “have not’s”. As commerce and prosperity continues to aggregate within regions of specialization and given the mobility of the enterprise and labor this class stratification will be segmented by region creating social, economic, and cultural problems that are difficult to manage. This is happening at an accelerating pace. The only debate is what regions have the capacity to navigate this economic system in transition.

This post summarizes complex macro market forces driven by free trade, globalization, and the shift to a post-industrial society. Few regions are prepared to effectively manage these market forces to ensure regional prosperity as measured by an increasing average household income. If history has taught us anything it is that change is driven either by enlightened leadership or financial crisis. What do you believe will drive change in your region?

^[1] Bell, Daniel. The Coming of Post-Industrial Society. New York: Harper Colophon Books, 1974.

Welcome

2007-12-06T13:30:00Z

Welcome to our site! We hope you will come and visit often. We will post considered and thoughtful insights regarding our community on a regular basis. Your comments are always welcomed.

This first post should leave you with the impression that we are serious people dealing with big issues. We have decided to share with you our perspective on macro forces facing our businesses, regions and communities and practical strategies, techniques, and technologies to address them. In these challenging times we see opportunity in bold actions.

Our corporate name, Magnale, is a Latin word, literally translated as “great things; mighty works, deeds, words”. Magnale has a unique tag line, “Powering Democratic Commerce”. Magnale’s definition is … practicing, advocating, and promoting the common commercial interests of mid-market business and their people through regional technology infrastructure. Among the factors that led to this choice was the wide marketing versatility of the phrase and its flexibility for communicating Magnale’s vision, mission, and strengths. It identifies Magnale as a leader holding the belief that prudent and practical commerce is the most effective driver behind democratic policy and regional agenda formulation and competitiveness.

This name and tag line is where we find our inspiration for our work. We understand that the U.S. may indeed be achieving high levels of employment in a time of fairly strong economic growth, but the decisions made by many businesses, regions, and metropolitan areas are concurrently diminishing quality of life for their citizens. Most U.S. regional and metropolitan economies, even large ones, still see getting bigger as the main goal of economic and community development. Decades-old policies that define growth as merely “more jobs and more people” have resulted in urban sprawl, traffic congestion, poor air quality, rising housing prices, and a shortage of skilled workers. In fast-growing regions, such problems are making it difficult for companies to recruit employees and for city governments to hire managers, administrators, teachers, police, and fire fighters. These problems are worse, and politically more urgent, in metropolitan regions that are growing at a dramatic rate, such as Atlanta, Phoenix, Las Vegas, and Seattle.

We think this situation calls for regional business, economic, and community leaders to do great things: to produce mighty works, deeds, and words that emphasize the quality of jobs they bring to their regions, more than the quantity of jobs. Better-quality jobs provide higher wages, employ more-educated workers, emphasize the importance of overall quality of life, and contribute to a high-and-rising standard of living for each employee and the community-at-large. Success in economic development should ultimately be measured by an increasing average per-capita household income. In a word, it makes more sense to strive for economic prosperity, not just economic growth.

Our intent with this blog, through a series of posts, is to create a contextual framework of understanding for our community as we apply and integrate technologies within our technology infrastructure. To this end we have adopted the definition of four categories of technology which embody significant public good elements:

Emerging technologies that entail high risk and long gestation periods but create new markets with significant wealth creation potential;
Systems technologies that provide infrastructure to many product and service technologies and thereby drive growth in major economic sectors;
Enabling or multi-use technologies which benefit multiple segments of an industry or group of industries, but encounter economies of scope and diffusion investment barriers;
Infra-technologies which leverage investment in both development and use of proprietary technologies, but require distinct competencies to develop and common ownership (such as defacto standards) to effectively use.

Our purpose is to solicit and act upon your insights and to collectively serve the public good. We welcome you on this journey with us. Your first contribution is to comment on these technology definitions and whether or not they make sense to you?

Please listen to my Podcast below.

The Great Equalizer: Internet Levels Playing Field For Regional Prosperity

2007-12-03T13:22:00Z

Magnale today unveiled a new web-based technology infrastructure called CommerceAuthority, developed to drive prosperity for citizens of America’s economic regions. The system was designed to help businesses, regional governments, importers, exporters and logistics service providers overcome mission-critical business challenges related to global commerce. It delivers an expansive trading partner network, a unique package of market and business intelligence, and networking and communication tools directly to users’ computers, through any standard web browser.

Press Release

www.magnale.com

Magnale Identifies Community Capacity Building As Critical To Regional Economic Success

2007-11-16T14:03:00Z

Magnale today released a thought leadership white paper which ties America’s regional economic success to something called community capacity. The paper defines community capacity as the ability of regional citizens and businesses to collectively draw upon local sources of capital and take advantage of opportunities to improve – or at least sustain – the region’s standard of living. Magnale identifies four interdependent categories of capital that regional interests can tap to respond to social, economic, environmental, and political stresses and meet community needs.

Press Release

Register To Get Access to Free White Paper and Other Thought Leadership From Magnale

www.magnale.com