Knowledge is the key factor of production for all modern economies. Old economic models held the traditional factors of production were land, labor or capital and these factors fuel business process. Interestingly, Wikipedia’s Business Processes definition includes a reference to Adam Smith’s description of the pin factory, from the 1776 book, “The Wealth of Nations”. Smith’s traditional factors of production are still important. In modern terms they have become marketing, business delivery, information technology and personnel. Yet individually, or collectively, they do not and cannot explain global growth. The business processes in Smith’s book address microeconomic principles and practices. It was an analogy, or model, for an individual enterprise with its division of labor. The model describes falling cost because of raising scales and managing the classic actors of production, and the pursuit of greater returns. The ‘pin factory’ story describes macroeconomic industry principles and practices using the notion of the “invisible hand of perfect competition”. The hand is a force that leads to new enterprises entering profitable markets and copying other profitable enterprises and their processes. Supposedly this would lead to rising cost because of demands on scarce resources.

Contradictions arose in the rising cost model in Adam Smith’s Economic model. The model led to the belief that, because of competition, no enterprise in the industry will set and keep their prices and profit margins. The result is decreasing profits to all enterprises in a given industry. We know the importance of knowledge in the enterprise has outdated these ideas. Firms still enter profitable markets and copy other profitable enterprises processes, yet they improve the process with a ‘monopolistic’ control of knowledge.

In 1990, Paul Romer published ‘Endogenous Technological Change’, which treated “knowledge as an endogenous factor of production”. Romer’s ideas became widely accepted after he and other economists developed a model that includes and represents “existing knowledge” and the “growth of new knowledge” in global and national economic models. These extended, knowledge-focused models show it is chiefly available “existing knowledge” (either proprietary or non-proprietary) and the “growth of new knowledge” that is responsible for worldwide and local economic growth (GDP). Growth in “proprietary Knowledge” and managing an enterprise with a “monopolistic competitive entity” has been responsible for sustained worldwide economic growth and increasing returns. It is not land, labor or capital or marketing, sales, factories and personnel based on a fixed economic demand.

Further, Business Processes built solely on the backs of outdated models will not build future economic growth and profit. Economists and business management theorists have recognized this only recently. Or more subtly, business process built without the benefit of knowledge-based decisions cannot keep their business profitable. Moreover most processes are brittle and have been constructed with many outdated assumptions. This is little comfort for the many firms that seek to retain the knowledge of the retiring ‘baby-boomer’. Knowledge” and the “creation of new knowledge” in all its domains and forms are the key critical success factors in all modern firms. Knowledge needs to be identified, defined, and incorporated into the decisions that create and maintain agile enterprise structures. In turn, these knowledge-driven business processes generate timely products, services, and profits.

In June, 2005, Frank Rhode published an HBR article, ‘Little Decision Add Up’, that captures the value of decision in profitability. Figure 1.1 graphs the decision yield concept: the value of the decision declines with the frequency of the decision. Small decisions hold the greatest potential for improvement. Infrequent, large scale decisions include mergers and acquisitions. Small scale, high value decisions include customer sales and support, employee onboarding and others. You improve the small-scale decision by improving the outcome. Outcome is improved by raising the accuracy. In the decision there is an increasing role of knowledge on the decisions. Almost pure knowledge is needed to make very large scale decision on the left and almost pure information makes very small decisions.

Decision Yield

Figure 1.1 This graph depicts the value of frequent decisions and the role of knowledge in these.

Figure 1.1 is idealized. Decisions at the frequent, small valued levels often require a burdensome quantity of knowledge from employees. Many processes are not properly digitized and the policies (business rules) are not understood. As firms become more mature in processes and managing decisions less knowledge is needed to make small decisions.

Agility Theory: One Transport Mechanism for “proprietary meta-knowledge”

More recently Romer pointed out the most important proprietary knowledge in the future will be “proprietary meta-knowledge”. This includes how to support the production, transmission and use of all types of operational, proprietary knowledge. He doesn’t tell us what the concepts, content, practices, artifacts, structure, standards or products of “proprietary meta-knowledge” will be. Because it presents a workable model of this, Agility Theory provides an important part of the structure to this knowledge. It is a critical form of meta-knowledge. Agility theory provides some insight about how economically-focused, enterprise-oriented, proprietary meta-knowledge will evolve, be implemented and be utilized.Enterprises, industries and whole economies must develop and use meta-knowledge and knowledge. The risk is that they might not grow or be able to sustain themselves as part of the rapidly changing, global economy. Agility Theory provides a framework for the growth

Therefore by definition, business agility is a critical metaknowledge framework a process that incorporates a firm’s value creation into a learning framework.