Thriving in a New Economy
chapter two
Twelve Themes of the New Economy
Take a moment out of the heat of your current pitched battle and chew on the implications of this thought. We are right now in the very early stages of a new economy, one whose core is as fundamentally different from its predecessor as, say, the automobile age was from the agricultural era. If you grasp this premise it's much easier to understand a lot of what's going on around you, including why a seemingly unrelenting tsunami of change keeps washing over you and your business.
John Huey, 1994(1)
It is fairly widely accepted that the developed world is changing from an industrial economy based on steel, automobiles, and roads to a new economy built on silicon, computers, and networks. Many people talk of a shift in economic relationships that's as significant as the previous displacement of the agricultural age by the industrial age. There are new dynamics, new rules, and new drivers for success.
But as Alan Webber, former editorial director of the Harvard Business Review, has written: "[N]o one has asked the all important question -- what's so new about the new economy?"(2) His question is reminiscent of the time that Albert Einstein was monitoring an exam for graduate physics students and was told that there was a problem because the questions on the exam were the same as on the previous year's test. "That's okay," he replied, "the answers are different this year."
Well, the answer to Webber's question is different this year, too. And it will be different next year also. The new economy is all about competing for the future, the capacity to create new products or services, and the ability to transform businesses into new entities that yesterday couldn't be imagined and that the day after tomorrow may be obsolete.
The Twelve Themes of the New Economy
A dozen overlapping themes are emerging that differentiate the new economy from the old. By understanding these you have the precondition for transforming your business for success.
Theme 1: Knowledge
The new economy is a knowledge economy.
Information technology enables an economy based on knowledge. But notwithstanding the rise of artificial intelligence and other "knowledge technologies," knowledge is created by human beingsóby knowledge workers (professional and technical workers now outnumber industrial workers by almost three to one) and by knowledge consumers. "Leveraged intellect and its prime facilitator, service technology, are reshaping not only the service industries but also U.S. manufacturing, the country's overall growth patterns, national and regional job structures, and the position of the United States in world politics and international competition," argues James Brian Quinn, professor at Dartmouth's Tuck School, in Intelligent Enterprise. (3)
To begin, the knowledge content of products and services is growing significantly as consumer ideas and information and technology become part of products. Take, for example, the new era of smart products which are beginning to revolutionize every aspect of society.
--Smart clothes. Clothing manufacturers are placing chips in clothes that can contain information on where and when the item was made, who manufactured it, when it was imported, when it arrived in the store, and when it was placed on the rack. When the item is purchased, information can be added about who purchased it, the date, and the amount paid. The item has a memory that can provide useful information to everyone in the value network. This can help to solve return problems, or if the item goes out the store door before it has been paid for, it can communicate back: "Help," cries the jacket. "I'm being stolen!"
--Smart cards. Credit card, debit card, an access card to the officeówho needs so many separate pieces of plastic with various expiry dates and annual fees? Coming: one card for all these functions plus driver's permit, personal health information including drug interreactions and organ donor info, spouse's sizes for gift givingóall managed by a single microprocessor embedded in the plastic. As for the issues of security and privacy? They are significant. (More on that later.)
--Smart houses. Burglar and fire alarms, appliances, and lighting can be controlled from a handy keypad or by dialing up the system from an outside phone. You can check on the room temperature, get supper started in the oven, feed the dog, and monitor goings-on to ensure that your teenagers aren't breaking too many pieces of furniture at the party they're not supposed to be having while you're on vacation. Soon, the pantry will keep track of items you're running out of and automatically issue food and beverage replenishment orders for food that is delivered to your door.
--Smart roads. Pavement can do more than carry vehicles to destinations. Roadbeds will monitor traffic and weather conditions, then issue warnings about dangerous conditions ahead. There will be fewer accidents because sensing devices will alert drivers who are following other cars too closely or who have fallen asleep and are swerving out of the proper lane. Transport trailers will give you sufficiently wide berth. Potholes? Unheard of.
--Smart cars. Too drunk to drive? The car won't start. Passing an historic site? An audio and video broadcast explains what happened and when. An integrated system monitors both your driving performance and the car's operations, automatically scheduling service visits where the technician plugs in and knows immediately what's wrong under the hood. Maps and directions will be broadcast via global positioning satellites. No man will ever again have to admit to his wife that he's lost.
--Smart tires. Logging trucks in Alaska and Northern British Columbia have onboard computers linked through satellite to geographical information and weather systems, which link back to the truck dynamically adjusting (among other things) the pressure in the truck's tires. Because trucks can go faster and last longer with tire pressure right for the road conditions, the entire cost of the system pays back in months.
--Smart pucks. Hockey is growing in popularity, but aging viewers find it hard to see the puck on the TV screen. Coming soon are pucks containing a chip that will transmit data to the network computers. The puck on the screen can be bright, or pink, or change color depending on which way the play is going, or it can even contain sound effects for the viewing audience.
--Smart radios and TVs. Who wants one-way communication? What about personal, interactive radio and television where you can ask for and receive more information about the music, movie, or commercial, including the capability to order merchandise? Or if you don't like what you're getting, more bowling scores and bingo locations can be yours. A built-in agent will look after your individual programming preferences and personal interests and then play information about them on command. Commercial messages will be tailored to your buying habits; no more ads for personal products you never intend to use.
--Smart telephones. Already phones have built-in answering machines and come with faxes and caller ID, but there's more yet. The smart telephone will combine all known communications functions, offer mobility, plus handle voice, video, and data at the same time. Now, if only there were a function known as call backward, so that you could turn back the clock and speak the wonderful sentence that you thought of five minutes after you hung up from that important conversation.
In an economy based on brain rather than brawn, there is a shift toward knowledge work. In the new economy the key assets of the organization are intellectual assets, and they focus on the knowledge worker. This is causing companies around the world to develop new ways of measuring and managing their intellectual capital.(4) For Peter Drucker, knowledge is not simply another resource along with the traditional factors of production such as labor, capital, and land; for him, it is the only meaningful resource today. Consequently, the knowledge worker is any organization's greatest single asset.(5)
Consider Microsoft as a new economy company. When evaluating the assets of Microsoft, it is ludicrous to contemplate old-economy questions such as the following:
How much land does the company own?
What is the value of Microsoft's manufacturing facilities, its plants?
How much inventory does it have?
How many office buildings does it own?
How great is its stock of raw materials?
Rather, the only meaningful assets are contained in the crania of the managers and employees of the company. These assets walk out the door every night (or in the case of Microsoft, many leave in the morning and at other sundry times of the day).
But surely capital is still a critical asset? Isn't Microsoft's ownership of and access to money what enables it to invest in new products, to acquire companies, to throw tens of millions of dollars into marketing a new product such as Windows 95? True, capital is a key asset, but it is a fleeting one. Fifteen years ago Microsoft had virtually no capital. Now its market capitalization is greater than that of General Motors or IBM. In the new economy, capital will more and more become a function of knowledge.
The means of production is shifting from something physical to something human. As Robert Harris says: "The most visible differences between the corporation of the future and its present-day counterpart will be not the products they make or the equipment they use, but who will be working, how they will be working, why they will be working and what work will mean to them."(6)
Furthermore, labor is no longer a commodity. In the old economy, the workers at one car company were pretty well equivalent to the workers at another. Labor was only a commodity and was interchangeable. Now, labor is highly variable. The craft workers at the old-economy Mercedes plant in Germany, hand-sewing the seat covers, have a completely different knowledge base and skill set from those of the highly educated workers running robots at today's Lexus plant. And in the battles shaping up between Lotus, Microsoft, Oracle, Novell, and other software companies, there is almost no labor in the traditional sense. The knowledge and creative genius of the product strategists, developers, and marketers are the key. What counts is a company's ability to attract, retain, and continually grow the capabilities of knowledge workers and provide the environment for innovation and creativity.
So AlliedSignal spends millions of dollars annually training plant workers to use sophisticated statistical methods to drive toward six sigma (very high) quality levels. It is this shift to knowledge work that is behind all the discussion in academic circles, management seminars, and boardrooms of organizational learning. In such a world, an organization will be competitive only if it can learn faster than either its current or emerging competitors. Any firm can have the same technology as another company; any product can be copied. In the new race to the finish line, lifelong organizational learning becomes the only sustainable competitive advantage.
Because production is based on knowledge, there are vast new opportunities for improvements in quality of life for societies that can achieve a successful transition and effectively distribute the social benefits. In the old economy, workers tried to achieve fulfillment through leisure. The worker was alienated from the means of production that were owned and controlled by someone else. In the new economy, fulfillment can be achieved through work and the means of production shifts to the brain of the producer.
Theme 2: Digitization
The new economy is a digital economy.
Throughout history, revolutions in a natural resource have enabled a new paradigm in tools (iron, bronze, steel), which led to new modes of wealth creation and social development. The new age could be aptly dubbed the age of sand. The affairs of commerce, business transactions, human communications, and the insights of science are all reduced to charges on particles of silicon or racing through glass fibersóboth derived from sand.
The new media, the I-Way, and the new economy are all built on a strikingly simple thing. All information can be represented as either 1 or 0, which form the basis of the binary number system. Number 1 is represented as a 1; number 2 as a 10; number 3 as an 11, and so on. If all numbers can be described as 1s and 0s, early thinkers concluded that a combination of 1s and 0s could be used to represent the letter "a" and the letter "b" and the capital letter "A" and, for that matter, other kinds of information.
These 1s and 0s can in turn be represented in a computer as the presence or absence of an electrical signal. The first computers could encode or translate numbers and, later, letters into 1s and 0s by using vacuum tubes. When the tube was on, this indicated a 1. When the tube was off, this indicated a 0. Later, tubes were replaced by transistors that could be turned on or off. These were, in turn, replaced by silicon chips in which the on or off was represented by the absence or presence of a charge on a particle.
Over time, digitization was applied beyond numbers and letters. Bits could be used to represent more and more types of information, such as graphs and photographs. Furthermore, time-based media (which are not static but which take time to present themselves) such as audio and video, could be sampled and translated into bits. If, for example, the analog wave form of a human voice could be converted into a digital signal by sampling it a sufficient number of times, these bits could be stored in a computer or a digital storage device like a disk (as in the case of voice mail) and reconstructed back into an analog wave that your ear can hear.
In the old economy, information was analog or physical (or as Nicholas Negroponte likes to say "atoms"). People communicated by moving their physical presences into a meeting room, talking over an analog telephone line, sending letters made of atoms to one another, broadcasting analog television signals to homes, showing pictures developed at the local photo shop, exchanging cash or checks, playing records by the guidance of a stylus through some grooves on a record, publishing physical magazines purchased at a store or delivered by the post office, or projecting light through a physical film strip at a movie theater.
In the new economy, information is in digital form: bits. When information becomes digitized and communicated through digital networks, a new world of possibilities unfolds. Vast amounts of information can be squeezed or compressed and transmitted at the speed of light. The quality of the information can be far better than in analog transmissions. Many different forms of information can be combined, creating, for example, multimedia documents. (If a picture is worth a thousand words, the right multimedia document retrieved at the right time is worth a thousand pictures.) Information can be stored and retrieved instantly from around the world, eventually providing instant access to much of the information recorded by human civilization. New digital appliances can be created that fit in your pocket (or smaller) and can have an impact on most aspects of business and personal life.
By comparing something as simple as the post office and its delivery of physical mail to the digital electronic mail systems of today (even though they are relatively primitive), you can begin to understand the effect of digitization on the metabolism of the economy. The benefits of e-mail are not just that messages move faster (approaching the speed of light compared to mail trucks). Nor that there is additional convenience in being able to send messages with the flick of a keyboard to a distribution list. Nor that there is a permanent searchable record of communications. Nor that "shadow functions," like walking to the mail box or playing telephone tag, are reduced. Although all those benefits are real enough, the point is that e-mail is just the beginning of a whole new way of human collaboration. Product planners are working as a team from various locations. People can work just as effectively from home or their hotel room as they can in the office. Similar change is coming to every aspect of commerce, management, and learning throughout the economy. As text-based e-mail systems are replaced by multimedia mailóin which your message contains information in many forms, including videoóthe capacity of humans to communicate across time and space will be affected significantly.
Theme 3: Virtualization
As information shifts from analog to digital, physical things can become virtualóchanging the metabolism of the economy, the types of institutions and relationships possible, and the nature of economic activity itself.
In the new economy, there are (to name a few) the following:
--Virtual alien. People working and participating in one country's economy who are physically located somewhere elseófor example, "virtual data entry workers" who live in India. Virtual aliens are often, technically, illegal aliens.
--Virtual ballot box. Any information appliance (TV, telephone, computer, kiosk, etc.) from which citizens can vote.
--Virtual bulletin board. Message Maestro, hyperlinked to other boards. Push pins not required.
--Virtual business park. "House" business resources on the Net to help companies rapidly create virtual corporations. As in Bell South's Media Park, which provides resources for the creative community.
--Virtual congress (aka virtual hearings). Legislative hearings held from multiple locations asychronously (in multiple time dimensions).
--Virtual corporation (virtual enterprise, extended enterprise, interenterprise). The conjunctional grouping, based on the Net, of companies, individuals, and organizations to create a business.
--Virtual coupon. On the Net, encouraging you to buy, for example, Jiffy peanut butter.
--Virtual government agency. Many different government agencies that have a similar purpose are linked by networks to deliver services through a single window to the public, as in "entitlements" virtual agency.
--Virtual job. Individual contract work conducted on the Net. Not to be confused with unemployment.
--Virtual mall. An environment on the Net in which like things can be found, as in "virtual shopping mall" or "virtual shoe sale."
--Virtual market. Any place in cyberspace where people shop.
--Virtual office. Anywhere. The location of work for the nomadic office worker.
--Virtual reality. The overriding oxymoron for virtualization.
--Virtual sex. Interactive multimedia sexual experience with digitized partner(s), in the future involving kinesthetic feedback.
--Virtual stockyard. Electronic auction of stock using interactive workstations. Stock do not need to be moved to a physical yard to be sold. Now replacing many physical stockyards, as at Calgary Stockyard Ltd., which conducts two-thirds of cattle transactions electronically.
--Virtual store. The store on the Net that isn't there, routing consumers to suppliers (aka virtual retail, virtual wholesale, virtual distribution).
--Virtual village. The grouping of individuals, independent of location, who share a broad set of common objective and subjective interests. Extends to village life, main street, village square, village clown.
--Virtual water cooler. Places on the Net where people can engage in informal, even playful communications such as those that occur around the (physical) water cooler. Sometimes called a MUD (Multi-User Dungeon).
Theme 4: Molecularization
The new economy is a molecular economy. The old corporation is being disaggregated, replaced by dynamic molecules and clusters of individuals and entities that form the basis of economic activity. The organization does not necessarily disappear, but it is transformed. "Mass" becomes "molecular" in all aspects of economic and social life.
The principal economic unit of the industrial economy was the corporation. The roots of the command-and-control hierarchy were in the church and military bureaucracies of the agricultural age but were extended to become the firm. The objective of every CEO and board was to increase the corporation's size, revenue, and profit.
The traditional hierarchy has been in deep trouble for years now because it was poorly equipped to respond to the new business realities. Conventional wisdom of the past decade has called for more responsive, flatter, team-based structures. The most significant movement to create such horizontal, process-oriented structures is business process reengineering (BPR). However, as Riel Miller, an economist working with the Alliance for Converging Technologies, put it: "The necessity of adding knowledge at every step in the value chain is beginning to call into question the familiar notion of the firm as an organizational unit. The Net may be, at one and the same time, the source of both the demise and salvation of the firm as we have known it."(7)
More than fifty years ago 1991 Nobel Prize winning economist Ronald Coase asked why firms exist. Why are there groups of people working together under one organizational framework? He wondered why there is no market within the firm. Why is it unprofitable to have each worker, each step in the production process, become an independent buyer and seller? Why don't the draftspeople auction their services to the engineer? Why is it that the engineer does not sell designs to the highest bidder?
One of the main answers to these questions has to do with the cost of information. Producing a loaf of bread, assembling a car, or running a hospital emergency ward involves a number of steps in which cooperation and common purpose are essential to making a useful product. An emergency room, where each doctor bids for nursing services in an attempt to get the lowest price, while at the same time determining if the nurse is actually capable of assisting with the operation, might provide a fully functioning market but not a particularly useful product for a dead patient. Similarly, holding an auction before the axle assembler would pass along product to the chassis assembler might slow down the line. It would be even less efficient if the information on engineering viability and compatibility needed to be purchased on the shopfloor marketplace at every step.
What makes a pure market impractical is the time and cost of acquiring the information needed to undertake complex production processes. What is being sold? What is the quality of the labor? What is the quality of the raw material or intermediate input? What is the price for the final product? How will it be sold? By whom? With what kind of information or marketing? Who will finance the production process, and how much will financing cost? The ensemble of functions within a firm consist not only of a series of discrete products but also the infrastructure of collaboration.
A clear framework and strict regimentation worked on many battlefields and in many marketplaces of the past. The role of the overarching infrastructure of the firm or army was clear and indivisible. But today, as Miller puts it: "The Net does not change the rules, but it changes what is possible. It opens up new horizons for what is economically and practically feasible. The costs of information and coordination are dropping. More than ever we are in a position to create wealth by adding knowledge to each product at each step."
The industrial hierarchy and economy are giving away to molecular organizations and economic structures. The word molecularization is awkward but helpful. In physics, a molecule is one of the basic elements of matter. It is the smallest particle into which a substance can be divided and still have the chemical identity of the original substance. Molecules can be held together by electrical forces. In solids, attracting and repelling forces are balanced, holding the molecules in place. The molecules do not have enough energy to move to another part of the solid. In liquids, the molecules move about easily although they still have attractive forces among one another. Certain organic compounds called liquid crystals have properties of both liquids and solidsómolecules form clusters that can move about and change rapidly, yet they retain a degree of structure. As conditions change (temperature), the state of the molecules changes as well.
The analogy is helpful in understanding the new economy. The new enterprise has a molecular structure. It is based on the individual. The knowledge worker (human molecule) functions as a business unit of one.(8) Motivated, self-learning, entrepreneurial workers empowered by and collaborating through new tools apply their knowledge and creativity to create value. Conditions may warrant a solid structure that tightly binds molecules together. More likely, conditions will require more dynamic relationships among molecules, causing them to cluster in teams, as in liquid crystals, or even to move more freely, as in liquids. The capacity for new relationships is profoundly increased through the new infostructure. There is still a role for the organization to provide a base structure for such molecular activity, but it is a far cry from the old hierarchy.
When such molecular activity is extended to the economy as a whole, we can see very different kinds of relationships that make discussion of the virtual corporation seem trite. For example, the mass media will become the molecular media, through which readers, listeners, and viewers become customers able to access and interact with millions of "channels." They do so when they choose, rather than according to the schedule of a broadcaster. Mass production becomes molecular production with production runs of oneórather than one millionópairs of jeans. Even products become composed of molecules linked together through standard interfaces. The software industry is becoming a parts industry in which companies build and market parts that work with others. Just as a modern wide-body jet is referred to in the industry as a "complex assembly of parts flying in close formation" because most of the parts are not manufactured by Boeing or Lockheed or McDonnell Douglas but by their suppliers, mass marketing becomes molecular marketing as marketers identify specific customer groups or individuals to receive sales information.
Theme 5: Integration/Internetworking
The new economy is a networked economy, integrating molecules into clusters that network with others for the creation of wealth.
When Ron Ponder took over as the CIO of AT&T in 1994, his central challenge was to create the network infrastructure for AT&T to segment its markets, to create a molecular delivery system. "We're creating a new operating model for the business," says Ponder. "We're creating the ability for unique segmentation for a customer market of one. But, you can't do this transformation without the new technologyóit enables you to go from one paradigm to the other."
The new paradigm in wealth creation is possible because of computer networks that are digital rather than analog, and because of a shift in the style of networking from the host computer, hierarchical networks of the past to peer-to-peer webs based on the Internet model. As the bandwidth of such networks grows to achieve full multimedia (integrating data, text, audio, image, and video media), the opportunities for such new institutional structures grow dramatically.
The new networked organizational structures are not simply the creation of process-oriented organizations in which "stovepipe" business processes are reengineered horizontally to save costs and improve responsiveness. Nor is the change simply a shift to team-based structures (although the business team is central to the new enterprise). Rather, it is a radical rethinking of the nature and functioning of the organization and the relationships between organizations. The new organization, dubbed by the Alliance for Converging Technologies as the "Internetworked Enterprise," is a vast web of relationships including all levels and business functions in which the boundaries inside and outside are permeable and fluid.
The new technology networks enable small companies to overcome the main advantages of large companiesóeconomies of scale and access to resources. At the same time, these smaller companies are not burdened with the main disadvantages of large firmsódeadening bureaucracy, stifling hierarchy, and the inability to change. As larger companies disaggregateóbecome clusters of smaller molecules that can work well togetheróthey gain the advantages of agility, autonomy, and flexibility.
The Internetworked Enterprise will be a far-reaching extension of the virtual corporation because there will be access to external business partners, constant reconfiguration of business relationships, and a dramatic increase in outsourcing. The Internetworked Enterprise will behave like the Internet, where everyone can participate and the total effort is greater than the sum of the parts.
The overall economy will act in the same way. Networks of networks along the Internet model are beginning to break down walls among companiesósuppliers, customers, affinity groups, and competitors. We will see the rise of internetworked business, internetworked government, internetworked learning, and internetworked health care, to name a few.
Every economy needs a national information infrastructure. This is the utility of the twenty-first century, a broadband highway for a broadband, high-capacity economy. And every organization needs to plug into this utility with an enterprise information infrastructure. The new infrastructure will change economic activity as significantly as did electrification. Just as business and wealth creation would be unthinkable today without electrification, so the new economy would be impossible without the power of information.
Cybertalk
Ballistic: What happens to you when nothing works, as in "I go--."
Cyberspace: Where everyone boldly goes.
Digital: Stuff you can count on two fingers.
Flamed: Dead meat, what happens to you if you break the Net rules.
Icons: Helpful signposts if you worship them respectfully.
Luddites: Bosses who don't know the difference between stability and paralysis.
Obsolete: The system you just purchased.
Vidiots: Those who spend too much time riding the Net.
Theme 6: Disintermediation
Middleman functions between producers and consumers are being eliminated through digital networks. Middle businesses, functions, and people need to move up the food chain to create new value, or they face being disintermediated.
If your company has in its midst agents, wholesalers, distributors, retailers, brokers, or middle managers, it's time to do some serious strategizing (or career planning if you are one of them). All these roles in the past have been in the business of executing transactions, brokering, or in general boosting the faint signals that passed for communications in a predigital economy. Disintermediation is changing the signal pattern. Musicians and their producers won't need recording companies, retail outlets, or broadcasters when their music becomes a database entry on the Net. Food producers won't need wholesalers or supermarkets when customers can replenish supplies weekly by accumulating entries in their shopping-list database and take delivery at home. Hotels won't need travel agents to execute booking transactions when everything can be done by would-be travelers "helicoptering" in a geographical information system (GIS) over their destination city.
Take the case of consumer goods manufacturers being squeezed by giant retailers like Wal-Mart demanding consignment sales and razor-thin margins. Manufacturers could use the new infrastructure to sell direct over the network, thereby eliminating intermediary retail channels. An electric tool and small appliance company such as Black & Decker could provide video or interactive programs on, say, home renovations featuring their tools. Or they may develop a cooking series, this week discussing Italian cuisine that features their pasta maker, food processor, and microwave oven. As such, they become infotainment companies providing content (for a fee or not) on the Net. In the process, the large retailers become disintermediated. People still like to go to the movies, but the home video market is now bigger than the Hollywood movie industry.
Government is also a candidate for disintermediation. Customers of government (the public) must line up at fifteen different places to deal with fifteen different government agencies, each having an office, staff, subcontractors, and related costs, and each delivering various degrees of service effectiveness. Leadership at the state level could create a single window on government through the information highway that would be accessible from the home (computer, television, or telephone), place of work, information kiosks, or other information appliances. Taxpayers could interact with computer-based services as appropriate or contact a human being (by audio or video) if necessary. If managed effectively, disintermediation could not only save billions of tax dollars but bring government closer to its constituents and improve customer service.
Or look at commercial real estate brokers who are in the business of matching property owners with potential buyers or leasers. They are true intermediaries, acting usually on behalf of the property owner. The goal is to find an appropriate buyer or lessee for the property. Usually they work as part of a team putting a deal together. The team may involve the broker, the owner, the owner's lawyer, the owner's accountants, and possibly others. The broker does not attempt to replicate the expertise of others on the team but tries to be the facilitator, the deal maker. On the other hand, the broker needs information and knowledge in a number of areas, including the market, types of deals, leases, and current tax legislation.
As critical information comes on line and owners and buyers become wired, the intermediaries are in trouble. Disintermediation is raising questions regarding the role of the broker. As Belleville, Ontario, broker John Beach describes it:
As technology facilitates the exchange of information between suppliers and customers, we need to find new ways to deliver value to our clients. Rather than being in the transaction or information exchange business we need to become value-added facilitators of deals and ongoing partners for commercial real estate advice and knowledge and help. In doing so, it will make more sense for sellers to partner with us rather than to try and do it themselves.
When leasing space in a new shopping center, the broker needs to understand not only the customeróthe potential purchaser (their financial situation, their requirements for retail space, etc.), but in order to deliver high value the broker also needs to understand the customer's customers. If a broker is attempting to lease a shopping center facility, he or she can provide significant value by understanding the potential customers of the customeróthe local population, their demographics, their income, employment levels, purchasing history, exposure to media, and so on. Additional critical information includes municipal bylaws such as zoning, environmental information, tax information, and creative deal arrangements.
This new way of thinking demands that the broker have instant access to extensive information. Coupled with strong human relations skills, solid knowledge of key variables, and powerful tools to package deal scenarios, the broker can move up the value chain to forge trusted partner relationships. Rather than being disintermediated, the broker can use the new technology to create new value. This is not a future challenge and opportunity. In 1995, the NARLINK system became available to many brokers. It includes information on regulatory issues, research findings, government legislation, and NAR (National Association of Realtors) positions on issues affecting real estate as well as access to the NAR library.
Similarly, travel agents are vulnerable and need to provide new value. Already more than 20% of air travelers purchase tickets directly from the airlines. Soon, tickets will disappear as the process becomes digitized. Agents need to become travel consultants delivering new services. Agencies specializing in business travel can become convention planners, helping to ensure a high-performance meeting, ensuring best discounts from hotels, and so on. Summit Travel of Winston-Salem, North Carolina, has decided if you can't beat 'em, join 'em. It has created a software package that helps travelers to search the Net for flights and make the transactions themselves. But the software also routes the reservation through Summit, which receives a rebate of 5% of customers' fares. Other travel agencies award frequent flyer points. Whatever the step, agents need to provide new value in the digital economyóto "reintermediate."
Theme 7: Convergence
In the new economy, the dominant economic sector is being created by three converging industries that, in turn, provide the infrastructure for wealth creation by all sectors.
In the old economy, the automotive industry was the key sector. The dominant sector in the new economy is the new media, which are products of the convergence of the computing, communications, and content industries. In the United States, new media and their ancillary industries and services account for more than 10% of the GDP. Computer hardware and communications bandwidth are both becoming commodities. The profit in the new sector is moving to content because that's where value is created for customers, not in boxes or transmission. Many of the content companiesóthe entertainment companies, broadcast networks, and publishersóare slow off the blocks for old paradigms die hard. The more successful companies are those with a background in software, services, computer-based content, and digital telecommunications.
Depending which corner of the triangle they inhabit, companies can suffer tunnel vision. Some television networks view the sole opportunity as interactive TV. Some Hollywood producers think convergence is irrelevant. Computer companies tend to focus on business applications only. The games companies view convergence as the new digital playground. And some telephone companies focus on enhanced telephony or video conferencing. Who's right? The marketplace will decide. "What do you think of radio?" Fred Allen once asked Titus Moody. And Titus replied: "I don't hold with furniture that talks." So much for the experts.
Some companies are making significant progress embracing convergence. One of the new media's corporate leaders, Dick Notebaert, CEO of Ameritech, notes that the old name "telephone company" doesn't even fit anymore. "In fact," he says, "we quit calling ourselves that a long time ago."
Convergence is becoming the basis of all sectors. The new media are already beginning to transform the arts, the way scientific research is conducted, and the way education is delivered. They are on the threshold of transforming the firm as we know it and changing the way we do business, work, play, live, and probably even think.
Theme 8: Innovation
The new economy is an innovation-based economy.
"Obsolete your own products." This theme is made clear to product planners, strategists, engineers, developers, and managers at Microsoft and is constantly reinforced in all aspects of their work, beginning with their first orientation on their first day at the job. If you've just developed a great product, your goal is to develop a better one that will make the first one obsolete. If you don't make it obsolete, someone else will. For example, Microsoft technologist Ken Nickerson is proud to say that it was Microsoft (with Windows 95) that succeeded in making obsolete the best-selling software of all time, Microsoft's own DOS.
Indeed, a key driver of the new economy is innovation, including a commitment to a continual renewal of products, systems, processes, marketing, and people. Compare this view to that held by many mainframe aficionados at IBM who early on fought against shifting IBM's massive resources to the PC, open systems, and client/server development. Their goal was not to obsolete or to innovate but to preserve and to resist. Rather than obsoleting their own products, they let their competitors do it for them, and the results soon became clear in the marketplace.
Ironically, in the preindustrial economy, innovation was very important. Each gun or shoe was differentócrafted by an innovator. The number of produced units for each product was very small, often only one. If the gun or shoe needed fixing, the craftsperson would innovate a solution. In the industrial economy, the number of units per product type increased for mass production of standard goods. In the new economy, there is a shift from mass production to mass customization of goods and servicesójust like going from Henry Ford, for whom every car was black, to Henry Fonda, to whom every film was different. In an innovation company, product life cycles collapse. Japanese auto manufacturers work on a two-year life cycle, and Japanese electronics consumer products manufacturers assume a three-month cycle. There are financial products in some markets that have a product life cycle of a few hoursóby then the competition has caught up. Most medium- or large-sized companies in North America introduce more than one new product per day. Last year Sony introduced 5000 new products. Microsoft group vice president Nathan Myhrvold (co-author with Bill Gates of the book The Road Ahead) says, "No matter how good your product, you are only 18 months away from failure." According to IBM CEO Lou Gerstner, the number of IBM products has risen dramatically. At the same time, the life cycle of an individual product has fallen sharply. In concert with that change, the effort to manufacture a product has collapsed from an average of 2500-person days per product to three hours. Even something as seemingly stable and low-tech as beer requires innovation; 90% of Miller's revenues come from beers that didn't exist 24 months ago.
It was only a decade ago that the steel industry in the United States was in deep trouble, uncompetitive with low-cost, high-productivity Japanese steel mills. Rather than giving in, the industry innovated by creating minimills like Chaparral Steel and Nucor. They reinvented the process of making steel with new production processes based on new technologies. This enabled smaller plants to produce higher-quality steel at lower cost. The plants were also located closer to markets, were able to create better relationships with customers, and used different models of employer-employee relationships. The result: The industry is again productive, competitive, and producing the highest quality steel in the world.
"In today's global economy, companies that take their leadership for granted soon find themselves bringing up the rear," said Frank Shrontz, chairman and CEO at Boeing when the 777 was successfully designed and introduced to market. "Clearly, the world is changing and we must change with itóby striving to better understand the needs and expectations of our customers, by becoming more efficient and productive, and by offering products and services that represent superior value. Information moves too quickly, and valued technologies are too perishable for Boeingóor any other companyóto assume that its past is a guarantee of its future."
How was it that Rubbermaid placed number one in Fortune magazine's annual poll of the most admired corporations? This seemingly unexciting, low-tech product company also tied for first with Microsoft in the United States's most prestigious industrial design competition. Forget about continuous improvement, Rubbermaid is into continuous innovation, the constant generation of new products and the regeneration of old ones. Even with a majority of its products selling for a only few dollars, the company has been able to innovate to meet customer needs and create new ones. It turns out that customers will happily pay for a large garbage can that (unlike any others) is very light, has wheels, is an attractive baby blue color, is animal proof, and is virtually indestructible.
Innovation drives every aspect of economic and social life. In the arts, whole new art forms are emerging based on interactive multimedia. Multivolume encyclopedias are being replaced by a single CD-ROM that can hold 360,000 pages of text. Not so long ago, music videos were a promotional add-on for a singer; now, they are necessary for success. Along with the perennial Academy Awards there now exists the Academy of Interactive Arts and Sciences; its first annual award show was held in 1994. Innovation is also beginning to drive education curricula. In the old economy, a curriculum was good for years and careers. In the new economy, to be relevant the education system must constantly change content, instructional tools, and approaches.
In the innovation economy, human imagination is the main source of value. The critical challenge for any company in the digital economy is to create a climate in which innovation is prized, rewarded, and encouraged. Every country needs innovative workplaces and organizations that foster creativity. Growth in the innovation economy comes from small- and medium-sized businesses rather than large corporations or governments. What's required are educational systems that teach and motivate students to learn and to be creative, rather than to recall information. Governments and regulatory frameworks must help to liberate the human spirit for invention and creation rather than acting as a bureaucratic brake on change and breakthrough.
Product and service leadership is one way to win in the innovation economy, but it is not adequate to understand the customers and their concerns and desires. Given the pace of change and complexity of markets, customers often cannot articulate their needs. You must innovate beyond what your markets can imagine. You must understand the needs of your customer's customer. Your organization needs a deep-seated and pervasive comprehension of emerging technologies. And you need a climate in which risk taking is not punished, creativity can flourish, and human imagination can soar.
Theme 9: Prosumption
In the new economy the gap between consumers and producers blurs.
As mass production is replaced by mass customization, producers must create specific products that reflect the requirements and tastes of individual consumers. In the new economy, consumers become involved in the actual production process. They can, for example, enter a new car showroom and configure an automobile on the computer screen from a series of choices. Chrysler can produce special-order vehicles in sixteen days. The customer creates the specs and sets in motion the manufacture of a specific, customized vehicle. In the old economy, viewers watched the evening network news. In the new economy, a television viewer will design a customized news broadcast by highlighting the top ten topics of interest and specifying preferred news sources, editorial commentators, and graphic styles. Moreover, that same viewer will be able to watch that broadcast whenever time permits or the need arises.
Every consumer on the information highway becomes a producer by creating and sending a message to a colleague, contributing to a bulletin-board discussion group, altering the end of a movie, test driving a virtual car, or visualizing the brain of a patient across the country.
In the old economy, such tasks were done by individuals but only as one part of a job. The worker produced with a lathe, a trowel, chalk, or a scalpel. In the new economy, such production occurs throughout daily life. Similarly, as the information and knowledge content of products and services grows, organizations will shift from being only consumers of information and technology to the point at which they are infotech producers. Automotive companies won't just assemble vehicles; they'll produce everything from infomercials to driver navigational tools and programming about auto safety. Toyota is already appealing to the forty-something buyer with a thirty-minute infomercial and the twenty-something crowd with an interactive CD.
Theme 10: Immediacy
In an economy based on bits, immediacy becomes a key driver and variable in economic activity and business success.
Product life cycles are cratering. In 1990, automobiles took six years from concept to production. Today they take two years. Hewlett-Packard's Computer Systems Organization chief Wim Roelandts says that these days most of HP's revenues come from products that didn't exist a year ago. In the old economy, an invention (like the Polaroid camera, xerography) ensured a revenue stream for decades. Today, consumer electronics products have a typical lifespan of two months.
The new enterprise is a real time enterprise, which is continuously and immediately adjusting to changing business conditions through information immediacy. Goods are received from suppliers and products shipped to customers "just in time," thus reducing or eliminating the warehousing function and allowing enterprises to shift from mass production to custom on-line production. Customer orders arrive electronically and are instantly processed; corresponding invoices are sent electronically and databases are updated.(9) Enterprises seek to "compete in time" effectively.(10)
Electronic data interchange (EDI) is a powerful, if badly misunderstood, example of how the I-Way is creating information immediacy.(11) Advocates of EDI argue that by linking computer systems between suppliers and their customers for purchase orders, invoices, billing, and record keeping, companies can save considerably over manual (nondigital) methods. In fact, EDI goes well beyond those possibilities. It's just the first splash in a tidal wave of electronic commerce that will shift the metabolism of business to real time and in so doing forever change the relationship between companies.
Theme 11: Globalization
The new economy is a global economy.
According to MIT professor Paul Krugman, author of Peddling Prosperity, there's nothing more to the global economy than trade in goods, services, capital, labor, and information. "That's it," he says. "There is no more mystical sense in which we have a global economy. We are living in a world which is about as integrated, give or take a few measures, as the world of the 19th century."(12)
Mr. Krugman, I beg to differ. The new economy is as different from the old economy as a Sea-Doo is from a penny farthing bicycle or e-mail is from the Pony Express.
Just as the bipolar geopolitical world has disintegrated, giving way to a new, dynamic, and volatile global environment, economic walls are falling as well. This phenomenon is related to rise of the new economy. As Peter Drucker says, "Knowledge knows no boundaries." There is no domestic knowledge and no international knowledge. With knowledge becoming the key resource, there is only a world economy, even though the individual organization operates in a national, regional, or local setting.
Linked to this, and despite the efforts of old paradigm warriors fighting for protectionism, free trade zones are growing in North America and the Pacific Rim. Global customers demand global products. Work is performed globally by exploiting cost advantages of traditional input factors such as labor and raw materials. New economic and political regions and structures (such as the European Union) are leading to a decline in the importance of the nation-state.
As the world economy continues to globalize, the need for stay-ahead management becomes even more crucial. Ad hoc alliances, strategic partnering, and, above all, information technology will be vital for the future. Collaboration is going beyond the old boundaries. "Collaboration in business is no longer confined to conventional two-company alliances, such as joint ventures or marketing accords," says Benjamin Gomes-Casseres, associate professor at the Harvard Business School. "Today we see groups of companies linking themselves together for a common purpose. Consequently, a new form of competition is spreading across global markets: group versus group."(13)
Globalization is both chicken and egg. It is driven by and driving the new technology that enables global action. Computer networks allow companies to provide 24-hour service as customer requests are transferred from one time zone to another without the customer ever being aware that the work is being done on the far side of the world. Networks enable smaller firms to collaborate in achieving economies of scale. Software development can be conducted on networks, independent of location. The office is no longer a place, it is a global system. Technology is eliminating the "place" in workplace. Home may be where the heart is, but increasingly the office is anywhere the head can be connected.
"These connections will empower us and enhance freedom and democracy. Citizens will be able to communicate, both send and receive information, on a previously unimaginable scale," said Anne Bingaman, assistant attorney general in the U.S. Department of Justice. "When you think about this, recall scenes from Nazi-occupied Europe of women and men crouched around the wireless, desperate to learn and tell the truth. Or think of citizens behind the iron curtain, searching the short-wave bands for Radio Free Europe or the BBC. And imagine how much more difficult an oppressor's job is when people yearning for freedom have access to digital computer networks."
There are few better descriptions on how the new economy is a global one than that cited by former Citicorp chairman Walter Wriston. He's seen it all. As late as the 1960s, communications between bank staff in New York and their colleagues in Brazil were akin to an adventure. There were so few international lines that once they'd got one, they'd hang onto it even if there were nothing to say, so that when the time came to exchange information, they had an established connection. In Wriston's words, what happens today is "global conversation." More than 100 million telephone calls are completed every hour, using 300 million access lines the world over, and the number of calls will triple by 2000. "The entire globe is now tied together in a single electronic market moving at the speed of light," says Wriston. "There is no place to hide."(14)
Similarly, globalization is driving the extension of technology. The new geopolitical world is opening up new markets everywhere, demanding a global response. Global businesses need to be able to link with customers, suppliers, employees, and partners throughout the world. New opportunities in global financial markets require an information infrastructure for exploitation. All this is contributing to a rethinking of organizational structure and entire industries on an international level. Companies and academics are working to build "transnational enterprises," "answer networks," "boundaryless firms," "global organizations," and "international enterprises."(15)
Theme 12: Discordance
Unprecedented social issues are beginning to arise, potentially causing massive trauma and conflict.
As we stand on the frontier of the new economy, we can also see the beginnings of a new political economy that will raise far-reaching questions about power, privacy, access, equity, quality of work life, quality of life in general, and the future of the democratic process itself. As tectonic shifts in most aspects of human existence clash with old cultures, significant social conflict will tear at the fabric of structures and institutions.
New social dialecticsóthe juxtaposition or interaction of conflicting ideas, are emerging.(16) Hegel developed the concept of conflicting forces leading to a synthesis of something new. Marx applied the notion to a view of the evolution of societies called dialectical materialism, but history did not evolve as Marx had planned. The new economy demands that the notion of dialectic forces be revisited. For example, there are strong pressures for the dispersion of economic and political power. These pressures conflict with old structures that seek to centralize economic and political power.
The nature of work and the requirements of the workforce in the digital economy are fundamentally different. The concept of labor is undergoing a radical redefinition. Just as the percentage of the workforce in agriculture has been declining since the turn of the century, the number of workers involved in the production of goods (the old economy) has been falling for a decade. The new economy is bringing high-paid, high-value jobs, but there is little job mobility between old and new. How will such a huge reorganization of the labor force and its skills occur?
There is a concurrent trend toward self-employment and the creation of small knowledge-based industries providing work on a contract basis. In the digital economy, as intellectual capital becomes the most valuable resource, the means of production shifts from the plant floor into the innovative minds of knowledge workersóthose who create value. Compare their emerging power to that of the industrial worker, who could withhold labor by going on strike. Similarly, employers could lock out workers and deny them access to the means of production. Knowledge workers can exert their power in infinitely more complex and effective ways. Bosses can't deny them access to their own brains. If they are unhappy or feel unwanted, they are likely to set up their own business, as millions have done in the last half decade. A good brain, a telephone, a modem, and a PC are all that's required to produce. As Miller puts it, "Bosses can't say I want x tonnes of innovative ideas out of this group, as he used to do with steel." Knowledge workers require motivation and trusting team relationships to be effective. They have emerging power far beyond anything Marx ever imagined. These owners of the new means of production will be better positioned than ever to share in the bounty. Yet this growing power conflicts with traditional ownership and power structures, which are based on ownership of industrial age assets, specifically capital.
In the new economy, those workers with access to the new infrastructure can participate fully in social and commercial life. Those without access, knowledge, and motivation will tend to fall behind. If not managed properly, this will increase social stratification severely, creating a new underclass. The have-nots will become confronted with the contradiction between the magnificent potential of the new technology on the one hand and their declining quality of life on the other.
In the new economy, learning will more and more be provided by the private sector. This will come about not out of social responsibility but, rather, because working and learning are becoming the same activity for a majority of the workforce and because knowledge is becoming an important part of products. Moreover, the traditional educational institutions are failing to meet the needs of the economy, and there are huge and growing opportunities for learning products and services. This places a greater responsibility on individuals (those who can afford it) to achieve lifelong learningópotentially increasing social chasms. Furthermore, teachers and their unions need to participate and lead in the transformation of education if the old industrial-age type of schools are to have a hope of transforming themselves and surviving. But increasingly, learning can be done without formal institutions, and learning in schools can be done through technology, requiring fewer teachers. This leaves teachers in a Catch-22 situationóbecome irrelevant by resisting change or possibly become irrelevant by leading it.
Development consultant Phil Courneyeur, currently living in Nicaragua, points to the political impact of restructuring, destabilization, and the breakup of nation-states and the potential negative use of the new technology by dictatorial regimes and by the many private armies emerging from the breakup of states. "It is staggering to think of the potential havoc of nuclear technology falling into the hands of gangs; or of lethal gases such as in the Tokyo subways; or bombs such as in Oklahoma; or the likely use of new technologies by small states in localized and proxy wars."
Notes
1. John Huey, "Waking Up to the New Economy," Fortune, June 27, 1994.
2. Alan M. Webber, "What's So New About the New Economy?" Harvard Business Review, January-February 1994.
3. James Brian Quinn, Intelligent Enterprise, The Free Press, 1992.
4. Thomas A. Stewart, "Your Company's Most Valuable Asset: Intellectual Capital," Fortune, October 3, 1994.
5. Peter F. Drucker, Post Capitalist Society, HarperCollins, New York, 1993.
6. Robert D. Harris, The New Paradigm of Business: Emerging Strategies for Leadership and Organizational Change, Pedigree Books, 1993.
7. Our thanks to Riel Miller for his insights on this section.
8. The first to introduce the notion of a business unit of one were Stan Davis and Bill Davidson in 2020 Vision: Transform Your Business Today to Succeed in Tomorrow's Economy, Simon & Schuster, New York, 1991. Subsequently, Tom Peters has taken up the slogan in his "Tom Peters Seminars."
9. Stan Davis and Bill Davidson, 2020 Vision: Transform Your Business Today to Succeed in Tomorrow's Economy, Simon & Schuster, New York, 1991. According to Davis and Davidson, the "real time organization" does not yet exist. For a good popularization of the concept refer to the above.
10. Peter G.W. Keen, Competing in Time: Using Telecommunications for Competitive Advantage, Ballinger Publishing Company, New York, 1988.
11. EDI (Electronic Data Interchange) is a term referring to the computer-to-computer exchange of data and documents. Information remains in computers and networks and need not be printed out. A popular example is the electronic billing between suppliers and customers. EDI uses data interchange standards enabling different kinds of systems to exchange information between them. The biggest obstacles to EDI are management issues, not technological. Companies have had difficulty understanding how to reshape their business practices and relationships with other companies enabled by the technology.
12. Fortune, June 27, 1994, p. 98.
13. Harvard Business Review, July-August 1994, p. 62.
14. Walter Wriston, The Twilight of Sovereignty: How the Information Revo lution Is Transforming Our World, Charles Scribner's Sons, 1992.
15. Stephen P. Bradley, Jerry A. Hausman, and Richard L. Nolan. Globalization, Technology and Competition, Harvard Business School Press, 1993. A good discussion of new global organizational structures and their relationship to technology; Mary O'Hara-Devereaux and Robert Johansen, Global WorkóBridging Distance, Culture and Time, Jossey-Bass Publishers, 1994. A stimulating and thoughtful discussion, especially regarding "The Anytime, Anyplace Global Workspace."
16. The Random House Dictionary of the English Language, Second Edition, Unabridged. New York, 1987.
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