What a difference a year makes. Just a year ago the NASDAQ was at the 5000 level, money was available for startups based on ideas sketched on a napkin, and “dot com” was the key to billions. The crash a year ago, followed by the continued decline of the NASDAQ, raises the question: is there anything of value left from the New Economy, or was it all just hype?
What happened in the “dot com” world was beyond reason. Based on the promise of access to customers through the web, of insight into customers through non-intrusive tracking of buying patterns, people invested in this new way of doing business. But while these opportunities are very real, important pieces of the puzzle were left out. First, when it comes to selling and distributing physical goods (whether groceries, books, or pet supplies), the back end of the system involving warehouses and distribution mechanisms must also be addressed. Without this, the potential upside cannot be realized.
Second, it takes time to change the way people think and do things. It took 25 years from the time the VCR was invented until it became a viable commercial product. It took even longer for the telephone and the radio. Even a good idea will often take a long time to be adopted by enough people to create economic viability.
Now that the backlash has set in, what remains of the New Economy? I would argue that there are five principles that will continue to change the face of business.
1. The Value of Information
For much of the 1900s, the industries on the top of the value chain produced material products. Clothing, food, automobiles, airplanes, buildings, and television sets all fit this description. Companies represented their products on their balance sheets but often gave away the information about them. They valued the inventory but not the intellectual capital that created the products. There were products consisting of information, such as newspapers, magazines, radio and television programming. But even here, it was the physical copy of the newspaper or magazine that was sold — the content came with it. You had to buy a television set but the television programs were “free” (actually traded for your time in watching commercials).
Today, companies recognize that the information related to their physical products has a great deal of value. A McKinsey study showed that more than half the cost of manufacturing large, physical products was the “interaction costs” in the process of designing and building these products.
Computers have not only enabled the collection but also the analysis of a great deal of information through data mining, creating insights not possible by human beings. Wal-Mart has pioneered this in retailing, gaining control over distribution and understanding retail sales patterns. Amazon.com takes this to another level on the customer interaction side, analyzing buying habits and preferences down to individual customers. The New Economy requires the best of both: the non-intrusive detail level customer information of Amazon.com and the incredibly integrated supply chain and warehousing information strategy of WalMart. When more products can be distributed digitally, Amazon.com may be very well positioned, but this takes time even for fundamentally digital products such as books.
Of course, there has always been some recognition of the value of information. When TV Guide became more valuable as a company than the television networks themselves, this point was made. It is the pervasiveness of this recognition that is new, and that is leading to new products and services.
2. Speed and Change
The temptation has always been there to treat information technology changes numerically. For example, video teleconferencing has often been justified on the basis of savings in travel costs. This assumes that people would do things the same way, simply replacing air travel by video teleconferencing. That almost never happens. Rather, video teleconferencing enables increased collaboration between the meetings, resulting in shorter cycle times for product development, business mergers, and the like.
Some have tended to discredit the issue of speed, because human beings still require time to think. John Seely Brown argues that there is no real speed change at all. I strongly disagree. Not everything is faster — but some portions of our work clearly are and this leads to a restructuring of how work gets done and what is most important.
Globalization might seem like an old concept. After all, measuring the import and export of goods has been a part of the economy for decades. Yet the spellcheck in the 1995 version of MSWord did not even recognize the word “globalization.” Multinational corporations such as Shell and Ford have been with us for a long time. But globalization is much more than importing or exporting goods, even more than multinational corporations.
Jack Welch, the CEO of General Electric, identified three stages of globalization. The first is selling products around the world. The second is building products around the world. The third stage is creating products and ideas around the world — tapping into the worldwide intellectual capital. In his book, The Lexus and the Olive Tree, Thomas Friedman explores the way the worldwide economy is interconnected through the information technology infrastructure.
This changes the nature of business. Because of the instantaneous availability of information there are no secrets anywhere in the world. Making a physical subassembly somewhere else in the world may be possible because of cheap labor, but the overall economics require the shipping costs be factored into the picture. Creating information assets (such as software) worldwide is a different story since there is no shipping cost over the data networks. This has given rise to the large software development industry in India, where the labor rates are less and the skills are high.
The World Trade Organization (WTO) protests in Seattle in 1999 painted a strange picture. Boeing machinists joined with dock workers (both of whom have their livelihood dependent on world trade) in protest. The fear of job loss, lack of control, concern for exploitation of workers in third world sweat shops all added to the unsettled environment and delayed the proclamation that globalization is all “good.”
4. Unprecedented Productivity
Early computing was almost always used for automation, but automation often produces surprisingly little gain for its cost. In his book The Business Value of Computing (1990), Paul Straussman demonstrated across industry no correlation between the amount of expenditure in IT and profitability. Not long after, however, businesses started to look seriously at how IT capability could be used to transform not only how things were done but what was done. In part, this was inspired by the books Process Innovation (Davenport) and Reengineering the Corporation (Hammer and Champy).
The hype associated with reengineering masked the very real breakthroughs that began to occur in the mid-90s. With the introduction of the web browser and the dramatic growth of the Internet at the same time, structural changes indicating productivity improvements from IT were starting to be recognizable.
In a June 13, 2000, speech Alan Greenspan said that productivity gains in the United States appear to result mainly from strong gains in information technology, according to a Reuters report from that day. This appeared to be the only explanation for low inflation in a tight job market and a growing economy.
5. Network Externalities
Network externalities is the term used by Carl Shapiro and Hal Varian in Information Rules to describe the potential growth in value of things because of external factors. A computer becomes more valuable when many others are on line because of the value of connectivity. This principle is quite at odds with our traditional economic principle of valuing scarcity, e.g., gold more valuable than iron.
Again, this is not a new concept. The classic example is the telephone. If only two people in the world had a telephone, that phone would have little value. The more people who have phones, the more value each one has. Bob Metcalfe (the inventor of Ethernet) claimed that in a networked environment, the value of network dependent tools grows as the square of the number of these tools that are available (Metcalfe’s Law).
In the New Economy driven by this principle, first to market may not be the winner. Timing to market, catching the potential growth curve at the right point (Andy Grove, the former Intel CEO calls this the inflection point) offers more promise. This timing is not just the point at which enough users could exploit the service, but when enough of them see value in doing so.
Grocery shopping and home delivery ordered on the Internet is a case in point. Statistics are showing that the value proposition is not clearly enough accepted and growth has lagged because of this. This could be either because the potential is there but not yet enough proof, or it could be because it is just a bad idea.
Those who equated the New Economy with instant success in the “dot com” world may think the New Economy is over. In fact what appears to be over is instant success in the “dot com” world. In other, more profound, ways, the New Economy is alive and well and changing business every day.
Al Erisman is executive editor of Ethix, which he co-founded in 1998.
He spent 32 years at The Boeing Company, the last 11 as director of technology.
He was selected as a senior technical fellow of The Boeing Company in 1990,
and received his Ph.D. in applied mathematics from Iowa State University.