Welcome to the New Economy: Act III

Dot-coms have discovered that they have to make money, and the Fortune 1,000 have learned that E-commerce isn't all that hard. What happens now?

  • From .com to .profit, by Nick Earle and Peter G.W. Keen (Jossey-Bass, 2000)
  • How Digital Is Your Business? by Adrian Slywotzky and David J. Morrison (Random House, 2000)

The radicals of the 1960s got it wrong. The (technical) revolution will not merely be televised, it will appear on your computer screen in glorious, living color.

In the new-economy tech wars, we are now in the third act of what promises to be a three-act play. In Act I, small companies used the Net to their advantage. In Act II, old-economy companies caught up with remarkable speed. And now, with the digital playing field more or less level, the best ideas and services will win.

A series of new books reinforce the point that if you don't understand what is going on, you -- like thousands of generals before -- are doomed to fight your last war.

In their book From .com to .profit: Inventing Business Models That Deliver Value AND Profit, authors Nick Earle, president of Hewlett-Packard's in-house incubator, E-Services.Solutions, and Peter G.W. Keen, a technology consultant who has written 20 books on business and IT strategy, deconstruct Act I clearly and informatively and delineate the new ground zero: being a dot-com, they say, "is about being open for business on the Web. Profit is about making money as a business on the Web. And they are not the same thing."

That distinction is being made painfully clear to tens of thousands of now struggling Internet start-ups. To underscore the obvious: being on the Web is no longer an objective but rather the price of entry for being in business. The ultimate goal is still to create a business model that makes sense.

Ironically, that gives large companies an advantage. Prior to the advent of the Internet, old-economy companies had sales and almost always reported earnings. In general, costs fell dramatically and sales climbed as those companies went digital. GE is a perfect example. Once the company made the decision to master the Web, it caught up to, and in many cases surpassed, the dot-coms.

What's a smaller company to do now that the first-mover advantage is gone? Well, you could do a lot worse than spend some time with How Digital Is Your Business? by Adrian Slywotzky and David J. Morrison, authors of The Profit Zone and Profit Patterns (Random House).

The book's premise is that your company should have a "digital business design" -- another way of saying that you need to have a detailed business strategy that actually makes sense. To Slywotzky and Morrison, a digital business design is "never about technology for its own sake; it's about using technology to create a unique and better business design."

The authors go on to list eight areas of importance and pose eight questions that they say you need to answer when building that model:

  • Customer selection. Which customers do I choose to serve?
  • Unique value proposition for the customer. Why do they buy from me?
  • Unique value proposition for the talent. Why do people work here?
  • Value capture/profit model. How do I make money?
  • Strategic control/differentiation. How do I protect my profits and my customer relationships?
  • Scope. What do I do to add value?
  • Organizational systems. What organizational structure and culture do I create?
  • Bit engine. How do I manage and distribute the intelligence inherent in the system?

Although the first seven concepts are fairly basic, they are important and necessary to mutually reinforce one another.

But what is perhaps most intriguing about their list is the eighth item. In creating their concept of a bit engine, Slywotzky and Morrison are building on a concept put forth by Nicholas Negroponte, author of Being Digital and founder of MIT's Media Lab. Negroponte drew the now accepted distinction between managing atoms and managing bits. Managing atoms is manipulating physical assets: stockpiling inventory, shipping product, building factories, and so forth. Managing bits is all about manipulating information.

Obviously, given a choice, you would prefer to have your company stationed behind door #2. That, as Slywotzky and Morrison point out, is where digital business design fits in.

"On the surface, Digital Business Design is about what fraction of your business processes are conducted online," they write. "At a deeper level, it's about whether you've transformed the way you do business by taking advantage of the new strategic options enabled by digital technologies."

Now, if you think some of that sounds familiar, you're right. And concepts like the "choiceboard," a process by which customers are allowed to interactively design the exact version of the product that they want, are just mass customization in a different guise. And many of the corporate examples given in the book (Dell, Schwab) will be well known to even the most casual business readers.

But Slywotzky and Morrison have put this information together in a way that is useful for managers. They provide specific examples -- including international cases such as Cemex, the Mexico-based cement company -- that show how companies have digitized their business effectively. Their book could help you write your own Act III.

On the Other Hand, Maybe We're All Doomed

  • The Coming Internet Depression, by Michael J. Mandel (Basic Books, 2000)

Maybe you shouldn't be thinking about technology at all. In fact, if you listen to Michael J. Mandel, a truly smart guy, you might want to use your computer to sell every tech stock you own and then go hide -- with your money -- under your bed.

That would be a perfectly understandable reaction after reading Mandel's book, The Coming Internet Depression: Why the High-Tech Boom Will Go Bust, Why the Crash Will Be Worse Than You Think, and How to Prosper Afterward.

First a discussion about why you should believe Mandel, and then a summary of his argument. Mandel is an economics editor at Business Week. But unlike most editors, he actually knows something and has the credentials to prove it. (Mandel has his Ph.D. in economics from Harvard.) Second, he has written well on the new economy for some years. Third, unlike most economists, Mandel has a definite opinion about what's going to happen. And that opinion is this: we are heading for a heap of trouble, and technology is to blame.

The intriguing thing about the new economy, Mandel says, is not that it has repealed traditional business cycles, as some contend. Rather, it's that it has amplified them.

Innovation is clearly the lifeblood of any economy. But in the new economy, funding for a large chunk of research has come from venture capital, and how much venture capital is available depends on how well tech stocks are doing on Wall Street. Mandel writes: "Faster growth and a rising stock market increase the incentives to invest in innovation -- which yields more start-ups, faster adoption of technology and more pressure on existing companies to keep up. But when a downturn starts, watch out."

In a downturn, not only will funding for research dry up but established firms will have little to fear from start-ups, the economist contends. That will allow the veteran companies to set higher prices and boost margins, which in turn will lead to higher inflation. And suddenly we are in a never-ending downward spiral.

"Hardest hit, of course, will be the stock market," he writes. "Rather than a single sharp crash, the market will sour over time. The leading-edge Internet companies will tumble even further than they did in spring 2000. Initial public offerings will come to a dead halt and the downdraft will spread to the technology stocks, which accounted for roughly 45% of the gain in market value during the New Economy boom [which Mandel dates as beginning in 1995]."

He goes on: "Attempts by investors to pull their money out of the market will drive down stock prices even further."

And down and down we go.

Since a downturn is inevitable, are we truly doomed? Well, almost buried in this well-written, well-reasoned book is one reason for hope: "The venture capital business only represents about $100 billion of the $9-trillion U.S. economy." So on an absolute basis, if it dries up, the hit should not be fatal.

Mandel's response? Yes, of course, the hit won't be devastating -- if people react rationally. But investors don't always do that, he points out. A major sell-off in technology could have an amazing ripple effect. Maybe it's time to bring out all those survival kits we prepared for Y2K.

Who Needs Publishers?
A smart CEO called me the other day, looking for some general background information on the publishing industry. (He was thinking about writing a book.) When I told him it usually takes from nine months to a year for a finished manuscript to appear in print, he was appalled.

"Wait a second! It's going to take me nine months to write the thing, and at least that long until it's on the shelf?" he asked. "That's a year and a half -- if everything goes well, and you're telling me I should count on two years from start to finish? How in heck can you do a technology book that has anything meaningful to say with that kind of lead time?"

It's a great question. So far, publishers don't have any great answers.

Why should you care? Three reasons:

  • You want access to the best information you can get on a timely basis.
  • You want to know who is a timely and reliable source of the information you need.
  • Someday you may want to write a book.

Traditionally, the book-publishing industry would have been the logical place to take all those desires. But as the CEO with whom I spoke the other day found out, conventional book publishing is becoming progressively irrelevant.

With that in mind, keep an eye on what's going on at sites like MightyWords ( www.mightywords.com) and Soapbox.com ( www.soapbox.com, created by the people at Motley Fool). Some sites allow nearly anyone, with some restricting conditions, to be an author. You post your approved original content and split the revenues.

Not surprisingly, so far the content on such sites is remarkably uneven. However, as more people learn about the opportunity of taking their message directly to the marketplace, the better the material is likely to be. (Things will improve further as more companies, such as Soapbox.com, provide a feedback mechanism that allows users to evaluate the content.)

Traditional book publishers dismissed Stephen King's self-publishing efforts, through which he sold a remarkable number of copies of his novel The Plant (north of 150,000 downloads at $1 a pop) directly to consumers. (Interestingly enough, the book is about a human-devouring flora that's sent to a publishing executive.)

Book publishers would do well not to ignore new business models -- and you would, too. If the plant doesn't get traditional book publishers, the competition will.

Paul B. Brown is the author or coauthor of 10 books and editor-in-chief of DirectAdvice.com, an online financial-planning company.

Executive Reader

George Pace
CEO of Rocco Inc., in Harrisonburg, Va., parent company of the Shady Brook Farms brand of turkey

Recent fave
The Greatest Generation, by Tom Brokaw. "About 15% of our employees are from that generation," Pace says. "Brokaw's book helps you understand where they are coming from. Each story in the book is about the extraordinary actions average people took in tough situations."

Business basic
A Passion for Excellence, by Tom Peters and Inc. contributor Nancy K. Austin. "You can have the greatest strategy in the world, but if it's executed poorly, you can still lose," Pace says. "If you execute well, you can win with an average strategy. Peters writes about finding a way to communicate to your employees no more than five priorities the company has, and how everyone can accomplish them by pulling in the same direction. That's easy to do when you have 5 employees, but not so easy when you have 3,500. But if you can do it, it's magic. Executional excellence is critical."

For fun
The Bear and the Dragon, by Tom Clancy. "I like Clancy. I enjoy thinking about how someone could think up all that stuff and keep it straight. Plus, it's 1,028 pages. If you travel a lot, it's good to have one book to hang with for a while." --Jill Hecht Maxwell

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