Week2
Global Marketing & The New "E"conomy
Week2
Global Marketing & The New "E"conomy
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The term "new economy" for many denotes a wide range of changes in business and financial practices resulting from innovations in computers and communication.
The notion of the "New Economy" is not that new--Some 34 years ago "Peter Drucker coined the term "The New Economy" to describe what he saw as the shift from a manufacturing based economy to a knowledge based economy ...He described the shift from a primary focus on engineering and manufacturing, to a primary focus on information gathering, analysis and marketing." (http://fp98.sentex.ca/sfinlay/eMarketing/introduction.htm)
Other visionaries such as Daniel Bell in his 1973 treatise "Coming of Post-Industrial Society: A Venture in Social Forecasting -- defined the new economy as "one in which the majority of those employed are not involved in the production of tangible goods. The manual and unskilled worker class gets smaller and the class of knowledge workers becomes predominant. ...Theoretical knowledge is the impetus of innovation and growth."
The new economy would be a "Technocracy - defined as a political system in which the determining influence belongs to technicians of the administration and of the economy. A technocrat is a person who exercises authority by virtue of his/her technical competence. ..The technocratic mode of production is bound to spread in society because it is so efficient. And in the process Bell predicted a shift in the power-sphere:
PRE-INDUST INDUST POST-INDUST Resource land machinery knowledge Social Locus farm business firm university plantation research inst. Dominant landowner business scientists Figures military people researchers Means of direct control indirect influ. balance of techno- Power of force on politics polit. forces franchises, rights Class Base property property technical skill military force polit. orgz. polit orgz tech skill Access inheritance inheritance education seizure by patronage mobilization armies education cooptation
Base of Power: Property Polit. Position skilll (http://www.spc.uchicago.edu/ssr1/PRELIMS/Political/pomisc1.html)
Bells 5 Key Dimensions of the post-industrial society
By Stephen A.
Herzenberg, John A. Alic, and Howard Wial
(
http://www.businessweek.com/chapter/herzenberg.htm
CHAPTER ONE
Recreating the Prosperity of the Past
in the Economy of the Future
The U.S. economy has grown steadily in the 1990s. By 1998, inflation and the federal budget deficit had melted away. Despite occasional jitters, the stock market continued to reach historic peaks. But regardless of what the business page says about consumer confidence at the time you read this book, Americans' anxiety about the future remains below the surface. Wages for all but a fortunate few have stagnated or fallen. Health care costs are up and insurance coverage down. Unemployment is low, but many people still fear the next round of layoffs. With factories moving offshore, big companies downsizing, and the public sector shrinking, workers are asking where the good new jobs will come from.
There is good reason to worry. Automation and international competition continue to eat away at the manufacturing jobs that were once plentiful. Service industries now employ about three-quarters of the workforce, with many workers trapped in low-wage, dead-end jobs. This book is about the reasons and the remedies for stagnation and decline in American living standards, for growing wage inequality and employment instability. Both causes and cures are to be found in the service economy; that is where the bulk of the jobs are and where the jobs of the future will be created.
Our starting point is the breakdown of the national economic system that generated prosperity for three decades after World War II, a period we call the Wonder Years. For a decade or more after the breakdown began, people clung to a past that could not be recovered. Now most Americans recognize that the past has gone for good. Yet no vision of the future has crystallized to take the place of people's past understandings of the economic world and their place in it: the old ideas of a job and career; how individuals and families achieve economic security; how employers, communities, and the nation prosper.
In this book we outline a reconstruction of the contemporary economy that could generate a new sense of confidence and a new era of widely shared prosperity. We argue that many elements of a reconstructed U.S. economic system have already begun to appear. We try to put the pieces together, showing how they might yield better performance as well as greater economic security.
The system we believe attainable would not be economic and social nirvana. Drudgery and hard physical labor would remain. Some Americans would still perform much more of this work, and earn much less, than others. Even if consumer price indices adequately accounted for new products and improved quality, we would not expect another period of quantitative growth--of more and more "stuff" every year--like the 1950s and 1960s. Still, the potential for qualitative improvements in services, for making work itself more rewarding, and for enjoying the fruits of growth in the form of shorter work time suggests an attainable future that Americans could look toward with optimism rather than unease.
Services Matter
Ever since Adam Smith wrote The Wealth of Nations in 1776, economic development has been virtually synonymous with manufacturing. Many people continue to regard production of services as subsidiary to production of goods, even a parasitic drag on economic performance. Although services have accounted for more than half of U.S. employment for more than fifty years (Figure 1), policymakers, economists, and business writers continue to focus on manufacturing. After all, for a quarter-century after World War II, productivity increases in manufacturing stimulated a virtuous circle of rising wages and growing consumer demand, corporate profits, more investment, job creation, and higher living standards. That era has ended.
When public attention belatedly turned to service industries, powerful rhetorical images portrayed the service worker as a hamburger flipper or window washer, producing nothing lasting or solid. Pundits and politicians asked how Americans could expect to get along, much less prosper, taking in each other's laundry.
Goods-producing industries still matter, of course. But the simple fact is that services now account for most of U.S. employment, while manufacturing has fallen to around 15 percent and continues drifting downward. More Americans now work in physicians' offices than in auto plants, in laundries and dry cleaners than in steel mills. Services, as a result, matter more than manufacturing when it comes to job quality. They also increasingly account for the rate at which living standards rise. But dependence on service jobs leaves many uneasy; say "dead-end job," and the image that comes to mind is McDonald's, not McDonnell Douglas.
It is wrong to assume that the majority of service workers will necessarily be stuck in low-wage jobs with poor benefits and little security. The services offer millions of good jobs, as well as millions of bad ones. And though a large share of service jobs pay little more than the minimum wage, this is a consequence of particular features of the U.S. economy and its labor market, especially the spread of wage-based competition. With deregulation and new competition in sectors ranging from trucking to retailing to health care, employers have sought to cut labor costs, treating workers as interchangeable parts and accepting the high turnover and low commitment to the job that result.
In earlier decades, in service industries such as telecommunications and banking as well as in manufacturing, workers could start at the bottom of a firm's job ladder and expect to advance through learning, experience, and seniority. They could look forward to a career, a progression rather than a succession of jobs. Those who worked their way up in the 1970s and 1980s now confront an ongoing wave of mergers and corporate restructuring. These go by many names, including downsizing (or "rightsizing") and reengineering. Whatever the label, the consequences include layoffs, lateral transfers that may foreclose advancement opportunities, and, for those who keep their jobs this time, fear that the next wave will catch them too. At the same time, a shrunken social safety net and the decline of nuclear and extended families mean that those out of work have fewer resources to fall back on.
In goods-producing industries, a combination of international and domestic competition drives restructuring. In services, the direct impact of international competition has been minor compared with deregulation and other new sources of domestic competition: unlike goods, only a few service products can be shipped or stored; most must be produced at the point of sale.
When competitive forces lead to new and better service products, Americans benefit as consumers. But when competition leads to downward pressure on wages and benefits, Americans suffer as workers. And as wages below the top slice of the income distribution fall, workers can buy fewer goods and services. The loss of the opportunities that made the Wonder Years so promising for earlier generations also heightens social divisions.
This book shows how to reverse recent labor market trends and the poor economic performance that has accompanied wage-based competition in many service industries. We argue, in our last two chapters, for a new set of institutions that will support higher wages for middle- and low-income workers and create more opportunities for those who seek to advance. These same institutions will also improve economic performance and service quality. The job for public policy, in short, is to catch up with the changes in the economy since the 1970s (indeed, since the last round of major U.S. labor policy innovation in the 1930s).
The Wonder Years were wonderful not only because many workers could expect steady advances in pay and benefits but because the economy delivered in ways that people experienced every day--cars, boats, TVs, bigger homes, basic health care. (In some other respects, of course, the Wonder Years, a time of cold war and conformity, were anything but wonderful.) The reforms we propose should also contribute to tangible improvements in people's lives: child and elder care that enrich life rather than exacerbate guilt, better education, more responsive customer service, a revival of family and community life once wage increases for the many make the struggle to survive less consuming.
This book is rooted in an analysis of work and business in the services. We use mostly service examples because we are trying to reorient debate away from the old economy and old concepts--away from manufacturing. Even so, the concepts we develop to make sense of the huge and diverse service sector also shed light on goods-producing industries. For this reason, as well as because the services now make up the bulk of employment, we see our last two chapters as a prescription for economywide renewal.
The Past: The Origins and Decay of the Wonder Years
The core features of the Wonder Years provide a basis of comparison for our analysis of the services today, a gauge of how the world has changed since white bread and bland beer gave way to microbakeries and microbreweries, and a historical and analytical starting point for asking how to construct a new period of prosperity.
During the one hundred years beginning in 1870, real gross domestic product (GDP) per labor-hour in the United States rose more than tenfold, an astounding increase. On a per capita basis, real GDP rose almost seven times between 1870 and 1973.
Mechanization and automation in manufacturing powered the American economic engine. The technological basis was laid after the Civil War, with the rise of the steel industry--initially to provide railroad rails--and the development of the "American system" of manufactures. The American system of assembling standardized interchangeable components was spawned in armories and factories that made axes, firearms, and clocks. It led to affordable mass-produced sewing machines and bicycles, later to automobiles and many other consumer goods. Railroads, telephone, and telegraph helped manufacturers coordinate their growing purchasing and distribution networks.
Engineers and managers refined the American system in mass production industries, developing the methods still known as "scientific management." Organizations capable of administering high-volume standardized production also emerged. Alfred Chandler has documented with painstaking detail the creation of new administrative giants in a long list of industries.
The big corporations that dominated major industries became vehicles for spreading mass production technologies through the economy. They had the capital and the control over markets necessary to invest in expensive, single-purpose equipment. Productive capacity rose at an unprecedented rate.
No mechanism existed, however, to ensure that wages and purchasing power would rise in parallel with the economy's newfound capacity to produce. When the Great Depression brought a prolonged period of stagnant demand and corporate losses, there was nothing to stop massive layoffs and real wage cuts from building to a vicious circle in which falling demand pushed the entire economy into deep decline.
Widely shared perceptions that inadequate consumer demand had helped trigger the Depression added to support for New Deal labor and social welfare reforms. Congress passed legislation that helped create the institutional pillars of the Wonder Years, buttressing the economy against a future downward spiral fed by declining wages.
(1) The National Labor Relations Act of 1935 (also known as the Wagner Act) protected workers' rights to organize and bargain collectively. It contributed to the rise of labor unions in the steel, auto, rubber, electrical equipment, and other manufacturing industries. After World War II unions and collective bargaining established industrywide wage and benefit standards in core manufacturing industries. Postwar union contracts linked annual increases in real wages to the roughly 3 percent annual rate of national productivity growth.
(2) The Fair Labor Standards Act of 1938 established national standards for the minimum wage, overtime pay, and restrictions on child labor. In the next thirty years periodic increases kept the national minimum wage above 40 percent of the average manufacturing wage. The federal minimum wage ensured that workers in many low-wage, nonunion industries also shared in the benefits of productivity growth.
(3) The Social Security Act of 1935, the foundation of the current social security system, established national contributory old-age pensions. The same legislation established a federal unemployment insurance tax and incentives that induced states to create unemployment insurance systems. When older or unemployed workers dropped out of the labor force, their consumption would no longer fall precipitously.
After World War II the United States entered the Wonder Years. The nation emerged from the war with unmatched industrial power. Not only were U.S. industries undamaged, but they had in many ways been strengthened by government investments in technology and production capacity. Conversion from military production proved less disruptive than many had feared. As other economies rebuilt, American industry in 1953 accounted for 45 percent of world manufacturing output. With foreign competition a minor concern, major firms settled into generally comfortable domestic accommodations. Union contracts, minimum wage increases, and unemployment insurance payments joined Keynesian fiscal and monetary policy to dampen the business cycle, complementing mass production by sustaining consumer demand. Jobs were plentiful and so were profits.
This pattern could not last. It was easier for Europe and Japan to catch up than for the United States to stay ahead. The big American steelmakers were complaining of "unfair" foreign competition by the end of the 1950s. Japan improved its manufacturing capabilities fast enough to become the world's low-cost supplier of goods ranging from ships to television sets in the 1960s. By the late 1970s imports accounted for almost 30 percent of U.S. automobile sales. No longer could U.S. Steel and General Motors function as price leaders, ensuring handsome margins for themselves and adequate, if usually smaller, profits for their domestic rivals and suppliers.
During the 1960s productivity rose at an average annual rate of 2.8 percent. The rate of increase fell below 2 percent in the 1970s and has since been even lower, around 1 percent a year. Low productivity growth put a damper on wage growth; without rising wages, demand growth slowed.
While international competition buffeted and broke the old oligopolies in manufacturing, deregulation, beginning under President Jimmy Carter in the late 1970s, contributed to steadily growing competitive pressures in a wide range of domestically oriented industries, including financial services, transportation, and telecommunications. At the same time, new entrants and changing consumer preferences brought new competitive pressures to industries such as retailing. In the 1990s attempts to contain rising costs brought competition even to the health care sector.
Manufacturing and service firms alike sought to reduce costs and improve quality and flexibility by automating and reorganizing their workplaces, closing off many internal job ladders, and cutting into well-paying jobs that had earlier been open to less-educated workers. Some manufacturers moved low-skilled, labor-intensive production to Asia and Mexico. In the 1980s Fortune 500 firms began to downsize, computers showed up on desktops, and employers merged, consolidated, and began to rely more heavily on part-time and temporary workers.
Meanwhile, the institutional framework of U.S. labor relations had been fraying. Male-dominated industrial unions adapted poorly to the rising percentage of women in the labor force and an expanding service sector. Advising corporations on how to remain "union-free" became a thriving cottage industry. Union coverage declined steadily to today's pre-Wagner Act levels--11 percent of the private nonagricultural labor force.
With the decline of unions came the erosion of the social policies supported by labor. The minimum wage roughly tracked productivity for the two decades after 1947, then lost half its value relative to productivity over the next three decades (see Figure 5, Chapter 8). The share of unemployed workers receiving unemployment insurance benefits fell. By the end of President Bush's term most people understood that the old days were gone, even if they weren't quite sure why.
Making Sense of the New (and Old) Economy
The narrative above is familiar. This book goes beyond it to develop an analytical framework that describes the economy of the Wonder Years and of today. We then use that framework to define policies designed to point the nation toward a new era of prosperity.
We describe the economy using three concepts: work systems, business organization, and career paths. Each type of work system relies on a different basic approach to organize production and motivate or control how hard and well people work. Examples range from assembly lines, to janitorial labor with mop and broom, to the bureaucratic incentives of promotion and pay found in banks and insurance companies, to professions such as medicine and the law. Work systems emerge from a complex interaction among firms, employees, and technological and other contextual influences.
By business organization we mean the ways that firms structure their operations. To a majority of Americans, the most familiar forms of business organization are still the giant corporations--GM, Sears, AT&T (and newer firms such as Microsoft on which the media shower equal attention)--and the small establishments that consumers pass by and deal with daily. Within these organizations, managers decide which goods or services to offer and how to produce or distribute them. Relationships between firms, in turn, are coordinated through the market, that is, through "arm's-length" buying and selling between firms that have no enduring ties and will buy from someone else if they can get a better deal. Patterns of business organization in the services have always differed from those in manufacturing because of the smaller average size of service establishments and the prevalence of franchise agreements. In both services and manufacturing, recent trends in business organization include the creation of more enduring and cooperative links between separate firms (as, for example, in health care alliances).
Career paths structure the movement over time of workers through the labor market. These paths are shaped by the decisions of individual workers, groups of workers (informal communities, professional associations, labor unions), and owners and managers. The job ladders within large firms illustrate one kind of career path (e.g., from file clerk to secretary to office administrator). Another example is the movement of skilled craft workers in the construction trades from one worksite to another. As we define them, career paths do not necessarily imply that workers have "good" jobs. Nor does movement always lead to advancement in pay, skill, or responsibility.
Public policy affects economic outcomes not only directly but indirectly through its influence on work systems, business organization, and career paths (Figure 2). An obvious direct effect comes from the legally mandated minimum wage. Examples of indirect impacts include antitrust laws that affect business organization and antidiscrimination laws that affect work systems and career paths.
The Wonder Years Revisited
Table 1 provides a brief comparison of the four work systems analyzed, in detail in Chapters 3 and 4. The core of the middle class in the Wonder Years enjoyed one-company careers in vertically integrated firms. One major group consisted of blue-collar workers, many with "tightly constrained" jobs (including assembly-line jobs, although there were never as many as in the popular imagination). During the Wonder Years large numbers of middle-class Americans also found employment (as secretaries, middle managers, factory quality inspectors, and supervisors) in a work system we call semiautonomous. In this system, good wages, seniority-based pensions and promotion opportunities, and other bureaucratic incentives tied workers to firms and elicited effort and commitment. Since they generally stayed with one employer a long time, workers could acquire and apply firm-specific know-how. They learned the company's products, its "standard operating procedures," how to work effectively with others in the organization whose cooperation they needed. Most of those in tightly constrained blue-collar and semiautonomous white-collar jobs did not work for GM or AT&T. They worked for the GM supplier or dealer, the community hospital, the local bank or supermarket. But rapid economywide growth translated into promotion opportunities and security even in smaller firms.
The top of the labor market, in the Wonder Years as today, consisted of employees in the high-skill autonomous work system. This category includes professionals, upper-level managers, craft workers, and many technicians. In the high-skill autonomous system, employees, not their bosses, take primary responsibility for performance. Professional and craft pride, reinforced by career incentives, motivates effort and performance. Some high-skill autonomous workers during the Wonder Years spent their entire careers in one or a few organizations. Others, such as skilled construction workers, had careers that spanned many employers. Formal institutions (e.g., professional associations and hiring halls, portable credentials and benefits) supported informal networks of professional and craft workers, reducing the social and economic cost to the worker of moving to a new employer.
At the bottom of the labor market were "unskilled" labor-intensive jobs: janitors and gardeners, waiters and waitresses in all but elite restaurants, nurses' aides and hospital orderlies. In these jobs, the nature of the tasks prevents continuous, close supervision. Neither employers nor employees systematically analyze the work process to improve efficiency or quality. Low wages and the modest cost of capital equipment discourage employers from attempting the type of rationalization typical of capital-intensive production processes. For this reason, we term this category of work system "unrationalized labor-intensive." In the Wonder Years some people in unrationalized labor-intensive jobs moved up by moving out--into other work systems with other employers. For workers in both unrationalized and tightly constrained work systems, collective bargaining and the minimum wage kept pay rising roughly in step with salaries in the other two work systems.
Many Americans see the post-World War II period as wonderful in hindsight because, unlike today, workers' aspirations and opportunities were more or less in balance. White men, at least, could take for granted that they would make it into a well-paid tightly constrained or semiautonomous job by some time in their twenties. Others were not so fortunate. African Americans, emboldened by the civil rights movement in the 1960s, challenged their relegation to the most arduous and mind-numbing work. The women's movement took issue with female segregation into unrationalized jobs and bureaucratic, semiautonomous occupations that paid less than male-dominated job categories. Since the 1960s, aspirations have risen. Since the 1970s, opportunities, especially for those with modest educational credentials, have narrowed. Widening gaps between aspirations and opportunities have left many Americans anxious, uncertain, confused.
The New Economy: The Origins of Economic Anxiety
Table 2 summarizes wage and employment changes by work system between 1979 and 1996. (Changes in occupational definitions make comparisons for years before 1979 treacherous.) Employment in the unrationalized labor-intensive work system remains at about a quarter of the total, as in 1979, while growth in professional and technical jobs has increased the share of the high-skill autonomous work system. Semiautonomous jobs have declined relative to other categories. Some semiautonomous jobs have migrated to the high-skill category. In other cases, employers competing on the basis of low wages have replaced semiautonomous jobs with unrationalized labor-intensive work. Retailing illustrates the substitution. In department stores facing competition from both discounters and specialty outlets, many nonprofessional positions that once paid decent wages and benefits and offered advancement opportunities--classic semiautonomous jobs--have been transformed into low-paying, high-turnover positions.
The wage picture is even grimmer. Since 1979 pay in the unrationalized labor-intensive and tightly constrained work systems has fallen relative to the high-skill system. The decline of unions and the real value of the minimum wage contributed to the widening gap. Part of the drop in union coverage reflects the difficulty of organizing service workers, many of whom work in small establishments spread across large industries such as retailing.
Within firms where the semiautonomous work system still predominates, career trajectories have become less predictable, in part because fewer of these jobs are in large firms with well-marked career paths. With deregulation, companies such as AT&T have reduced payrolls and dismantled their internal hierarchies. Wage inequality has grown as firms have contracted out work once performed by their own employees. Janitorial, food-service, and security jobs that once paid big-company wages and benefits are more often isolated in low-cost suppliers that rely on low-paid contingent workers.
The analysis summarized above and explored in detail in later chapters points to three underlying roots of economic anxiety. The first is low pay and lack of upward mobility for those stuck in unrationalized labor-intensive jobs, as well as in a few expanding, tightly constrained settings such as telephone call centers. These kinds of jobs rarely lead to a step up on a big-firm job ladder. A second cause is the insecurity that troubles those with good jobs. Office workers, managers, and sales employees, lacking specialized skills in high demand or portable credentials, fear the loss of income and status that may follow from a forced change of employer.
A third root of economic anxiety is the apparently stagnant economic performance of the services, which limits the fruits available to distribute. We trace low measured productivity growth in part to the nature of service sector work processes. In unrationalized labor-intensive jobs, exemplified by nursing homes and other low-wage social services, employers don't care about improving performance because workers are so cheap. Workers do not have the training, knowledge, or power to improve performance on their own. Even in some tightly constrained and semiautonomous service work, low or stagnant wages and the high turnover they generate discourage firms from investing in workers or more energetically seeking performance improvement. Indeed, managerial approaches to performance improvement in the services to a surprising extent reflect preoccupation with the "deskilled" jobs of the mass manufacturing era, even though the tightly constrained work system has never been very prominent in the service sector.
Imagining Some Solutions: A Policy Preview
The policies proposed at the end of this book directly attack the low wages, rising job insecurity, and lackluster economic performance that we see as the roots of economic anxiety.
Since wages are too low in the poorest-paying work systems, they should be raised. This will not happen by relying on the market as it now operates. Public policy can support wage levels in two basic ways: by raising the hourly minimum and by encouraging collective bargaining. The federal minimum wage (now $5.15) remains about 25 percent below its real value in 1968 (which would be about $7 today) and less than half what it was in 1968 relative to labor productivity. The minimum wage should be raised substantially. This would also push up wages for workers paid somewhat above the minimum.
The one-employer career may not have disappeared, but even the largest firms make it plain today that there are no guarantees. With declining employment attachments, firms are less likely to support the skill development needed both for improved economic performance and for career advancement. (In Chapter 5 we explain why workers' skills and experience are the key to achieving large improvements in performance in many services.)
There is no point in wishing for an end to downsizing and reengineering (which in some cases make their own contributions to performance improvement). The only practical way to address the mismatch between worker aspirations and actual prospects for security and mobility is to construct career paths that cut across firms. That way workers can look forward to "staircase" careers in which they can move up by moving to another employer. Public policies to encourage staircase careers include support for developing skill standards, training institutions, and job referral systems coordinated by multifirm labor and management groups.
The third leg of our policy stool is an expansion of "reinvented," more craftlike unions. These are critical for raising wages, building new career ladders, and improving workers' performance in many service occupations. Current policies, however, effectively deny representation to many workers who move among small firms. Framed in the 1930s, U.S. laws were designed to encourage unionization at big factories. These laws are poorly suited to an era of small service establishments and transient employment attachments. Labor law reform should support union formation and bargaining across multiple employers (e.g., in retailing or office work). Employers would benefit through access to better prepared, more capable workers.
Taken together, these and other policies discussed in Chapters 7 and 8 would create conditions that foster better economic performance within firms, clusters of firms, and occupational groups. Our policies would limit "destructive" competition, based on working harder and for less, in favor of "constructive" competition. They would allow public policy and institutions to catch up with the changes that have accumulated in work systems, business organization, and career padis since the 1930s.
We anticipate three sets of responses to the policy proposals summarized above. Some oppose wage-setting policies, maintaining that they raise unemployment and undermine economic efficiency. But as we argue in Chapter 8, allowing the minimum wage to fall erodes efficiency gains over time because firms need not improve performance to stay in ' business. There is, in addition, little evidence that recent hikes in the minimum wage have cut into job creation. And even with a big increase in the minimum wage, we suggest in Chapter 8 that the reinvention of social policy could keep unemployment low.
Second, some may object that low-wage foreign competition in a global economy must eventually prove overwhelming. Regardless of one's view of the consequences of wage-based foreign competition for U.S. manufacturing, only about 10 percent of the service workforce holds jobs directly exposed to international competition. Adding manufacturing and agricultural jobs would roughly triple the number of jobs potentially exposed to foreign competition, but even this total represents less than 30 percent of the labor force.
The great bulk of service products are nontradable and will remain so. It is true that information technologies, low-cost transportation, and reductions in trade barriers may increase cross-border services trade (e.g., back offices moved to Ireland or the Caribbean, software upgrades produced in India). But it is domestic competition, in which American workers compete only with one another, that holds down wages and benefits for those without highly specialized skills and knowledge. In the less mobile parts of the services, states and localities, as well as the national government, can set rules for competition without worrying that they will be undercut by others outside U.S. borders.
Finally, some might suggest that the best solutions to wage dispersion and dead-end jobs are found in education and training. Education is a good in itself. But education, standing alone, cannot make low-wage jobs disappear. As we argue in Chapter 4, low-wage jobs exist because some work systems are not organized to raise performance in ways that might lead to higher wages. Unless those work systems are reorganized, jobs for those in the lower part of the wage distribution will not pay better or offer greater career opportunities. More education will not automatically prompt reorganization, because low-wage work systems have little place for higher skills. Indeed, more education and training absent other policies could simply make worker frustration more widespread. Rising numbers of Americans would face opportunities that fall short of their aspirations.
Building a Postindustrial System
In the next chapter we compare jobs and productivity performance (to the extent it can be measured) in the services with those in manufacturing. The organization of the rest of the book follows our three main analytical constructs. Chapters 3 through 5 deal with work systems. Chapter 6 turns to business organization. Chapter 7 examines career paths. Chapter 8 considers how work systems, business organization, and career paths might be reshaped by public policy to generate more good jobs and better economic performance.
Our book is also organized to help readers envision a "system-building" process parallel to the one that created the manufacturing-centered prosperity of the Wonder Years. As we saw, three distinct but intertwined developments combined to create that prosperity. In stage 1, technological and organizational innovations--new products, rationalization, mechanization, and scientific management--led to dramatic rises in productivity. Stage 2 saw the creation of institutions that helped spread mass production methods and related innovations through the economy. The key institutions were corporations with enough market power to be confident that, after making large-scale investments, they would be able to profit from a correspondingly large volume of sales. Stage 3, completed in the 1930s and 1940s, ensured the purchasing power necessary to keep the national economy expanding. It involved the creation of demand-sustaining labor market institutions (industrial unions, pattern bargaining, the minimum wage) and social policies (unemployment insurance and social security).
Over the next generation or so the United States can choose to emulate the three-stage evolution that led to the Wonder Years.
Stage 1: Recent innovations in service sector work processes have begun to suggest new ways of improving performance. In Chapter 5 we argue that learning by workers, individually and collectively, can generate performance gains sufficient to support better jobs and better pay.
Stage 2: As the technological and organizational basis for performance improvement in services develops, the nation will need mechanisms that can propagate the new approaches, much as big corporations and labor market policy spread mass production methods. In Chapter 6 we suggest that recent changes in corporate strategy and structure are not enough to diffuse more productive approaches throughout the service economy. Although fluid and fragmented forms of business organization make corporations more nimble, they undercut the capacity of individual firms to support the training, learning, and employment security essential to high-quality, high-productivity strategies. In Chapter 7, therefore, we examine multifirm structures that could foster adoption of the new approaches to performance improvement and simultaneously give workers a wider range of employment and learning opportunities.
Stage 3: In the creation of the old industrial system, the final step was the resolution of the problem of aggregate demand and unemployment. We discuss the manifestation of this issue in the new economy briefly in Chapter 8. Today, there must be enough paid jobs and social support that vulnerable workers are not forced to take subsistence jobs in the low-wage unrationalized labor-intensive work system. We speculate that creative social policy could make it easier to move among paid work, education, family responsibilities, and community service. Harking back to the preindustrial era, people would always have useful activity to perform in one of these realms. And the ability to move among them could keep the need for paid work in balance with the available jobs.
The analysis of particular firms, industries, and work systems in the chapters that follow shows that competition can operate in constructive or destructive ways. That argument would likely be taken for granted if we were talking about the world of sports, where the game is a more obviously artificial construct. Basketball's competition committee, for example, modifies the rules periodically to maintain audience appeal. Why? Because coaches and players keep trying to beat the old rules. Several years ago the committee instituted severe penalties for flagrant fouls and prohibited hand checking. The new rules help ensure that fluidity and athletic skill, rather than brute force and barely contained violence, remain the keys to success on the court. The competition committee, in other words, acted to discourage destructive competition.
The economic world is also a human construct, not a state of nature. It is based on competition guided by rules. The issue is the type of economic competition and organization that the rules, from property rights to labor laws, encourage. Today they encourage widespread low-wage, low-skill competition and fail to encourage widespread improvement of service sector economic performance. Better economic and social outcomes require better rules.Marketing Strategies for the new economy
January 2001
http://www.go2cio.com/books/marketing_strat.html
Chetan Parikh
chetan@capitalideasonline.com
By Lars Tvede and Peter Ohnemus
Two of the Lars Tvede's books - "The Psychology of Finance" and "Business cycles - from John law to the Internet Boom" have been reviewed by me in the past on this site. I was somewhat surprised to see a marketing title on a book by Lars Tvede - but after reading the book, I felt that I had imbibed some fresh insights on strategy and valuation in the 'new economy'.
The authors start with Schumpeter's waves of innovation and make a convincing case to why the internet and computing are jointly creating one of Schumpeter's waves of innovation. As the author's state in the book: "By year 2000, less than 5% of the world's population had access to the web, and most of those used only one or two devices to connect. So there is room for growth. Massive growth, in fact. This will build, change and destroy industries at a speed that no one thought possible just a few years ago."
The authors review the history of marketing - 'The Commodity School' which emerged around 1910 and gained broad acceptance just after the Second World War. " The Functional School", which classified the different tasks involved in the marketing practice, '"The Regional School" which developed after 1913 and dealt with distribution issues - how to bridge the gap between buyers and sellers, ' The Institutional School' which focused on the organisational implications of marketing - how to organise a company internally, and how to co-operate with other companies to reach success and ' The Buyer Behaviour School', which focused on the reasons why people would buy certain products and services.
As the authors state : "Most of the mainstream knowledge gained from these six marketing schools is still true and relevant for the theory and praxis of marketing, whether it is within the 'old' or 'new' economies. Most of it will, in fact, probably be relevant for as long as business exists. But there are phenomena in the economy that these schools don't cover because the phenomena didn't exist or weren't important when the schools emerged. These new phenomena arise when companies, people and computers are tied together in huge digital networks where time, place and legacy investments matter less and less. None of the previous marketing schools had assumed the effects of millions of computers, billions of small chips, armadas of communication satellites --and the Internet. But while the traditional marketing schools did not describe the new networking phenomena, there have subsequently been numerous attempts to encapsulate many of the changes, that have occurred. Enormous amounts of literature have already been written about the effects of digital networking, and anyone who reads some of it will soon see that it describes things that are truly new and different. It is beginning to look like a new school of marketing.
We could call this new school many things, but the best term is perhaps the 'Digital School'. Networking has always been a part of marketing, so this term doesn't encapsulate the school. It's the digital aspect that is new. Digital communication is responsible for a cluster of new phenomena that are so strong and different that we think they deserve their own school.
This Digital School of Marketing has received contributions from numerous great thinkers. We shall meet many of them as we proceed further in the book, but it seems fair to list a few right here:
The author writes about the shift from networked computing to ubiquitous computing- "Ubiquity is provided not only because data can flow over many different networks. It is also because it can flow to many different devices. To PCs, of course, but also to television sets, mobile phones, personal digital organizers, car entertainment systems, and even to refrigerators with plasma screens. And to numerous devices equipped with jellybeans. There will soon be hundreds of categories of devices that connect electronically.
One of the key solutions will be a technology called 'Bluetooth'."
Saffo wrote in a 1999 article:
"Barely five years ago, the notion of commerce over the Internet was anathema. Later, Internet commerce became the hottest thing in cyberspace. Once Net commerce became real, conventional wisdom held that the Internet would spell the death if advertising.
In fact, the Internet turned out to be a huge new advertising frontier.
Now, a much more dangerous bit of conventional wisdom is on the loose. It is the notion that information technologies will bring about disintermediation - that is, networks and information systems will allow buyer and seller to interact directly, there by eliminating intermediaries and radically shortening value chains.
There's only one problem with this theory. It's directly at odds with what is actually happening. Rather than eliminate intermediaries, information systems do quite the opposite. Information systems are powerful commercial tools because they lower transaction costs. Lower transaction costs enable new kinds of transaction, which lead to new market niches and, overall, make the market environment more complex. In short, information systems create openings for new intermediaries to discover and occupy.
Meanwhile, old intermediaries are disappearing, but that is only part of the picture. What seems to be disintermediation is really a mirage, one static piece of a larger process in which the introduction of new information systems disturbs market environments, creating slots of new intermediaries whose presence threatens older established intermediaries who either disappear or adapt to new market realities. What looks like disintermediation is but one frame of a larger dynamic of 'Disinteremediation'."
Other than inventing one of the most complicated words in marketing ('disinter-remediation'), Saffo managed with this article to encapsulate a key development in the markets: while the new mediators don't have to operate retail shops, there are a number of tasks that they actually do fulfil. So, we could perhaps even try to extract yet another rule. (Saffo's Law', of course) from his writings: The diversity of distribution services is reversibly proportional to the cost of distribution transaction.
Digital communication technology reduces the cost of distribution, therefore we
see that the distribution intermediaries in digital economies (the sectors that
many thought would disappear) are alive and multiplying in numbers and
diversity, as they provide the following:
they will also, in most cases, have to maintain a physical inventory of goods, and they will need real people for customer support. Lots of them, in fact. Experiences. From electronic stock market trading service indicate, for instance, that you need a customer support person for every 50 active customers.
So, the real change is not disintermediation but a vast improvement of the services that intermediators provide to their customers. More and more goods will be traded in ways that are reminiscent of electronic stock markets. Customers will have full transparency, prices will change more frequently, and transactions will be possible from anywhere."
The authors have identified four key sources of market inefficiencies that dominate the digital economy:
They also identify five major value models.
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Major value model categories |
Specific value models |
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Asset-based value models |
Brand- building model Disruptive invention model Build-to-be-bought model Blockbuster model Standards model |
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Network-based value models |
Community-building models Platform and standards model Digital exchange model Profit multiplier model |
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Timing-based value models |
First-mover advantage model Organized-for-speed model |
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Customer relationship-based value models |
Secondary sales model Mass customization model Central aggregator model |
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Cost-based value models |
Critical scaling model Low-cost business design model Consolidation play model |
The authors discuss e-chain and value webs, digital ecosystems, the criterion for selecting strategic expansion models, competitor audits, one-to-one marketing, product policies and path dependencies, pricing, distribution and promotion strategy audits and the structure of long-term marketing plans
| The new economy, new opportunities and new structures |
| David Walters, June Buchanan. Management Decision. London: 2001. Vol. 39, Iss. 10; pg. 818, 16 pgs |
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| Subjects: | Studies, Intangible assets, Organizational structure, Flexibility, Shareholders wealth, Valuation, Models |
| Classification Codes | 9179 Asia & the Pacific, 9130 Experimental/theoretical, 2320 Organizational structure, 3400 Investment analysis & personal finance |
| Locations: | Australia |
| Author(s): | David Walters, June Buchanan |
| Article types: | Feature |
| Publication title: | Management Decision. London: 2001. Vol. 39, Iss. 10; pg. 818, 16 pgs |
| Source Type: | Periodical |
| ISSN/ISBN: | 00251747 |
| ProQuest document ID: | 259619941 |
| Text Word Count | 8369 |
| Article URL: | http://gateway.proquest.com/openurl?ctx_ver=z39.88-2003&res_id=xri:pqd&rft_val_fmt=ori:fmt:kev:mtx:journal&genre=article&rft_id=xri:pqd:did=000000259619941&svc_dat=xri:pqil:fmt=html&req_dat=xri:pqil:pq_clntid=23364 |
| Abstract (Article Summary) |
| The increase in intangible asset ownership and the importance of capabilities as "assets" has brought a new perspective to the conventional balance sheet and to the valuation of the assets, the business and shareholder value. The rise and demise of the "dot.coms" emphasise the need to reconsider the approach to corporate and shareholder valuation models. It is suggested that the virtual organisation offers the flexibility that organisation design will require if full advantage is to be taken of the emerging opportunities. However, successful virtual organisations require some planning and dedicated management if the success is to be sustained. |
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Copyright MCB UP Limited (MCB) 2001
A time of change Very early in the 1990s Davidow and Malone (1992) suggested: The complex product-markets of the twenty first century will demand the ability to deliver, quickly and globally a high variety of customised products. These products will be differentiated not only by form and function, but also by the services provided with the product, including the ability for the customer to be involved in the design of the product ... a manufacturing company will not be an isolated facility in production, but rather a node in the complex network of suppliers, customers, engineering and other "service" functions ... [P]rofound changes are expected for the company's distribution system and its internal organisation as they evolve to become more customer driven and customer managed. On the upstream side of the firm, supplier networks will have to be integrated with those of customers often to the point where the customer will share its equipment, designs, trade secrets and confidences with those suppliers. Obviously, suppliers will become very dependent upon their downstream customers; but by the same token customers will be equally trapped by their suppliers. In the end, unlike its contemporary predecessors, the virtual corporation will appear less a discrete enterprise and more an ever-varying cluster of common activities in the midst of a vast fabric of relationships. These arguments suggest that alternative organisational structures with which to take full advantage of the market place opportunities should develop. The challenge posed by this business revolution argues that corporations that expect to remain competitive must achieve mastery of both information and relationships (Davidow and Malone, 1992). Byrne and Brandt (1992) identified the characteristics of the "new corporate model": Today's joint ventures and strategic alliances may be an early glimpse of the business organisation of the future: the Virtual Corporation. It's a temporary network of companies that come together quickly to exploit fast-changing opportunities. In a Virtual Corporation, companies can share costs, skills, and access to global markets, with each partner contributing what it is best at ... the key attributes of such an organisation (include):
To describe the change that was occurring (and which continued) during the 1990s the term "market turbulence" has been popular. Glazer (1991) defines turbulence as "more events per unit of time". Pine (1993) expands this to suggest that the increasing number and magnitude of market events requiring an organisation's attention per unit of time creates difficulties. He suggests that market turbulence creates more difficulties for mass producers because they need time to respond to market changes. Pine's work on mass customisation is significant to this discussion because he identifies not only the process technology changes that have occurred, but also the attitude shifts by management as the "new economy" and its ground rules became accepted. He identifies differences in demand and structural factors that occur as market turbulence increases. Before we consider these we should review the context within which we do so. It is suggested (Pine, 1993; Ashkenas et al., 1995; Day, 1999) that market turbulence has resulted in changing the competitive nature of industrial and consumer markets. Dominant effects are consumer/customer related, such as changing demographics, changing socio-economics and sociocultural influences, resulting in changing customer attitudes and expectations. The underlying motivation for changes in customer expectations is a shift in the consumer perspective of value which has moved away from a combination of benefits dominated by price towards a range of benefits in which price, for some customer segments, has very little impact. Value is assumed to be the benefits received from a product choice less their costs of acquisition. There would appear an agreement among these and other commentators, that the consumer shift in expectations is one of a number of elements in the dynamics of market turbulence, but one which has had an important influence. Day (1999) identifies some interesting "transitions" that are having (or will have) disruptive effects. These include more supply and less differentiation (or excess capacity for commodity type products) that result in product-service imitation. Day cites the athletic shoe market as an example for which imitation reaches well beyond products and into delivery methods. The "net" based shopping offers of the major UK food retailers are another example. Globalisation, more global and less local trends are another important transition. Globalisation is being fuelled by the convergence, or homogenisation, of customer needs, trade liberalisation and the opportunities offered by international trends in deregulation. Day refers to the move from a "marketplace" to a "marketspace" perspective (a concept introduced by Rayport and Sviokla, 1995). Day suggests this is a new emphasis not only on marketing communications, but also on product-service characteristics and transaction payment systems. The marketspace removes the need for dominant location; "... customers can shop across the globe or country, dramatically cutting the advantage of local presence that is the mainstay of many retailers". More competition and more collaboration imply a shift away from self-damaging behaviour (such as that inflicted by price competition) towards a more collaborative approach to customer satisfaction. Day (1999) identifies an arrangement between Sony and Phillips which are working together to develop common optical media standards and supplying components for one another. Collaboration in the European automotive industry has resulted in shared diesel engine developments. As Day (1999) comments: There are many markets in which a firm can be a customer, supplier and rival at the same time. There are a number of interesting responses reported by companies to the demand and structural changes identified by these and other authors. However, before reviewing these we should explore one aspect of the changes in more detail, the characteristics of customer value expectations. Traditionally we have considered form, possession, and time and place utilities as drivers of consumer utility satisfaction. However, as Rayport and Sviokla (1995) suggest the move towards digital products changes the entire value creation, production, communication, and delivery and service process. Furthermore, customer expectations themselves have created new aspects of utility such as convenience, choice, information, communication and "experience". In a recent comment on the Tomorrow Project, a view of the future of relationships in the UK, Worsley (2000) identifies another dimension of value, that of fit. Worsley argues that if the consumer can now purchase clothes to meet an individual specification and can buy CDs with "individualised" tracks there is good reason to believe that the view "it must fit me exactly" will become the defining outlook and expectation of the next few decades. Evidence already exists to this effect. Toffler (1980) coined the term prosumer to identify consumer involvement in product design and manufacture and, if we consider the IKEA approach, we can include logistics. Nike offers customers the facility to design their own shoes using the Nike Web site. Customers in the US can choose between a cross trainer or a runner, select their shoe size, desired colour combinations and add personalised identification. The customer can view their "creation" in three dimensions and when satisfied consummate the transaction by providing credit card details. A fee of US$10 is charged for this customised service, together with a delivery charge, both of which are added to the retail price. Delivery takes two to three weeks and if they are not satisfactory can be returned to a Nike store. Levi-Strauss (Day, 1999) offers a similar service. Personal Pair is a service in which jeans for women are made to their exact specifications. Day also cites Custom Foot, which offers to make shoes to order from a choice of 10,000 variations for women and 7,800 for men. Dell Computer's build-to-order approach is well documented and requires no detailed comment but does offer a customised product with short delivery time. Kirby (2001) describes how customisation has been extended into cosmetics, skincare and perfume with a range of exclusivity: "In New York and London, customisation means individual hair analysis and product prescriptions ... At Manhattan's Henri Bendel department store, its about a personal scent made by British fragrance house Creed". The ability to offer individual responses to customer "wants" is not restricted to small businesses. Elizabeth Arden's R&D activity is focussed on customisation. The use of the Internet by a number of companies, Arden and Lush, has extended the "catchment" for customised products. For example, Three CustomColor in New York offers a matching service and www.lab2l.com responds with computer-blended, customised skincare. Pine and Gilmore (1998) explore the difference between service products and "experiences". They argue that as goods and services become "commoditised" experiences will become a distinct (differentiated) offering. In the experience economy the value delivered is a structured combination of memorable sensations that are staged rather than simply manufactured or sold. The value (or utility) is a memorable event individual to the person who is: "... engaged on an emotional, physical, intellectual or even spiritual level". Pine and Gilmore (1998) suggest that "outsourced" children's birthday parties are an example of this type of value. Theme based restaurants such as the Hard Rock Cafe are another example of experience based value. In other situations experience can be used to add "live" explanation to an event. For example, Stirling Jail (Stirling, Scotland) uses actors who play roles in order to add reality for visitors to the museum. The authors forecast developments such that a company may be able to charge admission to what is essentially a merchandise based offer. They suggest that experience based value has two dimensions. The first is customer participation that may involve passive participation in which the customer has no part to play; through to active participation in which customers assume key roles. The second dimension is connection, or environmental relationships in which the involvement varies from absorption to immersion. The attempts by Asda, the UK superstore multiple, to introduce "singles nights" into regular shopping visits is an example of both participation and connection, customers seeking partners were expected to get involved (immersed) in the activity. Organisational issues: enter the virtual organisation Slywotzky and Morrison (1997) and others suggest significant changes are occurring in management's perception of what customers are and on achieving customer satisfaction. Their argument contends that managerial emphasis was product focussed and centred on the productivity of the tangible asset base. This they suggest has shifted. The product focus has been replaced by the importance of customer relevance and the productivity of the intangible asset base has taken priority over tangible asset base performance. The arguments behind these assertions are based upon observed behaviour. Customer relevance has become important because of the improved accuracy, currency and availability of customer information; the facility to monitor customer purchases and preferences and to use these to create more relevant responses is a primary reason why a customer or market focus has replaced the importance of product. The concepts of value in use (customer perceived benefits or value satisfaction) together with life cycle costing (the research into aggregate customer costs over the life span of use of products) has enabled customer specific pricing to become a reality. The "market" orientation proposed by Abell (1980) and subsequently reflected in the writing of Webster (1994), Day (1990, 1999) and others has influenced a shift towards a market-product strategy rather than a product-market strategy, which for many firms has brought about major change in strategy and structure perspectives. The overall shift has been towards specific target customer groups with emphasis on relevant and effective means of segmentation. This shift has been accompanied by a view that organisations need to become interorganisational organisations if customer satisfaction is to be maximised rather than follow the traditional intraorganisational structures that have been met with increasingly less success. The end-uses) to which customers put products is also an important change; rather than suggest to the customer they change their processes to gain maximum benefit from products and services it is the supplier who changes the product specification to meet end-user needs. The "thinking" or learning organisation realises the importance of this and addresses the issue during the product development stage. Finally "delivery technologies" are becoming important components of the value strategy. Delivery technologies can be expanded to include the ordering, transaction and delivery processes that comprise the activity of managing the "physical" aspects of customer satisfaction. Intangible asset productivity is just as interesting. Companies such as Nike, Dell, The Gap, and it would seem, Ford, have realised how important their investments in intangible assets have become to their future. The importance of the brand is becoming a significant strategic factor as the Internet assumes increasing importance in commercial activities. Branded products that have been significant in corporate and consumer reckoning for a number of years are facing challenge and confrontation from the "dot.com" brands. An interesting question is emerging concerning the role of intermediaries such as "lastminute.com" in the purchase of branded travel products. Will BA loyal customers switch to another carrier if substantial price savings are available? In other words will the Internet based companies be "powerful" enough to restructure buying preference criteria and to reflect price and convenience rather than the "comfort" of aggregate expectations based upon experience with a traditional supplier? And does this suggest over time that travel customers will identify first with an Internet intermediary rather than the carrier/supplier? Human resources are becoming significant core competencies within value strategy. Specialist skills, knowledge and flexibility are becoming critical to both the formulation and implementation of customer focussed strategy. The recent (1999/2000) problems of Marks and Spencer have been influenced by lack of staff and staff "attitudes" towards customers. The role of research design and development is becoming well identified, as is its importance. The "high-tech" companies have proven the importance of ongoing investment in RD&D. For some (Dell, for example) it is their core competence - to the exclusion of other processes! It is arguable that the changes that have occurred are all due to the "new economy". However, there can be little doubt that the changes have brought with them a response from corporate thinkers. Whittington et al. (2000) comment: Increasingly competition, new information technologies, the rise of the knowledge economy, and extended global scope are all forcing many large companies to experiment with new forms of organising themselves. The concepts vary - they are seeking to become networked, virtual, horizontal or project based. But all these concepts express a need at the dawn of a new century to develop flatter, more flexible and intelligent forms of organising. Observation in the business environment suggests there is evidence to support this view. Ford has made some interesting acquisitions during the past two years, these would appear to have been motivated by their view of where industry profits are being made together with a revised view of customer expectations and its requirements for a "complete" product range. The vehicle range has been broadened by the purchase of Jaguar and other marques but the automotive industry total product range is far more extensive. It includes maintenance, financial and insurance services, car rental and (in the not too distant future) vehicle disposal. Hence it should come as no surprise to see Ford acquire Kwikfit (tyres and exhaust services) and in the US a vehicle recycling company. In Australia they have been experimenting with investment in the equity of large distributors. Clearly there are considerations concerning critical mass and economies of scale but equally there is the suggestion that there are concerns to ensure product and production capacity coverage. Capacity coverage at a local cost base is essential for global operations, it ensures that price competitiveness can be maintained and if this can be achieved through partnership agreements then capital commitment is avoided. Another, more recent example, concerns Unilever's entry into the domestic services business. Norton (2000) reports the company's launch of "myhome", a home cleaning, laundering and, eventually, a gardening business. Aware of their lack of competencies Unilever has acquired "Mrs McMopp" a home cleaning business and "Palace Laundry", both are London based businesses. Services will be expanded to include home repairs and security as well as gardening. The attraction for Unilever is the estimated four million-pounds sterling per year spent on home services and the potential growth it offers. Competition exists but is not national so the attraction includes a fragmented market that offers huge potential for partnerships within a value chain structure. In a comment made after the Rover/BMW decision, MacRae (2000), argued: "From the point of view of the whole country, the global shift to design and marketing is good news". McRae referred to a remark made by Jacques Nasser, the head of Ford, who late in 1999 suggested that Ford might in the future outsource all of its manufacturing. He reasoned that this is not because Ford was bad at manufacturing but because its particular skills are located at other parts of the value chain, such as design and marketing. Manufacturing has become a "commodity". While there is nothing here that other organisations have not already contemplated McRae does rightly comment; "... there is a seismic change taking place in the way our economy is organised". He contrasted the Rover/BMW outcome with the result of the flotation of Lastminute.com and compared the views held of the value (or economic utility) that both contribute. The motor vehicle offers the traditional tangible view of value with form, time and place utilities, each contributing part of the value/ utility offer. The value offer made by Lastminute.com is to make the industries it services run more efficiently by increasing capacity utilisation and offer convenience to end-users. These examples provide us with sufficient evidence to question existing structures. Strategy decisions have always involved an intra-company approach. Increasingly we need to adopt not only an interorganisational approach, but also an extra-- organisational view that involves the enduser but also suppliers, our distributors, our employees, investors and peripheral groups that may have influence in this larger market. A value chain approach would ensure that opportunities are identified and that the relevant value is created, produced, delivered and serviced. It will also make certain that the appropriate competencies are sourced, integrated and coordinated to ensure the interests of all stakeholders are met. New business models and new approaches The holonic, or virtual, organisation structure is one model that is finding favour. The holonic organisation or network is: ... a set of companies that acts integratedly and organically; it is constantly re-configured to manage each business opportunity a customer presents. Each company in the network provides a different process capability and is called a holon (McHugh et al., 1995). Holonic networks are not hierarchical structures - rather, each business within the structure is equal to each of the others. The network is in dynamic equilibrium and it is self-regulating. Access to, and exchange of, information throughout the network is open, as is access to and exchange of information across the network boundaries. The network is evolutionary and is constantly interacting with its environment. It is a knowledge network, a learning organisation. The authors suggest a number of advantages accrue to holonic networks: * Leverage. Widespread synergy is achieved by combining the best capabilities of a number of organisations. Quite small entities can share significant operational influence at a fraction of the costs occurring when independent. Shared activities, such as purchasing, developed in Internet based buying exchanges is a typical benefit. * Speed. A lack of management hierarchy, together with electronic data interchange (EDI), ensure that the information required for decision making is readily available. The fact that each member has a specialist input to the "product" that it alone manages ensures rapid decisions and actions. "Time-to-market" is minimal because a product variant or a new product is the result of the collaboration of a number of partners each with relevant core capabilities. * Flexibility. The combination of leverage and speed provides the ability to change product-service specifications to meet a range of customer needs or the rapidly changing requirements of the market. * Shared risk at reduced levels. Because a number of organisations are involved the overall risk is dispersed among the network members but, more significantly, it is reduced because of the high aggregate level of expertise that is deployed. * Independence as well as interdependence. Members of the network retain their independence. While extensive cooperation exists within holonic business systems the independence of members is recognised and respected. Faster growth and increased profitability. The authors cite work that found that companies with competitive time-tomarket response rates demonstrated both better profits and growth rates compared to competitors. Increased customer loyalty. The flexibility and customised responses of virtual (holonic) networks are characterised by longer and more profitable customer relationships. * Shared assets lower total capital investment. Less capital is required throughout the network because each member invests only in equipment that is specific to its core business processes. Working capital requirements are also lower because inventory is located on a "just-in-time" basis rather than "just-in-case", because of the interdependent nature of partnership relationships. *Rapid response to failure. The short time cycles and real time networks ensure that the system can recognise, and respond to, both operational and strategic problems with a minimum of loss to customers and to partners. * Change management is not a problem. The flexibility of network partnerships ensures that change is monitored and accommodated. Because investment for each partner is specific and excessive (and unnecessary) assets avoided, change can be implemented quickly and cost-- effectively. There are four different functions or roles within a virtual organisation. \Operational roles are occupied by specialists along the value chain, each of whom bring a core capability that combines with others to produce or to deliver the product that the end-user buys. Examples include manufacturing and logistics etc. A second role supplies a support process, such as procurement or customer service management and or facilities. McHugh and his co-authors (1995) suggest this is a functionally oriented role and that typically there is only one member supporting the value chain. Emerging examples of this can be seen in the large B2B buying exchanges appearing in industries such as the automotive industry. The third role is that of resource provider to the operational role members. Resources include skilled labour (such as designers), information/data management services and, increasingly important, customised facilities (such as those required for computer chip manufacturing). An "integrator" role completes the structure. The integrator has one of two functions (and may well perform both): one is to provide the initial "vision" around which the virtual organisation is structured. The other is a coordinating role within the value chain, identifying, matching and directing resources. Piore and Sabel (1984) provide an example of the integrator roles taking place in the Italian textile-- apparel industry located around Prato. Small specialist companies have developed longterm relationships with one another along the value chain. An impannatore undertakes a visionary role, together with an organising and coordinating role. The result is a very competitive value chain that offers currency and competitive prices in a fashion led industry. The holonic approach offers an ideal structure for organisations looking for opportunities in the "new economy". However some caution is necessary. Keegan (2000) commenting on the demise of yet another dot.com company identifies a problem applicable to any emerging business model: the failure to identify clearly the expectations of potential customers, the characteristics of the product (specifically its differentiation) and, related to this, the major cost features of the product and its service. Keegan (2000) points to the fact that many of the dot.com failures occur because consumers expect low prices and the very high costs of marketing and delivery of this medium. Survival in the new economy is dependent upon eliminating, or working with, competitors. Identifying competitors is often difficult. A second criterion concerns the use of the Web: success will depend upon using the Web (or, for that matter the delivery mechanism) to create competitive advantage rather than to sell "old economy" products in a different way. Third, it is important to survive by seeking partnership arrangements with established "old economy" companies to provide a proven alternative transaction channel. David Jones, an upmarket Sydney department store, had been criticised for not having moved into online retailing. The acquisition of TheSpot.com gave David Jones the required assets and in so doing overtook many of its competitors. Woolworth acquired a significant stake in Greengrocer.com and achieved much the same result. An alternative model has been pursued by Country Road which outsourced its entire online service to Wishlist.com. Keegan's (2000) comments reinforce the benefits of holonic networks and, at the same time, suggest the need for a structured approach. On their own the networks add value by offering synergy (through asset leverage), speed of response (strategically and operationally), flexibility in meeting order and service expectation criteria. They reduce risk through shared investment in capital requirements and in infrastructure requirements. Furthermore, the working capital requirements are also lowered due to the fact that inventory decisions and customer credit decisions are optimised. Keegan's (2000) comments also direct us to the essential requirement of considering the four roles that are necessary in structuring the virtual organisation. It is arguable that many of the failed dot.com organisations considered their most ideal and cost-effective role within the network structure. It is likely that as an innovator they assumed they had the expertise, if not the capital, to assume the integrator role. The increasing significance of intangible assets is emphasised by findings from the Brookings Institution. Brookings has been monitoring the changes in the financial structures of large US mining and manufacturing companies. Since 1982 fixed tangible assets as a proportion of total assets has declined steadily. In 1982 fixed tangible assets, as a proportion of total assets, were some 67 percent. By 1992 this was 38 percent and by 2000 the figure was reported to be less than 30 percent. Uren (2001) identifies trends in the role of intangible assets (notably brands and services) in competition between airlines and in automotive markets. He notes the differences between Qantas and Ansett, suggesting that Qantas with its international networks ("One World" and the links with travel agents) together with an investment in service is building competitive advantage based upon intangible service based assets. Two other examples from Uren are interesting and relevant. Uren quotes Schremp (DaimlerChrysler) who has expressed the view that: "... within ten years the price of a car will represent only a quarter of the total value provided to a customer with the balance consumed in maintenance, finance and other services". In another example Uren uses the packaging rivals, Amcor and Visy, which seek to differentiate a basic commodity product; both are using IT based e-commerce systems to increase customer service. In each of these examples a basic issue is emerging. Service extensions or augmentation of the basic product enhances the value of the "brand". These intangible service items are the result of investment in intangible assets and/or the result of partnership arrangements with specialist providers. The virtual organisation: a prospective view Clearly some lessons have been available (if not learnt) and issues for consideration have been identified. Boulton et aL (2000) make a useful contribution; they contend: The encompassing challenge that companies face in this new environment is how to identify and leverage all sources of value, not just the assets that appear on the traditional balance sheet. These important assets including customers, brands, suppliers, employees, patents, and ideas - are at the core of creating a successful business now and in the future ... But what assets are most important in the New Economy? How do we leverage these assets to create value for our own organisations in a changing business environment? What new strategies are required for us to create value? The authors continue by making the point that the new business models comprise asset portfolios whose success is influenced by the interaction of the assets. Furthermore, the new economy business model asset portfolio is far more diversified than that of the traditional organisation and includes intangible assets such as relationships, intellectual property and leadership. They suggest that new business models are becoming commonplace in "every industry" in the new economy. In these emerging models intangible assets such as relationships, knowledge, people, brands and systems are taking center stage. The companies that successfully combine and leverage these intangible assets in the creation of their business models are the same companies that are creating the most value for their stakeholders. In an attempt at establishing a "model" to identify assets that create value the authors propose five core categories of assets: physical, financial, employee and supplier, customer and organisation. Examples are given of companies that have focussed on a specific asset group to create above average value. For Boulton et al. (2000) it is clear that: "... the ultimate success of each of these companies depends not on its ability to make the most of just one or two assets, but on its skill in optimising all assets that make up the business model". They broaden the definition of an asset by the following comments: * Assets are tangible and intangible and extend beyond the balance sheet. They should be located where they will be strategically effective. * Assets are, therefore, both owned and leased, controlled and uncontrolled. They offer sources of value that are within an organisation's control and outwith it. Assets are sources of both financial and non-financial benefits. Intangible assets such as customers provide information as well as cash from sales revenues. Employees provide skills and ideas and, over a period of time, knowledge and learning. Organisations provide processes and systems.
* Assets have distinct lifecycles. * Assets include internal and external sources of value. The asset base of the virtual organisation includes numerous external relationships. Peebler (2000) in describing the development of virtual organisation structures in the oil industry offers a prescription for the future virtual organisation: The virtual enterprise of the future will be much more dynamic and sensitive to the need for tuning operational parameters of the enterprise as a whole, including capital spending for both producers and service companies, optimising the whole chain of value creation. The future world will be characterised by knowledge management and collaborative decision-making by way of virtual teams. Virtual enterprises will be empowered by a willingness to do business in more productive ways and by information technologies that eliminate barriers between stakeholders and radically improve work processes.
It follows that to be effective (a strategic issue), as well as efficient (the operational perspective) the virtual organisation or enterprise will need to be a planned structure rather than a reactive response. To this end we can expect pro-active organisations to be developing around "multi-enterprise" organisation structures. Five key features will be common among them: * A "visionary" who sees how "putting pieces together" can create a more effective business model.
* Core processes that are identified and viewed as inter-organisational rather than necessarily intra-- organisational. * A supporting infrastructure that facilitates integration. * The customer is considered to be an integral part of the organisation, a major stakeholder. * An inter-organisational performance planning system. The result will be an overall approach to strategy with specific features: * An emphasis on processes rather than functions. * Distributed assets. * Flexibility in production, delivery and service provision. * Communication, cooperation and collaboration through the infrastructure linkages. Synchronised networks that create virtual organisations.
Three key areas - knowledge management, technology management and relationship management - will influence the structure of the virtual enterprise. The structure that evolves will reflect the offer and delivery expectations of the target customer. The emphasis on processes and distributed assets, together with the principle of flexibility will ensure strategic relevance and operational performance. Some key questions are: 1 Customer value drivers: * What are the product and service features for which customers are willing to pay a premium price and are prepared to switch suppliers to obtain? * Which product and service features are exclusive to the organisation and offer competitive advantage? 2 Core processes: * Competitive necessity: which processes are critical to value production, delivery and service if the value offer is to be considered credible? * Competitive advantage: which core processes will move the value offer into a preferred position? 3 Core capabilities: * What skills, resources, "technologies" are required for leadership in the sector? Which offer a strategic competitive pathway for future activities? How many, and which of them, does the organisation possess? Which of them are unique (or at least exclusive) to the organisation? Are any unique/exclusive to your competitors or any other organisations? 4 Enterprise assets: * Tangible and intangible assets required to meet market (often specific customer) determined value specifications: (the capability and capacity profile): - Form utility (performance, quality and quantity)? - Time utility (delivery frequency and reliability)? - Place utility (convenience)? - Information utility (order progress information)? - Flexibility utility (the ability to change the utility specifications at short notice)? - Exclusivity utility (status, realisation, actualisation)? The virtual organisation: a "balanced scorecard" approach Olve et al. (1997) discuss the problems of traditional management control. They suggest these to be restrictive in the sense that they do not reflect the need to respond to "the requirements of today's organisation and strategy", encourage short-term thinking, are financially focussed and are not particularly effective as communications media. The authors review the "scorecard" approaches of Kaplan and Norton (1996) Maisel (1992), Adams and Roberts (1993), McNaur et al. (1990). The "scorecard" approach offers a response to these criticisms. It offers: a compact structure for communicating strategy; a requirement to consider cause and effect relationships among different factors; and a procedure for conducting discussions, one that replaces the traditional planning and control models. There are a number of contributions: "All of them designed to measure the business performance and to link the measures used to the company's overall strategy". The "balanced scorecard" not only records results but is used to indicate expected results. In this way it can be used to communicate a business plan and missions of the component business units. It helps focus on critical issues relating to the balance between short and long term and "to the appropriate strategic direction for everyone's efforts". It is this latter feature that gives the scorecard appeal as a planning vehicle for the virtual organisation. Each of the models reviewed by Olve et al. (1997) share, to a greater or lesser extent, the four perspectives better known from Kaplan and Norton's (1996) work. These are: * A financial performance perspective aimed at shareholder value expectations. * A customer perspective. * Identification of important internal processes. * The learning and growth requirements required for continuity of successful growth. Maisel (1992) and Kaplan and Norton (2000) are similar in the "perspectives" considered by the process. Maisel (1992) uses a human resource perspective, inclusive of innovation and education and training, product development, core competencies and corporate cultures. Adams and Roberts (1993) offer effective progress and performance measurement and suggest four areas to be monitored: 1 External measures; customers and markets. 2 Internal measures; improving effectiveness and efficiency. 3 Top-down measures; breaking down strategy and accelerating change. 4 Bottom-up measures; empowerment and enhancing freedom of action. The emphasis placed upon "intellectual capital" by Kaplan and Norton (2000) is emphasised by Olve et al. (1997). The term is used to reflect the increasingly large investment in what Stewart (1997) interprets as packaged useful knowledge and is offered as a reason why a company may be valued at more than the book value of its "hard" assets. The authors relate intellectual capital to competencies (capabilities) interpreting Hamel and Prahalad's (1994) view of these as: "... the patient and persistent accumulation of knowledge and understanding to acquire them". They also extend this thinking to Rumelt (1994) who argues: * Core competencies support several businesses and products. * Core competencies extend beyond the lifespan of products and services. They develop slowly and demonstrate more stability. * Competence is knowledge based and increases with use. * In the long term it is competence, not products, that determines success. Kay (2000) extends this view by suggesting competencies or capabilities are distinctive or reproducable. Distinctive capabilities are those characteristics that cannot be replicated easily by competitors. If they can be then typically the benefits are for the originating company. They include strong brands, patterns of relationships with suppliers and customers, skills and knowledge, processes and routines. Also included by Kay (2000) are the protected "proprietary" characteristics, such as patents, etc. Reproducable capabilities "... can be bought or created by any company with reasonable management skills, diligence, and financial resources". Kay (2000) contends most technical capabilities are of this kind, while marketing capabilities may be either. Kay's (2000) thesis is that only distinctive capabilities can be the basis of sustainable competitive advantage. The virtual organisation: a structured approach Enduring virtual organisations or enterprises do not simply appear, they are structured alliances that are based upon an acceptance that no one organisation will possess all of the capabilities or competencies required for success. Accordingly, the forward thinking companies invest in relevant capabilities, those that will not simply maintain their position but will reinforce their distinctive capabilities and thus contribute to a leadership status. As McHugh et al. (1995) comment: "No longer does strategy mean putting a stake in the ground and responsiveness is bounded by it in broader strategic thinking, how a company will compete is not predefined; the strategy - or the strategic thinking - is that the company will be a significant player in whatever markets can take advantage of its core competencies". And where ever its capabilities best suit its participation. Lipnak and Stamps (1994) identified some pitfalls: * Successful virtual enterprises are those that are planned. Companies involved in successful collaboration have clear plans concerning the type and extent of their involvement. * A clear understanding of the capabilities each partner brings into the organisation, each partner's expectations and mutual trust will limit the extent of coordination required for success. * Flexible response is essential. A lack of agility in responding to market change together with excessive planning inhibits virtual organisations. * Flexible structures that permit partners to respond with the most suitable solution (product or infrastructure services) are essential. * Partner performance monitoring is essential. It enables struggling members to be supported and if necessary to be replaced. * Failure to outsource reproducible capabilities inhibits overall performance. * If core capabilities are overlooked and the need for dedication to working as a partnership are ignored the benefits will not be realised. Each of the scorecard models reviewed is based upon a single enterprise. However, as noted by Koza and Lewin (2000): The last years of the twentieth century witnessed the emergence of a business rivalry paradox - cooperative competition. Its hallmark was the rapid rise in popularity of all types of alliances, so much so that some popular business writers refer to it as the era of alliance capitalism. The authors continue by discussing the high rate of instability and failure. A trend identified by the authors is that of an alliance structured as a network: "A network is a form of collaboration among multiple companies in which, typically, the network members are each specialised, bringing a unique value-adding resource to the network such as market access or skills". The virtual enterprise qualifies as a structured network - an alliance. As such the successful virtual enterprise shares the need for a structured approach with other alliance models. Mitchell (2000) suggests that successful alliance management strategy depends upon three elements: pre-alliance planning, post-- alliance education and corporate alliance management capabilities. Central to Mitchell's (2000) argument for the planning stage is the need to identify the precise customer response that is to be made together with the joint capabilities required for success. The need for a "structured" approach is clearly apparent and a combination of the "scorecard" approaches and the alliance structure is proposed. Kaplan and Norton (2000) contend: "Organisations need tools for communicating both their strategy and the processes and systems that will help them implement that strategy". They propose a "Balanced Scorecard Strategy Map". The model features the fair perspectives introduced in the original scorecard model. The financial perspective has improving shareholder value as its objective (identified as share price and return on capital employed). The customer perspective has customer acquisition, retention and satisfaction as objectives. The means, or processes, for achieving customer satisfaction comprise the internal process perspective and learning and growth defines the core competencies (capabilities) needed to support the organisation's strategy. For any approach to be effective an organised, methodological process should be established: * Define the industry, consider its development trends and identify the emerging opportunities. * Identify the capabilities and assets required for continued success in selected industry sectors. * Identify an organisation structure and its component organisations. Recruit partner organisations. * Identify the tasks of the four roles, i.e. operational, support process, resource provider and integrator. * Set preliminary objectives for selected sectors. * Establish the perspectives. * Break the objectives down according to each perspective and formulate strategy. * Develop measures and identify cause and effects and create a balance among the different measures within the perspectives. * Establish the top level "scorecard" measures. * Develop measures for each organisational unit from the top level scorecard. * Construct an implementation program. A virtual organisation planning model Given the cautions of imposing excessive structure on a virtual organisation, some planning and subsequent control monitoring is clearly necessary. The scorecard approach as described by the literature has limited (or no) application to the multi-organisational partnership. This is addressed in the model. In Figure 1 is an outline of the proposed planning model. The financial perspective has enterprise value as its key performance objective. The increasing importance of intangible assets suggests that the profitability and productivity of intangible assets such as "brands" and R&D should be considered. Hence it is suggested that enterprise value comprises tangible and intangible assets and, where relevant, growth from increased efficiency from the existing partner organisations. Knight and Pretty (2000) classify this to be latent value. Customer value drivers, relevant to the marketplace, determine customer value. Management processes are managed such that an effective response is planned (a strategic decision) and then is managed efficiently (an operational activity). The six processes identified are generic in that they are essential to achieving customer satisfaction and are likely to be dispersed within the virtual organisation. Note that logistics coordinates the "stocks and flow" of materials and information. Because the virtual organisation is a multienterprise structure, capabilities and assets are dispersed (this follows from the previous paragraph) and decisions to develop and utilise both are difficult to separate. This is a major difference between the application of scorecard planning and control models to single and multienterprise structures. Often the capability brought into the partnership is based upon the ownership of exclusive tangible or intangible assets. The learning and growth perspective is increasingly driven by knowledge, technology and relationship management. Often it is the interrelationships (developed by partners) between and among these that fuel capability and asset based advantages. Uren (2001); and Boulten et al. (2000) suggest this. The model is expanded in Figure 2 in order to demonstrate cause and effect relationships. Enterprise value is expanded to identify the stakeholder interests and possible customer responses responsible for enhancing value are added. Customer satisfaction is a function of identifying and meeting customer value driver expectations. Process analysis and design is based around the generic management processes. The iterative nature of this activity is indicated by double arrows. Again the specific process details are those necessary to meet customer value driver expectations. The capabilities identified may be distinctive or reproducible. The raison d'etre of the virtual organisation is that it structures both capabilities and assets (tangible and intangible) in a unique, or exclusive, combination. Figure 2 indicates the interrelationship between capabilities and assets. Learning and growth characteristics are an ongoing influence on the development of capabilities and assets. Summary The concept of the virtual organisation remains as Davidow and Malone (1992) envisaged it in the early 1990s. During the ensuing ten years much has been learnt. The experiences of successful and unsuccessful alliances offer a valuable insight into the construction and ongoing management of the virtual organisation. The future virtual organisation will require to be more flexible and more agile than those of previous years. Not only will this be imposed by competitive dynamics but aggregate and cumulative expertise will work towards refining structures and processes to ensure both strategic effectiveness and operational efficiencies. Peebler (2000) in describing the development of virtual organisation structures in the oil industry offers a prescription for the future virtual organisation: The virtual enterprise of the future will be much more dynamic and sensitive to the need for tuning operational parameters of the enterprise as a whole, including capital spending for both producers and service companies, optimising the whole chain of value creation. The future world will be characterised by knowledge management and collaborative decision-making by way of virtual teams. Virtual enterprises will be empowered by a willingness to do business in more productive ways and by information technologies that eliminate barriers between stakeholders and radically improve work processes.
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| Strategy in the new economy |
| Don Tapscott. Strategy & Leadership. Chicago: Nov/Dec 1997. Vol. 25, Iss. 6; pg. 8, 7 pgs |
| Subjects: | Globalization, Technological change, Economic forecasts, Strategic planning |
| Classification Codes | 1110 Economic conditions & forecasts, 5400 Research & development, 2310 Planning |
| Author(s): | Don Tapscott |
| Publication title: | Strategy & Leadership. Chicago: Nov/Dec 1997. Vol. 25, Iss. 6; pg. 8, 7 pgs |
| Source Type: | Periodical |
| ISSN/ISBN: | 10878572 |
| ProQuest document ID: | 23108948 |
| Text Word Count | 4115 |
| Article URL: | http://gateway.proquest.com/openurl?ctx_ver=z39.88-2003&res_id=xri:pqd&rft_val_fmt=ori:fmt:kev:mtx:journal&genre=article&rft_id=xri:pqd:did=000000023108948&svc_dat=xri:pqil:fmt=html&req_dat=xri:pqil:pq_clntid=23364 |
| Abstract (Article Summary) |
A dozen overlapping themes are
emerging which differentiate the new economy from the old. The new economy
is:
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| Full Text (4115 words) | |||||||||||||||||
| Copyright Strategic Leadership Forum Nov/Dec 1997 The dog days for strategists are coming to an end. The rule of reengineering as the main tool for improving corporate performance and competitiveness is in its final death agony. It is becoming clear to most companies that the redesign of business processes to control costs is an insufficient approach to success. Companies need to move beyond business processes and change their business models. Similarly, companies need to move beyond cost control to address the more significant issue of how to create value. The reason is simple. The context has changed-we are entering a new economy. It is 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, wrote several years ago: "[N]o one has asked the all-important question. . . what's so new about the new economy?"1 The Twelve Themes of the New Economy A dozen overlapping themes are emerging which differentiate the new economy from the old. Understanding these themes is the precondition for transforming a business for success. Theme 1: Knowledge-The new economy is a knowledge economy, based on human capital and networks. Knowledge permeates through everything important-people, products, organizations. There have always been people who worked with their minds rather than their hands. In the new economy, these are the majority of the workforce. Already, almost 60 percent of American workers are knowledge workers and eight of ten new jobs are in information intensive sectors of the economy. The factory of today is as different from the industrial factory of the old economy as the latter was from the craft shop of the earlier agrarian economy. A typical AlliedSignal plant is full of robots, brimming with microprocessors, and many of the plant workers have engineering degrees. The average worker at some Nortel plants has a community college degree. The president of a large management consulting company said to me, "We're in a risky business. Our key assets walk out the door every night." This is increasingly true of all business. Knowledge workers will themselves become the key form of capital.
When evaluating the assets of a new economy compan like Netscape, you don't ask old economy questions like, "How much land does the company own?" "How much inventory does it have?" The only meaningful assets are contained in the minds of its managers and employees. Traditional financial capital is an important asset, but a fleeting one. Three years ago Netscape had no capital. Microsoft, the fourth most valuable company in the United States. having a market value today of around $120 billion, had virtually no capital as recently as 20 years ago. And it won't have any 20 years from now if it makes a couple of Big mistakes. 'I'he dominant form of capital in the emerging economy will be the kids oft the Network (Generation (N-Gen). More than any other generation, these children need--and want-to construct solutions to the growing problems that threaten this small and increasingly fragile planet. There is no more critical challenge facing business and government than to understand how that capital can be nourished. Theme 2: Digitization-The new economy is a digital economy. Throughout history, revolutions in a natural resource have led to new tools, which led to new wealth 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 through glass fibers-both based in sand. In the new economy, information is increasingly digital in 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 with analog transmissions. Information can be stored and retrieved from around the world, providing instant access to much of the information recorded by human civilization. New digital appliances can be created which fit in your pocket and can impact most aspects of business and personal life. Theme 3: Virtualization-As information shifts from analog to digital, physical things can become virtual-changing the metabolism of the economy, the types of institutions and relationships possible, and the nature of economic activity itself. The new economy includes the: * Virtual Alien-People working and participating in one country's economy who are physically located somewhere else. * 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 Hearing)-Legislative hearings held from multiple locations in multiple time dimensions. * Virtual Government Agency-Many government agencies which have a similar purpose linked by networks to deliver services through a single window to the public. * Virtual Mall-An environment on the Net where like things can be found. * Virtual Stockyard-Electronic auction of livestock using interactive workstations, as at Calgary Stockyard Ltd., which conducts two-thirds of its cattle transactions electronically; * Virtual Water Cooler-Places on the Net where people can engage in informal, even playful, communications like those that occur around the physical water cooler. 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 which 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 objective of every chief executive and board of directors was to grow the corporation's size, revenue, and profit. But the traditional, command-and control hierarchy has been in deep trouble for years because it was poorly equipped to respond to the new business needs. Conventional wisdom of the last decade has called for more responsive, flatter, team-based structures. 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."2 The industrial hierarchy and economy are giving way to economic structures and molecular organizations. A molecule 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. In liquids, the molecules move about easily although they still have attractive forces between each other. As conditions change (e.g., temperature), the state of the molecules changes as well. The analogy is helpful in understanding the new economy. The knowledge worker (human molecule) functions as a business unit of one.' 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, tightly binding molecules together. More likely, conditions will require more dynamic relationships between molecules-causing them to cluster in teams like 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. For example, the mass media will become the molecular media, where readers, listeners, and viewers access and interact with millions of "channels." Mass production becomes molecular production with production runs of one-rather than one million-pair of jeans. Even products become composed of molecules linked together through standard interfaces. 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 which network with others for the creation of wealth. The new paradigm in wealth creation is possible because of digital computer networks and because of a shift from the host-computer, hierarchical networks of the past to peerto-peer webs based on the Internet model. As the bandwidth of such networks grows to achieve full multimedia, the opportunities for new institutional structures grows 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. 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 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 companies economies of scale and access to resources. At the same time, these smaller companies are not burdened with the main disadvantages of large firms-deadening bureaucracy, stifling hierarchy, and the inability to change. As larger companies become clusters of smaller molecules which can work well together, they gain the advantages of agility, autonomy, and flexibility. The Internetworked Business is 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 just 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 companies and their suppliers, customers, affinity groups, and competitors. Theme 6: Disintermediation-Middleman functions between producers and consumers are being eliminated through digital networks. Middle businesses, functions, or people need to move up the food chain to create new value or face being disintermediated. The "reintermediation" opportunities are greater than the disintermediation perils. If your company has agents, wholesalers, distributors, retailers, brokers, or middle managers, it's time to restrategize. All of these roles in the past have been in the business of executing transactions, brokering, or boosting communications in a pre-digital 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. Manufacturers could use the new infrastructure to sell direct over the network, thereby eliminating intermediary retail channels. An electric tool and small appliance company could provide video or interactive programs on home renovations featuring its tools. The manufacturers become infotainment companies, providing content on the Net. In the process, the large retailers become disintermediated. Government is also a candidate for disintermediation. The public must line up at 15 different places to deal with 15 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. Taxpayers could interact with computer-based services or contact a human being, 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. Similarly, travel agents are vulnerable. More than 20 percent 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 WinstonSalem, N.C., has created a software package that helps travelers search the Net for flights and make the transactions themselves. But the software also routes the reservations through Summit, which rebates 5 percent of customers' fares. Theme 7: Convergence-In the new economy, the dominant economic sector is being created by three converging industries which, 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, a product of the convergence of the computing, telecommunications, and content industries. In the U.S., new media and its ancillary industries and services account for more than 15 percent of 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. However, many of the content companies-the entertainment companies, broadcast networks, and publishers-are slow off the block as old paradigms die hard. The more successful companies are those with a background in software, services, computer-based content, and digital telecommunications. Convergence is becoming the basis of all sectors. The new media is already beginning to transform the arts, the way scientific research is conducted, and the way education is delivered. It is 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. If you've just developed a great product, your goal is to develop a better one which will make the first one obsolete. If you don't, someone else will. Compare this view to many mainframe aficionados in IBM who fought against shifting IBM resources to the PC, open systems, and client/server development. Their goal was not to obsolete but to preserve and resist innovation. In 1985, IBM chief executive John Akers was not willing to listen to how the mainframe, which was the foundation of IBM's revenue and market dominance, was going to become obsolete. The results of resisting innovation became clear in the marketplace. Innovation drives every aspect of economic and social life. In the arts, whole new art forms are emerging based on interactive multimedia. Multi-volume encyclopedias have been replaced by a single CD-ROM that can hold 360,000 pages of text, which in turn is now being replaced by Net-based products and the Net itself. Not so long ago, music videos were a promotional add-on for a singer; now they are necessary for success. Innovation is also beginning to drive education curricula. In the new economy, the education system must constantly change content, instructional tools, and approaches to be relevant. In the innovation economy, human imagination is the main source of value. The critical challenge for any company in the knowledge age is to create a climate where innovation is prized, rewarded, and encouraged. 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 be creative, rather than recall information. Governments and regulatory frameworks must help liberate the human spirit for invention and creation. Customer intimacy may be one way to win in the innovation economy. But increasingly, it is not adequate to understand customers and their concerns and desires. Given the pace of change and complexity of markets, customers often cannot articulate their needs. You need to innovate beyond what your markets can imagine. Your organization needs a deep-seated and pervasive comprehension of emerging technologies. And you need a climate where risk-taking is not punished, where creativity can flourish, and where 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 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. In the new economy, a "television viewer" will design a customized news broadcast by highlighting the topics of interest and specifying preferred sources, commentators, and graphic styles. Moreover, that viewer will be able to watch the broadcast whenever time permits. 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. As the information and knowledge content of products and services grows, organizations will shift from being only consumers of information a technology to infotech ii; ducers. 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 be forty-something buyer with a thirty-minute infomerical 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 seven years from concept to production. Today, they take two years. In the old economy, an invention like the Polaroid camera ensured a revenue stream for decades. Today, consumer electronic products have a typical lifespan of two months. The new enterprise is a real-time enterprise, continuously and immediately adjusting to changing business conditions through information immediacy. Goods are received from suppliers and products shipped to customers "just in time," reducing or eliminating the warehousing function and allowing enterprises to shift from mass production to custom online production. Customer orders arrive electronically and are instantly processed, with corresponding invoices sent electronically and databases updated.4 Enterprises seek to "compete in time" effectively.5 EDI (Electronic Data Interchange) is a powerful, if badly misunderstood, example of how the information highway is creating information immediacy." Advocates of EDI argue that by linking computer systems between suppliers and their customers, companies can save considerably over manual, non-digital methods. In fact, EDI is 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. Just as the bi-polar 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 the 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. (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. 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. Similarly, globalization is driving the extension of technology. Global businesses need to be able to link with customers, suppliers, employees, and partners throughout the world. Companies and academics are working to build "transnational enterprises," "answer networks," "boundaryless firms," "global organizations," and "international enterprises."7,8 Theme 12: Discordance-lJnprecedented 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 dialectics are emerging. 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 history called dialectical materialism. 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 which 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 number of workers involved in the production of goods (the old economy) has been falling for a decade. The new economy is bringing highly paid, high-value jobs, but there is little job mobility between old and new. 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, knowledge workers can exert their power in infinitely more complex and effective ways. If they are unhappy or feel unwanted, they are likely to set up their own businesses-as millions have done in the last half decade. A good brain, telephone, modem, and PC is all that's required to produce. 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 based on ownership of industrial age assets-specifically capital. In the new economy, those with access to the new infrastructure will be able to participate fully in social and commercial life. Those without access-because of cost, lack of knowledge, or lack of motivation-will tend to fall behind. If not managed properly this situation will severely increase social stratification, creating a new underclass. Strategy and Leadership The new economy is bringing the challenge of leadership to the fore. Firms need to change their business models their products, markets, distribution channels, organizational structures, cultures, and more. This revolutionary change can occur only when everyone in the company becomes involved in the strategy.
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To be at the leading edge of the New Economy, a company doesn't have to make semiconductors or optical-networking components or even map the human genome. As much as anything else, the New Economy is about new business methods -- and those new methods can be applied in any industry.
So technology stocks aren't the only way to invest in the New Economy.
Consider the case of Wal-Mart (WMT:NYSE) . From its earliest origins, it was a play on New Economy demographics, recognizing underserved ex-urban and suburban markets and the hollowing-out of smaller downtown centers. But as Wal-Mart grew, it became a state-of-the-art laboratory for modern retail logistics management and for optimized distribution partnerships with manufacturers of branded consumer goods.
But there's another element to Wal-Mart's use of New Economy business methods that may hold the key to its continuing dominance: its mastery of the precious market information that naturally flows from its far-flung retail empire. And last week, Wal-Mart announced that it would no longer share that information with anyone.
Wal-Mart's scope as a retailer is vast. But it's not just the number and dispersion of its more than 2,600 stores -- there's the number of its customers, the volume of its traffic and the variety of its merchandise. And for years, Wal-Mart's been capturing, storing and analyzing highly detailed, real-time information about every transaction. Probably no other retailer -- and surely, no government statistical bureau -- possesses as much high-quality information about the American public's buying preferences.
Wal-Mart: A
New Economy Play
By
Don Luskin
Special to TheStreet.com
5/14/01 9:03 AM ET
This information gives Wal-Mart a substantial edge in negotiating with suppliers, optimally pricing merchandise, stocking the goods that its customers want when they want them and keeping inventories low. It's a superlative and deadly competitive weapon -- and, as a corporate asset, a potential source of significant "hidden value."
Wal-Mart had previously made these data available to manufacturers, competitors, Wall Street analysts and anyone else who might be curious through various third-party data vendors such as ACNielsen and NPD Group (which paid Wal-Mart a fee for the right to distribute it).
Quoted in The New York Times on Saturday, a Wal-Mart spokesman said, "We did receive a payment. But we decided that despite that payment, we didn't get as much out of it as our competitors did."
Wal-Mart is waking up to the fact that, in the New Economy, market information and information systems can be the most valuable assets a company has. For example, AMR, the parent of American Airlines, recognized this when it spun off its Sabre reservation system as a separate company. Today Sabre Holdings has a market cap of $6.5 billion, while AMR's market cap is only $5.7 billion. The information about the airline turned out to be more valuable than the airline itself.
We own Wal-Mart because we think it's in a particularly interesting position right now in these uncertain times: It's set up to win whether or not the economy recovers from here. In a recovery led by demand-side, stimulus-oriented monetary and tax policies, all of the retail stocks should do well. But as a super-efficient discounter, Wal-Mart is also a great recession play. For these reasons, it's one of our three favorite retailers, along with Target (TGT:NYSE) and Home Depot (HD:NYSE) .
Now this news of Wal-Mart's increasing awareness of the true nature and power of its competitive advantage in the New Economy makes us like it even more.
Assignment: Due 12noon-Jan. 20th
1) Select the
international marketing issue/trend or company that you would like to research
for your individual paper & presentation and outline your reason/rational for
choosing it.
2) Delineate & describe what you believe are the most important characteristics of the New-Economy that impact on or relate to your topic selection.
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