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 informationintensive 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 hig 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 ienration, 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 husiness 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-andcontrol 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 companieseconomies 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 modelstheir 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.