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Where to in the New Economy?

Author: Robert Burlin
Contributed by Cambridge Management Consult
ants

 

 

Welcome to the New Era.

A new economic order is evolving. Technology, in particular, the Internet, has become a strategic business weapon. Business cycles are shrinking, and whole industries are being turned upside down. Customers are in the driverís seat like never before, triggering a shift in power away from the business. Intellectual capital is the prime currency, triggering a further shift of power away from the business to the employee. Trust matters more than ever to workplace effectiveness. And change is the only constant.

To thrive in the New Economy, organizations must put people first, recruiting and retaining the best employees by giving them the processes, tools, skills ó and most important, the enthusiasm to do more, better. Network the minds of employees and pool that knowledge to develop great ideas and bring them to life. Ensure that the business maintains momentum by balancing the need for a central direction with the need for spontaneity and creativity.

Deconstruction Dynamics

The New Economy is changing the nature of competition between businesses by instantly opening up global, digital marketplaces, dramatically increasing the information and choice available to customers, and making data interchange between manufacturers, suppliers, and partners affordable. Perhaps the most interesting change is the deconstruction of existing value chains.

But what exactly is deconstruction? Itís the process through which technology, in particular, the Internet, creates new business models ó melting the "information glue" that previously held elements of the value chain together and causing business components to coalesce into radically different forms.

In competition between traditional, vertically integrated businesses, competitiveness is a game of averages. And deconstruction leads to de-averaging. When the value chain deconstructs into distinct segments, layers, and markets, the only thing that counts is a companyís absolute level of competence at each individual point in the value chain. With such an emphasis on strengths, weaknesses in the value chain or business model become readily apparent. Competitive advantage becomes more concentrated, providing fewer ways to win. And resulting in fewer winners.

Is Deconstruction a Crushing Tidal Wave or Merely the Next Wave of Opportunity?

Sure, the New Economy is dramatically re-arranging the business landscape. But it is not a tidal wave crushing businesses in its wake. Rather, it is the next wave of opportunity for businesses. And it is not so revolutionary that its effects canít be predicted ó and used for competitive advantage. In fact, three possible business models arising from the New Economy have been well documented by Boston Consulting Group. They include:

Orchestrators

Rather than owning pieces of the value chain (often capital intensive, non-strategic activities), these companies orchestrate them. Nike and Dell, as just two examples, are orchestrators. By virtue of their powerful brands, or in some cases, critical information or other proprietary resources, orchestrators hold the "new" value chains together.

New industry standards are formed as an orchestrator creates the specifications for product design and delivery. Eventually the system becomes so standardized and transparent that the new supply chain can offer itself to players entering the market to compete with the lead orchestrator. Also threatening to orchestrators are suppliers (such as Microsoft and IBM) that become so strong that the balance of power within the new value chain shifts irrevocably in their favor. Orchestrators can, of course, thwart their competitors by building new relationship assets and competencies that are hard to duplicate. And by never underestimating the power of a good brand. After all, in brand customers trust.

Layer Masters

As integrated value chains break apart, some of the existing layers have the potential to become "sweet spots" where value is concentrated and the best returns can be earned. As an example, Microsoftís dominance of the operating system layer in the PC industry allows it to extract the lionís share of value in its industry.

Itís important to keep in mind that a layer is only worth mastering if it can it be dominated. Masters must secure the buy-in of industry players to their layer while maintaining control of it. To exist as a layer, the product or service must be supplied by a single company, but be a key input into one or more value chains. Layer players must also recognize theyíre subject to aggressive competition. The key defense strategy is to never stand still. Continuously extend your brand into new areas and evolve your customer value proposition.

Navigators

Navigators seek to add customer value by shaping the way customers research, compare, and buy products. In doing so, they take control from traditional product suppliers and undermine long established brands and customer relationships. Navigators arenít subject to the constraints of geography, inventory, and existing distribution channels. Rather, they aim to control customer relationships by offering a one-stop solution based on breadth of choice and information. For some companies, navigators offer a practical alternative to their existing sales and marketing processes. By focusing on easily compared attributes like price, navigators shrink margins and threaten to commodotize every product in the market except the quality leaderís product. Navigators need to guard against manufacturers who enrich their brands and deconstruct their existing distribution channels.

Schwab OneSource and Chemdex.com are examples of successful navigators.

Is Deconstruction Every Companyís Fate?

The answer is a resounding no. Of course, no industry is immune to the effects of the New Economy. But every single company will be affected differently. Strategic options abound. And how companies approach the New Economy is up to them.

The first step toward New Economy success is bringing people from across the organization together to create a vision for how your business model and value chain need to change to capitalize on the emerging opportunities. Armed with a vision, you can implement your e-business strategy in stages. Thereís no need to redesign all of your processes at once. Even in the rapid-fire New Economy, thorough planning is still critical; iteration of small changes leads to quick wins.

Here are seven key questions to ask yourself:

  1. Will the business model you have now make you successful going forward?

    Competition in the New Economy is between business models more than through organizational efficiency. Itís time to take a thorough look at your organization to determine what value you deliver to you customers, what defensible competencies you leverage, which parts of your value chain donít add value, how you could do things differently, and whom you should turn to for help.

  2. How close are you to your customers?

    Customer power is a central characteristic of the New Economy. Success will belong to those companies that harness customer power, not those that are victims of it. Ask yourself what you know about your customers, what do they value in you and your competitors, what will they want next, what information should you share, and how deeply are they/should they be embedded in your processes?

  3. How successfully do you partner with other organizations?

    The New Economy will alter your interactions with suppliers and may provoke alliances with one-time competitors or with temporary partners whose value-add to customers you canít yet imagine. Examine how you identify partners. Ponder how to best combine business models, determine roles and responsibilities, and share and measure success. Perhaps most critically, determine how youíre going to build trust linkages, because collaboration wonít work without trust among peers and partners across all levels, departments, and companies.

  4. Can you deliver against your Internet promise?

    When we say e-business, we donít mean grafting the Internet onto an existing business model. Weíre talking about harnessing the power of the Internet to transform your business model and ensuring that you can make your value chain "friction free." How well do you really understand your business? Where are the points of leverage? How can you improve key areas? Do people across your value chain work coherently to achieve the right objectives? How effective is your management team at pro-actively managing performance?

  5. How will the organization learn quickly enough?

    The New Economy is a knowledge economy. Successful companies will define, gather, share, and use information better and faster than their competitors. Does your organization use information effectively? Does it learn from experience? Are employees encouraged to improve through practice? Do you have a unifying knowledge management strategy/process that links to your operations ó and your bottom line? Is learning built into core processes?

  6. How confident are you that the organization can consistently deliver results?

    The New Economy is all about the delivery of results. Quickly. As business cycle times collapse and customer choice expands, there are few second chances. As technology advances daily, returns on investment must be realized rapidly so the next investment can be made. Review how results-focused your organization is. Do people manage performance or processes? Does performance ownership happen at all levels? Do you understand the relationship between results and behavioral change?

  7. Most important, how are your people going to be successful?

    All the technology in the world canít change businesses. Only people can. In the New Economy, people are going to be subject to more change and dislocation, and expected to adapt more rapidly than ever to changing circumstances and responsibilities. Are people at the center of your organization? Are their jobs and your corporate mission "meaningful" to them?

Choosing the Right Partner

The New Economy requires a new approach. Itís a new way of doing business and you may not have the resources or skill sets to go it alone. Your usual choices of partner ó traditional reports-driven consulting firms or smaller Internet-only boutiques ó wonít cut it in this high velocity, high stakes world.


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