The Age of the Internet
Living on a fault line causes one to take an interest in what geologists call plate tectonics. These are the forces under the earth that create the conditions for recurrent and severe earthquakes. In the case of the new information economy, the emergence of the Internet is demonstrating itself to be just such a force.
In this chapter, we are going to examine how what used to be bedrock for our economy, the foundation upon which most established companies "built to last," is now in fact shifting beneath our feet. This in turn will call us to put a new focus on information technology, require us to manage to a new resource equation, and demand from us a new level of commitment to focus our resources increasingly on core processes only.
By the end of this chapter, we will see that in the new economy strategies that heavily leverage outsourcing have a distinct competitive advantage. At the same time, we will acknowledge that the inertia within established organizations resists moving to such strategies. In the search for a lever to move our companies forward, we will hit upon shareholder value and stock price, which will transition us smoothly into the next chapter.
It is a known disease of writers and editors to declare the era they live in "the age of . . ." something, and for the present "the age of the Internet" seems reasonable enough. But why should any self-respecting manager or executive fall prey to this vice? The answer is, only if it will help you to manage for shareholder value better. In this case I think it will.
The claim that we are entering a new age is based on the notion that over the past decade a series of subtle but profound changes in the nature and structure of business have fundamentally changed the game we are playing. At one level, we see the impact of these changes in the unprecedented behavior of our stock market: It appears to overvalue the new and speculative and undervalue the proven ways dramatically. At another level, we see line functions that used to be the heart of our businesses-like manufacturing-now being outsourced while other disciplines that used to be staff functions-like computer systems-have come to the fore. Looking elsewhere, we see the graduates of our finest business schools uniformly agreeing that a Fortune 500 corporation is the last place they would want to work-even when that corporation is footing the bill for their schooling! What makes this last observation even more chilling is that it is not based on the corporation being boring, slow-moving, or lacking in advancement opportunities. No, the big beef the new crop of graduates has with the Fortune 500 is that they think going forward, these companies are going to be losers! (Heaven only knows what they think is in store for all the other corporations out there.)
So in the words of the Buffalo Springfield, "Something's happening here, though what it is ain't exactly clear." The job of this chapter is to bring that something to light and to assess what it means for the management agenda.
Backfield In Motion
The forces that are reshaping business are for the most part happening in the background and not manifesting themselves directly in events happening in the foreground. As a result, they don't get reported in the Wall Street Journal, do not come up on quarterly conference calls with the investment analysts, and are not raised by customers in advisory board sessions. Thus, not surprisingly, they do not tend to register on the executive team's radar screen.
These forces are best understood in terms of a series of remarkable transitions, of which we will look at six. In each case, note that power is shifting away from something that has long been a trusted source of value creation and toward something that heretofore was considered secondary, derivative, or tangential.
From Assets To Information
In Being Digital, Nick Negroponte describes how value in the age of the Internet has migrated from atoms to bits. The implication for the new management agenda is that information about an asset has become more valuable than the asset itself. It is now more profitable, in other words, to own information about oil than to own oil, information about airline flights than to own an airline, information about a nation's currency than to own the currency itself.
This is bizarre, so let's take a moment to see why it is true. Suppose you own 100 barrels of oil worth $10 each. In other words, you have $1,000 invested in oil. Suppose the price of oil goes up $5 per barrel. You make $500. But suppose for $1 per barrel you could buy the option to buy oil at $10 a barrel at some future date. You wouldn't own any oil; you would just own "a position" in oil. Now you could take your $1,000 and instead of buying 100 barrels of oil you could buy the option to purchase 1,000 barrels. Once again, the price of oil goes up $5. Now you can call in your option, buy (virtually) 1,000 barrels of oil at $10 and sell them (again, virtually) at $15. Instead of $500 you make $5,000 minus the $1,000 you paid for the options, or $4,000.
Ah, you say, but what if oil prices had gone down $5? Where would we have been then? Well, if you had owned the 100 barrels of oil, and the price went down, you just lost $500. Worse still, if you had bought 1,000 options at $1 per barrel, you just lost $1,000! But here's the real kicker-if you had used that same $1,000 to buy options for $1 to sell oil at $10 a barrel, then once again you would have made $4,000!
