The new economy has done more than change the way business is conducted; it has rendered obsolete the fundamental economic assumptions on which businesses have been based. The industrial economy is now the electronic economy.
The move means five fundamental economic assumptions have crumbled:
No longer are interaction and collaboration costs high
In the industrial economy it was often easier and more cost-effective for organisations to own many of the pieces of the value chain, from raw materials to customer delivery services.
But in the e-economy communication and IT have made it more desirable to employ a virtual organisation. By assembling a network of partners specialising and excelling in the links of the value chain, and by performing functions customers value most, it is possible for organisations to achieve new levels of quality, flexibility and savings.
Many established organisations own much of their value chains. Before reorganising, they must dismantle those value chains – literally disintegrate.
New organisations with models already based on the e-economy, must continuously develop and maintain flexible models. They must resist the temptation to vertically integrate to improve quality, speed, or customer service, and think hard before acquiring physical assets or performing activities not central to satisfying key customer values.
No longer do physical assets play the central role in value propositions
In the industrial economy, market returns were derived primarily from physical assets. Property, plants, and equipment were key in the valuation of an enterprise. Brand names, technological innovation and customer relationships, contribute considerable value, but existed only in the context of physical products. Intangibles were not themselves a source of revenue.
In the e-economy, intellectual property and customer relationships move to the forefront. No longer dependent on a corresponding collection of physical assets, these can be easily and cheaply leveraged across a global customer base and have become a freestanding source of revenue and value.
Many established organisations have significant intellectual property and customer relationships. But they are also burdened by physical assets, which are becoming commodities in the customer value proposition. Pricing pressures are starting to squeeze margins and decrease valuations. New organisations, on the other hand, must continuously leverage intellectual property and their relationships with customers, the core of their business, to drive both volume and margins while resisting the temptation to acquire physical assets to reduce short-term costs.
No longer does size ultimately limit returns
Traditionally, decreasing returns to scale meant there was room for multiple players in most industries. In the industrial economy, where maximising profits meant limiting production capacity, the only way to meet total demand was through many organisations. This rule applies in the e-economy, but only to businesses based on physical assets. Information, intellectual property and customer relationships are not limited by plant capacity.
In fact, there are increasing returns to scale in the e-economy.
An organisation can grow without limit, incremental unit costs can approach zero, and unit value to the customer can increase exponentially. One player, maybe two, can dominate. Established organisations can quickly fall behind new entrants. New organisations must constantly redefine customer value propositions to drive volume and lower costs, resisting the temptation to compete solely on cost.
No longer is access to information restricted
For buyers and sellers in the industrial economy information was often difficult to get, expensive, or both. Few sources of product information for consumers were accessible. Manufacturers and retailers needed to conduct expensive market research to learn about buyer needs and behaviours, which they could only determine in aggregate.
Information now is easier and cheaper to get. As a result, manufacturers can offer customers more and better choices tailored directly to their preferences, and customers have much more information to evaluate these expanded choices. As a result, customers are becoming more demanding.
Organisations are now under pressure to create innovative, valued offerings to counter price-based competition.
And no longer does it take years and deep pockets to build a global business
In the industrial economy, opening new markets took years to conduct research, construct and deploy assets, identify and deliver inventory and put production and sales capabilities in place. In the e-economy, markets can be opened overnight.
As a result, established organisations see new competitors rapidly enter markets and steal market share. New organisations must continuously test new value propositions and markets to enhance their brands, and must rapidly expand their global reach.
Most organisations are now focused on e-commerce initiatives, but many are investing without first understanding the fundamental new set of rules.
The e-economy offers significant opportunities to increase revenue through new value propositions, channels, and customer relationships; to reduce operating and raw material costs; and to decrease dependence on physical assets. Equally significant is the strategic and operational shift necessary to fully realise these benefits. Organisations must open up the entire enterprise to suppliers (and their suppliers) and customers (and their customers) from procurement to customer service and participate in networks that are focused on the need to satisfy customer intentions. In this context, organisations must first determine what customers ideally want, then identify the best role they can play in the networks that deliver those preferences, and then align their organisation and activities.
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