WSJ/Manager's Journal: Enron May be Dead But the New Economy Isn't
December 3, 2001
By Don Tapscott. Mr. Tapscott is co-founder of Digital 4Sight and co-author of "Digital Capital: Harnessing the Power of Business Webs" (Harvard Business School Press, 2000).
First the dot-com collapse. Now the largest ever corporate failure in American history. Almost every day it seems another nail is pounded into the coffin of the "New Economy."
But recession or not, the Internet has transformed the way the world does business. And the key tenets of corporate survival strategies from previous downturns -- hunkering down, shelving new projects, and sticking to basics -- no longer make sense. While cost-cutting is appropriate, today it must be achieved along with unprecedented business-model innovation and corporate agility.
Many traditional firms are still thriving and succeeding by transforming their core business architectures around the Net. The classic, vertically integrated corporation is no longer the most effective vehicle for value creation. Because the Internet slashes the cost of sharing knowledge, collaborating, and meshing business processes among corporations, smart companies focus on their core competencies and partner or outsource for the rest. It is telling that even in the current environment what Dynegy wanted most from Enron (before Enron's opaque books queered the deal) were not Enron's old-economy physical assets, but its Web-based energy-trading platform, EnronOnline.
The Internet demands fresh thinking about the nature of the corporation. In 1937, Nobel economist Ronald Coase asked why corporations exist. After all, the marketplace was theoretically the best mechanism for equalizing supply and demand, establishing prices, and extracting maximum utility from finite resources. So why weren't people acting as individual buyers and sellers, rather than gathering in companies of tens of thousands and effectively suffocating competition within the corporate boundaries?
Mr. Coase argued that the answer was transaction costs. First are search costs, such as finding different suppliers and determining if their goods are appropriate. Second are contracting costs, such as negotiating the price and contract conditions. Third are the coordination costs of meshing the different products and processes. The upshot is that most corporations concluded it made most sense to perform as many functions as possible in-house. Ford was the quintessential example of this. At one point, the company owned steamships, power plants, forests and virtually every other input critical to building an automobile.
Enter the new information and communications technologies centered on the Internet. The Net is a deep, rich, publicly available information infrastructure that is relentlessly growing in functionality and bandwidth. The result is that the Coasian notion of separately negotiated transactions throughout the production process no longer seems impractical. We can increase wealth by adding knowledge value to a product or service -- through innovation, enhancement, cost reduction, or customization -- at each step in its life cycle. Companies can now focus on what they do best, and partner to do the rest.
Siebel Systems Inc. is one of the fastest growing companies in America, with revenue soaring more than 1,400% in just three years. The relatively small core company creates software products and, through networking, orchestrates a team of more than 750 consulting companies, technology providers, implementers, suppliers, and vendors that take its products to the global marketplace. Siebel doesn't really sell, support, or service its products or transform its clients' business practices -- its business web does. Company founder Tom Seibel says, "We only have 8,000 people on our payroll, but more than 30,000 people work for us." That's a business strategy in tune with today's difficult environment.
Established businesses, such as Herman Miller, Dow Chemical, Schwab and many product divisions of GE, are now transforming themselves by partnering in areas that were previously unthinkable. The CEO of Boeing calls his company a systems integrator, not an aircraft manufacturer. IBM is a computer company that doesn't make its computers -- its partner network does. Herman Miller uses the Net to bring furniture designers, manufacturers and customers together and compete successfully against vertically integrated Steelcase. BMW is hiring Magna to assemble its vehicles.
Even in times of recession, we are seeing impressive growth in contract manufacturing -- with companies such as Celestica, Flextronics and Solectron partnering with computer and telecommunications vendors to provide core electronics manufacturing services. In this industry, the top five contract-manufacturing firms, virtually overnight, have achieved aggregate revenue of more than $50 billion, with healthy return on invested capital.
Newer companies based on the Internet, such eBay, Travelocity, E*Trade and Amazon are growing dramatically and competing well despite volatility in their stock prices. Napster caused chaos in the music industry, forcing every music company to rethink its value proposition. Unprecedented business entities like Linux and the open-source movement pose a huge threat to Microsoft.
Recession or no, the corporation is changing, as are the dynamics of competition and the requirements for an effective business strategy. Not all innovative companies will be successful, as we see with Enron. But their innovations themselves may well be.
During the Nasdaq's rise, myriad pundits offered theories as to why stock prices were soaring. Most were rubbish. Corporate executives justifiably feel duped, and understandably want to return to comforting, time-honored theories of management. The nascent recession makes this retreat to corporate conservatism doubly alluring. Don't be seduced. A siege-like mentality will prove fatal.
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