Changing Values in the New Economy - Term Paper Example

 1.0 Introduction: In the last decade and a half the information technology revolution has shaken the very foundation of the old industrial and occupational order. The changes brought about by the IT revolution have redefined the rules of entrepreneurship and the faces of competition among firms globally. This has resulted in the creation of a global market place for a myriad of new goods and services. As a consequence a new economy with a progressive force for increased productivity and higher incomes, more-knowledge based jobs and an expanded number of stakeholders have been created. Thus globalization of business and the revolution in information technology are the cornerstones of the new economy that has come into existence. The changing circumstances and thought processes in the business environment under the New Economy are undermining the old order and are forcing business to restructure. The emergence of the new economy has also brought changes in the outlook of the investors in that the there has been an increased expectation of return on the capital invested. Investors in the new economy prefer to work on a faster payback of their investments as against their counterparts in the old economy who were satisfied with a nominal and consistent return on their investments and safety of the investments as the deciding factor for any investment decisions. With this background this report analyses the radical changes brought about by the new economy in the outlook of the investors including the institutional investors. 2.0 What is New Economy - A Definition: Stephen B. Shepard (1997) states that the New Economy has emerged because of the interaction of two broad trends namely the globalization of business and the revolution in information technology. In the New Economy “capitalism is spreading around the world--if not full-blown capitalism, at least the introduction of market forces, freer trade, and widespread deregulation.” It boosts productivity, reduces cost, cuts inventories and facilitates electronic commerce. The digital technology is creating new companies and new industries before our eyes. Paper on New Economy from PPI (2000) defines the new economy as knowledge and idea based economy where the key to higher standards of living and job creation is the extent to which innovative ideas and technologies are embedded in services, products and manufacturing processes. The new economy is one where risk, uncertainty and constant changes are the rule rather than the exception. In the new economy there is a transformation process constantly going on which replaces the hierarchical organizations by network learning organizations. It may be interesting to note that almost eleven new companies are created every week in Silicon Valley and one of them went public every five days when the new economic development process started. The new economy has also seen a widespread change in the methods of conclusion of trade transactions, changes in the purchasing methods of consumers and novel methods of meeting the customer needs by innovative approaches in delivering the products ordered over the internet. E Commerce took its root and developed over a short period in the new economy, although initial hiccups were present. The classic example in this type of business is the success of Amazon.com. Thus new business activities using the new technology, media, telecommunication facilities, e commerce and Web portals became inseparable parts of the new economy. 3.0 Outcome of the New Economy: The new economy with the advent of globalization and the rapid development of information technology has resulted in an all round development of various economic sectors. These developments attributable to the modern digital technologies had been a reason for excitement and elation at the end of the last decade. The reported developments were mainly concerned with: the emergence of a knowledge based sector whose huge market and broader transformational potential set it apart from earlier demand constrained, knowledge intensive sectors such as pharmaceuticals; falling costs of information which created new distribution channels and products on the web and stimulated a new competition which created opportunities for prime movers just as it threatened many established corporate players; a disconnection of price from earnings on the stock market with a bubble in dot coms, which traded on price/expectations ratios as old companies were marked down to price/earnings of 10:1. (Hengyi Feng et al.2001) 4.0 Framework of the New Economy-Value Creation Approach: So far the economic policy framework centers round the Neo-Keynesians theory of increasing the government spending to boost the economic growth by spurting the consumer demand. On the supply side of the economy, the school of thought has been that the indulgence of the government in sizeable tax-cuts combined with regulatory relief and some reduction in corporate responsibilities will automatically boost up investments and growth of the economy. Both these ideologies were mainly concerned with the short term management of the business cycles rather than concentrating on long-term growth as the key economic task of the government. In contrast to these principles, there is a growing advocation from the economists that by increasing the knowledge base of the economy including research and development, furthering education and skills and fostering technological innovation which is the basic framework of the New Economy, the governments can formulate long-term economic objectives and thereby can accelerate the income growth. Under such circumstances the maxim ‘knowledge is the basis of value creation’ takes effect. 5.0 New Economy and Business Models: In order to understand and appreciate the concepts underling the New Economic theory it is essential that an alternative approach to study the concept through business models evolved for the purpose is studied. Applying the business model approach needs: an understanding of the contradictions of the new economic processes whereby the firms must concentrate on the recovery of costs by value addition to the products and services understanding the mediating and/or regulating role of the capital market resulting in the enhancement of value to the stakeholders and the emphasis on cost recovery depending on the internal decisions and structural variables of the individual firms. However Lewis (1999) stated that “The ‘business model’ of most internet companies was to attract huge crowds of people to a web site, and then sell others the chance to advertise products to crowds. It was still not clear that the model made any sense” But in current usage the term business model according to Hengyi Feng et al. (2001) is a term denoting the firm level plan for cost recovery that can be explained to a journalist or venture capitalist or shareholder. It is not a business model by choice where cost recovery is not an object or when the cost recovery fails so dramatically that the management is replaced or the firm goes out of business. The term Business model thus has a strong association with resolutions and closure which practically implies a prospect of sustained cost recovery for a period of 3-5years. By considering how the business models envisage the cost recovery from product and or capital market a better and precise concept of business models can be evolved. 5.1 Effect of Business Models at Micro Level on the New Economy: The New Economy can not be categorically characterized as just a stock market bubble judging from the mushroom growth of dot.com companies and other software companies that are being formed at a faster rate in Silicon Valley. The business models representing at firm level adopted a double standard during the initial periods of the economy. These double standards in the corporate economy under a capital market triggered the stock market requiring increased earnings from viable old companies to the extent of 12 to 15 percent of Return on Capital Employed (Post Tax) for enhancing the shareholder value. On the other hand capital was placed with the new start up companies without any expectation in the immediate future by way of venture capitals and IPOs. “At the same time the capital market was prepared to throw capital at new economy companies that had no earnings and uncertain prospects of profiting from digital technologies. By doing so it created an ideal new company trajectory” Hengyi Feng et al. (2001). With the easy inflow of such more than sufficient capital the new company would grow quickly and then get itself sold out to a quoted company or would go on its own on an IPO to raise additional capital. This was expected to happen within the first three to four years of the start-up companies. Thus the double standards encourage a divergence between the business models of old and new firms. It placed a pressure on the Old economy companies to improve upon their profitability by a stricter control on their costs and thereby they could create additional value for the shareholders by distributing higher returns in the form of dividends. But on the contrary the start-up companies could mobilize resources in excess of their costs over revenue. This was due to the assumption that such firms were engaged in a digital alchemy which would make great and instant riches. However such encouragement for the recovery of costs under the double standards, for the start-up companies was limited to the capital market alone and did not extend to the product markets. A fitting example of the emergence of a company to reach predominant heights without turning in any profits in the initial years is Amazon. The company proved to be an unresolved business model which could hyperactively grow by borrowing billions to cover its continued losses. Financial Times (30th August 2000) reported “The world’s best known retailer has grown spectacularly since 1995 to reach $1.6 billion sales in 1999 without ever turning a profit, so that its $2.1 billion of long term debt more or less covers the accumulated losses.” However this double standard adopted by the capital market did not prolong on the realization that it would not last long. The effect of such disoriented approach resulted in the destabilization of many old economy businesses without really creating new economy business models the characteristics of which were resolved and proved. 5.2 Business Models at Sectoral Level under the New Economy: The problems relating to product market competition faced by the new economy companies like Amazon and Tesco in recovering the costs from digital ordering and physical supply necessitated the creation of business models at sectoral or meso levels. With the ineffectiveness of the double standard of the capital market in resolving the business models in the old as well as new economic thoughts, the firms started looking at acquiring and occupying positions of power in the vantage points of the supply chain in order to achieve the objective of cost recovery. This was facilitated by the management efforts and actions in sectoral or meso levels. These meso level of inter and intra sectoral relations between companies presented sizeable market environments which encompassed the input purchases and output in all the sectors of the old and new economy. However the mere presence of a large market does not on its own guarantee the cost recovery for the firms that do not meet the customer demands. Examples of companies which have acquired sectoral power are Healtheon in the American health care industry and Covisint a web based auto parts exchange company. 6.0 Conclusion: The New Economy with its rapidity in the technological improvement in the information technology had proved to be a great success and a profound disappointment as well. While the new economy boosted the stock market growth by accelerating the production in the durable goods sector, it has not made any impact on the remaining manufacturing and other sectors. It has been observed that the growth in the other sectors has actually showed a downward trend. This is so in spite of the massive investments that was done in the manufacture of computers and related products. The technological improvements in the information technology is considered as a small increment in the standard of living of mankind as compared to that of other scientific inventions like radio, television etc. References: 1. Hengyi Feng, Julie Froud, Sukhdev Johal, Colin Haslam, Karel Williams (2001) A New Business Model? http://bibliothek.wz-berlin.de/pdf/2001/ii01-202.pdf 2. Lewis, M. (1999), The New New Thing, London: Hodder and Stoughton 3. Paper on New Economy from PPI (2000) New Economy Task Force Report: Making the New Economy Grow An Action Agenda Progressive Policy Institute http://www.ppionline.org/ppi_ci.cfm?contentid=1490&subsecid=123&knlgAreaID=107 4. Stephen B. Shepard (1997) of Business Week The New Economy: What it Really Means http://www.businessweek.com/1997/46/b3553084.htm#Related%20Items Read More