Wealth Effects and the New Economy - Essay Example

? Old Economy Business vs. New Economy Business OLD ECONOMY BUSINESS VS NEW ECONOMY BUSINESS Compared to new the economy business,old businesses now seem like dinosaurs that compete mainly in order to exist. This largely has been caused by skewed investment that favors the new economy, as opposed to the old one. The old economy businesses are often viewed as mature and conservative markets with little room for growth, which shifts investor interest to the new economy businesses (Edison & Slok, 2011: p22). The new economies, on the other hand, are geared towards markets that are on the horizon and not yet in existence. This current scenario appears to point to a deep change in the way investment institutions think with shifts from traditional approaches and a new economy. However, it is not a certainty that these new economy businesses will lead to an economic heaven. The dawn of the new economy threatens the values that were inherent in the old economy. To investors, it now seems that all companies need to be new economy businesses or no businesses at all. This has been deciphered as a challenge to all companies to move towards new economy businesses via lowering costs, redefining supplier and client relationships, as well as entry into new markets (Edison & Slok, 2011: p22). Institutional investor double standards led to ‘new economy’ businesses receiving near limitless funding for investment while ‘old economy’ companies restricted investment. This paper seeks to show how the difference in funding has distorted the corporate strategy and performance of these economies It is obvious that strategies that were successful in the old economy are no longer successful in supporting the new economy. In the old economy, businesses relied on growth and development as currency to attract investment for companies like manufacturing with significant plant capacities (Keha & Singh, 2009: p44). Businesses defined their economy by their infrastructure and the way they could accumulate old capital like lending capacity, land, and equipment. Potential employees, therefore, followed the jobs. Due to the high outlay of capital and the planning involved, which was a long term, to establish business facilities, the communities were able to keep the economic activities that they possessed. In old the economy businesses, keeping business costs low was a vital strategy since low wage communities and minimum taxes were more competitive (Keha & Singh, 2009: p45). The oversight of companies and people were based on the notion of control and management. The employee market was regional with community competition also being low, as was the talent market. However, the new economy has turned the old economy strategies on its head. Talent as economic growth’s major currency has replaced manufacturing plants. This talent is fungible; it is exchangeable like currency. Talent is driven by various factors, including diversity and tolerance, as well as innovative environments. Sustainability is also more embedded in the new economy business than it was in the old economy (Keha & Singh, 2009: p52). Therefore, economic development in the new economy does not come, necessarily, at the expense of social inequity and depleted resources, unlike the old economy. The new economy businesses are founded on the recognition that success and economic competition is now determined on a global scale. While the elements of the new economy businesses are not all global, the ones that will have the greatest importance in coming years are. For instance, most of the employment opportunities lost in the State of Michigan have been lost to the service industry. The service sector seeks to meet local needs, employee services, as well as resident care (Keha & Singh, 2009: p52). Some reasons exist as to why investment institutions are looking towards the new economy business, as opposed to the old economy businesses. The double standards in funding have seen the new economies shift to digitization, which requires higher capital outlays. Natural resource revolution, throughout history, has led to new tools that, in turn, have led to social development and new wealth. Information in the new economy has slowly but gradually turned digital, helped by the increase in investment (Kennedy, 2010: p23). New possibilities evolve as the information is digitized and communicated via digital networks. Information can also be compressed or squeezed, as well as transmitted at very high speeds. Old economy businesses that have been slower in turning to the digital sphere still have some of their information stored and transmitted in analog, which has ensured that they cannot benefit from the storage and retrieval of data from anywhere and the provision of instant access to information. New digital appliances that new economy businesses have been able to incorporate have impacted almost all aspects of personal and business life, but old economy businesses have not been managed able to reap the benefits of these advances (Kennedy, 2010: p24). Double standards by investment institutions have also ensured that new economy businesses have been able to evolve into “molecular economies”. Old economy businesses are at a disadvantage because they cannot replace their business practices with clusters of entities and individuals that form the basis of the new economy business activity (Kennedy, 2010: p33). While organizations do not disappear necessarily, they are transformed. The old economy business had the corporation as its principal economic unit, and the objective of CEOs and director boards was increasing profits, revenue, and corporation size. However, this traditional command/control hierarchy has waded into deep waters in the new economic conditions as it has been poorly equipped to respond to needs posed by the new conditions, especially since investors have turned to the new economy business model. The new economy has insisted on a flatter, more responsive, and team based structure have extended to the entire economy, breeding new kinds of relationships (Kennedy, 2010: p34). For instance, mass media in the new economy has turned “molecular”, where viewers, listeners, and readers interact with tens of thousands of channels with mass production turning to “molecular production” with production of one rather than a thousand channels. The bias towards the new economy business by investor institutions has also allowed new economy businesses to pursue an internetworking/integration strategy. New economy business is now a networked economy where the molecules are in clusters that network with other clusters in order to create wealth (Sagner, 2011: p44). This has greatly disadvantaged the old economy business that still relies on a single unit systems with tedious inter-network communications. The new economy businesses have been able to increase wealth creation due to networks of digital computers, coupled with shifts from hierarchical, host computer networks still in use by old economy businesses to peer-to-peer networks that are based on the model of the internet. Skewed investment that seems to favor new economy business has enabled them to work on taking advantage of the growing bandwidth of these networks, in attaining full multimedia as their opportunities for new structures increases dramatically. Small companies in the new economy have also been able to overcome the disadvantages of resource access and economies of scale while they are also not burdened by an inability to change, stifling hierarchy, and deadening bureaucracy, which has slowed down the growth of small business in the old economy (Sagner, 2011: p46). As these companies cluster into smaller “molecules” that can work in tandem, they gain flexibility, autonomy, and agility, which those in the old economy are still struggling. Through increased funding that is not available to the old economy business, new economy business has managed to undergo disintermediation. Digital networks, funded by investor institutions, have enabled these businesses to eliminate the functions of intermediaries between the consumer and the supplier. Old economy businesses have been unable to re-strategize along these lines, especially since they have been forced to retain middle managers, retailers, distributors, wholesalers, and agents (Sagner, 2011: p60). These roles as still used by old economy business have been used for boosting communication, brokering, and executing transactions in a pre-digital economy. The signal pattern, however, has enabled new economy business to shift to disintermediation. An example of this in the new economy is that artists and their music producers no longer require broadcasters, retail outlets, and recording companies when music is entered into the database on the net Music companies that are still in the old economy. Therefore, are at a grate disadvantage as they cannot move towards this strategy while upstart internet based music networks that perform all their tasks using the disintermediation strategy have seen increased growth and revenue (Sagner, 2011: p60). In the new economy, the economic sector that dominates is created by three industries that are converging that, in turn, provide wealth creation infrastructure by every sector. The old economy, on the other hand, had the automotive industry as its main sector. In the new economy business, sector that most dominates is new media, which is a convergence of the content, telecommunications, and computing industries. New media, and its supporting services and industries, accounts for over 15% of American GDP with communications bandwidth and computer hardware becoming new commodities (Sagner, 2011: p82). In the new economy, the profits have moved to the content sector since it is here that value is created. However, most content companies that begun in the old economy; for instance, publishers, broadcast networks, and entertainment companies have been slow in taking advantage of this shift due to funding constraints. The companies that proved more successful are those founded in the new economy with a background in digital telecommunications, computer based content, and software services. Convergence, as a strategy, is becoming the basis for all new economy businesses with old economy business struggling to catch up as new media alters arts, scientific research, and delivery of education (Sagner, 2011: p83). With increased funding, the new economy business has become an innovation-based economy. New economy businesses like Microsoft have an “obsolete your own product” theme for their managers, developers, engineers, strategists, and product planners, which require them to develop a better product than they developed earlier or another company will. IBM, an old economy giant were not able to shift resources to client/server, open systems, and PC development, which was due to constraints in funding and, in turn, were not able to take advantage of the innovation boom currently high on the agenda of the new economy businesses. Innovation in the new economy has driven every aspect of social and economic life with human imagination being the main value source (Whitford, 2012: p51). New economy business has been able to create an environment where innovation is encouraged, rewarded, and prized. In the new economy driven by the innovation strategy, customer intimacy has also turned into one way of winning. However, customers cannot always articulate their needs, and it is up to businesses to innovate beyond the market’s imagination (Whitford, 2012: p51). This requires funds from institutional investors who apply double standards in their funding, being biased towards new economy business. For this reason, old economy business cannot compete on the innovative stage since this requires heavy funding. This has caused them to lag behind in the innovative sector. The new economy business has been enabled to take advantage of an increasingly global economy by the increased funding from institutional investors. Just like there has been a collapse of the old geo-political order that has given rise to a new, volatile, and dynamic global environment, economic walls have also crumbled (Whitford, 2012: p72). With knowledge increasingly becoming a vital resource and the fact that knowledge is all over the world, the next frontier for business is the global economy. This requires a huge financial outlay, which institutional investors are freely willing to provide only for the new economy businesses. Old economy businesses have been left to rely on the strategy of protectionism, which is slowly being overtaken by the new economic strategy that emphasizes on free trade zones. Globalization is also a driving force for technology extension. Global business requires to link with partners, employees, suppliers, and customers around the world. New economy businesses are now working towards building of boundary-less firms, answer networks, transnational enterprises, international enterprises, and global organizations (Whitford, 2012: p72). Old economies, however, due to funding constraints, cannot take advantage of this strategy, which hurts their bottom line. References Edison, Hali. & Slok, Torsten. (2011). Wealth Effects and the New Economy. Washington : International Monetary Fund. Keha, Harbhajan. & Singh, Varinder. (2009). Digital economy : impacts, influences, and challenges. Hershey : Idea Group Pub. Kennedy, Dan. (2010). Wealth Attraction In The New Economy. New York : Entrepreneur Press. Sagner, James. (2011). Investing in the new economy. New Hope : Franck J. Fabozzi Associates, cop. Whitford, Josh. (2012). The new old economy : networks, institutions, and the organizational transformation of American manufacturing. Oxford : Oxford University Press Inc. Read More