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The Two Forces

By Bernard

Here are the two big forces of the New Economy. They are:
1. The separation of the Information Economy and the Economy of things, et
2. The explosion in the New Economy of the constraint between « Richness » and « Reach ».

These two forces will put the traditional Economic structures into trouble by deconstruction, demolition and reformulation. These traditional Economic structures include franchising, value relations, supplier relationship and multiple organizations. The New Economy is making the structures to disappear by decomposing them in minimal informations: bits! These bits will then be rebuilt in new structures within the New Economy, based on the separation of the Information Economy and the Economy of things

After deconstruction, all the competitive advantages are transfered. Take any integrated business : the most profitable aspects of it will see the competitors from the New Ecnomy taking their place and the profit possibilities will be reduced very fast. After some time, the overal business will see its profit possibilities reduced at a ricky level that will bring deconstruction. In the future, every business needs to have a competitive advantage on each part of its activities, otherwise some part will be lost and the whole business will disapear.

Now, a well established business do not see too much competition because the whole Economy is stable. With the New Economy, the number and the strengh of the new competitors are increased.

The first attack will separate the information from the things themselves. The informations are flowing freely on the Internet and some of them have a strategic importance, according to the circonstances. Anyway, these informations now are flowing on new channels, without any control from the traditional businesses.

The big avantages of traditional businesses reside with their structure, built long the years: scale advantages, segmentation, productivity, trade alliances, monopolies, patents and licences, etc.

The New Economy is bringing new opportunities; some traditional businesses will take advantage of them, but some will disappear. Amazon.com took advantage of an existing computerized catalogue before the site was launch. Today, any other major book publisher can do the same and be the competitor of Amazon.com, who now is extending its regional settings in order to give a better service. Who will be the winner? Who will decide for a new strategy that will create the next changes in this industry?

Philip Evans et Thomas S. Wurster, from Harvard Business School and The Boston Consulting Group, first wrote a text whose title was «Strategy and the New Economics of Information» in september 1997 in Harvard Business Review, then a whole book: «Blown to Bits: How the New Economics of Information Transforms Strategy». They announced the emergence of web browsers, being programs like Quicken, data bases like Auto Trader, evaluators like Consumer Reports or search engines like Yahoo. It is always the duty of the newcomer to make its place on the market. The traditional businesses will have more and more difficulties, each of them cannibalizing itself in order to change its management.

The best way to understand the separation of the Information Economy and the Economy of things is to look at some exemples from Evans and Wurster:
1. The daily news papers,
2. The banks et
3. The car sales.

The daily newspaper

Many people are thinking that the big daily news papers will be replaced by the Internet. On theother end, this replacement will not append,if it wll, the way people are usually thinking: for sure, not by the posting of news on the Internet.
A daily newspaper is a very big business, emploing hundred of employees in many different departements: redaction, publicity, distribution or else. These people are link to the readers through the paper on which the newspaper is printed. The scale return is provided by the large rotary press who will print thousands of copies per hour. These copies include a lot of different subjects, like the daily headlines, classified advertisements, sports, Stock Exchanges reports, publicities, cultural pages, cartoons, caricature… Some of these are bringing in income for the newspaper, but some are not, being only given as service to the readers who are buying and paying for the newspaper. Over all, the news paper should make more income than expenses for the owner!
In the economy of things, the center of the newspaper, that is holding the business together, is the rotary press and the distribution system. If the distribution of the news paper is done atherwise, the daily newspaper will not be profitable anymore, because the New Economy will have changed the relation between « Richness » and « Reach ».

Let’s see what could append:
· A journalist may send his paper through email directly to his readers, who are paying or not for it, but it will not be as profitable!
· The readers may make themselves their daily using all the news they can grab on the Internet, but it will not be as efficient either!
· The go-between, saying the Internet providers, may build some sites adapted to the taste of the readers, but it will not be as efficient too!
All of this is really happening now, but it is not as efficient as the daily newspaper, a proven idea for success. The daily newspaper will not be vulnerable until the deconstruction do not touch its bulleye: the classified advertisements.
The classified advertisements
The classified advertisements are a part not so glorious in the daily newspaper. They are the nmost vulnerable because they are bringing 40% of the total income against 10% of the costs of the whole business. Without the classified advertisements, the whole daily newspaper will lost his profitability and disapear. Who wants to pay to read the editorials? Who wants to pay for the sports news? Who wants to pay for the saturday edition of Travel?
After deconstruction, the new Economy will keep only the products that can be profitable. The non profitable parts of the daily newspaper will disapear compltely. The profitable parts will remain in the New Economy, like: Subsription to some chroniques, specialised classified advertisements, specialised chronicles payed by publicity and others. The deconstruction will hit where nobody think, at some vulnerable point. Every business is the same, having its weakness, an Achilles’ heel.

The banks

Today, the banks are very profitable, they are all good deals; but the future will be less rose-coloured spectacles for them, especially when we consider their shortcomings.
Using Internet for daily banking transactions is seen by the banks as a way to save expenses and increase services to customers. It’s a new away to give dteàheir services and much less costly than the usual counter services with the cashiers. The banks will even provide for free the individuals program for their customer touse their on line services, for personal accounting or for user-friendly services.
Even more, the computer science standards like SSL, SET et OFX had done a lot to improve the data transmission security. Almost all the baking services are available directly from your home. Even, the invoices are sent now through email and, using the proper code, anyone can pay them directly without going outside the the physical bank branch.
Today, bank customers can access to many informations, even to any required information, from many different financial institutions. Anyhow, the customer may decide from its own home where he has the best oportunity for doing its costly banking transactions, like mortgage. He can even ask some bids from different financial institutions, being banks or not.
With the hard charging and the worldwide financial informations available, the actual physical banking system, as we all know it, will be deconstruct. The actual links within the kanking network will be demolished, but they will stil exist in a different way. The bank profitability today depends a lot on small profitable customers. How many of these very paying customers could a bank loose before it becomes no more profitable? It is said that 12% of USA households using the personal financial management programs are bringing 75% of the profits of the banks.

The Car sales

The car dealers, like the daily newspapers and the banks, are giving services that are more or less profitable. Which is their weak point?
Today, the dealer possess a competitive advantage over the buyers, because he knows more informations and that the transaction is made in his office. On the contrary, in the New Economy, the informations are now universally available on Internet and the number of information sources is growing.
The customer sees his posibilities growing with more informations and more power to negociate, as for the used car public auctions on the Internet, even for cars almost new (less than3 years old).
The only advantage remaining in the dealer hands is the road test. Its an advantage that I did not take every time, myself, fbefore buying a car! And you? Further more, any car renter could provide the service for a very small cost!
Finally, the car dealer network in concentrated by a smallnumber of manufacturers and the links between them and the independants dealers. That structure could slow the deconstruction, but nothing could never stop it. It is already on the way!