The following is an excerpt from the book Cracking the Value Code: How Successful Businesses Are Creating Wealth in the New Economy by Richard E.S. Boulton, Barry D. Libert and Steve M. Samek:
How much does the New Economy weigh?
Answer: A lot less than you might think. U.S. Federal Reserve Chairman Alan Greenspan posed that question in a speech in Dallas, Texas. His conclusion: The country’s economy is proportionally lighter, in a literal sense, than at any time in this half-century.
By conventional measures, he noted, the U.S. gross domestic product is five times what it was 50 years ago, but its physical weight has grown only slightly. That is because the smokestack industries of the past produced tangible goods. Today, a significant part of the country’s economic output is intangible, and that part is growing at exponential rates.
A newspaper available on-line in digital form, for example, weighs nothing compared with the physical product, and it can be transported via the Internet at a cost of next to nothing. A software program weighs no more than a few ounces. Music is no longer weighted down by packaging at all, as listeners download it from the Internet into their computers or MP-3 players.
Greenspan put it succinctly when he said that “virtually unimaginable a half-century ago was the extent to which concepts and ideas would substitute for physical resources and human brawn in the production of goods and services.”
What does all of this mean for you and your organization? It means that the New Economy is not just hype and high-flying stocks, that it represents a new reality that no company can afford to ignore. It means that you and your business are going to have to embrace a new model of how to create value.
Why? Because today’s economy — built as it is on a foundation of new technologies, globalization, a new generation of people entering the workplace, and the increased importance of intangible assets-is different from anything any of us have encountered before.
In the words of Fast Company magazine, “a global revolution is changing business, and that business is changing the world. New rules of business, and a new breed of company [that] will challenge the corporate status quo. No part of business will be immune. The structure of the company is changing; relationships between companies are changing; the nature of work is changing; and the definition of success is changing. The result will be a new world order representing unparalleled opportunity and unprecedented uncertainty.”
Organizations are creating value in totally new ways, using assets and combinations of assets heretofore unrecognized under traditional accounting systems — and certainly unmeasured. The realization of the enormous economic value of people, for instance, has sparked a no-holds-barred war for talent, often at the expense of traditional attitudes about work itself and old ways of recognizing and rewarding employees. In such a milieu, old methods of managing and measuring are simply not up to the task.
To ignore the significance of the changes afoot in business today is to ignore reality itself as the page turns on a new millennium. And what organization can thrive, or even survive, in a world of illusion? None.
Those changes are manifest in every day’s headlines: When it turns out, for example, that almost every new member of the Forbes list of 400 wealthiest individuals in 1999 built his or her fortune on technology; when an upstart Internet company like America Online, Inc., could seek to acquire the Time Warner, Inc. media empire; when Microsoft Corporation achieved a market value exceeding the combined value of eight giant U.S. corporations (Boeing, Caterpillar, Ford, General Motors, Kellogg, Eastman Kodak Company, J.P. Morgan & Company and Sears, Roebuck). As the millennium began, Microsoft’s market value stood at $602.4 billion — built almost entirely on intangibles.
This book examines how successful businesses like these are creating value in the New Economy. And we draw a key distinction between value creation and value realization. Value creation — that is, future value captured in the form of increased market capitalization — is how successful businesses are creating value in the New Economy. Value realization — that is, value captured in the form of past and current earnings or cash flows — is what underlies both traditional accounting and most of today’s management information systems (including EVA). It necessarily means that many organizations take a short-term view, ignoring the drivers of value creation today, especially intangible assets.
In the pages that follow, you will find a new set of tools that we have developed to help you create value in the New Economy. It is called Value Dynamics, and it is based, in part, on an intensive three-year, 10,000-company research project by professionals at Arthur Andersen. It speaks directly to the four realities of the New Economy.
New business models are emerging.
Businesses are their assets, all of their assets — tangible and intangible, owned and unowned. But in the New Economy, it is intangible assets such as relationships, knowledge, people, brands, and systems that are taking center stage. We see this in the new strategies and business models being developed by such powerhouses as Microsoft Corporation, E*TRADE Group, Inc., and Amazon.com, Inc. Successful companies will combine both old and New Economy assets. In fact, it is the combination and interaction of various assets — more than any other factor — that will determine a business’ economic success.
New business models create new risks.
Companies are increasingly employing unique business models, which push the boundaries of traditional controls. That is, leading-edge companies are finding that their management and measurement systems are no longer aligned with the assets that they are using to create value. What’s more, the New Economy is producing a whole set of different risks — from new transactions and new markets to new technologies, new competitors, and new relationships. But risk in the New Economy encompasses the upside, as well as the downside. As a result, companies need to embrace (as well as manage) risk to prosper and succeed.
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