Is the New Economy / The Long Boom dead ?

News categories: enterprise and business strategy, investor and stakeholder relationship management, business performance management

Since April 2000, when the dotcom hype plunged and the stock market bubble has burst, many people asked themselves, if the boom is already over, the vision of a new economy, of an Internet based networked economy, which creates through technology based continuous efficiency gains on the one hand, and increasing reach, market share and revenue gains on the other nearly automatically continuously growing wealth for investors.

In its July 1997 issue Wired Magazine published a cover story about the “Long Boom”. The article was about a scenario that explored a future history of the world from 1980 to the year 2020. It was seen as the kick off of the idea of a “New Economy”. In that scenario the two authors, futurist Peter Schwartz (see also Peter Schwartz’s book about scenario planning: Peter Schwartz, The Art of the Long View: Planning for the Future in an Uncertain World) and former managing director of Wired Magazine Peter Leyden, tracked the trends that developed in the first 20 years and carry those through into the next 20 years – the future. They argued that we are riding the early waves of a possible 25-year run of a greatly expanding and booming new economy. The two authors believed that no other age ever possessed the tools or the knowledge to do what we can do today. Technological change and global integration and a new ethos of openness are the two megatrends that will transform – according to their opinion, the economy and the world in total. The New Economy as a term and as an idea was born and the hype took off.

Today we have a different situation. I attended this week a conference for CFOs and Financial Leaders of European fortune 500 companies in London / UK about the challenges the new e-business world creates for businesses and what this means for finance. At this conference the CEO of a quite successful European online travel agency spoke and described the characteristics of his business-to-consumer (B2C) business. Besides the usual statements (speed as success factor etc.), he made one very interesting remark about the current situation for B2C dotcom companies. He said that due to the April 2000 stock market correction, B2C dotcom businesses again face the same situation as before the Internet and New Economy revolution: they do not find investors who are willing to bear the entrepreneurial risk of a total new business model in a uncertain market environment. The consequence: We do not have any more in the B2C area the exceptional situation that enough venture capital is available for “try-and-error” innovation. B2C dotcoms who need a second investment round after their IPO are not able to rise the required money and are either forced into mergers or into bankruptcy. This CEO found himself lucky, because he made his second stock issue just some months before the April 2000 correction -the ones who came later, were not able any more to fund their growth and initial in-profitability period. And because there is now a significant market entry barrier for potential new competitors - they are simply not able to start, because nobody will fund them – this CEO found himself even more happy. The ones who came first, are now the ones that will survive – if they have a business model that will soon lead to profitability. And now the question: Because American companies had been first – does this mean that Europe and Asia are the losers in the economic game of the future ?

The answer is no, because the New Economy is not just a B2C phenomenon. According to studies of management consultants and economists, the real New Economy boom is just to start off – based on business-to-business (B2B) innovations, and here Europeans and Asian companies still have the same chances and opportunities like their American peers.

New business models will revolutionize the way companies work together. We will see in the next years, that companies will work with their suppliers, customers and other stakeholders in a much more open way as before. Totally new business models will emerge. E-Markets are the latest innovation in this area: several companies – even competitors – are forming a partnership to run at least parts of their operations together, for example eliminating inefficiencies in the supply chains of all of them (which results in significant reduction of inventories and working capital and handling costs), increasing asset utilization (also of intangible assets) and increasing market reach for all (resulting in revenue improvements). Even if such improvements lead only to obviously small improvements in short term financial ratios compared to the oldcompany (oldco) model (e.g. cash operating margin improvement from 5% to 7%, working capital reduction by 2%, reduction of fixed capital by 2%), this can result in unexpectedly large value gains. If you use the discounted cash flow (DCF) method and compare the net present value of future cash flows of several periods of oldco with newco, this incremental small gains can add up to a tenfold increase of corporate market value ( that is +900% !).

In future articles and in my upcoming new book I will inform in detail about the new economics of this B2B economy and about the way management will be able to capture this value and to convert it into financial value for investors and other stakeholders.

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