New Rules for
the New Economy
10 Radical Strategies for a Connected
World
by Kevin Kelly |
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Reviewed by Leslie Glatz
(885C) |
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New Rules for the New
Economy provides a strategic
blueprint for business architects in the twenty-first century, where the
Internet and technology play ever increasing roles. However, much of author Kevin Kelly’s sound “byte” style advice
can also be used by investors who must navigate the muddy and constantly changing
waters of equity investing in this new economy. Key points investors should embrace include: |
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Not
only have the rules changed for managers who are on the front-line of this
new frontier, but the lens through which investors examine managers and their
companies needs to be refocused. |
Metrics for
Evaluating New Economy Companies
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Traditional
investors are suspicious of optimistic hockey stick-style revenue forecasts
of quick exponential growth. These
investors expect to see revenue streams from product or service sales with
price inflation or deflation in years to come. Sales are a function of marketing dollars spent, and
productivity improves as sales volume grows.
Conservative investments are made in early stage companies in order to
test the waters to see whether the firm is able to meet benchmarks such as
critical product development, key customer acquisition, or patent
approvals. The total value of the
firm would be measured on past and projected revenues. |
New economy companies cannot be valuated with these traditional
metrics and methodologies according to Kelly. In the new economy the early months of a company’s genesis
matter most. Revenue growth can be quick
and smashing with profit models designed to give away basic products or
services with cash flow generated from accessories or ancillary
services. Growth will be a function
not only of keen marketing, but also of the network in which the company
moves. Value can be measured not only
through cash flow projections, but also in relationship to the firm’s
network, and the opportunity nodes it creates. Time is collapsed with success or failure determined quickly
and early. Investors in the new
economy must be prepared to accept these new models and expectations.
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Role of Networks,
Industries, and Value Chains
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With
the success or failure of the new economy firm dependent upon the network in
which it operates, analysis of the network itself becomes critical to the
investor. “Because the value of an
action in the network economy multiplies exponentially by the number of
networks that action flows through, you want to touch as many other networks
as you can reach.” (p. 47) Networks
include members of the value chain as well as the industry infrastructure
surrounding the company. By
incorporating a network’s standards, protocols, or preferences in a product
or service, it becomes valuable to that network. For example, by making a software program compatible with
Windows, it becomes valuable to the network of persons using the Windows
operating system. If the same program
could also operate with a Macintosh, O/S2, and UNIX operating systems, it
would be valuable to each of those networks as well. |
With the success of a company so dependent on each
network it touches, the health of that supply chain member of industry
customer becomes critical to the health of the company itself. Metrics available to investors for evaluating
networks include the degree of the network’s “open- or closedness, its
circulation, [and] its ability to adapt.” (p. 66)
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Role of Management
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In
the old economy, decisions on the level of product features available to
different network members are important, but may not be handled by senior management
or considered critical to the firm’s success. However, in the new economy, the effect of small decisions like
these is magnified by network effects.
Network effects also raise the level of importance that alliances and partnerships
play. Therefore,
managers will be judged not just on their ability to implement projects
efficiently and effectively, but also on the quality of strategic decisions
made at all levels. Managers in the
new economy must possess the skills to handle these new challenges, and
investors must carefully assess their aptitude with little previous
experience on which to base judgment. |