New Rules for The New Economy

In this book, the author Kevin Kelly discusses the implications of the digital revolution in the economy and how it transforms business models in virtually all industries around the world. For this, he establishes ten “rules” and assesses the impact of each one of those in the business environment as well as in our lives in general. Although some of these rules are more speculative than real axioms of the digital economy, I enjoyed the reading and overall agreed with the author in his evaluations of the new economy. Four points in particular were more interesting and impacting: The digital revolution does not include only the world wide web, the rule of increasing returns, the need to invest in the network as a number one priority for businesses, and the opportunities the new economy brings with it. In the next paragraphs, I will elaborate on each of these points and reveal the insights and lessons I got from them.

As chips and microprocessors become increasingly cheaper, the digital revolution will not be restricted to personal computers or the Internet only. As the author highlights, every house appliance, car and package we currently deal with will soon be able to carry a chip and perform functions beyond our imagination. For example, a fridge in the future may have different temperatures for each food, subject to the owner’s preference, and will be able to connect itself to a grocery store as soon as it detects that some item’s inventory like a vegetable or yogurt needs to be refilled. A bank’s smart card will also be capable of storing data about spend patterns that will help the bank’s cross-sell efforts and cash flow management. The primary takeaway of this rule is that despite of being a scary reality that may bring issues like privacy to the debate, the number of opportunities in the economy will be countless. The hundreds of possibilities for micro segmentation and mass customization in the consumer products and in the financial services industries are just examples of what this new reality will bring. Another insight brought by the author is the need companies will have to be always connected, collecting data and information from customers, partners and suppliers in real time in order to stay competitive in this new scenario. The faster business managers realize how essential this flow of information already is and will be key to their success, the easier will be the transition to this network-based economy.

Another interesting point touched by the author is the rule of increasing returns. Basically, he suggests that businesses that first manage to build their networks will experience robust returns over their invested capitals, in a winner-take-it-all scenario. I totally agree with his assessment, mainly because of the barriers for new entrants that a well-established network raises. For example, it is hard for any software company to launch an operational system and compete with Microsoft windows, or even a web browser to face Internet explorer. The network of those technologies’ users creates a compelling reason for everyone else to adopt them rather than developing new alternatives. As a result, the market share and margins on those products are well above the market average, in a clear winner-take-it-all situation.

Another fascinating idea for me was the need to invest first in the network and later in improving processes and products. The issue in this case is the race to make an industry standard and the example used to illustrate that, VHS vs. beta, leaves no doubt about its importance. Very few people challenges that beta was a better-quality system than VHS but the faster spread of VHS and its bigger network of users made it much more attractive to VCRs manufactures, to movie makers and consequently to customers. Thus, in this case the size of the network was more important than product features and quality, which cannot be underestimated. The lesson here is to make the product a standard first and invest on its improvement later. Also, not try to create an “Esperanto”, a new and better system, if a dominating one already exists and is widely accepted.

The last and probably most important point in my judgment is the horizon of opportunities that comes with this revolution. As the Internet and the digital economy will somehow affect all business models, processes will be redesigned, alternative forms of intermediation will be created, and hence new products and new ways to do business will take place. Needless to say that this will bring a whole new wave of opportunities and wealth. It will also bring a series of related issues like privacy, unemployment, and education to the news. And the ability to deal with those issues, to best utilize the new tools and resources available and to delivery better products/services will separate the successful and the leftovers in this new economy. Again, scary but at the same time a very exciting picture.

In summary, those were the aspects of the book that I considered most interesting and revealing for me. In my opinion, the bottom-line is that the revolution is already going on right now; it is primarily based on the impact of global networks and free flow of information in all business models and it requires from managers an approach based on speed, flexibility on strategies and enhancement of their own networks in order to strive in this revolution and capture that impressive amount of wealth that is being created.

Kleber Santos

The Darden Business School

MBA Candidate Class of 2001