Why manufacturers must embrace the New Economy

by Klaus Oestreicher

My esteemed colleague Graham Sharpless asked the right question in his recent column: Where are we going? Whether it’s CDs or DVDs, a car or your software product: Why can’t manufacturers hold their price?

The answer to the biggest question of all is straightforward yet complex: What has changed? Everything!

We all were brought up to believe that profit is achieved by buying cheap and selling dear. Buying cheap is no problem and, in fact, has become easier. Selling dear – or shall we say for an adequate price – is today’s headache.

We all use computers, ICT and are happy with the quick and easy ways available to detect new resources or to identify new customer potential. Unfortunately, networked computers and networked corporate thinking has shifted our economy into a new dimension, namely the 0-sum economy. Not heard about it? Most people have not but its consequences can be seen and felt every single day.

The Laws of Connection or Plentitude are two of the basic principles of that new economic order. But for a better understanding of what drives business today, the Laws of Exponential Value or Tipping Points are more important. In total, there are a dozen of them.

What do they mean? Unfortunately it is impossible to provide a view of the complete new economic framework here. But suffice to say that the underlying principles are not complicated.

The demands and expectations of the marketplace are permanently increasing. Probably no company can employ all the specialists needed to fulfil a certain customer demand at a specific time. For that. the network economy has become key. Strategic partnerships create an organic whole. As tasks vary, members may vary and operate around a core group. That is the Law of Connection.

Tasks don’t just change by ideas that clients create. Think about the growing prosumer concept, augmented and modified as they are by the Interruptive Technologies.

Yesterday it was CDs, today DVDs and right now we are discussing the right format for HD knowing that Super Hi-definition is already visible on the horizon. That influences the life cycle of any product massively.

Currently we talk about a car with chips but, in fact, the chip on four wheels is already in development and the time to sell any product at full price has dramatically shortened. The only way for companies to sell a little time later is by reducing prices substantially and permanently: The product has started on its way to the 0-line. Most products will never arrive at total 0, but very close to it.

Considering that, each manufacturer is well advised to recognise that the time of high prices is the time to develop the next product. That will enable the company to release an innovative product in due time, latest when the former product is close to its end, near 0. Then the game starts all over again. Any manufacturer that ignores innovation is in serious trouble with no profits and no new releases to resolve the situation. That is the Law of Innovation.

What is the perfect situation? When the new product depends on the previous one. Then the Law of Generosity can be practiced: Give the old product away – best free, since people will then become keen on the new one: Follow the (Law of the) Free. Crazy? Well that’s exactly the scenario that is manifest in the software industry.

This new system postulates that marketers give up the perfectly known at the right time and to embrace the imperfect unknown. And, these days, it is not anymore about doing the job right, but doing the right job. The latter means productivity can be improved to more than being perfect but that will not be sufficient for organisational survival. The important thing is ongoing innovation.

If a product is not perfect at release, it will be perfected by its users. That explains, for example, why so many new cars start with a goodly number of troubles. Not ideal, certainly, but a consequence of what is happening in a fast developing 0-sum economy.

By familiarising themselves with the rules of the new, 0-sum game, manufacturers, especially in hi-tech, will not be making a mistake. To rely on calculation and productivity alone is a road to nowhere.