New Rules for the New Economy

July 20, 2000
Managing a company was never an easy job. And now managers have to learn a new set of rules.

President Peter S. Cohan & Associates
Marlborough, Mass.

Using traditional management theories in today's rapidly growing economy is like starting a fire with two stones when matches are available. An ever-growing Web and bewildering array of new technologies are changing the way companies are run. This leaves managers in every industry wondering what works if old management theories don't.

The changing economy calls for a new set of management principles. But surprisingly, a complete redesign isn't necessary. What is needed is similar to what happens in any good engineering department — adapt what works, throw out what doesn't, and invent what previously did not exist, all while maintaining market leadership. The following six rules should help companies succeed in the New Economy.

1. Empowered employees trump bureaucrats
Under traditional command-and-control hierarchies in Old Economy companies, successful employees help advance their bosses careers while quietly working within the organization to make it operate smoothly. Often, the individuals who get ahead in these companies are adept at the internal competition that pits one division against another, advancing the interests of part of the organization at the expense of the whole. These people are useful only in organizations that can dictate terms to customers and totally control the steady growth of their industries.

In the New Economy, employees are empowered to make decisions. There isn't time to get clearance from the top on everything and still keep up with changing market requirements. Detailed job descriptions are no longer useful because a person's work changes quickly as they adapt to new situations. For New Economy companies to succeed, it's essential they attract and maximize the productivity of different kinds of people. Companies need to create a work environment in which self-motivated workers can flourish and contribute to the company's success at all levels.

A prime example of such an employee is Andy Bechtolsheim. Although he made millions of dollars at Granite Systems, a company he founded, he was willing and eager to step down as CEO and become vice president at Cisco Systems Inc., San Jose, the company that bought him out. He began working seven days a week and 16 hr a day. When asked why he continued to work so hard, he explained that his personality is such that when a new technology emerges, he needs to get a winning product to market faster than competitors.

2.Customer value wins over dictating supply
While few companies are willing to admit they put customers second, there are countless companies in the Old and New Economy that do just that. One of the most memorable examples of this is the story of a 1980s computer salesperson who was asked by a customer for a product his company didn't sell. The salesperson's response? If we don't make it, you don't need it. Only Old Economy companies secure in their industry can afford that attitude toward customers. And there are few, if any, of those left.

Today, companies put customers first if they want to succeed. The company, for example, is based on a business plan that included interviews with potential customers. The interviews gave the company important insights into building an online network. As a result, its online exchange for buying and selling materials direct to customers had over 14,000 registered manufacturers using its services within six months of opening.

Cisco Systems is another company that works closely with customers, respecting their technical requirements and organizational values. They have earned a string of successes by identifying the customer's problem at the root instead of the symptom level. For example, a local university had departments with different computer systems that ran on different protocols and therefore, they had trouble communicating with each other. An engineer living in a vacuum might attack the symptoms by standardizing all departments on a single protocol. From the university's perspective, however, the goal was to keep all departments running, not maximize interdepartment communication. The one-protocol solution fails to incorporate the political and cultural dimension of the problem, namely, each department's unwillingness to incur the costs and loss of quality that would come with a new communication protocol. Cisco under-stood this and created a router that lets departments keep their specific communication protocols, but also lets them exchange files.

Cisco also stays close to its customers by encouraging feedback and listening carefully. The engineers use technical-support calls to identify ways to redesign products that minimize technical support. In addition, Cisco's culture encourages all employees, including those who traditionally don't interact with customers, to become customer advocates. As a result, Cisco has employees in purchasing, credit, and order-management teams listening to customers.

3. The frugal beat the wasteful
Many Old Economy companies are run like private fiefdoms. Executives are paid millions of dollars and travel in Gulfstream V jets to premier hotels around the world. This kind of wasteful spending works out fine as long as the company is operating in a protected market that generates huge amounts of cash. New Economy companies do not enjoy that luxury. They need to spend money on sales, marketing, and advertising to establish market leader-ship, and it's essential they take a frugal approach to spending money. Detailed budgeting and reporting can be useful in the New Economy as long as it done quickly.

One new company known for being well managed and tight fisted is Web portal Yahoo! Inc. The company started in a rented one-bedroom apartment, and as the staff grew, the company tried to fit as many people as possible into it. Money was not spent on things that didn't contribute to company productivity. Management at Yahoo! maintains tight control over the business through weekly flash reports presenting key metrics, such as revenues and expenses for the different business units. All employees have stock options so they know that being tight with expenses translates into greater personal wealth.

4. Fast execution defeats lengthy strategic plans
Many great business ideas are out in the public domain. What differentiates companies is how fast they can turn ideas into reality. While Old Economy companies stick to long-range strategic planning and issue press releases about how they will create a $250 billion online exchange, start-up firms are generating revenues from sites they built in the time it took the other companies to agree on the wording of the press releases. is known for speedy execution. Last October, launched its site. In November, they set a goal of filing for an initial public offering on March 6, 2000. The actual date of its filing was March 2. The company is run with a Gantt chart, and weekly meetings trace the company's progress in achieving specific goals in areas, such as engineering, sales, and recruiting. The ability to set aggressive goals and achieve them sets a company apart from competitors who talk about goals but aren't as effective at reaching them.

5. Effective acquisitions overwhelm the NIH syndrome
Many companies are wedded to the idea that all technology they sell must be developed in their own R&D lab. This not-invented-here (NIH) syndrome has plagued companies like Wang Computer, which saw its leader-ship in word-processing systems erode in the 1980s as personal computers offered customers better value. Rather than cannibalize its existing business, Wang stuck with its closed systems and went out of business.

Successful acquisitions are necessary to keep up with changing customer needs. Under CEO John Chambers, Cisco has acquired at least 55 companies since 1993 — acquisitions that add to its product line, revenues, and its pool of managers and engineers. When Cisco Systems began buying companies, high-tech acquisitions were an oddity. Their biggest customer at the time, Boeing, was about to place a $10 million order with a company called Crescendo for a product Cisco did not sell. Chambers went to the board and recommended Cisco pay over $200 million to acquire Crescendo. He was concerned that if Cisco could not win the $10 million order, Crescendo would end up replacing Cisco at Boeing. The product Cisco acquired now generates multibillion revenues.

6. Fast feedback
Product development tends to be a time-consuming task. Too many companies use a relay-race approach where engineering blueprints are sent to manufacturing, who send the manufactured product to the sales department, which tries, often unsuccessfully, to sell the result.

The New Economy simply moves too fast for such formal management processes to work. Companies must listen to customers' frustrations with existing products, develop quick prototypes of solutions, get the prototypes into the hands of customers, and make improvements based on the feedback.

Rather than spend six months planning and another six months executing that plan, relies on the feedback-loop approach. They spent a relatively brief amount of time planning and even less time building their Web site. They quickly gathered feedback from suppliers and buyers and modified the site to more closely meet customer needs. Getting rapid feedback lets them introduce features ahead of their competitors who don't move through these cycles as rapidly.

Old Economy versus New Economy
Old Economy

  • Wealth depends on natural resources or manufacturing and distribution.
  • Workers serve as extensions of machinery, and many don't receive a share of company.
  • Successful employees follow specific job descriptions and make formal processes run smoother.

New Economy

  • Technology changes quickly, customers are more demanding, and new competitors arise.
  • Workers are sources of new business ideas, as well as owners of company.
  • Work environment is designed to help people turn ideas into revenue.

Peter Cohan is a management consultant and the author of e-Profit (Amacom), Net Profit, and The Technology Leaders (Jossey-Bass).

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