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Executive Times |
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2005 Book Reviews |
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The New
Normal: Great Opportunities in a Time of Great Risk by Roger McNamee |
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Rating: •• (Mildly Recommended) |
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Click on
title or picture to buy from amazon.com |
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Munchies Fans of Fast Company will find the same tone and feel on the pages of
Roger McNamee’s new book, The New
Normal: Great Opportunities in a Time of Great Risk. McNamee pours out
definitive statements, but it’s not clear where they come from, and what
basis has led McNamee to his convictions. There’s nothing deep in The New
Normal, and reading it is akin to snacking on tidbits rather than
enjoying a nutritious, balanced meal. Here’s
an excerpt, all of Chapter 3, “Business: The Courage to
Act,” pp. 15-22: The world of business is
emerging from a monster hangover, the kind that can be cured only by time and
rest. The mania of the late
1990s persuaded businesses—as well as governments and people in general—of
the existence of a New Economy, complete with its own set of rules. Remember
the New Economy? The business world temporarily rejected sound principles
that had governed it for nearly a century in favor of a make-it-up-as-you-go-along
strategy. Even the largest companies drank the Kool-Aid of the New Economy.
But the biggest impact occurred in the world of start-ups, where an entire
generation of entrepreneurs committed themselves to business plans that had
only the smallest chance of success. Today, many of them wish they had been
committed, period. For business, the most
obvious manifestation of the New Normal is a return to traditional metrics:
revenues, profits, and cash flow. After five years when companies could
simply invent operating metrics—”eyeballs,” page views, and the
like—businesses are being held accountable for old-fashioned results. It is
painful for some, but progress for all. It will put us on firmer footing. While the New Economy turned out to be
an illusion, its consequences were as real as an earthquake, and we are
still living with the wreckage. The economy continues to struggle with excess
capacity produced by six years of over-the-top capital spending. Executives
resize and restructure their businesses without a clear picture of the true
level of business activity. Investors continue to harbor unrealistic
expectations. Time and rest have done their best. Now
it’s time to move on— and to make the most of the post-post-mania
environment. And there’s a lot of opportunity out there. But here’s a glitch:
because no one is quite certain what to expect, people are sticking to what
has worked most recently for them. During the downturn, companies got
accustomed to cutting their capital expenditures, particularly their
technology capital expenditures. In a lousy economy, cost cutting is very
effective. The longer the downturn, the bigger the payoff from cost cuts. If
the downturn lasts long enough, and the recent one certainly did, companies
can even get away with not investing in their future. All they have to do is
tell their investors that the environment remains uncertain.
.
. and hope their
competitors don’t invest. The recent environment created a
challenge for business. Still smarting from the downturn, CEOs wanted to
delay capital spending and expense growth as long as they could. They could
clearly see that the economy had passed bottom but were reluctant to abandon
the cost-cutting policies that worked during the downturn. The perceived risk
of making the wrong decision was greater than the perceived risk of doing
nothing. Compounding the situation: businesses
are still adapting to the flurry of regulatory reform in securities and
corporate governance. Securities and governance regulations play an important
role in protecting society from the tendency of both individuals and
organizations to operate in their own short-term self-interest. But reform
always has unintended consequences. Don’t get me wrong. I think the intent of
the Sarbanes-Oxley Act of 2002 is very sound. The law, which is aimed at
increasing the independence of boards of directors, would work better if it
did not impose arbitrarily expensive rules on all companies irrespective of
size, but these imperfections can and should be addressed. And Eliot Spitzer
is one of my heroes. I think he’s doing a great job of restoring some
integrity to securities-law enforcement, and he may actually prompt the SEC
to start doing the job for which it was created. But there is an unintended
consequence of all this reform: it gives managements and boards of directors
a built-in excuse to avoid creative and aggressive decision-making. The
reflexive response to the new regulations is to do nothing. Directors don’t
want to do anything that increases their liability. After the nonsense of the late 1990s,
you might question whether the words creative and aggressive should
be used in the same paragraph as the word corporation. The important
thing is to give people freedom. Freedom for management to do what it thinks
is best for the company, shareholders, and employees. Freedom for shareholders
to know what is really going on, to have a voice, and to sell shares if they
don’t like what they see. Freedom for customers to get the best products at
the best prices. Fortunately, the current corporate
holding pattern won’t last forever. We’ve got history on our side. Typically,
cycles of outrageous behavior are followed by waves of regulation that
moderate behavior. When mania turns to bust, it takes a long time for people
to get over the consequences—and even longer for them to get courageous
again. In general, uncertainty and regulatory reform sustain conservative
behavior longer than is good for our economy. At some point, however, a
management team always gets bold. It invests in its business. The investment
pays off. Competitors are forced to respond. Then other companies read about
it and follow suit. Businesses start cranking again. That is the beauty of
free markets. In the New Normal, there are
astonishing business opportunities, but they typically don’t look like
yesterday’s opportunities. Neither big businesses nor IPOs
will get all the glory. Today, size matters less than at any time in the past
fifty years. Thanks to technology, even small businesses can have a global
footprint if they leverage the Internet and available tools that are dropping
in price even as capabilities increase. Large companies still have lots of
opportunity. They can win when it comes to mass customization and mass distribution.
But in many parts of the economy, where customization is more important than
mass, smaller companies and individuals have a shot at success simply because
they can be more focused. It’s hard for any company to be good at a hundred
different domains at the same time. It’s easy for a hundred small companies
to be good at one domain each. Flexibility has replaced scale as the
key ingredient for corporate success in uncertain times. All else being
equal, most companies would rather be large than small, but nearly everyone
has come to appreciate the benefits of flexibility. Since the Internet bust,
corporations have been focused on making do with fewer people. They are
struggling to develop the ability to grow or shrink according to market
conditions. This seismic shift opens up enormous opportunities for start-ups
to serve the needs of large companies—to deliver key business processes that
enable large companies to respond to the market without having extra
employees during lean times. With productivity and flexibility as the most
sought-after capabilities, companies will continue to outsource key business
processes to third parties, specialist firms that will come in every
conceivable size and structure. This is a monster opportunity pounding on the
door. Sure, large companies still have huge
advantages, but those advantages have value only in combination with a good
business model. As the playing field becomes more level, business models grow
in importance. There’s simply no room in the economy for companies without a
solid one. To see the importance of business
models, consider the examples of Hewlett-Packard and Dell. In 2002, H-P
acquired Compaq to create the world’s largest vendor of PCs, printers, and
other important technology products. The merged company remained the number
one vendor of PCs for roughly one fiscal quarter. It couldn’t hold that
position because its business model, which depends on a hybrid of retail and
direct-sales channels, could not keep pace with Dell’s. To sell through
dealer channels, H-P must bear the enormous expense of building products
months in advance, whereas Dell builds most of its products in response to
customer orders. Dell’s cost savings completely offset H-P’s temporary scale
advantage. It took Dell only a matter of months to regain the number one
position. Companies with winning business models
will sail confidently into the New Normal. Google, which puts unobtrusive,
relevant ads in front of people while they search the Web, charges
advertisers only for ads that generate sales leads. Pay-for-performance
advertising is the hottest thing on Madison Avenue, and it started on the
Web. Lots of business models that worked
really well in the 1990s need a facelift for the New Normal. Successful
companies will adapt their business model to the times. In an environment
where PC industry revenues are growing painfully slowly, Microsoft needs to
be creative to sustain its growth. The subscription business model is an
answer. Microsoft now encourages customers to view software as a subscription
purchase. Increasing numbers of customers have made Microsoft software a line
item in their annual budget. Another example is EMC, the
Massachusetts-based leader in storage management systems, which saw its
revenue collapse during the bust. EMC was quick to realize that the game was
up. It could no longer prosper selling huge arrays of very expensive disk
drives. Embracing the inevitable, EMC changed its business model. It cut
prices dramatically on storage systems and started buying enterprise software
products that could be sold to its high-end customer base. The company now
sells a wide range of enterprise software to complement its storage
solutions. It is too early to know if the acquisitions will pan out, but
win, lose, or draw, EMC is better off. EMC understood that the risk of
dramatic change was actually quite acceptable in comparison to the
inevitable disaster that would have come from standing still. The company
bought itself some time, and with time comes opportunity. EMC is one of a handful of companies
that have taken bold action in the early days of the New Normal. Apple
Computer is another. Apple has made a big bet on consumer electronics, a bet
that is paying off so far. Again, it’s no guarantee of future success, but
that’s not the point. The world has changed, and Apple has changed with it. There are countless companies facing
questions similar to those faced by EMC and Apple. Among them are Lucent, a
leading vendor of technology for voice and data communications, and Sun Microsystems,
the leading vendor of computer systems based on the Unix operating system.
Both Lucent and Sun were high fliers in the 1 990s. Both have come upon hard
times. Lucent has been all but forced to take aggressive action. Thanks to a
huge cash reserve, Sun does not feel the same sense of urgency. As a result,
Sun is still trying to decide if aggressive action is called for and, if so,
what form it should take. Meanwhile, such vendors as Dell and IBM are taking
market share from Sun. Industry analysts and pundits have been quick to write
off Lucent and Sun, but the final chapter on these companies has not been
written. I hope they move aggressively to reinvent themselves. But time is of
the essence. Business models cannot remain under construction for long. Just as corporations will be
increasingly dependent on strong business models, they’ll also need to be
more thoughtful in how they use technology. The encouraging news for large
enterprises is that start-ups are no longer a threat in most industries. Freed
from the pressure to deploy flaky Internet technology to impress investors
who were dazzled by start-ups, large companies now can concentrate on using
really good Internet technology to gain sustainable competitive advantage. For corporations, making the most of
technology in the New Normal means taking a decentralized approach.
Technology is no longer so mysterious that it requires a priesthood of IT
professionals to make all the decisions. Instead, enterprises in every
sector of the economy simply need to understand how technology affects their
particular business and what they can do to take advantage of it. This
requires effort at all levels of the organization. Top management needs to
be involved in technology strategy, and the whole company needs to take
responsibility for making it work. Management needs to delegate more and
more of the specification and deployment responsibility to the operating
folks who will actually use the stuff. This will give IT a new and more
valuable role: partnering with operating people to make the business work
better. When this happens, technology becomes more like other mature categories
of capital expenditure, such as forklifts and office furniture, and it drives
value creation. Meanwhile, another new trend will
continue in the New Normal: cycle times are shrinking. The trip from
start-up to success is faster than ever. The same goes for the trip from
success to failure. One of the biggest lessons of the 1990s is that it’s in
everyone’s interest to identify success or failure as quickly as possible.
Customers and investors are less patient than ever. As you can imagine, there
is both good and bad in this. On the one hand, it creates tremendous
pressure to deliver positive results quickly. On the other hand, there are
new market opportunities—including the market for tools and services to help
businesses understand faster than they could before what works and what
doesn’t. So the New Normal combines a return to
traditional business metrics—sales, profits, and cash flow—with new rules.
The early lessons are clear: technology enables businesses to prosper with
fewer employees. Flexibility is key to prospering in
uncertain times. And globalization creates opportunities for small companies,
as well as large ones. As always, delay is still a strategy.
But it’s a really, really bad one. There are worse ways to spend time than
reading The
New Normal, and readers may come away with a useful thought or two. McNamee’s
broad reach and clear statements may generate agreement or dissent, and what
readers decide to do differently as a result of reading this book will be the
result of the readers’ own reflection, not clear suggestions from the author. Steve Hopkins,
April 23, 2005 |
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Buy The New
Normal @ amazon.com |
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ã 2005 Hopkins and Company, LLC The recommendation rating for
this book appeared in the May 2005
issue of Executive Times URL for this review: http://www.hopkinsandcompany.com/Books/The
New Normal.htm For Reprint Permission,
Contact: Hopkins & Company, LLC • E-mail: books@hopkinsandcompany.com |
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