Article - Issue 7, February 2001

New lamps for old

John Forrest FREng

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One of the fervent debates of recent times has been that concerning the ‘old’ economy and the ‘new’ economy. Sadly, in most cases it is not a well-informed debate. We have few mechanisms for such debate; the overall administration in our modern society is so widely distributed and there is little accreditation of the ‘information’ that is disseminated by the sensation-seeking media.

A year ago, there was boundless enthusiasm for the ‘new’ economy, an enthusiasm based largely around the vision that trading over the internet would revolutionise the way in which business was conducted. We saw it as a natural progression from the agricultural revolution to the industrial revolution and now to the information revolution.

The most significant change in perception, however, was the abandonment of the old principles of company value which were based on the recent record of turnover or profit, with well-established norms for calculating value as multiples of these quantities. Suddenly, everything was speculation on future value, based on amazing expectations of rapid change in the way that our society might carry out its everyday life. Greed and the prospect of making large sums of money played an important role in the upsurge of the equity value of internetrelated companies. The share values of traditional companies which did not show a strong involvement in the ‘new’ economy slumped.

As some of the early ‘dot.com’ companies started to fail, the bubble of the new vision burst with a ferocity that took most by surprise. Investors have fled the high-technology stocks, particularly in the USA. The advent of the internet and of world-wide instantaneous communications has played a role in this and has emphasised another human characteristic – we all want to be on the winning side. This is especially true in an environment in which we are regularly bombarded by the media on success – how we should look, how we should behave and what possessions we should have. Once a trend arises, many factors conspire to drive it forward more strongly. In engineering terms, we have taken damping and negative feedback out of the system!

We are perhaps missing the reality of our current situation. The ‘internet economy’ is indeed the next phase of development of our society, but is in its early stages. Massive improvements have already been made in traditional industries with the advent of information networks that coordinate relationships with suppliers and customers. These are not innovations of the last year, but represent changes that have been implemented over a number of years as the power of computers and linking networks has grown.

Arguably, this is why market sentiment is turning towards investment in the ‘clicks and mortar’ companies – those that have solid traditional businesses but are enhancing these with internet-based services and are using the internet to improve their production or supply capabilities. The relatively new ‘internet businesses’, such as Amazon.com, have made remarkable progress and are greatly appreciated by a sector of consumers, the traditional ‘early-adopters’. However, it will still be a long haul to achieve established indicators of profitability and most of these companies will need alliances with traditional businesses that have strong cash flow.

Just as the UK saw, through the arrival of machines and chemicals, the move of half the population who worked on the land to work in the factories, we shall see similar migration from the factories to the information industries. Some decry the decline in ‘engineering’ in the UK, but we should remember that a key part of engineering is information technology, which is at the heart of the next phase of our society’s development.

We will need to be a little patient, however. The recent rush to create an information society was a little too fast and we are now seeing the backlash in terms of perception about the viability of the ‘new economy’ and concerns about the infrastructure of technology over-running certain qualities of life that we feel we value. The whole supply chain has been reconfigured over many decades from a situation in which power rested with the manufacturer, to the power resting with the retailer, and now resting with the customer. The prizes in engineering in the next few years will go to those who are innovating in the areas of userfriendliness and quality of service, for this is the route to making the most progress in times of rapid change. It will be a transition involving a mix of the old and new economies. The understanding of how to match the change and rate of change in our infrastructure, driven by new technologies, to the rate of change acceptable to our society, is critical.

Vital organisations, like vital people, re-invent themselves over and over and over’ is, for our present times, one of the most relevant statements made in management courses. The re-invention that we all face as people is perhaps the most difficult challenge!

This is an issue to which we will return in future issues of Ingenia.

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