The Shift to the New Economy
The Role of Business
The Old Economy is Dying
Drivers of the New Economy

Times are changing. Through advances in information and communications technology, the world is virtually becoming a smaller place. It is no longer enough for companies to just make profits for their shareholders and to obey the law. They are increasingly accountable to more environmentally and socially aware shareholders, to civil society in general, to employees, to customers and to a variety of other stakeholders.

Explaining our work in the context of the new economy helps our clients understand why they need to act now, if they are to succeed in growing their businesses in the future. Companies need to ride the wave of change or face being overturned by its fury. We start the story below by defining the role of business.

Business is just a group of people. It is an organising (administrating) form. It exists to fulfil a simple function - to satisfy our needs and wants, in the context of society's values and beliefs. This is not a complex idea. Companies that deliver on the needs and wants, and keep operating in line with society's values and beliefs, prosper and grow. Those that don't are killed off and replaced with new ones. Keeping in touch with needs and wants is what business must become good at.

The importance of values and beliefs has always been there, but the way in which failure in this area gets applied to companies has changed. It is faster and more ruthless. Mistakes can now be fatal. In the case of genetically modified (GM) foods , for example, the ag-biotech industry didn't take sufficient note of shifts in society's values and beliefs and delivered what it assumed its customers' (farmers') needs and wants were. It didn't allow for the ultimate consumers' values and beliefs.

While the role of business hasn't changed, the context in which it is operating has. Previously business was often about a confrontational struggle between companies and civil society with the government acting as the broker. In the old industrial economy business perceived itself unconnected to society at large. The goals of production and successful business operation were seen as ends in and of themselves. Management was reserved for technical specialists - non business-related entities were, therefore, seen as incapable of understanding business matters and represented potential threats to business functioning.

The old or industrial economy is characterised by isolation and non-integration among the various stakeholders. It has consisted of companies effectively seeing themselves as being in control and as being the business. While they interact with external players, the psychology has been about control and reluctant interaction with those forces that impact on the business like regulators and civil society. It assumes tension between the sectors. It is an economy built on the model of 19th century industrial England … and it is dying.

The old economy only offers the pretext of greater stability for corporations. Because societal values are poorly reflected by corporate actions and decisions, tension continues to escalate until a backlash results. Witness the environmental movement in the US during the 1970s following a series of environmental catastrophes during the 1960s, as well as the Superfund legislation of the early 1980s. In some sense, the old economy model simply defers the "costs" until a later date, at which time the repercussions could be so severe as to completely undermine the firm's ability to function, while also destroying societal value.

For companies to be successful in operating in the new economy they need to understand the other forces or drivers which will impact their business in the future. This is why we start with the idea that companies are working in a new economy which impacts the way in which they will conduct their businesses.

If companies fail to understand the implications of the new economy for their businesses they risk developing flawed strategies that ultimately will see their licence to operate extinguished. If they get it right, they earn the licence to grow not only from government and the financial market, but also from society as a whole.

Hence it's important to understand the drivers of the new economy and how they impact on a company's operations before embarking on any major change in strategy or company direction.

1. Rise of Civil Society
The presence and power of "civil society", being the community in general and those organisations that exist outside of the state and the market, has dramatically increased during the past decade.

The Yearbook of International Organisations estimates that during the 1990s the number of international Non-Government Organisations (NGOs, one of the actors within civil society) increased from about 6,000 to more than 26,000.

Implications for Corporations
The world has become a "global fishbowl" open to the scrutiny of NGOs that are Internet and email empowered. Uniform and global standards of operation are expected. Corporations must learn to engage these new actors and co-formulate business strategies to ensure alignment between business objectives and societal values. Failure to do so could mean loss of Right To Operate and Right To Grow. Witness the anti-Monsanto and the global anti-GM crops and foods campaign as an example of this.

2. Retreat of Government
Governments are increasingly getting out of the business of business, privatising and deregulating telecommunications, the natural resource sector, financial services, etc. For business, this creates opportunities, but also increases their responsibility and society's expectations for corporate behaviour.

Global privatisation revenues quadrupled from 1988 to 1998, with total privatisation revenues over the 10-year period reaching $735 billion. Policies liberalising the flow of capital have created a reinforcing loop, in which competition for investment has led to additional cuts in taxes and deregulation, further decreasing governments' capacity to provide services (eg. social services).

Implications for Corporations
The retreat or redefining of the government sector across the globe coincides with the opening of new markets (eg. India, China and Brazil), bringing with it new opportunities for corporations. Yet expectations of the role of corporations will likely shift, as society places upon business the very roles and responsibilities formerly in the government domain. In addition, business must recognize the changing power landscape, as civil society actors seek to protect the values previously safeguarded by governments. New partnerships and stakeholder relationships will be necessary to navigate this emerging landscape.

3. Victory of Democratic Market
Closely related to the "Retreat of Government" is the rise of democratic capitalism. The dramatic rise in democratic regimes and the related shift to market-based economic systems have opened new markets and placed greater power in the hands of corporations.

Implications for Corporations
With this increase in power comes an increase in responsibility, based on a "social licence" that can be taken away by the ultimate power brokers, civil society. The community increasingly looks to corporations to take responsibility for driving positive change instead of expecting governments to do it.

4. Globalisation
Globalisation, a process of political, economic and social integration and exchange, has accelerated in the past decade, driven by falling costs of communication and transportation and the wide acceptance of liberal democratic capitalism.

The expansion of trade, the integration of markets and ubiquity of television/radios and communication technologies are opening borders and creating a global awareness.

By almost any measure, the world has become more globalised:

• Exports: Between 1950 and 1998, world exports of goods increased 17-fold-from $311 billion to $5.4 trillion-while the global economy expanded only six-fold.
• Transnational corporations (TNCs): Between 1970 and 1998, the number of TNCs worldwide grew from 7,000 to an estimated 53,600, with some 449,000 foreign subsidiaries.
• Air Transport: Between 1950 and 1998, the number of passenger-kilometres flown internationally grew nearly 100-fold, from 28 billion to 2.6 trillion.

Implications for Corporations
Cross-border competition will continue to intensify, as firms seek to maximise economies of scale and scope and to accelerate earnings growth. Innovation, agility and product customisation will be paramount. Increasing globalisation will have a paradoxical effect: promoting a greater sense of local identity. Corporations must respond by developing the competency to understand and respond to the needs of international customers with different values systems and perceived needs.

5. Connectedness
Internet and mobile communications are creating global communities, accelerating the rate of idea transmission and democratising access to information. For corporations, this means an operating environment that amplifies the voices, power and reach of dissatisfied stakeholders.

Faster and cheaper communication technologies are delivering messages and information to and from the most distant of locations.

• In 1990, there were just over 11 million mobile phones worldwide. By 2001 there were almost 400m. By 2004, the number is likely to hit one billion, exceeding the number of wired phones.
• Since 1995, the Internet has grown by roughly 50 percent each year, following 15 years of more than doubling in size annually. In 1998, some 43-million host computers connected an estimated 147 million people to the Internet.
• The rapid pace of innovation within the communications industry has driven down costs. For example, the average cost of processing information fell from $75 per million operations to less than a hundredth of a cent in the period 1960-1990.

Implications for Corporations
The new economy is about one word. Connected. It sees the business as a dynamic system with players other than the company being participants in the business, not external to it. Rather than problems to be dealt with, these other players are best seen as opportunities. The company's opportunity is to negotiate mutual value propositions with these players. To do business deals. The value may be financial, social or environmental. The partners may be other companies, community groups or customers. These partners are also operating in their own business system, they have objectives, they seek value (though not always financial) and they have customers (to which they deliver "products" which may be of social value.)

To succeed within this emerging business model requires that corporations learn to identify and engage stakeholders that fall outside of the traditional business value chain. It requires new competencies, in particular the ability to manage a diverse coalition of stakeholders and to engage them in participatory strategy formulation. It requires that corporations integrate societal values throughout the firm, and that they measure performance using both traditional business metrics and broader measures of societal and environmental value.

6. Sustainability
Strained ecosystems, rising inequity, and a rapidly expanding human population are forcing a rethink of the manner in which business operates. The material-intensive nature of our industrial systems and the massive human deprivation throughout the world are incompatible with a secure and peaceful world. Successful businesses will accept these challenges as opportunities.

Implications for Corporations
The democratic free-market system needs a stable society within which to operate. Thus corporations and business leaders have a major vested interest in social and environmental sustainability, as well as the financial variety.