Changes transforming economy<\/p>\n
By Ken Gibson<\/p>\n
JAKARTA (JP): Indonesia has clearly caught the 'dot com flu'
\n-- new startups are cropping up every day; U.S. dot coms have
\narrived in Jakarta; and a host of companies are busily trying to
\nput an 'e-spin' on their Old Economy businesses.<\/p>\n
Is there really money to be made in the New Economy? When will
\nthe bubble burst? What does it mean for Indonesia? What will
\nhappen to those in the Old Economy?<\/p>\n
A global management consultancy firm, McKinsey and Company,
\nhas recently completed a research on the underlying fundamentals
\nof the New Economy. It concluded that beneath all the hype and
\npublicity, there are in fact powerful economic changes afoot that
\nwill permanently transform the way economies and businesses
\nfunction.<\/p>\n
The research focused on three major forces at work in the
\nglobal economy -- digitization, regulatory liberalization, and
\ncapital mobility -- and studied their potential effects on
\nindustrial cost structures around the world.<\/p>\n
It grouped all existing costs into two types: transformation
\ncosts and interaction costs. The former are the physical costs of
\ntransforming inputs to outputs -- turning metal into cars,
\nleather into shoes, etc.<\/p>\n
The latter are the costs of exchanging information,
\ncoordinating activities, monitoring, and so on. Interaction
\ncosts, the research revealed, account for roughly 50 percent of
\ntotal costs in most industries, and as much as 70 percent in
\nindustries such as banking.<\/p>\n
Where the Industrial Revolution brought about a dramatic
\nreduction in transformation costs, the New Economy is rapidly
\nslashing interaction costs.<\/p>\n
In fact, the study concluded that the three forces at work
\n(digitization, deregulation, and capital mobility) will boost
\ninteraction-cost productivity by at least three times.<\/p>\n
In some cases, interaction costs should eventually approach
\nzero, as the Internet and other enablers proliferate. Falling
\ninteraction costs will change the economic world beyond
\nrecognition: customers will reach new suppliers despite
\ngeographic distances; companies will penetrate untapped markets;
\nand intermediaries-distributors, merchants, agents and others
\nwill be decimated as buyers and sellers do their own match-
\nmaking.<\/p>\n
These changes are occurring much faster than most people
\nanticipated. Whole industries are being reshaped everyday -- even
\nOld Economy industries, such as autos and pharmaceuticals.<\/p>\n
For example, Ford, GM and Daimler\/Chrysler recently announced
\nthat they will launch a joint component procurement business,
\nwhile Johnson & Johnson, Baxter and three other large medical
\ncompanies have just joined together in marketing to hospitals.<\/p>\n
Only a few years ago, such cooperation between arch rivals was
\nunthinkable.<\/p>\n
A major reason for this phenomenon is that in the New Economy
\nthe winner takes all. In the stock market the evidence is already
\noverwhelming: in every e-commerce category, the leaders command
\nfar higher valuations than their competitors.<\/p>\n
Look at Amazon versus Barnes & Noble, or Ebay, Yahoo! and AOL
\nversus their peers. The reason is that in the New Economy scale
\nis everything. If you are the first and largest, your brand is
\nsubstantially more valuable and technology costs are spread over
\nmore customers. Moreover, you create a larger network of
\ncustomers who then interact with each other and make your site
\neven more attractive.<\/p>\n
These changes are fast arriving in Asia and Indonesia is no
\nexception. Indonesian companies need to understand how the New
\nEconomy will affect their business -- how supplies can be
\npurchased, how products can be sold, and how businesses will
\ncoordinate with each other.<\/p>\n
Indonesian exporters need to move particularly quickly, given
\ntheir direct ties to the changing global economy. For example,
\nshould Indonesian paper companies use the procurement services of
\nChemdex.com? Should they sell through paperexchange.com? Should
\nthey form an industry consortium?<\/p>\n
Even domestically oriented businesses must beware.
\nStockbrokers will soon face global and Asian competition from
\ncompanies like Schwab and E-TRADE, while the travel agent
\nbusiness could be destroyed by companies like Travelocity.<\/p>\n
Fortunately, the challenges are accompanied by breathtaking
\nopportunities. Companies that understand the New Economy can
\nprofit enormously by building new businesses.<\/p>\n
International examples of innovative business building abound:
\nwitness BBC's success in becoming a global content provider or
\nthe achievement of Telefonica-the Spanish telecommunications
\ncompany-in establishing a successful ISP and portal service
\nacross South America. Similar success stories can be written in
\nIndonesia.<\/p>\n
For consumer-oriented businesses, a major obstacle is the
\nsmall size of Indonesia's on-line community. However, a number of
\ncreative solutions are being devised to boost Internet access
\nthrough cable TV, mobile telephone and broadband satellite
\naccess. These projects promise to dramatically alter the face of
\nInternet usage in Indonesia within a few years.<\/p>\n
In fact, we believe that Internet technology can actually be a
\ncatalyst for Indonesia's economic recovery: a vibrant and dynamic
\ne-commerce community will inevitably make Indonesian businesses
\nmore efficient and offer new benefits to consumers.<\/p>\n
If these new technologies are exploited thoughtfully, there
\ncan be tremendous social benefits for all Indonesians. Take one
\nextreme example: why not put broadband Internet kiosks in village
\nschoolrooms and hospitals?<\/p>\n
Such initiatives could allow Indonesia to revolutionize its
\neducation and health care systems and 'leapfrog' over other
\ncountries. Hopefully, government policy will embrace the New
\nEconomy and harness the extraordinary power offered by emerging
\ntechnologies. If so, the real winners would be the people of
\nIndonesia.<\/p>\n
The writer is president director of PT McKinsey Indonesia.
\nThe article is adapted from his presentation at a recent
\nconference jointly organized by PT McKinsey Indonesia, PT IBM
\nIndonesia, and the Indonesian Institute for Management
\nDevelopment (IPMI).<\/p>",
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