The Real New Economy

Summary
The Real New Economy by Diana Farrell presents arguments as to how IT was perceived to change the business environment and the major factors that actually accounted for the change. According to the labor productivity research carried by McKinsey Global Institute in United States, Germany and France, the author credits fierce business competition, aggressive innovation and productivity growth, during the late 1990s, as the major agent of change rather than the Technology. As opposed to what many believed, Information technology though of great importance is not the primary factor that shapes the fate of industries or individual companies. Though during the late 1990s, productivity grew steadily alongside investment in technology, little correlation between productivity and IT investment were found when the performance of different industries was examined. The productive gains were found to be more concentrated in just six sectors: retailing, securities brokerage, wholesaling, semiconductors, computer assembly, and telecommunications, whereas many other sectors such as the hotels and television broadcasting with heavy investment in IT saw little or no productivity at all. In an extremely competitive industry where companies face the possibility of loss, managers must find creative ways to cut cost and increase value for the customers, the choice really is to innovate or die. There are many ways to innovate, but during the late 1990s IT proved to be a particular powerful tool. Though the effects of IT was not felt equally in all industries, it benefited sectors mostly dependent on intensive information, processes, heavy transaction loads, or technically sophisticated products. The three reasons that establish IT as a powerful tool listed by the author are: IT enables development of both new products and efficient new business process It facilitated the rapid industry wide diffusion of innovations. It exhibited strong scale of economies its benefits multiplied rapidly as its use expanded.

Though Information Technology renders productive gains, investing in IT just for the sake of investing or following the broad IT trends will create inefficiency. Even in the six sectors that gained the most from IT, many companies failed to earn strong returns from their technology investments. Some simply abandoned new systems when implementation difficulties arose or costs exceeded expectations. Others took a piecemeal approach, automating only parts of their business processes. In making an investment decision, managers must understand their core business function and concentrate the IT spending in those units that will leverage the gains and efficiency. The core unit that justifies IT spending however differs from business to business and industry wise. A Group C

The Real New Economy manager must understand that a technological adaptation that leverages efficiency in particular industry or business will not generate similar result in his case. Hence, IT applications that generate greater impact are often tailored to a purpose rather than a general one. Apart from the leveraging factor the managers while investing in IT needs to consider sequencing the various IT units and timing the investment; to be the leader or the follower of the IT trend. History shows that technological innovations are typically of little use until managerial practices adapt to them. In all successful cases, business managers led the way, reshaping their companies' processes and practices so that the full benefits of new information systems could be realized. Therefore, in making the IT investment decision, managers must understand that IT alone is almost never a true differentiator. The ability of manages to understand the particular characteristics of their business and mould the IT factor to their specific requirement defines the success of IT investment. The challenge is to IT is not a silver bullet. But if it is aimed correctly, IT can be an important competitive weapon.

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