2.7 THE NEW FIRM: REBUILDING WITH BITS

    If the Law of Diminishing Firms explains the disruption to current business, the public goods aspect of information accounts for the phenomenal opportunities for growth that are emerging at the same time. Because information wants to be free, the sudden creation of cyberspace, a viable home for free-moving bits, is driving a massive information migration. During 1997, InterNIC, the company responsible for registering site names on the World Wide Web, reported that new sites were being added at the rate of one every minute. Libraries, publishers, financial service firms, and buyers and sellers of every kind have been flooding cyberspace with their information archives. Some of Wall Street's hottest technology stocks are for companies like Yahoo!, Excite, and Alta Vista, all of which simply help users to navigate through this amazing wealth of knowledge.

    Just as cheap bits are shrinking the traditional firm, their public goods features are building firms back up again, using bits for the bricks and mortar. The new forms, however, look little like their predecessors. As information flow increases, organizations are less able to hide their costs and pass along inefficiencies to customers. So they must focus, as authors Gary Hamel and C. K. Prahalad argue in Competing for the Future, on those activities that truly add value; that is, activities they can perform, owing to their expertise, scale, and other special properties, more efficiently than everyone else. Companies already struggling with these changes have found that the first wave of displacement involves employees. But people can be retrained. The next phase of restructuring is more difficult. Fixed assets-the trucks, pieces of manufacturing equipment, factories, and warehouses that were a necessary evil of running an integrated firm-are not so flexible.

    New entrants and early adopters of new technologies do not have fixed assets, and in the new economy, what was an advantage will quickly become a disadvantage. Digital publishers don't have or need printing presses, a distribution network, and retailer contracts. Digital insurance firms and banks don't have or need agents and branches. And digital shopping malls don't need any of the three key assets of traditional retailers: location, location, and location. New digital competitors can still reach an exploding, global, unregulated market overnight, and at very little start-up cost. The barriers to competition are falling fast, falling at the speed of a bit. Software giant Microsoft is already offering services as varied as event ticket sales, travel reservations, home and car shopping, and investment advice.

    In effect, someone has just turned your balance sheet upside down. As the CEO of a leading durable goods manufacturer told us, "The leverage has shifted to the consumer. They know when they're getting value and when they're not getting value and will pay for service where there is quality service. If there is no value added to high-cost distribution systems, they aren't going to pay for them." Utilities, used to passing along cost overruns from plants they didn't need to build directly to consumers, have a new term to describe these items in a deregulated environment. They call them "stranded assets."

    Getting caught with stranded assets, even ones that you considered just the other day to be the source of your competitive advantage, isn't hard. It can happen with remarkable speed, even in markets that aren't highly regulated. In the early 1990s, Microsoft's Bill Gates approached Encyclopedia Britannica about creating a digital version of its leading encyclopedia, to be delivered on the increasingly cheap medium of CD-ROM. Britannica, concerned that licensing content would jeopardize the high margin market for their printed books, turned him down. So Gates created his own encyclopedia, Encarta, using content from Funk and Wagnalls and public domain audio and visuals. From the beginning, Encarta was published exclusively in digital form. Not only is the multimedia product more engaging than the cold text, it is cheaper to produce and distribute ($1.50 to press the CD-ROM versus $250 to print the book), and easily updated as well.

    Within eighteen months, Microsoft Encarta became the best-selling encyclopedia in the world. Britannica saw its own market collapse. Britannica approached Gates about reconsidering his deal. The meeting ended, according to Gates, when he informed the company that his market research showed that the Britannica brand name now had negative value in the new interactive encyclopedia market and that the company would need to pay him to use its name on his product. Since then, Britannica has changed hands several times, eliminated its direct sales force, and struggled to gain market share with a competing CD-ROM product, initially priced at $1,000.