In spite of the painful correction
technology stocks have suffered since the New Year, the technology boom
is not going away. What we have seen so far is just the tip of the iceberg.
Like every major technology change before, from printing to railroads
to mass production, the early visible wealth is being captured by the
technology firms themselves. But for every dollar of wealth created
in the technology sector, there will be nine dollars created by the
technology sector. The real benefits of technology accrue not to the
tech companies or their owners, but to ordinary companies selling ordinary
products and services, their employees, and their customers by improving
the quality and lowering the costs of their products. But there is a
price to pay. Technology revolutions make old ways of doing business
obsolete. Like the dinosaurs, people who can't, or won't adapt to change
become obsolete too.
The headlines are about the dot.com companies, their valuations, and
their billionaire founders. Technology companies have taken over the
commercials on our televisions. They have taken over the stock market
-- except for technology companies, the market was down last year. They
have taken over real estate prices in Seattle, Boston and San Francisco.
They have even taken over our language, with words like B2B, portal,
download, and email.
Some aspects of this boom are reminiscent of Tulipmania, the Silver
rush, the Florida real estate bubble, and other speculative episodwa
of the past. These bubbles take place when people -- I almost referred
to them as investors -- after seeing a group of other people make a
lot of money in a short time, convince themselves the train is about
to leave the station without them. They then bid the prices of whatever
is in vogue up to ridiculous levels that are completely detached from
the intrinsic, or underlying, value of the asset. The funniest part
of this bubble behavior, as Mark Twain wrote about in Roughing It, is
that everyone is drawn into it (even guys like me who write about this
stuff and are supposed to know better). Nothing is sadder, or funnier,
than the long faces of the speculators after the bubble pops, as it
But the technology revolution is more than a passing bubble. It will
have permanent macro and micro effects. The macro effects are higher
growth, more productivity, lower inflation and lower interest rates,
as I wrote in this column on TK. The Internet is basically a tempo-suction
device that takes the time out of doing business. It makes everything
go faster. By definition, this has to raise growth rates. GDP and other
measures of economic activity are measured in dollars of business per
unit of time. The Internet, by reducing the amount of time it takes
to do a dollar of business, allows more dollars of business to take
place per hour, day, week, month or year. We measure this as increased
productivity and higher growth. For this same reason it lowers costs
and prices, which are essentially measures of low much time a person
must work to purchase a good or service. So the Internet also reduces
The micro story is less obvious but will have bigger, more permanent
effects on our lives. Part of the micro effect is visible. Some tech
companies, like Microsoft, Intel, Amazon and a host of others, will
be winners and their owners and managers will have the opportunity to
The larger part of the micro story is not so obvious. Technology is
forcing massive and irreversible changes in the way we all do business.
Like every other technology advance in history, a few successful technology
providers will make the initial profits, but the lion's share of benefits
will accrue to their customers. Every other technology change worked
this way, including agriculture, printing, railways, automobiles, air
travel, electricity, telephones and personal computers. It will work
this way with the Internet too.
This will be bad for some companies. In the Internet economy, information
is free, time delays are zero, and geography is irrelevant. So any business
that profits from the ignorance, or the slowness or remoteness of others
is potentially in serious trouble.
This puts distribution companies squarely in the crosshairs of the
Internet. More than half the operating assets in the US economy are
in distribution, not in manufacturing. This includes the rows of shiny
cars at the car dealer, the piles of sweaters or cans of soup at the
retail store, and the boxes of books at the warehouse. In a world of
free, complete and instant information these are all, or nearly all,
non-earning assets. The tech revolution will do to car lots and retail
stores what JIT did to inventories in the 1980's - wipe them out. Customers
will get better selection, fresher goods, quicker deliveries and lower
prices the more layers of middlemen that technology can remove from
the supply chain. In the limit, with customers buying direct from producers,
the only finished goods inventory required is the box in the back of
the FedEx truck (which you have already paid for) on its way to your
house. All the rest can go.
But as investors found out this Xmas season, someone still has to deliver
the stuff to your house after you click the order now button on the
website. Fulfillment, execution, quality, trust and service are even
more important with clicks than with bricks because in the Internet
economy these intangible benefits are the only points of contact between
the customer and the vendor.
This need for high-quality fulfillment will create lots of opportunities
for ordinary companies if their owners and managers are flexible enough
and fast enough to adapt. Especially for small, flexible companies,
where technology levels the advantages of size. Here are some examples
of companies we own where we have used technology.
One of our companies has historically used a direct sales force to
sell our premium branded fitness products. That way each customer got
direct attention. With fewer than 20 sales people and more than 20,000
prospects, however, we could only reach a small fraction of the people
who might like to buy our product. In December, we opened a web site
that allowed customers to order our product with a few clicks. The sales
force can now concentrate on customers requiring personal service. Consumers
can buy directly from the web site. In the first two months of e-commerce
we have sold nearly a million dollars of products to new customers.
Another company we own is the largest wholesaler of contact lenses
in the US. They already use technology to track orders from entry to
picking, shipping and billing for over 300,000 products. Besides speeding
up the flow of business, this system scans product at point of shipment
and checks to make sure what's in the box is exactly what was ordered.
Result: 100% quality, faster shipping, and lower costs. Since this system
is expandable, we are now acquiring strong regional companies to build
a national powerhouse. This company is also using the Internet to open
a new channel to improve service to out customers by giving each of
them a personalized website to service their customers.
Another company manufactures picture frames and operates 70 retail
stores where customers can buy pre-framed art, as well as have their
own artwork or their diploma custom-framed. This company uses technology
to transmit custom orders from a point of sale terminal in the store
to the factory, so they can begin making the frames without delay, which
allows them to serve the customer in a few days instead of weeks. They
are also in discussions a company that sells artwork on the Internet
about providing all their framing and fulfillment needs which could
dramatically increase sales.
These stories all have two things in common; managers with the right
mental attitude and the right resources to do the job. To successfully
use new technology to change an existing business, managers must be
committed to attacking new opportunities, not to defending old ways.
And they must be willing to move fast.
These companies will profit from the technology boom, regardless of
stock market valuations for the dot.com companies.