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Economy & Business Environment Blog

May
17
2016

Making dollars—and sense—out of the New Digital Economy

As the economy continues to digitize at an unprecedented pace, why don’t we see faster economic growth and productivity increases? The answer is that the diffusion process of technologies from the New Digital Economy—characterized by rapidly increasing spending on cloud computing, data analysis, and other services in a world of ubiquitous, Internet connections – has only just begun. In a new report on the digital economy, The Conference Board incorporates a suite of economy-wide, industry-specific, and firm-level data alongside interviews with executives in a dozen major companies to examine the progress of the New Digital Economy. In another blog we report on some of the metrics, in particular rapid price declines in ICT assets and services and an ongoing shift from investment in ICT assets to spending on ICT services, underlying our view that the productivity effects have yet to come.

So why is this taking so long? And is it unusually long?  Yes and no. Let’s start with “no”. It has been well documented that general purpose technologies (or GPTs, of which the New Digital Economy is an example) provide significant cost reductions and efficiency gains only over a considerable length of time as they are often characterized by long periods of diffusion, adoption, and penetration.  The New Digital Economy is still in its “installation phase”: a period during which new technologies emerge and advance, driven by the creation of new infrastructures and new and superior ways of doing things, disrupting established practices and organization – but not yet producing the economy-wide productivity gains.

Installation Phase versus Deployment Phase in the New Digital Economy. Source: based on Jerry Neumann, The Deployment Age, Reaction Wheel – Jerry Neumann’s Blog, October 14, 2015 and Carlota Perez, Technological Revolution and Financial Capital. The Dynamics of Bubbles and Golden Ages, (Cheltenham, United Kingdom, Edward Elgar Publishing Limited), 2002

While GPTs always take time to evolve, there are two reasons to be concerned that it is perhaps taking unusually long to see the results from the New Digital Economy. First, slow growth in the aggregate economy doesn’t help even though there are different opinions about the causes.  These include demand constraints due to disincentives to spend and invest, or supply constraints—like slowing labor force growth and weak productivity growth—that are holding growth back.

Second, it may simply be harder this time for an organization to fully accomplish the digital transformation process. Digital technologies and the data they produce need to be employed to connect organizations, people, physical assets, processes, etc. for the purpose of rapidly developing new products, services, markets, and business models to capitalize on emerging customer needs. So it’s not just about buying the right digital assets and services, but about business innovations which build on those to create real value for a business. It is not difficult to see that is significantly more disruptive and impactful for organizations today to develop business solution for the New Digital Economy than it was in the Old Digital Economy, when the PC was introduced and the internet was used primarily for marketing and e-commerce.

So what can companies do? In our new report we several steps companies can take even in today’s slow-growth environment to accelerate digital transformation and move faster from the installation phase toward the deployment phase. These include

  • Taking advantage of ongoing rapid price declines in ICT assets and services to obtain significant cost reductions, without running up cost elsewhere.
  • Leveraging the shift from investment in ICT assets to purchased digital services to increase business flexibility in raising productivity and speeding up the bringing to market of new products and services.
  • Creating key knowledge-based assets (product and services design, workforce training, and organizational improvements) to strengthen innovative capabilities.
  • Assessing and managing different degrees of talent shortages among digital workers and tech-savvy workers.
  • Utilizing local innovation ecosystems by taking advantage of access to talent, partnerships, and shared services.
  • Creating agility and resiliency to anticipate and respond to the disruptive impact of new technology.

To fully capture the growth and productivity effects the New Digital Economy offers, a digital strategy needs to be broad based as it touches on virtually every function and task in an organization. As the economic environment provides many headwinds, business leaders need to do continuous reality checks on opportunities and risks.



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