y

WTiich companies will thrive in the coming B Y

PETER COY
vears? Those that value ideas above all else

dam Smith, the arch-capitalist, didn't like corpora-

tions. He wrote in 1776 in The Wealth of M
i that they breed "negligence and profusion' „„
\ "scarce ever fail to do more harm than good." In his
day, governments handed out corporate charters
i rarely and gi-udgingly. But a century later, as the
required scale of enterprise grew, corporations came to the
fore. Thev built railroads, steel mills, refineries, and other
 nFWTIIRYIHIKIJIIiMllli;
T H E C R E A T I V E E C O N O M Y

last year—^than it did just a

businesses of unprece-
dented size. In so do- THE INFO TECH decade ago.
ing, they played an in-
dispensable role in what
TECHNOLOGY SURGES... People are cranking out
computer programs and in-
University of Califomia IMPERATIVE 40 - INFORMATION TECHNOLOGY
ventions, while lightly
at Berkeley economist INVESTMENT AS A PERCENTAGE staffed factories chum out
J. Bradford DeLong OF OVERALL CAPITAL
30 - SPENOING
the sofas, the breakfast ce-
calls the "central fact" reals, the cell phones. The
in 20th century econom- physical content of the
ic history: the greatest gross domestic product
increase in material seems to be vanishing like
wealth ever. Lewis Carroll's Cheshire
Now the Industrial cat. Although the U.S. is
Economy is giving way still often called an indus-
to the Creative Econo- trial economy, the Bureau
my, and corporations of Labor Statistics projects
are at another cross- that by 2005, the percent-
roads. Attributes that made Information ...AND PRODUCTIVITY age of workers employed
them ideal for the 20th centu- and ideas are REBOUNDS in industry wall fall below
ry could cripple them in the the key to the 20%, the lowest level since
21st. So they wall have to 1850. And the long lull in
3 -ANNUAL GROWTH RATES OF
change, dramatically. The Dar- new Creative NONFARM UBOR PRODUCTIVITY productivity growi;h seems
winian struggle of daily busi- Economy. Infor- FOR FIVE-YEAR PERIODS
ENOING IN MARCH QUARTER
behind us. If productivity increases 3% a
ness will be won by the peo- mation-technoiogy 2 _ year—below its recent rate—the aver-
ple—and the organizations— age output per hour of work will double
investment in 25 years. That will translate directly
that adapt most successfully
to the new world that is should continue into higher living standards.
unfolding. to rise—and keep The tum of the millennium is a tum
This Special Double Issue the recent pro- 0.
from hamburgers to software. Software is
is an attempt to peer into the ductivity rebound '75 '85 '90 '95 '00 an idea; hamburger is a cow. There wall
future to describe the look and • PERCENT still be hamburger makers in the 21st
feel of 21st century corpora- aiive DATA: BUREAU OF U 8 0 R STATISTICS century, of course, but the power, pres-
tions. We draw on the insights tige, and money will flow to the compa-
of CEOS, venture capitalists, nies wath indispensable intellectual prop-
academics, consultants, and, of course, was ascendant. But the advanced erty. You can see it already. At the end
the cubicle dwellers who do the work. economies have gotten so efficient at pro- of last year, Microsoft Corp., with just
We look at management via the Web, ducing food and physical goods that most 31,000 employees, had a market capital-
the workplace of the future, the battle for of the workforce has been freed up to ization of $600 billion. McDonald's Corp.,
talent, the ecosystem in which corpora- provide services or to produce abstract with 10 times as many employees, had
tions will exist, job titles of the future, goods: data, software, news, entertain- one-tenth the market cap. Or take Yahoo!
and much more. Our aim is to provide ment, advertising, and the like. You can Inc.—a virtual place in a virtual medium,
readers wath insights that could help see it in the statistics. The share of U. S. the Intemet. Although far below its peak
their own companies thrive in the capital spending devoted to information price. Yahoo trades at more than 40
decades ahead. technology has more than tripled since times book value. If usx Corp.'s U.S.
VIRTUAL VALUE. Let's start with the most 1960, to 35% from 10% (chart). Fields Steel Group traded at the same multiple
important force of all: the growing power such as biotechnology are booming. The to book as Yahoo, its market capitaliza-
of ideas. In Adam Smith's time, most U.S. Patent & Trademark Office hands tion would be nearly $90 billion, instead
people worked on farms. Later, industry out 70% more patents—about 170,000 of less than $2 billion.

CAPITAL IS ABUNDANT INITIAL PUBLIC

The money that OFFERINGS
turns ideas into
reaiity is easier to
get than ever be-
fore, thanks to the
boom in initiai
public offerings
and venture capi- '99
tal investing • BILLIONS OF DOLLARS A BILLIONS OF DOLLARS
DATE; THOMSON FINANCIAL VENTURE ECONOMICS
DATE: THOMSON FINANCIAL SECURITIES DATA

78 BUSINESS WEEK / AUGUST 28, 2000

 now so is the Intemet, thanks to ser-
vices that enable people to download mu-
sic, movies, and software for free. The le-
gal battle over the biggest of the music
piracy havens, Napster Inc., is a sign of
things to come.
Theft of intellectual property is lethal
to innovation. Yet overly strict enforce-
ment of intellectual-property protections
can dampen innovation as well by let-
ting the property owners get lazy. Chuck
D, the lead rapj)er for Public Enemy and
a supporter of Napster, complains that
record companies often buy rights to
songs and then let them languish. To
keep the Creative Economy growing,
govemments wül have to strike a delicate
balance: enforce patents, copyrights,
trademarks, and noncompete clauses to
preserve incentives to create, but not so
much that it suppresses competition. "In-
tellectual property is going to be the big
In an economy based on ideas rather cluding ordinary investors in the stock fighting issue" of the coming decades,
than physical capital, the potential for market. That's because the commodity predicts Lester C. Thurow, a Massachu-
breakaway successes like Yahoo is far they supply—money—^is no longer scarce. setts Institute of Technology economist.
greater. That's because ideas, like germs, What's scarce are the good ideas. Thus, . In the Creative Economy, the most
are infectious. They can spread to a huge shareholders are likely to lose some pow- important intellectual property isn't soft-
population seemingly overnight. And once er in the 21st century, while entrepre- ware or music or movies. It's the stuff in-
the idea—say, a computer program—has neurs and idea-generating employees gain side employees' heads. When assets were
been developed, the cost of making copies it. Huge bonuses and option grants to physical things like coal mines, share-
is close to zero and the potential profits key employees are early evidence of the holders truly (WTied them. But when the
enormous. trend. Raghuram Rajan, an economist at vital assets are people, there can be no
With the possibility of gargantuan re- the University of Chicago's Graduate true ownership. The best that corpora-
turns, it's no wonder that idea-based cor- School of Business, says it may be time tions can do is to create an environment
porations have easy access to capital. to rethink the conventional wisdom that that makes the best people want to stay.
The pool of investable money has been shareholders are entitled to all the prof- Of course, not everyone will benefit
swollen by the rising tide of wealth its of a corporation. Charles Handy, the equally from the shift to an information-
around the world, coupled with a new British author of The Age of Unreason, based economy. High school grads' medi-
culture of investing. U. S. companies re- even suggests that some corporations an weekly eaiTiings are 43%' less than
ceived nearly $50 billion in venture capi- might become more üke voluntary asso- those of college grads, far worse than
tal last year, 25 times as much as in 1990. ciations, run for the benefit of their work- the 28% gap in 1979. And education is
The amount of money raised in U. S. ini- ing "members." likely to become even more essential to
tial public offerings last year, nearly $70 TIGHTING ISSUE." The rising importance prosperity in the future. The five fastest-
billion, was 15 times the amount in 1990. of ideas creates all kinds of difficulties for growing occupations in the U.S. are all
Both records are certain to be broken corporations. Books, music, and software computer-related, according to projec-
this year. are devilishly difficult to create—and di- tions of the Bureau of Labor Statistics.
The sheer abundance of capital could abolically easy to copy. China, for in- Corporations faced with a shortage of
be bad for the capitalists the-mselves, in- stance, is a counterfeiting machine. And skilled help are Likely to resjMnd through

TOMORROW'S WORKFORCE AMERICA'S CHANGING COMPLEXION

By 2050, non-Hispanic
whites will be a slim t NON-HISPANIC WHITES NON-HISPANIC BiACKS •HISP:,;:
• ASIANS AND PACIFIC ISLANDERS NATIVE AMERICANS
majority of the U.S. U.S. P O P U L A T I O N
population. Hispanics 0.9%

will make up nearly a

quarter of the popula-
tion, according
to Census Bureau
projections 1995 DATA; CtNSUS BUREAU 2050

BUSINESS WEEK / AUGUST 28, 2000 79

 CENTURY HiJ¡]fiil!yi1líii:i
T H E
a combination of training, ex-
porting work offshore, and look-
ing for ways to "de-skill" cer-
tain jobs. Fast-food cashiers, for
instance, punch buttons for food
items rather than keying in
prices.
A NEW MIX. A chronic shortage
of skilled help will be accompa-
nied by a change in the mix of
people in the workforce. The
long-term trend toward earlier
retirement has recently been re-
versed, with more older people
looking to stay at work or re-
turn. Overall, a record 67% of
the adult population is employed
or looking for work, mainly be-
cause female participation in the
labor force has jumped to 60%
from about 50% two decades
ago. And the ethnic mix of the
workforce is changing, partly be-
cause the great American jobs
machine is sucking in immi-
grants. The Census Bureau projects that
by 2050, 53% of the U. S. population will
be non-Hispanic whites, down from 74%
in 1995.
The corporations that thrive will be
the ones that embrace the new demo-
graphic trends instead of fighting them.
That will mean even more women and
minorities in the workforce—and in the
TOMORROW'S WORKPLACE
There will still be Old
Economy jobs in the
21st century, but high-
tech employment will
grow much faster. Mean-
while, the share of the
workforce with flexible
hours should keep rising
JOBS OF
THE FUTURE
TOP FIVE IN TOTAL JOBS ADOED, 1998-2008
JOBS PERCENTAGE
ADDED GROWTH
SYSTEMS ANALYST 577,000
RETAIL SALESPERSON 563,000
CASHIER 556,000
GENERAL MANAGER 551,000
TRUCK DRIVER 493,000
OVERALL 20,300,000
80 BUSINESS WEEK / AUGUST 28, 2000
C R E A T I V E E C O N O M Y
boardrooms as well. Ted Childs, who runs The 21st century may see the emer-
IBM's global diversity program, claims gence of a kind of "welfare capitalism,"
there are 350,000 unfilled jobs in the U. S. in which corporations try to recruit and
information-technology industry. "I be- retain employees by providing services
lieve we're in a war for talent," he says, that in another era were provided by
ticking off various IBM projects to devel- govemment agencies or families: assis-
op talent among women, blacks, Asians, tance with child care and elder care,
homosexuals, and other groups. "None valet services, and so on. Their employ-
of this is charitable." ees win handle more personal matters at
work, and more work
FLEXIBLE HOURS
matters at home: The
man in the gray flannel
suit is becoming the man
30-
in the gray flannel shirt.
FULL-TIME WORKERS Even floor plans are go-
WITH FLEXIBLE
ing New Age at places
20- WORK HOURS
like SEI Investments Co.
in Oaks, Pa. Computer
10-
linkups drop from the
ceiling, and employees
move from place to place
'91 •97
as their assignments
• PERCENT DATA: LABOR DEPT.
change.
While some freelance
workers will jump from
job to job like hired guns,
TOP FIVE IN PERCENTAGE GROWTH, 1998-2008 companies like IBM and
JOBS PERCENTAGE Sun Microsystems Inc.
ADDED GROWTH want to have a core of ca-
94% COMPUTER ENGINEER 323,000 108% reerists to provide conti-
14 COMPUTER SUPPORT SPECIALIST 439,000 102 nuity. "Enduring relations
with employees become
17 SYSTEMS ANALYST 577,000 94 an enormous asset, be-
16 OATABASE AOMINISTRATOR 67,000 77 cause those employees are
17 OESKTOP PUBLISHING SPECIALIST 19,000 73 what connects the compa-
ny to its partners," says
14 OVERALL 20,300,000 14 James N. Baron, a pro-
DATA: LABOR DEPT.
fessor at Stanford Uni-
 f
THÊ@) CENTURY B
T H E C R E A T I V E E C O N O M Y

versity's Graduate School of Business. ees fell 3%, while the collective market advantage of their transnational status
And just as companies want to hang cap rose 500%, according to data sup- to operate beyond the control of na-
onto a core of permanent employees, plied by The McGraw-Hill Companies' tional governments. They can play gov-
they'll want to retain some key busi- Standard & Poor's. ernments off one another through their
ness functions in-house as well. Forget Some of these trimmed-down busi- decisions about where to locate factories
the vision of the entirely "virtual" cor- nesses may emerge as more powerful or research labs. And many use unreal-
poration in which nearly everything is than any corporations ever have been. istic transfer prices to shift income from
outsourced. Clayton M. Christensen, au- In the industrial past, there were natur- high-tax jurisdictions to low-tax ones.
thor of The Innovator's Dilemma, points al limits to the power of a strategically Last year, a General Accounting Office
out in an essay written for this issue placed corporation. A corporation was study reported that from 1989 to 1995,
(page 180) that outsourcing won't work restricted in how many businesses, or an outright majority of corporations,
for cutting-edge products whose specifi- customers, or suppliers it could draw into both U. S.- and foreign-controlled, paid
cations are in flux. its sphere of influence because there were zero U. S. income taxes.
For all the talk of a brave
new world, nation-states
THE CORPORATION THRIVES BOOK VALUE? aren't going away in the 21st
Despite the WHO CARES? century. So it's a good bet
merger boom, that there will be repeated
clashes between corporations
the most valu- and the countries—and peo-
able companies ple—that play host to them.
today have fewer In response to the globaliza-
employees than tion of business, governments
may coordinate their efforts
those of a to regulate corporations on
decade ago. And issues ranging from taxation
they're less capi- to pollution.
tal-intensive: The ra- Of course, corporations
'90 '99 have always been easy to
tio of market cap to DATA: FEDERAL RESERVE, STANDARD S POOR S COMPUSTAT, hate. In 1612, British jurist
McKINSEY S CO
book value has soared Sir Edward Coke com-
plained that they "have no
Still, corporations in the soul." In the 1960s, Martin
21st century will evolve new Luther King Jr. warned of
forms of close interaction. MORE ...WITHOUT the alienation produced by
Silicon Valley is the exem- PROFITS... pi^K MORE PEOPLE ^^^^r
"gargantuan industry and
plar of a new kind of inter- government, woven into an
dependence: Skilled engi- 300 - TOTAL PROFITS OF 100 MOST intricate computerized mech-
VALUABLE U.S. CORPORATIONS
neers jump between anism." The past year's out-
companies as easily as 200- cries against globalization
switching desks, and as they spell trouble for transna-
do, they spread ideas. "In tional ranging from Coca-
100- 7 - TOTAL EMPLOYMENT OF 100
some ways, Silicon Valley MOST VALUABLE U.S. Cola Co. to Exxon Mobil
performs as a large decen- CORPORATIONS Corp., and there's no sign
tralized corporation," Philip • they're diminishing.
'89 '99 '89 '99
Evans and Thomas S. A BILLIONS Of DOLLARS A MIIUONS Stul, corporations have a
Wurster of Boston Consult- OATA: STANDARD S POOR'S COMPUSTAT DATA STANDARD SPOOR'S COMPUSTAT way of flourishing under
ing Group Inc. write in their : ; changing circumstances.
new book, Blouni to Bits. While some will go down
THE REAL ASSET: IDEAS. In the same natural limits on how many could be with the dinosaurs, the corporate form it-
way that the economy is losing granted access to its crucial asset—say, a self has a good deal of fiexibility. Many
weight—software instead of steel—cor- railroad terminal. corporations have already begun to ad-
porations are getting lighter, too. But in the Creative Economy, the just to the new realities of the Creative
They're able to generate lots of rev- power to exert influence is nearly un- Economy—^by allowing power to tut from
enue and profit off a small base of as- limited because there's no ceiling on how the sources of capital toward the sources
sets and employees. Despite the merg- many people can be made to depend on of ideas, by embedding themselves in
er wave of the 1990s, the most valuable idea-based assets, notes the University of fertile corporate ecosystems, and by
companies in America aren't bigger by Chicago's Rajan. An example: America adopting codes of social responsibility to
employment than the most valuable Online Inc.'s instant-messaging system. win the trust of a wary pubUc. Legally, a
companies of a decade earlier. Compar- Companies will exercise power by shar- corjwration is a person—a person who
ing the 100 U. S. companies by market ing—or withholding—crucial intellectual is potentially immortal. Let's see how
cap in 1989 with the corresponding property. these ageless characters handle the next
group in 1999, the number of employ- Global corporations will try to take 100 years.

82 BUSINESS WEEK / AUGUST 28, 2000

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