In my opinion: Philip Yea, a partner at Investcorp and an Institute of Management companion, contends that the new economy will make managers more like entrepreneurs

In my opinion: Philip Yea, a partner at Investcorp and an Institute of Management companion, contends that the new economy will make managers more like entrepreneurs - Most readers of this column have been brought up accepting that the purpose of capitali

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Last Updated: 31 Aug 2010

Most readers of this column have been brought up accepting that the purpose of capitalism is to allocate resources to the most promising opportunities and that markets act as an efficient mechanism for the raising and pricing of capital. Most managers have gained their experience through optimising tried and tested models for running businesses, so anyone who successfully creates new models is usually described as an entrepreneur and not a manager.

Given these starting points, it is no surprise to discover that the new economy is a threat to many. Business school graduates are turning their backs on the preferred training grounds of their predecessors - the bulge-bracket investment banks, top strategy consultants and leading multinationals - and are rushing to create new economy businesses. Peer pressure is driving others to leave secure posts in established companies and try their hand in a new world.

Despite recent market corrections, the gap between the valuations of new and old economy companies continues to defy conventional financial analysis. No wonder questions are being asked about both the markets' rationality and the seriousness of the threat to old companies and old management skills.

Drawing conclusions about the outcome of a revolution when you are at the start of it is not easy. However, none of us can afford not to have a view. Even those who assume that the present markets constitute a bubble, and that valuations will adjust further, cannot deny that an irreversible communications revolution is taking place.

The high calibre of human resources being directed towards the new technologies is fuelling this revolution, as are the financial markets in what seems to be a modern and distinctly private-enterprise version of the '60s state-led space race. This trend is unlikely to reverse.

Having only recently moved from being the finance director of a well-established consumer goods company to becoming an active investor in the technology area, I find many of the basic principles of business valuation as relevant as ever.

Factors such as the size and growth of the addressable market, the quality of the management team, speed to market, the defensibility of the proposition against competitive attack, and the scalability of the operation are critical.

What is obviously missing is sufficient historical evidence to provide reference points for a number of these key assumptions. Most of these markets are so new that consumer or customer behaviour is not easily understood or predictable. Information is improving as additional reference points are created.

Yet issues such as determining prices for new technological goods and services remain unresolved, not least because the competitive sets themselves are changing rapidly.

It is probably right that first-mover advantage receives particular weighting. Investors take a benign view that it is better for a company to get started and come to the market, gain customers and adjust its customer proposition (including price) on a real-time basis than to lose time on less than perfect research. Such a view has been likened to valuing an option, which is to say that a company present in a fast-changing market has a greater ability to exploit its development than one that is absent.

However, the vulnerability of such operations to a further generation of more effective companies and models is certainly not priced into their aggregate valuations. Moreover, not even the best-thought-out business model is impervious to poor execution.

Looking beyond the business-to-consumer arena towards business-to-business models, much new value is being created through lower working capital and other cost efficiencies. However, the most likely beneficiary of such cost reductions in many cases will be the customer and economy at large rather than a single set of shareholders.

In reality, it all remains to be played out. Many of the new businesses being established today will create value for their investors. Many will not, although the recognition of this may come late. The massive decline in the present valuations of many old economy companies should be seen as an opportunity.

For if these valuations fully discount the threat of the new, then those companies that respond well and can demonstrate that they are up with events will surely be rewarded by a recovery in valuation. And distinction between old and new will break down as established companies respond and new companies become subject to more traditional valuation criteria.

One lesson is becoming increasingly clear: the role of the manager is facing fundamental challenges. Customer relationships and business models are likely to continue to be vulnerable to change, and retention of human capital will become even harder.

The creation of new models will gain precedence over the optimisation of the old ones. As a consequence the science of management will need to move much closer to the art of the entrepreneur.

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