The New Digital Economy - Chapter 1: Introduction

This is a series of articles which intent is to be an update of the books The hidden treasure chest (Bergstrand et al, 1993) and The New Business Information (Bergstrand et al, 1995).

This is the first chapter in the series. More chapters will follow, so stay tuned.

When The hidden treasure chest and The new business information was written, computerization was only in its infancy. Yet it was very clear that the traditional economic control instruments began to encounter problems with increased demands in product cost calculations. Implications that were a clear signal of a growing proportion, against product and customer, non-measurable work behind the desks in companies. A growing fog covering overhead cost within which unproductive bureaucracy can grow and which in the long run risks triggering a serious economic crisis in companies.

Quote from The Hidden Treasure Chest:

"The orienteer runs according to the compass bearing. Consequently, if the compass shows errors, the orienteer gets into trouble. The income statement and product cost calculation are the compass of a business. A compass that was once developed to guide us to the geography of the industrial society. A compass we argue gives more and more misspellings, the more elements we received from the soft terrain of the information society".

The income statement and product cost calculation (the compass of the company) must ensure that the products are competitive and generate more money from the customers than they cost to manufacture.

Hard soft w textpng  

The Hidden Treasure Chest and The New Business Information showed that the financial reporting (blue marking in the image above) focusing on product cost calculations was designed based on the conditions of industrial society (“hard” refinement). An industrial economic accounting and product cost calculation that was not designed to measure and control the expanded “soft” refinement which was a consequence of computerization (see red marking in the image below). The consequence is increasing overhead costs in product cost calculations that are difficult to relate productivity to its contribution to the company's competitiveness and profitability.

  Hard soft w text 2png

Although it has been more than 25 years since the books were written, nothing has been happening in the financial reporting or product cost calculation, even though the proportion of soft processing increased significantly. Now we are entering a new era, digitalization, which means that the soft processing will explode.

Lean Accounting rejects traditional accounting / product cost calculations

Quote from Practical Lean Accounting (2011, Maskell, Baggaley, Grasso):

"Traditional accounting systems (especially those using standard costing, activity-based costing, or other full absorption methods) are designed to support traditional management methods. As a company moves to lean thinking, many of the fundamentals of its management system change and traditional accounting, control and measurement methods become unsuitable. "

Lean Accounting goes so far in its distance from traditional accounting that, among other things, abandons the product cost calculation that it considers to be out of order. However, the fact remains that the core of all business is to ensure that the products produced generate more money from the customers than they consume in terms of resources.

From a producer-controlled to a consumer-driven market
 
Unlike the industrial society, which was producer-driven, long product life cycles, few or no product variants, and most of the product consisted of hard components, the post-industrial / digital society completely different challenges for the companies. Companies live in a global, more and more digitized competition where the customer is in the driver's seat. The rate is increasing, product variables are increasing, and product life cycles are shorter. Moreover, not least, the percentage of soft refinement increases.
 
That is, it is a survival factor for companies to get out of the growing deadlock and gain access to an economic compass that, in real time, basically measures the combination of soft and hard refinement, both short and long term, based on competitiveness and productivity linked to customer benefit and profitability. The compass needle is the product cost calculation.

The New Digital Economy – updated 2018 version of the books

The economic models and management practices presented in The Hidden Treasure Chest and The New Business Information are more relevant today 2018.

The New Digital Economy has three focuses:

  • To show how the economic models reported in The Hidden Treasure Chest  give businesses back the economic compass to effectively compete in post-industrial digital society
  • To show how the methods (symbolized in a staircase), presented in The New Business Information, help companies to continually trim their processes based on customer and market requirements. “Sweep the stairs from the top – the market and customer needs – and down"
  • Pointing out the necessary fundamental changes and considerations regarding:

    o the way to lead companies
    o today's economic regulations and competency structures
    o Lean accounting concept
    o IT/ERP community
 
It is very serious that Lean Accounting abandon the product cost calculation (compass needle in corporate governance), thus leading companies out of the ashes into the fire. Across the core concepts of Lean. Lean Accounting’s focus should instead be on the IT/ERP industry and how to get this to support Lean

Economists in their different roles must start focusing on the refinement of the companies and its compassionate product cost calculation. The good news is, as the new digital economy shows that in practice it is only wearing other glasses that accept the soft refinement on the same premises as the hard one. Some major adjustments in laws and regulations governing financial accounting are hardly necessary. On the contrary, with the new glasses, companies have the opportunity to better live up to current laws and regulations. The challenge lies in existing IT/ERP solutions, and in getting their communities to support companies based on today's reality.

The management's focus must be to get an increasingly efficient and agile process orientation of their businesses. More emphasis must be placed on the interaction customer, from marketing and sales based on customer needs, delivered as well as caring for existing customers in the form of an efficient aftermarket. In order to be able to live up to this customer focus, corporate executives can no longer delegate IT/ERP issues (the engine in soft refinement). Without competence, these issues must be as obvious as hard refinement issues are.

The IT/ERP industry has long been profiting from cementing functional and industrial structures, ie building hierarchical structures instead of interacting with Lean in process orientation of the companies. The IT/ERP industry is in great need of a thorough re-engineering of its business models. If not, there are great risks that digitization will represent a reprint on what The Hidden Treasure Chest and The New Business Information described, where the IT/ERP industry utilizes the new technology to further enhance functional/hieratic structures. It is the IT/ERP industry that basically has to change in their solutions and skills to control and measure soft refinements on the same premises. The prerequisite for process orientation based on customer needs, for competitiveness and for short-term and long-term profitability.