From the August 1996 issue of Entrepreneur

Are you geared up to compete in the new Digital Economy-the computerized business world? "Businesses that aren't will be toast," warns Don Tapscott, author of The Digital Economy (McGraw Hill), a book that's long held a place on bestseller lists.

Tapscott's message is double-edged, packed with promise and peril. He tells us that the old, industrial economy-based on corporate behemoths-is history. A new, global business marketplace is emerging, one based on networked computers-that is, millions of computers linked together via phone lines and the Internet. That's created real promise for small business, according to Tapscott, who sees the future belonging to lean, fast-moving entrepreneurial companies.

But the peril is just as real. Businesses, large or small, that remain locked into the old economy and out of the Digital Economy may well perish, says Tapscott, chairman of the Alliance for Converging Technologies, a Toronto-based think tank investigating new media's impact on business.

Here, in this exclusive Entrepreneur interview, Tapscott gives the nitty-gritty of why you must get onto the Internet-now.

Entrepreneur: You say in The Digital Economy that "the single most important" to-do a reader can take from the book is to sign up with an online service. Why?

Don Tapscott: You have to get yourself on the Internet. This is a whole new medium of human communication, and you need to know about it because it is changing all the rules of how we do business. Those who don't risk corporate decline because they will miss out on using the tools of the age to transform their companies.

Five or 10 years ago, managers joked, "Sure, I use a computer. It's on my secretary's desk." Today, comments like that don't get a laugh. Instead, people think "What a loser!" More and more, the decision to not use technology has become irrational-a fact that's keenly understood in the developing world.

If I do a briefing with senior managers in London and ask, "Who here has surfed the World Wide Web in the last week?," perhaps 5 percent of them will raise their hands. I was in Malaysia recently and asked the same question at a meeting of 1,000 senior managers. I had to search the room to find people who didn't have their hands up. So many people think the developing world will never catch up-but watch out! The Digital Economy is changing all the old paradigms.

Entrepreneur: Is it worth a leader's time and trouble to get on the Internet?

Tapscott: A leader cannot lead in the Digital Economy if he or she can't use the tools. And no technology in human history has proliferated faster than the Internet. Plus, the World Wide Web has changed managerial attitudes. Before, managers questioned if it was worthwhile to learn how to use, say, a computerized spreadsheet. They had a point. The tools weren't always easy to use.

But the Web is different. If you can point and click with a mouse, you can use it-you can surf competitors' Web sites, for instance. An "Ah-ha" phenomenon takes hold when managers use the Web for the first time. They see that they can use this tool and that it has value.

Entrepreneur: Why is it so important for businesses to learn to compete in the Digital Economy?

Tapscott: A revolution is occurring, and it is leading to profound changes in the way we create wealth. Just as the electrical power grid and the roads formed the infrastructure for the old industrial economy, the information superhighway-the linking of millions of computers into the Internet-is becoming the basis for a new Digital Economy where digitized information [computer bits] can race at the speed of light across global computer networks. That's changing all the rules of business, and any organization that understands the drivers of this new Digital Economy has a chance of succeeding.

Entrepreneur: Why do you say that in the Digital Economy, being big has become a business liability?

Tapscott: For decades, business has been a multilevel bureaucracy based on the command-and-control hierarchy, a model that came out of the church and the military centuries ago. But this model no longer works in a global economy moving at fast-forward speed. It doesn't work when it takes a big company six months to make a decision on a product that may have a competitive lifespan of an afternoon.

The corporation has been in deep trouble for a long time, and now the Internet is enabling fundamentally new business models. In the Digital Economy, computers from around the world can be networked together to concurrently attack a business problem-and, more important, the know-how and ingenuity of the people who use the computers also can be linked together to create a higher order of thinking and knowledge. That's making possible new inter-networked businesses that are as different from the old corporations as the corporations were from the feudal craft shops of the Middle Ages.

Entrepreneur: What's a for-instance?

Tapscott: A group of individuals and companies are working together to attack the world's hardest custom-fitting problem, women's jeans. Just 27 percent of women are satisfied with the fit of their jeans. It all started when Sung Park, a former IBM software executive, was in Hong Kong and noticed the phenomenon of making men's custom-tailored suits in one day.

Back in America, Park brought together a number of companies into a network: a stitching company, a sewing company and Levi-Strauss. A woman now can go into a Levi's store-and soon to a site on the Web-give six measurements, and get jeans that fit perfectly delivered to her house within a few weeks. They cost $10 more, but most women will gladly pay that. So Park has created an inter-networked business that is radically different from the corporation as we have known it.

Entrepreneur: Doesn't this example also illustrate another key to the Digital Economy-the shift from a one-size-fits-all mass-production model to a system that provides consumers with personalized, individually tailored products and choices?

Tapscott: That's true. The term I use to describe this is "molecularization." In high school physics, we learned that a molecule is the smallest unit a substance can be divided into and still maintain the substance's original properties. Well, wherever in the old economy you heard the word "mass," in the Digital Economy you now substitute "molecular" because the individual is the Digital Economy's basic unit of wealth creation.

For instance, mass marketing becomes molecular marketing-that's why AT&T is now seeking to segment the marketplace into markets of one, so every AT&T customer can be treated differently. Mass media become molecular media, where I can get "Don Tapscott's Customer Newspaper" via the Web. Before there were a small number of TV channels; now there are millions of Web sites and they are the new broadcasters. But they are molecular, not broad, and the viewer becomes the user.

Throughout the business world, companies are facing a molecular economy-but many of them haven't figured this out yet.

Entrepreneur: As a business moves into the Digital Economy, will its customers follow?

Tapscott: One thing we're learning in the Digital Economy is that the customers you had in the old economy aren't necessarily the customers you will have in the Digital Economy. Encyclopedia Brittanica learned that. They were No. 1 for 217 years; last year, they fell to third place, with Microsoft's Encarta [an encyclopedia on CD-ROM] in first place.

And now almost nobody is buying printed encyclopedias because [CD-ROM encyclopedias] come bundled for free with new computers. To compete, Brittanica had to change its product from a book to a subscription service on the Web that provides links to other information sites. The product is being reinvented as a value-added digital directory of human information. In the process, Brittanica has shifted from selling to individuals to selling to institutions-many universities have signed up to give their students unlimited access to the Brittanica Web site.

So, to prosper in the Digital Economy, Brittanica has changed its product, its distribution channel and its customers. Many other businesses will have to do likewise.

Entrepreneur: "Disintermediation" is one of your main themes. Does this concept boil down to a prediction that middlemen will vanish from the business landscape?

Tapscott: If you are an agent, broker or retailer, it's time to do some serious strategizing about the future because you will be disintermediated unless you find new ways to create value for consumers. When we can go online and buy our groceries and household staples, and the system remembers our usual order or allows us to do quick, customized searches-say, low-fat dinners under 300 calories-what's the role of a traditional, bricks-and-mortar food wholesaler or retailer?

But every day I see examples of businesses that have figured out how to provide the services needed in the Digital Economy. For instance, I recently sold my house, and I chose not to disintermediate the real estate agent because she created new value for me, based on the 'Net. She came in with a digital camera, photographed the house and put the photos online. That made what she did for me valuable, and I paid for the service. Many other businesses must now do the same; that is, they must reintermediate themselves by creating new value between the producers and consumers.

Entrepreneur: You argue that in the Digital Economy, a corporation's value is less a function of its capital than of its knowledge and its capacity to learn and innovate.

Tapscott: The key assets have become intellectual assets. Look at Microsoft-do you ask how many office buildings it owns? You don't even ask how much capital it has. In the Digital Economy, the main assets are contained in the heads of the people who work for the company.

At Microsoft, by the way, when you join the company's product planning division, you get a card that reads "Obsolete our own products." That's Microsoft's goal-to make what it sells today obsolete. Compare that with the cliché of the old economy-"If it ain't broke, don't fix it." To me, the theme of the Digital Economy should be "If it ain't broke, break it before your competition does," because innovation is what's driving this economy.

Entrepreneur: Is that why you say a big theme in the Digital Economy is immediacy?

Tapscott: The fact is, product life cycles are collapsing, and time to market is shrinking. In 1990, it took six years to go from concept to production of an automobile; now it takes just two years. Remember when it took weeks to get eyeglasses? Now it takes under an hour.

The new enterprise needs to be a real-time business, making adjustments now to changes in market conditions and consumer needs. Wait, and by the time you get to market, it will be too late. Conditions will have changed, and customers will be demanding new and different products. This is an environment that favors small, agile businesses that can respond quickly to the marketplace.

Entrepreneur: Will the Digital Economy affect all businesses? When you stand before a group of CEOs and say, as you do in your book, that every industry will be unrecognizable in a decade, do they believe you?

Tapscott: More and more CEOs believe me. Yes, new paradigms are often received with mockery and hostility. Ten years ago when I talked about this stuff, I was received with coolness by many. Not now. Everybody knows big, big changes are coming. Often at my speeches, you can literally hear a pin drop because the audience is really worried. People wonder about the future of their industries, their companies, their jobs.

It's not just businesses that need to change-each of us needs to change, too. In a knowledge-based economy, work and learning become the same thing. In the old economy, there was a period when you learned; then that stopped, and you worked for 40 or 50 years. That's not how it goes in the Digital Economy, where added value is created primarily by brains, not brawn.

Adding ideas to existing services and products and turning new ideas into new products and services are the ways wealth is now created. Today, we need to keep changing our whole knowledge base-as individuals, as companies. That's how to prosper in the Digital Economy.