The E Business Environment

The E-Business Environment Professor Feng Li The Business School University of Newcastle upon Tyne E-Mail: Feng.li@ncl.ac.uk © Feng Li, 2006 1 The New Business Environment?              New global political & economic order Wars on terrorism Demographic changes (aging) and education The opening & development of new markets Offshoring and outsourcing Globalization & localization New pressure on public sector organizations European integration and enlargement Lowering of trade barriers (e.g. WTO, EU, APEC) Environmental concerns The ‘ICTs Revolution’ and the information economy Internet and e-business Others © Feng Li, 2006 2 The Driving Forces?  The ‘ICTs Revolution’ and information economy  The Internet and Revolution in Interaction    The new digital, network economy & E-business Government initiatives? Others? © Feng Li, 2006 3 The ‘ICTs Revolution’     Rapid cost reduction (30-40% per year for telecom; 12% for 1987-94, 26% for 95-99) Rapid increase in power and capacity (Moore’s law) Convergence between computers, telecoms & media Pervasive proliferation of ICTs in all sectors (8.3% of US economy but contribute over 30% economic growth since 1995)      Heavy investment by private & public sectors $243bn/1995 to $510bn/1999) (In US Rapid development in infrastructure & services Governmental initiatives Explosive growth of the Internet (304million in 2000, 80% increase from 1999 – well over 1billion users now) Others © Feng Li, 2006 4 The Information Economy    Information, both as commodity and resource, become 'strategic resource' Information content in all economic activities Information labour as a proportion of the overall workforce © Feng Li, 2006 5 Information Economy     In 1967, 46% of US GNP from information activities, 50% of labour force as information workers earning 53% of labor income, grown to 62% in 1994 1981 UK, 45.2% workforce (58% in greater London) By early 1980s in OECD, 40-50% of workforce in information occupations. 60%+ today … ‘We are indeed in a new economy – an economy driven by information, research, knowledge and technology.’ © Feng Li, 2006 6 Number of People Online … global Number of People Online Mar-99 (in Millions) Mar-00 Level increase Percent Increase Africa Asia/Pacific Europe Middle East Canada & US South America 1.1 27.0 40.1 0.9 97.0 5.3 2.6 68.9 83.4 1.9 136.9 10.7 © Feng Li, 2006 1.5 41.9 43.3 1.0 39.9 5.4 136 155 108 111 41 102 7 The New Economy?        The productivity paradox – ‘you can see computer age everywhere but in productivity statistics’ The new economy arrived in the late 1990s in US according to Mckinsey & Economic Report of the President 2001 etc. Labour productivity increased from 1.4% (73-94) to 2.4% (95-99) … 2.9% in 2000, 1.1% in 2001 and 4.8% in 2002 IT is of great, but nor primary importance (?) New economy emerged from business competition and managerial innovations Farrell, D (2003) The real new economy. Harvard Business Review. Oct 2003, pp 105-112 Adams, F Gerard (2004) The E-Business Revolution and the New Economy. Thomson, Mason (Ohio) © Feng Li, 2006 8 Intangible Assets       The total value of a company compare with the value of its tangible asset (e-Bay is worth more than McDonald’s; Microsoft worth more than the 3 car manufacturers put together) Employee’s skills, IT systems and organisational culture and company brands etc are worth far more to many companies than their tangible asset Intangibles are hard for competitors to imitate – sustainable advantage ? Intangible asset worth different things to different people and organisations BUT - Many existing management theories and techniques geared toward managing tangible assets … Robert S Kaplan & David Norton (2004) Strategic Map. Harvard Business School Press, Boston (also their earlier book on ‘Balanced Scorecard’; also HBR papers) © Feng Li, 2006 9 ‘IT doesn’t matter?’         IT as infrastructural technologies – others call it utility Companies can benefit from it by having superior insight than competitors, but advantages will not last forever Commoditization of IT means most cutting edge IT capabilities quickly become available to all The Internet has enabled universal access New rules of IT Management – spend less; follow but don’t lead; and focus on vulnerabilities not opportunities Criticisms everywhere … (check out) *** Carr, Nicholar (2003) IT Doesn’t Matter. Harvard Business Review May 2003: 41-49 Book in 2004 - Does IT Matter? © Feng Li, 2006 10 General Implications      All industries became information-intensive Accurate & adequate information crucial to success of industrial & commercial operations Fast growing ICTs & information industries Profound impacts of on what activities are located where, how territories administered or markets served, linkages maintained between customers and suppliers etc. Need for Strategic and organisational Innovations! © Feng Li, 2006 11 New perspectives      Zuboff & Maxmin – Chasm between individuals and organisations: People have changed more than the commercial organisations upon which they depend. And here is the new opportunity …. New economic order (p8) The chasm … is not limited to the business world… citizens and their public institutions, … worshopers and their religious institutions. (p9) Corporations today continue to operate according to a logic invented one century ago New logic needed – a new support economy based on new distributed capitalism – critical role for electronic communications (ICTs)! © Feng Li, 2006 12 New perspectives … 2        Prahalad & Ramaswamy – Co-Creating unique value with customers From company-centric & customer-centric logic to network centric logic Traditional notions of value creation no longer sustainable ‘… joint efforts of the consumer and the firm – the firm’s extended network and consumer communities together – are co-creating value through personalized experience that are unique to each individual consumer.’ (p.x) Connected, informed and active consumers – information access; global view; networking/communities; and experimentation Interaction as basis for co-creation is at the crux of emerging reality From products to solutions to experiences - The new experience economy © Feng Li, 2006 13 The Internet and ‘A Revolution in Interaction’  Individuals & organisations interact to:    Find the right party with which to exchange, Arrange, manage & integrate activities associated with the exchange Monitor Performance    Interactions happen within & between firms - all the way to end consumers Examples - management meetings, conferences, phone conversations, sales calls, problem solving, reports, memos etc. Purpose is to enable the exchange of goods, services and ideas © Feng Li, 2006 14 Share of Interactive Activities Country USA Germany India Interactive activities 51% 46% 36% Non-interactive activities 49% 54% 64% Source: Butler, P et al (1997) 'A revolution in interaction' in McKinsey Quarterly, No 1, 1997, available at Http://www.mckinsey.com/pub/pubmain.html © Feng Li, 2006 15 Transaction Costs    Cash transaction costs alone account for over half of all non-governmental GDP ‘We spend more money negotiating and enforcing transactions than we do fulfilling them. (p103)’ Evans, Philip & Bob Wolf (2005) Collaboration rule. Harvard Business Review, July-August, 96-105 © Feng Li, 2006 16 How Interaction Shapes Organisations    When setting boundaries & choosing focus, firms trade off the value of specialisation with the interaction costs associated with external suppliers Transformation costs of production & delivery Interaction costs of arranging & coordinating exchanges © Feng Li, 2006 17 Typically    Interaction costs are lower within the firm Production costs are lower for specialist outside suppliers The structure of firm and industry at a give time is designed to minimise the total costs of transformation & interaction - the boundary between firms & markets © Feng Li, 2006 18 McKinsey Predict:      Interactive capacity increase 2-5 folds in 5-10 years Rate of data transmission increased four folds in past 10 years - will increase 45 folds in next 10 years!!! Efficiency of data gathering could increase by a factor of at least 3; written & oral communication by 2; group problem solving interactions by 1.5 Straight forward searches can be conducted in a fraction of the time they currently take If current technology broadly applied, economic capacity to search increase 10+ folds; capacity to coordinate & monitor grow by a factor of 2-10!!! © Feng Li, 2006 19 Potential impacts      Organisations - structures and boundaries - alternative configurations Customers - extra costs of search & marginal gains (perfect market?) Outsourcing and offshoring Emerging forms of organisations and changing nature of firms and market ‘Deconstruction of integrated organisations’ as one way to respond to revolution in interaction © Feng Li, 2006 20 The Networked Economy     Wealth come directly from innovation – not optimisation Ideal environment for cultivating the unknown is by nurturing the supreme agility & nimbleness of networks Embrace the unknown means abandon the highly successful known The cycle of ‘find, nurture and destroy’ happens faster and more intense than ever before (perfecting the known vs. imperfectly seizing the unknown) © Feng Li, 2006 21 12 New Rules for the New Economy (1)       The Law of Connection - Embrace Dumb Power more than the sum of separate parts; dumb parts connected properly yields smart results) (the whole is The Law of Plentitude – More gives more scarcity; things become devalued when things were made plentiful – Standard) (Versus value come from The Law of Exponential Value – Success is non-linear The Law of Tipping Point – Significance precedes momentum (the lowering of tipping points) The Law of Increasing Returns – Make virtuous circles (more than economies of scale – exponential growth) The Law of Inverse Pricing – Anticipate the Cheap (innovate faster than they are commoditized) © Feng Li, 2006 22 12 New Rules for the New Economy (2)       The Law of Generosity – Follow the Free The Law of the Allegiance – Feed the web first The Law of Devolution – Let go at the top The Law of Displacement – The net wins (info) The Law of Churn – Seek sustainable disequilibrium The Law of Inefficiencies – Don’t solve problems (do the job better versus do the right job) © Feng Li, 2006 23 Organizational Innovations through ICTs    Organizations can and should be organized and managed in fundamentally different ways New rules of game (Sword Vs. Machine gun) Need for a new generation of organizational & management theories for the new economy © Feng Li, 2006 24 The future of the new economy?   Peter Schwartz – 4 scenarios (http://www.gbn.org/public/gbnstory/scena rios/columns/june2000column.htm) S1 – The new economy   S2 – Incremental scenario  A world of winners, lots of new players; incumbents fall   S3 – The illusion   Modest transformation, incumbents recover and mostly win Some old winners and very few new winners Everyone is a loser – crash and burn S4 – Crash © Feng Li, 2006 25 S1 – the New economy     Fundamentally it is about the reorganisation of the economy into new ways of working and living Future is much richer driven by new knowledge Enormous potential We had that before – beginning of the 20th century: electricity, phone, railway, cars, steam power … © Feng Li, 2006 26 S2 – Incremental transformation     Something new is happening but it is going to take a long time to establish Old players and the old rules will slow things down In the transition period – many big old companies are likely to make the transition successfully into the new economy E.g. a company with physical presence and a physical brand is probably able to make the transition cheaper, better and faster than one starting from scratch (toys’R’us versus e-Toys) © Feng Li, 2006 27 S3 – New economy as an illusion    The potential is just an illusion Most productivity gain is focused on the IT industry itself – Robert Gordon of Northwestern University By getting IT to knowledge workers, we are working longer and harder, not more productively – Steve Roach of Morgan Stanley Productivity of services ?? © Feng Li, 2006  28 S4 – Crash and burn     The new economy is just a hype So are most of the new technologies No gain in productivity and stock market tumbling down Bring down the world economy and the average consumers © Feng Li, 2006 29 Implications of the scenarios      Telecom infrastructure makes sense in all scenarios (cisco, lucent, nortel, nokia etc) New economy – Internet investments (Amazon, eBay etc) Incremental – old brands that can exploit the new world – Mototola, Wal-mart etc Illusion – buy old blue chips (DuPont, P&G, Ford etc) Crash – get out of the stock market quickly; cash and bonds will be king © Feng Li, 2006 30 Peter Schwartz’s bet?    The safest bet – the incremental scenario: be ready for the new economy or the illusion and hedge against crash Available evidence weigh more towards the new economy, and he is prepared to bet on it – but watch to make sure it isn’t just an incremental scenario (many old names coming back with the help of the Internet). Another article in 2002 http://www.gbn.org/public/gbnstory/articl es/ex_nextdecade.htm © Feng Li, 2006 31 Questions     Is there a new business environment? Key processes - Driving forces and facilitating factors New rules of the game? Implications for organisations strategies, business models and organisational innovations © Feng Li, 2006 32 What is e-Business? How the Internet Transforms Organisations    Chapter 3. The ‘ICTs Revolution’ and the Information Economy Chapter 4. The Network Economy: New Rules of the Game Chapter 5. How the Internet Redefines Organisational Boundaries: A Transaction Cost Analysis © Feng Li, 2006 33 Suggested Reading:       Burtler, P, Ted W Hall, A M Hanna, L Mendonca, B Auguste, J Manyika and A Sahay (1997) 'A revolution in interaction' The McKinsey Quarterly, 1997 No.1: 4-23 Kelly, Kevin (1997) New Rules for the New Economy: Twelve dependable principles for thriving in the turbulent world, Wired, September 1997, pp140-197, http://www.wired.com/wired/archive/5.09/newrules.html (also book in 1999) Schewartz, Peter (2000) The future of the new economy, http://www.gbn.org/public/gbnstory/scenarios/columns/june2 000column.htm Surowiecki, James (2002) The New Economy Was a Myth, Right? Wrong! Wired. Issue 10.07 - Jul 2002 http://www.wired.com/wired/archive/10.07/Myth.html Martin, R L & M C. Moldoveanu (2003) Capital versus Talent: The battle that’s shaping business. Harvard Business Review July 2003: 36-41 Evans, Philip & Bob Wolf (2005) Collaboration rule. Harvard Business Review, July-August, 96-105 © Feng Li, 2006 34 Reading … continued        Carr, Nicholar (2003) IT Doesn’t Matter. Harvard Business Review May 2003: 41-49 (also check out responses in following issues and elsewhere on the Internet) Farrell, D (2003) The real new economy. Harvard Business Review Oct 2003 Adams, F Gerard (2004) The E-Business Revolution and the New Economy. Thomson, Mason (Ohio) Peter Schwartz (2003) Inevitable Surprises: Thinking Ahead in a Time of Turbulence. http://www.gbn.org/ArticleDisplayServlet.srv?aid=14200 Robert S Kaplan & David Norton (2004) Strategic Map. Harvard Business School Press, Boston (also their earlier book on ‘Balanced Scorecard’) Zuboff, Shoshana & James Maxin (2004) The Support Economy. Allen Lane, London Prahalad, C K & Venkat Ramaswamy (2004) The Future of Competition. Harvard Business School Press, Boston © Feng Li, 2006 35