The E-Business Environment

1. 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

2. 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

3. 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

4. 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(In US $243bn/1995 to $510bn/1999) • 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

5. The Information Economy • Information, both as commodity and resource,become 'strategic resource' • Information content in all economic activities • Information labouras a proportion of the overall workforce © Feng Li, 2006

6. 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 informationoccupations. 60%+ today … • ‘We are indeed in a new economy – an economy driven by information, research, knowledge and technology.’ © Feng Li, 2006

7. Number of People Online (in Millions) Mar-99 Mar-00 Level increase Percent Increase Africa 1.1 2.6 1.5 136 Asia/Pacific 27.0 68.9 41.9 155 Europe 40.1 83.4 43.3 108 Middle East 0.9 1.9 1.0 111 Canada & US 97.0 136.9 39.9 41 South America 5.3 10.7 5.4 102 Number of People Online … global © Feng Li, 2006

8. 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

9. 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

10. ‘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

11. 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

12. 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

13. 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

14. 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

15. Country Interactive activities Non-interactive activities USA 51% 49% Germany 46% 54% India 36% 64% Share of Interactive Activities 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. The Networked Economy • Wealth come directly from innovation – not optimisation (perfecting the known vs. imperfectly seizing the unknown) • 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 © Feng Li, 2006

22. 12 New Rules for the New Economy(1) • The Law of Connection - Embrace Dumb Power (the whole is more than the sum of separate parts; dumb parts connected properly yields smart results) • The Law of Plentitude – More gives more (Versus value come from scarcity; things become devalued when things were made plentiful – Standard) • 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

23. 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 dis-equilibrium • The Law of Inefficiencies – Don’t solve problems (do the job better versus do the right job) © Feng Li, 2006

24. 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

25. The future of the new economy? • Peter Schwartz – 4 scenarios (http://www.gbn.org/public/gbnstory/scenarios/columns/june2000column.htm) • S1 – The new economy • A world of winners, lots of new players; incumbents fall • S2 – Incremental scenario • Modest transformation, incumbents recover and mostly win • S3 – The illusion • Some old winners and very few new winners • S4 – Crash • Everyone is a loser – crash and burn © Feng Li, 2006

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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/articles/ex_nextdecade.htm © Feng Li, 2006

32. 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

33. 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

34. 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/june2000column.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

35. 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