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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 The New Business Environment? New global political & economic order Wars on terrorism Demographic changes (aging) and education

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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

the new business environment
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

the driving forces
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

the icts revolution
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

the information economy
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

information economy
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

number of people online global

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

the new economy
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

intangible assets
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

it doesn t matter
‘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

general implications
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

new perspectives
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

new perspectives 2
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

the internet and a revolution in interaction
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

share of i nteractive a ctivities

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

transaction costs
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

how interaction shapes organisations
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

typically
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

mckinsey predict
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

potential impacts
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

the networked economy
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

12 new rules for the new economy 1
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

12 new rules for the new economy 2
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

organizational in novations through icts
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

the future of the new economy
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

s1 the new economy
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

s2 incremental transformation
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

s3 new economy as an illusion
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

s4 crash and burn
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

implications of the scenarios
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

peter schwartz s bet
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

questions
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

what is e business how the internet transforms organisations
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

suggested reading
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

reading continued
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