ACTA U N IVERSITATIS LODZIENSIS
FOLIA OECONOMICA 167, 2003
Jacek Unold
BASIC ASPECTS OF THE DIGITAL ECONOMY
E k o n o m ia c y fr o w a c h a ra k te ry zu je s ię c y fr y z a c ją w ielu p r o -d u k tó w i u słu g o r a z w y k o rzy s ta n ie m In te rn e tu i in n y c h s ie c i -d o k r e o w a n ia d z ia ła ln o ś c i g o sp o d a r c ze j. W y ra źn ie w y stę p u je z ja w i-s k o tr a n i-s fo r m a c ji tra d y c y jn e g o , fiz y c z n e g o ry n k u w s tr o n ę w ir tu a ln e j p r z e s tr z e n i ryn ko w ej. K o n k u re n c ja w ta k o k re ś lo n y m ś r o d o -w isku u le g a z n a c z ą c y m zm ia n o m i za s a d n ic zo -w zm a g a się. W p ły-w e k o n o m ii c y fr o w e j n a s p o s ó b p r o w a d z e n ia b iz n e su u w id a c zn ia s ię n a tr ze c h z a s a d n ic z y c h p o z io m a c h : d o s k o n a le n ie m a r k e tin g u b e z -p o ś r e d n ie g o , tr a n sfo r m a c ja o r g a n iz a c ji o r a z -p r z e d e fin io w a n ie p o d s ta w o w e j d z ia ła ln o ś c i o rg a n iza c ji.
T he d ig ita l e c o n o m y is c h a r a c te r iz e d b y tlie d ig ita tio n s o f m a n y p r o d u c t a n d s e r v ic e s a n d th e u se o f the In te rn e t a n d o th e r n e t-w o rk s to s u p p o r t e c o n o m ic a c tiv itie s. T h e tr a d itio n a l m a r k e tp la c e s h ifts to a v ir tu a l m a rk e ts p a c e . C o m p e titio n in su c h an e n v ir o n -m e n t is v e ry in te n se a n d -m a jo r c h a n g e s o ccu r. Tlie i-m p a c t o f d ig ita l e c o n o m y on b u s in e s s ca n b e id e n tifie d a t th re e b a s ic le v e ls: im p ro v in g d ir e c t m a rk e tin g , tr a n sfo r m in g o rg a n iza tio n s, a n d r e -d e fin in g o rg a n iza tio n s.
Introduction
One o f the most significant changes that we experience today is the m ove to an Internet-based society. Some o f the changes are already here, and they are spreading around the globe, others are ju st beginning. O ne o f the most signifi-cant changes is in the m anner we conduct business, especially in how we m an-age the m arketplaces and com m erce. Electronic com m erce (e-com m erce) refers to the way in which transactions take place over networks, m ostly the Internet. E-com m erce facilitates the growth and dynam ic developm ent o f the digital econom y, taking place in the digital ecosystem .
The article analyzes the basic aspects o f the digital econom y, defining the notion o f this im portant phenom enon and its basic advantages, describing the universal shift from a m arketplace to the m arketspace, referring to the nature o f
com petition in this new environm ent, and the overall impact o f the digital eco-nom y on business.
T he notion o f digital econom y
The digital econom y, also known as the Internet econom y, new econom y, or the Web econom y, refers to the econom y that is based in a large part on digital technologies, including digital com m unications netw orks (Internet, intranets, etc.), com puters, softw are, and other related inform ation technologies (Turban et al. 2002, p.45). In other words, the term digital econom y refers to the conver-gence o f com puting and com m unication technologies through the Internet and the resulting flow o f inform ation and technology that is stim ulating e-com m erce and spurring vast organizational changes.
Digital netw orking and com m unication infrastructures provide a global platform to interact, com m unicate, collaborate and search for inform ation. This unique platform includes the follow ing com ponents:
- A wide area o f products m ade o f digital bits - databases, news and infor-mation, books, m agazines, TV and radio program m ing, movies, electronic gam es, m usical CDs, and softw are - that are delivered over the digital in-frastructure anytim e, anyw here in the world in the 24/7 mode.
- C onsum ers and firms conduct financial transactions digitally through digital currencies or financial tokens dow nloaded and carried on sm art cards via netw orked com puters and m obile devices.
- Physical goods such as hom e appliances and autom obiles are em bedded with m icroprocessors and netw orking capabilities (Choi and W hinston
2000).
Basic advantages o f digital econom y
A ccording to a report issued by one o f the governm ental agencies in the United States (Em erging, 2002), the digital econom y has created an econom ic revolution, which is evidenced, as o f today particularly in the US, by unprecedented econom ic grow th and the longest period o f uninterrupted econom ic ex -pansion in history. Even the recent slow dow n in this up-trend does not rule it out.
Inform ation technology industries have been grow ing at m ore than double the rate o f the overall econom y, reaching close to 9% o f G D P in 2000, up from 4.9% in 1985. IT industries by them selves have driven on average over one- quarter o f total real econom ic growth in the years 1966-2000.
W ithout IT, overall inflation would have been 3.1% in 1997, more than a full percentage point higher that the 2.0% that it was. C om panies throughout the econom y are betting on IT to boost productivity. In the 1960s, business spending in IT equipm ent represented only 3% o f total business equipm ent investm ent. In the late 1990s, IT ’s share rose to 45% each year.
In 1999, over 8.5 million people w orked in the IT sector and in IT-related jobs in the US w orkforce. These workers earned about $49,000 per year, com
pa-red to an average o f $29,000 for the private sector as a whole. At alm ost $60,000 per year, workers in the softw are and services industries were the highest wage earners. Salaries have been grow ing at a rate o f 6.6% per year, versus 3.8% for total private sector em ploym ent.
There were nearly 2.5 million Internet-related jo b s in the US in D ecem ber 1999, up 36% during the year. In Silicon Valley, unem ploym ent is the low est in the world, frequently at a negative 3 to 5 percent (more jobs than em ployees).
These figures confirm that we are indeed experiencing a digital revolution. They also illustrate the follow ing points (Turban et al. 2002, p.44):
- It is som etim es necessary to com pletely change business m odels and strate-gies to succeed in the digital econom y.
- W eb-based IT end e-com m erce are the facilitators o f survival by providing com panies a com petitive advantage.
- Global com petition is not just about price and quality; it is also about service. - An extensive netw orked com puting infrastructure is necessary to support
a large global system. This may be very costly, as is the cost o f building the e-com m erce applications.
- W eb-based applications are used to provide superb custom er service, not ju st sales or procurem ent support.
As a result, W eb-based e-com m erce opportunities are now attracting universal attention in the executive world. The num ber one benefit o f Web- based system s is enhancing com petitiveness or creating strategic advantage (Le-derer et al. 1998).
M arketspace as a digital ccosystem
T he developm ents in econom ics described above has brought about a new reality, som etim es referred to as W ebonom ics, or Web econom y (Schw artz 1997). In a nutshell, W ebonom ics am ounts to new econom ic rules, new form s o f currency, and new consum er behavior.
One o f the most im portant aspects o f this phenom enon is the changing eco-nomic role o f markets. M arkets have three main functions:
- m atching buyers and sellers,
- facilitating the exchange o f inform ation, goods, services, and paym ents as-sociated with m arket transactions,
- providing an institutional infrastructure that enables the efficient functio-ning o f the market.
In recent years, the m arkets have seen a dram atic increase in the role o f IT and e-com m erce. The em ergence o f electronic m arketplaces, called m arketspa-
ces, especially Internet-based m arketspaces, changed several o f the processes
used in trading and in supply chains. These changes, which were driven by 1Г, resulted in even greater econom ic efficiencies and low er transaction and distri-bution costs, leading to more efficient, “friction-free” markets. The process ot doing business in the virtual world is com pletely different from the real world because instead o f processing raw m aterials and distributing them , e-com m erce involves gathering, selecting, synthesizing, and distributing inform ation (Ray- port and Sviokla 1994). Therefore, the econom ics of e-com m erce, starting with supply and dem and and ending with pricing and com petition, are com pletely different from traditional econom ic models.
Sim ilar to a m arketplace, in the m arketspace the parties exchange goods and services for money (or they barter them), but they do it electronically. I lie m ajor com ponents and players of a m arketspace are (Turban et al. 2002):
- Digital products. T here is a wide range o f products that can be digitized. Basically there are three groups o f them:
— inform ation and entertainm ent products (paper-based docum ents, pro-duct inform ation, graphics, photographs, audio and video, softw are), — sym bols, tokens, and concepts (tickets, reservations, financial
— processes and services (governm ent services, electronic messaging, business-value-creation processes, auctions, bartering, distant learning, entertainm ent).
- Consumers. Although there are tens o f millions o f people w orldw ide that surf the Web, and they are potential buyers, 85% o f e-com m erce activities are perform ed by organizations.
- Sellers. There are hundreds o f thousands o f storefronts on the W eb, adverti-sing and offering millions of items.
- Interm ediaries. The role o f all kinds o f interm ediaries on the W eb is diffe-rent from that o f regular interm ediaries. They create and m anage the online market, help match buyers and sellers, provide som e infrastructure services, and help the parties to institute and com plete transactions. M ost o f the in-term ediaries are com puterized system s, referred to as e-inin-term ediaries, or infom ediaries.
- Support services. These services are created in order to address im plem tation issues, and they range from certification and trust services, which en-sure security, to know ledge providers.
- Infrastructure companies. M any com panies provide both the hardw are and softw are necessary to support e-com m erce and consulting services on how to set up a store on the Web. O ther com panies o tter hosting services for small sellers.
- C ontent creators. The quality o f W eb content is a main success factor in e-com m erce and there are hundreds o f m edia-type com panies that create and constantly update W eb pages and sites.
- Business partners. They operate additionally to buyers and sellers, mostly along the supply chain.
- Electronic m arketplaces. The m ajor types ot electronic m arketplaces inclu-de: exchanges (m any-to-m any), sell-side (one seller-m any buyers), and buy-
side (one buyer-m any sellers). E-m arketplaces can be public and private.
There are many m arket m e c h a n i s m s that can be used in e-m arketplaces.
The m ost com m on and important are electronic auctions.
T he nature o f com petition in the digital ecosystem
The m odel o f com petition in the digital ecosytem rem inds a web o f interre-lationships and not exactly the traditional, hierarchical, com m and-and-control model o f the industrial econom y. Like an ecosystem in nature, activity in the digital econom y is self-organizing. T he process o f natural selection takes place
around com pany profits and value to custom ers. T he new ideas and ways o f doing things can com e from anyw here at any time, and the old rules o f doing business no longer apply.
There are several reasons for which the com petition in the digital ecosystem is very intense:
- lower buyer’s cost, - speedy com parison,
- differentiation and personalization, - low er prices,
- custom er service,
- insignificant role o f the distance from the custom er, - easy removal o f language barriers,
- lack o f normal w ear and tear o f digital products (Choi and W inston 2000, Turban 2002, Unold 2001).
M .E .Porter (2001) introduced a com petitive advantage m odel, which identi-fies five m ajor forces o f com petition that determ ine the industry’s structural attractiveness:
- bargaining pow er o f suppliers, - rivalry am ong existing com petitors,
- bargaining pow er o f channels and o f end users, - threat o f substitute products or services, - barriers to entry.
The com bination o f these forces determ ines how the econom ic value cre-ated in an industry is divided am ong the key players. T he im pact o f the Internet on these forces is divided into either positive or negative for the industry. As an exam ple, a positive determ inant within the area o f bargaining pow er o f suppliers is the fact that procurem ent using the Internet tends to raise bargaining pow er over suppliers, though it can also give suppliers access to m ore custom ers. A negative determ inant in the sam e are is the fact that the Internet provides a channel for suppliers to reach end users, reducing the leverage o f intervening com panies.
In general, the com petition is not betw een online and offline com panies but also am ong the online new com ers. A ccording to Turban et al. (2002, p.52), this com petition which is especially strong in com m odity-type products (toys, books, CDs), was a m ajor contributor to the collapse o f many dotcom com panies in
The im pact o f digital econom y on business
A ccording to Bloch and Segev (1996), the impact o f digital econom y on business can be divided into three m ajor categories:
- im proving direct m arketing, - transform ing organizations, - redefining organizations.
T here are num erous im pacts o f B2C direct m arketing, and they include: product prom otion, new sales channels, direct savings, custom er service, brand or corporate image, custom ization, advertising, ordering system s, m arkets, redu-ced cycle time. As an exam ple, the delivery o f digitized products and services can be reduced to seconds. Even the adm inistrative work related to physical delivery across international borders can be reduced significantly, cutting the cycle time by more than 90%.
Transform ing organizations is based on the prem ise that rapid progress in
digital econom y forces com panies to adapt quickly to the new technologies and offers them an opportunity to experim ent with new products, services and busi-ness models. People in organizations are forced to learn and adapt im m ediately, and this process o f adaptation is followed by strategic and structural changes. At the sam e time, the nature o f work itself has to be transform ed. Digital eco-nomy w orkers have to be very flexible and very few will have truly secure jobs in the traditional sense. M any will work from home.
T here are many potential changes that will redefine organizations. C om -pletely new products are created and existing ones are custom ized. Such changes redefine organizations’ m issions and the m anner they operate. M ass custom iza-tion enables m anufacturers to create specific products for each custom er. Using the W eb, custom ers can design or reconfigure products for them selves (T-shirts, furniture, jew elry, and even cars). Digital econom y affects entire industries. This leads to the use o f new business m odels that are based on the wide availability o f inform ation, for exam ple, electronic interm ediaries.
O ther im pacts include the influence on m anufacturing, on finance and ac-counting, and on hum an resource m anagem ent, training and education. An inte-resting concept is that o f virtual m anufacturing, which is the ability to run global plants as though they were one single plant. For exam ple, C isco System works with 34 plants globally, 32 o f which are ow ned by other com panies (Cisco
2001
).The w idespread adoption o f wireless and m obile netw orks, devices, and m iddle-w are creates an opportunity to use new applications online. The way of
conducting e-com m erce via wireless devices is referred to as m obile com m erce,
m -com m erce, m -business, a n d pervasive com puting. The num ber o f m obile
devices is projected to top 1.3 billion by 2004 (m obile.com m erce.net). The main characteristics o f m -com m erce are: mobility, broad reachability, ubiquity, convenience, localization o f products and services. Basic drivers o f m -com m erce include:
- w idespread availability o f devices, - no need for a PC,
- the handset is becom ing a culture, - vendor’s push,
- declining prices,
- im provem ent o f bandw idth, - the explosion o f e-com m erce,
- the digital divide (Turban et al. 2002, p.829).
The most representative applications o f m -com m erce include: online stock trading, online banking, m icropaym ents, online gam bling, ordering and service, online auctions, m essaging system s, B2B (m obile.com m erce.net).
Conclusions
The digital econom y is characterized by the digitization o f many products and services and by the use o f the Internet and other netw orks to support econo-mic activities. Such com puterization changes the m anner in which business is done and considerably im proves econom ic activities and com petition. T he main issues that are germ ane to m anagem ent include the introduction o f new business models, different rules in the are o f com petition, the issue o f organizational transform ation to the digital econom y, the changing role o f interm ediation (di-sinterm ediation and reinterm ediation), the process o f globalization o f each aspect o f business activity, organizational changes and new business alliances. Practically all functional areas are im pacted by the digital econom y. Direct m ar-keting and one-to-one m arar-keting are becom ing a norm. Also, mass custom iza-tion and personalizaiza-tion a^e becom ing more and more com m on. Produciza-tion is shifting to a pull model, changing the supply chain relationship. C ycle time is reduced, financial planning and budgeting are outsourced, and human resource m anagem ent has to take into account the huge IT/hum an gap.
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