ACTA UNIVERSITATIS LODZIENSIS

FOLIA OECONOMICA 167, 2003

Jacek Unold

BASIC ASPECTS OF THE DIGITAL ECONOMY

E k o n o m ia cyfro w a c h a ra k te ryzu je się c y fry za c ją w ielu p r o -

d u k tó w i u słu g o ra z w yko rzysta n iem In te rn e tu i in n y c h siec i d o
kre o w a n ia d zia ła ln o śc i g o sp o d a rczej. W yra źn ie w ystęp u je z ja w i-
sk o tra n sfo rm a c ji tra d ycyjn eg o , fiz y c z n e g o ryn ku w stro n ę w irtu -
a ln e j p rz e str ze n i rynkow ej. K o n ku re n cja w tak o k reślo n y m ś r o d o -
w isku u leg a zn a czą cym zm ia n o m i za sa d n iczo w zm a g a się. W p ływ
e k o n o m ii c y fr o w e j na sp o só b p ro w a d ze n ia b izn esu u w id a czn ia się
n a trzech za sa d n ic zy c h p o zio m a c h : d o sk o n a le n ie m a rk e tin g u b e z -
p o śre d n ie g o , tra n sfo rm a c ja o rg a n iza c ji o ra z p r z e d e fin io w a n ie
p o d s ta w o w e j d zia ła ln o śc i o rg a n iza cji.

The d ig ita l e c o n o m y is c h a ra c te riz e d b y tlie d ig ita tio n s o f m a n y

p ro d u c t a n d se rv ic e s a n d th e u se o f the In te rn et a n d o th e r n e t-
w o rks to su p p o rt e c o n o m ic a c tivities. T he tra d itio n a l m a rk e tp la c e
sh ifts to a v irtu a l m a rketsp a ce. C o m p etitio n in su ch an e n v ir o n -
m e n t is very in ten se a n d m a jo r c h a n g e s occur. Tlie im p a ct o f
d ig ita l e c o n o m y on b u sin e ss ca n b e id e n tifie d a t th ree b a sic levels:
im p ro vin g d ir e c t m a rketin g , tra n sfo rm in g o rg a n iza tio n s, a n d re -
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 move to
an Internet-based society. Some o f the changes are already here, and they are
spreading around the globe, others are just beginning. One 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, mostly 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-
nomy on business.

The notion o f digital econom y

The digital econom y, also known as the Internet econom y, new econom y, or
the Web economy, refers to the economy that is based in a large part on digital
technologies, including digital com m unications networks (Internet, intranets,
etc.), com puters, software, 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 following com ponents:
- A wide area o f products made 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 software - that are delivered over the digital in-
frastructure anytim e, anyw here in the world in the 24/7 mode.
- Consum ers and firms conduct financial transactions digitally through digital
currencies or financial tokens dow nloaded and carried on sm art cards via
networked com puters and m obile devices.
- Physical goods such as hom e appliances and autom obiles are em bedded
with m icroprocessors and networking capabilities (Choi and W hinston
2000).

Basic advantages o f digital econom y

According 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 unprece-
dented econom ic growth and the longest period o f uninterrupted econom ic ex -
pansion in history. Even the recent slow down in this up-trend does not rule it
out.
Inform ation technology industries have been growing at more 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 investment. In
the late 1990s, IT ’s share rose to 45% each year.
In 1999, over 8.5 million people worked in the IT sector and in IT-related
jobs in the US workforce. 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 software and services industries were the highest wage
earners. Salaries have been growing 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 job s in the US in Decem ber
1999, up 36% during the year. In Silicon Valley, unem ploym ent is the lowest 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 following 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 economy.
- W eb-based IT end e-com m erce are the facilitators o f survival by providing
com panies a com petitive advantage.
- Global competition is not just about price and quality; it is also about service.
- An extensive networked 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
just 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

The developm ents in econom ics described above has brought about a new
reality, som etim es referred to as W ebonomics, or Web econom y (Schwartz
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 market transactions,
- providing an institutional infrastructure that enables the efficient functio-
ning o f the market.
In recent years, the markets 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 marketspa-
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 lower 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. There 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, software),
— sym bols, tokens, and concepts (tickets, reservations, financial instru-
ments).
 — 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 worldwide 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.
- Intermediaries. 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 some infrastructure services,
and help the parties to institute and com plete transactions. M ost o f the in-
term ediaries are com puterized systems, referred to as e-interm ediaries,
or infomediaries.
- Support services. These services are created in order to address im plem en-
tation issues, and they range from certification and trust services, which en-
sure security, to knowledge providers.
- Infrastructure companies. Many com panies provide both the hardware and
software 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.
- Content 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 marketplaces. The major 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 is m s that can be used in e-m arketplaces.
The m ost com m on and important are electronic auctions.

The nature o f com petition in the digital ecosystem

The model 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 economy. Like an ecosystem in nature, activity in the
digital econom y is self-organizing. The process o f natural selection takes place
around com pany profits and value to custom ers. The 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,
- lower prices,
- custom er service,
- insignificant role o f the distance from the custom er,
- easy removal o f language barriers,
- lack o f normal wear and tear o f digital products (Choi and W inston 2000,
Turban 2002, Unold 2001).
M .E.Porter (2001) introduced a com petitive advantage model, which identi-
fies five major 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. The impact 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 power
over suppliers, though it can also give suppliers access to more custom ers.
A negative determ inant in the same 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 between online and offline com panies but
also am ong the online newcomers. According 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
2000- 2001 .
 The im pact o f digital econom y on business

According to Bloch and Segev (1996), the impact o f digital economy on

business can be divided into three major categories:
- im proving direct marketing,
- transform ing organizations,
- redefining organizations.
There are num erous impacts 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, markets, redu-
ced cycle time. As an example, 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%.
Transforming organizations is based on the premise 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 same time, the nature o f work itself has to be transform ed. Digital eco-
nomy workers 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’ missions 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 economy affects entire industries. This
leads to the use o f new business models that are based on the wide availability o f
inform ation, for exam ple, electronic intermediaries.
O ther im pacts include the influence on m anufacturing, on finance and ac-
counting, and on human resource managem 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 example, Cisco System works
with 34 plants globally, 32 o f which are owned by other com panies (Cisco
2001).
The widespread adoption o f wireless and m obile networks, devices, and
m iddle-ware 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-commerce, m-business, and pervasive com puting. The num ber o f mobile
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:
- widespread 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 bandwidth,
- 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 networks 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. The 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 impacted by the digital econom y. Direct m ar-
keting and one-to-one m arketing are becoming a norm. Also, mass custom iza-
tion and personalization a^e becom ing more and more com m on. Production is
shifting to a pull model, changing the supply chain relationship. Cycle time is
reduced, financial planning and budgeting are outsourced, and human resource
managem ent has to take into account the huge IT/human gap.
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