Transforming Business Models in the Global Digital Economy: The Impact of the Internet
Dr. Valdas Šamonis, CPC
Web Professor of East-West Business and e-Merging Markets (SM)
The Center for European Integration Studies (ZEI), Bonn and Semi Online, Baltic IT Review 4 '2000
The author of this article looks at the global and digital e-conomy as a new paradigm for business, one which offers unprecedented opportunities to produce and to sell on a mass scale, to lower costs, and to customize operations for the needs of consumers – all at the same time. The global digital economy is transforming business models and is bringing new ways of doing things to recently independent countries such as Lithuania. Such countries must leap at the new opportunities which are being created, because they represent the best chance for the "latecomer’s advantage" – the ability to leapfrog straight to the technologies and ways of doing business which are presently new in the West, as well. The author suggests that Lithuania and the other Baltic States should implement "affirmative action" when it comes to ICT and the digital economy, especially when it comes to the sector of small and medium businesses. This will lead to global, not just European integration benefits.
In 1938, the great American economist and Nobel Prize laureate Ronald Coase famously asked, "Why do firms exist?" Why, indeed, can economic activity not be handled by what I would call "atomized" buy-sell transactions in a free global market – sort of a global exchange. Coase answered that such direct transactions are often difficult and/or costly for a variety of impediments – distance, a shortage of information, coordination costs, etc. It was useful and cost-reducing, therefore, to "internalize" transactions within companies. The "transaction cost" paradigm and model of business was born.
<big>The Internet revolution </big>
Then came the Internet – the network of computer networks and the greatest technological breakthrough since the invention of print by Johannes Gutenberg half a millennium ago. It was a true digital revolution. Today a consortium of American universities and high-tech firms are already working in "Internet 2" – a very rapid and powerful Internet which will become available commercially in a year or two. This is all happening against the background of so-called third-generation wireless technologies, which are radically widening access to all Internet applications. The impact of the Internet revolution, in short, is multifaceted, and it touches all of the spheres of human life today. But how does the Internet change business models under the framework of the new GDE (global digital economy) paradigm?
<big>The death of distance </big>
Geographic distance used to be very important in the world economy and in the gravitational models of international trade. Today we can say that distance is (almost) dead. Anyone on the Internet can work or do business with anyone else who is on the Web, and this usually happens at a fraction of the pre-Internet cost. This is particularly true in the service sector, but it is increasingly becoming true for the sector of goods, as well. This means a number of things:
• Anyone on the Internet is a global player by definition, and from the very start;
• Whether you’re in little Estonia or enormous China, the market is the same – it’s the whole planet;
• Anyone on the Internet faces not local, not domestic, not regional and not international – but truly global competition.
<big>The collapse of time </big>
The powerful interactivity which is being brought about by the Internet is fueling change. Companies must accept a strong culture of creative change, because in a world of instantaneous interactivity and connections, there is a big premium on fast responses, fast learning and fast adaptation to client needs.
<big>Undoing of the old paradigm </big>
ICT costs have dropped by a factor of 10 or more for large systems and a factor of 100 or more for smaller systems over the last 20 years [Westland and Clark, 1999]. Because ICT costs are representing an increasing share in the cost of producing modern goods and services, while costs related to distance coordination and other aspects of transactions have been declining, the old Coase transaction-cost paradigm is becoming less and less relevant. The world is moving toward atomized transactions which are carried out via linked electronic exchanges, and this process is more and more coming to resemble a global free market.
<big>Logistics and efficiency: Intermediaries replaced by "infomediaries" </big>
In the digital economy, buyers tend to deal directly with sellers, and traditional middlemen such as distributors and agents are being pushed out of the game. The economic process becomes more efficient. In the future this may mean that countries which are located at a geographic gateways – countries such as Lithuania – will be less and less able to use these "natural" advantages as a way of making money in international commerce. Because the body of information is growing very quickly, however, new opportunities are appearing, and new, non-geographical intermediaries (or "infomediaries") are becoming necessary to sort out the mass of information, to analyze it and to draw useful conclusions.
<big>The network effect on value, marketing and business development </big>
It used to be true that scarcity determined the value of goods and services. In the global digital economy, the network effect is replacing the principle of scarcity. The more ubiquitous or plentiful a product is, the more people want to have it. Microsoft Office is an example of this, because it establishes a platform or commonly accepted standard for widespread use. According to what is known as Metcalfe’s Law, a network’s value grows in square proportion to the number of participants in the network.
Underlying this process of value creation is the "viral marketing" which the Internet makes possible. First mover advantages are of great importance in the high-tech sector of the global digital market, and they are helping to strengthen the "creative destruction" of old technologies and ways of doing business. The network effect ad the first mover advantages, however, are also helping to create new barriers against entry, especially in the high-tech sector.
<big>The new nature of work, firms and comparative and competitive advantage </big>
The old "bricks and mortar alone" model of corporations has been dying out much more quickly than most people realize. In the global "digital village", individuals and very small businesses alike can go global.
At the professional level, this means fewer traditional "9-to-5" jobs and more contracting with free-agent skilled workers who are Web-based anywhere in the world. Competition in the goods and services markets has been brought up to new and higher levels.
"Developed" nations can no longer hide behind political barriers, physical or other walls to protect themselves from competition from "developing" nations. Rather than clinging to old models, individuals and corporations both in "developed" and, increasingly, in "developing" or "transitional" countries must upgrade their competitive advantage through more in the way of education and training. It is far more important to improve human capital than it is to upgrade physical capital such as buildings and machinery, or "natural" capital such as raw materials, geographic position, etc. New information and communications technologies, and especially the Internet (which is increasingly becoming wireless), are bringing about new opportunities to specialize and to increase trade and investment flows. If these gains are to be enjoyed, however, corporations themselves must undergo essential transformations. They must become less hierarchical, and above all they must focus far more on their core competencies, albeit seeing them dynamically (i.e., as ones which are constantly changing) and not statically. Companies must also rely less on the locally available "jack of all trades" workforce and more on the outsourcing (or "netsourcing") of jobs to contributors who can be Web-based anywhere in the world. These people may or may not be full-time employees, but in most cases they will have the necessary qualifications or more, they will be eager to learn, and they will offer greater flexibility. All of this will increase economic efficiency and create new competitive advantages.
<big>Technology and growth: Lessons from history </big>
The global economy, one which is now going digital, is subject to ebbs and flows which are known as long waves or Kondratieff waves (after a brilliant Russian economist who proved the existence of this process). These waves are about 50 years long, give or take five or ten years, and they are usually related to major technological breakthroughs. The last long wave started in the 1950s, spurred by the Western world’s emerging from the war with pent-up demand for goods, fuelled in particular by the Marshall Plan and other US aid, and underwritten, so to speak, by a new technological paradigm (automobiles, highways, television, space research, etc.).
What followed in the 1950s and 1960s was a period of sustained growth at an annual rate of around 4% globally, accompanied by an average inflation rate of 4% per annum – a very moderate figure by the yardstick of those times. It can be said that times were good in the 1950s and 1960s in the Western world.
Half a century later, we are once again seeing a new flow in the global economy, and this time it has been brought about by the ICT revolution, and the Internet revolution in particular. In terms of the potential impact on our lives of the Internet, it can surely be compared to electricity itself. Indeed, the Internet is eventually likely to become even more pervasive and to cover more aspects of our lives than electricity did.
In the shorter term, the effect of the Internet on the global economy can be compared to a positive shift in oil prices. The Internet is bringing down prices and slowing down inflation, and it is leading to higher economic growth. Higher oil prices have quite the opposite effect.
All of the world’s great technological revolutions – breakthroughs such as the steam engine, railways, electricity, etc. – have brought about overall productivity increases, as well as great benefits to humanity (although it has always tended to take longer for those benefits to kick in than most people expected). Today modern ICT, and especially the Internet, are helping to bring down business transaction costs by eliminating inefficient and/or unnecessary intermediaries, by using less in the way of human resources to learn about products and services offered in other countries, and by leading in many other ways to increased competition, improved information and better allocation of scarce resources. The Internet eliminates the need for very big companies of the sort which were once essential if business transactions were to be more efficient. Today anyone with a computer and good knowledge of the Internet can handle efficient transactions, replicating the benefits which the Coase theorem once lauded. "Small is beautiful" again – and in a big way this time. The individual entrepreneur, once so highly praised by another great economist, Josef Schumpeter, is back at the top of the hill; just watch the dot.com revolution.
All of this amounts to the aforementioned "creative destruction" of the old paradigms of the world economy, the old technologies and the old ways of doing business. This paradigm shift is increasing global competition and raising productivity and growth on the global scale.
In sum, we are experiencing a new, technology-driven upswing in the global economy, and there is no need to fear a major financial meltdown. I think that we will continue to see market corrections which are very much needed to tamp down the irrational exuberance which has existed in some equity markets. They will also help us to identify the high-tech winners of tomorrow, and at a much lower cost than has been the case in major recessions in the past.
<big>The global digital e-conomy: Lessons for Lithuania </big>
The global digital e-conomy is offering unprecedented opportunities to produce and sell on a mass scale, with lower costs and an ability to customize your work to the needs of consumers – all at the same time. Whether you’re in a large country like China or a smaller one like Lithuania, your potential market is of the same size, and you can outsource or netsource inexpensively whenever you need to do so. Added to that are immensely increased opportunities to access new knowledge and technologies – something which is driving up productivity and living standards even further.
Recently independent countries such as Lithuania are operating under a heavy burden – the remaining development-retarding effects of communism [Samonis 2000b]. These countries are well advised to leap at the new opportunities which are being created, because they represent the best chance for the "latecomer’s advantage" – the ability to leapfrog straight to the technologies and ways of doing business which are presently new in the West, as well. Lithuania should implement "affirmative action" when it comes to the ICT and digital economy, especially when it comes to the sector of small and medium businesses. This will lead to global, not just European integration benefits.
The important thing is that countries like Lithuania must engage not only in theoretical research, but also in analysis of the experience that is available from various business incubators, innovation centers and other aspects of business approaches, policies and strategies in countries such as Finland, the United States, Canada, etc. Case study insights must be gained on specific solutions which worked well or which failed. There is a need to learn from the comparative international experience that has already been gained, because that way a country can leapfrog across the very costly phase of experimentation.
Some suggestions and specific ways of going about this centennial or millennial task are presented in this paper, as well as in other writings by this author. Much more research is needed, however.