digital economy

How has the digital economy impacted business strategy?

Posted on Posted in IT Strategy

The Digital Economy – “is characterised by the use ICT’s to undertake business processes (e-business); effect transactions along the supply chain (e-commerce) and the coordination of entrepreneurial activities based on knowledge, innovation, and creativity.”

Technological advances have had an enormous impact on the business community as the means to produce/sell products, communicate with customers and stakeholders, and administering the business process. The most significant event driving this change was the development of the WWW in the mid-1990’s which allowed disjointed computer systems to link up on a global scale and ensured the commercial viability of the internet as a medium for communication. The internet and other ICT’s have played a key role in transforming business by providing the means to increase efficiency and speed/quality of delivering products and services to customers.

This has brought a significant change to the way companies compete and chooses strategies because business models have changed, markets have expanded, strategies adapted, the way companies collaborate has become more important, and consumer behavior is dissimilar. These and many other factors lead to the realization that the “game has changed” but a leader in strategic thought, Michael Porter, believes that these changes will have negative effects on businesses and industries and that we should not ignore the tried and tested strategies.

Porter’s opinions on e-business are that it is an, ‘enabling technology’ and that the Internet is not necessarily a blessing. Porter feels the internet tends to alter industry structures in ways that dampen overall profitability, and it has a leveling effect on business practices, reducing the ability of any company to set up an working advantage that can be sustained Porter (2001). There have been many academic writers who disagree with what Porter believes and that his views on strategy must be updated to more dynamic strategies. However, his strategies in the 1980’s are still relevant but they must be looked at differently because of all the major changes. Regardless, Porter feels it requires building on the proven principles of effective strategy.

Porters Positioning Approach is still relevant to e-business but this strategy has changed due to the dynamic nature of the internet, mobile technology, and other ICTs. Originally, the positioning approach composed of three generic strategies that were applicable to just about any business or industry but now these strategies have been adapted to conform to recent developments in ICT’s.

The generic strategy model was created to help firms overcome the constraints that emerge because of external environmental analysis. This model features strategies of cost leadership, differentiation, and focus.

Cost Leadership has changed because firms who were once able to rely on their ability to sell cheap products or services are now challenged by many new entrants. E-business and e-commerce, in particular, has made it so that newer companies can compete directly with established companies without many barriers. The strategic use ISS will help by affording companies a way to avoid overhead costs and transaction costs as well as being able to link or align business processes.

Differentiation is a strategy that derives its competitive advantage from being able to offer a different product or service to its rivals. Differentiation consists of many factors and this is an area that I feel any company should focus on. Building a reputation for having a unique product, service, and image is crucially important and this should be reflected in a company’s strategy. Differentiation has changed and since the inception of the digital economy, there are ways in which IS/IT have assisted companies to realize their strategic goals to meet customer requirements and check their perceptions as well as achieving faster delivery, improve quality control, and foster R&D. Marketing and marketing strategies, in general, have changed and businesses can cherry-pick customers and personalize services and products for its customer base.
The niche or focus strategy refers to a market segment which a firm specifically targets. This target market can be decided by focusing on different demographics such as race, age, location, interests, etc…The changes in this strategy since the digital economy emerged include the ability to identify target markets, get unique information on the target market, and distinguish products from general offers.

The Five-Forces strategy was an important tool for analyzing the central theme of relating average profits of industry competitors to the competitive forces affecting the industry. The forces include (1)existing or (2)potential rivals, the power of (3)suppliers or (4)customers, and the availability of (5)substitute products or services. Each of these forces has an influence on a firm’s ability to compete in the industry or analyze itself in an industry. The internet has presented a number of challenges and opportunities and of particular relevance is the rapidly changing business environment.

Michael Porter (1985) proposed the value chain model as a means of identifying those activities that form the basis of a firm’s strategy for achieving competitive advantage by driving down the costs or differentiating the product or service. The four key steps to value chain analysis are: define the strategic business unit under analysis, identify the key activities, define the products or services, find the value attached to each activity. The primary activities are logistics, operations, marketing, and sales and service and the support activities include the infrastructure, HR, technology, and procurement.
The emergence of the internet and e-business/e-commerce made the need for a new value chain model . Rayport & Sviokla developed the virtual value chain model that closely matched the activities of firms engaged in gathering, organizing, selecting, synthesizing and distributing information via electronic means. The physical value chain activities may include the actual distribution of the product to customers.The concept of the virtual value chain arose when firms built their business models around the internet for information gathering, storage, and use. A key distinction is where the physical value chain acts as a support mechanism, the virtual value chain has a strategic function which is clear in the digital economy when information is integrated with physical activities to create value-added products or services.

The RBV closely links the internal capabilities of firms. The RBV according to Robert Grant and others takes an organization’s resources and uses them as a foundation for its strategy. Firms are utilizing its resources to gain a competitive advantage as they attempt to outperform all of its competitors using rare or innovative technologies.
Dynamic Capabilities is a modified and more recent adaptation of the Resource-Based View that addressed the static nature of the RBV . Teece stated in an article in 2007, that dynamic capabilities can be harnessed to continuously create, extend, upgrade, and keep the enterprises unique asset base relevant. The dynamic capabilities model can be used to sense and shape opportunities and threats and to seize opportunities.
These concepts are clear in many firm’s strategies as they are attempting to create and extend a unique asset base of technologies, frameworks, and capabilities. These capabilities refer to the ability to integrate, build and reconfigure internal and external competencies with competitive environments characterized by rapid change. The Dynamic Capabilities theory allows the fluid dimension that is lacking in the RBV by focusing attention on how resources can be developed and integrated into the firm and then released as a means of creating a competitive advantage. Simply – how agile a company is when dealing with constant change
Current Thinking
Dominant approach – dynamic capabilities
Themes – Innovation, creativity, change
Key issues – Agility, opportunistic, speed
Techniques – Collaboration, knowledge management
Organization effects – Global networks, flat structures

Overall the positioning approach to strategy and the resource-based view are useful starting points for understanding the competitive environments and internal capabilities but they do not translate well to e-business because of the static nature of the models and the lack of recognition that many modern e-business firms collaborate and establish partnerships. The emergence of the digital economy has transformed both business and the wider economy and the key factors that can determine competitive advantage in the digital economy involve firms being flexible, opportunistic, quick to market, collaborative and specialized in their nice. Some models like the value chain have been altered to fit better with current strategic thinking but the dynamic capabilities model, which addressed the shortcomings of the RBV is a hugely important to understanding the changes to business strategy since the digital economy emerged.

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