Emergence Of The Digital Firm

Introduction:

“The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.”

-Bill Gates (http://www.saidwhat.co.uk/topicquote/technology)

Over the past two decades Technology has come to become an inseparable part of business activities. The modern era of dynamic and discontinuous change requires continual reassessment of organizational routines to ensure that decision-making processes, keep pace with the dynamically changing business environment. The adoption of advanced technology, to maintain a digitally enhanced firm, is necessary, especially for small and medium sized companies, to ensure their viability in the future. With the onset of globalization, the wide presence of digitally equipped firms has intensified international competition, and digital capabilities also provide small and medium sized enterprises with new potential for participation in the international market. Inevitably, a structural change is brought about by all the technological equipment in the companies as the need for new skills are created, which are accompanied by the constant need for training and information sharing, and assessment of technological issues by the management.

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Emergence of the Digital Firm:

The first use of information systems in enterprises was in the form of card processing machines which were used in the accounting departments and focused on historical information reporting. The early 1960’s, marked the onset of mainframe computers, which when compared to today’s desk top computers and PDA’s, were miniscule, in processing power. In the coming decades, the advancements in technology gained speed with management reporting, transaction processing, decision support and forecasting enabled by information technology. The presence of Information technology is now widely significant in every business activity of the modern enterprise. Most recently, information systems transcended departmental, divisional and organizational boundaries in order to link the firm electronically, often instantaneously, to its customers, suppliers, and distribution partners .(Ives, 2002)

With the development of technology and internet, modern enterprises have embraced Information and communication technology (ICT) and several e-business applications that have provided many benefits across many intra- and inter-firm business processes and transactions. With the use of ICT applications, information and knowledge management inside the firm has considerably improved reducing transaction costs and increasing the speed and reliability of transactions for both B2B (business-to-business) and B2C (business-to-consumer) transactions. They have also proved to be effective tools for improving external communications and quality of services for established and new customers. (http://www.oecd.org/dataoecd/6/9/31919255.pdf)Most small and medium sized enterprises use information and communication technologies. Research has shown that the use mainly of computers serves administrative and functional uses, such as the rendering of accounts, payroll, the drawing up of a budget, inventory, and other similar functions (Bridge and Peel 1999). The basic condition that arises for the use of computers, but also for all technologies, old or new, electronic or not, is not only their acquisition by the SMEs, but also their correct and functional use (El Louadi, 1998).

There are a large number of different ICTs, which makes identifying them and their functions difficult. Below is a classification of Information and communication technologies which includes the ICTs used by enterprises and comprises of five main categories, within which the technologies-systems comprising the category are distributed individually.

Classification of ICTS:

(Source: Papastathopoulos, Beneki (2009))

Intranet: Intranets are inexpensive, scalable to expand or contract as needs change, and accessible from most computing platforms. Whereas most large companies must support a number of computer platforms that cannot communicate with each other, intranets help to provide instant connectivity, uniting all computers into a single, seamless, network system.

Electronic Commerce: Although most commercial transactions still takes place through conventional channels, rising number of consumers and businesses are using the Internet for electronic commerce

Buyer

Retailer

Information

Orders

Service and support

Manufacturers, Suppliers and Distributors

Purchases

Bids

Banks

-Credit checks

-Payment authorization

-Electronic payment transfer

Illustration: Electronic Commerce Information Flows

Business environment:

The modern business environment is characterized by a dynamic continuous change. For the firms to thrive and benefit from ICTs, a healthy business environment is necessary. This includes a transparent, open and competitive business framework, clear independent rule of law for all firms, easy set up and dissolution of businesses, transparent, simple and accessible corporate regulation, and equal and stable legal treatment for national and cross-border transactions. (http://www.oecd.org/dataoecd/6/9/31919255.pdf)

Organizational Forms:

The concept of “organizational forms” was quickly accepted and vouched for by management scholars who have already accepted concepts such as the `knowledge economy’ or the ‘new information economy’ ( Halal 1998) and who had believed that the emergence of the Internet would change the way business transactions business functions are performed (Tapscott , 1999).

shift to new forms:

According to Drucker (1997), businesses of the new age have not only led to advancements in technology and provided an atmosphere of stiff competition, but have also contributed to the promotion of change in the organizational forms. This is why, New Organizational Forms that respond to the need to align strategy-structure- direction processes are influenced by the dynamic changes in the environment. New transaction management modes from new organizational forms.

The following illustration gives a clear picture of the increase in the use of new organizational forms, where internet and e-commerce plays a significant role. (Illustration sourced from: http://www.labs-associados.org/docs/OCDE_TIC.PDF)

Increase in the use of new organizational forms:

With every passing year, more and more firms are adopting new organizational forms in an attempt to stay competitive in the market. The benefits of incorporating ICTs and other e-business activities are now widely recognized. In the research conducted by ‘Christina Beneki’ on “Organizational forms based on information and communication technology adoption” (http://www.aabri.com/manuscripts/09362.pdf), an empirical study was carried out among 54 Greek SMEs to identify the emerging forms of organizations based on ICTs.

Personal interviews were conducted with people recognized as being the most knowledgeable about the developments of ICTs within the firm. Hence, the interviewees ranged from director or owner-manager and IT personnel to general managers. The results of this study reveal that the SMEs’ journey towards ICT adoption-use can be classified into three levels:

Level 1: Basic Use of ICT or ICT-beginners SMEs. On this level the ICTs used by SMEs support the monitoring of basic-elementary activities, transactions and communications of the enterprise

Level 2: Advanced Use of ICT or ICT-based SMEs. On the second level the ICTs used by the SMEs serve specialized activities of the modern enterprise, such as programming operations, transaction monitoring, and decision making and auditing. Furthermore, they combine data and advanced analytical models or data analysis tools so as to support the making of semi structured decisions or unstructured decisions. Finally, they allow business and commercial digital transactions as well as the transmission of information with electronic means even to geographically remote places.

Level 3: Superior use of ICT or ICT-Driven SMEs. The ICTs used by the SMEs on the third level contribute to the integration of the informational and business processes of the enterprise, and they support the long-term planning activities as well as the digital exchange of information, the carrying out of commercial transactions and collaborations with the external environment of the enterprise

Figure: The Three Levels of ICT-Adoption Process

The figure shows that a very small percentage of SMEs use basic ICTs (7%), about 22% percentage use ICTs serving specialized business activities, while for most of the SMEs (70%), technology does not constitute the basis but rather as a guide to their business activities. This clearly demonstrates the steep rise in the use of Internet communication technologies.

Opportunities for the management in a digitally enabled firm:

New organizational forms comprising of Information and communication technology (ICT) and e-business applications provide many benefits across a wide range of business processes and transactions. (http://www.oecd.org/dataoecd/6/9/31919255.pdf)

With the use of computer terminals, e-mail, internet and its applications, several types of businesses can improve information and knowledge management within the firm, leading to more efficient business processes and better firm performance.

Transfer of information through shared electronic files and networked computers significantly improves the efficiency of business process like documentation, data processing and other functions like organizing incoming orders and preparing invoices.

Business-to-Business and Business-to-Consumer transactions are now conducted with increased speed and reliability, using ICT applications.

Sophisticated ICT applications like Decision Support System (DSS) helps firms to analyse large amounts of data in quick time, enabling swift decision making. Enterprise Resource Planning (ERP) helps to integrate various departments of a firm effectively.

Internet and e-commerce have drastically reduced the cost of business transactions.

Internet-based B2B interaction and real-time communication help to reduce information asymmetries between buyers and suppliers and build close relationships among trading partners. (Moodley, 2002)

ICT applications also increase labour productivity and have a positive impact on firm performance. The following illustration helps to identify the positive effect of ICT applications in Canada.

Sourced from : (http://www.labs-associados.org/docs/OCDE_TIC.PDF)

Challenges faced by the management and organization in a digital firm:

Requirement of internal ICT and managerial knowledge:

Since SMEs focus on day to day operations, they are less aware of the benefits of new technologies and would tend to lack the human technological resources needed for a digital firm, when they decide to investment in advanced technologies. Even when they are aware of the potential benefits of adopting e-commerce, they would need qualified personnel to carry out the operations. The firms that adopt Internet and e-commerce are likely to have personnel within the firm who have a reasonable knowledge of the incorporated technology. A study of small ICT companies with 3-80 employees suggests that the Internet was adopted by firms with personnel who understand the technology used (Mehrtens, 2001). The study found that these were not necessarily ICT professionals, but simply people interested in technology. If firms have the resources to access or outsource skills, then scarcity of technologically skilled personnel would not be a hindrance. However, presence of internal technological capabilities is still vital because adoption of internet communication technologies cannot succeed without an understanding of the e-business model. Without internal technological capabilities, dependence on outside support services for system maintenance can be dangerous because firms that conduct e-business activities have to bear the risk of occasional system failures and computer viruses. If ICT support services, especially in an emergency, are needed to minimise the loss from a system malfunction, the e-business system of the firm may be vulnerable if they are not immediately available. The existence of local ICT services is thus an important consideration for the management, especially for small offices in remote areas or emerging economies, where ICT services are scarce and expensive.

Skills and understanding of e-business models is also vital for the managers. Successful integration of e-business requires many firms to restructure their business processes, to change organisational structures and to redefine their core competence and positions in the value chains. So, e-business tools cannot be successfully introduced and implemented without the visionary power and strategic decisions about how to apply ICT technologies for business processes. (http://www.aabri.com/manuscripts/09362.pdf)

Cost of developing and maintaining e-business systems :

For small and medium sized firms, sometimes, the cost of adopting e-business systems and their maintenance outweighs the benefits received from them. Budget constraints and uncertainty of return on investment may sway the management’s decision to adopt e-business systems. Thus, gathering the capital for investing in sophisticated and expensive internet communication technologies is an issue that the management needs to counter. The management needs to decide, depending upon its size and capacity to bear the cost, how far they can extend their arms over the latest technologically advanced business systems. Some small businesses, especially micro-enterprises with 1-9 employees or the self-employed, may adopt a simple Web site without any e-commerce function if the cost of basic Internet use is well within their marketing budget. (http://www.aabri.com/manuscripts/09362.pdf)

Viability of Business Models:

The advancements in internet have changed the business models in a number of key industries including media, financial services, travel and automobile retailing. But although internet technology provides great prospects, not all Internet business models have been successful. Conducting business over the internet is not always cost effective and efficient. For some companies, resorting to traditional methods is more viable. Of course, retailers on the internet may not need to pay for attractive outlets and employees, but they would need to use a large proportion of their budget for web site maintenance, customer service call centres, supply chain management and customer acquisition. There are also challenges to be faced for firms that try to use the web for supplementing or enhancing traditional business models. Businesses that are unclear about their e-business strategy may end up wasting a lot of money in building and maintaining websites that fail to deliver results. Successful websites may also incur high costs. For instance, Equipment Inc., popular seller of indoor gear, has large payroll expenditures to pay for skilled technical staff supporting the website and additional shipping expenses to ensure web orders are delivered on time.

Thus, the management needs to consider the viability of e-business models for its firm before deciding to invest.

Business Process Change Requirements:

Even if a firm does have a viable business model, it can still fail due to bad management or poor execution of the business model. Many dot-com firms like Garden.com, Productopia.com, Pets.com, Chinese Books Cyberstore etc. have closed down. The implementation and working of an electronic business model requires successful management of a firm’s divisions, production sites, sales offices and also maintaining close relationships with customers, suppliers and business partners. All important business processes need to be restructured and closely integrated. Firms will need to have well designed policies and procedures for sharing data. There are also traditional boundaries existing between a firm’s divisions and departments, customers and suppliers which can be barriers to collaboration and relationship building. Thus, the management needs to ensure a complete transformation of the firm and the ways in which it conducts business.

Channel Conflicts: A channel conflict is a ‘competition between two or more different distribution chains used to sell products or services of the same company’. ( Laudon & Laudon, 2006)When a company uses the web for selling its products, it creates a channel conflict with the firm’s traditional methods of selling. This is especially true for products that are less information sensitive and require a physical intermediary. In such a case, a company’s revenues may drop as customer make purchases directly from the web. Channel conflict is a major issue for business-to-business business models, where the consumer purchases directly from the manufacturer through the Web. Milacron Inc., a machine tools company with extensive websites, minimizes the negative impact of channel conflict by paying full commissions to reps making online sales in their territories, even if they do not work on the sale or meet the buyer. Other companies have devised solutions, such as offering only a portion of their product line on the web.

Legal Uncertainities:

Conflicting regulatory environments and legal uncertainties for cross-border transactions, especially B2C, may affect small and medium scale firms. There is no harmonised legal framework with rules pertaining to the determination of jurisdiction and applicable law nor are there mechanisms that ensure the cross-border enforcement of legal rulings. The internet is global and is used by numerous organizations in different countries. Suppose a product were offered on sale in China, but the purchaser lived in the United States, whose law would apply? (Laudon & Laudon, 2006)Small businesses can risk being due to inconsistent laws.

Trust, Security and Privacy:

For e-commerce to flourish there needs to be an atmosphere of trust among buyers, sellers and other partners involved in the transactions. Consumers will be wary of the security and confidentiality of credit card details and other personal information supplied over the internet. Internet based systems are at a risk of being penetrated by outsiders, as the internet is open to everyone. Any information, including e-mail passes through many different systems before it reaches its destination. It can be monitored and hacked into at any of these points resulting in loss of confidential data. Valuable data such as sales contracts, marketing plans, product development and pricing strategies, etc. can be intercepted causing significant risk to the company. Thus, the management needs to be extremely cautious and maintain stringent security systems to safeguard their business models. (Laudon & Laudon)

Opportunities and Challenges for Employees in a digital firm

The rapid shift in trends in the market is seeing more and more companies undertaking a full scale adoption of technology that has in turn created an array of opportunities for the employees. Some of them are:

Better job prospects.

The emergence of digital firms has opened up attractive avenues for IT employees all over the world. With advancements in every area springing up, those equipped with specific technological expertise are also gaining demand with attractive bonuses rewarded.

According to the research methodology used by Ricardo Parez Garrido on ‘New Organizational Forms for knowledge transfer’ (http://latienda.ie.edu/working_papers_economia/WP05-03.pdf), the company ‘Alpha’ was founded with the idea of uniting the best programmers in Spain interested in the internet and e-business and create for them an environment where they could work freely. Alpha experienced a tremendous growth of 400% from 1998-1999. But the success had attracted another telecommunication giant in the country which offered better incentives for employees. As a result a majority of the Alpha taskforce moved to the competing firm.

Employees empowered in decision- making.

With the onset of the digital era, many firms are now approaching a change in work attitudes. The system of bureaucratic is now being replaced by independence for different roles in an organization. With more space for employees to work, an atmosphere of ownership of the company results, providing better results and incentive for staff to work.

The case study on the Royal Bank of Scotland (Currie & Willcocks, 1996) provides an insight into the new philosophies of work practice being adopted by the bank. Senior managers were aware that customers were intimidated by the bureaucratic image of the bank and felt a change was necessary. The traditional emphasis on geographical splits was done away with and a different structure was established with three inter-related businesses- Retail, Commercial and Corporate. This way, individual departments are given complete responsibility and independence to run their functions.

Employees play a greater part in the company

The information systems sector is now recognized as a chief part of any firm. The days of technological expertise playing an underdog are over. It is now realized that those equipped with the technology side of the firm are better positioned to understand their part and hence are now increasingly given more ownership and responsibilities.

Despite the fact that modern advancements in e-business have created opportunities for employees, they have also had a negative impact on them. Some of the drawbacks are:

Outsourcing of technological expertise.

With the wide availability of IT skills and restructuring of organizations, most companies now prefer to outsource technical expertise which may be better suited in terms of cost and quality of technical skills. As a result the existing employees are difficult to accommodate because of the drastic changes brought about by adoption of advanced technology that renders their skills incompetent. This is especially true for companies do not primarily rely on technology for their core business functions.

The case study of the Royal Bank of Scotland (RBS) and their Business Process Re-engineering project (Currie & Willcocks, 1996) shows how a complete restructuring of the banks activities resulted in many job losses. Also the technology unit was perceived by the business units as a support function, not therefore core to the business. Some senior managers were keen to outsource a major portion of the technical sector altogether. This also reflects a growing trend among organization seeking IT outsourcing as an alternative to in-house operating.

Obsolescence of work.

Because most companies are undergoing changes in their functioning process by incorporating advanced information systems that help to better integrate various departments within the organization, traditional forms of work are now losing a place. More and more employees are now faced with job losses because their work has been rendered useless with current business systems.

The case study documenting the ‘Columbus project’ undertaken by RBS (Currie & Willcocks, 1996) gives evidence that due to the complete restructuring of the bank’s activities and how banking services were offered to customers, many manager were worried about a large staff redundancy.

Communication problems

Inevitably, communication problems between business units and technological units will tend to occur. Since technology department supplies the applications for various business functions, sometimes friction might arise over what is supplied and what is actually needed. Due to the complexities involved in business functions, the tactics and strategies used might change from time to time, causing the technological department to swiftly adapt to the changing conditions, which is not always simple.

The case study documenting restructuring of RBS (Currie & Willcocks, 1996) indicates the prevalence of communication problems. Business units complain that computers have been imposed on them with little relevance to the business context. However, the technology unit argued that business users change their mind regularly as to what is required from them. This miscommunication may lead to high costs, failure to meet delivery dates, loss of management control, low morale, etc.

Conclusion:

The emergence of new organizational forms according to the level of use of information communication technologies gives rise to new research opportunities in the sensitive sector of SMEs. In addition, the need for the emergence of new organizational forms stems also from the fact that technology no longer constitutes a mere link in the chain of businesses processes but rather the driving force behind this chain both in the internal and in the external business environment.