Analysis of Digital Economy - Research Paper Example

Analysis of Digital Economy Introduction Digital economy, which is also referred to as web economy, internet economy or the new economy, refers to a type of economy, which is centred on digital technologies. The theory of the digital economy emerged during the last decade of the 20th century. A popular metaphor used to describe digital economy is the shift from processing atoms to the processing of bits. This metaphor suggests the immense disadvantages of the former such as transportation, bulk and materials and the advantages of the latter such as virtual, instantaneous global movement and weightlessness. In the digital economy, digital networking, as well as communication networks provides a global platform, which allows people and institutions to establish strategies, interrelate and collaborate in searching for information. In the popular Blown to Bits, Wurster and Evans assert that the sudden increase of the digital economy or e-business bears massive challenges to long-established institutions that run well. Therefore, if digital economy poses such substantive dangers to established businesses, then it is a wonder how much more threats digital economy poses to the future of the entrepreneur. Currently, there is relatively little research on the effects of the digital economy with regard to the field of entrepreneurship. On the other hand, there are insignificant quantities of research on the role played by the conventional entrepreneur in the establishment, as well as growth of the digital economy. On one hand, one cannot deny the lure of popular press that draws attention to the phenomenal success of a number of entrepreneurs like Amazon.com’s Jeff Bezos. The quantity of millionaires in many fields and projects grows at unbelievable rates. However, most of these persons only possess technical skills, but just happened to be in the right place at an opportune time, rather than the standard entrepreneur who is intensely devoted to the growth of a business. The Internet, has, on the other hand, set up a level playing field as a famous cartoonist put it, through the Internet; no one knows one is a dog. Simply put, this means that even small businesses that struggle to even raise registration fees can also place themselves in a spectrum that is populated by the major players of the industry. A recent literature review for the year 2002 on the subject of entrepreneurship and e-business realised only six academic articles. Most of these articles deal with topics on management information systems. The minimal quantity of publications based on e-commerce in academic front in comparison to the massive quantities of articles in popular media, and especially the shortage of publications on entrepreneurship and e-business provides an opportunity for the conduct of research. Such a differential implies that the phenomena of e-business or the digital economy have not been incorporated into the frameworks of business disciplines in form of theory. Specifically, the examination of the entrepreneur has not advanced to include the subjects of the digital economy or e-commerce. This paper will first discuss the characteristics, as well as definitions of an entrepreneur and entrepreneurship. On the basis of such discussion, it will be evident that entrepreneurship will flourish in the age of the digital economy. The initial section of this paper entails an intense literature review, as well as the definition of entrepreneurship. From this discussion, a list of key characteristics of entrepreneurial behaviour shall be provided. The second section, on the other hand, entails a report on the growth of e-commerce, the internet and the new frameworks under which firms will attain success. The last section shall outline the qualities of entrepreneurial behaviour in fusion with aspects of success in the digital economy. Through this extensive literature review, the importance of entrepreneurial behaviour in the growing digital economy shall be established. Definitions of Entrepreneurship and Entrepreneurial Behaviour Entrepreneurial behaviour refers to an activity that entails three distinct yet related activities. These entail, entrepreneurship, which refers to the activities in which an independent entrepreneur participates; intrapreneurship, which centres on path-breaking and innovative activities in the midst of a structured institution, and entrepreneurial organisations, which are institutions that act in an entrepreneurial manner (Palmer Web Marketing 2012, 1). This paper will use the broad perspective of all three elements of entrepreneurial behaviour as suggested by Gardener (1994, 34). This definition will help in the examination of the potential disruptive changes with regard to business environmental changes occasioned by the digital economy. On the basis of Savitt (1997, 15), entrepreneurial behaviour results in disruptive changes as it disputes the status quo, established models of behaviour, rules that are formulated by established institutions and the overall strategy in an industry (Porter, 1990, 67). Apparently, e-business entrepreneurial behaviour changes the relationships of customers, substitutes, suppliers, potential entrants and industry-based competition. Suggestions are rife that entrepreneurial behaviour is likely to emerge or rather intensify in relatively unstable socio-economic settings when it is critical for institutions to establish rapid changes within the environment (Carsrud, Brockhaus and Shaver 1994, 57; Carsrud and Johnson 1999, 127). Such entrepreneurial behaviour as the system of change is accredited to Schumpeter (1934, 97) who described an entrepreneur as the driving force for creative destruction. According to Schumpeter, the entrepreneur formulates such creative destruction through the development of new products or advanced methods of producing existing products, the identification of new suppliers and markets and the creation of fresh forms of organisation. However, subsequent researchers on the subject of entrepreneurship either endorse Schumpeter’s ideas or extend them. Long (1993, 45) implied that an entrepreneur handles risk and uncertainty, balances managerial competences and creative opportunism. Other researchers further suggest that flourishing entrepreneurs engage in research to lower the hazard of conveying it to others. Churchill and Muzyka (1994, 147) support the theory that the entrepreneurial process entails levels of uncertainty, as well as risk management. Most researchers such as Venkataraman (1997, 87) apply entrepreneurial behaviour as the examination of opportunities. However, Kirzner (1992, 37) once again stresses that the key function of an entrepreneur is to identify market opportunities. Churchill and Muzyka (1994, 68), on the other hand, suggest that the heart of entrepreneurial activity lies in economic innovation as per Schumpeter’s assertion. According to Drucker (1995, 84), an entrepreneur refers to one who changes economic resources to a high productivity from a low one. The entrepreneur meets opportunity and uses innovative means to increase the levels of productivity. The element of opportunity is discussed by Timmons (1999, 54) who referred to an entrepreneur as one who makes something from nothing. This definition centres on the recognition of opportunity, an innovative process or product to exploit such an opportunity and the connection of entrepreneurship to overall business growth. Within the synthesis of existing literature, Churchill and Muzyka (1994, 16) captured three basic dimensions in their definition of entrepreneurship as a process that occurs within different situations and environments that results in changes, in the economic order, through a series of innovations brought by persons who establish or deal with economic opportunities that construct value for both the society, as well as these persons. With this discussion at heart, as well as the observations of other researchers such as Lambing and Kuehl (1997, 71); Morris, LaForge and Ingram (1994, 24), the following list details the characteristics of an entrepreneur: 1. Passion for an idea. 2. Persistence with regard to new business. 3. Confidence regarding the business, as well as its network. 4. Self determination and self motivation. 5. Effective management of risk. 6. Positive perception toward change and ambiguity coupled with a high sense of optimism regarding the future. 7. Great personal need for high achievement. 8. Immense creativity through innovations of either processes or products, or both. 9. Ability to look at the bigger picture when examining situations. 10. Great ability to seek opportunity. Lambing and Kuehl (1997, 97) suggest that entrepreneurial institutions, as well as small businesses, may gain great competitive advantage over large institutions through some of the following ways: 1. Proximity to customers. 2. Innovative products and processes. 3. Flexibility with regard to responding to change in the industry’s environment. 4. Speedy decision making. However, such small institutions are bound to face competitive disadvantage when compared to large institutions because of their small size, scope and economies of scale, insufficient resources and lack of or inadequate organisational networks and support mechanisms. The next section shall examine digital economy, describing the characteristics of institutions that have high probability of succeeding in such an environment. The last section will additionally discuss why the process of entrepreneurship is critical to business success in e-commerce or the digital economy. Growth of the Digital World and Digital Economy Studies on electronic commerce show that web-based commerce is fast gaining popularity globally. In the year 2009, for instance, global web-commerce totalled $16 billion. This figure encompasses sales from consumer and industrial services and goods, as well as equipment and software used to enable e-commerce. The following table (table 1) shows growth obtained through e-commerce over a period of five years from 1999 to 2003. Industry e-commerce in 1999 Estimated growth by 2003 Retail Industry US$ 18.2 Billion US$ 108.0 Billion Financial Services US$14.0 Billion US$ 80.0 Billion Energy (trading of Gas and Electricity) US$ 11.0 Billion US$ 170.1 Billion Business to Business Transactions US$ 43 Billion US$ 1,300 Billion Research shows that growth in the digital economy is as a result of the development of new business processes such as auctions that enable consumers to shop through cheaper and more entertaining models. The digital economy has provided consumers with greater price comparisons, as well as immense access to sources. These offer consumers a wide range of choices, as well as rich information to aid in making purchasing decisions. In addition, the digital economy has lowered inventory costs for businesses, great reach or access to new customers and markets and sufficient information on their customers and markets within the industry. Furthermore, continuous advances in data and browser communication technologies such as high speed modems, fibre optic cables and DSL have also enhanced the responsiveness of the digital economy and commerce. According to Evans and Wurster (2000, 123), the navigators have allowed for the expansion of richness and reach customers and suppliers. Nonetheless, there is more to the digital economy than the evident customer access through the Internet. The following figure shows an implicit organisation of digital commerce through different relationships between customers and businesses. Some of the renowned examples of business-to-customer digital commerce (B2C) include among others Amazon.com and e*trade.com. It is apparent that the growth of advertising for such “dot.com” businesses is what allows them to thrive in the current digital economy environment. However, according to table 1, it is also clear that the greater proportion with regard to transactional volume is in the business-to-business (B2B) category. A viable example of B2B is Vertical Net, which allows firms to access suppliers and industrial customers. However, one aspect that is often overlooked is the history of EDI transactions through the use of proprietary and dictated connections. Such networks have evolved over the course of many years to encompass one-to-one or direct connection, one-to-many (such as in the case of department stores and their suppliers) and many-to-many (through systems such as Visa that link merchants with banks) relationships with regard to information trading. Today, the growth of the Internet is quite fascinating as it has led to the standardisation of platforms for all these connections. The faction that continues to capture the imagination and attention of consumers is the consumer-to-consumer (C2C) section. Through sites such as eBay.com and other services within the Internet, consumers are allowed the opportunity to connect with other consumers across the globe. Moreover, through digital economy, a segment that was previously imagined in theory within the physical world but proved rather unfeasible has become a reality. This is the consumer-to-business (C2B) segment. A notable example of such a segment is priceline.com, which is a service that captures the surplus competence of airlines, grocery stores and hotels and allows consumers to bid for such surplus facility. Contemporary economics requires that consumers pay less for services or goods that have many suppliers. The power of the digital economy emerges from the added segregation between the flow of information on products and services and the same products and services. This distinction was especially evident in the 19th century through the invention of the telegraph. Before its invention, mail and news services were coupled, but following the invention, information and news of entrepreneurial aspects such as shipment of goods were separated from the shipment itself. Evans and Wurster (2000, 16-17) fittingly summarize the role of the internet by appreciating that, over the last century, the economy of information has rapidly become separate from the economy of things because less physical-based media emerge from the distribution of information. This means that digital networks make it possible to destroy the connection between rich information and its physical haulier. In addition to the disconnection of information flow (bits) from the service or product (atom) (Sawhney 2000, 37), the digital economy has resulted in further changes to the conduct of business. Another element of the digital economy is the lowered concentration on physical matter and additional focus on the flow of information. Mayer (2000, 157) hints that the tangible weight of the global gross domestic product in 1997 was lower compared to that of 1977. Today, products are more technologically rigorous. While people were conditioned to think in terms of what they can see and feel, the digital economy has rendered the concept of actual matter insignificant. Furthermore, digital economy allows for the shrinking of physical distances. In the digital economy, the requirements for proximity are almost entirely removed, at least in theory, because people are interconnected. A suitable case in point that demonstrates this element is the case of a small jewellery maker in India who sought customers from the US. In the initial year after using the Internet, Surat Diamond Jewellery Limited attained greater purchases from Americans than Indians living in America. According to the owner of Surat Diamond Jewellery Limited, such sales would have been impossible without the Internet, which further echoes Sawhney (2000, 194). The insignificance of distance is one of the defining elements of the digital economy. The reduction of space is also related to the reduction of duration take to execute transactions, as well as the response time to changes within the marketplace (Spulber 2000, 157). This permits speedy interaction with customers and further allows agile businesses to modify their products, services, prices and delivery schedules at minimal costs. Such flexibility is also enhanced by the customisation of sites to the requirements of specific customers. As customers log into quality websites, they are often welcomed with suggestions that are based on previous purchases. The Internet has also altered another element of conducting business. Through minimal creativity, a customer can also become a great salesperson. For instance, Hotmail used this imaginative approach by tagging all messages sent through hotmail to allow customers become salespeople. A rather interesting aspect is that Hotmail is the biggest e-mail provider in Sweden and India despite not conducting any form of marketing in the two nations (Jurveston 2000, 97). Jurveston (2000, 231) asserts that the greatness of opportunities in the Internet is as a result of viral marketing, but not because actual viruses are transmitted rather because news and information is replicated online at high speeds. Mirabilis, an Israeli firm also successfully applied viral marketing in the promotion of its instant messaging software known as ICQ. In summary, five significant shifts have occurred in the business world through digital commerce. These are a growing disconnection of information on products and services from the physical services and products, additional focus of new products and services on information rather than tangible matter, immense reduction of the essence of distance between producers, consumers and the creation of opportunities for fast responses to market changes and customers and the capacity to use consumers as marketing agents. Entrepreneur Behaviour and Digital Economy As earlier cited, one of the key traits of entrepreneurial behaviour is opportunity seeking. The fascinating feature of digital era is the great levels of ambiguity regarding the future of the digital world. Valuations of dot.com companies in stock market until the year 2000 globally show that analysts are relatively unable to decipher this ambiguity. On the other hand, the establishment of such firms continues because entrepreneurs have a good grasp of the concepts of the digital economy or have the capacities to cope with this ambiguity. It is more difficult for established firms to deal with ambiguity than small firms. According to Christensen (1997, 217), established and successful firms are more interested in the maintenance of established technologies, while new entrants or entrepreneurs are interested in backing new and disruptive technologies. To an already established firm, a disruptive technology will result in ambiguity regarding its products, services, as well as customers. Evans and Wurster (2000, 6) provide a number of reasons for this phenomenon with regard to disaster in already established firms, in the era of the digital economy. Incumbents are weighed down by legacy assets such as clunky mainframes, sale and distribution networks, bricks and mortar and core competencies and brands. In turn, competition within the confines of new information economics requires that such firms either use up these assets or destroy them entirely. This is a major shift in business operation and in a majority of conventional situations; the defence has the upper hand (Barua, Pinnell, Shutter, and AB Whinston 1999, 4). However, when information economies shift, insurgents are at an advantage because they lack legacy systems, mindsets and assets. This means that for the new entrants, having nothing or minimal to lose thus becomes a great advantage. However, while, on one hand, it is rather difficult for established firms to manage ambiguity or implement a disruptive technology, Reid (2000, 284) stresses that these are the main reasons for the growth of entrepreneurial firms within the digital economy. According to Reid, the Internet allows any company or firm in an industry to carve out a niche and start serving a market with interactive forums, as well as constituency despite how minimal or remote the constituency is. Certain elements of the growing digital economy enable the firms to offer their market a number of goods and services without necessarily increasing their staff base, facilities or overhead and running costs. Conclusion The rise of the digital economy has led to substantial advancements in various areas such as innovation, production and distribution of goods and services. This paper has sought to answer the enquiry of whether or not the digital economy poses a golden opportunity for the growth and advancement of entrepreneurial behaviour. The major question, according to Evans and Wurster (2000, 9) is whether the digital economy strengthens brands, customer associations, value of information and knowledge, supplier partnerships, or it simply obliterates them. More importantly, despite the challenges, are large and established firms viable vehicles for addressing them or does the digital economy pose a challenge to the very existence of established entrepreneurial firms. This paper has recommended that capacities and traits necessary for successful entrepreneurship are also essential in digital economy. Mainly, the capacity to deal with information in a different way from established corporations is a key entrepreneurial trait as identified by Casson (1992, 81). Casson (1992, 82), recommended that in order to become a successful entrepreneur, one must focus on using information in a relevant many because an entrepreneur has to think differently and become a major driving force in the digital economy or in e-commerce. Therefore, through the rapid growth of the Internet, such growth has immense implications for both firms that have entrepreneurial behaviour, as well as individual entrepreneurs. 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