The digital perspective of many companies doesn't extend much beyond producing webcasts, ordering office supplies online and giving PDAs to the sales force. This is almost certainly putting these companies at greater risk from more able, technically savvy competitors. By Richard M. Melnicoff Outlook Journal, September 2006 Download this article [PDF, 206K]
PDF Help   It doesn't take a deep understanding of baseball to appreciate the power, grace and skill of the game's best hitters. When such a superb hitter swings and connects with the ball, he looks like he was born to do it. It's unlikely that he will ever use mathematical equations to adjust his grip on the bat or his stance.
In the same way, there are executives who intuitively "get" the digital economy. Like the guy at bat, they don't need to be trained in textbook physics to understand how the new game continues to reshape their working world. They instinctively see the full potential of the Internet, high-bandwidth connections and low-cost computing, and they act promptly to take advantage of these opportunities. The good news for the economy overall is that there are more of those digital managers every day, and they're not all twenty- and thirtysomethings. (They're also not all at Google, which sometimes seems to have cornered the market on talent.) Many have the experience and spans of control to help their companies regularly outmaneuver less digitally savvy competitors. Other managers who don't have that natural digital "swing" are starting to learn how it works. They need practice, but they can be taught. Yet there are managers who don't want to be taught; they believe their companies already embrace all things Internet. Their digital perspectives don't extend much beyond producing webcasts, ordering office supplies online and putting BlackBerries in the hands of the sales force. As a result, those managers are seeing only a small part of what's possible. They're missing major new opportunities to add value. And they're almost certainly putting their companies at greater risk from more able, technically savvy competitors. In short, their views of the digital economy may be myopic. And, as a result, their companies just aren't digital enough. In "The eEconomy: It's later than you think," which ran in the June 1999 issue of Outlook, we began to sketch out what the digital economy might look like and ultimately make possible. We described five characteristics of what we then called the "eEconomy"—characteristics we believed were imperative for executives in traditional businesses to grasp (see Sidebar ). In hindsight, the idea that most traditional businesses would be "Amazoned" seems naïve at best. At the same time, the managers who saw the Internet as a fad have been proven wrong. Winners and Losers
There have, in fact, been winners and losers from both the "old" and "new" economies. Much-vaunted online exchanges and lavishly capitalized Internet retailers fell hard and fast—think Chemdex.com and Webvan. And some "old economy" companies that moved quickly to capitalize on the digital economy—industrial distributor W.W. Grainger, for example, or UK grocer Tesco—have been highly successful. Indeed, many traditional businesses have embraced digital opportunities. A company's website is now the first point of reference for potential investors, new customers and new hires. Online retail business, albeit still a fraction of total retail sales, is growing steadily: US census figures show that 2005's e-commerce sales of more than $86 billion were up nearly 25 percent over 2004. It's becoming common for customers to use online product developers, interact online with service reps, and track orders and shipments in near real time. When it comes to core operations, many basic work routines are now faster, more accurate and less costly. Today, most large businesses purchase electronically. At least 40 percent of companies in 10 industry sectors studied by the European Union's e-Business W@tch unit are making purchases online. Manufacturers now trade engineering drawings and specifications via high-bandwidth Internet links. Wal-Mart and other retailers excel at giving their vendors near real-time updates on what's selling. Meanwhile, in the back offices, HR departments at most large enterprises are using intranets on which employees can manage their own 401(k) plans and health benefits. Electronic invoicing, employee expense management and equipment leasing have become routine in most finance departments. Marketing and sales now digitize everything from product updates and ad campaign cost tracking to quotes and commission calculations. M&A specialists use virtual "deal rooms" to speed up due diligence on acquisition targets. And IT departments are rapidly deploying software that helps improve asset management and cut costs. (Using its own tools, HP is consolidating its 85 data centers worldwide into 6, which can be managed remotely, via the Internet.) The Network Effect
In other words, many of the digital economy elements we described in 1999 are very much in play today. With the network effect, epitomized by eBay, the value to an individual participant rises exponentially with the total number of participants. The travel industry is increasingly online-centric, from shopping for flights to printing boarding passes. Although the theorists' idea of "perfect" information will always elude us in the real world, more and more car buyers arrive at the dealership with complete information covering the dealer's destination charges, the cost of options, financing plans and so on. Others may even forgo the trip to the dealership altogether and buy their cars online. New Business Value
So if businesses have come so far so fast, why sweat the small stuff? Because it's anything but small. In fact, the most influential aspects of the digital economy have yet to be fully exploited. They are driven by four key enablers of new business value. 1. Low-Cost, Standard Data Communication
 The World Wide Web is as close to the ideal of a universal communications medium as has been developed. Broadband Internet service is increasingly prevalent, and has become a broadly affordable service in many parts of the world. About 30 percent of North American households use broadband, reports Forrester Research. And many countries, like Finland and Korea, boast even greater broadband penetration (See Figure 1) 2.Low-cost Computing
At today's prices, personal computers have almost become impulse purchases, and memory chips cost so little that they have the market dynamics of a true commodity. Mainframe computing costs are falling by 20 percent a year, and the cost of running Unix servers is decreasing annually by 18 percent. 3. An Eager and Tech-Savvy User Base
Internet use has long since ceased to be a novelty or something for only the technically elite. Nearly 70 percent of North Americans use the Internet, as do more than a third of Europeans. Mobile phone use is nearing saturation in many markets, and almost everyone seems to have a BlackBerry or an iPod within reach. Globally, for today's teens, technological savvy is second nature. 4. More Capable, Flexible Tools
In 1999, the tools at IT's disposal—both hardware and software—were already very capable. Today, IT can take advantage of highly flexible, service-oriented architecture and a slew of web-based tools with which to develop and manage applications, utilize legacy systems more fully, and manage such assets as servers and desktop computers. The first two factors were on everybody's lips when our article appeared seven years ago. The third factor is driven by the coming of age, worldwide, of a population that relates well to computing and needs little (if any) training to leverage well-designed software and the infrastructure it runs on. The fourth factor speaks to the tools that will arguably do the most to enable the disaggregation and recombination of value chains. The combination of these four factors means greater acceptance of digital economy initiatives by users (as customers and as employees) and a robust and affordable technology platform to launch and support those initiatives. So how come many managers are still hitting singles instead of home runs? Reassessing Rationales
One way to begin explaining this is by looking at three different categories of digital economy activity—in ascending order of value creation. Streamlining and cutting the costs of current processes. Examples include web-generated airline boarding passes, online tracking of an order's status and e-mail alerts delivered to a handheld device. All add value, of course, since all help rein in costs. But the underlying work processes have not changed, so the mere fact that they're digitized doesn't mean they'll merit being on the agenda at the next shareholders' meeting. Collaboration between businesses. This includes a broader range of business processes shared between two or more enterprises, often using the web. Examples include the transfer of engineering data files to outsourcing partners and the exchange of inventory data between a manufacturer, its customer and its suppliers. For instance, Nokia, the world's largest manufacturer of mobile devices, continuously exchanges demand and supply data with customers and suppliers to increase its value in the chain. Although such approaches still have huge potential, the core transactions and value propositions are much the same as they were before being digitized. Disassembly and reassembly of some or all of the value chain. At this level, managers are reassessing the rationales for keeping operations under one roof. In many cases, they are able to leverage the tools of the digital economy to float or outsource parts of their operations that had long been kept in-house. The auto industry is a good case in point: Once heavily vertical, most automakers now specialize in design, marketing and final assembly rather than in manufacturing. Another case is Dell, which began life with a value chain design that helped it leapfrog older competitors and drive long-term price declines in its products, all across the computer market. Many business leaders who think their companies are digital enough have not gotten beyond that first category. They have difficulty seeing how digital tools can help their organizations collaborate more effectively. And they struggle to grasp the idea of taking apart and rebuilding their value chains. Reexamine, Reconfigure, Renew
The picture becomes clearer with an understanding of the changing nature of transaction costs. In his influential 1937 essay, "The Nature of the Firm," economist Ronald Coase first advanced the idea that mass markets and corporate hier-archies were the consequences of what were then the relatively high costs of coordinating among and transacting business between independent economic entities. His conclusion was that it was cheaper for businesses to "own" many of the activities up and down the supply chain. A good case in point is Motorola, which, in recent years, has dramatically shifted its level of vertical integration and made major changes in its product portfolio. In April 2006, the company sold its automotive electronics group to Continental. Two years earlier, as Motorola began its renewal, it spun off its semiconductor unit to focus on communications products. Both sales were of seismic significance for a company whose very name reflected its longtime ties to the auto industry. Now the company is augmenting its strength in innovation with the acquisition of BenQ'sEuropean R&D centers and product development staff. Given the shift in underlying economics we've been discussing, many companies would likely benefit from a similar self-examination. Even in banking—where wave after wave of mergers has placed almost half of US banking assets in the control of the 10 largest commercial banks—the digital economy is giving small banks new opportunities to compete on relationships and brand rather than on assets. How? Because they can now easily and securely farm out their back-office operations to third-party providers. In banking, bigger is no longer unambiguously better. At the same time, increasing horizontal integration, often by acquisition, has become a more attractive business strategy in a digital economy. Look at VF Corporation, parent of such well-known apparel brands as Wrangler, JanSport, Nautica and The North Face. By continuing to acquire attractive clothing labels, VF is able to reward its shareholders handsomely by scaling its efficiencies in supply chain and other operations areas. Another phenomenon that is not universally leveraged is the unbundling of intellectual property and relationships from physical assets; this can enable new value propositions and can also drive industry reconfiguration. Current incumbents are taking direct advantage of this and leveraging outside companies and solo designers in new ways. Take, for example, Procter & Gamble, which uses its Connect + Develop program to multiply its innovative capacity with its global network of research partners. A customized website allows potential technology partners to submit their ideas electronically, to search specific P&G technologies, and more. Redefining Value Chains
In the seven years since we wrote our "eEconomy" article, plenty has changed. But many managers have not changed their mindsets to keep pace. Only 52 percent of companies regularly track their competitors' technology initiatives, and just 4 out of 10 consistently brief their boards of directors on emerging technologies and threats, according to a 2005 survey by the Economist Intelligence Unit. The challenge for many managers is to think and act beyond simply using digital tools to reduce the costs of existing business processes. They must envision their working worlds unfettered by yesterday's definitions of value chain and corporate boundaries; they must make time to imagine the outcomes of disruptive innovation—disruptions that they can drive as well as those they must dodge. Those challenges must be met soon. Business cycles are shorter and more volatile, market share is more fragile and margins are more vulnerable than ever. On top of that, the "natural" digital economy managers are here to stay, and plenty of other managers are proving to be able pupils of Professor Coase's thinking. The message for the "digital enough" crowd should be abundantly clear. Sidebar: As things turned out . . . In 1999, we made an early estimate of five key characteristics of the "eEconomy."
Here's a quick glimpse of what we said then, and how things have evolved so far. What we said then
1. Business is moving from vertical integration to vertical disintegration.
Where things stand now
True, and although change is taking place at a different pace in each industry, the pace of change is likely to accelerate. What we said then
2. There's increased emphasis on intellectual property and relationships.
Where things stand now
Many examples already exist of industry change driven partly or directly from this phenomenon, such as the separation of logistics from small designers and manufacturers, where logistics are increasingly provided by third parties. What we said then
3. The law of increasing returns is becoming more important.
Where things stand now
Companies such as eBay excel at understanding and exploiting the "network effect," as can "old economy" companies. What we said then
4. Individuals have greater access to information and can better leverage that information.
Where things stand now
All the more true today—to the point where time-starved managers need better business-intelligence tools to help them understand customers better. What we said then
5. There is a shift from requiring business environments to be physically co-located to having virtual business environments.
Where things stand now
Well understood: It's increasingly common to see engineering development centers far from the manufacturing plants, for example. About the Author Richard M. Melnicoff, a managing partner in the Accenture Strategy Service Line, leads the company's Strategic Information Technology Effectiveness (SITE) practice in North America. He has worked extensively with clients in the high-tech, communications, pharmaceuticals, distribution and other industries. In addition to 17 years of consulting, Mr. Melnicoff has 10 years of industry experience in executive and marketing roles at high-tech companies and IT service providers. He is based in San Francisco. Related Research & Insights:
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