The Development of the Digital Economy - Essay Example

"Critically analyse the issues surrounding the development of the digital economy and propose how such issues have influenced the behaviour of firms in an industry sector of your choice". Introduction This report in the first section analyses the emergence of the digital economy, the issues involved and the drivers behind it. In the second section, it analyses the airline industry and the impact the digital components have on its functioning and the benefits it enjoys as a result. Section 1 Definition The Digital Revolution is a term describing the effects of the rapid expansion of power of digital devices such as computers and telecommunications. It includes changes in technology and society as newer technologies emerge and are globally adopted. The "digital economy" includes information and communications technology, electronic commerce, and digitally delivered services, software, and information. These are very different from each other and are different from the earlier end products of industrialisation. The growth of the digital economy The digital economy comprising of information, computing, and communications - is now the primary driver of economic growth and social changes. It has reached a stage where it is no longer possible except to adapt and enhance oneself to the digital economy to avoid being left behind. A better understanding of these adaptations help in more efficient decision making that translates into better solutions in research, products, or services. The health of any economy has gone from the dependence on farming in the agrarian age to the industrial end products in the industrial age to the current digital or information age. The time period of growth seems to be accelerated and considering that the digital age only began with the invention of the ENIAC computer about less than four decades ago, the world as seem to have progressed in leaps and bounds. Then, Tim Berners-Lee and some others joined to pioneer another great step: the Internet. The Internet has become a critical component of the digital economy and the most influential. The impact of its power cannot be estimated. Internet commerce, which is arguably the most significant component of electronic commerce ("e-commerce"), includes consumer retail and business-to-business transactions; online financial services; media; infrastructure; and consumer and business Internet access services. Recent industry research shows that over one million people in the UK became Internet users for the first time during the third quarter of 1998. Fifteen per cent of the adult population in this country have now visited the World Wide Web. This puts it some two years behind the US, where web users now represent 37 per cent of the adult population, but ahead of Germany (ten per cent) and France (eight per cent). The Issues Economic Implications Every economy is now affected by the emergence of the digital economy. It has changed all the aspects of business, social and cultural entities. The Internet, a main component of the digital age has brought about significant changes in the way business is conducted and the way people work and live. Lowered costs and increased productivity have heralded rethinking strategies in all aspects of the society. Dependency and undue influences of the digital economy has given rise to speculations of how far out these can go without backfiring on the basic aspects of life. Globally, it has seemed to widen the gap between the developed and developing nations while at the internally it has seemed to widen the gap between the rich and the poor due to the accessibility of the infrastructure. Changes in Organizations Information technology has brought with it changes in the organisational performances, policies and people. Information technology has the potential to change the structure and performance of organizations and human enterprise. It has enabled companies to go global with ease and hence forth opened up the borders of the workplace. While it has created a new dimension of relationship among suppliers, customers, competitors and providers, it has also raised a need to fathom the maintenance of these virtual relationships of the organisation and formulate a specific cultural structure to meet the needs in this regard. The lack of personal contact often translates into little or no loyalties and hence these virtual relationships are often not a long term dependency. Small Business This seems a golden opportunity for the small businesses by eliminating the middle men and saving transaction costs and accessing global markets. However these are often cash strapped firms when it comes to scaling and do not have the volumes to economise. Hence often are unable to sustain the pace, making them vulnerable targets for buyouts. It needs to be seen to what extent that these firms are actually benefited. Infrastructure availability The growth and success of the digital economy depends on the ability of businesses and citizens to participate. However, this digital access to the information requires availability of local infrastructure, physical ability to access the information and the skill to interpret it. These also need to be sufficiently well utilised in order to translate into economies of scale. Absence of this access to one segment creates a "digital divide" which continues to widen, as well as unfair advantages to the economically well endowed. Market Structure and Competition Some economists believe that the uniqueness in the characteristics of the components of the digital economy will lead to different market structures and competitive conditions. This is made more complex by their ever changing characteristics often causing fluidity in the markets. The computation of the various scenarios with respect to evolution of markets, market structure, and competition in the emerging digital economy are often not possible due to the short duration of a prevailing technology or scenario. Jobs and Workforce The workforces are being changed in terms of size and composition as well as the skills and knowledge required for the jobs. It has now become imperative to develop, recruit and retain a technologically sophisticated work force. The global competition has now been geared to aid this scenario. In fact a company's future is now dependent on its ability to scale and find the right person for the right job and labour market shortages to fit the required profile in a particular country have a great impact on its economy. Drivers for growth of the digital economy Dramatic rise in users Companies are now moving actively into the concept of information technology because of the number of internet users that is expected to be about one billion by the end of 2005. That constitutes enormous reach and is a tremendous base for doing business. This bound to drive the computer, software, related services and communication industries. E-commerce in business The most important aspect of e-commerce in business has been the reduction of layers in the commercial transactions leading to significantly higher productivity by using electronic networks to create, buy, sell, provide and distribute products and services. Digital delivery Software, music, CDs, games, etc. is no longer required to be packed and delivered to shops or homes. In addition to this airline e-tickets, banking transactions and credit card payments and online education are all the result of the digital economy which has appealed globally to the consumer for the ease of transaction. This conversion to the electronic conveniences is a very visible driver of the digital economy. Online retailing Online shopping is fast catching up, due to the fact that people now have more choices, are able to compare prices at the touch of a button and above all do it all from the from where they are. Although online retail sales are still a small percentage of the total sales, it is a very rapidly growing component. Access to infrastructure Having a PC or an Internet access is no longer considered a luxury and has become the norm. Internet has made electronic commerce affordable even to the humblest home office. Companies, big to small, can communicate to the public through the Internet, within the company through the Intranet and with its business partners through an exclusive extranet. Lower costs The ability to reach a wider supply base in the procurement field electronically has enabled efficient cost cuttings. Also this has enabled the small and medium payers to get into the fray since they are now more visible. Overall the elimination of wasted time in the traditional procurement process and the quick turnaround time and the instant availability has all translated into lower production costs. Lower cycle times The collaboration of the workforce spread around has been made easier due to the electronic media. Instant clarifications and resolving of problems have reduced the lead times. Lower marketing costs Digitally being able to do a lot of the jobs has lessened the dependence on a large workforce preferring a smaller skilled work force. The smaller workforce supported electronically is able to handle a better workload resulting in increased efficiency at no additional or lesser marketing costs. Wider customer base The Internet has been a boon to the marketing and sales of the products and services. There is huge demand to seek content on the web and the availability of the information is an asset. When the company has made the relevant information available, globally, it continually caters to time zones and markets not available before thereby increasing visibility greatly and translating into better sales. Section 2 We shall now analyze how this digital revolution has impacted the Airline Travel Industry. Background During the last 10 years the airline industry in the UK has changed out of almost all recognition. The biggest change has been the emergence of the low-cost airline sector, which now dominates the short-haul market. However, there has also been considerable consolidation within the traditional full-service scheduled sector, with British Airways, BMI and Virgin Atlantic emerging as the three key carriers. The charter airlines have also restructured themselves leading to considerable consolidation in this sector, with some of them also being attracted into the expanding and potentially lucrative low-cost market. The airline sector is more competitive today than it has been at any time in the past, providing consumers with more choice and cheaper fares than ever before. It is therefore no surprise that the number of passengers uplifted from UK airports is still increasing, with 86 million having flown in 2004, up from 70 million in 2000. The development of a fifth terminal at London Heathrow testifies to this growth. However, against this expanding consumer market, the industry continues to struggle in the aftermath of 11 September, although the tragic events of that day only accelerated many of the trends that were already starting to emerge at the turn of the century. High oil prices and increased competition will also continue to test airlines to the full over the next few years. Over the past year, the travel and tourism industry has been battered by a number of unforeseen tragedies ranging from horrific criminal tragedies to devastating natural disasters. Industry analysis According to Porter, the five competitive forces affecting an industry are: threat of entry, competitive rivalry, and bargaining power of suppliers, threat of substitutes, and the bargaining power of buyers. Let's use the airline industry as an example of how an analyst may interpret the competitive forces that affect an industry. The threat of new entrants presents the possibility that new firms will enter the industry and diminish industry returns by passing along value to buyers in the form of lower prices and raising the cost of competition. Hence the airlines need to keep costs down in order to survive. The home markets of Europe's two biggest no-frills carriers, Easy Jet and Ryan air, are close to maturity and so they are focusing on opening up new bases and routes in mainland Europe, in competition with smaller local carriers. This has put tremendous pressure on the ticket prices. Suppliers are concentrated within the airline industry. Boeing and Airbus supply most commercial fixed-wing air carriers. Supplier concentration makes it difficult for competitors to exercise leverage over the supplier and obtain lower prices or play one supplier against another. The third competitive force is the bargaining power of buyers. Airline travel is not cheap, and can be the most expensive part of a family vacation. A small difference can often shift the business from one airline to another. Fourthly the threat of substitutes in case of air travel has to do with time, money, personal preference, and convenience in the air travel industry. Longer distances may not fall under this category while options maybe available for shorter hops. Lastly, the airline industry is fiercely competitive. Industry growth is moderate, and carriers are struggling to take away share from each other. Barriers to exit are substantial in the airline industry. It is easy to gain entrance but difficult to sustain and exit. Due to all these pressure airlines like any other sector are under great pressure to offer value at lowest possible cost. The Travel Industry Chain This industry has been traditionally dependent on the travel agencies as middle men for the procurement of their needs for airline tickets, had to contact hotels for reservation purposes and rental car companies for transportation etc. More choices and convenience: With the advent of the Internet revolution, making travel plans or choosing preferred travel packages have become ever so easy for the consumers. The majority of the websites provide rich information on the destinations (history, traditions, culture and geography, as well as accommodation, restaurants and entertainment, mainly in the form of tourism provider contacts or links to major hotel chain websites). The information is presented graphically in an attractive way and documented with photographs. State-of-the-art online reservations facilities now offer an incredible selection of vacation packages, holiday destinations, and flight options in one place. Orbitz.com and Expedia.com in the U.S.A and Ebooker.com and Lastminute.com in the UK are doing booming business. MyTravel Group is a major player in the world's most active markets for package holidays and other leisure travel services. The company was established in the UK in 1973. MyTravel played a leading role in the development of package holidays, which have become an extremely popular form of leisure travel, bought by almost 20 million people each year in the UK alone. Holidays are sold through more than 700 of the company's own stores worldwide, through travel agents, over the phone, and increasingly online. The sale of online tickets is the largest initial travel business. Booking flight tickets, rooms, car rentals, tourist attraction tickets with easy to navigate online reservations make life easy. If the ready made packages do not make sense then custom built deals seem to offer more value for money and suit the traveller's aptitude. With so much information at their fingertips, the inclination to use online resources is fast gaining ground. British Airways went the e-commerce route in 2002 and was influenced by Amadeus' a fast growing GDS system's strength in travel distribution technology and systems, as well as the potential for British Airways to reduce significantly its operating and development costs, while providing enhanced passenger management systems in the future. British Airways also stands to benefit from the extensive e-commerce expertise of Amadeus. The consumers are benefited by the increasing choices, conveniences as well as the quick turnaround times to cash in on the deals. Also booking online gives them choices like choosing seats and meal preferences and most of the websites hold their preferences in memory and often are useful when the process is repeated at a later stage. Hitwise is the world's leading provider of online competitive intelligence services. Each day, Hitwise monitors how more than 25 million Internet users interact with over 500,000 websites across 160 industry categories. Hitwise reports that visit to travel related websites have increased by over a quarter in the 12 months to April 2004, reflecting the continued strength of this sector online. Lower sales and marketing costs: It is cheaper for an airline to process a ticket sale online rather than to use a travel agent or a reservations centre. Not only are transaction fees reduced, but savings are also realized when cheaper electronic tickets are substituted for more expensive paper tickets. In fact, to achieve substantial savings, Northwest Airlines was the first to charge $10 more for booking through their call centres while charging $25more to get paper tickets mailed to them over and above the fare. The absence of an intermediary lowers the marketing costs which the airlines are able to pass on to the customer thereby increasing traffic to its services. According to the Air Transport Association of America, it costs $8 to process a ticket through a travel agent using the CRS, $6 to book though a travel agent in liaison with the airlines and $1 to process a ticket online when the customer books directly with the airline. Lower Distribution costs: Distribution networks, including travel agent commissions, marketing and advertising commissions and facilities for running and hosting central reservation systems are one of the largest operating expenses airlines face. The opening up of the digital era heralded the advent of new travel web services where the airlines themselves sponsored travel sites or "Virtual Agents" which did the job for them. Microsoft's Expedia.com and Sabre's Travelocity are good examples of the digital age travel sites. The commissions paid to online agents for a single ticket is often way less than what it would be for a traditional agent. Some airlines also encourage customers to use electronic tickets by awarding frequent flyer miles when they are purchased. Additional revenues: The airline industry has also incurred increase in revenues from unsold seats which are often found no matter how accurate the forecast or prediction about the demand. In those cases, airlines auction these "Cyber fares" to the highest bidder. For example, every Monday or Tuesday, American Airlines, does an inventory of its low-performing markets. By midweek it offers great deals and discounted fares in these segments, through an email for about 1 million"NetSAAver" for the upcoming weekend. Thanks to the digital help, since its launch in March 1996, this has generated tens of millions of revenues for the airlines. Tracking and feedback: In the constantly changing world of customer expectations, it is very easy to keep track of customer preferences and trends when logging online. Analysis of this data gives the organisation a great tool to analyse and make changes or restructure the strategies that will direct more traffic for their products and services. Also, the customer is also satisfied since he feels that his preferences have been monitored and the next time he is not required to punch them in again unless required thus saving him time. Conclusion This report has focused on the emergence of the digital economy the promise it contains and some of the challenges it poses. The impact of the digital economy on the Airline travel sector has also been analysed. Like any other technological advancement, the benefits it brings will definitely be offset be by some drawbacks. It would take a lot of dynamic research to see how best it can be made use of for a progressive society. Sources Building the Knowledge Driven Economy Department of Trade and Industry [Online] http://www.dti.gov.uk/comp/competitive/ec_ch4.htm 7th November 2005 Facilitating the Digital Economy World Information technology and Services Alliance [Online] http://www.witsa.org/papers/digecon.pdf 7th November 2005 Online travel sector E-Consultancy [Online] http://www.e-consultancy.com/about/press.aspid=181 7th November 2005 Society Today Economic and Social Research Council ESRC.com [Online] http://www.esrcsocietytoday.ac.uk/ESRCInfoCentre/facts/index48.aspx 7th November 2005 About Mytravel My travel [Online] http://www.mytravelgroup.com/ 7th November 2005 Brynjolfsson, Erik Kahin, Brian Edited by Understanding the Digital Economy Data, Tools, and Research [Online] http://mitpress.mit.edu/catalog/item/default.aspttype=2&tid=3935 7th November 2005 Del Vecchio, John Analyzing industries 9 March 2000 The Motley Fool [Online] http://www.fool.com/research/2000/features000309.htm 7th November 2005 Salmelin, Bror European Approach to E-business September 2000 European Commission Information Society [Online] http://e-conomy.berkeley.edu/conferences/9-2000/EC-conference2000_papers/salmelin.pdf 7th November 2005 Read More