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What is "e-Business"?


The Sectoral e-Business Watch takes a business process oriented view. Following a recommendation of the OECD, e-Business is defined as "automated business processes (both intra-and inter-firm) over computer mediated networks."

A new picture of the digital economy

The much-heralded revolution in the global economy, driven by ICT adoption and e-business and giving birth to a radically different, 'new economy', has not taken place, as it seemed for a short moment in history it might.

Instead, a broadly-based evolutionary development of electronic business has set in across the globe. This development, though not visibly revolutionary in character, has been nonetheless powerful in its impact, and the maturity of e-business has substantially increased across sectors and regions over the past five years. If it has been a revolution it has been silent this time, but the cumulative result has been that a new picture of the digital economy is beginning to emerge. Consensus is unbroken that ICT and e-business do matter in the global economy – perhaps even more now, well into the 21st century, than during the hype of the late 1990s.

Key drivers continue to be new technol­ogical developments (e.g. ever more powerful wireless infrastructure and devices or the ubiquitous deployment of increasingly miniaturised ICT - "ambient intelligence") and the increasing compet­itive pressure on companies in Europe as new contenders in the global economy grow extremely rapidly in strength. Competitive pressure drives firms everywhere in a constant search for opportunities to cut costs, and reducing costs continues to be one of the most important promises of electronic business, delivered primarily by increased efficiency of business processes, internally and between trading partners in the value chain.

While the search for opportunities to cut costs is still a valid motive for e-business activity, the most innovative firms have discovered and begun to exploit the potential of ICT for delivering against key business objectives; they have integrated ICT into their delivery of quality goods and services, into their quality management, and in more recent times in marketing and for improving customer service. The latter applications are widely considered key to improving competitiveness in the current phase of development of European economies. Competing in mature markets requires not only optimised cost structures, maximal efficiency, and products or services of excellent quality, but also the ability to communicate effectively and indeed cooperate with customers and with potential customers.

To radically improve the value proposition to client groups of increasing sophistication, customers are being integrated into planning, decision making and production processes at an increasingly early stage. The flexibility offered by ICT applications permeating business operations is an essential precondition for this new relationship with customers. Particularly in enterprises serving large numbers of customers, complementary ICT systems such as CRM (customer relationship management) facilitate the comprehensive collection of data on marketing and sales activities, the analysis of this information, and their use for a broad range of strategic and operational decisions.

In service sectors such as tourism and telecommunications, ICT-based interaction with customers has become an indispensable element of marketing strategies, if not the most important channel of all. The impact on the competitive scenario in these industries has been substantial; the full transparency of prices and service depth has changed the balance of power between the players in the respective value systems.

Though service sectors lead the way, ICT is already quite widely used in manufacturing sectors to improve service levels. The recent sector study by e-Business W@tch (2005) on the machinery and equipment industry found clear evidence for these developments.

These developments lead to a complex situation. On the one hand, some e-business activity is maturing in many sectors as applications deployed become commoditised (e.g. e-procurement systems); on the other hand, the application of ICT is being expanded to new fields in business, new technological developments are starting to be exploited and diffuse across the sectors, and leading enterprises and their suppliers continue to be creative and innovative in the application of existing solutions.

Definitions of key terms

As the process of innovation and maturing ICT use continues, electronic business has progressed from a rather specific to a very broad topic over the past 10 years. Initially, particularly in the mid 1990s, the policy and research focus was very much on e-commerce, which can be defined as online commercial transactions.

Transactions can occur between companies ("B2B" – business-to-business), companies and consumers ("B2C" – business-to-consumers), or with governments ("B2G" – business-to-government). If transactions are conducted electronically ('e-transactions'), this constitutes e-commerce.

Transactions can be broken down into different phases and related business processes, each of which can be relevant for e-Commerce. The pre-sale (or pre-purchase) phase includes the presentation of (or request for) information about the offer, and the negotiation about the price. The sale / purchase phase covers the ordering, invoicing, payment and delivery processes. Finally, the after sale / purchase phase covers all processes after the product or service has been delivered to the buyer, such as after sales customer services (e.g. repair, updates).

Pre-sale / pre-purchase phase
Sale / purchase phase
After sale / purchase
Information about offer
Price comparisons
Negotiations between seller and buyer
Placing an order
Customer service
Guarantee management
Credit administration
Handling returns

Practically each step in a transaction can either be pursued electronically (online) or non-electronically (offline), and all combinations of electronic and non-electronic implement­ation are possible. It is therefore difficult to decide which components actually have to be conducted online in order usefully to call a transaction as a whole ‘electronic’.

In this context, the OECD proposed in 2000 broad and narrow definitions of electronic commerce both of which are still valid and useful: While the narrow definition focuses on 'internet transactions' only, the broad definition defines e-Commerce as "the sale or purchase of goods or services, whether between businesses, house-holds, individuals, governments, and other public or private organisations, conducted over computer-mediated networks. The goods and services are ordered over those networks, but the payment and the ultimate delivery of the good or service may be conducted on- or offline" (OECD, 2001).

The addendum regarding payment and delivery is an important part of the definition, but can be debated. The difficult question is which processes along the different transaction phases constitute e-Commerce and which do not. The OECD definition excludes the pre-sale or purchase phase and focuses on a specific part of the sale / purchase phase, namely the ordering process.

e-Commerce, defined in this way, is a key component of e-business, but not the only one. In recent years, it has been increasingly acknowledged among policy and research communities that the focus on e-commerce transactions may be too narrow to capture the full implications of e-business. A wider, business process oriented focus is now widely recognised. Reflecting this development, the OECD WPIIS proposed a (broader) definition of 'e-Business' as "automated business processes (both intra-and inter-firm) over computer mediated networks." In addition, the OECD proposed that e-business processes should integrate tasks and extend beyond a stand-alone or individual application.

This definition reflects an understanding of e-business that encompasses more than e-commerce transactions. The broad concept of e-Business also includes the digitisation of internal business processes, as well as cooperative (or possibly even collaborative) processes between companies which are not necessarily transaction-focused.

The study of ICT impact

A main argument for policy activities in the area of e-business is the impact of ICT on productivity and innovation. In a global business environment, where enterprises have to compete with firms in countries with much lower average wages, competitiveness can only be maintained by achieving higher productivity and a higher degree of innovation; this enables firms to compensate labour cost disadvantages; either directly or indirectly by leading to a better quality of products and services.

The i2010 Communication stresses the critical role of ICT for productivity and innovation, stating that "… the adoption and skilful application of ICT is one of the largest contributors to productivity and growth throughout the economy, leading to business innovations in key sectors" (p. 6).

Given that this is the case, modern economic and industry policy at European, national and regional level has to consider how the uptake of ICT among enterprises within its constituency can be promoted. The search for effective policy instruments that accelerate ICT uptake, thus creating a positive net effect for the economy as a whole, is a key underlying rationale for the work of the SeBW.

In support of this assessment, some evidence for the impact of ICT on productivity and innovation activity is presented in the following chapters.

ICT, e-business and productivity

That ICT use in enterprises has an impact on productivity is fully acknowledged in research and policy, though there continues to be much debate about the exact extent to which ICT contributes to productivity gains. Over the past 10-15 years the impact has been particularly strong on US enterprise: "There is now broad agreement that the productivity revival of the USA since 1995 is an ICT story, triggered by both capital deepening and enhanced total factor productivity growth." However, the impact in European enterprises has not been as great,and this discrepancy continues to be a major concern in EU policy.

Recent work by the UK Department of Trade and Industry (2005) found evidence that ICT explains a productivity advantage of US firms based in the UK over their UK-owned counterparts with comparable operations Some other interesting findings by the same study are:

  • Both hardware and software capital show significant productivity gains. However, gains attributable to ICT across service sectors are higher than those in manufacturing sectors.
  • Returns to ICT exist across high- and low-use sectors, and both for large and small firms.
  • ICT tends to reinforce the productivity of other capital and skills.
  • Employee use of ICT adds significantly to productivity, over and above effects of hardware and software capital (after controlling for sector, size and ownership).

Other studies conducted at firm-level show similar results. In fact, studies with firm-level data often find the strongest evidence for economic impact of ICT, exposing factors which cannot be observed or measured at the aggregate level.

Maliranta and Rouvinen (2004) find strong evidence for productivity-enhancing impacts of ICT in Finland. After controlling for industry and time effects, the additional productivity of ICT equipped labour ranges from 8% to 18%, which corresponds to 5-6% elasticity of ICT capital. The effect was much higher in younger firms and in the ICT-producing sector, notably ICT producing services. With a view to sectoral differences, and as can be expected from descriptive statistics on ICT use, they report that "manufacturing firms benefit in particular from ICT-induced efficiency in internal communication (…), while service firms benefit from efficiency in external (Internet) communication."

Hempell, van Leeuwen and van der Waal (2004) studied the joint impact of ICT use and permanent technological innovation on productivity for German and Dutch service firms. They find evidence that such impact exists and is of the same magnitude in the two countries, while the direct impact of innovation on multi-factor productivity appears to be more robust for German companies. A general conclusion is that ICT is used more productively if it is complemented by innovation efforts in the firms concerned.

Gretton et al. (2004) find for Australia that ICT and related effects raised Australia's annual multi-factor productivity (MFP) growth by around 0.2 percentage points in the 1990s. This is significant, even if it is a relatively small part of Australia's 1990s rate of MFP growth of 1.8% a year. The analysis found positive links between ICT use and productivity growth in all sectors that were examined.

Impact due to improving intra and inter-firm links

An important consideration in this context is that productivity effects of ICT result to a large extent from improving the links between activities in a company's value chain and value system. A value chain logically presents the main functional areas ('value activities') of a company and differentiates between primary and support activities. These activities are "not a collection of independent activities but a system of interdependent activities", which are "related by linkages within the value chain" (Porter 1985). These linkages can lead to comp­et­itive advantage through optimisation and coordination. In fact, it is exactly here that ICT has a major impact, as ICT applications are a key instrument to optimise linkages and thus increase the efficiency of processes. The value system expands this concept by extending the perspective beyond the single company. The firm's value chain is linked to the value chains of (upstream) suppliers and (downstream) buyers, resulting in a larger set of processes – the value system. e-Commerce, i.e. electronic transactions, occurs within this value system.

Key dimensions of this framework (notably inbound and outbound logistics, operations, and the value system) are reflected in the concept of Supply Chain Management (SCM). Here, the focus is on optimising procurement-production-delivery processes, not only between a company and its direct suppliers and customers, but aiming at a full vertical integration of the entire supply chain (Tier 1, Tier 2, Tier n suppliers). In this concept, each basic supply chain is a chain of sourcing, production, and delivery processes with the respective process interfaces within and between companies. The optimisation of these linkages will eventually translate into aggregated e-business effects on industry productivity and competitiveness, with the potential to create competitive advantage for those industries that most rapidly and effectively exploit this opportunity.

ICT, e-business and innovation

Another important mechanism by which ICT impacts on competitiveness, which is closely related to productivity effects, is the link between ICT and innovation. The European Commission has for good reason long placed great emphasis in policy actions on the critical role of innovation in ensuring European businesses stay competitive in the global economy. At the same time, competitive pressure provides powerful incentives for companies to continuously engage in innovation and R&D. Thus, innovation, competition and competitiveness are closely intertwined.

ICT has a special role to play in innovation and the related increases in competitiveness, being widely recognised as a major enabler of innovation, in particular for process innovation. According to a survey by e-Business W@tch (2005), 75% of companies that had introduced new business processes in 2004 reported that this innovation was directly related to or enabled by ICT.

In many cases, the implementation of e-business processes in a company will in itself const­itute process innovation. In manufacturing sectors, e-business has triggered significant innovation inside the companies, notably in supply chain and delivery proc­esses, such as automatic stock replenishing and improved logistics. In service sectors such as tourism, the innovative impact of ICT is more evident in the way that external trans­actions are accomplished. For example, if a company starts to sell its services online, this usually implies significant innovation in the service delivery process and in customer communication.

In some sectors, particularly in ICT manufacturing, consumer electronics and tele­communications, ICT are also highly relevant for product and service innovation.

As ever more companies strive to exploit the innovation potential of ICT, it becomes more difficult for the individual company directly to gain competitive advantage from this technology. In many fields of application where penetration rates are moderate or high, e-Business has become a necessity to stay in business rather than a means to differentiate from competitors. For later adopters, the fact that the introduction of innovation can cause substantial costs in the short and medium term coupled with the reducing benefit stream as competitive advantage dwindles means that it takes ever longer before investments pay off. This causes dual challenges in particular for small and medium-sized companies, who often have neither strong financial resources nor early adoption capabilities (scouting, assessment, piloting).