The DIGITAL ECONOMY
I. Introduction

( Pearlson & Saunders, 2013, Introduction; Tapscott, 2014, Ch. 1)

@mtpadam
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Educational Objectives for Today
• Foundations of the economy
• Similarities and differences between analog and digital goods
• Understand the basic concepts of the digital economy
• A brief overview of the history of IT
• Creative destruction and digital disruption

| EBUS3050 | The Digital Economy| I. Introduction

“These Google guys, they want to be billionaires and rock stars and go to conferences and all that. Let us see if they still want to run the business intwo to three years.” (Bill Gates, Microsoft, 2003)

“$100 million is way to much to pay for
Microsoft.” (IBM, 1982)

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“Information technology and business are becoming inextricably interwoven. I don’t think anybody can talk meaningfully about one without the talking about the others.”
(Bill Gates, Microsoft)

“By 2005 or so, it will become clear that the
Internet’s impact on the economy has been no greater than the fax machine.” (Paul
Krugman, Professor of Economics, 1998)

“I think there is a world market for maybe five computers.” (Thomas Watson, IBM CEO,
1943)

“There’s no chance that the iPhone is going to get any significant market share. No chance.” (Steve Ballmer, Microsoft CEO, 2007)

The ongoing advances in information technology have a strong impact on the economy. At ever increasing speed, this creates a winner‐take‐all environment that is characterized by high levels of insecurity and risk.
(Pearlson & Saunders, 2013; Ryan, 2013)

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Contents
Business Analysis
I. Introduction
I.1 What is a (Digital) Economy?
I.2 The Architecture of Firms & Markets
I.3 A Brief History of Information and Communications Technology
I.4 Digital Disruption

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Let’s get started!

What is an economy?

What is a digital economy?

What is an information system?

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Definition

What is an Economy?
Definition: An economy consists of the production, exchange, distribution and consumption of goods and services by different agents in a given geographical location. The economic agents can be individuals, businesses, organizations, or governments. Transactions occur when two parties agree to the value or price of the transacted good or service.

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A Simple Economy
Economy

ACTOR

ACTOR

ACTOR

ACTOR

ACTOR

ACTOR

ACTOR

ACTOR

ACTOR

ACTOR

ACTOR

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ACTOR

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Analog vs Digital (1/2)
Analog
Mechanical, tangible, natural
Varies continuously

Digital
Electronic, static, structured
Discrete and discontinuous

Analog representations use tangible elements to For digital representation, information is first create analogies of the real world. They do not converted into numbers (digits) and then stored, involve processing numbers electronically. transferred, or displayed.

An analog‐to‐digital converter (ADC) is a technology that converts a continuous physical quantity to a digital number that represents the quantity's amplitude.
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Analog vs Digital (2/2)

Further examples of products where digital technology replaced analog representations?

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Definition

What is a Digital Economy?
Definition: A digital economy is an economy that is based on digital technologies.  According to the Australian Government, the digital economy is “the global network of economic and social activities that are enabled by information and communications technologies, such as the internet, mobile and sensor networks.”
 The twelve key themes of the digital economy are (i) knowledge, (ii) digitization, (iii) virtualization, (iv) molecularization, (v) integration/ networking, (vi) disintermediation, (vii) convergence, (viii) innovation, (ix) prosumption, (x) immediacy, (xi) globalization, and (xii) discordance (Tapscott, 2014, Ch. 2).
 Synonyms: new digital economy, new economy, Internet economy, web economy

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Information Hierarchy
Data

Information

Knowledge

Definition

Simple observation of the state of the world

Data endowed with relevance and purpose

Information from the human mind (includes reflection, syntheses, context)

Characteristics

• Easily structured
• Easily captured on machines • Often quantified
• Easily transferred
• Mere facts

• Requires unit of analysis
• Data that have been processed • Human mediation necessary • Hard to structure
• Difficult to capture in machines • Often tacit
• Hard to transfer

Example

Daily inventory report of all inventory items sent to the
CEO of a large manufacturing company Daily inventory report of items that are below economic order quantity levels sent to inventory manager Inventory manager knowing which items need to be reordered in light of daily inventory report, anticipated labor strikes, and a flood in
Brazil that affects the supply of a major component

(Pearlson & Saunders, 2013, Introduction, Figure I‐7)

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Things vs Information
Information has beecome a critical resource for any company. It is important to understand how information differs from things in order to take the right strategic decisions
Things

Information

Durability

Wear out

Doesn’t wear out (durable),
Can become obsolete or untrue

Replicability

Are replicated at the expense of the manufacturer.

Is replicated at almost zero cost without limit

Location

Exist in a tangible location

When sold, seller may still possess and sell again

Price

Price based on production cost Price based on value to customer

(Pearlson & Saunders, 2013, Introduction, Figure I‐9)

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Definition

What is an Information System?
Definition: An information system is the combination of technology (the
“what”), people (the “who”), and process (the “how”) that an organization uses to produce and manage information.
 Information technology (IT) is the technology component of the information system, usually consisting of the hardware, software, networking, and data.
 A business system is a set of business components working together in order to achieve a defined purpose. The components of a system include people, IT, processes and equipment. Each component may be a system in its own right.
 Aligning information systems and business decisions is imperative for business!
Every business operates as an information‐based enterprise.
Organisations and their members are usefully conceptualised as
(business) systems designed to accomplish predetermined goals and objectives through the people and other resources that they employ.
(Paul et al., 2010, Ch. 1; Pearlson & Saunders, 2013,Introduction)

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System Hierarchy
 An information system is the combination of technology (the “what”), people (the “who”), and process (the “how”) that an organization uses to produce and manage information.
Management

Information Systems

People

Technology

 Management develops the business requirements and business strategy that the information system is meant to satisfy.

Process

Even those businesses not typically considered to be information businesses have business strategies in which information plays a critical role.
(Pearlson & Saunders, 2013, Introduction, Figure I‐10)

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Contents
Business Analysis
I. Introduction
I.1 What is a (Digital) Economy?
I.2 The Architecture of Firms & Markets
I.3 A Brief History of Information and Communications Technology
I.4 Digital Disruption

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The Nature of the Firm
In 1991, Ronald H. Coase was awarded the 2011 Nobel Prize in Economics
"for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy.“ Ronald H. Coase
(Nobel Laureate)

 “I found the answer by the summer of 1932. It was to realize that there were costs of using the pricing mechanism. What the prices are have to be discovered. There are negotiations to be undertaken, contracts have to be drawn up, inspections have to be made, arrangements have to be made to settle disputes, and so on. These costs have come to be known as transaction costs.” (Coase, 1992, p. 715)
 Transaction costs include:
(1) Search costs: e.g., finding different suppliers and determining whether their goods are appropriate.
(2) Contractual Costs: e.g., negotiating the price and contract conditions.
(3) Coordination Costs: e.g., meshing the different products and processes.
(http://www.nobelprize.org/nobel_prizes/economic‐sciences/laureates/1991/; Coase, 1992; Tapscott, 2014)

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Transaction Costs in the Digital Economy
It makes sense for a firm to expand until the cost of performing a transaction inside the firm exceeds the cost of performing the transaction outside the firm.
 Digital technologies slash transaction and collaboration costs.
 They enable firms to create a platform where customers, partners, and other third parties can co‐create value.
 In the old economy, the business model of many companies was based on the fact that the search, contractual and coordination costs of a reaching transaction were (much) higher than paying an intermediary
 Many intermediaries are no longer neccessary, as ICT enables direct transactions. At the same time, however, globally operating intermediaries emerge that provide the platform for these transactions
(e.g., AirBNB, Amazon, eBay, Taobao, Uber).
(Tapscott, 2014, Ch. 2)

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Markets & Information Aggregation

Price

(1) Adam Smith’s “Invisible Hand”, i.e., individuals seeking their own interest achieve a Pareto optimal state.

?
Supply
p*

(2) Walras’ Tâtonnement
(3) A social planner sets the prices and quantities in order to maximize welfare. Consumer‘s surplus
Producer’s surplus

Demand q* (4) A centralized market based on an
(double) auction mechanism.

Quantity

Digital technologies can reduce contractual, collaboration, and search costs, and thereby increase allocation efficiency and welfare in the global economy.

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Sell
Buy
Sell

Buy
Sell
Sell

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Contents
Business Analysis
I. Introduction
I.1 What is a (Digital) Economy?
I.2 The Architecture of Firms & Markets
I.3 A Brief History of Information and Communications Technology
I.4 Digital Disruption

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A Brief History of ICT (1/5)
 1930’s Alan Turing and his machine
‐ Alan Turing developed a hypothetical model of computational processing
‐ Spurred on later technological developments
Alan M. Turing
(Visionary Thinker)

 1940’s Enigma machine
‐ Turing was pivotal in the decrypting the Enigma
‐ Economic impact – significant to ending WW2

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A Brief History of ICT (2/5)
 1950’s computers used in business for faster calculations (engineering and accounting)
‐ ENIAC (Electronic Numerical Integrator And Computer) was the first electronic general‐purpose computer
‐ Turing complete, digital, reprogrammable
‐ Economic impact – gains in efficiencies and effectiveness

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A Brief History of ICT (3/5)
 1960’s ‐1980 computers used for storing and processing data
‐ Economic impact – efficiency gains

 September 2, 1969: Start of the ARPANET at UCLA
‐ ARPA = Advanced Research Projects Agency

‐ ARPANET evolved into the Internet in the 1980's
‐ Economic impact – backbone for e‐commerce & digital economy IMP1: First Node of the ARPANET
(1969)

(http://www.lk.cs.ucla.edu/personal_history.html)

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A Brief History of ICT (4/5)
 1977‐1985 Microcomputer
‐ Eventually moving from hobbyists to business
‐ Economic impact – Mass market PCs in permeating business process

Apple I
(April 1976)

IBM PC
(August 1981)

Commodore VIC‐20
(January 1981)

Tandy/Radio Shack TRS‐80
(August 1977)

Commodore C‐64
(January 1982)

Macintosh by Apple Computer
(January 1984)

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A Brief History of ICT (5/5)
 1985‐2000 Use of ICT to facilitate process‐design
‐
‐
‐
‐

Business Process Management (BPM)
Enterprise Resource Planning (ERP)
Total Quality Management (TQM)
Economic impact – paradigm shift

 1989: Start of the World Wide Web (WWW)
‐ Based on a proposal by Tim Berners‐Lee (1989)
‐ ICT supporting communication between people
‐ Economic impact – foundation of e‐Business

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The Changing US Technology Sector
“Founded in 1911 as a manufacturer of punch‐card machines, more than a century later [IBM] remains one of the largest technology companies in the world. Where once it made mechanical behemoths for reading and manipulating paper cards, today it focuses on providing computing services and software to clients across the world.”
“Though today’s tech giants are larger than ever, even Apple, now the largest publicly traded company in America, accounts for less than a quarter of the market. Many companies that supplanted IBM during the 1980s and 1990s, such as Hewlett‐Packard and Microsoft, now find themselves in eclipse. All three are trying to make a comeback by pushing into cloud computing, meaning that data are stored and crunched on remote servers.”

(The Economist, 2015, http://econ.st/1QfdNNp)

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Contents
Business Analysis
I. Introduction
I.1 What is a (Digital) Economy?
I.2 The Architecture of Firms & Markets
I.3 A Brief History of Information and Communications Technology
I.4 Digital Disruption

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Creative Destruction

Joseph A. Schumpeter
(Austrian Economist)

Creative destruction describes the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one“ (Schumpeter, 1942).
 Schumpeter argued that the forces of creative destruction can eventually lead to the demise of a capitalist system.
 Agents act in their own interest and therefore continuously aim for innovation in an effort to increase profits or to avoid being overrun by competitors. This continuous innovation is the prime force of creative destruction and causes periodic cycles of crisis.
 Prominent examples for digital disruption:
 Kodak (analog vs. digital cameras)
 Polaroid (instant vs. digital cameras)
 Xerox (laser printers)

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Example: Digital Disruption of Consumer Goods & Retail

(Bellaiche et al., 2012, Exhibit 2)

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Last Slide

… the one about disruptive technologies

(http://dilbert.com/strips/comic/2015‐01‐21/)

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References
Bellaiche, J.‐M., Chassaing, T., & Kapdia, S. (2012). Digital’s disruption of consumer goods an retail, bcg.perspectives by THE BOSTON CONSULTING GROUP, pp. 1‐6. Available online: https://www.bcgperspectives.com/content/articles/retail_consumer_products_digitals_disruption/ Berners‐Lee, Tim (March 1989). "Information Management: A Proposal". W3C. Retrieved 2 February 2015. http://www.w3.org/History/1989/proposal.html Coase, R. H. (1937). The nature of the firm. Economica 4(16), pp. 386‐405.
Coase, R. H. (1992). The institutional structure of production. The American Economic Review 82(4), pp. 713‐719.
Pearlson, K. E., & Saunders, C. S. (2013). Managing & Using Information Systems: A Strategic Approach (5th ed.).
Hoboken, NJ: John Wiley & Sons. ISBN: 978‐1‐118‐2873‐4.
Ryan, L. (2013). Dammit Science, Where's My Hoverboard. Hardie Grant Books, ISBN: 978‐1742706559.
Schumpeter, Joseph A. (1942). Capitalism, Socialism and Democracy. New York: Harper and Row.
Tapscott, D. (2014). The Digital Economy: Rethinking Promise and Peril in the Age of Networked Intelligence (20
Years Anniversary Edition). New York: McGraw‐Hill Education. ISBN: 978‐0‐07‐183555‐5.

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