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  • 1. THE EFFECTS OF DIGITAL ECONOMY ON DIFFERENT INDUSTRIES. A CONCEPTUAL TOOL FOR ANALYZING DIGITALIZATION Heikki Karjaluoto, Jari Salo Faculty of Economics and Business Administration, University of Oulu, Po Box 4600, University of Oulu, FIN-90014, Finland heikki.karjaluoto@oulu.fi, jari.salo@oulu.fi ABSTRACT The paper proposes a conceptual tool for analyzing the main effects of digitalization on firms’ business logic. It is suggested that the main effects of digitalization of industries at a firm level can be categorized under electronic business/electronic commerce, networking, cost savings, and customer interface management. The tool forms a matrix in which these effects are analyzed in relation to the four business logic aspects: 1) the industry recipe, 2) the business system and the linking of business systems, 3) industrial wisdom, and 4) corporate strategies. The matrix is also useful for managers in empirically analyzing the effects of digitalization on various industries. Keywords: digital economy, internet, conceptual tool, business logic INTRODUCTION Along with the progress of the new millennium, businesses have taken major steps in utilizing Information and Communication Technology (ICT), which together have created new possibilities to improve business on the traditional level and on virtual level relating to cyberspace businesses. Improvements in ICT are often viewed as a revolution and many times referred to as the digital economy. While the digital economy especially affects traditional industries, it has also created new business models and novel ways to excel at competition. The business logic in various industries has already faced radical changes and is definitely an area currently under transformation. Information technology influenced productivity, profitability and efficiency in various businesses and industries. Information technology, also called e-business, is mostly understood as Internet-technology. While e-business is seen as an upper construct and defined as an integration of systems, processes, organizations, value chains and markets utilizing Internet-technology, e-commerce is described as being a part of e- business but confined to dealing mainly with marketing and sales processes (see e.g. Chaffey, 2004). E-business has a profound impact on various business activities and value chain activities, as shown in Figure 1. Especially four areas are under transition: 1) supplier relationships, including production and supply chain management (SCM see Lancioni, 2000, Lancioni, Smith & Oliva, 2000); 2) R&D, comprising product data management (see Philpotts, 1996) and design; 3) commercial activities, referring to e-commerce, ordering, billing and enterprise resource planning (see Motwani et al., 2002); and finally 4) marketing and sales, including customer relationship management (Adebanjo, 2003), customer interface and intelligence management, as
  • 2. well as relationship building (Mohr, 2001; Grönroos et al., 2000 Kekäläinen & Lipponen, 2002). FIGURE 1. INTEGRATION OF VALUE CHAIN INTO THE E-BUSINESS E-Marketing Sales CRM SCM ERP Production E-Business Ordering E-Procurement E-Commerce PDM R&D E-Design The information refinement is of paramount importance to companies in every part of their value chains. The competition is fierce, and companies have to consider whether to take the advantage of all the opportunities the digital economy brings or only make use of some of them. Many times a balance is needed between on-line and off-line activities (Gulati & Garino, 2000). Companies not paying enough attention to information management related to the value chain activities are undoubtedly giving their competitors too much of a competitive advantage. On one hand, this research deepens and widens our previous understanding of the digitalization of traditional industries, and provides insights into comprehending the impacts of the digital economy on business logic on the other. As a result of our research we aim at creating a purposeful conceptual tool for managerial use. In order to achieve the study objectives, the following research questions were developed:  What are the main effects of digitalization on economies and business logics?  How to describe and analyze business logic in different industries?  How to combine effects of the digitalization and the business logic in different industries? DIGITALIZATION OF INDUSTRIES It is commonly accepted that the digital economy gives companies new possibilities to conduct businesses. The adoption of e-business depends heavily on the strategic objectives of each company. In other words, the e-business applications that cause the most observable growths in productivity will be adopted in the first wave (Jalava & Pohjola, 2001). Nowadays most companies operate in rapidly changing environments, where time and information management has become the major criteria of success. It is not enough any more to do your business right; instead, you must do it first to achieve a competitive edge over others (see e.g. Hamel & Prahalad, 1994).
  • 3. Definitions of the Digital Economy Digital economy is a broad construct that has been used more or less interchangeably with the concept new economy. As already mentioned, digital economy is a concept used to describe the new world of business in which information and communication technologies have become the key drivers of change (see e.g. Hunt, 2001; Jalava & Pohjola, 2001; Wadhwani, 2001). For instance, Internet and all Internet-related technologies combined with mobile and wireless technologies combined with the software and hardware advancements have influenced the creation of the digital economy. Castells (2000) sees the digital economy as an informational, global and networked economy, attempting to find the characteristics of this concept and to emphasize their intertwining. The digital economy is, firstly, informational because the productivity and competitiveness are basically based on the capacity to produce, process, and efficiently use knowledge-based information. Secondly, it is seen as global because the core activities (such as production, consumption and circulation) and components (such as capital, labor, raw materials, management, information, and markets) are organized globally. Thirdly, the digital economy is seen as networked because the productivity is produced in a global network of interaction between business networks while at the same time competition occurs. Although some academics and practitioners use the concept information revolution (or even internet age) when describing the new economy, the concept digital economy is used more commonly. In the 20th century each of the shifts in economy from farming to manufacturing to services can be labeled as a revolution. This is the reason for calling this concept “the information revolution”. We have seen the effect of new technologies in how they have changed our world in spite of the fact that there is no major influence e.g. on tangible measures like wages and GDP (gross domestic product) growth (Taylor, 2001; Landefeld & Fraumeni, 2001). Figure 2 gives an overview of the economic history dating from the industrial revolution in the late eighteenth century to the present day. Five longer-term cycles (or even different marketing paradigms) can be separated on the basis of the application and diffusion of key technologies and resources (Pattinson & Brown, 1996). As can be seen, phase five (the digital economy) relates to the diffusion of information and communication technology on a global scale. During this time frame the main resource of technology are microprocessors. Therefore the developments in global information infrastructure are remarkable. The lifeblood of the digital economy consists of new ideas, new economics, new innovations and new companies (e.g. dot/mobcoms). In Finland, for instance, there are many new high-tech companies such as Nokia which have managed to do business successfully. However, it is unwise to bite off more than you can chew. Some of the companies have made a mistake like this by focusing on too broad market areas or made other errors in the internationalization process. The digital economy is said to create success in several industries but for instance Porter (2001), for instance, along with others reveals some negative aspects as well. Especially the benefits of the Internet (such as making information widely available, reducing the difficulty of purchasing, marketing, and distribution) are often difficult to capture as profits.
  • 4. Nevertheless, the digital economy is here to stay by creating change, opportunities, and challenges. FIGURE 2 TECHNO-ECONOMIC PARADIGMS AND KEY RESOURCES (Pattinson & Brown, 1996) Fifth: information and communication: a Microprocessors b Global information infrastructure Fourth: Fordist mass production: a Energy (especially oil) b Highways, Motorways, Telephone companies, Aviation Third: Electrical and heavy engineering: a Steel b Electricity utilities, Large bank Second: Steam power and railway: a Coal, Rail transport b Railways, Steamships, Postal systems First: Early mechanization: Cotton, Pig iron b Water power, Canals | | | | | | 1770 1835 1885 1935 1985 2035 Key a Abundant technology resource b Major infrastructure developments DIGITAL ECONOMY AT THE FIRM LEVEL Economic performance during the digital economy and the “old” economy is often measured in terms of productivity. Research in general agrees that the digital economy has had a clear influence on companies' productivity by for example enhancing processes and activities across the entire organization (Strauss, El-Ansary & Frost 2006, p. 6). From 1986 through 1995, productivity grew in the non-farm business sector at an average rate of 1.4 per cent per year. After this period the annual average rate of productivity growth has been around 3.0 per cent, and it is mostly due to the progress in computer technology in general and online technologies in particular (Bullard & Schaling, 2001). The digital economy has for example helped to tie together inventories, purchasing and accounting by pooling the strengths of better computer-aided design, manufacturing and information systems (Taylor, 2001). Porter (2001) indicates that the creation of true economic value becomes the final arbiter of business success. He describes how many businesses active on the Internet are artificial businesses competing by artificial means and propped up by capital that until recently had been readily available. Due to economic value, it is useful to draw a distinction between the uses of the Internet (such as operating digital marketplaces or
  • 5. trading securities) and Internet technologies (such as site-customization tools or real- time communications services), which can be deployed across many uses. Mainly, the uses of the Internet create economic value. Technology providers can prosper for a time irrespective of whether the uses of the Internet are profitable. In what follows we concentrate on four main issues which have been identified as the most important in the digital economy on the firm level: e-commerce, networking, cost savings and customer interface management (see e.g. Pires & Aisbett, 2003; Rao, Metts & Mora Monge, 2003; Fillis & Wagner, 2005). E-commerce Investments in computers have been very remarkable over the last decade or so. Productivity growth has been soaring due to the growth of ICT, such as computers and peripherals, computer software, communications and related equipment (Bosworth & Triplett, 2000). It has also affected economic growth. However, productivity growth will not last forever. Therefore new potential areas of business are welcomed to keep the information revolution going. The most potential alternative that would maintain the information revolution and productivity growth is e- commerce, which is just beginning to rock the economy. According to Rotella, Abbot and Gold (2001), the e-commerce environment demands that companies concentrate on traditional basics, such as leadership (setting standards, establishing vision), clear strategy and "human capital" (i.e. attracting and motivating employees). For instance, e-commerce is very helpful in a supply chain. B2B works smoothly when an e- commerce system takes care of the placement of the order, confirmation, updates about delivery schedules, billing, payment, receipts, and accounting (e.g. SAP or i2 provides such marketing intelligence systems). Overall, the results achieved using e-commerce are remarkable. However, there are not that many companies that are willing to go through the changes needed in order to become web-based organizations. Companies that are willing to use e-solutions can also benefit from cost savings. For instance, according to a survey made by Taylor (2001), the cost reductions resulting from utilizing e-commerce were an enormous 75 per cent in the area of administration. Networking Companies in the different areas of businesses are competing with each other in this world. The 21st century is expected to be a time of market uncertainty, heightened competition and slowing revenues. Therefore it is essential that companies concentrate on interlinked value creation. While companies have previously focused merely on managing tangible (e.g. physical and financial) assets, nowadays companies also concentrate more on managing their intangible assets (e.g. communication, connectivity and collaboration). Many business markets are organized as networks where companies are able to create value with their intangible assets. In other words, they jointly create value through relationships, partnering, and alliances (Ulaga, 2001). IKEA is a good example of such a company, with its main competence being the management of a wide logistical network (see Normann & Ramirez, 1993). From the organizational perspective, companies can make major improvements by increasing knowledge sharing via networking. It was just a couple of decades ago
  • 6. when organizations became able to build new intra- and inter-organizational relationships. These network types are able to communicate better and spread data through the network. What is the most valuable is that companies can improve their decision-making, planning and coordination due to the fast information connections. The ability to create knowledge-based networks of partners gives the company a major advantage in competing with others. Additionally, e-knowledge (e-business knowledge) usage improves the company's reactivity (Warkentin, Sugumaran & Bapna, 2001). However, while being capable of competing with others, companies must be proactive, which refers to co-operation and support, a selective consumer base and to having an innovation strategy (Carayannis & Sagi, 2001). Moreover, flexibility and rapid response are also very focal in the new Internet-driven economy (Hunt, 2001). Inter-organizational systems (IOS) give organizations the opportunity to exchange information and interact electronically across organizational boundaries. In other words, IOS interaction gives companies better connections to their collaborate partners (Warkentin et al., 2001). By using strategic alliances companies are able to enter a given market more effectively and efficiently (Xie & Johnston, 2004). In addition to that, companies are allowed to minimize risks relating to their technological, market, or competitive environments. During the past ten years strategic business alliances have become more common, and the change has due to the digital economy. A strategic alliance refers to a relationship between one or more companies (alliance, joint venture and a partnership). The partial commitments of the alliance members and their flexibility make the relationship strong (Pietras & Stormer, 2001). According to Mayer-Guell (2001), the effectiveness in the digital economy requires changes in the operating levels. It is vital for companies to understand the changing market demands and also to integrate with alliances in order to collaborate with other organizations across their value chains. The digitalization of the entire value chain is required to attain the real gains of the digital economy (Barua, Konana & Whinston, 2001). Cost Savings According to Anandarajan, Anandarajan & Wen (1998), extranets, among other technologies, can be used as a great tool for cost control in a value chain framework. The cost savings are remarkable in every part of the chain. Cost reductions can be made in various areas, such as in data entry and management, office and other routine procurement, speeding financing accounts receivable, personnel management, and communication, just to name a few examples. The savings made in data entry costs are a consequence of the automatic transfer of information from one document to another. The usage of office supplies is easily diminished because of the electronic documents. Both postage costs and the need for paper are reduced. If the financial issues are taken care of electronically, time will be saved because when done electrically, the preparation and transfer of invoices is much faster. If customers, too, use the electronic way as a payment method, the whole process will be faster. The labor costs are much lower when using for example electronic preparation, storage, retrieval and comparison of documents. The reduction is seen in person-hours. Last but not least, the new technology enables us to communicate in several different ways (such as by using telephones, faxes, e-mail, mobile messaging and voice-over-ip), which also generates cost savings.
  • 7. According to Kennedy & Deeter-Schmelz (2001), the purchasing cost reduction in B2B activities on the Internet is estimated to increase from ten to thirty per cent during the next five years. B2B purchasing activities on the Internet are also expected to increase at least six times as much as the comprised business-to-consumer (B2C) purchasing activities predicted to occur by 2003. In general, B2B purchasing activities on the Internet have evolved to a considerable extent, and besides electronic marketplaces, even electronic auctions are used for organizational buying of business solutions (see Jap, 2007). Customer Interface Management While for most companies customer satisfaction is the number one aim, more attention should be paid to customer relationship management and the building of individual brands and the total company image. Customer interface management or touch point management, to use another term,, is the key when trying to strengthen the relationship between the customer and the company. When a company is able to achieve two-way communication with the customers, it also encourages them to create a co-operative and productive environment. It is a commonly held belief that a trade-off situation takes place between the reach and the richness of information, as it is shown in Figure 3. The trade-off situation has shaped the way companies communicate, collaborate and conduct transactions both internally and with customers, suppliers and distributors (Evans & Wurster, 1997; Walters & Lancaster, 1999). FIGURE 3 THE IMPACT OF IT DEVELOPMENTS ON TRADE-OFF DECISIONS (Walters & Lancaster 1999) A A Richness Richness B B Reach Reach As Figure 3 shows, the trade-off situation fluctuates between reach and richness. Reach contains the number of people exchanging information. Richness consists of three different aspects of information, namely bandwidth, customization, and interactivity. Bandwidth is defined as the amount of information that can be transferred from sender to receiver in a given amount of time. Customization refers to the extent to which it is possible to customize the information. Interactivity, also called dialogue, is dominant among small groups. When trying to reach millions of people, monologue has to be used instead (Evans & Wurster, 1997; Walters & Lancaster, 1999).
  • 8. The first curve in Figure 3 presents the level of significance of the issues related to the richness and the reach of information. For instance, when companies are conducting business with one another, the number of people exchanging information is inversely proportional to the richness of the information they want to exchange. A company can send its message in an advertisement, a targeted (customized) letter or a personal sales visit. This refers to the fact that the richness increases from the advertisement to the personal sales visit while simultaneously the reach decreases. In other words, the richness increases as the reach decreases. Figure 3 presents options A and B, which describe the possibilities of high information quality with limited dialogue (A) and a much larger number of contacts with limited information quality and the two-way contact (B) (Evans & Wurster, 1997; Walters & Lancaster, 1999). The second curve in Figure 3 indicates the impact of the digital economy on the reach and the richness of the information. Both reach and richness increase simultaneously due to the development of information and communication technology while at the same time the significance of the issues related to richness and reach decreases. Therefore the options A and B move closer together (Walters & Lancaster, 1999). Along with the digital economy there are new universal technical standards for communication, which allows companies, organizations and individuals to be connected through networks in order to exchange information. It has been claimed that in the future the standards improve exponentially, which makes it possible to reach an increased number of people with an insignificant sacrifice of richness. In addition to that, the trade-off situation effected by ICT developments is able to increase in cost effectiveness. The contact costs of richness and reach decrease, and the management of the company will have the opportunity to customize/target the information flows without worrying as much about the costs. Overall, the trade-off situation affected by ICT facilitates competition between companies. Traditional industries are afraid of coming off a loser due to ICT and are frightened that Internet industries steal their customers (Evans & Wurster, 1997). If the trade-off situation can be eliminated completely, there is a possibility that customers will change suppliers easily and the binding of new relationship and the clarification of customer needs would become more difficult (Walters & Lancaster, 1999). UNDERSTANDING BUSINESS LOGIC IN TRADITIONAL AND DIGITAL INDUSTRIES Understanding different business contexts, e.g. industries, industrial fields and sectors, business systems and clusters, has been one of the central themes in organization and management studies (see Hellgren, Melin, Petterson, 1993; Lilja, Räsänen, Tainio, 1992; Whitley, 1992; Porter, 1990; Spender, 1989). In this study we attempt to develop a 'local theory' about digitalization, business logics, the industry recipes and dominant firm strategies in different industries. From a managerial point of view, a host of alternative concepts exists to capture the logic of different industries and the firms operating in them. For both researchers and managers alike, these concepts can provide a point of departure toward a more complete understanding of the key structural and/or processual characteristics of various industries. In this research we primarily follow the stream of research that concentrates on generating local theories of digitalization within specific industrial contexts. Based on previous studies about understanding industries, we aim at forging a link between understanding the more
  • 9. general digitalization processes on one hand and its links to business logics/industry recipes on the other. In doing this we use different industries as empirical arenas on which we tentatively highlight the interplay and connections between the recipes and digitalization. Traditional and Digital Industries The information revolution has divided industries into two categories on the basis of digitalization: 1) digital economy industries, and 2) “old” economy industries. In this study the digital economy industries are called Internet industries and the “old” economy industries traditional industries. The Internet industries utilize e-business and virtual marketplaces owing to the fact that these kinds of companies operate purely or partly in cyberspace. According to Porter (2001), the Internet has created some new industries, such as on-line auctions and digital marketplaces. However, its greatest impact has been on enabling the reconfiguration of existing industries, which have been constrained by high costs for communicating, gathering information or accomplishing transactions. Internet Industries The so-called dot.coms began to conduct business in virtual marketplaces after the mid-1990s. The dot.coms are characterized by inventive and ingenious business operations. The virtual marketplace (marketspace) is a global network in which companies have to consider the possibility for open competition. The number of the Internet industries has increased enormously during the last three to five years. According to Mohr (2001), there are lots of companies that have revolutionized the traditional industries by utilizing the outsourcing strategy. They attend to their customers directly in order to maintain all of the customers’ information. Capturing and managing the data of their customers is essential to the company in the Internet industry in order to maintain the customer relationship in the future. For instance, Amazon, along with eBay and YouTube, has revolutionized a number of industries, including the retail industry, by making it feasible to conduct business in the marketspace rather than the marketplace. There are also lots of other virtual bookstores that have begun to compete against the bookstores in the marketplace. Another good example of an Internet industry company is YouTube, which enables consumers to share their video files. In addition to that, YouTube offers simple solutions like the Craigslist, which has caused serious damage to traditional industries, as the list renders Yellow pages and miscellaneous ads from traditional newspapers obsolete. Furthermore, miscellaneous ads are a huge source of revenue for local and national newspapers. Besides digital content industry, more traditional industries like the computer industry have also faced some challenges from digital economy, as it enables transforming not only the logic of making things but the distribution logic as well. Traditional Industries With the help of the Internet, many companies have found new customers, new sources of profit and new ways of doing business in a global marketplace. E-business is first and foremost about business; technology is seen as only the facilitator in this new business paradigm (Vlosky, 1999). However, a number of companies have equally failed to utilize the potential of electronic commerce tools. According to Janssen & Sol (2000), the usage of electronic commerce has at least one effect on
  • 10. conducting business in traditional industries, namely the overlook of intermediaries (disintermediation) in electronic markets in order to lower transaction costs. In some cases new additional types of intermediaries are created that specifically handle online transactions and verifications (Shaw, 2000). In addition to disintermediation and reintermediation, electronic marketplaces are powerful tools for reaching new customers and lower procurement costs (Bakos, 1997). Electronic marketplaces, e.g. the Covisint, have lowered the costs of buying automotive supplies (Arbin & Essler, 2002). There is a good example of how traditional industries benefit from digital economy in the banking world: In the year 2006 in Finland, for instance, over a half of the adult population uses mainly electronic delivery channels in their banking, and over 90 % of the banking transactions are made electronically. Concepts of Business Logic and Industry Recipe As far as the business logic/industry recipe is concerned, it is important to differentiate between conceptual frameworks designed to tackle industry logic on one hand and (empirical) analyses of the key features of different industries on the other. The objective of the first category is to provide concepts in order to highlight structures and processes of typical behavior in a certain industrial setting. The dominant business strategies of individual companies are bounded by the general industry logic. On the other hand, the industry logic emerges from the company strategies in a certain industrial field. Thus there is an inherent link between the industry recipe and the dominant strategies on the enterprise level. Furthermore, the industry logic is also affected by the logic of doing business in the supplying, customer and supporting industries (e.g. Porter’s widely cited structural analyses of industries and industrial clusters, 1990). In this research the analysis of the effects that digitalization has on different industries is based on the following conceptualizations concerning the firms operating within their contexts: the industry recipe by Spender (1989), the business system by Whitley (1992), and the linking of business systems, industrial wisdom and corporate strategies by Hellgren & Melin (1992, cf. the industrial field by Hellgren, Melin & Petterson, 1993). These studies provide the theoretical points of departure for our empirical analysis of the different industries. Spender's (1989) industry recipe emphasizes the cognitive dimension of organizations and organizational fields. Different industries are seen as collective structures. Managers are claimed to draw their judgment from a shared pool of knowledge, which is called the industry recipe. The recipe acts as a belief structure that regulates collective behavior within an industry. The same idea has also been embraced by Huff (1982). She talks about the importance of ‘shared’ or 'borrowed' experience within an industry. According to Spender (1989), a recipe is a commonly shared way of thinking and acting in a specific industry: "A recipe is a set of ideas that has certain potential under the specific circumstances which are the recipe’s implicit expectations …As different firms develop different strategies and experience results, messages are broadcast back to others in the industry about what works and what fails" (Spender, 1989, 193-195). Although the industry recipe is considered to be relatively stable, managers in a certain industry build and modify the recipe continuously in their everyday work. The recipe as such is not assumed to be sufficient; rather, it offers partial and ambiguous
  • 11. guidance for managerial action, which can then be adapted to the firm’s particular situation. The same idea of cognitive framing in the structuring of organizations has been utilized by Hellgren & Melin (1992). They used the term industrial wisdom to express the shared beliefs about the competitive rules of the game and the structural freedom of action in an industry: "Industrial wisdom is a shared conventional wisdom about appropriate structure and action that is held by most firms in an industry". To further elucidate, Whitley (1992) uses slightly different dimensions when studying organizations in their contexts. In his concept of the business system, Whitley emphasizes the institutional context of organizations. He describes a business system as a distinctive configuration of market-hierarchy relations that becomes established in its specific societal context, typically within the boundaries of the nation state (Whitley, 1992, 36). The industry recipe, from this perspective, means simply a specific configuration of relations, such as authority, relative size, and formal structures that dominate in the given context – both within and between organizations. Whitley (1992) argues that the most appropriate context for a business system is a nation. However, the concept has also been applied to different levels of analysis. Räsänen & Whipp (1992), for example, suggest that analysis should be conducted on other units of collective actions, such as industries, industrial sectors, production systems or cultures. Spender’s (1989) concept of the industry recipe is often argued to be rather loose, making differing interpretations possible. In order to further understand industries and organizations within their contexts, Hellgren & Melin (1992) combine the two complementary aspects of the business recipe: the recipe as a cognitive structure at the ideological level and the recipe within an institutional context of a business system. In other words, a conceptualization of different recipes should consider the role of both institutional ruling and cognitive framing in the structuring of organizations. Nonetheless, managers easily tend to become overloaded with information, and therefore simplification is a necessity. In other words, managers have to concentrate on certain pieces of information to be able to cope with their potentially vast information environment quickly. According to Prahalad & Bettis (1986), managers make decisions by using pre-existing knowledge systems (schemas). Past experience has created a vast repertoire, a ‘cluster of knowledge’, which is assumed to be organized into structural frames called schemas (Normann, 1976, 73.) The dominant strategy can be understood as both a knowledge structure and as a set of managerial actions. Often the dominant strategy is based on the logic of the core business of a corporation and is thus a reflection of it. A Conceptual Tool for Analyzing Effect of Digitalization In order to empirically analyze the effects of the digital economy on the business logic in the different case industries, it is necessary to have a conceptual tool which helps to categorize the effects. Firstly, based on the previous conceptual discussion the general effects of the digital economy on a firm can be categorized under 1) e-business/e- commerce utilization, 2) networking, 3) cost savings, and 4) customer interface management. Secondly, business logic features should be categorized under specific themes capturing strategic and specific aspects that influence business logic of a firm. These can vary from company to company, but the four main elements at least ought to be analyzed: 1) the industry recipe, 2) the business system and the linking of
  • 12. business systems, 3) industrial wisdom, and 4) corporate strategies (Spender, 1989; Whitley, 1992; Hellgren & Melin, 1992; Hellgren, Melin & Petterson, 1993; Alajoutsijärvi, Tikkanen & Sallinen, 2001). Thirdly, the effects and features are set out in Table 1, where the combination of the effects on business logic features is outlined. This kind of table helps us to analyze the changes occurring in business logic. TABLE 1 THE EFFECTS OF DIGITALIZATION ON BUSINESS LOGIC OF A FIRM → Effects of the digital Customer economy e-business: Networking Cost savings interface ↓ Business logic features e-commerce management 1) Industry recipe 2) Business system 3) Industrial wisdom 4) Corporate strategy As a result, Table 1 can be analyzed in two different ways. By analyzing the table downward it is possible to analyze the effects of the digitalization on the different business logic features one by one. It is possible to see how one effect of the digital economy influences on different business logic features (such as how e-commerce effects the first feature, the second feature and so forth). Moreover, by analyzing sideways, it is very interesting to see how one business logic feature changes when influenced by several of the digital economy effects - in other words, how for example the first feature is influenced by e-commerce, networking, cost savings and customer interface management. Finally, when all the effects of the digital economy and business logic features have been gone through, all the effects and changes can be seen in Table (white area). By analyzing the discovered effects and changes more closely we are able to identify the new business logic influenced by digitalization. CONCLUSION In this paper we described the challenges and changes the digital economy has brought to traditional marketplaces as well as on new-born industrial niches. By quoting management literature we highlighted the central role of industry recipes in understanding and coping with the challengers and changes passed down by digital economy. With the help of brief practical examples, this paper illustrated how digital economy is changing the industry recipes. A clear limitation of the study is the conceptual nature of the paper. In the future some case studies on different industries will be conducted to see if the framework applies, and a large-scale quantitative study could be arranged to see if the results are applicable to a wider audience. REFERENCES Adebanjo, D. 2003. Classifying and selecting e-CRM applications: an analysis-based proposal. Management Decision. 41 (6), 570-577. Alajoutsijärvi, K., Tikkanen, H. & Sallinen, S. 2001. Understanding an industry. Industry recipes and dominant corporate logics in the Finnish mechanical wood industry. Journal of International Selling and Sales Management. 7 (2), 73-88.
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