Digital Economy: Impacts, Influences and Challenges 2005 phần 5 potx

Impacts of the Digital Economy 143 Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. distribution into the industry’s value-system, and often as own-brand contractors. In this way the total number of firms engaged in the value-creating chain in the grocery sector has dramatically increased. Supermarkets increasingly try to supply novel products to consumers based on customer desires. Retailers can supply these products to stores in a customer responsive fashion due to their mastery of the supply-chain. Information about consumer needs is obtained through a variety of channels: by analysing consumer information captured with loyalty cards at point of sale, with data mining and strategic ordering systems in dedicated data warehouses, with qualitative information as to consumer requirements gathered from customer feedback and focus groups, from Internet order histories, observing changing social trends (such as shifts in restaurant trends), and by consulting experts from past moving consumer areas such as those represented by “celebrity” chefs. Whilst increas- ing buyer power and category management techniques allows supermarket to offer cheaply produced own-label low cost versions of branded goods — sometimes manu- factured by the branded producers themselves — knowledge of customer trends is also allowing them to out-compete manufacturers in high-value-added market segments by using innovation networks to create and produce their distinct own-brand products — although they neither own nor operate the production process. The process of creating new magazine titles and novel own-brand products is the subject of the section on innovation networks. A key feature of these products however is that they are designed from the outset as short-life products and this attribute is the subject of the following section. From Life-Cycle to Life-Span Products The use of digital technology in publishing has removed many of the entry barriers to the industry. Competition in the high-value segments (i.e., monthly magazines) is therefore about addressing consumer needs — and consumer needs often change in line with current fashions, trends and new technologies—rather than printing costs. Maga- zine publishers and small independent entrants are able to use their detailed knowledge of “lifestyle” areas to offer specialist magazines. Consumer-driven innovation is not however about identifying one key product — a “killer app” — that will enable the producer to gain a competitive edge through an efficient scale of production to support low costs and moderate margins. Rather it is about the ability to manage a continuous process of development and innovation based on supplying products for changing consumer needs. The magazine publishers who identify fans of TV series such as “Buffy the Vampire Slayer” or a new computer gaming platform such as the X-Box do not expect that magazines targeted at these audiences will have more than a limited life-span. In the same way competition between the vertical networks supporting retailer’s own-brands is enacted though the constant supply of products. Innovation for life-span goods is about managing constant innovation. TLFeBOOK 144 Mowatt Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. The publishing industry questionnaire responses showed that consumer magazine companies have extended their activities to exploit their knowledge of consumer markets by supplying new titles and also other products and services. Television stations, shows and radio programmes based on magazine brands (such as KaRang! TV for heavy metal music fans), licensing for foreign distribution, Internet advertising, event sponsorship, fairs, exhibitions and direct activity with consumers are all ways in which consumer knowledge has been exploited (for a detailed review of the questionnaire results, see Cox, Mowatt and Young, 2003). Consumer firms can get very close to consumers. In the mountain biking segment for instance riders may meet the editors of mountain biking magazines on public trails and also on trails actually sponsored and created by maga- zines. One magazine in the segment, MBUK, has an extremely active Internet chat room and forum with hundreds of discussion threads generated by mountain bikers per week. The magazines editorial staff not only engages in the sport themselves, and observe reader’s activities directly, but also interact through the Internet: for example, six MBUK readers who had complained about the magazine online in a discussion were brought into the magazine company to work for a week and this later became the basis for a story — and continued dialogue on the forum. It is the speed, quality and depth of this interaction that characterises consumer-responsive firms in the digital age. This interaction allows firms to explore new niche markets and service, for example launching a new magazine to capture emerging trends in the sport and launch spin-off, single edition or special edition titles. In the supermarket the chilled ready-meals story in the UK provides a compelling example of the transformation from producer to consumer-driven competition and the shift to life- span products in the food retailing industry. Chilled ready-meals are the prime example of retailers’ ability to differentiate quality own-brands, and are high value-added premium convenience products, which have displayed consistent rapid growth from the 1990s to date. They are ready-prepared, short-shelf-life, complete meals which are chilled, not frozen, for freshness. Unlike frozen ready-meals, where four branded manufacturers still control 50% of the market, 95% of the chilled market is controlled by supermarket own- brands, supplied through innovation networks comprised largely of small firms (Cox and Mowatt, 2004). The appeal of the sector lies not only in its convenience, but also as a substitute for takeaway and restaurant meals, and retailers therefore need to be able to offer their customers an expanding and changing range of high quality products in line with fashionable eating trends. SuperCo offered a total of 141 different chilled ready- meals in 2000, having introduced some 44 new products in 1999 alone. Retailers tend to source the inputs for chilled ready-meals from a great number of suppliers (180 in 2000) in order to respond quickly to new restaurant trends with new recipes, exploiting the flexibility of small suppliers. The process of innovation is examined in the following section. TLFeBOOK Impacts of the Digital Economy 145 Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. Innovation Networks for Life-Span Products Publishing Firms Publishing companies are able to use innovation networks to supply new titles and services to customers willing to pay high prices for quality magazines. People with expert knowledge of a special interest can take advantage of the low entry barriers in the industry to originate their own magazine titles — something that was possible before the digital age but very rare (the launch of an independent high-value monthly in the early 1980s such as the Face was exceptional). It is more usual that actors with experience in the publishing industry develop their network of expert contacts in order to create new titles. For example, publishers within large production-orientated firms that were until recently operating in the old paradigm had developed linkages with consumer experts across several market areas, and within the firm and through their personal contacts in the industry a network of technical and editorial people. Publishers and editors who identified new opportunities often either left their company to form their own start-ups or themselves launched a new title pilot to demonstrate the potential to the company. A typical story from one publisher detailed how he and his editor on a style magazine received a lot of feedback from readers concerning a feature on celebrity diets. The publisher was able to put together an informal team comprised from his personal networks to develop a spin-off title to cater to this market at this own personal initiative. In the last few years large magazine publishers have begun to realize that they are repositories of expert knowledge that can be used not only to publish existing magazines but to see their activity as coordinators of networks that can be flexibly rearranged to generate new titles quickly in response to consumer trends. For organisations this had meant re-forming around consumer interest groups, and using an essentially project-based approach to spin off new titles and products. The small publishers formed in the first wave of digitization in the mid and late 1980s have also grown on this principle — using experts to inform the company about new opportunities and to put together a project-based team to develop a new title. This process relies on contributions from external actors (contract journalists and experts commissioned for work) which has greatly increased the scope of the production system coordinated but not internalized by firms. The digitization of publishing has occurred simultaneously with the externalization not only of printing, but also of journalism and copy-based tasks (Stanworth and Stanworth, 1988). For consumer-driven areas it is vital that these informants, who may compose copy, send reports or be brought in as technical advisors, journalists or editors, are authentically connected to consumer trends — which is one reason why a flexible external network rather than in-house journalists is a feature of project-based networks. On publisher described how he worked with people on a surfing magazine. The credibility of being informed by “real” surfers enabled the magazine to appeal to readers. The publisher noticed that surfers were increasingly riding mountain bikes after surfing, and snowboarding in winter — at a time when these sports were less well-known in the UK. He was able to develop new informants from these sports TLFeBOOK 146 Mowatt Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. and put together magazine teams from his technical network to exploit these opportuni- ties. These external experts and actors can be coordinated remotely by e-mail and Internet-based communications technologies, something increasing apparent from the response to our questionnaire (see Table 2), and again this flexibility allows a far faster and wider contribution to firms. In the innovation networks employed by magazine publishing firms the value-adding activities are those which provide quality to consum- ers — in terms of content (through expert contribution), layout and style. DTP allows editorial teams complete control over these key design processes with only a small staff per title. Supporting activities such as advertising sales can be centralized across consumer groups, rather than tied to a changing array of specialist titles. A final story illustrates the changing flexible nature of the magazine publishing firm: Roger (name changed) worked for a large magazine house as editor to a specialist water sports title. He left the company in 1994 and founded his own rival title using his trusted expert contacts from both the sport and the publishing world. From this he established several spin off titles, including one in the men’s interest sector — competing head-to-head with international firms such as EMAP and IPC. From one title in the mid-1990s, he has established a portfolio of seven titles by 2002, having opened and closed four others. His main activity is now looking for new niches — those far from the related areas of lifestyle and sport. His competitive advantage is speed in developing new titles, a low- cost and low-risk process with current technology for specialist rather than weekly mass market titles. The UK has a very established magazine distribution system, with multiple magazine outlets such as WHSmith stocking a large number of tiles in each store (usually with a list of over 2,000) so it has been relatively simple to gain access to consumer points of sale (although retail pressures are beginning to change this). Roger’s comment was that, “It is simple finding local experts to develop your copy once you have found a market.” Innovation in Food Retailing In this section we examine the operation of SuperCo’s innovation network to understand how life-span products are created through flexible innovation networks of firms in loose strategic alliances. SuperCo’s innovation network evolved from its initial development of own-label specifications through internal hygiene and later product development departments for its own-brand goods (Fernie, 1997; Hughes and Merton, 1996; Senker, 1986, 1988). The consumer information which SuperCo collects is considered in conjunc- Table 2: How publishing firms receive copy from external and contact staff Method of Supply Two Years Ago Now Physically (e.g., Film by post/couriers) 40 31 By EDI or Integrated Network Linkages 9 43 Electronically through the Internet 4 23 Only Electronically 4 26 Total Respondents 44 57 TLFeBOOK Impacts of the Digital Economy 147 Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. tion with strategic alliance partners, whose activity is act in a co-ordinated way is possible because of the retailer’s control of the supply-chain. SuperCo accepts that, “Many new product ideas come from our suppliers and we work very closely with some of the top chefs … so we follow those consumer trends which are very fashionable.” In this sector the relationships engaged in are best understood as inter-organisational networks whereby manufacturers and packaging firms develop new products in conjunc- tion with retailers. SuperCo claims to have “very long-term relationships” with some suppliers and accepts that trust within long-term relationships is critical (Lane and Bachmann, 1998), especially as SuperCo has no capital stake in suppliers and there are few formal contracts between retailers and food suppliers in the chilled ready-meal sector. Relations essentially take the form of a “gentleman’s agreement” and this is made possible by the structure of the industry created by the innovation network itself. SuperCo uses many small suppliers to ensure it has access to a large variety of recipes, but relies on a key supplier for 50% of its ready-meals by sales volume. This firm, with a turnover of over £750m in 2002, has grown principally as a supplier to the supermarket sector and has a dedicated factory for SuperCo, guaranteeing confidentiality and exclusivity. This trust has enabled SuperCo to move from business plans of typically three years to longer terms of five years, and implement joint investment plans. These plans range from non-contractually based agreements in which SuperCo agrees to “deliver a volume of business to a manufacturer for five years and the manufacturer invests in a dedicated factory,” to arrangements to supply small firms with technical assistance in return for access to new recipes. For this process to be effective the retailer must ensure that its quality standards and processes are adopted and integrated with its packaging and, crucially, own-brand marketing strategy. Information needs to be passed between the partners in this network. The “relationships in this sector are different than when you are working with the big branded suppliers as we work very closely with ready- meal suppliers and the confidences that we tell them we wouldn’t do on the branded side.” This is especially significant for small-scale suppliers where the retailer is their sole client. This series of very close relations binds the network firms into mutual dependencies. In the case of large manufacturers the relationship centers on negotiation over exclusivity agreements, the use and development of dedicated manufacturing centers, and the co- ordination of new hygiene technologies and processes, such as the development of specific packaging systems. Relations with smaller firms were characterized more by an exchange of hygiene technician staff to co-ordinate basic standards and to transfer technological information, especially information about production systems from manu- facturers, from the retailer to small producers. Knowledge is developed and disseminated throughout the innovation network. The process of working in a network is itself important knowledge. Relations in the innovation network are “fluid and dynamic” within and between firms. SuperCo’s chilled ready-meal innovation unit is part of the fresh foods division and incorporates buyers responsible for recipe development and has a permanent team of 26 people. SuperCo staff and supplier staff spend around 50% of their time in each other’s firms and meet in other locations. Flexibility and face-to-face contact are important when “some of the factories now are like large hotel kitchens, because it has become more and more specialized and the runs have become smaller.” Far from the picture of adversarial price-based negotiation between suppliers and retailers which was partially responsible for the Competition TLFeBOOK 148 Mowatt Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. Commission enquiry into the activities of supermarkets in the UK, network relationships where complimentary assets (consumer information for new product; the ability to flexibly supply new quality recipes) are mutually beneficial to both firms and vital for the supply of life-span goods. The Extension of Innovation Networks In the preceding two sections we have examined how firms in two distinct sectors have been able to use innovation networks to produce and supply high-value niche products. A key element of this strategy has been for firms to be able to identify end-consumer desires. The ability to assemble project-based teams to source, design, manufacture and deliver products is in itself a key element of competitive success in the digital era. This flexibility has also enabled firms to be able to extend innovation networks, exploiting key consumer knowledge by offering additional products and services. In the example of the magazine industry, the spread of services from magazine production into supplying services to consumers was acknowledged. Similar observations can be made in the supermarket sector. Some supermarkets, for example, have exploited their proximity to consumers and their ability to innovate branded products through contractors to enter the magazine market. The retailer J. Sainsbury, for example, uses its contract publisher New Crane to offer The Sainsbury’s Magazine. This magazine had a circulation of 278,043 copies in the first half 2003 (ABC data) and although only sold in Sainsbury’s supermar- kets, it competes directly with magazines offered by mainstream publishers. In this way coordinators of consumer-critical information are able to compete across industrial and market areas outside of their usual line of business. This underlines the complexity of competition in the contemporary period. Shift to Consumer-Driven Life-Span Competition in Analytical Context The ability of the firms in these two industries to leverage critical consumer information to drive innovation through the use of networks presents challenges for our understand- ing of innovation and organisation in the digital age. It has been suggested that the role of knowledge in the digital economy has led to “New Innovation Regimes” (Windrum, 2000) in seeking to explain innovation in “knowledge-intensive services.” This perspec- tive demonstrates that Schumpeterian approaches to innovation, first concentrating on the role of the individual in the innovation process (entrepreneurial capitalism) and later conceptualised in terms of the action of large firms upon innovation and the ownership of knowledge by big business, is limited in dealing with firms in the digital economy. From the evidence presented in this chapter it should be clear that rather than acquiring TLFeBOOK Impacts of the Digital Economy 149 Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. innovative capacity by internalising entrepreneurs as predicted by Schumpeter, firms are increasingly able to coordinate and control innovation through networks. The networks described are not only inter-organisational but bring in individuals and the end- consumer. A key feature of these networks is that the central hub firms co-ordinating information and innovation — magazine publishing firms and supermarket retailers — are managing many simultaneous networks with large numbers of suppliers. The analysis of these collaborative relationships is problematic for a transactions-cost approach to the organisation, with its central concerns of establishing the legal boundaries of the firm, make or buy decisions in production, bounded rationality and opportunism (Williamson, 1995), in attempting to understand the operation of these firms and competition between them. Ekinsmyth (2002) has argued that the magazine publishing industry is project-based, and although this analysis focused on the operation of single magazine titles, our findings have borne this out. I argue that many new consumer-sector, project-based organizations are essentially concerned with life-span products, with a necessary focus on temporary and shifting patterns of alliances in production. From an analytical economic perspective recourse to a legal-ownership definition of the firm as recently argued by Foss (2002) does not further our understanding of production systems — surely the purpose of firm’s activities — where due to the transient nature of activities internalization is unlikely. The digital age has made new systems of innovation possible which are neither within nor outside of the legal definition of the firm, but managed through complex network arrangements. From this perspective the boundaries of firms are less important than the information flows that the firm controls. An approach to the analysis of firms offered by Casson (1997) allows us to conceive how resources outside of the ownership of the firm are potential strategic assets providing that firms can control them. Digital economy project-based, life-span firms as examined in this chapter are also problematic for conventional analysis as they are based on generic technologies. Unlike traditional R&D in manufacturing, where the focus is on the development of idiosyncratic assets developed through bespoke design, many features of the innovation systems that we are examining here are based on generic systems and even in some cases freely available software. For the “pervasive technologies” of the digital age (Cantwell and Noonan, 2001) their value rests not in their uniqueness, but conversely, in their availability to all partners in the value-chain (Nicol, 2001). Network study approaches have attempted to move beyond a simple transactions-cost framework (see Ebers, 1997, for a review) and incorporate conceptualizations of the trust relationships that are important in innovation networks (Lane and Bachman, 1998, provide an overview). However, the value-chain and innovation systems in the indus- tries illustrated also incorporate information directly from end-consumers, and few analysis of consumer-driven innovation to date treats the final consumer in these “edge” markets (White, 2002), as the majority of transactions within an industrial economy are those between firms involved in intermediate forms of production and related services (the customer is often taken to be another supplier or firm in the value chain). However, the communication potential of current technology allows firms to greatly increase their information reach. Consumer-driven competition makes it more likely that firms will extend their innovation networks to final consumers, and that the features described in TLFeBOOK 150 Mowatt Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. these industries may be generalized across the economy more widely. Network analysis also often attempts to describe long-term or embedded social relationships rather than the dynamic short-term ones that characterize innovation networks for life-span goods. The challenge for economic analysis is to explain empirical realities with theories that can deal with the complex nature of firms and production systems in the digital economy. Conclusions This chapter has examined how two distinctly different “low-tech” industries have been able to embrace new forms of information management and complex network forms of organization in response to the use of new digital technologies. The common themes in examining the innovation process in both sectors is the importance of firms being able control and observe information flows through the use of information systems to engage in consumer-driven innovation. The key driver of innovation is the ability of firms to transform the critical information about consumers into knowledge about consumer preferences coupled with the ability to supply these needs through network arrange- ments. The products offered are more likely to have a short life-span, and this will be recognized from the outset. This ability has transformed competitive pressures within traditional industries from those conditioned by the economics of production to the ability to engage in consumer- driven innovation. In the food industry the large retailers in the UK have successfully challenged the dominance of food manufactures in several key product areas and founded several new, highly profitable, own-brand-dominated product markets such as that represented by chilled ready-meals. The manufacturing in this case is undertaken not by the food manufacturers or the retailers but by many small flexible companies encompassed by the retailer’s innovation network. In the publishing industry the advantage held by magazine companies whose competitive success had been founded on the ownership of production evaporated with the advent of DTP and ICTs. Competi- tive advantage in this industry shifted from economies of scale in production to firms able to innovate new magazines and services desired by end customers. Large incumbent firms have found that they can refocus their activities around consumer-driven innova- tion and establish a competency in managing knowledge leveraged through extensive networks of contract journalists and specialists. In both cases external experts and suppliers are crucial in supplying the information that the core firms in the network can transform into knowledge about consumer requirements. Traditional economic approaches to analyzing the operations of firms find temporary and trust-based networks challenging. The focus on ownership and boundaries is of limited utility for understanding innovation networks. A key challenge for the firms in the digital economy is for firms to determine how to control the crucial, consumer-based information that drives the innovation of new products and services. Firms that offer little in the way of value-adding activities may find that they are unable to prevent firms from squeezing their margins. Firms far from sources of consumer information may find that they are increasingly beholden to retailers for distribution. Participation by small suppliers and TLFeBOOK Impacts of the Digital Economy 151 Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. contractors in innovation networks provides new opportunities for access distribution and growth through collaborative partnerships. The systems described in this chapter present new challenges for competition authorities and our understanding of the theory of the firm, which should seek to extend network-based analysis. Further detailed study is needed into other empirical examples of new and existing industries characterized by consumer-driven, life-span products. Acknowledgments The empirical work for this project was supported by a Leverhulme Trust Institutional grant. The research itself is indebted to the managers who were interviewed for this project. The analysis of the work also owes great thanks to Howard Cox who has co- authored several papers on networks and business history with the author, and Stuart Young who has analysed the questionnaire results with the author and Howard Cox. References Abernathy, F.H., Dunlop, J., Hammond, J. and Weil, D. (1999). A Stitch in Time: Lean Retailing and the Transformation of Manufacturing - Lessons from the Apparel and Textile Industries. 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TLFeBOOK [...]... technologies and increasingly inexpensive Internet bandwidth (Christman, 2002; Dahl, 2003; Lee and Capell, 2003) The ability of customers to adapt and reformat digital products is also an essential characteristic of digital products—a characteristic that can be affected by changes in technologies, as well Pricing and Distribution of Digital Products Issues regarding pricing and distribution control of digital. .. deal in digital products Digital Products Some products exist only in digital form, such as software and certain types of information databases Many more types of products exist in physical form, but can be digitized Copyright © 20 05, Idea Group Inc Copying or distributing in print or electronic forms without written permission of Idea Group Inc is prohibited TLFeBOOK Digital Products on the Web 155 These... drawings, choreography notes, sound recordings, and video recordings In some cases, digital products arise from the transmission of other digital products, as in the case of telephone and fax transmissions Defining Digital Products Krishnamurthy (2003) defines a digital product as anything that can be digitized and includes such items as “advertisements” and “financial assets” such as stocks or bonds... masters theses on demand ProQuest offers digital versions of these documents for sale, along with a number of newspapers, journals, and other specialized academic publications Many schools and libraries have subscriptions to ProQuest Other companies, such as SilverPlatter Information and EBSCO Information Services sell subscriptions to digital versions of journals and books to corporate and university libraries... Although Slate drew a wide readership and received acclaim for its quality reporting and writing, it was unable to draw a sufficient number of paid subscribers At its peak, Slate had about 27,000 subscribers generating annual revenue of $50 0,000, which was far less than the cost of creating the content and maintaining the Web site (Sanderfoot and Jenkins, 2001) Copyright © 20 05, Idea Group Inc Copying or distributing... digital products on the Web can easily bundle products and services (Sieber and Sabatier, 2003) and can charge premiums for complementary products in different amounts to different customers, thus combining the productbundling strategy with the price discrimination strategy described above (Venkatesh and Kamakura, 2003) Revenue Models for Digital Products Companies have combined the basic pricing and. .. http://www.uni-bielefeld.de/iwt/sein/kibslond.pdf Copyright © 20 05, Idea Group Inc Copying or distributing in print or electronic forms without written permission of Idea Group Inc is prohibited TLFeBOOK 154 Schneider Chapter VIII Digital Products on the Web: Pricing Issues and Revenue Models Gary P Schneider University of San Diego, USA Abstract Products that exist in digital form can be bought, sold, and, in some cases, delivered,... products arose before the Internet and the World Wide Web (Web) became prevalent However, the availability of an inexpensive and near-immediate electronic transmission medium has added new issues and complicated existing issues These pricing and distribution issues affect the nature, quantity, and quality of competition in markets for these products Copyright © 20 05, Idea Group Inc Copying or distributing... Britannica sells is its reputation and the expertise of its editors, contributors, and advisors Britannica has decided that the best way to capitalize on that reputation and expertise is through a combined format of subscriptions and advertising support The Future of Digital Product Sales: Web Services A key element in the delivery of digital products is the ability to communicate and send products across organizational... (2000) Pricing strategies and technologies for on-line delivered content Journal of End User Computing, 12(2), 4-10 Book Publishing Report (1999) Britannica’s online move signals critical point for reference market, 24(44), 4 -5 Brynjolfsson, E & Smith, M (2000) Frictionless commerce? a comparison of Internet and conventional retailers Management Science, 46(4), 56 3 -58 5 Buyer and seller liability for . effective the retailer must ensure that its quality standards and processes are adopted and integrated with its packaging and, crucially, own-brand marketing strategy. Information needs to be passed between. use of networks presents challenges for our understand- ing of innovation and organisation in the digital age. It has been suggested that the role of knowledge in the digital economy has led to. to retailers for distribution. Participation by small suppliers and TLFeBOOK Impacts of the Digital Economy 151 Copyright © 20 05, Idea Group Inc. Copying or distributing in print or electronic