As noted in the previous section, the way business is conducted has fundamentally changed in the past decade. Empowered by the Internet, IT is now an essential part of business and society.

For example, although cooking and serving fast food might, on first examination, seem to be a non–technology-related undertaking, the truly successful fast food restaurants are intensely dependent on IT. Inventory is tracked and managed, distribution is planned, and replenishment is executed automatically based on target inventory levels and expected delivery times. This allows real-time changes based on actual demand, reduces excess inventory and spoilage, and eliminates lost sales due to out-of-stock situations. Business intelligence is also gathered in real time, allowing businesses to monitor changes in customer preferences, advertising, and buying behaviors. By comparison, smaller fast food operations that rely on manual processes (even using electronic records) suffer from lost productivity and human error through manual processes. In addition, delays in sensing and responding to change in demand or disruption in suppliers can result in reduced sales and profits.

Likewise, for exporters and outsourcers who are trading across geographical borders, the extension of IT through the Internet is proving to be essential to competing globally. The Internet is enabling both product and information flows, creating a new virtual form of transportation, and enabling business to extend its reach to other markets and customer bases. It allows a business to inexpensively achieve a world-spanning presence that, in the past, was only available to large companies that had extensive advertising capabilities.

The Internet and IT can be used in many ways and to varying degrees to bring benefits to all businesses and public sector organizations. Organizations are using the Internet and IT strategically to create new products and services, improve productivity and efficiency, increase revenue, and improve customer satisfaction. Organizations are also using the Internet and IT to improve the efficiency and effectiveness of communication, collaboration, and process sharing. Used effectively, the Internet and IT can help your organization compete and survive in the economy of today.

By the end of this module, you will be able to do the following:

The next section discusses how the Internet has impacted global productivity and competitiveness.

The Internet and IT are changing the world and the way business is conducted and services are delivered. New technology advancements allow both private and public organizations to improve productivity and efficiency, deliver new customer value, and transform their operations.

In this section, you will learn how the Internet and IT do the following:

The Internet and Global Productivity

The evolution of business has largely been the process of managing the means for communication, such as telephone, telegraph, printing press, and transportation. Historically, commerce evolved as a way to communicate information and to move products from producers to consumers. The individual who enabled the transportation of the product was able to generate a profit on the transport.

Modes of communication initially involved writing letters, which were delivered by an unstructured mail delivery system such as someone traveling in that direction. The first commercial telegraph was used in Great Britain in 1839, ironically, within the railroad industry. Commercial use of telephones arrived in the later part of the nineteenth century. These communication devices were point-to-point until Bell emulated the Western Union telegraph exchange concept, which introduced what eventually came to be known as the public switched telephone network. Rapid advances in wiring technology, from a single wire to twisted pair to four pair, allowed long distance and international calling capability. Cellular telephony was developed as an offshoot of radio frequencies. Handheld cell phones were introduced in 1973 with a media event demonstrating the tool between Motorola and Bell Labs. Also in 1973, packet-switched voice was carried over ARPANET, the precursor to the Internet, utilizing the Network Voice Protocol, which ran on top of the earliest versions of IP. Early in the twenty-first century came the advent of voice over the Internet infrastructure, based on IP. This is known today as VoIP. Throughout the history of electric telephony, the voice communication provider market rhythmically expanded and contracted, very much like today.

Modes of transportation initially involved the development of roads, then ships, followed by canals, rail lines, highways, trucking, and aircraft. In each case, the transportation function enabled new forms of business and new ways to link businesses. As each mode of transportation evolved, it initially involved a boom where entrepreneurs moved quickly to build infrastructure, followed rapidly by a burst, where excess capacity drove down investment and markets. Ultimately, in each case, there came a time where the new form of transportation led to new markets and business models and where the excess capacity was consumed and then augmented.

An important point to note is that the evolution of new forms of transportation also involved increasingly abbreviated cycles of adoption. Whereas primitive roads took 1000 years to transform business, railroads took only 200 years, and airfreight took a mere 50 years to impact business.

An important concept here is that transportation is a way to deliver things of value from one place to another. Now with the advent of the Information Age, the thing of value is actionable information or intellectual property. The Internet, standards-based information systems, and fast, low-cost logistics networks have enabled global value chains that have reduced costs by improving efficiencies and accelerating information and product flows. In this regard, the Internet may be considered a new transportation system, and it has evolved at breathtaking speed. In a mere four years, the Internet connected more than 50 million people, and it is now approaching more than 1 billion people. Projections completed recently by research firms estimate that well over half of the world will be digitally connected by 2010.

When Al Gore coined the phrase “information superhighway,” he only got it half right. Although the Internet can be thought of as a highway, it is also something more. Unlike highways, in which there is only a transportation function and it is limited by time and space, the Internet is not limited by either dimension. As shown in Figure 1-1, as intelligence is being built into the Internet, it is increasingly becoming a virtual marketplace where collaboration is leveraged to generate more value almost instantaneously.

Figure 1-1. Virtual marketplace

The dramatic increase in the use of the Internet and IT over the past decade has helped increase the competitiveness of businesses that harness its power. The expanded use of the Internet and IT has also enhanced the productivity of organizations, governments, and individuals. The Internet is driving these increases by doing the following:

• Collapsing timeframes: Unlike a road, the Internet is not traversed in the classical sense of traveling somewhere. On the human scale of interaction, it is enough to present data to the network to make it instantaneously available to the receiver. In a sense, this accelerates travel to the speed of light and radically collapses the timeframes associated with information exchange.

• Changing relationships: In the age of the Internet, it is no longer possible to be unaware of the activities of either businesses or their customers. Markets are beginning to approach the ideal market condition of perfect knowledge. This fact is radically reshaping the ways in which business is conducted. Now markets and businesses operate in much greater transparency, where fewer secrets are kept from customers, competitors, and other business constituents.

• Enabling collaboration: Collaboration is the reason that business has traditionally built office complexes and campuses. A fundamental strategy of business is to bring together resources and enable people with good ideas to interact and coordinate actions to create value and generate a profit. In the age of the Internet, office buildings, complexes, and campuses have become less important. Collaboration can be facilitated electronically through a web presence. This means that rather than building expensive office buildings, businesses can use networked technology to place human minds in close logical proximity so that ideas can be generated and actions coordinated. In many cases, businesses are becoming more virtual, operating without the physical constraints of the past.

• Shortening time to market: Using collaboration facilitated by the Internet, businesses can quickly generate information that can be made available to suppliers and customers, radically shortening the time to market. It is no longer necessary for businesses to rely on physical interactions of people to develop and ready products for markets. Now people can work together over time and distance in real time or asynchronously. For example, engineering teams in various parts of the world can work 24 hours a day on different aspects of a product to enable it to be developed and delivered more quickly. Time-to-market and feedback loops are now defined by the time it takes to make decisions rather than the time required to modify business processes.

• Creating economies of scale: In the past, many products were never introduced because they lacked a sufficient market. Now, automation combined with the connectivity afforded by the Internet allows almost any product to find a global market, thus creating the economies of scale necessary to produce a product profitably.

• Transforming customer value: Customer value is determined by the perceived difference between the customer evaluation of all the benefits and the costs of offering the perceived alternatives. IT-enabled benefits such as shorter time to market, faster delivery, increased ability to customize, and improved customer service levels are transforming customer value.

The Net Impact Study, conducted in 2002 by Varian, Litan, Elder, and Shutter, found that both large and small organizations that adopted Internet business solutions realized significant financial returns for their efforts. A study called “Net Impact 2003: Driving Networked Business Productivity,” conducted by Momentum Research Group, identified specific characteristics of the organization that contributed to the increase in revenue and reduction in costs when using Internet business solutions.

Organizations that indicated the greatest levels of revenue generation did the following:

1. Deployed Internet business solutions focused on customer service and support and research and development (R&D)

2. Worked to enforce data standardization across the organization

3. Focused on ensuring that mobile users had access to the same data that they would on their desktop

4. Experienced greater purchase volumes from existing customers since the adoption of Internet business solutions

The benefits of the Internet not only impact the organization, but affect entire economies. As more organizations use the Internet to cut costs, productivity rates improve, which in turn translate into a better economy.

Citizens enjoy a higher standard of living due to an improved economy in several ways:

• Through growth in real wages, which reflects productivity

• Through slower inflation rates, which also enhance real wages

• Through added spending on social programs, which improves the quality of life and potential tax cuts due to larger government surpluses

Productivity growth is especially important to economic policy makers who are concerned with improving the quality of the citizens’ lives. For budget policy makers, projections of productivity growth are the most critical element in long-term budget forecasting, despite the fact that productivity growth is one of the most uncertain elements to predict.

The Internet represents a new and powerful way to communicate information faster, cheaper, and with greater flexibility. This should allow organizations to do the following:

1. Reduce the transaction costs of locating and purchasing required supplies, including labor

2. Enhance the efficiency of producing and delivering goods and services through lowered inventories and enhanced cooperation among designers of new products and services in different locations, whether inside or outside the firm

3. Reduce the cost and improve the effectiveness of dealing with customers by out-tasking the customer-facing process with Internet-based, self-service applications

It is important to note that the mere communication of information at higher speeds does not result in business transformation. It is the combination of this communication with the ability to add value to the communication that provides transformational impact. As information is generated through collaboration within the Internet, it can be multiplied, amplified, and enhanced to generate new information and insights that otherwise would not have resulted had conventional forms of communication been utilized.

Using the Internet and IT to enhance collaboration even moderately can bring benefits to the organization. For example, a recent study indicated that even moderate levels of external integration, such as allowing customers, suppliers, and partners to view the information for an organization online, cut costs by an average of 14 percent (NerveWire 2002, 14). As Figure 1-2 illustrates, as the level of integration increases, benefits increase. Such benefits allow the organization to remain competitive in a global environment.

Figure 1-2. Benefits of Increasing Levels of External Integration

There has been massive growth and adoption of the Internet by the public and private sector worldwide in just one short decade. In this section, you learned how the Internet could do the following:

You should now have some ideas about how the Internet and IT will affect your organization and how you might compete more effectively in the global economy.

In the previous section, you were introduced to the Internet and some of the ways in which it is impacting the global business environment. You also learned how an organization can utilize the Internet to become more efficient and profitable. This section examines the ways in which IT impacts the organization. You will see how IT can boost productivity, increase efficiency, develop innovation, improve customer satisfaction, and enhance quality.

In this section, you will learn about the positive financial impact that IT can have on an organization, specifically in the following areas within the organization:

As noted in the Introduction, the Internet is emerging from under the dark cloud that was the dot-com bubble burst of the first years of this century. It is becoming apparent that business is no longer separate from IT. In fact, it is fundamentally enabled by IT. As a consequence, IT must be pursued in a way that improves the essential business functions that produce revenue. IT can do this in numerous ways.

The use of Internet-enabled applications allows companies to increase the efficiency of their business processes, reinvent business models, and reconstruct value chains. Organizations are using the Internet for several purposes:

The Internet also enables the centralized knowledge and core functions within organizations to be distributed, shared, and adapted by anyone in the organization. This allows organizations to provide better customer service, address new market opportunities, quickly adapt to changing conditions, and form virtual teams to create new value. From this networked intelligence comes global competition. With more competition, organizational efficiency needs to rise, and more focus needs to be put on the value chain so that the organizations will not just survive but thrive.

In essence, the use of Internet-enabled applications amplifies the efforts of employees so that they can produce more value for a given amount of work. As a consequence, IT can be thought of as a force multiplier.

This notion of force multiplication is at the heart of productivity. Productivity involves doing more with fewer resources. In the case of business, it is increasing the revenue generated per employee through the greater ability of employees to deliver goods and services to customers willing to pay for them faster and more efficiently.

IT can enhance productivity by enabling growth and scaling operations. An increase in productivity can be achieved in several ways with IT. For example, reducing delays in the supply chain and sales process of an organization also reduces cycle time. Therefore, the organization can create more products in less time, which translates into increased output and revenues.

IT enriches productivity by enabling employees to acquire and retain satisfied customers. IT also enables an increase in the production of goods and services for better revenues at improved margins. Each of these activities, prior to the Internet, had a force multiplier of 1. That is, one employee could only do what one employee was capable of accomplishing with his own knowledge and resources. With Internet-enabled IT, force multiplication is well beyond 10 to 1 compared to business processes that are not IT enabled. For some industries, the force multiplier can be in excess of 100. No end is in sight to the force multiplier as firms integrate technology with business processes. With productivity increases of 3 percent or more per year, this compounding will double the overall force multiplication in less than 24 years. By the end of the century, IT-enabled productivity gains will increase productivity by more than 1500 percent.

However, productivity gains by themselves do not create profitable companies. A company can be extremely productive and still go out of business. More is needed.

Another requirement of a successful business is efficiency. What this means in practice is that the company needs to utilize its means of production in ways that maximize the output for a given input. Unlike productivity, which seeks to maximize the output in absolute terms, efficiency seeks high productivity with minimum extraneous cost. Efficiency is high productivity with minimum waste.

IT shines in the efficiency department. With Internet-enabled IT, companies can track their business processes, inputs, and outputs to reduce process time, decrease waste, and maximize throughput. IT does this by simplifying and automating transactions and by involving the customers in the delivery of goods and services by enabling them to conduct their own transactions.

IT can improve efficiency by reducing or avoiding costs related to head count, materials, travel, transaction time to completion, and transaction costs. Internet-enabled applications that are focused on the reduction of administrative tasks can decrease the cost and advance the efficiencies of administrative staff to process applications and remove human latency and potential for errors. As shown in Figure 1-3, organizations lower the cost of sales and order fulfillment by linking internal systems and processes from order entry to delivery.

Figure 1-3. Efficiency Through Automation

However, a piece is missing from the business equation. As noted previously, the business of business in the twenty-first century is intellectual property, or the creation of good ideas. As Peter Drucker (Innovation and Entrepreneurship, 1985) noted, intellectual property can be thought of as a direct replacement for capital, money, and labor. As the dot-com has illustrated, small companies armed with good ideas can outperform much larger companies.

The production and application of good ideas is innovation.

In practice, innovation is the process of making practical use of an invention or good idea to do the following:

Innovation is used to gain competitive advantage or social benefit. From the standpoint of business, however, innovation is the fuel that drives revenue generation. Few businesses can expect to produce the same product for the same price for any length of time. Global competition ensures that competitors will surface that can do the same thing cheaper, faster, and better.

It is the concept of innovation that is the most powerful influence in business. Even if a company chooses not to innovate, innovation will still take place within the competitive market because competition forces innovation. At the very least, a company must match its competition to remain in business. To do so, it will either innovate or adopt the innovation of its competitors. No other alternatives exist.

Innovation is implicit in the development of new products and services (product innovation), the application of goods and services (application innovation), the way in which goods and services are produced (process innovation), and the way in which all these things are managed (business process innovation).

Just as IT is essential to productivity and efficiency, it is proving to be critical to the innovation process. The Internet and IT are driving innovation in these ways:

The use of IT allows organizations to adopt and develop innovative technology, which in turn gives them a competitive advantage.

For example, Wal-Mart, a giant American retailer, invested in IT to create a sophisticated information network. As shown in Figure 1-4, the network linked company suppliers directly to sales information from its thousands of stores. This allowed Wal-Mart to record, analyze, and manage product inventory information immediately. Wal-Mart was able to order only what it needed from its suppliers, thus keeping inventory costs down and bringing sales up. In the past, with a disparate system, Wal-Mart was not able to track this kind of activity in a timely manner.

Figure 1-4. Wal-Mart’s Supplier Network

As a result, Wal-Mart went one step further to implement scan-based trading, a process innovation that requires suppliers to retain ownership of all goods until the customer buys them upon checkout. Scan-based trading lowers Wal-Mart inventory costs and improves profitability.

As noted previously, innovation is critical to business because it has a direct, measurable impact on financial results. Businesses that encourage creativity and innovation tend to outperform those businesses that do not. As you saw in the previous case study, and illustrated in Figure 1-5, through integrated networked information systems, Wal-Mart leads its industry in key financial performance measures, including these:

Figure 1-5. Wal-Mart’s Financial Performance Metrics Compared to its Industry

It bears noting that Wal-Mart is one of the most highly studied companies in the world. Just as the Japanese captured world attention with their application of total quality management principles, Wal-Mart is driving a wave of copycats that seek to replicate what Wal-Mart has achieved. It is inevitable that other Wal-Mart-like companies will evolve; what is certain is that at least one of those rising competitor companies will be even more efficient and innovative than Wal-Mart is today. The bar that Wal-Mart set will be raised and will drive further change in the discount retail market.

Satisfaction has become a principal metric in the evaluation of the effectiveness of the delivery of a good or a service. It is also a strong indicator of the probability of repeat business from a customer. Measuring customer satisfaction informs a supplier about its performance and the quality of its relationship with the customer over time. Customer satisfaction also informs a supplier about the current and future needs, issues, and expectations of its customers. Businesses seek to maximize satisfaction and typically invest substantial resources in trying to determine the level of satisfaction of their customers. In fact, a common complaint of many consumers is that they are overwhelmed with opinion surveys by vendors with whom they have done business. The point of all of those surveys is to gauge satisfaction.

But what is satisfaction? Customer satisfaction can be defined as the ability of a company to fulfill the business, emotional, and psychological needs of its customers. Generally, from a survey point of view, the question is this: did the transaction make you happy? Although “happy” is a state of mind subject to interpretation, in the context of a business transaction, it can be a good determinant of how satisfied the customer is.

The Internet and IT are driving customer satisfaction by enabling the following:

And, customer satisfaction can have a measurable effect on business financial performance. To the extent that satisfied customers tend to be repeat customers, seeking to maximize customer satisfaction can be good business. Market research also shows that it is easier and more affordable for a business to retain a customer than to gain a new customer, so the impact of customer satisfaction is high for the business.

The Reference Management Barometer Study by PriceWaterhouseCoopers surveyed top executives from multinational companies and found that nonfinancial performance measures were considered more important than current financial results in creating long-term shareholder value. Nonfinancial performance measures include product and service quality and customer satisfaction and loyalty. Among those surveyed, 83 percent cited customer satisfaction and loyalty as long-term contributors to shareholder value.

Today, customers are increasingly expecting to receive service and support through a variety of means, including the Internet. Integrated contact centers and Web-based applications are reducing customer acquisition costs. Web-based tools and customer relationship management (CRM) applications are created to improve customer satisfaction outcomes. As shown in Figure 1-6, technology improvements lead to greater revenue and higher levels of customer satisfaction and loyalty.

Figure 1-6. Value of Customer Satisfaction Improvement Initiatives

Although an initial measure of customer satisfaction is important, you need to recognize that the feeling of satisfaction can dissipate rapidly if a product or service does not live up to expectations over time. This notion of satisfaction durability is central to the next concept: quality.

Prior to the great Japanese quality revolution, few people thought much about the idea. However, since the 1980s, quality has become a central theme in any business. Although quality as a practice has undergone several iterations (TQM, Six Sigma, and so on), the fundamental idea is the same: reducing defects.

As W. Edwards Deming and other process improvement thought leaders pointed out, the reduction of defects is not an activity that can be imposed on a process; it must be integral to the process. By ensuring that a process is in statistical control, defects are minimized and process improvement can be undertaken to further reduce the defect rate.

Processes that are deemed in control are defined as repeatable. IT and the Internet have enabled the repeatable processes by helping to do three things:

The Reference Management Barometer Study by PriceWaterhouseCoopers surveyed top executives from multinational companies and found that 89 percent of business leaders cited product and service quality as a contributor to long-term shareholder return.

In addition, quality has a direct, measurable effect on near-term financial performance as it relates to manufacturing. Key quality metrics that influence financial performance include product returns, credits, yields, and scrap variations.

As you have seen, Internet-enabled IT can fundamentally drive business productivity, efficiency, innovation, customer satisfaction, and product quality. As has been noted, the most profound impact of IT on business is likely in the area of innovation. Because intellectual property is the business everyone is in, innovation is the engine that drives intellectual property creation. As more of the noncore functions of an enterprise become commoditized, ultimately the one essential core competency of any business is its ability to develop, leverage, and expand on good ideas.

Internet-enabled IT is an essential part of making innovation possible. Armed with the good ideas made possible by IT, businesses can then use the power of IT to become more efficient and productive and to improve customer satisfaction and product quality.

The next section examines some of the fundamental concepts behind market forces and business responses to those forces.

All businesses share the need to focus on revenue, growth, and profitability. Market and business efficiency often determine whether an organization will succeed, survive, or fail.

In this section, you will learn the following:

To this point, the focus has been on the dynamics of technology. You have seen how the Internet combined with IT has transformed businesses and industries and brought local markets into global markets. You have also seen how the same technology can transform businesses into much more productive and efficient revenue-making machines. You might assume that, armed with this technology, a business is assured of success. However, nothing could be further from the truth.

If that is the impression you have gained from the material so far, do not feel bad. This is exactly what happened to entire economies during the dot-com era. Equipped with technology and little else, many businesses secured large amounts of capital and then discovered that they did not really know how to make money or even why money is made. What they did not understand is the fundamental way in which markets operate and, more importantly, how businesses operate within markets.

This section reviews the ideas of market efficiency and business efficiency: what makes a market operate, and what the corresponding processes are within businesses that must operate within the market.

Efficiency, you will recall, is a way of thinking about productivity with minimal waste. It turns out that in a market that is unconstrained by artificial controls and in which information is allowed to flow freely, maximum efficiency can be approached. This section explores the implications of such efficiency on businesses that aim to achieve success within such unconstrained markets.

What is meant by market efficiency or business efficiency? Efficiency implies talk about a reduction of overheads and a high degree of throughput. But what does this mean in the context of a market?

It turns out that a market can be thought of in much the same way that you think of a business. A market consumes raw materials and information and produces goods and services that customers want—at the price they want them. Of course, a market is composed of many businesses, all of which want to maximize their own profits and share of the market. How can this work?

Free markets function because all the players in the market have fairly complete information on the actions of the other players. As long as all players have the opportunity to act upon their information, the actions of each will be constrained by the actions of the others. In other words, competition will act to prevent any one player from grabbing too large a share of the market and from arbitrarily raising prices. The market will always act to reduce prices, increase quality, and maximize innovation. This does not work perfectly, however, which is why most countries have laws against monopolies. However, unconstrained markets where most of the players obey the rules will always work better and be more efficient than those markets that are constrained.

Assuming a free market, unaffected by overregulation or the actions of monopolists, several forces influence market and business efficiency.

Over time, market efficiencies in all industries naturally increase. Organizations must keep up with the market by improving their business efficiency, or they will fail. As market leaders become more efficient, they are in turn able to drive further market efficiencies and gain a competitive advantage.

The Internet and use of information are key drivers of both market efficiency and competitive advantage. Figure 1-7 shows how the Internet improves market efficiency by increasing market transparency and educating customers. It betters business efficiency by enabling businesses to reduce costs.

Figure 1-7. Market Efficiency Improves Through Increased Market Transparency

As Figure 1-8 illustrates, you can represent market efficiency and business efficiency as a four-quadrant model. Market efficiency moves from low to high along the vertical axis, whereas business efficiency moves from low to high along the horizontal axis. If you consider this chart carefully, you will realize that this defines the way in which different kinds of businesses and markets interact to enable business success or failure.

Figure 1-8. Business Impacts of Increased Market Efficiencies

Success or failure of a firm in a given market is influenced by a combination of the efficiency of the market and the efficiency of the business operating within the market. Thus, it is necessary to examine the organization to determine whether the business efficiency is high or low.

As you might recall, market efficiencies naturally increase over time. For businesses to survive, they must improve their efficiency; otherwise, they will fall behind the market and fail. Efficient businesses may be able to drive market efficiencies and competitive advantage through innovation and cost leadership:

In the following space, indicate where you think your business falls in this chart. List at least three reasons why.

Take a look at the following business scenario:

Do you think that Zipcart is operating in a market of high market efficiency, low market efficiency, mid-market efficiency, or no market efficiency? On this and the following page, give your answer and list your reasons.

As you have seen, in highly efficient markets, efficiency must increase for the business to survive in the market. As market efficiencies develop over time, driven by the rise in business efficiencies by various organizations, your organization must constantly look for new ways to improve and streamline its processes as well as cut costs.

The Internet enables both markets and businesses to achieve efficiency. As the Internet increasingly pervades the global economy, it is driving market efficiency worldwide. This transformational dynamic is creating a single global market where businesses everywhere are forced to be efficient or die.

Organizations that want to survive and thrive in the economy today must leverage their relationships with their partners, suppliers, distributors, and manufacturers. Gone are the days of hoarding information, maintaining independent information sources, and keeping processes disconnected.

This section discusses the following:

Prior to the Information Age, companies basically worked in isolation. Although vendor-supplier relationships existed, these tended to be relationships beyond the loading dock. The Japanese realized that for high-quality process control to work effectively, supplier relationships would need to be tightened. The just-in-time (JIT) manufacturing methods required suppliers to be tightly coupled into the manufacturing process. In some instances, this even required access to the vendor systems. These connections, though, were static. Typically, the integration of systems was hard enough that only a few critical suppliers were integrated and then, with the expectation that the relationship would last for a considerable period.

With the advent of Internet-enabled IT, the ability to link closely with a supplier became a capability that was accessible to all businesses. The Internet, with its ubiquitous presence, ensured that any company could connect with any other, and the systems available for process management and inventory control made it relatively easy for any company to grant access to its systems for the purpose of production.

The ability to leverage your partners and suppliers has moved beyond something that is a nice-to-do to a level of must-do. To survive in a global economy, closely coupled vendor supplier relationships are essential. Organizations that want to survive and thrive in the economy today must leverage their relationships with their partners, suppliers, distributors, and manufacturers. Gone are the days of hoarding information, maintaining independent information sources, and keeping processes disconnected.

The next section examines the implications of external integration, explores the four levels of integration, and then discusses some of the financial implications of such integration.

External integration works only when businesses internally link their own departments and information assets. Historically, information systems within an organization were not networked. These non-integrated departmental information systems are shown in Figure 1-9. Each department managed its own information, and this information was not shared between suppliers and purchasing, between employees and human resources, or between customers and warehouses. Customer and supplier data had to be entered into the information system each time the data came in contact with a different part of the company. Paper-dependent processes and a large, middle management layer were required to handle business and administrative processes.

Figure 1-9. Non-integrated Departmental Information Systems

Today, Internet-enabled organizations break out of their own departments to share information through the use of standard technology platforms and IT platforms. Where this is not true, companies have problems. Examples abound: U.S. automobile manufacturers, for years, relied on largely archaic information technology to track and deliver new cars to customers. The Japanese, with well-integrated automation, were able to deliver cars much faster, even when separated from their markets by large geographical distances. U.S. manufacturers are only now developing this same capability and continue to lag the Japanese in many respects.

Using Internet-based IT, business processes and relationships are restructured using web-based applications and the Internet. The result is more connection, better collaboration, and improved customer value.

After it is internally integrated, an organization can consider integrating externally. External integration refers to the level or degree to which an organization integrates its information, systems, and processes with other external organizations. As shown in Figure 1-10, these external organizations include suppliers and customers, as well as business partners. Integration can entail anything from the ability to view or exchange information online to the ability to share databases.

Figure 1-10. Integration with External Organizations

A recent study shows how organizations can measure how well they have integrated externally by using a four-level scale (NerveWire Study, 2002). Take a close look at the different levels, and determine where your organization is on the external integration scale.

Based on these ratings, on this and the following page identify where you think your organization is on this scale. Give 3 to 4 examples of why you think this is the case.

Any level of integration will yield some business benefits, even at the lowest level (NerveWire, 2002). You can assess the level of benefits by using the seven key business measures:

Organizations at the highest level of collaboration achieve major revenue gains, in addition to cost and cycle-time reductions, quality improvements, and increases in customer retention. Highly integrated organizations enjoy improved financial performance and added value for their customers.

According to NerveWire, the following financial benefits characterize organizations at each level of external integration^[1]:

Just as teamwork within organizations yields the benefits of multiple points of view and leverages the strengths of each individual to optimize decisions and the creation of good ideas, so too, integration both internally and externally to a business can improve the ability to compete successfully and to generate revenue.

Integration with other organizations, suppliers, partners, and customers generates business benefits. The more integrated an organization is, the higher the financial benefits will be. In this section, you learned about external integration and the four levels of integration. You also learned how the integration of processes and technology relates to increased financial performance and improved customer value.

This section focused on the impact of Internet-enabled IT on markets and businesses. You have seen how the communication capabilities, both between individuals and systems, have accelerated competition and torn down walls that have separated business from their markets, businesses from their suppliers, and businesses from their customers. You have also seen how the Internet has fundamentally transformed the world economy from small markets separated by geographic distances to a global economy that transcends geography and time.

This module wrapped up its examination of the Internet with a discussion of integration and how even moderate levels of integration can have significant financial benefits to business.

At this point, though, you might think that this seems a bit overwhelming. From the standpoint of a small business, especially, you might think that it is impossible for a business to survive for long in a global market where almost anything that you have thought of has already been implemented by someone else. This is not true, though.

In the next module, you will see how to put effective business strategies in place to leverage new technology to your advantage.