The old economy refers to the blue chip industries that experienced high growth at the beginning of the 20th century due to rapid industrialization. The old economy was characterized by companies that focused on mass production and heavy investments in physical assets such as factories. Advancements in information and communication technologies led to the emergence of the new economy, which is characterized by a large service industry, technology, and electronic commerce (Walters, 2004, pp. 346-357). This paper will discuss the differences between doing business in the old and the new economy.
Business Strategy for the Old and New Economy
In the old economy, business strategy focused on increasing production in order to serve new markets across the globe. Thus, companies focused on expansion through both organic growth and acquisitions. Vertical integration was also an integral business strategy in the old economy. Managers had to build end-to-end businesses in order to control their supply chains (Walters, 2004, pp. 346-357). Corporate strategy focused on improving cost efficiency by achieving economies of scale through mass production.
The business strategy for the new economy focuses on innovation and creation of new knowledge. This helps in developing new products and reducing operating costs. Investing in advanced information technologies such as the internet is one of the strategies used to achieve innovation and creation of new knowledge (Ansoff, 2007, p. 52). For instance, retailers are shifting from physical to online stores to increase their market shares, to improve customer service, and to reduce operating costs.
Motivation for Becoming an E-business
An e-business is a company that uses electronic commerce to conduct activities such as selling, marketing, and providing customer service. The motivations for becoming an e-business include the following. First, e-business enables companies to expand their operations by gaining instant worldwide exposure (Sadler, 2003, p. 147). For instance, a company can use its sales website to serve customers in any part of the world. Second, e-business promotes sales by enabling companies to operate 24 hours a day.
Third, e-business leads to significant cost reductions. It enables companies to streamline business processes such as billing, procurement, and supply chain management. This leads to reduction of costs associated with maintenance, repair, and labor. Fourth, e-business platforms facilitate provision of excellent customer service (Lapiedra, Smithson, & Chiva, 2004, pp. 219-228). For instance, online marketing systems enable customers to get instant feedback concerning their queries and to interact directly with the sales team. Finally, e-business facilitates effective control of various business processes by providing the information that managers need to make decisions.
Ways in which IT Makes the New Economy to be Different from the Old One
The new economy differs from the old one in terms of its six characteristics namely, knowledge, digitization, virtualization, innovation, dismidiation, and internetworking. IT has facilitated these differences in the following ways. First, IT has enabled companies to develop “knowledge management systems that facilitate creation, storage, and dissemination of information” (Ansoff, 2007, p. 139). In the new economy, companies use computer-based databases to store and access the knowledge needed to improve competitiveness. Second, advancements in IT have led to digitization of information and communication in the new economy. Digitization has improved the quality of information, thereby shifting business processes such as marketing, procurement, and sales from manual to online platforms.
Third, information technologies such as video conferencing have led to creation of a virtual business environment. This includes virtual shopping malls, offices, government agencies, and distribution systems. Fourth, IT facilitates dismediation by eliminating middlemen functions in the supply chain (Walters, 2004, pp. 346-357). For instance, online business-to-business sales platforms eliminate the role of wholesalers in the supply chain. Finally, the advent of peer-to-peer internet-based networks has enabled small companies to overcome the barriers to economies of scale that characterized the old economy.
Porter’s competitive model identifies five forces that businesses must overcome to improve their competitiveness. These include competitive rivalry, threat of substitutes, threat of new entrants, suppliers’ bargaining power, and buyers’ bargaining power (Sadler, 2003, p. 93). Porter’s generic model identifies three strategies for responding to the aforementioned forces. These include cost-leadership, differentiation, and the focus strategy. Cost-leadership involves improving profits by reducing operating costs. In the old economy, companies reduced costs by achieving economies of scale in production. In the new economy, companies employ e-business technologies to reduce the costs associated with inventory, labor, and sales. The cost leadership strategy helps in overcoming high competitive rivalry, as well as, the threat of new entrants and substitutes.
Differentiation involves developing unique products to overcome the threat of substitutes and new entrants, as well as, the bargaining power of buyers and suppliers. In the old economy, differentiation focused on improving product quality in order to attract and retain customers. In the new economy, differentiation mainly focuses on delivering innovative outputs in order to enhance customer loyalty (Ansoff, 2007, p. 165). The focus strategy involves serving a particular market through differentiation or cost-leadership. Given the high competition in the new economy, companies focus on serving specific market segments, which they best understand. The resulting improvement in customer value enables firms to increase their profit margins.
Agile and Adaptive Organizations
An agile organization is a company “that is flexible, robust, and capable of responding rapidly to unexpected challenges, events, and opportunities” (Ansoff, 2007, p. 213). Agile companies use an inverted management pyramid to promote innovation by including employees in decision-making processes. Agile firms believe in continuous learning, as well as, generation and sharing of knowledge. The organizational culture of an agile firm promotes liberty, cooperation, and high productivity among employees. In the new economy, agile firms use IT to enhance their flexibility, creation of knowledge, and decision-making processes. In the old economy, the use of command and control management systems and inadequate investments in IT reduced firms’ ability to become agile.
An adaptive organization is a company that “constantly matches and synchronizes the demand and supply of its goods and services in order to prevent wastes and losses” (Sadler, 2003, p. 245). In the new economy, firms become adaptive by optimizing the use of key resources. Adaptive firms in the new economy avoid holding large inventories in order to reduce their operating costs. They use advanced information technologies to plan their production to ensure that their supply is adequate to meet existing demand. However, firms in the old economy were less adaptive since they focused on holding large inventories. This tied up their capital in unproductive resources, thereby reducing their ability to respond to unexpected challenges and opportunities.
Real-time Business and Information Systems
A real-time information system is a computer-based technique that facilitates immediate processing and access to data. Businesses often use real-time information systems to process and to manage their transactions. A real-time business information system is an “approach to data analytics that enables managers to access up-to-the-minute data by directly accessing operational systems and data warehouses” (Lapiedra, Smithson, & Chiva, 2004, pp. 219-228). The techniques that are used to implement real-time business information systems include data virtualization and data federation. Real-time business and information systems enable managers to make instant decisions to respond to market needs in time.
Failures of Real-time Business and Information Systems
First, real-time business and information systems can fail due to inadequate information security. For instance, unauthorized access to the systems can lead to lose of important information that companies need to improve their competitiveness. Second, real-time business and information systems can lead to information overload (Ansoff, 2007, p. 263). This can slow the process of making decisions. Third, the effectiveness of real-time business and information systems depend on the quality of the data fed into them. Thus, they can provide misleading information if the data fed into them is unreliable.
The old economy was characterized by companies that focused on mass production, whereas their counterparts in the new economy achieve competitive advantages by investing in information technologies and innovation. The main characteristics of the new economy include generation of new knowledge, dismediation, innovation, and virtualization. These characteristics have been achieved through heavy investments in information technologies. Moreover, these characteristics enable companies in the new economy to be more agile and adaptive than their counterparts in the old economy.
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Lapiedra, R., Smithson, S., & Chiva, R. (2004). Role ofinformation systems on the business network formation process: An empirical analysis ofthe automotive sector. Journal of Enterprise Information Management, 17(3), 219-228. Web.
Sadler, P. (2003). Strategic Management. London, England: Kogan Page. Web.
Walters, D. (2004). A business model for the new economy. International Journal of Physical Distribution and Logistics Management, 34(3), 346-357. Web.