01/06/1997

How Information Technology is Changing Business Trends

Shinji Kato 

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Introduction

One of the key words emerging last year from the information society was "electronic commerce," also known as EC. Despite MITI's touted ¥10 billion EC trial experiment, construction of a common infrastructure has finally just begun. Among the virtual shopping malls that have appeared on the Internet in the past two years, slow merchandise sales have prompted many to revise their experimental plans. Enthusiasm over EC seems to have cooled down from a year ago.

While much discussion on EC has centered on technological issues involving settlement methods and security features on the Internet, the most important issue has been largely ignored− how EC is changing business opportunities. Thus rather than the specifics of electronic transactions, we look at the direction of business trends from the view point of the underlying information technology.

 



I. Nature of the Information Age

1. Coming of the Information and Communications Revolution

The so-called "new media boom" of the 1980s failed to live up to expectations because the underlying technologies never became widespread. In contrast, technological advances on two fronts −digitization and networking− have become indispensable components of today's society. Digitization is enabling the fusion of different media based on technologies for processing and transmitting huge volumes of data. Networking is creating virtual communities on networks (cyberspace) centered around the Internet.

With the advance of technology, electronic networks are revolutionizing structures and processes in the business world. To improve processes, businesses are introducing e-mail and intranets. But of even greater impact is the revolution in business contacts not only with other companies but with consumers. The infrastructure has grown as more consumers use personal computers and participate in networks, and technological advances are making communication more efficient. Whereas information technology in the past mainly focused on changing work processes inside companies, today's revolution in information and communications technology could potentially alter the model of communication between businesses and consumers.

2. From Material to Information Focus

In his book Digital Economy, U.S. consultant Don Tapscot writes: "In the old economy, information, communication, and transactions are all physical things. They include cash, stamps, invoices, stock certificates, reports, face to face meetings, analog telephones, radio and television broadcasts, receipts, blueprints, maps, photographs, books, newspapers, magazines, and direct mail advertising. In the new economy, all types of information, transactions, and personal communication will increasingly be digitized-that is, compressed into bits, stored in computers, and transmitted through networks at the speed of light. The quality of information will be much better than with analog transmission."

Today our approach to daily life is centered around physical things. For example, the act of shopping involves a process of going to a store, obtaining information on the desired product, making a purchasing decision, paying money, and receiving the product. With the emergence of mail order shopping, transactions could be carried out simply by exchanging information on a product or service, and credit cards and mail delivery eliminated the need to visit a store and talk to a sales clerk.

In other words, information on products and services could be dissociated from and distributed separately from the physical product or service, eliminating time and space restrictions of conventional physical communication. This implies a shift in management resources from land, labor and capital, to information. In the information network society, the conventional conditions for corporate success −large cities, large markets, and large companies− will no longer apply. Companies can operate from anywhere if they are connected to a network, and can plunge right into the global market rather than grow in the local market. Since the most important factor is the value of the information a company possesses, we predict that market entry and competition will intensify as size of capital becomes irrelevant to market entry.

3. Consumers Benefit from the Power of Information

The revolution in information and communication technology drastically reduces the cost of acquiring and exchanging information, and enables people to establish new relationships unfettered by physical restrictions. This gives rise to the formation of what are called electronic communities.

For example, before purchasing a product, people can access an electronic bulletin board with their personal computers to see product reviews, or participate in forums to acquire information from actual product users. Computer networks, which have characteristics such as interactivity, real time access, and freedom from physical restrictions, are promoting the exchange of information among consumers. Recently, for instance, consumers have been exchanging information on ways to purchase and play with the highly popular pocket-sized "Tamagotch" game.

In addition, buyers have the ability to band together through networks to extract volume discounts from sellers. We predict that such network communication will become a major determinant of consumer purchasing behavior, and increase the power of consumers through their access to information.

With the increasing number of highly educated, double-income households, there is a growing demand for time-saving methods. Consumers are collecting information at their own convenience and according to their own values, evaluating the information, and making purchasing decisions. As this trend continues, consumers will increasingly want products and services specifically tailored to their needs, rather than standardized products and services.

 



II. Information Technology and the Direction of Business Trends

1. Era of Direct Communication

According to a Nikkei Sangyo Shimbun survey of 28 think tanks in the U.S. and Japan, the greatest change that networks will cause in businesses is the growth in direct sales through the spread of electronic commerce. This was followed by speedier decision making processes, more outsourcing, and more network alliances.

 

 

In particular, the growth of direct sales will inevitably precipitate changes in distribution by eliminating intermediaries and sales companies. Direct sales will pose significant issues for management, including the consolidation and realignment of existing sales channels and reevaluation of how prices are set. Moreover, it also entails major changes in the flow of information. The direct contact and communication between companies and their customers will require new marketing strategies specifically geared to direct sales. Nissan Motor among others have begun experimenting with communication for direct sales.

 

Case 1:Nissan Motor will begin sales of an "Internet Car" over the Internet in the summer of 1997. The new mode of shopping takes existing models and offers special colors and options unavailable elsewhere. Consumers can obtain detailed information on specifications and prices. The elimination of advertising costs at dealerships is expected to lead to significant cost and price reductions compared to cars sold at dealerships.
 
2. New Communication Trends Between Businesses and Customers

(1) End to Monopolization of Information

In the era when a small number of producers provided information to a large number of consumers, the monopolization of information by manufacturers symbolized the power relationship. Jealously guarding information in a way was how businesses could express their purpose of existence. However, open networks such as the Internet have vastly expanded the volume of available information while reducing its cost, so that the information disparity between buyers and sellers is shrinking to practically zero. Sellers no longer enjoy the advantage of controlling the information flow to consumers, and consumers will gain more power to obtain the information they need.

Behind the development of the Internet has been the idea that information should not be controlled and monopolized by a few people, but made available to many people so that knowledge is shared. Thus information is seen not as a possession but as a shared asset among people participating in networks.

In the future, businesses will need to make more of their own information available, begin a dialogue with customers to facilitate direct contact, and have consumers participate in corporate processes as partners. We predict that communication will shift from a one-way flow of information (a stimulus-response model) to an interactive dialogue (an exchange model).

(2) Network-Type Services

On networks, customers can access information on related products , services, and companies using links. These links are global in scale and not restricted by company size. We predict the emergence of service providers which, unlike conventional business affiliations, are based on loose alliances of core business functions. Today there are already tie-ups offering services ranging from transportation, hotels, car rentals, and entertainment. These service providers will be "virtual companies" on networks −an alliance of companies that offers a range of products and services no single company could offer.

In addition, there is a strong possibility of the emergence of network shopping malls with specific consumer-oriented themes such as marriage, job hunting, child care, and so forth. These malls can be considered to be a new form of business that takes advantage of network characteristics.

 

Case 2:Sakura Bank constructed a virtual mall last fall together with Mitsukoshi Department Store, Toshiba, and Mitsui Trading with the theme of "bridal and new married life." The mall is experimenting with electronic transactions, marketing methods, and customer data analyses, and plans to house 40 to 50 stores offering jewelry, furniture, interior goods, wedding attire, travel, hotel, wedding halls, and life and casualty insurance.
 
(3)Greater Consumer Input in Corporate Processes

As companies come to deal directly with individual customers, customers will increasingly want customized information, services, and products. Producers will then have to make products tailored to individual consumer needs, while consumers will become able to participate in the development and production of products. Thus consumers are likely to become more than simply consumers.

Moreover, companies will be able to present certain hypotheses or scenarios to customers, and use their responses to revise and refine the hypotheses. Consumers will participate in the actual design process by inputting information, knowledge, and ideas into the product specification process. Thus networks will be an increasingly valuable resource for producers as a medium to convey their message to consumers.

(4) Elimination of Intermediaries Who Provide No Added Value

By enabling direct contact between buyers and sellers and facilitating the exchange of information, computer networks will reduce the need for intermediaries standing between the two. People in the middle must do more than simply act as a representative in transactions or help exchange and transmit information, and shift to being ongoing partners who add value to transactions, or will face the prospect of disintermediation.

We predict that disintermediation through direct contact between buyer and seller will produce time savings, reduce fees and other indirect costs, and thus lead to lower product prices.

 

Case 3:Konica and NTT have announced an experimental photographic processing service using digital technology on the Internet. Customers' film negatives are digitally processed and stored on servers. Customers can then freely access their photos through the Internet, and view or download them. If the service is commercialized, it could potentially put 20,000 photo minilabs out of business and completely alter the photographic distribution market.
 
(5) Customer Agents

Traditionally, sales people have represented manufacturers. Although they sometimes genuinely serve customers by providing useful knowledge, sales agents often are more interested in moving inventories and closing sales. Thus their advice tends to be biased, and customers may not end up with the desired information or product.

This will change in the future. Sales agents will become customer agents who represent the customer's interests. Their main role will be to efficiently search through large amounts of information and find the information and products that customers want. They will collect data, learn customers' needs, observe trends, search for information, and make transaction arrangements. Intermediaries will also need to shift toward such roles.

 

Case 4:The online version of "Recruit From A" magazine not only simplifies job searches with categories for interests and locations, but has a useful mailing service. Job hunters first register their desired job type or location by train station, and are notified of new openings immediately. In the future, a "matching service" will enable customers to register their desired conditions for used cars, housing, etc., and receive a notice as soon as a suitable product appears on the market.
 


III. Conclusion - Toward Electronic Commerce

There is an old game called the "Message Relay Game" in which a somewhat complex combination of words is relayed verbally from person to person, and the team that most accurately conveys its message to the last person wins. Conventional communication between businesses and consumers resembles this game. The mass media spreads information on new products and corporate images, while consumers have to go to a store or other intermediary to obtain detailed information. Since the information provided by intermediaries is very influential in consumer purchasing decisions, businesses concentrate their efforts on controlling the intermediate channels. Thus businesses play the message game with the aim of controlling and accurately converying product information to consumers.

The advance of information technology through digitization and networking has the potential of completely altering this business environment. The cost of obtaining and exchanging information has dropped, and anyone can participate in networks. Information exchange between consumers will probably become more active as well.

The electronic commerce experiments currently underway are designed to connect businesses directly with consumers for transactions on open networks. Product information is conveyed without bias directly from product developers to end users. In this context, the message game approach is rendered useless, and new business rules will be needed appropriate to an electronic community. New business opportunities will be created in the transition.

In other words, the idea behind EC is not simply to make commerce electronic, but to advance it by using electronic networks. This has less to do with technology than with the perspective that electronic commerce entails the formation of communities to exchange and distribute information. In the future, while not all transactions and communication will take place on electronic networks, competitive advantage will lie with businesses who can accurately and quickly convey their message to consumers.

 

 

 

Shinji Kato

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