Digital Business Transformation


Many products and services are becoming digitized and, consequently, software is emerging as the "factory" in many industries. Examples include products, like newspapers, and services, such as voice communications. With the emergence of consumer online services in the mid-1980s and the commercialization of the Internet since the mid-1990s, many consumer markets have been or are being digitized.

In this environment, firms are struggling to adopt digital production and distribution. Information technology challenges existing cost structures and, therefore, "law and order" in industry. Examples include the combination of first, (near) zero cost of copying and second, distributed, peer-to-peer delivery systems (e.g., Kazaa). Lower fixed cost tends to erode entry barriers in many markets. In this digital world, incumbents face start-ups pursuing specialization strategies. Start-ups, on the other hand, struggle with the uncertainty of whether the cost advantages of specialization can offset higher transaction cost and the risk of vertical foreclosure all of which depends on the target industry's level of integration or degree of "openness."

As a result, new structures in supply chains and channel systems are emerging. Often, such structural change is referred to as "convergence", because new vendors and channel partners enter the industry to provide the new assets and skills required to go digital. These new entrants are typically from the computer and communications industry. Problems arise, first, if they challenge profit allocation, and, second, if they do so by introducing new strategic dynamics. As IS become more important--the factory--architectural control emerges as a key strategic weapon. One example is taking advantage of control of a software application interface in order to also control interaction across the interface. Similar behavior can be observed in other areas such as the U.S. cable television market. Multiple systems operators (MSOs) leverage ownership of coaxial cable infrastructure to gain control over access to content and programming. In May 2000 Time Warner Cable temporarily removed seven Disney-owned ABC stations in a dispute over fees.

Often, this leaves "content" firms to answer the key question: To what extent should a content firm be involved in digital infrastructure?

Answers may appear obvious, but the struggle of merging America Online with Time Warner suggests otherwise. This struggle presents an opportunity for research.

My projects aim at theory building and the identification of strategic responses to the challenge of digital business transformation.


Figure: E-Channel System and Emerging Business Models

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Copyright 1999-2007 Dr. Chris Schlueter Langdon

Last modified: May 13, 2007