The European e-Business Report 2004 - Berlecon Research GmbH

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The European E-Business Report 20041.6 IT still matters: New evidence on Internet-enabledinnovation and financial performance of enterprises 34In a much debated article, Nicholas Carr (2003) argued that IT doesn’t matter anymore as a strategicdevice for companies to gain competitive advantage. His reasoning was both simple and convincing:As IT becomes ubiquitous, it turns into an infrastructure technology (just like electricity or telephones)possessed by everyone, instead of a resource that is only available to few. Therefore IT loses itspotential for creating sustained competitive advantage because it is scarcity, not ubiquity, that enablesa company to gain an edge over rivals. Carr concludes that IT should be viewed and managed as acommodity and not as a strategic asset.In this chapter, it is argued that Carr’s argument is not correct because it overlooks an essentialproperty of information technology: IT creates numerous, company-specific opportunities to improveprocesses and to generate new products and services for customers that did not previously exist.Hence, IT is inherently strategic because it enables innovation and is therefore a medium tocompetitive advantage.It was pointed out in various reports of the e-Business W@tch that it is not information technology perse that determines the economic impact of IT investment, but rather what companies decide to do withthe new technology. It is argued that it is necessary to combine technology adoption with process orproduct or service innovations to realise economic gains from the investment into the new technology.Hardware and software tools offer a set of technologically feasible opportunities. Its potential will mostlikely keep increasing due to constant further developments and technological improvements.However, technology is flexible and the extent to which it is implemented and used to change existingprocedures and product or service offers depends on the strategic decision of firms and their ability tosuccessfully manage and complete change processes. In other words, two companies that invest thesame amount into the same information technology might end up with two very different outcomesdepending on how successfully they managed to re-invent business processes, organisational design,or service offers for their customers. It is the process of technology-enabled change and innovationthat makes IT a valuable strategic asset rather than a pure commodity or infrastructure.But just how much innovative activity can be attributed to IT? And does IT-enabled innovation reallytranslate into the financial success of a company? This chapter presents some new evidence from thee-Business W@tch in response to these questions.Electronic business and innovationThe November part of the e-Business Survey 2003 contained questions regarding the innovativeactivities of firms. Two introductory questions that were put to every subject elicited whether acompany had introduced substantially improved products or services to its customers during the past12 months. It was also asked if the company had introduced new internal processes during the past12 months. These introductory questions were adopted from the Community Innovation Survey (CIS,cf. www.cordis.lu/eims/src/cis.htm) to determine the share of companies in the sector that had recentlyintroduced product or process innovations. The advantage of adopting the questions from CIS wasthat it allowed the e-Business W@tch team to use a well accepted and mature survey instrument.In addition to the introductory questions on innovation, a particular goal of the survey was to find outthe share of innovative activity that is directly related to or enabled by Internet-based technology.Therefore, companies that indicated in the introductory questions that they had conducted innovationsin the past 12 months were asked follow up questions. The aggregate results for more than 7,000companies interviewed in November 2003 35 are shown in Exhibit 1.6-1.3435This chapter was authored by Philipp Koellinger, DIW Berlin. Contact: pkoellinger@diw.deFor detailed information about the sample, see Annex III (Methodology)37
The European E-Business Report 200450% of enterprises in the sample introducedsubstantially improved products orservices to their customers in 2003. Morethan one third of these product or serviceinnovations has been directly related to orenabled by Internet-based technology.This corresponds to 21% of enterprises inthe sample that have introduced Internetbasedproduct or service innovations in2004. The importance of the Internet iseven more pronounced for process innovations:42% of enterprises introduced newinternal processes in 2003. About one halfof these process innovations were directlyrelated to or enabled by Internet-basedtechnology.It can, thus, be concluded that IT and theInternet are currently important enablers ofinnovation in the European Union. Manyfirms actually make use of IT to conductprocess innovations or to offer newproducts or services to their customers.Exhibit 1.6-1: Innovative activities in 10 sectorsand 25 countries in the European Union, 2003*605040302010050Product or serviceinnovationOverall4221 20Process innovationInternet-enabledBase: all enterprises without missing values, unweighted. Reportingperiod: November 2003. N = 7,046 for product innovations, N = 7,079for process innovations.Source: e-Business W@tch (2004)Innovation and financial performanceThe adoption of new technologies such as e-business can result in business success in two basicways: (1) efficiency gains via process innovations – this corresponds to an outward shift of an existingsupply function; (2) the creation of new products or services – this corresponds to the creation of anew supply function (Kamien and Schwartz, 1982, p. 2). In both cases, firms that succeed in theseendeavours should experience increasing turnovers, profits, and market shares, ceteris paribus.The joint occurrence of innovations,increasing turnovers and profitability canbe tested on the basis of data from theNovember part of the e-Business Survey2003. The question of interest in thiscontext is what specific kind of innovationis most frequently used by the moresuccessful companies in the EuropeanUnion.Exhibit 1.6-2 shows the financial performanceof enterprises in Europe in2002/2003. 44% of firms in the sampleexperienced increasing turnover in 2003compared to 2002. 20% report unchangedturnover in 2003, and 35% reportdecreasing revenues. A very high share ofcompanies (72%) state that they havebeen profitable over the last 12 monthsprior to the survey (November 2003).Exhibit 1.6-2: Financial performance of firms from10 sectors and 25 countries in the EU (2002/2003)8070605040302010044Turnoverlast yearincreased20Turnoverlast yearunchanged35Turnoverlast yeardecreased72Profitableover last 12monthsBase: all enterprises without missing values, unweighted. Reportingperiod: November 2003. N = 6,253 for turnover development, N =6,443 for profitability.Source: e-Business W@tch (2004)38
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