TECHNOLOGICAL ENVIRONMENT

Among all the segments of environment, technological environment exerts considerable

influence on business. J.K. Galbraith defines technology as a systematic application of scientific
or other organized knowledge to practical tasks. During the last 150 years, technology has
developed beyond anybody’s comprehensions. 1983 was particularly considered as the year of
scientific success.

We are on the verge of a revolution that is just as profound as the change in the economy that
came with the industrial revolution. Soon electronic networks will allow people to transcend the
barriers of time and distance and take advantage of global markets and business opportunities
not even imaginable today, opening up a new world of economic possibility and progress. (US
Vice-President, Al Gore Jnr, July 1998)

This is undoubtedly an exciting time to be considering developments in the technological

environment, with the emergence of new business terms and concepts such as electronic
markets (e-markets), electronic business (e-business) and electronic commerce (e-commerce).
In the so-called ‘new economy’ digital networking and communication infrastructures provide a
global platform through which enterprises and people interact, collaborate, communicate and
search for information.

The potential growth for electronic business worldwide is impressive. A wealth of

complementary digital technologies, including digital communications networks (Internet,
intranets, extranets), computer hardware and software, and other related networks, databases
and information systems, distribution and supply chains, knowledge management and
procurement are being merged into a powerful combination for business change using the
World Wide Web (WWW) as the driving force. Starting more or less from zero in 1995, e-
commerce has recently celebrated its 24 anniversary, and for many of us it is difficult to
remember the pre-Internet business environment. In the US, it is estimated that the 200 million
Americans with access to the web will soon be spending more than $145 billion annually online,
equivalent to 7 per cent of all US retail sales. Similarly, in western Europe, a quarter of all
Europeans do some shopping via the Internet. Globally, e-business has grown from $26 billion
in 1997 to an estimated $1 trillion by 2005.1 Predicting the future growth of e-business is
fraught with difficulty, but given that it has the potential to deliver a low-cost, universal,
interactive and global medium that provides a simple and secure method for exchanging
information instantaneously, the business case appears compelling.

In addition, we might speculate that an Internet-based society will also notice a dramatic
change to other aspects of people’s lives, outside of the workplace. For instance, changes such
as new distance-learning methods and material are starting to emerge in education and many
other areas of daily life are increasingly being affected by technological developments.
However, we should also remember that while terms such as e-business and e-commerce are
relatively new, they are part of an evolutionary technology process dating back over 30 years.
The concept of e-business has actually emerged from a fusion of various separate technologies,
such as electronic data interchange (EDI), electronic fund transfer (EFT), electronic point-of-
sale (EPOS) and smart cards that had previously struggled in isolation to achieve mass
acceptance. Indeed, the terms ‘electronic business’ and ‘electronic commerce’ have no
universally accepted definitions, and confusingly are often used interchangeably. However, for
our purposes there is a significant difference between the two terms. Broadly, e-business
means doing any element of business over the Internet, and embraces activities such as
servicing customers and collaborating with partners, in addition to buying goods, services and
information. E-commerce covers a narrower sphere of activities than e-business, and refers in
particular to the process of electronic transactions involved in the exchange of products,
services and information between buyer and seller. The activities of e-retailers such as Amazon
would fall under this category.

Within an organisation, there are several activities (for example, information and knowledge
management, resource co-ordination etc.) that might be more effectively achieved through use
of an intranet

Technological change can have impact on the decisions taken by international business.
Technological change can involve:

New process of production: new ways of doing things which rises productivity of factor inputs,
as with use of robotics in car assembly techniques which has dramatically raised output per
assembly line worker. For example around 80% of technological change has been process
innovation.

New products: For example, online banking and many new financial services are direct result of
advances in micro processor based technologies.

Technology and employment

New technologies can both create and destroy jobs. Where the new technologies involve
process innovation then labour is often replaced by capital equipment in the production
process and the term ‘technological unemployment’ is often used. For example, the US Internet
banking company has introduced ‘smart’ technologies into every aspect of its operations, so
that its $2.4bn of deposits are now managed by just 180 people, compared to the 2,000 people
required to manage deposits of this size in less technologically advanced banks.
However, the new technologies may lower product prices and raise product quality, thereby
increasing product demand and creating new jobs, even if these are different from the original
jobs displaced.

Technological unemployment may, however, be about to enter a new phase! Rifkin (2004)
reports that new technologies are increasing productivity at ever-accelerating rates in both
industrial and service sectors, so much so that job destruction is outweighing job creation.

Technology and competitive advantage

Technological change provides national and international business with both opportunities and
threats. For example, five new broadband wavelengths were auctioned in the UK in early 2000.
Access to such wavelengths has been regarded as vital for the new generation of wireless
application protocol (WAP) products, making possible the internet, television and other
interactive application on the third-generation of mobile phones.

The impact of technical change on competitive advantages is also considered. For example new
technologies in manufacturing of semi-conductors have had a major impact on that industry.
The monster chip fabrication plants, or Fabs, can produce more than US$8 billion of chips a
year, more than several medium-sized produce a major impact on that industry. The monster
chip fabrication plants, or Fabs, can produce more than US$8 billion of chips a year, more than
several medium-sized producers combined, around 5% of global capacity.

Technology Transfer

It is widely held that multinational activity is more efficient foreign multinationals promotes
technology transfer to the benefit of domestic companies. For example, when Nissan
established a car plant in Northern –Eastern England, it demanded much of higher standards of
UK components suppliers than the incumbent national producer such as Ford and Rover.

There are some limitations in technology transfer: for example in case of inward FDI may reflect
multinationals seeking to exploit an ownership-specific advantage over domestic companies. In
such circumstances, it is unlikely that foreign multinationals will willingly share the
technologically based sources of its competitive advantage over local rivals.

A further obstacle to technology transfer may involve the issue of cultural dissonance. The
psychic distance between US and UK companies is relatively small. Both shares a broadly
common culture, a common language and they have a reasonably high level of mutual
understanding. However success of multinationals from (Japan) or other parts of east and
south-east Asia is built on a very different setting.
An opposing view point to the potential damage to the host country’s of technology transfer
when it enables foreign affiliates to dominate domestic markets and displace domestic
producers.

Types of technology transfer

Internationalised transfer: This takes the form of direct investment by a parent company in its
foreign affiliates. Such intra-firm technology transfer may be difficult to measure.

Externalised transfer: This can take a variety of forms such as: licenses, franchises, minority
joint ventures, subcontracting, and technical assistance, purchase of advanced equipment and
so on. According to Wall et al (2010), the following factors are widely regarded as increasing
the probability of an MNE resorting to ‘internalised transfer’

Benefits of internalized transfer to host country

It gives host country firms access to new, up to date and more productive technologies, which
are unlikely to be available by any other means.

Other benefit often follow from access to such technologies, as in the case of the host economy
being used by the parent company as a production platform for an exported oriented policy
region.

The host country may also gain access to expensive brand images which further aid overseas
sales as well as to substantial financial and other resources owned by the parent company.

New operation management and other logistical techniques may be learned by the host
country workers, with the general skill base of local labour being raised by exposure to more
advanced operations and in-house training methods.

Costs of internal transfer to host country

Local firms may be disadvantaged by being dominated in their home and export market by the
production affiliates of overseas parent company. This may reduce overall employment and
income in the home economy.

Parent company may share little of tacit or explicit technological, organizational or operational
knowledge with the local affiliates, thereby doing little to raise the skill and knowledge base of
the local economy (host country).

SUMMARY
Technological developments have revolutionised the global marketplace and have spawned a
whole new business vocabulary including the notion of e-business.

_ The concept of e-business relates to the different aspects of doing business over the Internet
and embraces a whole range of activities concerned with the exchange of products, services or
information across electronic networks.

_ E-commerce denotes a narrower range of activities related to the process of electronic

transactions between buyer and seller.

_ B2B and B2C represent the core of the notion of electronic commerce and provide a number
of potential benefits for the parties involved in the transaction process.

_ Both B2B and B2C, however, have their limitations which may hamper the growth of these
two types of commerce.

_ In the field of retailing a number of B2C business models have begun to emerge.

_ Developments in this field have implications for both the demand side and supply side of
markets.

_ Technological advancement is a never-ending process that continues to shape the business

environment.

Amazon.com/ CASE STUDY

Bookselling over the Internet is one of the most sophisticated and successful B2C ebusiness
sectors to have developed. The global cyber book market is expected to have grown beyond
$1.1 billion by 2002. Amazon is one of the most famous websites on the Internet, with 50 per
cent of the cyber book market share. Amazon officially opened in July 1995, and had a turnover
of $600 million by 1998, with an average monthly growth rate of 34 per cent. As a pioneer,
Amazon enjoyed considerable first-mover advantage, generating enormous publicity, which
created awareness and established its brand name among the book buying public. Jeff Bezos,
Amazon’s founder, was convinced that consumers would enjoy the experience of browsing
books electronically, reading reviews and excerpts from a particular book, and having it
delivered a few days later. Bezos also felt that Amazon should be more profitable than
traditional retailers in the longer term, on the basis that: ‘We’re short on real estate and long
on technology. Technology gets cheaper every year and real estate more expensive.’

After initially gaining a reputation as a cyber bookstore, Amazon has gradually expanded its
range of offerings into areas such as music, video, gifts and auctions. However, while Amazon
has an impressive customer base, with over $1 billion in cash, and expanding sales, it has only
just begun to make a profit (around £500 000 in 2004). In fact, Amazon has found that it faces
many of the problems of traditional retailers. For instance it has had to build a vast
infrastructure of warehouse and distribution centres to house its burgeoning inventories of
product lines, and has needed to spend heavily on off-line marketing to attract new customers.

Competition in the cyber book industry is also now very fierce with new competitors entering
the market all the time. Barnes & Noble started to counterattack in 1997, and it quickly reached
15 per cent of the cyber book market share. Amazon also faces competition from software
agents, such as BestBuyBooks.com and Buy.com, which offer to find the lowest prices available
anywhere on the Net. Nevertheless, Amazon still has many supporters. These argue that the
lack of profits so far have arisen simply because the company has striven to build up a dominant
position in e-commerce, and that triple-digit growth rates and expansion into new product lines
will produce the increased sales needed to cross over into profitability. Also its rival on-line
retailers lack scale. For instance, Barnes & Noble, Amazon’s nearest rival, only attracts a third of
Amazon’s 14 million unique visitors a month.

Amazon has always shown an incredible ability to innovate and to diversify its product range. It
has introduced ideas such as allowing customers to review books on its website, and publish
rankings that assign a chart position to every book in print based on its sales. These ideas are
now commonplace on other sites. Amazon has also successfully patented its Associates
programme that allows an on-line merchant to sell products through other websites by paying
commissions for customer referrals. For instance, if you run a website selling rare coins, you can
publish a website listing the best books available on rare coins. When visitors click on these
titles they are transported (one-click) to the Amazon website, which will pay the referring
website a commission, if the visitor buys a book. It is estimated that about $1 billion of
Amazon’s future sales (out of a total of $3.4 billion) per year could arise through this affiliate
system. To attract customers Amazon is also increasingly making special offers, such as free
shipping, or further discounted prices, although critics claim this is financially unsound given the
current lack of profitability. Amazon though does have a number of opportunities to diversify
and expand further. For instance, it has created partnerships with companies such as Toy ‘R’ Us,
and Borders Groups Inc., which have found it difficult to operate their own on-line operations.
What these companies are seeking is to share and benefit from Amazon’s expertise in delivery.
Bezos has made the point that while the distribution centres of traditional retailers are good at
shipping containers of products to stores, they are not designed to deliver single items direct to
customers, something which requires very different capabilities, and in which Amazon
specialises. Second, there are a number of economic opportunities to expand the selling of
additional higher-priced (if lower-margin) items on-line. Amazon is currently able to offer a
selection of 25 000 electronic items on its site, compared with say 5000 in a big electronic store.
Although gross margins in electronics are smaller than books, at only 10–15 per cent, the costs
of storage, packing and shipping are roughly the same for a £300 digital camera as for a book.
So overall the net profit per unit for these goods is actually higher. Third, there are emerging
makets such as China, which has an 86 per cent literacy rate and five times the population of
the USA. Local companies, such as Dangdang.com, China’s biggest online bookseller, are
already becoming established but have less than 0.25 per cent of the Chinese book market. The
problem with the Chinese market at the moment is not price but a lack of Web access,
consumer trust and online banking services. So far, only 6 million of the 50 million Internet
users in China have shopped online. Fourth, Amazon continues to innovate. It has recently
entered the DVD rental market. It delivers DVDs by first-class post with pre-paid envelopes
provided for returns. As technology develops it will undoubtedly be able to supply DVDs
virtually in future, while it is able to use its current personalisation tools to recommend films to
customers. In terms of technological improvements, by using sophisticated software tools to
improve its internal operations management, it has managed to reduce distribution costs from
155 per cent of revenues in 1999 to 7 per cent today. Amazon was able to ship 1.4 million
copies of Harry Potter and the Order of the Phoenix without a hitch on the day of its release in
June 2003.

Case study questions

1 Have a look at the websites of Amazon (www.amazon.com ) and its biggest American rival
Barnes & Noble (www.bn.com) and compare what they do, and how their websites are
structured.

2 Carry out a SWOT analysis of Amazon.com Inc. Using a rating scale of 1–5 for each factor
identified (where 1 represents the most salient factor), summarise these into a single table.

3 Identify, in your opinion, the most important (highest-rated) factor for each category
(strength, weakness, opportunity and threat), and explain your rationale for selecting those
particular factors.

4 Try searching the WWW, using a search engine such as Google or Yahoo, for ‘booksellers’.
How many hits do you get? What do these results suggest?

5 In the light of question 4, and using Porter’s five-force model as a framework, consider the
impact that Amazon.com Inc. has had on the book selling industry.

6 Consider whether the strategy pursued by Amazon (cyber-based only) or that of Barnes &
Noble (traditional bricks and mortar plus cyber space) will be the more successful in the longer
term. Explain your reasons.