E-Commerce is a Disruptive Innovation

The changes made possible by the Internet are strategic and fundamental (Ghosh, 1998). The changes are beyond the traditional boundary of an organization. The Internet has also changed the way in which supply chains are managed, planned, and controlled (Anderson & Lee, 2000). Even though the changes caused by the Internet are "disruptive" and have profound impacts on business strategies and operations, the underlying technologies are not radically different from the existing technologies that support business operations. This is not atypical, given that the technological changes that damage established companies are usually not radically new or difficult from a technological point of view (Bower & Christensen, 1995). For example, the technologies underlying the Internet—computing and communication technologies—have both been improved incrementally over the past decades.

Disruptive innovations have two important characteristics. First, they typically present a different package of performance attributes. Second, the performance attributes that existing customers do value improve at such a rapid rate that the new technology can later invade those established markets (Bower & Christensen, 1995). Disruptive innovations introduce a very different package of attributes from the one historically valued by mainstream customers, and they often perform far worse along one or two dimensions that are particularly important to those customers. For example, e-commerce still needs to improve the performance of several attributes, such as transaction security, system reliability, privacy, and trust.

Internet commerce is disruptive to the traditional way of doing business in that it is transforming the rules of competition and inventing new value propositions and business models. The successful implementation of e-commerce requires a paradigm shift. In moving toward e-commerce as an enabler, a business executive must be able to identify the disruptive nature of the innovation and then capture the benefits. Several disruptive attributes brought by the introduction of e-commerce include:

• Network effects. Network effects exist in the industrial economy (e.g., regular telephone service) but are much stronger in the digital economy. For knowledge-intensive products, such as software operating systems, characterized by high upfront costs, network effects, and customer groove-in (Arthur, 1996), achieving a critical mass of installed customer base is vital for success.

• Open platform. The Internet provides an open and nonproprietary platform for communication and collaboration. The open source movement in software development (see Raymond, 1999) has contributed to Internet-enabled collaboration and free information sharing.

• Connectivity and interactivity. E-commerce enables close connections with customers and among supply chain or business ecosystem partners' information systems. The benefits include real-time pricing, flexible products and services versioning, gathering customer information, and a very low cost for the distribution of information goods.

• Exchange and sharing of information. In the digital economy, the traditional tradeoff between richness and reach in information exchange no longer exists (Evans & Wurster, 1997). In e-commerce, information can reach many customers or business ecosystem partners through the Internet without sacrificing the richness of the contents.

• Convergence of production and consumption. The term prosumption was introduced by Tapscott (1996) to describe the convergence of design with development process and the production of goods and services by customers in the e-commerce environment. Internet-enabled collaborations can reduce both concept-to-design and design-to-production cycle times.

• Digital assets as the input into the business transformation process. A firm that exploits the Internet should build and utilize its digital assets (Rayport & Sviokla, 1995), which is all the information about its customers, in order to provide value across many different and disparate markets. In the digital economy, information is a source of revenue and every business is an information business (Earl, 1999). Therefore, a firm should use information to create new businesses and/or reinvent customer relationships through the implementation of virtual value chain (Rayport & Sviokla, 1995).

• Cost transparency. The vast amount of information about prices, competitors, and features that is readily available on the Internet helps buyers "see through" the costs of products and services (Sinha, 2000).

• Virtual display of merchandise. General online merchandise stores (e.g., Amazon.com) and all purposes business-to-business mega exchanges can offer enormous variety without building huge physical display areas that rack up costs and alienate many shoppers. Therefore, upgrading the physical aspects of the supply chain to match the speed and complexity of the e-commerce environment to reduce order-to-delivery time to customers is vitally important.

• Speed and frequency of changes. Change is fast and frequent in the digital economy. Firms in every industry must learn to adapt quickly to changing business and economic environments. Adaptation in a turbulent environment means watching for the next wave that is coming, figuring out what shape it will take, and positioning the company to take advantage of it (Arthur, 1996).

• Industry boundary. Value generated in Internet-enabled business transcends traditional industrial sectors. A firm or business ecosystem (Gossain & Kandiah, 1998) or business web (Tapscott, Ticoll, & Lowy, 2000) must provide unique (and customized) "solutions" (as opposed to single product or service) to individual customers.

Traditional organizations facing the challenge of transforming their businesses in the digital economy must understand and be able to capitalize on the disruptive attributes of e-commerce. A firm's ability to compete in the future, as well as its very existence, will be in question if it cannot capture the benefits of the disruptive nature of e-commerce.