The Impact of the Internet

The Internet's impact on the way business is conducted is undeniable, yet at the same time, it is not fully understood nor is the Internet's presence in business fully implemented. Internet business solutions such as B2B e-marketplaces and supply chain management systems hold great potential in boosting productivity and keeping prices low. [7] Intelligent enterprises of the 21st century will need to embrace such systems to stay competitive, increase operating efficiencies, improve services, and expand markets.

Varian et al. (2002) interviewed 2,065 companies to measure the economic benefits of the Internet in the U.S. The authors report that the deployment of Internet business solutions has thus far yielded cumulative cost savings of $155 billion to U.S. organizations, with another $373 billion expected once all current solutions have been fully implemented by 2010. The impact on productivity growth could be profound; Internet business solutions have the potential to drive 40 percent of the projected increase in U.S. productivity from 2001–2011.

How will the Internet drive such a large increase in productivity growth? Because the Internet's application to commercial business is relatively new, projecting the Internet's impact on productivity growth is really more of an art than a science. Sufficient data are not yet available to use standard statistical analyses for estimating the Internet's impact on economic growth. Nevertheless, Varian et al. (2002) put forth several reasons why the Internet will lead to higher productivity.

The Internet is a powerful communications medium that allows access for anyone to connect anywhere in the world instantaneously at little cost and with great flexibility. This increased information availability directly leads to lower transaction costs. That is, search and information costs are lower, bargaining and decision costs are lower and policing and enforcement costs are lower. Better information that is available faster and cheaper also leads to efficiency improvements in the production and delivery of goods and services. That is, inventories can be maintained at lower levels, decision-makers at physically distant locations can communicate and cooperate more effectively, and supply chain performance measurement can be monitored and recalibrated in real-time. In addition, to the extent that the Internet enhances transparency, many markets will move closer to a market structure characterized by perfect competition and pressures will intensify for firms to adopt cost reducing and efficiency enhancing improvements facilitated by the Internet. [8]

Lee and Whang (2001) describe the Internet as an efficient electronic link between entities, creating an ideal platform for sharing information with those who need it. The effective integration of supply chains comes from "information hubs" that allow multiple organizations (or divisions within one organization) to interact and process information in real-time. The authors' report that a recent study by Stanford University and Accenture of 100 manufacturers and 100 retailers found that companies reporting higher than average profits were also the ones engaged in higher levels of information sharing.

The attempt to develop e-marketplaces presents tremendous opportunities to dramatically restructure industry supply chains. Thomas (2000) describes e-marketplaces as electronic, Internet-based commerce arenas for groups of buyers and suppliers within a specific industry, geographic region, or affinity group. The first e-marketplaces—,, and—formed in 1995 and 1996 to essentially serve as middlemen between suppliers and buyers. The number of e-marketplaces grew rapidly in the late-1990s as venture capitalists envisioned fantastic efficiency enhancements and lower procurement costs for businesses participating in such markets. [9] While B2B e-commerce and e-marketplaces were among the hottest investment sectors, many e-marketplaces have failed to produce the desired results.

Despite the collapse of many dot-coms, the Internet has not been over-hyped and may, in fact, be under-hyped. Most efficiency improvements that lead to broad-based macroeconomic productivity gains will show up in so-called Old Economy businesses. For example, as shown in Table 3, Brooks and Wahhaj (2000) estimate that moving purchasing activities onto the Internet will provide various industries with input-cost savings of 2 percent to 39 percent, depending on the industry. Overall, such input cost savings have potentially large impacts on reducing aggregate prices in the economy, which, in turn, could ultimately boost productivity and GDP growth much higher than it would otherwise have been.

Table 3: The Internet's Impact on Purchasing Activities.


Cost Savings (percent)











Electronic Components


Food Ingredients


Forest Products


Freight Transport




Life Science




Media and Advertising


Maintenance, Repair, and Operating Supplies


Oil and Gas






Source: Brooks and Wahhaj (2000).

For businesses, the Internet allows firms to reorganize the way they process information flows. Put simply, the Internet helps firms reduce the paper trail (by putting it online), produce more output with less labor, and hold less inventory in the supply chain. All of these improvements generate higher levels of output with fewer resources, ultimately raising living standards and helping to contain inflationary pressures.

[7]See Siems (2001a) for more on why the fundamentals behind B2B e-commerce and its impact on the economy remain strong. While most productivity gains and cost reductions will occur between businesses, the greatest long-term beneficiaries of Internet business solutions will be consumers, who will enjoy lower prices and higher living standards.

[8]As explained in Siems (2001b), B2B e-commerce and e-marketplaces move many markets closer to the textbook model of perfect competition that can be characterized by many well-informed buyers and sellers, low-cost access to information, extremely low transaction costs, and low barriers to entry.

[9]Chen and Siems (2001) find that investors reacted favorably to B2B e-marketplace announcements during the July 1999 – March 2000 period, with slightly higher abnormal returns associated with vertical (intra-industry) than horizontal (cross-industry) e-marketplaces.

Intelligent Enterprises of the 21st Century
Intelligent Enterprises of the 21st Century
ISBN: 1591401607
EAN: 2147483647
Year: 2003
Pages: 195 © 2008-2017.
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