Value Creation in the Digital Economy

In the digital economy, a firm must be able to create value in both marketspace and marketplace. A firm's business transformation process can be represented by an input-transformation-output model. In the industrial economy, input is raw materials or all of the necessary inputs that are required to produce the finished products or services. Output is finished products or intermediate goods used as inputs to another transformation or value-creation process. According to Meredith and Schaffer (1999), the "physical" transformation process involves one or more of the following four value-adding activities: alter, transport, inspect, and store. In the industrial economy, management's focus is to improve the physical transformation process by implementing management techniques such as total quality management, lean manufacturing, and just-in-time production. In the digital economy, data or information (in digital form) has become the input into a business transformation process. Information can be used directly to create values for individual customers by identifying their needs or preference based on their previous purchase patterns and profiles. Rayport and Sviokla (1995) identify five steps to create customer value in the digital economy: gather, organize, select, synthesize, and distribute. Since physical and digital economies coexist within a firm or business ecosystem, management should go beyond concentrating on improving the transformation process itself to focus on leveraging information assets and taking advantage of the disruptive nature of e-business to create more value (a package of solutions) for the customers (Lee, 2001).

Table 1 compares and contrasts these two transformation processes. Table 2 presents value-creation strategies in the digital economy. In the physical part of the value-creation process, information is the glue that holds a firm's internal units and the entire supply chain together and allows it to function (Chopra, 2001). With the introduction of e-commerce and virtual value chain, information itself has become a source of value. Since information (as an input) will not be consumed or depleted during the business transformation process, a firm or supply chain can redefine economies of scope by drawing on a single set of "digital assets" to provide value across many different and disparate markets (Rayport & Sviokla, 1995). Consumers are able to receive a "package of solutions" offered by a single "trust" vendor, supported by a business ecosystem of partners, to meet their needs.

Table 1: Business Transformation in the Physical and Digital Economies

	Physical Economy	Digital Economy
Input	Raw materials or intermediate products (e.g., parts and components)	Data or information in digital form
Business transformation or value creation activities	Alter, transport, inspect, and store	Gather, organize, select, synthesize, and distribute
Output	Intermediate products or finished products or services	Information/knowledge products or services New information services bundled with physical products to provide customer a "package of solutions"
Strategic role of information in the business transformation process	Information is a supporting element that facilitates the physical transformation (production) activities Information serves as the connection between the various value-adding stages within a supply chain	Information is a source of value that enable firms to offer new value propositions Real-time information enables integration, collaboration, and synchronization within a supply chain or virtual organization Information (as an input to a transformation process) will not exhaust after the transformation (production) process; therefore, firms operating in the digital economy should capitalize on the economic principle of abundance

Table 2: Value-Creation Strategies in the Digital Economy

Business Transformation Process	Input	Transformation	Output
Strategic goal for e-commerce applications	Design innovative products and services Reach the critical mass by building an installed base of customers Take advantage of the network effects to build a successful e-business	Improve efficiency and effectiveness of business or supply chain transformation process Match the performance of the physical activities to the digital world	Create numerous innovative products and services Provide a package of solutions to satisfy or exceed customer's expectations
E-commerce strategy and management	Increase collaboration throughout the product design process Synchronize product design requirements within a supply chain or business ecosystem in the early stages of the development process Leverage knowledge capital critical to the design process through external linkages (e.g., alliance partners, research labs, and universities) Achieve demand-side economies of scale by increase installed customer base's collective switching costs Reduce customer's transaction costs (i.e., make it easy for customers to do business with you)	Sustaining innovation approach: Apply conventional management techniques (e.g., lean manufacturing and total quality management) to improve process efficiency Achieve production economies of scale and scope Disruptive innovation approach: Take advantage of the lower transaction costs in the digital economy to redesign organizational structures and to reconfigure value-creation systems	Transform value proposition by taking advantage of the network effects and demand-side economies of scope, i.e., leverage on a single set of "digital assets" to provide many solutions to individual customers Increase user's (or buyer's) switching costs by offering value across many different and disparate markets Influence users' decision-making process through the use of extranet and Web-based collaborative planning tools Look beyond costs as the sole arbiter of value
Source: Adapted and Extended from Lee (2001)

Many companies have transformed their operations according to this value-creation principle. For example, Intel Corporation has transformed its operations from a traditional semi-conductor manufacturing company to an "e-business" solution company by creating an ecosystem centered on its core technologies. Online mega merchant Amazon.com is able to utilize a set of "digital assets," facilitated and supported by a group of ecosystem partners.