TRANSFORMATION OF THE BUSINESS ENTERPRISE

TRANSFORMATION OF THE BUSINESS ENTERPRISE

Along with rapid changes in markets and competitive advantage are changes in the firms themselves. The Internet and the new markets are changing the cost and revenue structure of traditional firms and are hastening the demise of traditional business models. 

           For instance, in the United States, 20 percent of travel sales are made online, and experts believe that 50 to 70 percent of travel sales will be online within a decade. Realtors have had to reduce commissions on home sales because of competition from Internet real estate sites. The business model of traditional local telephone companies, and the value of their copper-based networks, is rapidly declining as millions of consumers switch to cellular and Internet telephones. At current rates of decline in subscribers, about 15 percent per year, the value of traditional local phone networks will decline by 50 percent by 2010 (Brown and Latour, 2004).

           The Internet and related technologies make it possible to conduct business across firm boundaries almost as efficiently and effectively as it is to conduct business within the firm. This means that firms are no longer limited by traditional organizational boundaries or physical locations in how they design, develop, and produce goods and services. It is possible to maintain close relationships with suppliers and other business partners at great distances and outsource work that firms formerly did themselves to other companies.

           For example, Cisco Systems does not manufacture the networking products it sells; it uses other companies, such as Flextronics, for this purpose. Cisco uses the Internet to transmit orders to Flextronics and to monitor the status of orders as they are shipped. GKN Aerospace North America, which fabricates engine parts for aircraft and aerospace vehicles, uses a system called Sentinel with a Web interface to monitor key indicators of the production systems of Boeing Corporation, its main customer. Sentinel responds automatically to Boeing’s need for parts by increasing, decreasing, or shutting down GKN’s systems according to parts usage (Mayor, 2004).

At the Orbitz Web site, visitors can make online reservations for airlines, hotels, rental cars, cruises, and vacation packages and obtain information on travel and leisure topics. Such online travel services are supplanting traditional travel agencies.

           In addition to these changes, there has also been a transformation in the management of the enterprise. The traditional business firm was—and still is—a hierarchical, centralized, structured arrangement of specialists who typically relied on a fixed set of standard operating procedures to deliver a mass-produced product (or service). The new style of business firm is a flattened (less hierarchical), decentralized, flexible arrangement of generalists who rely on nearly instant information to deliver mass-customized products and services uniquely suited to specific markets or customers. 

           The traditional management group relied—and still relies—on formal plans, a rigid division of labor, and formal rules. The new manager relies on informal commitments and networks to establish goals (rather than formal planning), a flexible arrangement of teams and individuals working in task forces, and a customer orientation to achieve coordination among employees. The new manager appeals to the knowledge, learning, and decision making of individual employees to ensure proper operation of the firm. Once again, information technology makes this style of management possible.