ARCHIVED—Transforming Organizations

Background Document
The Challenge of Change: Building the 21^st Century Economy
e-Commerce to e-Economy: Strategies for the 21^st Century
Industry Canada
September 27-28, 2004
Ottawa, Ontario

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The previous chapter presented a macro view of the emergence of the e-economy by outlining the role ICT networks are beginning to play in raising productivity, generating growth and establishing competitive advantage across the Canadian economy as a whole.

In this chapter, we will examine the emergence of the e-economy from a different perspective, at the micro level, by looking at how private firms, governments and public service providers redesign their business and service models, using ICT networks to transform production processes and organizational structures.

In seeking transformation, the goals of the private and public sectors are different. Private firms seek competitive advantage. Governments seek to improve the efficiency and effectiveness of public services. In both cases though, they are beginning to adopt network-based models – the new organizational paradigm for the e-economy.

A. Transforming business models

The e-economy is founded on the adoption of network-based e-business models and practices by firms in all sectors. As a recent study noted,
The key factor driving the implementation of e-business throughout the economy is the competitive advantage such technologies and applications offer … A growing number of businesses are using the Internet and employing e-business solutions (sometimes referred to as Internet Business Solutions or IBS) to improve and modify their business processes, reduce operational costs, expand markets, increase revenues, enhance collaborative business partnerships, and strengthen customer and supplier relationships. Individual firms are increasingly employing electronic applications to ensure competitiveness in the marketplace and to survive against competitors who are adopting these strategies. ⁸

The Internet and other advanced communication networks make it possible for buyers and sellers to interact on a global basis. They also make it possible for firms to organize worldwide value chains, to control production, distribution and service processes in real time and to source human capital from countries or regions that offer a competitive advantage.

1. The current state of e-business in Canada

Canadian businesses have good Internet and broadband connectivity compared to other countries. In this respect, they are well positioned to adopt e-business models and practices. While basic connectivity has been achieved, however, much more remains to be done to adopt more complex applications (see Figure 4).

The adoption of Internet Business Solutions allows firms to reduce transaction costs throughout their value chains by implementing network-based just-in-time and real-time production, distribution, sales and service business models. IBS can be to the e-economy what the assembly line and mass production were to the industrial economy – a transformation of the basic business model.

2. Strategic issues in business transformation

In the global marketplace, any productivity or competitiveness gap between Canadian businesses and their international competitors is a critical issue that should be analyzed on a sector-by-sector basis, so that strategies can be formulated to build on our traditional sources of comparative advantage. In local markets, the low rate of IBS adoption by SMEs leaves many of them vulnerable to competition from larger-scale international rivals in sectors where there is unrestricted international market access and where goods and services can easily be sold on a transborder basis.

SMEs are the lifeblood of the Canadian economy and it is vital to our future prosperity that we maintain the competitiveness of our SMEs. They account for over 99 percent of Canadian companies and contribute significantly to job creation and economic growth. Of the 2.2 million businesses in Canada in June 2003, just over one million had employees on their payroll; of these, only 2773 had more than 500 employees. ⁹

SME adoption of advanced e-business models and practices lags seriously behind adoption by larger firms. While many SMEs are using basic applications such as e-mail and non-transactional Web sites, they lag in the use of advanced e-business applications such as e-procurement, supply chain management, accounting and finance management and human resource management. This is despite the substantial cost saving and profit-enhancing potential of these applications.

Research by the Canadian e-Business Initiative (CeBI) through its Net Impact work identifies the reasons that Canadian firms, particularly SMEs, have been slow to adopt advanced e-business models and practices. One possibility is that most applications are designed for large-scale enterprises and are not adapted to the needs of smaller firms. Another is that many businesses lack the skills and resources needed to identify and apply e-business solutions. ¹⁰

As part of a national strategy for the e-economy, it will be important to consider whether we should aim to be a producer of advanced e-business solutions, or whether we should focus instead on helping firms become intelligent consumers of products that are developed elsewhere. The answer to this question has important implications for research, education, training and skills development.

3. Implications of e-business for the workplace

The adoption of IBS and e-business models also raises serious issues related to the transformation of the workplace. A flexible, highly adaptable, real-time business model requires a flexible, adaptable workforce. New knowledge, skills and abilities are required at all levels of the firm, from the executive suite to the production floor.

Low cost and efficient communications makes outsourcing a key feature of the e-business model. While Canada is a recipient of "insourced" work from other countries, it is also the originator of work sent elsewhere. There are social, political and economic implications arising from this activity. Workers in the host country are competing with workers half a world away, in countries that usually have completely different wage structures, working conditions and environmental protections. It is important that outsourcing takes place in a way that is least disruptive both to host and recipient countries. A gathering of the facts and implications of this activity are necessary before any policy is put in place. International organizations, such as the OECD have begun work on this issue.

The transformation of the workplace to fit the e-business model also raises questions about social and human impacts. On the one hand, the flexibility made possible by mobile work offers previously unavailable opportunities for participation in the workforce to people with family responsibilities, as well as to those with disabilities. On the other hand, because ICTs make it possible for people to be available any time, anywhere, there is concern that e-business practices require people to work longer hours and are consequently interfering with family, leisure and voluntary activities and leading to rising levels of stress.

B. Transforming government

As part of Canada's Electronic Commerce Strategy, the federal government undertook to become a model user of information technology and the Internet. As Figure 5 illustrates, it has been successful in meeting this objective: according to the international management consulting firm Accenture, Canada has ranked first in the world in the implementation of e-government for the past four years.

The challenges facing individual government departments and agencies in using electronic networks to transform their operations are in some ways similar to those facing private enterprises. Transforming traditional governmental "silos" into integrated, online service delivery networks, however, involves several additional challenges. These include:

• engaging citizens more fully in policy formulation program planning, service delivery, and performance evaluation;
• transforming government services with the active involvement of all stakeholders; and
• reforming the inner workings of government so that cross-cutting issues are dealt with more efficiently.

A successful response to these challenges requires the adoption of a client-driven approach to transforming government services that cuts across the boundaries that divide different departments and agencies as well as different levels of government.

C. Transforming public services

In addition to the challenges Canadian governments face in transforming their overall operations, they face special and particularly acute challenges in transforming the delivery of two key public services – education and health care – which together account for some 15 percent of the gross domestic product (GDP) and the lion's share of provincial government expenditures. In addition, these sectors face significant shortages of qualified professional personnel, such as nurses, teachers and professors.

In both of these areas, Canada faces a rising demand for services. The ageing population increases demand for health care services, while the requirements of the e-economy increase demands for education, skill-development and lifelong learning services.

There is a consensus that ICTs can be applied to improve service and contain costs in our health care, education and skill development systems as well as deliver these services quickly and effectively to rural and remote regions. In 2001, health care expenditures represented approximately 9.6 percent of Canada's gross domestic product (GDP). For 2003, they were estimated at 10 percent of GDP. ¹¹ This means that if, for example, health care expenditures could be reduced by 1 percent through the intelligent application of ICTs, annual costs would fall by more than $1 billion. As well, investments in learning have a multiplier effect as they can contribute to the effectiveness of all other sectors.

As Figures 6 and 7 illustrate, ICTs and Internet-based services are used to assist the delivery of health care and education services. These applications, however, have just begun to scratch the surface of what is possible, particularly through the use of broadband networks. Much more needs to be done, both in urban areas and in rural and northern communities, as we move towards an e-economy and e-society.

In the area of health care, both the Kirby and Romanow Commissions recommended that the federal government should invest in developing tele-health and tele-medicine services. In addition, the federal government has devoted considerable resources to the development of health care information systems designed to improve patient care and health care delivery in all areas of the country.

The role of ICTs and the Internet in education, training and skills development has also been the subject of considerable discussion and debate over the past decade. Canada was the first country in the world to connect all of its public schools and libraries to the Internet. A logical next step might be to upgrade these connections to full broadband capability – and to develop educational services and applications that take full advantage of broadband communications to give all children equal opportunities to learn.

Outside the formal education system, considerable work has been done to apply ICTs in the training, skills development and lifelong learning programs sponsored by the public and private sectors.

Beyond incremental improvements in service delivery through the use of ICTs, the real challenge facing providers of health care, education and other public services is re-thinking their service models in light of the possibilities that are opened up by ICTs and the Internet, and re-designing their delivery systems and organizational structures to fit these new service models.

D. Challenge questions:

What strategies are needed to transform organizations?

What kinds of organizational changes are needed to increase productivity in the public and private sectors?

• What kinds of new business models can private sector firms, including SMEs, adopt to improve their productivity and competitiveness?
• How can large or leading firms champion the adoption of IT and e-business throughout a sector?
• How can governments cooperate in designing and implementing citizen-centric services on a cross-jurisdictional basis?
• How can health care and educational services be transformed to improve quality and contain costs?

What adjustments are needed to transform the workplace for the e-economy?

• What adjustments are needed in education and skills development systems to prepare Canadians for the work requirements and managerial responsibilities of the e-economy?
• What adjustments are needed to employee benefit systems and social safety nets to help individuals and communities cope with the effects of rapid technological change, global competition, outsourcing and the flexible employment practices that are the hallmarks of the e-economy?
• What adjustments are needed to labour codes and management practices to help employees and their families maintain a good quality of life in an online, real-time, 24/7 world?

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⁸ Neogi, P.K., A. Leduc, and C. Peters, "Internet Connectivity and e-Business Adoption by Canadian Firms: An Empirical Analysis". Proceedings of the 6th International Conference on Electronic Commerce Research, Dallas, 2003.

⁹ Business Register, Statistics Canada, June 2003 and Key Small Business Statistics, Industry Canada, May 2003.

¹⁰ Net Impact Study Canada: The SME Experience, Canadian e-Business Initiative, 2002.

¹¹ Canadian Institute for Health Information, National Health Expenditure Trends, 1975–2003.