Chapter 1: The e-Business Environment

Fast Forward 5.0: Making Connectivity Work for Canada
Canadian e-Business Initiative (CeBI)
September 2004

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1.1 Canada in the World

The 21^st century economy is an e-economy¹. The Internet, and information and communications technologies (ICT) are central to economic growth and productivity. They are also essential technologies for promoting advances in new fields, such as biotechnology and nanotechnology, and facilitating collaboration, modelling and information sharing. In addition, Internet-based technologies and networks can increase productivity, decrease costs and open new market opportunities; they are the foundation for increasing private-sector competitiveness and for public-sector service reform.

Since 1999, experts from around the world have recognized Canada as a world leader in electronic commerce and Internet adoption. Canada has attained some of the highest levels of Internet connectivity and infrastructure development. According to a recent Ipsos-Insight report, Canada leads in Internet adoption by individuals, followed closely by South Korea, the U.S. and Japan.² Canada is second only to Korea in terms of broadband Internet adoption and is consistently in the top five globally in terms of business connectivity. The Conference Board of Canada similarly finds that, in terms of connectivity—including availability, price, reach and use—Canada ranks second among G-7 nations.³

However, despite good infrastructure and a high level of connectivity, a variety of recent international reports indicate that Canada's rank in the world economy is slipping. In 2001, Canada ranked fourth out of 64 countries in the Economist Intelligence Unit e-readiness rankings. By 2002, we were ranked ninth; in 2004, we were eleventh.⁴ The U.K. E-Envoy Study similarly concluded that, despite Canada's high level of infrastructure deployment and consumer acceptance of the Internet as a commercial medium, basic access to the Internet has not translated into increased electronic commerce.⁵ Canadians have not taken full advantage of online opportunities.

Electronic commerce sales continue to be a small portion of overall consumer spending, and Canadians remain very concerned about online security. Similarly, a relatively high number of SMEs do not engage in e-commerce, citing high cost, lack of time, concerns about security and lack of IT skills as the major barriers to their participation in e-business. Net Impact Study, the International Experience⁶ noted that Canadian firms have already implemented less costly and less complex Internet Business Solutions (IBS), such as e-mail enabled applications and simple websites, and eschewed more advanced back-end solutions, which often bring the most value to firms.

Encouragingly, SMEs continue to increase their investment in Internet technologies and, in many cases, Canadian firms are adopting technology more aggressively than their U.S. counterparts. Value improvement in the Canadian dollar forced many Canadian firms to employ e-business to make their firms more productive and competitive. As the next generation of young, technologically aware Canadian entrepreneurs enters the market, we may expect a greater focus on e-business. With Canadians and Canadian enterprises leading the world in terms of Internet adoption, there is still an opportunity to take Canada to the forefront of the world. To do so, there is a need for renewed focus on efforts that build an innovative economy, including consideration of the contribution of ICT to economic growth and productivity.

The low ranking assigned Canada by various reports stems in part from cautious public-policy leadership in this area. ICTs are by their nature transformative, redefining how business, educational and health institutions, and all of society, interact. In combination with the 1999 technology downturn, this factor contributed to government caution in pursuing strategic policy making on this front and de-emphasised a previously ambitious national policy. Meanwhile, political leaders in other nations, including the U.K., Australia and Korea, have recognized the importance of ICT to productivity growth, and implemented aggressive strategies to drive adoption of e-business within their countries.

The February 2004 Speech from the Throne and the March 2004 Federal Budget⁷ have emphasised the government's priority of building a 21^st century economy in Canada. The Canadian government, the business community and the educational sector must develop a co-ordinated public-policy approach to capitalise on Canada's technological advantages, including a strong focus on encouraging Canadian SMEs to adopt more sophisticated e-business solutions.

1.2 E-business: the Value Proposition

E-business denotes using computer-mediated networks to perform a wide range of commercial transactions, to automate and transform business processes at the firm level, and to manage more effectively value chains across firms. In addition to e-commerce, customer service and support applications, e-business can include human-resource functions, sales-force automation, supply-chain management and other applications to automate firms' central internal processes.

E-business can deliver real returns to firms, making them more productive and profitable. The ability of e-business to generate profit for firms has proven to exceed even the most optimistic economic predictions. Forrester Research predicted in 1999 that U.S. consumer e-commerce would reach $108 billion by 2003. In fact, despite slowdowns in the U.S. economy in 2002, this figure stood at $95 billion in May 2003.⁸

Economists also agree that ICTs contribute to productivity growth.⁹ In studies of the impact of ICTs on the U.S. economy, economists found that the jump in ICT investment by firms, combined with higher-skilled workers, has contributed significantly to productivity growth since 1995.¹⁰

It is easy to see how, at the most basic level, using ICTs to deliver services can enable customers to receive services faster and more conveniently. For example, computerized reservation systems combined with automated ticket machines enable customers to purchase tickets—whether for travel or entertainment—much faster. The real value for firms, however, comes from automating internal business functions and transforming processes to realize efficiencies and reduce administrative costs, as well as cost of goods sold.

Net Impact Canada: The SME Experience, published in November 2002, reported on how Canadian small and medium-sized enterprises were using IBS to improve their business processes. (SMEs are defined as businesses with fewer than 500 employees.) The study suggests that, in a "best case" scenario, an average firm could increase net profits by more than 150 percent due to changes in revenues and costs brought about by the adoption of IBS.

The case for using e-business is clearly compelling. By increasing productivity, e-business can make an integral contribution to Canada's economic growth and prosperity. Canada has the infrastructure to enable firms to take the next step. How, then, are Canadian firms doing? Are they proactive in utilizing e-business? If not, what policy or structural changes are needed to spur e-business adoption?

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¹ Industry Canada, The Challenge of Change: Building the 21st Century Economy, e-Economy Conference Background Paper, September 2004.

² Ipsos-Insight, The Face of the Web, January 2004.

³ Conference Board of Canada, Cashing In on Connectedness, April 2004.

⁴ Economist Intelligence Unit, The 2004 e-Readiness Ranking Report, 2004.

⁵ Office of the e-Envoy, Country Report, The Canadian e-Economy, July 2003.

⁶ CeBI, Net Impact Study Canada: The International Experience, May 2003.

⁷ Budget 2004, New Agenda for Achievement, March 23, 2004.

⁸ BusinessWeek, The E-Biz Surprise, May 12, 2003.

⁹ OECD, ICT and Economic Growth: Evidence from OECD countries, industries and firms, 2003.

¹⁰ Industry Canada Research Monograph, Economic Growth in Canada and the United States in the Information Age, Dale Jorgensen, ed., May 2004.