The Philosophy of Supply Chain Management in the New Economy: Net Readiness in the Net Supply Chain Zbigniew Pastuszak The internet has been described as breakthrough technology. Its use in business can drastically change the situation in the business sector leading traditional enterprise to collapse. In the era of the Digital Revolution, postindustrial society is evolving towards the information society creating the foundation of the New Economy. Its basic elements include globalization processes, massive implementation of Information Technology and the establishment of virtual enterprises. Implemented processes take the form of pro-active business that fosters innovation and personification of its market offer. Enterprises that utilize Internet infrastructure in their activities carry out a specific e-business model. Their key commodity is information. It is based on changing the traditional scm into e-scM as well as on creating the so-called ‘Internet value network.’ In order to be created, the enterprise has to be properly prepared for the new conditions, which is called net readiness. This article describes the characteristics of supply chains in the new economy, stresses the significance of information and effective business management in addition to a potential effect of the new economy on the market competitiveness of enterprises. Net readiness has been described here based on a study of a group of the biggest Polish businesses. From Old to New Economy World economies function under the conditions that result from human evolution based on a continuous creation of added value1 (Table 1). The ‘virtuality’ of our era has its roots in ‘tough’ historic solutions. Digital Revolution changing the post-industrial era society into the information society laid the foundations for the New Economy based on a massive implementation of Information Technology – it. Here are 12 principles of the New Economy according to D. Tapscott (1998): 1. Information - departure from physical labor; ‘information input’ is an essential component of products. Dr Zbigniew Pastuszak is Reader at the Faculty of Management, Lublin University of Technology, Poland. Managing Global Transitions 2 (1): 15–30 16 Zbigniew Pastuszak Pre-Internet Era Post-Internet Era Managing Global Transitions The Philosophy of Supply Chain Management in the New Economy 17 Table 2: New Economy and production processes Business challenges before 2020 Ways of accomplishment Reaching high level of competitiveness in all operations lee - Lean, Effective (on all levels of the process of production). Enterprises Integration of human and technology resources in order cre - Customer to raise production effectiveness and customer satisfaction. Responsive Enterprises Immediate transformation of information obtained from tce - Totally Connected a wide network of various sources into useful knowledge Enterprises which facilitates making effective decisions. Reduction of production waste and influence on the Environmental natural environment to ‘almost nil’. Sustainability Fast reconfiguration among production businesses in Knowledge Management response to changes in various needs and opportunities. Quick innovations in production processes and products Technology Exploitation keeping in mind a constant reduction in their physical size. Source: Manufuture 2003. 2. Power of digital technology - departure from analogue technology. 3. Heading toward virtual reality by searching for virtual solutions corresponding to present ones. 4. Molecularization - departure from systems hierarchy toward ‘individual creators of values’. 5. Integration (work) on the Web. 6. Elimination of intermediaries and indirect functions. 7. Correlation of market areas - combining their organizational structures, areas and functions (e-content). 8. Innovation - key success factors. 9. Consumer-producer - consumers participate in production already on the level of product design. 10. Functioning in real time (real-time economy). 11. Globalization. 12. Era of anxiety and threat (for societies outside the ‘loop’). These processes require a continuous process of adaptation on the part of businesses to meet evolving consumers’ needs (Table 2). New Economy Enterprises - Virtual Organizations New economy enterprises apply new principles of operation. Traditional solutions based on the concepts of Total Quality Management Volume 2 · Number 1 · Spring 2004 i8 Zbigniew Pastuszak Figure 1: Sources of internet value network in the New Economy (author’s analysis) (tqm), Business Process Reengineering (bpr) or Value Based Management (vbm), see a comeback in popularity in the informational era. The implementation of the Internet guarantees an ever-increasing effectiveness within the Time Based Management (tbm). Capitalizing on the advantages of Human Resources Management (hrm), it creates a previously unthinkable synergy effect in the form of holistic (multi-aspect) management of an entire chain of cooperating enterprises in all areas (Figure 1). The logistics pipeline comprises physical, informational and financial flows. The processes described lay real foundations for the development of the new economy through the creation of virtual organizations defined as:2 i. Temporary, goal-specific network of independent businesses joined by Internet Technology, based on synergy-effect cooperation (alliances, joint ventures, coopetition).3 2. New business that integrates processes previously implemented by different enterprises but now operates independently and creates added value due to the synergy of its combined functions. 3. A totally new creation offering totally new products and totally new functions. Managing Global Transitions The Philosophy of Supply Chain Management in the New Economy 19 Practically speaking, virtual organizations are treated as production systems, i. e. designed and organized economic unions (enterprises) used in order to create certain products and satisfy customers’ needs. They utilize concrete supplies, i. e. input, (e. g. hardware, software) or information supplies (e. g. data base, graphics etc.) and output (e. g. Web page content, financial transactions, contacts with subcontractors) that satisfy the needs of the market and ensure expected profit. Virtual Supply Chain - Internet Value Network escM Enterprises that utilize Internet infrastructure in their operations can be divided into three groups: users, telecommunications businesses and suppliers. They offer both traditional and virtual enterprises a wide variety of services to access on-line resources and opportunities. This access is based on the ‘5c’ (Afuah and Tucci 2003): 1. Coordination, 2. Commerce, 3. Community, 4. Content, 5. Communications. In this way a virtual supply chain is created which is strictly connected with the traditional supply chain based on the flow of goods and services (Figure 2). The synergy of Internet properties, wide use of Electronic Data Interchange (edi), knowledge and intellectual capital of organizations as well as the effectiveness of traditional s cm system solutions all lead to management of the supply chain in the new economy, i. e. es cm (electronic Supply Chain Management) and to the creation of the Internet value network (Afuah and Tucci 2003). Though it is based in many cases on the so-called dynamic network, utilizing the cooperation of the mother company with a network of specifically selected partners, it is generally based on a wide use of the Internet in the following processes: commerce, production, physical movement, planning, supply and product design (Figure 3). Knowledge and intellectual capital of new economy enterprises create, according to L. Edvinsson’s rooted tree theory (Edvinsson and Malone 2001), the basis for their real sphere, i. e. physical and production flow, which stimulates the development of other spheres of their Volume 2 · Number 1 · Spring 2004 20 Zbigniew Pastuszak i. Users i. Trade companies 2. Content assemblers 3. Market organizers 4. Service companies <---------------- in. Suppliers 8. Content creators 9. Software suppliers 10. Hardware suppliers Managing Global Transitions The Philosophy of Supply Chain Management in the New Economy 21 eProduction eLogistics Growth ePlanning Customer loyalty Contract efficiency Product availability Flexibility eDesign eSupply Reduction Reaction time Operating cost Servicing cost Sales cost Figure 3: Elements of e (author’s analysis)4 activity in their close and global environment as well as contributing to their growing competitiveness. CHARACTERISTICS OF THE SUPPLY CHAIN IN THE NEW ECONOMY The specific characteristics of the supply chain functioning in the new economy are mainly based on the synergy effect of traditional business solutions and Internet technology applications. The comparison of the characteristics of the chains in the old and new economies is presented in Table 3. Net Readiness of Polish Enterprises RESEARCH METHODOLOGY The utilization of evident advantages of supply chains in the new economy is conditioned by a number of factors that are chiefly related to the internal characteristics of a business. They are referred to as Net Readiness (nr), i. e. the degree to which an enterprise is ready to conduct its business activity using the Web. Employees of Cisco Systems (Hartman, Sifonis, and Kador 2001) are the authors of the Net Readiness methodology used to research Polish Volume 2 · Number 1 · Spring 2004 22 Zbigniew Pastuszak Managing Global Transitions The Philosophy of Supply Chain Management in the New Economy 23 Volume 2 · Number i · Spring 2004 24 Zbigniew Pastuszak enterprises. They refer to Net Readiness as a subjective combination of ‘(...) four factors that enable enterprises to activate highly effective business processes utilizing Internet technologies and having a real, concentrated and measurable character.’ They include: leadership, management, competencies and technology. Cisco research proves it is very unlikely for any company to be successful in e-business if either of these factors malfunctions. The main nr research tool is the nr evaluation chart. It describes the level of involvement of an enterprise in e-business solutions. It also enables the position of the enterprise to be determined in relation to the best representative in its group. The authors of the methodology divide enterprises into five groups: i. Internet visionary – enterprises displaying best preparation to operate in the Net, 2. Internet expert – Net Readiness of the enterprise is impressive but certain significant elements are missing, 3. Internet savvy – enterprises showing ‘higher than average distance from the concept and language of Net Readiness’, 4. Internet aware – enterprises that are more conscious of than ready for the Net economy challenges, 5. Internet agnostic – e-business remains outside of the enterprise’s range of interest. RESEARCH RESULTS nr research of Polish enterprises was conducted between October 2002 and November 2003. It was funded through a grant from the Polish Scientific Research Committee and was entitled ‘Adaptation of Polish Enterprises to E-Business Competition’. 71 enterprises were researched that had been selected from the year 2001 list of 500 biggest Polish enterprises. The stock exchange and non-stock exchange companies that were studied gained profit in 2001 in the 60 million–2,9 billion us d range (1 usd = 3.5 pln). They employed between 100 and 100,000 employees while their investment reached from 290,000 to 1,5 billion usd. Managers of the enterprises that took part in the study answered questions regarding the use of information technology, application of the Internet while contacting main customers and suppliers, opportunities for individualization and virtualization of products and processes, speed of services as well as the clients’ attitudes to accepting new means of product delivery. Managing Global Transitions The Philosophy of Supply Chain Management in the New Economy 25 The Net Readiness Evaluation Chart that was used in this research consisted of 20 questions concerning the following: leadership, management style, competencies and technologies (Table 4). Survey participants rated respective areas on a 1–5 point scale. A comparison of overall results achieved in the group of researched companies to the ideal model and Cisco research population (Table 5) confirms the broad technological opportunities of Polish enterprises. However, with lack of e-business orientation (Table 4, question no. 20 - minimum value - 2.67), the results point out, at the same time, that the it infrastructure is sufficient to conduct e-business (question no. 17 - highest average - 4.42). The discrepancy among these answers clearly shows deficiencies of the largest Polish companies in developing e-business. This has been observed mainly in e-business management. Admittedly, the bosses of researched companies seem to notice some opportunities in e-business, but they lack ideas on how to utilize them, e. g. lack of development strategy, administrative procedures and e-project evaluation. Marked disproportions can also be noticed between production- and non-production companies as well as between companies with high as opposed to low levels of sensitivity to e-business competition (Table 6). Researched companies generally reached a relatively high level of readiness (‘Internet sense’). However, the leading group of the ‘Net experts’ includes non-production companies in addition to companies with a high level of sensitivity to the risk of e-competition. On the level of leadership and management, the majority of companies are highly sensitive to competition’s e-business. They also show a relatively high level of e-business competencies and technological advancement. This group can only be compared to the non-production companies that dominate as far as technology and competencies are concerned. This fact confirms a general observation that it is relatively easy for these companies to undertake activities leading to the use of the Internet. It is obvious that production companies with low sensitivity to e-business competition, on the other hand, rate much lower. This results from a low susceptibility of their products to virtualization processes. Summary Business solutions used in supply chains of the new economy lead to time savings, contribute to value creation for cooperating businesses and enable maximum adjustment of business offer to the needs of the market. Volume 2 · Number 1 · Spring 2004 26 Zbigniew Pastuszak Table 4: Polish enterprises net readiness evaluation chart (median, N = 71) No. Net readiness factor Mean Leadership 3.68* 1 Top leadership keeps in mind opportunities/threats resulting from Internet 4.12 economy. 2 Internet projects under implementation are well integrated with the overall 4.09 business strategy of the company. 3 There is a culture of information sharing within the entire organization. 3.97 4 Company has a clearly defined and accepted 12- to 18-month development 3.21 strategy regarding e-business. 5 Company’s e-business efforts stress more the strategic significance of value 3.00 creation rather than concentrate on its operational effectiveness. Management 3.32* 6 Company has standard principles of work organization of e-business projects. 3.36 7 We have stable indices rating the effects of e-project implementation. 3.00 8 Company has clearly specified functions, range of duties, responsibilities and 3.39 control in relation to e-business projects. 9 E-business projects are implemented by the right people who are properly 3.33 motivated to achieve expected goals. 10 it Department sees itself as a business partner and consultant in utilizing 3.48 Internet services by the company’s business units. Competencies 3.62* 11 Company is able to function in the face of rapid and constant change. 4.18 12 E-business projects are implemented quickly and efficiently, i. e. by 3 to 6 3.15 people in less than 3 months. 13 Business managers have it knowledge while it managers have business 3.70 knowledge. 14 Company is experienced in simultaneous management of internal and 3.79 external relations. 15 Company can quickly start and develop cooperation with business partners. 3.30 Technology 3.90* 16 Entire company is covered by a stable and standard it infrastructure. 4.27 17 Company has an indispensable technical infrastructure such as the networks, 4.42 hardware etc. 18 Company’s solutions are flexible enough in response to changes in the 4.15 environment. 19 Company’s solutions can be easily adapted to changing needs of its customers. 3.97 20 Majority of company’s solutions is e-business oriented. 2.67 * Arithmetic mean of the rating obtained from all answers regarding the specific nr factor. Source: Author’s analysis based on Cisco methodology and results of research. Managing Global Transitions The Philosophy of Supply Chain Management in the New Economy 27 Table 5: Researched companies net readiness Leadership Management Competencies Technology Ideal model 5 5 5 5 Cisco population 4,4 3,9 4,1 4,2 Polish companies 3,7 3,3 3,6 3,9 Source: Based on Cisco methodology and results of research. Table 6: Net readiness of enterprises according to type of activity and sensitivity to competition Leadership Management Competencies Technology Productive 3,56 3,32 3,57 3,73 Non-productive 3,71 3,19 3,9 4,2 Low sensitivity 3,39 3,13 3,46 3,74 High sensitivity 3,91 3,47 3,65 3,93 Source: Results of research. Modern supply chains do have a number of advantages; however, they are not free from threats resulting from the characteristics of e-economy (Table 7). Generally, these threats lie in low net readiness to operate in the e-business environment as well as in the necessity to make broad investments in it solutions. Limits in new opportunities that can also be noticed are due to a world-wide economic stratification and a clear division into digital civilization and outsiders. Additionally, there are difficulties in a free flow of information connected with specific persons or companies (e. g. problems with infrastructure) or problems with a revolutionary transition from the old to the new economy omitting intermediate stages such as the technological gap, social factors, mentality, level and features of consumer needs. Nevertheless, it can be stated that the correlations generally taking place in many aspects of economy will have a growing influence on its basic processes. Economic evolution in different countries, on the other hand, will be wider and more intense, which, in turn, will be conducive to the transition into the new economy of more countries. In this process, the only companies to reach a high level of competitiveness will be the ones effectively managed and ready to function in the Net, showing this readiness by participating in modern, highly flexible, virtual supply chains. Volume 2 · Number 1 · Spring 2004 28 Zbigniew Pastuszak Table 7: Elements of swot analysis for escM (vs. traditional scm capabilities) Strengths • High flexibility of action • High speed of processes • Very high integration of chain members • Great influence of needs on offer creation • Lower cost of transaction completion • Lower cost of investment in development of cooperation within supply chain. Opportunities • Opportunity for quick action in case of a market niche • Globalization of business activities and consumer expectations • Diversified consumer expectations • Opportunity to use latest technical innovations, e. g. cordless Internet, micro payments • Synergy of opportunities and experiences of supply chain members • Lack of barriers to the flow of information Adapted from Kisielnicki 2002. Weaknesses • Low level of net readiness • Necessity of wide it solutions implementation, especially integrated software • Necessity of purchasing (creating) and constant updating of data base • Necessity to trust all members of e-supply chain • Lack of examples to follow Threats • Failure of 1 t systems • Lack of generally accepted legal regulations • Lack of preparation of supply chain members for operating in the new supply chains • Lack of interest on the part of the new supply chain consumers (and potential cooperating firms) resulting from delays related to infrastructure, local culture, mentality or organization Opportunities for Future Research A diagnosis of the current degree of enterprises’ readiness to function in the new economy creates new directions for research. Questions ahead are related to, among other things: 1. Posibility and potential scope of process and product virtualization in enterprises with varied levels of technological advancement. 2. Rate of achieving new competitive positions within e-business solutions. 3. Influence of companies’ countries of origin, basic activity markets and international connections on effectiveness of e-business solutions. 4. Influence of the past on the functioning of enterprises in the former ‘Eastern Bloc’ countries in comparison with enterprises from Western Europe, Japan and the us. Managing Global Transitions The Philosophy of Supply Chain Management in the New Economy 29 Notes 1. The term ‘added value’ refers, in this case, to an additional input in the development of civilization at a specific phase of world economy. 2. Author’s elaboration based on Grudzewski and Hejduk 2002,93–7 and 164–5. 3. Coopetition is a tool and a form of competition. It consists in making unions among businesses in order to serve the client and compete more effectively on the market (Pastuszak 2002a). 4. Author’s analysis based on Korff and Knak (2001) and author’s study of 53 Polish production enterprises (Pastuszak 2002b). 5. When characterizing supply chains in the new economy, the classification of business activities within the supply chain was based on an article by M. E. Porter and V. E. Millar (1985). 6. A lot of attention is paid in this process to the concept of the Virtual Customer, who influences, through the Internet, product development in all stages if its production (see Dahan and Hauser 2001). References Afuah, A., and C. L. Tucci. 2003. Biznes internetowy: Strategie i modele. Kraków: Oficyna Ekonomiczna. Dahan, E., and J. R. Hauser. 2001. The virtual customer: Communication, conceptualization, and computation. mit Papers 104. Edvinsson, L., and M. S. Malone. 2001. Kapitał intelektualny: Poznaj prawdziwa˛ wartosc swojego przedsiebiorstwa odnajduja˛c jego ukryte ko-rzenie. Warsaw: pwn. Grudzewski, W M., and I. K. Hejduk. 2002. Przedsiebiorstwo wirtualne Warsaw: Difin. Hartman, A., J. Sifonis, and J. Kador. 2001. E-biznes: Strategie sukcesu w gospodarce internetowej. Warsaw: Liber Kisielnicki, J. 2002. Przedsiebiorstwo przyszlosci w warunkach nowej ekono-mii. In Przedsiebiorstwo przyszlosci: Wizja strategiczna, ed. W M. Grudzewski and I. K. Hejduk. Warsaw: Difin. Korff, K., and H. Knak. 2001. Co moz˙e producentom dac´ eZarza˛dzanie Łan´cuchem Dostaw? cxo, December, 51–6. Manufuture. 2003. Working document for The Manufuture 2003 Conference. European Manufacturing of the Future: Role of Research and Education for European Leadership. Milan, 1–2 December, 23. Pastuszak, Z. 2002a. An enemy or a friend: Coopetition in scm. Polish Journal of Logistics 4:13–5. Pastuszak Z., 2002b. Innovation and competition in Polish sme. In Privatisation of enterprises in Polish industry, ed. M. Baltowski. Warsaw: State Scientific Publishing House / pwn. Volume 2 · Number 1 · Spring2004 30 Zbigniew Pastuszak Porter, M. E., and V. E. Millar. 1985. How information gives you competitive advantage: The information revolution is transforming the nature of competition. Harvard Business Review, July. Tapscott, D. 1998. Gospodarka cyfrowa. Warsaw: Business Press. Managing Global Transitions