E-commerce: the new industrial revolution

  • 2000-11-09
  • Thomas Gurtner
It is now widely recognized that the impact of e-commerce on particular businesses will be profound. But what will be the effect on the global economy as a whole? For every winner will there be a loser?

No.

What e-commerce amounts to is a dramatic improvement in the efficiency of doing business, and therefore the amount of business that can be done.

Part of this effect comes from cost savings brought about by easier transactions. E-commerce brings producer and consumer closer together.

Through the easy acquisition and transmission of information, all sorts of intermediate processes and middlemen are made redundant. The result of this clearance of waste is to reduce basic costs of production and the ultimate value delivered by consumers.

The change will embrace money itself. The holding of deposits, and, indeed, all other financial activities, is quintessentially immaterial. But it has taken a long time for money and finance to escape the shackles of the material world. Society long ago managed the transition from a monetary system based on gold and precious metals to one based on intrinsically valueless paper. This saved a great deal of resources previously absorbed in the mining, transport and storage of precious metals. But although paper was relatively valueless, it was far from costless to handle and transmit. Now e-billing and e-payment are making the final transition to disembodied money, thereby saving huge amounts of resources taken up by paper shuffling.

The scope of e-commerce to alter the share of business, and even the product itself, is surely the greatest with those things, like money, which are themselves intangible or immaterial such as software, music, cinema, and video, books, magazines, and all forms of stored knowledge and information. For in these cases e-commerce not only makes the transaction easier but also transports well the thing being transacted.

Of course there are going to be problems. For example, the creativity of the mind is often held back by the limitations of available technical ability; and we are unfamiliar with how e-fraud will hold up this unstoppable evolutionary process.

Yet this change in the transaction process will also affect material things, including goods where the costs of storage and stockholding have both driven up prices and limited consumer choice. Most household items such as kitchenware, garden tools and electrical goods, for example, are typically bought from department store outlets, of which there are many across the economy as a whole, but each of which holds a tiny stock and accordingly offers consumers little choice. Yet the combined stock held in all of these stores is immense.

But with e-commerce the ability of the consumer to review goods electronically reduces the economy-wide ratio of stock to sales while simultaneously offering customers access to the whole range of available alternatives.

Even so, the most far-reaching effects of e-commerce derive not from the reduction of costs but from the effect on demand, its empowerment of consumers at the point of transaction. The explosion of information about alternative sources of supply, prices and different quality, and the availability of sophisticated software to help the consumer make their choice, increases the responsiveness of consumers. In economists' jargon, it increases the elasticity of demand. The result is to force suppliers to operate with lower margins and to seek to maintain or increase profitability through higher volumes.

This simple effect combined with widespread cost savings, passed on to consumers in lower prices, will lead to large improvements in living standards. The Baltics, and Estonia in particular, are well-placed to take advantage of their reactive and proactive stance to this new economy.

I see no reason why the early nineteenth century should have a monopoly on dramatic changeover points in economic history. Indeed, I suspect the next five years will show that the transactions revolution is a transformation every bit as significant as the Industrial Revolution. o

Thomas Gurtner is the regional managing partner of Deloitte & Touche in the Baltic states and is based in Estonia.