INTRODUCTION
Digital Economy and Risk: A Two-Edged Sword
The digital economy has been generated by radical changes to every aspect of business and commerce in the last two decades. These changes are far more significant than the developments in Information and Communication Technologies (ICTs) that have largely facilitated the digital economy itself. Every business sector has witnessed changes in the competitive structure of the marketplace, consumer preferences, buying habits, marketing and promotional strategies, production operations, internal administration systems, supply chain arrangements, and the opening up of the global economy. Managers would concede that the uncertainties and risks in running their businesses, as a result of such changes, are not only much greater than previously but increasing. However, the digital economy is a two-edged sword in the sense that the ICTs generating the additional uncertainties and risks also provide the means to enable decision makers to manage them more effectively. The key to survival in the digital economy rests with the abilities of the managers to utilize ICTs effectively to manage uncertainties and risks.
ICTs have largely been seen as helping to enhance database access, analytical powers, and the communications capacity of managers. The justification for these efforts has been based on the premise that more and better quality information will result in reduced uncertainty and improved risk perceptions in decision situations. In short, the outcome would be reflected in “better quality” decisions in terms of risk assessment and resolution.
BACKGROUND
The Digital Economy
The term “digital economy” reflected in the title of this paper may be viewed from a variety of perspectives:
1. Technology developments, especially those relating to the digital communication of data and information, are usually considered the primary driver in the creation of the digital economy. Increases in speed, improvements in capacity, accuracy, reliability, general quality, and ease of use are all features that have enabled the widespread adoption and development of digital technologies. The developments in audiovisual communication technologies and wireless technologies are opening up further opportunities for the transmission and exchange of business intelligence.
2. Socio-economic changes have been equally influential in the rapid adoption of the new technologies. Individuals of all ages, educational and social backgrounds are prepared to regularly use mobile communications, access the Internet and engage in interactive video communications, often with friends and family in different parts of the globe. The impact that these changes in individual and group social behaviors have had on the rate of adoption of new technologies should be fully appreciated. The reasons underlying such changes are multifaceted and complex and beyond the scope of our present discussion, although they have broadly been influenced by individual social and economic needs.
3. Micro-economic factors at the level of the individual organization have been responsible for “pulling” and “pushing” organizations and their management towards increased attention and adoption of the digital economy. Significant “pull” factors include demands from end users of the product or service (e.g., requests for more detailed information on the product/service prior to and subsequent to the purchase, in terms of performance, maintenance, modifications, upgrades). The “push” factors are typically associated with the business organization seeking to maintain its competitive position by offering services equivalent to those of its main competitors, especially if these may be viewed as providing a distinctive competitive advantage (e.g., providing detailed product information via the Web and enabling customers to order directly). Some of
Table 1: Key topic areas presented in this article.
Key topic areas relating to digital economy and risk presented in this article include:primary elements of the digital economy overview of risk and risk management risk and uncertainty individual/organizational response to resolving risk role of information search and corporate intelligence contribution of the digital economy to risk resolution individual characteristics and risk perceptiveness management of risks risk perception information processing and risk resolution risk management within the digital economy the issues involved will be discussed further in later sections of the paper. 4. Macro-economic factors are particularly significant in enabling the development of the digital economy, although they are often less evident when exploring individual product/market developments. Changes in legislation affecting consumer rights, guarantees of financial transactions, security of information held on computer systems, and commercial contracts negotiated via the Internet are all examples of the changes in the macro-economic environment needed to facilitate and support the development of the digital economy. Without such changes, individual organizations and customers might consider the risks of such commercial transactions to be too high. In essence, the responsiveness of governments and other similar institutions have lagged behind many of the demands placed on them by the rate of change in the digital economy.
It may be argued that defining the term “the digital economy” remains problematic due to the number of perspectives from which this term may be viewed and due to the number and interactive nature of the variables involved.
OVERVIEW OF RISK AND RISK MANAGEMENT
The key dimensions of risk and its management are represented in Table 2.
Risk and Uncertainty
This seemingly simple term “risk” has proved somewhat problematic in arriving at an agreed definition. Most academic fields and researchers (e.g., Dowling & Staelin, 1994; Knight, 1921) provide variations on the theme, though most would agree that risk relates to two dimensions: the Likelihood of a particular event occurring (i.e., probability), and the Consequences should this event occur.
In the case of the consequences, it has been common to assume that these are generally undesirable, e.g., financial loss or even loss of life. Sitkin and Pablo (1992, p.9) define risk as “the extent to which there is uncertainty about whether potentially significant and/or disappointing outcomes of decisions will be realised.” Similarly, MacCrimmon and Wehrung (1986) identified three components of risk: the magnitude of loss, the chance of loss, and the potential exposure to loss. However, it is important to recognize that there would be no point in taking risks unless there were some benefits to compensate for the possible negative outcomes (Blume, 1971). An associated feature is that of differing risk perceptions. Different individuals, groups of individuals, and organisations may view or perceive the risks (i.e., the likelihood of occurrence, nature and scale of negative consequences, and the potential rewards) differently (e.g., Forlani & Mullins, 2000; March & Shapira, 1987).
The term “uncertainty” typically reflects the ambiguity surrounding the decision situation in terms of the precise nature of the situation, its causes, possible solutions, and the reaction of others to possible actions taken. Rowe (1977) has defined uncertainty as the absence of information concerning the decision situation and the need to exercise judgment in determining or evaluating the situation.
Table 2. Key dimensions of risk and its management
risk and uncertainty risk solution
role of information search and corporate intelligence contribution of the digital economy individual characteristics management of risk risk perception
Risk Resolution
A natural reaction by decision makers facing uncertainty and risk is to seek to resolve the uncertainty and risk inherent in the decision situation. There are several actions that may be taken:
• seek to understand the parameters of the “problem” or situation;
• assess the predictability of the parameters;
• consider the possibility of eliminating or ameliorating the risks; and
• assess the attitudes of the decision takers towards the risks.
These elements represent the process that individuals and organizations develop to manage the risk, to position the organization, and to develop appropriate strategies to manage the impact of such events (Bettis, 1982). The increasing complexity and multitude of relationships consequent to the digital economy pose new challenges for the management of risk at the organizational level.
Role of Information Search and Corporate Intelligence
The decision maker confronted with a risky decision situation naturally follows a process of gathering more information, processing this in different ways, and evaluating this in relation to the risks faced. This information is then used—maybe consciously or unconsciously—by the decision maker to assess to what extent the risk has been removed, reduced, or resolved. If the decision maker is not satisfied that s(he) has achieved sufficient resolution of the risks involved, then further information searches, analysis, and processing will occur. However, this intelligence-gathering process need not necessarily result in improved understanding and risk resolution. Uncovering more information may reveal more influencing variables causing perceptions of greater uncertainty, both as a consequence of uncovering new influencing variables and an increasing sense of complexity. Ritchie and Marshall (1993) argued that the quality and sufficiency of the information available will influence the perception of risk by those involved in the decision-making process. Ritchie and Brindley (1999) argued that risk perception is both the consequence of information search and analysis as well as its determinant.
Contribution of the Digital Economy
Information can be considered as a risk-reduction or risk-insulating tool, on the basis that more and better information would result in improved decision making and more effective risk management. The rapid pace of ICT developments (Kalokota & Robinson, 2000; Rycroft & Kash, 1999) and the emerging digital economy (Brindley & Ritchie, 2001) demonstrate that both individuals and organizations have easier access to more information that is more immediate and arguably more relevant. The decision makers can therefore access through their own desktops, internal data, external market reports, competitor information, etc. Swash (1998) recognized that it is essential to overcome the problem of information overload by ensuring the Internet is used frequently, thus improving the users’ surfing proficiency and their knowledge of “useful” sites. Zsidisin and Smith (2004), in examining the impact of the Internet on supply chain decisions, suggested that it is natural that information exchange improves. Improvements in the voluntary exchange of information may produce better knowledge of the situations surrounding the dynamics of a business or commercial relationship. This provides greater potential for detecting, averting, and managing risks.
Individual Characteristics and Risk
It is generally accepted that there are differences in individual risk perception, information-processing styles, and decision-making attributes (e.g., Chung, 1998). There is perhaps less agreement on the nature and consequences of such individual differences. For example, differences in gender have been posited as the reason for women being more meticulous in information search, responsive to decision cues, and being more risk averse than men (e.g., Chung, 1998). Others have failed to establish significant differences (e.g., Masters & Meier, 1988), suggesting that other contextual variables (e.g., social, educational, and experiential background) may be more relevant to any differences in behavior. For example, the decision to start a business may generate differences in risk-taking behavior that is not gender-, culture- or age-related (Busenitz, 1999; Shapira, 1995). A number of authors (see Forlani & Mullins, 2000; Ghosh & Ray, 1997; Kahneman & Lovallo, 1993) have suggested that the provision of structured decision approaches and information search frameworks can provide the appropriate mechanism to overcome any biases and improve the quality of decisions.
Management of Risk
The strands of risk together with business intelligence in the digital economy may be captured in the three dimensions of individual/group/organizational behavior when confronted with risk in given decision situations:
• Willingness to seek further resolution of the decision situation faced, both in terms of the context and the decision-specific variables.
• Desire to identify and measure the risks in some way, either objectively or subjectively.
• Information search and processing to support the decision.
These three dimensions are closely inter-related and are employed to modify the risk perceptions of the decision makers. In addition to these decision-making activities is the range of activities associated with risk management. Some risk management activities may be undertaken prior to the decision itself (e.g., insuring against certain risks) or after the decision (e.g., effective management of relationships with customers to reduce the likely incidence of disputes). While activities of this type may be employed fairly readily with local markets, many managers may find it more difficult to avoid the risks resulting from increased global competition in their home or local markets, consequential of the digital economy.
Risk Perception
Throughout the decision process, an individual is seeking information to remove the uncertainties and to resolve the risks involved in the decision.The factors that contribute to the perceptions of uncertainty and risk experienced by the individual may be represented in table 3.
The integration and interaction of many of these components increases the complexity of understanding both risk perception and decision behavior. For example, although funding may be available to undertake intensive research, the pressures of time to respond to a given situation may preclude such activities even though they may be considered desirable.
Information Processing and Risk Resolution
The information-processing behavior of the individual may be presented in terms of the process described in Diagram 1. The decision maker seeking to resolve the risks perceived will search for appropriate information, process, analyze, evaluate, and synthesise this with other information relating to the situation. The contribution of the digital economy is evident not only in providing the initial intelligence but in assisting the decision maker in the processing and manipulation of the data prior to the decision-making stage. It is suggested that the decision maker either consciously or sub-consciously assesses whether the risks have been sufficiently resolved or not. In many respects, this may be posing the question concerning one’s own degree of confidence in proceeding with the decision, though it may also be influenced by the factors identified.
An assessment that the risks had not been adequately resolved would normally result in further information search, analysis, synthesis, etc., repeating this cycle until the individual believed the risks had been sufficiently resolved to proceed. It is unlikely that the decision maker would achieve the situation where s(he) was fully confident concerning risk resolution. The probable outcome, even after seeking further risk resolution, is that of having to make the decision even though the risks are not fully resolved, as a consequence of pressure of time, lack of resources to pursue further information, or the feeling that further search is unlikely to prove cost-effective. This is probably a very common outcome reflected in the statements of many decision makers that “there are many other angles that we ought to explore but we no longer have the time to do so.”
In situations where the decision maker considers that the risks have been adequately resolved, one might conclude that the normal procedure would be to proceed with the decision. Another possible outcome could be suggested where the decision maker decides to delay the decision. This may be simply a reluctance to commit oneself even if one is fairly clear and confident of the decision to be made. Alternatively, it may reflect a more deliberate tactic of delay to await changes in the decision situation, to assess the likely responses of other participants in the competitive situation, or perhaps in the hope that someone else may take the responsibility. The making of the decision is no longer viewed as the concluding stage in the process. Attention is increasingly being directed to the post-decision activities that seek to ensure data quality which may significantly influence the nature of the risks perceived that the opportunity is taken to avoid potential risks anticipated in the decision processing to avoid risks seen as less likely to impact on the situation, and to minimize the likelihood and consequences of those risks seen as more likely to occur. A generic term for these activities is Risk Management. Examples of Risk Management activities are presented in Table 4.
Table 3. Main groups of factors influencing individual risk perceptions
direct implications in terms of costs and benefits and the scale of these
other decision outcomes, known with less certainty (e..g. reactions of peers and colleagues)
time available in which to take the decision, typically constrained
funding available to undertake the research, analysis and evaluation processes involved
achievement of personal goals that decision maker(s) seeks to satisfy
Diagram 1: Information processing and risk resolution. Adapted from Ritchie and Marshall
FUTURE TRENDS
Risk Management within the Digital Economy
The digital economy will impact on organizations irrespective of their size, geographic location, or sector. While such developments will engender greater uncertainty and risks, they will also facilitate solutions and opportunities for organizations to resolve and manage the new risks. Specific challenges for the organizations in the digital economy are:
1. Fundamental changes in the marketplace as a consequence of providing more direct communications with the consumer, greater heterogeneity in the market in terms of consumer needs and behavior, and a movement in the balance of power towards the consumer as opposed to the manufacturer or service provider.
2. Individuals and organizations are unlikely to behave in a rational and structured manner to resolve risks. The previous emphasis on predictable patterns of information search, corporate business intelligence, and evaluation of information is likely to be replaced by less predictable demands as the nature of the problems encountered are less predictable. This will have significant implications for the development and design of business intelligence systems.
3. Predictions that the digital economy—by providing improved access to information and processing capabilities—will lead to improved decisions is unlikely to be sustainable.
Table 4. Risk Management Activities
insuring against the financial consequences of particular outcomes
developing formal contractual arrangements with trading partners to limit scope for non-prediction
behaviour
training and staff development
communication of intentions within the appropriate internal and external networks to ensure involvement and commitment (e.g. relationship marketing) detailed planning, monitoring and control at all stages
building close relationships with key partners to generate a sense of common purpose and trust (e.g. partnering) developing more effective Risk Management strategies through more effective communications at all levels both within the organisation and with external partners
4. The modus operandi of competitive and business relationships within the digital economy will evolve as the nature and extent of risks faced change, both in terms of novel risk situations encountered and the rate at which these occur.
5. The development and training of the individual in terms of the appropriate knowledge, skills, and behavior patterns provides an important requirement to utilize the information available effectively.
6. The nature of what constitutes “effective” risk management may well change in the digital economy (Ritchie & Brindley, 1999).
CONCLUSIONS
The digital Economy has produced a fundamental change in the nature of the risks faced and increased the likelihood that the marketplace will remain turbulent, unstable, and risk prone. Managers now need to have the capability—through improved knowledge, skills, and understanding—to identify, analyze, and manage these competitive developments and the associated risks. Associated with the improved capability to manage the risks is the ability to implement a wider range of risk management strategies to ameliorate the consequences of the incidence of risks and their consequences. The digital economy and the associated ICTs improve the opportunities to ensure effective risk management.
KEY TERMS
Decision support: the tools, techniques, and information resources that can provide support to the decision maker in improving the efficiency and effectiveness of his/her decisions. Many of these decision support tools may employ ICTs and be part of the Management Information System itself.
Digital economy: accepts as its foundation, the ICT developments and represents the impact that these have had on the conduct of business and commercial activities. Changes in markets and supply chains as well as increasing global competition all represent what is encapsulated within the term the digital economy.
Information and Communication Technologies
(ICTs): a generic term used to encapsulate the diverse range of technological developments (e.g., computer storage and retrieval, computing capacity, wired communications, wireless communications, portable technologies) that have enhanced the internal and external activities of organizations. Especially important is the manner in which these strands of technological development have been integrated to provide greater synergy.
Management Information: a term that covers a wide variety of sources and types of information that may prove valuable to the decision making, management, and control of an organization. This term would include quantitative and qualitative information types, internal and externally sourced information, as well as classifying the information in terms of its quality (e.g., accuracy, detail, relevance, timeliness).
Risk: in a limited manner, the decision situation in which the full range of possible outcomes are known with certainty and the probability of their occurrence can be assessed accurately, usually by some objective means (e.g., rolling the dice is a classic risk decisions situation). More usually, the probabilities must be assessed subjectively, often based on previous experiences or intuition, and the outcomes themselves may not be fully identifiable. The term “risk” is used commonly to generally define decision situations that are really a combination of classical risk and uncertainty, i.e., the more normal decision situation in organizations.
Risk Management: the range of activities that may be taken to avoid the occurrence of an undesirable event or to modify, minimize, or eliminate the consequences should the event occur (e.g., an insurance policy against particular risks would not prevent the occurrence, but would compensate for the financial and other consequences of the outcome).
Risk Perception: the term used to express how a situation is viewed or seen by the decision maker(s). Individual characteristics, experiences, and beliefs may influence the way in which we might view a given situation as being either more or less risky. Usually this is measured on a subjective and relative scale (i.e., Situation A is perceived as riskier than B) rather than on an objectively measurable scale.
Uncertainty: the situation where less than perfect knowledge exists about a particular problem or decision requirement. There exists a wide variation in terms of degrees of uncertainty from extreme uncertainty (i.e., very limited knowledge of outcomes or likelihood of their occurrence) to near certainty (i.e., almost complete knowledge of the outcomes and the likelihood of occurrence). Generally, an uncertain decision situation refers to one containing ambiguity about part or all of the decisions parameters.
