Productivity in the Internet Industry: Issues and Challenges

Productivity in the Internet Industry: Issues and challenges

Sam Choon Yin (March 2005)



          Technology can be defined as the application of cutting-edge products and processes. With advanced technology, things can be done faster and at a relatively lower cost. The use of automated teller machines and banking on the Internet for example reduces manpower needs particularly tellers in banks in addition to enhancing accuracy and prestige of the banks. The use of radars improves safety in airlines and shipping transportation while laser scanners helps to clear queues and improve inventory management in retailing industry. Developments of software like Excel and Lotus 1-2-3 make financial computations easier. Finance and research institutions could churn out more data per day or labour than before. This article focuses on productivity increment attributed to the use of the Internet. Productivity refers to the phenomenon that more can be done with less input. In manufacturing, productivity is usually measured by dividing output with input. The former refers simply to the number of units of output (say computers or television) produced. In service firms such as banks and supermarkets, sales or capital employed could be represented in the numerical. This is in recognition of the fact that service is a performance, not a thing. Service performance, being intangible, has to be experienced rather than owned. Input, on the other hand could be represented by labour or capital in manufacturing and number of customers or labour in services.

Use of the Internet to raise productivity

            Increasingly, more companies are using the Internet as a supplementary service to facilitate the provision of core benefits. Today, booking of hotels and airline tickets can be done online. So are payments of bills, taxes and many more. In contrast to the past where the Internet is mainly used to send and display information, shopping, buying and selling on the Internet (collectively as the electronic commerce) is common today. Companies are providing more information about themselves and their products through websites, allowing them to save printing costs. Consumers can send enquiries to the companies through electronic mails. Such arms length transactions reduce the level of direct contacts with consumers and this reduces opportunities for corruption. Building a superb website correspondingly reduces the demand for service personnel and expenditures to build physical evidences, albeit not completely. People processing services like visits to the hotel, restaurants and hospitals still require direct contact between the service personnel and consumers.

            Consumers of course are better off with online services. They could contact the companies online anytime and anywhere around the world. So if the bank customer has an account with a Singapore bank and he/she is overseas, banking transactions can still be carried out. With the Internet, consumers receive more personalised or customised services. Consumers can shop and buy online and pay their taxes at the comfort of their homes and offices.

            The above changes are irreversible. Companies adopting the change should be more competitive than others without a website. As such, the Internet could serve as a useful supplementary service to differentiate a company from the rests. Nevertheless, there are some challenges that company managers must take into consideration in using the Internet.


            Operating online is not without risks and challenges. This section outlines some of them.

1. Choosing the right segment

The population consists of many types of people. Focusing on a particular segment of the market is often recommended in marketing for greater effectiveness of marketing strategies. But choosing the right customers is not easy. Should the target customers be heavy users of the Internet? Do the target customers adaptable to the new product or not in the first place? Do they have the technical capabilities to download, view and perform the services available online? Answering such questions is essential in the design of the web pages. Of course, the contents of the web must also be culturally acceptable to the target market.

2. Security and privacy issues

One of the hindrances to the development of electronic commerce is that consumers are fearful, fear that the companies may misuse the information about them (like name, identity card number, address and credit card numbers). A possible way to mitigate the problem is to use encryption (refers to the process of enabling information to be coded in such a way that it cannot be read without a code). Use of user identity and password is perhaps the most common way. But this is surely inadequate to conquer the fear among consumers. Better ways need to be developed.

3. Building relationships and trust

One of the challenges to companies wanting to go online is to build relationship with consumers. Unlike offline buying, online contracts are more difficult to monitor and enforced. The website for example could be easily closed down. The problem is compounded by the fact that consumers are normally not able to inspect the product prior to purchase. It takes time to build trust. Positive word of mouth from consumers who had previously utilised the services serves as a useful promotion or advertisement for the online company. This essentially requires and forces firms to fulfil their promises and act ethically. Once negative comments are passed on, it would not be easy for the companies to recover. Online companies that have been successful in building trust include e-bay, Yahoo and

4. Lack of bandwidth transmission

Despite the development of broadband and wireless bandwidth, there is still a concern about the lack of capacity to permit quicker transmissions and download of products on the Internet particularly during peak periods. Slow service delivery on the Internet may result in consumers switching to another website. Because of the ease in doing so, companies failing to provide excess capacity may lose visitors. Consistently maintaining an excess capacity is particularly important for firms with webs containing graphics, audios and video options.

5. Stiffer competition

Ease of switching one website from one to another also translate to more intense competition in the online industry. Unlike offline shopping where the need to transport from one shop to another increases searching costs, consumers are able and more willing to search products online for it takes a relatively shorter time to do so. It should also be noted that setting up a website is increasingly common, due partly to the government’s relaxed regulation in the industry (many governments for example do not impose taxes on e-commerce transactions fearing that doing so may hinder the online industry’s growth).  This has similarly raised competition in the e-commerce industry. In fact, it can be said that today, it is not so much of just getting the website up. The speed of delivery and ease of browsing are important considerations to raise the popularity of the company’s web.

6. Dealing with hackers

Some companies may employ hackers to test the strength of the product offered online and the encryption process. The ability of break into the system implies imperfection of the systems thus signalling to the companies the need to further improve their online products and services. However, non-employed hackers are nuisance for they can break into the system and steal private and confidential information or data. Because of the complexity of the computing languages, dealing with the hackers is not an easy task. Specialists are needed to do the job. But halting their advances is essential for failing to do so may jeopardise the element of trust that exists between the online company and its customers. Successful hacking also disrupts the service transactions thus potentially halting business opportunities, sometimes for days.

7. Dealing with viruses

In a related problem, companies operating online have to deal with potential virus attacks. Viruses can replicate themselves. Requiring a carrier or ‘host’, a company virus can damage the computer system. The problem with viruses is that it is possible for them to go undetected for many months this possibly resulting in many computers infected with them. The presence of viruses could disrupt the normal processes causing information and possible business transactions to be distorted and missing. Accordingly, it is important for the companies to install the necessary anti-virus software to bloc the viruses from infecting their computer systems particularly those companies that rely heavily on their computer systems to support management and operational decisions.

8. Authentication issues

The other challenge pertains to making sure that messages sent to the clients (or intended recipients) reach them and not some other persons. Putting this in another way, the receiver must ensure that the identified sender is really the one sending the message and that no intermediary sender is involved in the process. The problem with the Internet is that face-to-face service delivery is usually not required.

9. Choosing the domain name

One of the earliest tasks to companies going online is to choose the domain name for the website. For companies with an existing business, the task should not be too difficult for it has the company name to start with. For new businesses, the task can be a challenging one. The challenge is to see that the domain name has not been used elsewhere and resembles a popular name or brand. There have been legal proceedings against companies using domain names or popular brands or have registered misspelling of a popular name.

10. High fixed costs

It is often perceived that the costs of setting up a website is not significant. This is incorrect. Toys’ R Us for example spent US80 million to set up its website. What perhaps is true is that the marginal cost of production online (defined as the change in the total cost of production divided by the change in the number of customers) is relatively low. For example, additional costs imposed on companies providing music, movies and news articles online to an additional consumer is generally insignificant relative to the fixed cost of production. This explains why it is important for online companies to encourage more people to visit their websites and make a purchase even to the extent that the prices of the products offered online are usually lower than that of an offline purchase. This is to allow the companies to reap economies of scale. Properly accounting for the costs and recognising their differences is a managerial challenge. Proper analysis of the business (as part of the business plan) is perhaps inevitable in this respect.


           Undoubtedly, the use of the Internet in business is increasingly common. Improved accuracy, possibility of providing customised services and lower costs allow such companies to enjoy increments in productivity measured in sales per visits. One reason for the higher sales is that the Internet allows companies to sell to a larger market than before. Despite this, as noted in this article, Internet managers must deal with the ten challenges adequately.

However, it must be said that tackling the ten challenges cannot guarantee success in the online business. The challenges are merely potential problems than online managers have to be aware off. To be successful online, as AT Kearney’s (2000) model suggests and applied in Jones et al (2001)[1], companies need to consider and apply the eight Cs adequately, namely content, convenience, customer care, community, communication, connectivity, customisation and concern for consumers.

[1] Kearney, AT, 2000, E-Business performance, White Paper, AT Kearney, Chicago.

Jones, P., Clarke-Hill, C., Shears, P. and Hillier, D., 2001, The Eight Cs of ‘Retailing’: Customer Concern, Management Review News, Vol. 24, No. 5, pp. 11-16.

[1] Kearney, AT, 2000, E-Business performance, White Paper, AT Kearney, Chicago.

Jones, P., Clarke-Hill, C., Shears, P. and Hillier, D., 2001, The Eight Cs of ‘Retailing’: Customer Concern, Management Review News, Vol. 24, No. 5, pp. 11-16.