Strategic Management of e-Business: The Economics of e-Business

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Strategic Management of e-Business The
Economics of e-Business
Jason Chou-Hong Chen (???), Ph.D. Professor of
MIS Graduate School of Business Gonzaga
University Spokane, WA 99223 USA chen_at_jepson.gonza
ga.edu
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TYPES of COMPETITION
OF FIRMS PRODUCT Characteristics PRICE CONTROL ENTRY To Industry
MANY, SMALL SIMIAR SUPPLY DEMAND EASY
MANY, LARGE SMALL DIFFERENT SOME FAIRLY EASY
FEW SIMILAR OR DIFF. A LOT HARD
ONE NO SUBS- TITUTE REGU-LATED NO WAY!
1. PURE COMPETITION
2. MONOPOLISTIC COMP.
3. OLIGOPOLY
4. MONOPOLY
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The Economics of e-Business

• The benefits that e-business offer to businesses
  and customers are
• more information
• lower production and distribution costs
• lower costs for buying and selling
• more precise targeting of customers
• benefits from virtual communities

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Transaction cost reductions

• Six types of transaction cost
• search cost,
• information costs,
• bargaining costs,
• decision costs,
• policing costs and
• enforcement costs

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B2B sites create values in two ways

• brining a group of sellers and buyers together
  under one virtual roof
• reduce T.C. by providing one-stop shopping

• Aggregation

• Matching (static)

• brining buyers and sellers together to
  negotiate prices dynamically and in real time

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Targeting customers and market segmentation

• Not only is it possible to more accurately
  identify and reach specific customer groups, but
  it is also possible to do this much more cheaply
  using e-business technologies (cost)

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Price discrimination(Revenue Management)

• Economists distinguish between three types of
  price discrimination
• third-degree price discrimination based on group
  identification (e.g., student or senior citizen)
• second-degree price discrimination consumers
  voluntary choices
• first-degree (or perfect) price discrimination
  based on consumers willingness to pay.
• Impact
• a) desirable increases the efficiency of the
  economy and is frequently promoted by
  government
• b) opposition from the public

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Virtual communities(Network externality effects)

• Benefits
• 1) existing communities provide a ready access
  point for firms that wish to market to specific
  groups
• 2) many new e-business have actively encouraged
  communities to form around their site
• 3) accelerate the uptake of a particular product
  or service since they act as a reference group
  which customers use when deciding what to
  purchase.

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Metcalfes law
Figure 3.3
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Innovation diffusion curve
Figure 3.4
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Other issues

• Law of increasing returns
• Building critical mass (early liquidity)
• First-mover advantage
• Loss-leaders
• Sustainability of competitive advantage

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Diminishing returns
Output
Input
Fig. 5.10 (p.166)
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Increasing Returns
Output
Fig. 5.11 (p.166)
Input
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Other issues

• Law of increasing returns
• Building critical mass (early liquidity)
• First-mover advantage
• Loss-leaders
• Sustainability of competitive advantage

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Issues in E-Markets Liquidity, Quality, and
Success Factors

• Early liquidity
• Achieving a critical mass of buyers and sellers
  as fast as possible, before a start-up companys
  cash disappears
• Quality uncertainty
• The uncertainty of online buyers about the
  quality of non-commodity type products that they
  have never seen, especially from an unknown
  vendor
• Microproduct
• A small digital product costing a few cents

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Other issues

• Law of increasing returns
• Building critical mass (early liquidity)
• First-mover advantage
• Loss-leaders
• Sustainability of competitive advantage

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Relationship between profits and time of market
introduction
300
Profits relative to competitions ()
250
200
150
100
50
0
Time of market introduction relative to
competition (months)
Figure 7.10 (p.227)
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Keens Six-Stage Competitive Advantage Model
Stimulus for action
Commoditization
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The new technology adoption curve
Impact
Readiness
Intensification
Level of Activity
Which stage is the current e-Business?
Time
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Other issues

• Law of increasing returns
• Building critical mass (early liquidity)
• First-mover advantage
• Loss-leaders
• Sustainability of competitive advantage

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Winner takes all
100
Winner
Market share
Loser
0
Time
Fig. 5.12 (P167)
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Other issues

• Law of increasing returns
• Building critical mass (early liquidity)
• First-mover advantage
• Loss-leaders
• Sustainability of competitive advantage

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Digital Products and Services

• Characteristics of DPS
• Ease of manipulation
• Durability
• Sharing

• Product differentiation
• Bundling and subscription
• Durable goods monopoly

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Digital products and services (cont.)

• Cost structure of digital products high fixed
  costs, low variable costs and high sunk cost
  have implications for competitive strategies.
• is particularly susceptible to vast economies of
  scale, the more you produce, the lower the
  average cost of production (software)
• fixed cost the sunk cost (software cant be
  recoverable from DPS)
• SCM do little to reduce initial cost.
• Therefore, with DPS the best way to reduce
  average cost is to increase sales volume.

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Intermediation and Syndication in E-Commerce

• Roles and value of intermediaries in e-markets
• Search costs
• Lack of privacy
• Incomplete information
• Contract risk
• Pricing inefficiencies

Why needs intermediaries? (Five important
limitations of direct interaction)
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Intermediation and Syndication in E-Commerce

• Intermediaries (brokers) provide value-added
  activities and services to buyers and sellers
• Intermediaries in the physical world are
  wholesalers and retailers
• Infomediaries

electronic intermediaries that control
information flow in cyberspace, often aggregating
information and selling it to others
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Infomediaries and Information Flow Model
Information Flow
Infomediaries
Buyers
Sellers

• Infomediary Services
• Matching
• Search/complexity
• Privacy
• Informational
• Infrastructural
• Content
• Community

• Infomediary Services
• Matching
• Search/complexity
• Privacy
• Informational
• Infrastructural
• Content
• Community

Flow of Products/Services

• Revenue from Buyers
• Membership/Subscription fee
• Transactions
• Fee for Services

• Revenue from Sellers
• Advertising
• Transactions
• Membership/Subscription fee

Exhibit 2.2
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The Value Chain Process View of the Firm
N
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Virtual value Chain
Physical Value Chain
Virtual Value Chain
Figure 7.2 (p.186)
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The Value System Interconnecting relationships
between organizations
Firm value
Upstream value
N
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The three Ds model.
Digital convergence
Disintermediation
Disaggregation
Figure 6.2 (p.187)
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Disintermediation
Why go through a middleman?
Figure 6.3
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Transaction Cost Theory

• The disintermediation hypothesis rests on two key
  assumptions
• e-Commerce will reduce all transaction costs to
  _______ (i.e., become insignificant)
• transactions are atomic (i.e., unitary and not
  further decomposable into small units)

zero
Ch.6 p.190
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Disintermediation hypothesis
I
T3
T2
C
P
T1
I intermediary P producer C customer T1,T2,T3
transactions
Figure 6.5 (p.190)
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Types of Transactions

• Different classes of transactions are affected in
  different ways
• Disintermediation
• Supplemented direct market
• Supplemented intermediaries (Network-based
  transactions)
• Cybermediaries

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Other Possibilities
Pre-Internet
T1gtT2T3
T1ltT2T3


Supplemented direct market
Disintermediation
T1ltT2T3
Post-Internet
Supplemented intermediaries
Cybermediaries
T1gtT2T3
Figure 6.6 (p.191)
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Disaggretgation/Reaggregation Richness versus
Reach
(Bandwidth, Customization, Interactivity)
(Connectivity)
Figure 6.8 (p.194)
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Deconstruction of the newspaper industry
Old newspaper industry value chain
Journalists
Distributors
Readers
Editors
Printers
Columnists
New newspaper industry value chain
Figure 6.9 (p.196)
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Digital Convergence

• Whereas disintermediation and disaggregation
  involve changes within an industry value chain,
  the third effect involves linking of value chains
  across industries.
• The technological convergence has led in some
  instances to breaking down (and blurring
  boundaries ) of the traditional industry
  boundaries and convergence between the industries
  involved.

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Types of Convergence

• Convergence in substitutes occurs when
  different firms develop products with features
  that are similar to features of other products
• Convergence in complements occurs when products
  work better in combination than separately
• For convenience we can divide this into three
  segments content production, distribution and
  content retrieval and processing.

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The Development of an e-Business Strategy
addresses Six Interpreted Issues
1. Vision
Fig. 10.1 (P184)
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Future Trend

• Instead of defining the business mission in terms
  of product or position in a value chain, the
  question in the future may be
• what does the firm serve or
• what does the
  firm possess and
• what other products and services can be firm
  provide?

function
core competencies

• If this trend continues, instead of the linear
  value chains we see in most industries in future
  in many industries we may see multiple and
  interlinked value chains or firms offering a
  variety of content over multiple media.

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Impact of e-business on global industries
Source materials And Inbound logistics
Production
Channel distribution and outbound logistics
Marketing and services
Distribution aspects of production decreased,
creating local EOS, but as a second order
effect from channel delivery and marketing
Online banking and related services decreases
branch reliance and provide direct delivery pf
service. LR is increased because of more
specialized one-on-one delivery (which is
tailored by the customer for themselves). TC is
increased because of the ability to more
accurately transact with large and larger group
of customers who are self-revealing
Banking
Alternative source of music supply arise
because of the ability of the artist to go
direct to the music listener ( increasing TC)
Direct-to-home delivery creates little need to
produce through traditional means
(increasing TC)
Completely new modes of distribution reduce the
cost of delivery (increasing TC) and provide for
tailored offerings (thereby increasing LR and
TC)
Music
Direct marketing and tailored serving middlemen
provides less direct value (increasing both GI
and TC)
Procurement system move onto the Web and open
up existing EDI structures (increasing TC and
GI)
Tailored production based on Web-based ordering
(increasing GI)
Ordering system can be integrated with
operating and marketing (increasing TC and GI)
IT equipment
System allow for pre-ordering and forecasting,
directing fishermen to the right stock
(increasing LR and TC)
Wastage is reduced and more stable price and
quality control exists (increasing TC)
Because specific fisherman focus on only the
fish necessary, sorting and distribution are
co-ordinates (increasing TC)
Fishmongering
Figure 6.13 (p.204)
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Summary

• Internet and other e-business technologies have
  altered the behavior of existing markets or
  created new markets by
• Providing better market information
• Lowering production and distribution costs
• Lowering transaction costs for buying and selling
• Allowing more precise targeting of customers
• Allowing the creation of virtual communities