e commerce market mechanisms
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E-Commerce
Market Mechanisms
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Electronic Marketplaces
Markets facilitate exchange of
InformationGoodsServicesPayments
Markets create economic value for
BuyersSellersMarket intermediariesSociety at large
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Electronic Marketplaces (cont.)
3 main functions of marketsMatching buyers and sellersFacilitating the exchange of information, goods, services, and payments associated with market transactionsProviding an institutional infrastructure
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NTE Evens the Load
National Transportation Exchange (nte.com) is attempting to keep trucks on the road full on both outbound and return trips—uses the Internet to connect shippers with fleet managers who have space to fill
Creates spot market Gets information from shippers about their needs and flexibility in datesWorks out the best deals for the shippers and the haulers Issues the contract and handles paymentsThe process takes only a few minutes
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NTE Evens the Load (cont.)
NTE collects a commission based on the value of each dealFleet manager gets extra revenue that they would otherwise have missed out on The shipper gets a bargain price, at the cost of some loss of flexibilityNTE reaches down to the level of individual truck drivers and provides a much wider range of services (wireless Internet access)
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Marketspace Components
Marketspace—a marketplace in which sellers and buyers exchange goods and services for money (or for other goods and services), but do so electronically
Customers SellersGoods (physical or digital) InfrastructureFront-end Back-endIntermediaries/business partnersSupport services
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Marketspace Components (cont.)
CustomersWeb surfers looking for
Bargainscustomized itemsCollectors’ itemsentertainment etc.
Organizations account for over 85 percent of EC activities
SellersHundreds of thousands of storefronts are on the WebAdvertising and offering millions of Web sitesSellers can sell
Direct from their Web site E-marketplaces
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Marketspace Components (cont.)
Products Physical productsDigital products—goods that can be transformed to digital format and delivered over the Internet
InfrastructureHardwareSoftwareNetworks
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Marketspace Components (cont.)
Front-end business processes include
Seller’s portalElectronic catalogsshopping cartSearch enginePayment gateway
Back-end activities are related to
Order aggregation and fulfillmentInventory managementPurchasing from suppliersPayment processingPackaging and delivery
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Marketspace Components (cont.)
Intermediary—a third party that operates between sellers and buyers
Other business partners—collaborate on the Internet, mostly along the supply chainSupport services such as
Certification and trust servicesKnowledge providers
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Types of Electronic Markets
Electronic storefronts—a single company’s Web site where products and services are soldMechanisms for conducting sales
Electronic catalogs Payment gatewaySearch engine Shipment courtCustomer services Electronic cartE-auction facilities
Electronic malls (e-malls)—an online shopping center where many stores are located
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Types of Electronic Markets (cont.)
General stores/malls—large marketspaces that sell all types of products Public portalsSpecialized stores/malls—sell only one or a few types of products
Regional vs. global storesPure online organizations vs. click-and-mortar stores
Types of stores and malls
E-marketplaces—online market, usually B2B, in which buyers and sellers negotiate; the three types of e-marketplaces are private , public , consortia
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E-Marketplaces
Private e-marketplaces—online markets owned by a single company:
Sell-side—company sells either standard or customized products to qualified companiesBuy-side marketplaces—company makes purchases from invited suppliers
Public e-marketplaces—B2B markets, usually owned and/or managed by an independent third party, that include many sellers and many buyers (exchanges)
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Consortia & Information Portals
Consortia—e-marketplaces that deal with suppliers and buyers in a single industry
Vertical consortia are confined to one industryHorizontal allow different industries trade there
Information portal—a personalized, single point of access through a Web browser to business information inside (and marginally from outside) an organization
Publishing portals Commercial portals
Personal portals Corporate portals Mobile portals
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Supply Chains
Supply chain—the flow of materials, information, money, and services from raw material suppliers through factories and warehouses to the end customers
Includes organizations and processes that create and deliver the following to the end customers:
Products InformationServices
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Supply Chains (cont.)
A supply chain involves activities that take place during the entire product life cycleIt also includes:
Movement of information and money and procedures that support the movement of a product or a service
The organizations and individuals involved
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Exhibit 2.3A Simple Supply Chain
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Supply Chain Components
Upstream supply chain—includes the activities of suppliers (manufacturers and/or assemblers) and their suppliersInternal supply chain—includes all in-house processes used in transforming the inputs received from the suppliers into the organization’s outputsDownstream supply chain—includes all the activities involved in delivering the product to the final customers
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Types of Supply Chains
Integrated make-to-stockContinuous replenishmentBuild-to-order—model in which a manufacturer begins assembly of the customer’s order almost immediately upon receipt of the orderChannel assembly—model in which product is assembled as it moves through the distribution channel
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Exhibit 2.4Supply Chains: Integrated & Build-to-Order
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Value Chain & Value System
Value chain—the series of activities a company performs to achieve its goal(s) at various stages of the production process; each activity adds value to the company’s product or service, contributes to profit, and enhances competitive position in the marketValue system—a set of value chains in an entire industry, including the value chains of tiers of suppliers, distribution channels, and customers
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Supply Chain & Value Chain
Value chain and the supply chain concepts are interrelated
Value chain shows the activities performed by an organization and the values added by eachThe supply chain shows flows of materials, money, and information that support the execution of these activities
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Supply Chain & Value Chain (cont.)
EC increases the value added by:Introducing new business modelsAutomating business processes
EC smoothes the supply chain by:Reducing problems in the flows of material, money, and information
EC facilitates the restructuring of business activities and supply chains
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Intermediation in E-Commerce
Intermediaries provide value-added activities and services to buyers and sellers: wholesalers, retailers, infomediariesRoles of intermediaries
Search costs—databases on customer preferencesLack of privacy—anonymity of sellers and buyersIncomplete information—gather product informationContract risk—protect sellers against non-paymentPricing inefficiencies—induce appropriate trades
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E-Distributors on B2B
E-distributor—an e-commerce intermediary that connects manufacturers (suppliers) with buyers by aggregating the catalogs of many suppliers in one place—the intermediary’s Web siteE-distributors also provide support services
PaymentsDeliveriesEscrow servicesAggregate buyers’ and or sellers’ orders
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Disintermediation &Reintermediation
Disintermediation—elimination of intermediaries between sellers and buyersReintermediation—establishment of new intermediary roles for traditional intermediaries that were disintermediated
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Syndication as an EC Mechanism
Syndication—the sale of the same good (e.g., digital content) to many customers, who then integrate it with other offerings and resell it or give it away free
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Competition in the Internet Ecosystem
Competition in the Internet ecosystem (business model of the online economy)
Inclusive with low barriers to entrySelf-organizingOld rules may no longer apply
Competition is tenseLower buyers’ search costSpeedy comparisonsDifferentiation and personalization
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Competition in the Internet Ecosystem (cont.)
Differentiation—providing a product or service that is uniquePersonalization—the ability to tailor a product, service, or Web content to specific user preferencesLower prices
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Competition in the Internet Ecosystem (cont.)
Customer service is an extremely important competitive factorSome competitive factors are less important as a result of EC:
Size of company is no longer significantGeographical location is insignificantLanguage barriers are being removedDigital products do not have normal wear and tear
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Competition in the Internet Ecosystem (cont.)
EC supports efficient markets and could result in almost perfect competition with these characteristics:
Many buyers and sellers must be able to enter the market at no entry costLarge buyers or sellers are not able to individually influence the marketThe products must be homogeneousBuyers and sellers must have comprehensive information about the products and about the market participants’ demands, supplies, and conditions
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Porter’s Competitive Analysis
Porter’s competitive forces model applied to an industry views 5 major forces of competition that determine the industry’s structural attractivenessThese forces, in combination, determine how the economic value created in an industry is divided among the players in the industrySuch an industry analysis helps companies develop their competitive strategy
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Exhibit 2.6: Porter’s Competitive Forces Model
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Liquidity
Liquidity—the need for a critical mass of buyers and sellers
The fixed cost of deploying EC can be very highWithout a large number of buyers, sellers will not make money
Early liquidity—achieving a critical mass of buyers and sellers as fast as possible, before the market-maker’s cash disappears
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Quality Uncertainty & Assurance
Quality uncertainty—the uncertainty of online buyers about the quality of products that they have never seen, especially from an unknown vendor
Provide free samplesReturn if not satisfied
Microproduct—a small digital product costing a few cents
Insurance, escrow, and other services
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E-Market Success Factors
Product characteristics
TypePriceAvailability of standards and product information
Industry characteristics
Brokers currently necessaryIntelligent systems may replace brokers
Seller characteristicsConsumers find sellers with the lowest prices
Low-volume, higher-profit-margin transactions
Consumer characteristics
Impulse buyers
Patient buyers
Analytical buyers
Contributors to e-market success
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Electronic Catalogs
Electronic catalogs—the presentation of product information in an electronic form; the backbone of most e-selling sitesEvolution of electronic catalogs
Merchants—advertise and promoteCustomers—source of information and price comparisonsConsist of product database, directory and search capability and presentation functionReplication of text that appears in paper catalogsMore dynamic, customized, and integrated
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Classifications ofElectronic Catalogs
Dynamics of information presentation—static or dynamicDegree of customization—ready-made or customizedElectronic catalogs allow integration of:
Order taking and fulfillmentElectronic paymentIntranet workflowInventory and accounting systemSuppliers’ extranetRelationship to paper catalogs
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Customized Catalogs
Assembled specifically for:A companyAn individual shopper
Customization systems can:Create branded, value-added capabilitiesAllows user to compose orderMay include individualized prices, products, and display formatsAutomatically identify the characteristics of customers based on the transaction records
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Electronic Catalogs at Boise Cascade
Boise Cascade Office Products--$3-billion office products wholesaler of over 200,000 different items
They had a 900-page paper catalog that was mailed once each year; minicatalogs tailored to customers’ individual needsThe company placed its catalogs online in 1996 (boiseoffice.com)
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Boise Cascade (cont.)
Sales through the Web site:1997—20 percent1999—30 percent2004—80 percent (expected)
Production of a single paper catalog took 6 weeks/production of Web catalog takes 1 weekMajor advantage of customized catalogs is pricingElectronic orders cost 55 percent less to process than paper-based orders
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Boise Cascade (cont.)
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Search Engines
Search engine—a computer program that can access a database of Internet resources, search for specific information or keywords, and report the resultsSoftware (intelligent) agent—software that can perform routine tasks that require intelligence
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Search Engines, Intelligent Agentsand Shopping Carts
E-commerce users use both search engines and intelligent agents
Search engines find products or services Software agents conduct other tasks (comparisons)
Electronic shopping cart—an order-processing technology that allows customers to accumulate items they wish to buy while they continue to shop
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Auctions
Auction—a market mechanism by which a seller places an offer to sell a product and buyers make bids sequentially and competitively until a final price is reachedAuctions deal with products and services for which conventional marketing channels are ineffective or inefficient
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Limitations of Traditional Auctions
Traditional auctions are generally a rapid processIt may be difficult for sellers to move goods to the auction siteCommissions are fairly high
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Electronic Auctions
Electronic auctions (e-auctions)—auctions conducted online
Host sites on the Internet serve as brokers offering:
Services for sellers to post their goods for saleAllowing buyers to bid on those items
Many sites have certain etiquette rules that must be adhered to in order to conduct fair business
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Electronic Auctions (cont.)
Major online auctions offer:Consumer productsElectronic partsArtworkVacation packagesAirline ticketsCollectiblesExcess supplies and inventories being auctioned off by B2B marketers
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Dynamic Pricing
Dynamic pricing—prices that change based on supply and demand relationships at any given timeThe four major categories of dynamic pricing are based on the number of buyers and sellers involved:
One buyer, one sellerOne seller, many potential buyersOne buyer, many potential sellersMany sellers, many buyers
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Exhibit 2.8Types of Dynamic Pricing
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Dynamic Pricing (cont.)
One buyer, one seller usesNegotiationBargainingBartering
Price will be determined by:Each party’s bargaining powerSupply and demand in the item’s marketPossibly business environment factors
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Dynamic Pricing (cont.)
One seller, many potential buyersForward auction—an auction in which a seller entertains bids from buyersEnglish auction—an auction in buyers bid on an item in sequence and the price increases with timeYankee auction—auction of multiple identical items in which bidders can bid for any number of the items offered, and the highest bid wins
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Dynamic Pricing (cont.)
Dutch auction—auction of multiple identical items, with prices starting at a very high level and declining as the auction time passes
Free-fall (declining price) auction—a variation of the Dutch auction in which only one item is auctioned at a time; the price starts at a very high level and declines at fixed time intervals, the winning bid is the lowest one when the time expires
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Exhibit 2.9English Auction, Ascending Price
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Dynamic Pricing (cont.)
One buyer, many potential sellersReverse auction (bidding, or tendering system)—auction in which the buyer places an item for bid (tender) on a request for quote (RFQ) system, potential suppliers bid on the job, with price reducing sequentially, and the lowest bid wins; primarily a B2B or G2B mechanism
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Exhibit 2.10The Reverse Auction Process
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Dynamic Pricing (cont.)
One buyer, many potential sellers (cont.)
”Name-your-own-price” modelConsumer-to-business (C2B) model
Many sellers, many buyersDouble Auction—buyers and their bidding prices and sellers and their asking prices are matched, considering the quantities on both sides
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Limitations of Electronic Auctions
Possibility of fraud—defective goods or receive goods/services without payingLimited participation—invitation only or Open to dealers onlyLack of security—C2C auctions sometimes not done in an unencrypted environmentLimited software—only a few “complete”or “off-the-shelf” market-enabling solutions
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Impacts of Auctions
Auctions as a coordination mechanismAuctions as a social mechanism to determine a priceAuctions as a highly visible distribution mechanismAuctions as a component in e-commerce
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Reverse Mortgage Auctions in Singapore
Homebuyers like to get the lowest possible mortgage rates
In Singapore, Dollardex.com uses reverse auctions that are combined with “group purchasing”
Dollardex’s first project:Site invited potential buyers to fill out applications on a secure Web site7 lending banks were invited to bid on the loans
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Reverse Mortgage Auctions in Singapore (cont.)
In a secure electronic room, borrowers and lenders negotiated the deal, 2 days later the borrowers voted for one bankBorrowers negotiated loans 0.5 per-cent less than the regular rate and waiver of the legal fees with United Overseas Bank (UOB)UOB generated $10 million of business
Dollardex allows customers to participate in an individual reverse auction if they do not want to join a group
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Bartering—an exchange of goods and servicesBartering exchanges
Give your offer to intermediaryIntermediary asses value of your product or service in”points” Use “points” to buy what you need
Bartering sites must be financially secureAlternative to bartering is to auction surplus and then use the money collected to buy items needed
Bartering Online
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Bartering Online (cont.)
E-bartering—bartering conducted online, usually by a bartering exchangeBartering exchange—a marketplace in which an intermediary arranges barter transactions
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Online Negotiating
Online negotiation—electronic negotiation, usually done by software (intelligent) agents that perform searches and comparisons; improves bundling and customization of products and servicesDynamic prices can be determined by negotiationNegotiated prices result from interactions and bargaining among sellers and buyers
Expensive items like cars and real estateDeal with nonpricing terms like payment method and credit
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Online Negotiating (cont.)
Three factors that facilitate negotiated prices
Intelligent agents that perform searches and comparisonsComputer technology that facilitates negotiation processProducts and services that are bundled and customized
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Mobile computing permits real-time access to information, applications, and tools that, until recently, were accessible only from a desktop computerMobile commerce (m-commerce)—e-commerce conducted via wireless devicesM-business—the broadest definition of m-commerce, in which e-business is conducted in a wireless environment
Mobile Commerce
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The Promise of M-Commerce
Mobility significantly changes the manner in which people and customers:
InteractCommunicate Collaborate
Mobile applications are expected to change the way we:
LivePlayDo business
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The Promise of M-Commerce (cont.)
The PC-based Internet culture may change to one based on mobile devicesM-commerce creates new business models for EC, notably location-based applicationsMany large corporations with huge marketing presence are transforming their businesses to include m-commerce-based products and services
Microsoft AT&TIntel AOL-Time-WarnerSony
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I-Mode: Successful Mobile Portal
Shopping guidesMaps and transportationTicketingNews and reportsPersonalized movie service
EntertainmentDining and reservationsAdditional services
BankingStock tradingTelephone directory searchesDictionary servicesHoroscopes
An example of the spread of m-commerce is DoCoMo’s i-Mode; some applications of I-Mode are:
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Impacts of E-Markets on Business Processes & Organizations
Product promotionNew sales channelDirect savingsReduced cycle timeCustomer service
Brand or corporate imageCustomizationAdvertisingOrdering systemsMarket operations
Impacts of e-markets on B2C direct marketing:
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Exhibit 2.11Analysis-of-Impacts Framework
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Transforming Organizations
Technology and organizational learningTo survive, companies will have to learn and adapt quickly to the new technologiesCorporate change must be planned and managedNew technologies will require new organizational structures and approaches
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Transforming Organizations (cont.)
The changing nature of workDriven by increased competition in the global marketplace, firms are Reducing the number of employees and Outsourcing whatever work they can to countries where wages are significantly lessThe upheaval brought on by these changes creates new opportunities and new risks; forces us to think new ways of about jobs, careers, and salaries
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Transforming Organizations (cont.)
Digital-Age workers will have to be very flexible—truly secure jobs will be few, many will work from homeDigital-Age companies will have to prize its core of essential workers as its most valuable asset—empowering them and providing them with means to expand their knowledge and skill base
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Redefining Organizations
New and improved product capabilitiesE-markets allow for new products to be created and/or for existing products to be customized in innovative waysCustomer profiles and data on customer preferences—source of information for improving products or designing new onesMass customization enables manufacturers to create specific products for each customer, based on the customer’s exact needs
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Redefining Organizations (cont.)
New business modelsE-markets affect individual companies, products, entire industries
Improving the supply chainImpacts on manufacturing
Manufacturing systems changing from mass production lines to demand-driven, just-in-time manufacturingVirtual manufacturing enables global manufacturing plants to run as though they were one in location
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Exhibit 2.12aChanges in the Supply Chain
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Exhibit 2.12bChanges in the Supply Chain
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Redefining Organizations (cont.)
Impacts on Manufacturing (cont.)Build-to-Order—the biggest change in manufacturing will be the move to build-to-order systems
Manufacturing or assembly will start only after an order is receivedWill change not only the production planning and control, but also the entire supply chain
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A New Model for Small Movers
When the U.S. economy started to slow down, and fuel prices increased
DM & S (a small trucking company with $1.8 million in annual sales) started to lose moneyA major problem in the trucking industry:
Trucks need to move cargos at certain timesThey may not have a full load causing lost revenue
DM & S created a reverse-auction serviceSmall moving companies bid on jobs of moving goods for individualsCustomers with flexible moving dates benefit the most
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Small Movers (cont.)Dickerabid.com cost $15,000 to create:
Customers place notice of their job on the siteSmall truckers start to bidCustomers can get huge discountsTruckers can earn money to help cover their fuel expenses
During the first few months of operation4 truckers increased to 20Increased revenues by $14,000The Web site won third place in Inc.’s Web innovations in 2000
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Redefining Organizations (cont.)
Impacts on finance and accountingE-markets require special finance and accounting systems—most are electronic payment systems complicated by legal issues and international standards Executing an electronic order triggers back-office transactionsThese activities must be efficient, synchronized, and fast so the electronic trade will not be slowed down
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Cisco’s Virtual Close
Cisco Systems supplies vast networks that connect computers to the Internet
Virtual Close was developed to allow companies to close its accounting records (its “books”) more quicklyCisco is implementing such a system for itself for closing quarterly accounts
Used to take up to 10 days; within 4 years it took 2 days—significantly cut its costBy 2002 or 2003 Cisco hopes to close the books with 1 hour’s notice, on any day in the quarter
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Cisco’s Virtual Close (cont.)
Advantages of Virtual CloseCompanies can become proactive, spotting problems at any timeNew opportunities can be detected earlyEnables quick “drill down” analysis, which locates the causes of either poor or excellent performanceBrings huge productivity gains related to corporate financial reporting
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Redefining Organizations (cont.)
Impact on human resource management and training
EC is changing how people are recruited, evaluated, promoted, and developedEC also is changing the way training and education are offered to employees
Online distance learning and virtual courses are explodingCompanies are cutting training costs by 50 percent or more
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Redefining Organizations (cont.)
New e-learning systems offer two-way video, on-the-fly interaction, application sharingE- learning may be their ticket to corporate survival as changing environments, new technologies, and continuously changing procedures make it necessary for employees to be trained and retrained constantly
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Managerial Issues
How do we compete in the digital economy?What about intermediaries?What organizational changes will be needed?Should we auction?What should be auctioned?Should we have our own auction site or use a third-party site?Should we barter?What m-commerce opportunities are available?
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Summary
E-marketplaces and their componentsThe major types of e-marketsSupply chains and value chainsThe role of intermediationCompetition, quality, and liquidity in e-marketsElectronic catalogs, search engines, and shopping cartsTypes of auctions and their characteristics
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