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 (陳周宏 ), Ph.D.

Professor of MIS

Graduate School of Business

Gonzaga University

Spokane, WA 99223 USA

[email protected]

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# OF FIRMS

PRODUCTCharacteris

tics

PRICECONTROL

ENTRYTo Industry

MANY,SMALL

SIMIARSUPPLY

& DEMAND

EASY

MANY,LARGE

&SMALLDIFFERENT SOME

FAIRLYEASY

FEWSIMILAROR DIFF.

A LOT HARD

ONENO

SUBS-TITUTE

REGU-LATED

NOWAY!

TYPES of COMPETITION

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

consumer’s 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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0

10

20

30

40

50

60

70

80

90

1 2 3 4 5 6 7 8 9

No. of users

Uti

lity

Metcalfe’s law

Figure 3.3

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Innovation diffusion curve

Figure 3.4

0

5

10

15

20

25

30

35

40

1 2 3 4 5

Time

%P

opu

lati

on a

dop

tin

g

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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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Input

Output

Fig. 5.10 (p.166)

Diminishing returns

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Input

Output

Fig. 5.11 (p.166)

Increasing Returns

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Other issues






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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 company’s 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






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-10 -5 0 5 100

50

100

150

200

250

300

Time of market introduction relative to competition (months)

Pro

fits

rel

ativ

e to

co

mp

etit

ion

s (%

)

Figure 7.10 (p.227)

Relationship between profits and time of market introduction

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Keen’s Six-Stage Competitive Advantage Model

Stimulus for action

Commoditization

First major move

Customer acceptance

First-mover expansion movesCompetitor catch-up moves

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The new technology adoption curve

Level of Activity

Time

Which stage is the current e-Business?

Readiness Intensification Impact

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Other issues






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Time

Market share

Fig. 5.12 (P167)

Winner takes all

100

0

Winner

Loser

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Other issues






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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 can’t 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

Infomediaries

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

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

BuyersSellers

Information Flow

Flow of Products/Services

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

Revenue from Sellers• Advertising• Transactions• Membership/Subscription feeExhibit 2.2

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Com

petitive

Adv

anta

ge

(Value)

N

The Value Chain: Process View of the Firm

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Virtual value Chain

Physical Value Chain

Virtual Value Chain

InboundLogistics

ProductionProcess

OutboundLogistics

Marketing Sales

Information Capture

Figure 7.2 (p.186)

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The Value System: Interconnecting relationships between organizations

Upstreamvalue

Firmvalue

Downstreamvalue

N

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The three Ds model.

Figure 6.2 (p.187)

Disaggregation

Disintermediation

Digitalconvergence

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Disintermediation

Supplier Intermediary Customer

Disintermediation

Figure 6.3

Why go through a middleman?

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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)

Ch.6; p.190

zero

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I

P C

T3

T1

T2

Disintermediation hypothesis

I= intermediaryP= producerC= customerT1,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

Figure 6.6 (p.191)

Supplementeddirect market

Disintermediation

Cybermediaries Supplementedintermediaries

T1>T2+T3T1<T2+T3

T1’<T2’+T3’

T1’>T2’+T3’

Pre-Internet

Post-Internet

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Disaggretgation/Reaggregation:Richness versus Reach

Figure 6.8 (p.194)

Reach

Richness

(Bandwidth,Customization,Interactivity)

(Connectivity)

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Deconstruction of the newspaper industry

Figure 6.9 (p.196)

Old newspaper industry value chain

Journalists

Columnists

Editors Printers Distributors Readers

New newspaper industry value chain

Journalists

Columnists

Internet

Editors

Readers

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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

2. Quantifiable

objectives

3. Value creation

4. Target market

5. Organizational

set-up

6. Business model

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?

functioncore 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

Figure 6.13 (p.204)

Source “materials”And

Inbound logisticsProduction

Channel distribution and

outbound logistics

Marketing andservices

Alternative source of music supply arise because of the ability of the artist to “go direct” to the music listener( increasing TC)

Procurement system move onto the Web and open up existing EDI structures (increasing TC and GI)

System allow for pre-ordering and forecasting, directing fishermen to the right stock (increasing LR and TC)

Distribution aspects of production decreased, creating local EOS, but as a second order effectfrom channel deliveryand marketing

Direct-to-home deliverycreates little need to “produce” through traditional means (increasing TC)

Tailored production based on Web-basedordering (increasing GI)

Wastage is reduced and more stable price and quality control exists(increasing TC)

Completely new modes of distribution reduce the cost of delivery (increasingTC) and provide for tailored offerings (thereby increasing LR and TC)

Ordering system can be integrated with operating and marketing (increasing TC and GI)

Because specific fishermanfocus on only the fish necessary, sorting and distribution are co-ordinates (increasing TC)

Direct marketing and tailored serving middlemen provides less direct value(increasing both GI and TC)

Online banking and related services decreases branch relianceand 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 abilityto more accurately transact with large and larger group ofcustomers who are “self-revealing”

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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

strategic management of e-business: the economics of e-business

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