School of Business Carleton University

Ottawa, Canada

Strategy in the Context of eCommerce

42.590– Directed Studies Professor D. Cray Sven Harmsen # 275 842 sharmsen@chat.carleton.ca

i

Table of Content

Table of Content ..............................................................................................................................................................i

Figures ............................................................................................................................................................................ii

1 Introduction ............................................................................................................................................................1

2 Strategy...................................................................................................................................................................2 2.1 Definition of Strategy .....................................................................................................................................2 2.2 Competitive Advantage ..................................................................................................................................5 2.3 Strategic Models and Concepts.......................................................................................................................6

2.3.1 Five Forces (Porter) ................................................................................................................................6 2.3.1.1 Threat of New Entrants.......................................................................................................................7 2.3.1.2 Threat of Substitutes .........................................................................................................................11 2.3.1.3 Bargaining Power of Suppliers .........................................................................................................11 2.3.1.4 Bargaining Power of Customers .......................................................................................................12 2.3.1.5 Industry Competitors ........................................................................................................................12

2.3.2 Value Chain ..........................................................................................................................................13 2.3.2.1 Primary Activities .............................................................................................................................14 2.3.2.2 Support Activities .............................................................................................................................14

2.3.3 Vertical and Horizontal Boundaries......................................................................................................15 2.3.4 Positioning vs. Hypercompetition.........................................................................................................17

2.4 Innovation in the Context of Strategic Competitive Advantages..................................................................17

3 Electronic Commerce ...........................................................................................................................................19 3.1 Definition of Electronic Commerce..............................................................................................................19 3.2 The e-Commerce Matrix...............................................................................................................................20

3.2.1 Business-to-Consumer (B2C) ...............................................................................................................20 3.2.2 Business-to-Business (B2B) .................................................................................................................21 3.2.3 Consumer-to-Business (C2B) ...............................................................................................................22 3.2.4 Consumer-to-Consumer (C2C).............................................................................................................22

3.3 Historical Overview......................................................................................................................................23 3.3.1 General..................................................................................................................................................23 3.3.2 Nations/Regions....................................................................................................................................27

3.4 How eCommerce Differs from Traditional Approaches...............................................................................29

4 Strategic Challenges of eCommerce.....................................................................................................................31 4.1 Five Forces ...................................................................................................................................................31

4.1.1 Threat of New Entrants.........................................................................................................................31 4.1.2 Threat of Substitutes .............................................................................................................................32 4.1.3 Bargaining Power of Suppliers .............................................................................................................33 4.1.4 Bargaining Power of Customers ...........................................................................................................34 4.1.5 Industry Competitors ............................................................................................................................35 4.1.6 Are the Five Forces Still Sufficient to Analyse an Industry?................................................................36 4.1.7 Conclusions ..........................................................................................................................................37

4.2 Value Chain ..................................................................................................................................................38 4.3 Positioning ....................................................................................................................................................39

4.3.1 Positioning Factors ...............................................................................................................................40 4.3.2 Bonding Factors....................................................................................................................................41

5 Conclusions ..........................................................................................................................................................42

6 Bibliography .........................................................................................................................................................43

ii

Figures

Figure 1: Strategy as Hierarchical Construct .................................................................................................................3 Figure 2: SWOT-Concept as a Component of Strategy.................................................................................................4 Figure 3: Porter's (1990) Five Forces ............................................................................................................................7 Figure 4: Value-Chain Activities.................................................................................................................................13 Figure 5: The e-Commerce Matrix ..............................................................................................................................20 Figure 6: Volume of eCommerce, Economist (1999c)................................................................................................23 Figure 7: Early Mover Advantage (Economist, 2000c)...............................................................................................24 Figure 8: Assessment of Internet's Impact (Economist, 1999d) ..................................................................................24 Figure 9: eCommerce 4-Stage Model (KPMG, 1999a) ..............................................................................................25 Figure 10: Websites' Capabilities (Economist, 1999b)................................................................................................27 Figure 11: Differences in Online Market Shares (Economist, 2000b).........................................................................28 Figure 12: Amounts of E-Commerce (Economist 1999c.............................................................................................28 Figure 13: eCommerce Thresholds (Economist, 1999e) .............................................................................................28 Figure 14: Internet Service Value Chain, Plant (2000, p. 138)....................................................................................35 Figure 15 : Information Intensity Matrix, Plant (2000, p.85) ......................................................................................38

1

1 Introduction

The past years have shown an impressive number of new eCommerce start-ups and

internet initiatives of established firms. However, lately a number of firms has disappointed

investors by failing to deliver promised results. As Marc Benioff, former database specialist

for ORACLE states, many decisions of internet firms are not comprehensible. In this

context it appears relevant to analyse concepts of strategy and if and how they affect

electronic commerce.

This paper introduces some of the most often used strategic models, the concepts of

competitive advantage and value chains as well as Michael Porter’s model of five forces to

analyse a firm’s competitive position within an industry.

Chapter 3 investigates the status of electronic commerce. This is followed by an

analysis of which aspects of the competitive, strategic environment of companies are

affected by the economic changes that come with electronic commerce and what

consequences arise for strategic approaches and decisions.

2

2 Strategy

2.1 Definition of Strategy

The Cambridge International Dictionary (2000) defines strategy as “a detailed plan

for achieving success in situations such as war, politics, business, industry or sport, or the

skill of planning for such situations .” “A strategist is someone with a lot of skill and

experience in planning, esp. in military, political or business matters.”

Welge and Al-Laham (1999) quote Quinn et. al. (1988) who state: “[i]nitially

strategos referred to a role (a general in command of an army).” Later it came to mean “the

art of the general”, which is to say the psychological and behavioural skills with which he

occupied the role. By the time of Pericles (450 BC) it came to mean managerial skill

(administration, leadership, oration, power). And by Alexander’s time (330 BC) it referred

to the skill of employing forces to overcome opposition and to create a unified system of

global governance.

This description implies that strategy is a matter of the highest authorities of an

organization, like the executives of business organizations. In this context strategy deals

with decisions and thoughts about how to deploy the organization’s resources in the form of

machinery, personnel, money, time and more in order to achieve the strategic objectives,

which are usually long-term. Chandler (1962), quoted in Welge and Al-Laham (1999),

follows this classical approach and defines strategy as “the determination of the basic long-

term goals and objectives of an enterprise, and the adoption of courses of action and the

allocation of resources necessary for carrying out these goals.” In the classical

3

understanding of strategy, it is a product of formal and rational planning (Welge and Al-

Laham, 1999, p.13) and is a hierarchical construct (Barney, 1997, p.11) (Figure 1):

Figure 1: Strategy as Hierarchical Construct

Welge and Al-Laham (1999) describe the classic understanding of strategy as a

transfer of game theory, where a optimum choice for every possible and realistic situations

is needed. They quoted Barney (1997, p.22), who illustrates the SWOT-concept for

analysing situations and making strategic decisions: A SWOT-analysis analyses the four

areas of strength, weaknesses, opportunities and threats of a firm (Figure 2).

Strategies: Means through which firms accomplish mission and objectives

Mission: Top management’s view of what the organization seeks to do and become over the long term

Tactics / Policies: Actions that firms undertake to implement their strategies

Objectives: Specific performance in each of areas covered by a firm’s mission

4

Figure 2: SWOT-Concept as a Component of Strategy

A different idea than the classical interpretation of strategy comes from Mintzberg

(1990) who questions the assumption of rationality underlying the classical concept of

strategy and strategic decision making. He observed the following ‘main patterns’ of

strategies (Welge and Al-Laham, 1999):

• Intented / planned strategies that are implemented as planned, a pattern that is

seldom found in reality.

Strength

Opportunities

Weaknesses

Threats

Organizational Analysis

Environmental Analysis

Strategic Choice

5

• Intended strategies that could not be implemented as originally planned due to

reasons like insufficient resources, changes in underlying assumptions or

changes in the competitive environment.

• Strategies whose implementation was not intended as such and are more random

than actually planned.

Since in a capitalist, shareholder-oriented society the generation of value for

shareholders is the primary goal of organisational actions and management decisions,

therefore the creation of shareholder value is the main goal of strategic decisions.

Shareholder value can be measured in many ways, like return-on-investment, after-tax-

profits etc., but one of the key measures has become total shareholder return. It combines

both the value created by handing out dividend payments and also by gains in the value of

stocks hold by the individual investors. As Porter (1979) states, “[t]he essence of strategy

formulation is coping with competition.”

2.2 Competitive Advantage

“Competitive advantage cannot be understood by looking at a firm as a whole. It

stems from the many discrete activities a firm performs in designing, producing, marketing,

delivering, and supporting its product. […] A firm gains competitive advantage by

performing these strategically important activities more cheaply or better than its

competitors.” (Porter, 1985)

This implies that a firms profitability does depend, among others, on the

management’s strategic decisions, which always need to be made and evaluated in the

6

context of the competitive environment. There is no generic strategy that guarantees a

competitive advantage without taking both the environment and internal structures,

processes, and resources of the firm into account.

2.3 Strategic Models and Concepts

This section will introduce some of the most commonly taught and used strategic

models, although only an overview is given. The following models and concepts will later

in this paper be analysed in the context of electronic commerce.

2.3.1 Five Forces (Porter)

Porter (1990) introduced a model of five forces acting in an industry that he

considers to be the main drivers of competition within an industry. Whereas, according to

Welge and Al-Laham (1999), in earlier models economic factors like price elasticity of

demand were used to describe competitive effects, Porter’s model includes factors like

concentration within the industry and its suppliers and customers, as well as the degree of

information available to market participants and their bargaining power.

Porter’s (1990) model includes the following groups of industry factors, commonly

known as ‘Five Forces’: Threat of New Entrants, Bargaining Power of Buyers, Bargaining

Power of Suppliers, Threat of Substitute Products or Service, and Rivalry Among Existing

Firms (Figure 3).

7

Figure 3: Porter's (1990) Five Forces

Each of these five forces has individual effects on a firm’s profit margin and

therefore its profit or return. Assuming rational behaviour among investors, the effect of

these five forces on the firm’s ability to earn a sufficient return on the invested capital

determines the firm’s survival in the competitive environment. The Five-Forces model can

be used to analyse the competitive pressure that a firm faces due to the competitive

situation of the industry.

2.3.1.1 Threat of New Entrants

Assuming a limited demand for the goods produced in an industry, an increase of

supply will cause the equilibrium price, that clears both excess demand and excess supply,

to fall. The threat of new entrants is mainly associated with the fact that new entrants

increase the production capacity within the industry and therefore tend to decrease prices

and profit margins. Welge and Al-Laham (1999) state that the probability of the entry of

8

new competitors depends on two factors, the expected reaction of the established

competitors as well as the extent of existing entry barriers. If the established competitors

are known to have sufficient reserves to lower prices or increase their level of services in

the case of an entry of new competitors, they can be considered rather safe since in this

condition potential competitors can only earn profits if they can lower their prices to at least

the price of the established competitors while still maintaining a sufficient return on their

investment. However, if established competitors are expected to be unable to lower their

prices to a price likely to be offered by new entrants, or are expected to follow a high-price

strategy, then the expected reaction is less likely to deter possible competitors from entering

the industry.

In addition to a possible engaging reaction of existing competitors, entry barriers

affect the possibilities of potential competitors. Welge and Al-Laham (1999) give the

following seven causes for barriers of entry:

• Economies of scale. The economic theory of production assumes decreasing

average costs of production for higher volumes due to the distribution of fixed

costs over more units. This assumption works for constant variable costs of

production, in case of increasing variable costs or even increasing fixed costs

economists derived a U-shaped production cost curve.

Welge and Al-Laham (1999) write that economies of scale can occur in

functional areas like procurement and distribution or for certain activities like an

optimal level of machine utilisation.

For entrants into an industry these economies of scale can count as a barrier to

entry since they will usually enter the industry at lower volumes of production

9

than the established competitors. This gives the new entrants a disadvantage of

higher unit costs while they at the same time face higher costs for establishing

their brand and distribution channels.

• Product differentiation. Entrants into an industry usually compete for existing

customers. Established competitors have an advantage since their products have

been on the market for a longer period of time, have become known for a certain

level of quality or cost; established competitors usually manage to establish a

buyer loyalty by using brand recognition. As Welge and Al-Laham (1999)

describe, “product differentiation advantages of established firms are based on

the recognition of products and buyer loyalty that was caused by earlier

advertisement, service, differences of products, or the fact that the established

firms were the first ‘to the market’ (“Advantage of Innovation”).”

• Capital requirements. In industries that require a minimum amount of service or

market coverage, like telecommunications, entrants into an industry will face

severe difficulties if they are not able to offer a level of service that comes at

least close to that of existing competitors. For mobile telecommunications that

would mean at least a city-wide if not regional service. In contrast, first movers

were usually able to build their network step-by-step. This requires new entrants

to spend significantly more at the beginning of their entry, without having first

cash-flows to finance these investments.

10

• Cost of change. If customers keep in-house personnel for service and

maintenance, they have a product-specific expertise that is either partly lost if

the company decides to switch to a different product by a new entrant, or needs

to be paired with additional new expertise for the new product. One example

would be airplanes, where both pilots and maintenance personnel need to be

specifically trained for each model they work with. Adding e.g. Airbus aircrafts

to an existing fleet of Boeing-only requires training. Welge and Al-Laham

(1999) give the example of software, where the similarity in the use of different

Microsoft programs encourage potential customers to buy new Microsoft

programs instead of buying different software that requires more training or is

not possible to install as an update from existing programs and profiles. The

additional costs for buying a different set of programs can be considered a

barrier of entry.

• Access to distribution channels. Frequently distributors establish long-term

relationships with their suppliers. These relationships can have the form of

contractual agreements that forbid distributors to sell competing products in

order to prevent competitors from using the same channel. One of the prime

examples was Kodak’s problem when entering Japan, Fuji Film’s home market.

Kodak found it extremely difficult to find retailers willing and legally able to

distribute their products.

11

• Government policies. Depending on the importance of the industry, national

governments take more or less of an interest in an industry. Governments tend to

influence industries through subsidies, norms, regulations, taxes and licenses.

One example is the auctioning of a limited number of third-generation mobile

telephony licenses. Both the high costs and limited number of those licenses

pose a high barrier of entry for potential entrants.

• Absolute cost advantages. Apart from the cost advantages arising from

economies of scale and product differentiation, absolute cost advantages can

arise from the existence of know-how through learning, patents, or the use of the

most suitable locations for production facilities or distribution centers.

2.3.1.2 Threat of Substitutes

Substitutes are similar products that could replace the produced product in case that

it is financially feasible, like nuclear and regenerative sources of electricty from the

perspective of the energy consumer. Welge and Al-Laham (1999) state that the existence of

substitutes creates a maximum for the price that can be demanded for the original product,

therefore it can be deduced that substitutes influence the price elasticity of demand for a

certain range of the demand curve.

2.3.1.3 Bargaining Power of Suppliers

The influence of suppliers is determined by the number of potential suppliers, the

degree of customization needed at the side of the firm to reconfigure the production process

12

for the substitute, and the number of potential customers of the suppliers. The higher the

costs of changing a supplier, the less suppliers, and the more firms in an industry, the

higher the bargaining power of suppliers.

2.3.1.4 Bargaining Power of Customers

Quoting Porter (1997), Welge and Al-Laham (1999) attribute the bargaining power

of customers to

1. the degree of concentration of customers, where a few large customers can

have a high influence of the competitive pressure to lower prices.

2. the relative share of the firm’s product within the customers’ total budget.

The higher the relative share, the more price-sensitive the customers will be.

3. the degree of standardisation, where customers have a high influence if the

products they require are standardised.

4. the danger of integration, where customers scare suppliers by threatening to

execute the suppliers’ activities in-house.

5. the market transparency, since only in transparent markets do customers

have a complete overview over all combinations of price, quality and other

desired characteristics available.

2.3.1.5 Industry Competitors

The degree of competition within an industry is determined by the number of

competitors, existing over-capacities, lack of product differentiation that protects from costs

competition, as well as barriers of exit, like public relations or moral effects of withdrawal

from a certain industry.

13

As mentioned earlier, Porter’s model can be used to analyse the competitive

situation that a firm faces from the configuration of the competitive environment it operates

in.

2.3.2 Value Chain

Porter (1985) describes the necessity to analyse a firm’s competitive advantage for

understanding “the sources of competitive advantage.” He introduces “the value chain as

the basic tool for doing so.” The value chain disaggregates a firm into its strategically

relevant activities in order to understand the behaviour of costs and the existing and

potential sources of differentiation. The value chain, developed by McKinsey & Co., is

composed of five primary activities and four support activities (Figure 4).

Value-Adding Activities

Figure 4: Value-Chain Activities

Technology Dev.

HRM Infrastructure

Marketing & Sales Inbound Log. Operations Service

Outbound Logistics

14

2.3.2.1 Primary Activities

The primary activities of the value chain are (Porter, 1985):

Inbound Logistics: Activities including warehousing, inventory control, handling

returns, receiving and sorting of inputs.

Operations: Activities that transform the inputs into the final product or

intermediates, involving assembly, testing, maintenance,

packaging and more.

Outbound Logistics: Activities including the storage and distribution of the final

products, including order processing, scheduling,

warehousing, and delivery operations.

Marketing and Sales: Activities providing potential customers with possibilities to

purchase the product and assisting the buying decision like

advertisement, pricing, channel selection and sales force

management.

Service: Activities involving repairs, parts supply, training and

installation of products.

As Porter (1985) writes, “[e]ach of the categories may be vital to competitive

advantage depending on the industry. […] In any firm, however, all the categories of

primary activities will be present to some degree and play some role in competitive

advantage.”

2.3.2.2 Support Activities

Support activities are activities not directly in contact with inputs, the manufacturing

process, or outputs:

15

Procurement: “Procurement refers to the function of purchasing inputs used

in the firm’s value chain, not the purchased inputs

themselves” (Porter, 1985) Procurement is further involved

with ensuring the quality and timely delivery of the order

inputs.

Technology Development: The activity of technology development is concerned

with creating the know-how for the procedures and

technologies used in the firm’s processes. Technology

development can happen in different areas of the firm and

does not just mean product development, it can also be the

improvement of processes or the packaging of the product.

Human Resource Management: HRM involves recruiting, selection, development

and training as well as compensating personnel. According to

Porter, “[I]n some industries it holds the key to competitive

advantage.”

Firm Infrastructure: The remaining activities belong to the firm’s infrastructure,

including finance and controlling, planning, general

management, legal and tax affairs.

2.3.3 Vertical and Horizontal Boundaries

In order to analyse strategy in the context of electronic commerce, it seems not

feasible to just consider the competitive environment the firm operates in, but also real and

optimal boundaries of a firm in both vertical and horizontal dimensions.

16

Besanko et. al. (1996b) discusses the degree of vertical integration of a firm as well

as the main factors that influence the optimal level of vertical integration. As they describe

it, “[f]irms can organize exchange around arm’s-length market transactions, or they can

organize exchange internally, that is, they can vertically integrate.” Vertical integration

therefore describes how much of the value chain for one final product is within one firm.

The degree of vertical integration influences the costs of (1) technical and (2) agency

efficiency. Besanko et. al. (1996b) define technical efficiency as an indicator “whether the

firm is using the least-cost production process. […] Agency efficiency refers to the extent

to which the exchange of goods and services in the vertical chain has been organized to

minimize the coordination, agency, and transaction costs”. Their analysis derives the

following three key drivers of vertical integration:

Scale and scope economies: If specialized suppliers or customers outside the firm

can use economies of scale or scope relative to the firm’s own scale and scope advantages,

the configuration is against vertical integration.

Product market scale and growth: If a market has a sufficient scale or growth

opportunities then a firm can expect to gain future economies of scale or scope by vertically

integrating adjacent elements of the value chain.

Asset specifity: If the production of an input requires specific assets, meaning the

supplier needs relationship-specific equipment like integration into the firm’s supply chain

management system, a firm can have an advantage producing the required inputs in-house.

According to Besanko et. al. (1996a) “[a] firm’s horizontal boundaries identify the

quantities and varieties of products and services it produces. […] The optimal horizontal

17

boundaries of firms depend critically on economies of scale and scope.” This means that the

existence of economies of scale and/or scope gives an advantage to firms that are able to

use these economies by using their core processes or competencies in a high-volume

production.

2.3.4 Positioning vs. Hypercompetition

Michael Porter (1996) addresses the point of view that the traditional strategy of

positioning has become obsolete since companies need to be flexible enough to cope with

the fast changing competitive environment. “According to the new dogma, rivals can

quickly copy any market position, and competitive advantage is, at best, temporary.”

According to Porter (1996), firms lose their competitive positions and drift into

‘hypercompetition’ by focusing too much on operational effectiveness like reengineering,

quality management, or benchmarking instead of trying to establish a sustainable

competitive advantage.

2.4 Innovation in the Context of Strategic Competitive Advantages

In order to understand strategic decisions to invest in innovations and to offer new

products and services, some theory on growth and innovative behaviour is needed. Romer

(1986) gives five basic assumptions for endogenous growth and innovative behaviour:

“There are many firms in the market economy“

“Discoveries differ from other inputs in the sense that many people can use them at

the same time.”

“It is possible to replicate physical activities.”

18

“Technological advance comes from things that people do.”

“Many individuals and firms have market power and earn monopoly rents on

discovery”(Romer 1986, p.12)

From these assumptions it follows that in the growth model described by Romer not

perfect competition but a certain degree of monopoly power prevails. This gives innovators

the opportunity to earn rents higher than marginal costs, thereby recouping their R&D

costs. Only if the competitive situation gives the innovator a chance of earning a monopoly

rent at least as high as the costs for developing the innovation, then does the strategic

decision make sense.

19

3 Electronic Commerce

3.1 Definition of Electronic Commerce

As the Economist (2000a) puts it, “[i]t is temptingly easy to use the phrase

“electronic commerce” without troubling to define it.” They define electronic commerce as

“trade that actually takes place over the Internet, usually through a buyer visiting a seller’s

website and making a transaction there.”

This definition does not specify if buyers or sellers are business or consumers,

leaving space to include the concepts of business-to-business (B2B), business-to-consumer

(B2C) and vice-versa that are described later in this chapter.

“IBM defines e-commerce in terms of business benefits that go beyond improving

processes to leveraging the web to bring together customers, vendors, suppliers, and

employees in ways never before possible, and Webenabling your business to sell products,

improve customer service, and get maximum results from limited resources” (Baker, 1999).

This definition uses the concept of the value chain and its component activities that

consist of primary activities (inbound logistics, operations, outbound logistics, marketing

and sales, service) and support activities (procurement, technology development, and

human resource management). It could be said that electronic commerce affects the

peripheral activities (inbound logistics, outbound logistics, marketing and sales, service as

well as procurement). In contrast, electronic business could be defined as the complete

orientation of all organizational activities towards the net, meaning that not just the contact

20

with suppliers and customers but also the internal administration is moved onto the inter- or

intranet.

3.2 The e-Commerce Matrix

The Economist (2000a) gives the following “e-commerce matrix”:

Figure 5: The e-Commerce Matrix

3.2.1 Business-to-Consumer (B2C)

The B2C sector of the matrix consists of internet-based marketplaces that trade the

products of either one or more sellers (businesses). B2C companies can be either purely

web-oriented companies like Amazon and Dell that have no standard retail operation or

companies like Toys R Us and Walmart that have added the internet as an additional sales

channel to their existing bricks-and-mortar organizations (Plant, 2000).

21

3.2.2 Business-to-Business (B2B)

B2B is currently considered the biggest component of the e-commerce matrix.

Several large companies (e.g. General Electric, Cisco, Oracle) have transferred most of

their procurement, purchasing, sales, and service activities to the internet (Economist,

2000a), causing a significant reduction in average transaction and service costs. Although

Cisco in 1999 had six times the level of sales than in 1994, the number of technical support

personnel only doubled in the same period (Economist, 1999a). As Plant (2000) describes

the possibilities for offering B2B electronic commerce solutions he points out that the most

basic approach, a B2C-like retail website, is “clearly inefficient when the organization

wishes to purchase hundreds, thousands, or even millions of components from multiple

sources of supply.” Marketplaces that solve this problem are what Plant (2000) calls

vertical or horizontal portals or hubs.

He defines a vertical portal as a portal that “provides specialized services across

several industries”, while “a horizontal portal primarily provides a set of services across a

single industry.” An example for vertical portals are marketplaces that offer a set of

services like maintenance, travel services etc. specialising in a certain industry or niche like

office buildings or sports cars as opposed to many different kinds of buildings or cars.

“These sites aim at providing one-stop shopping for all services and information relating to

a particular specialized domain or professional area” (Plant, 2000 p. 26). In contrast,

horizontal portals are less specialized and provide a set of services, products or information

for organizations in multiple industries or industrial sectors. These might be financial

information, legal information, insurance and others.

22

3.2.3 Consumer-to-Business (C2B)

The Economist (2000a) names Priceline and Accompany as two examples for C2B

organizations. The term C2B does not imply that services and goods are transferred from

consumers to businesses and payment from businesses to consumers, but that the old

system, where companies offer products and services at certain prices and the decision

whether to accept or decline the offer lies with the consumer, is inverted. A C2B

marketplace gives consumers the opportunity to make offers, thereby they assume the old

role of businesses by offering a good (money). Taking the old role of consumers of either

accepting or declining offers, the businesses have a variety of offers to choose from and can

decide which and how many offers by consumers they want to accept. This model has come

to be known as ‘reverse auctioning’.

3.2.4 Consumer-to-Consumer (C2C)

Companies like eBay and QXL, as named by The Economist (2000a), offer a

marketplace for consumer-to-consumer transactions, much like a flea-market but without

limitations to a physical location. EBay provides only the ‘space’ for the display of

products, organizes the bidding process and gets the partners into contact, however, it takes

no active part in the settlement process. After a change in the business model away from

financing through advertising revenue, eBay now charges sellers a percentage fee for their

services.

23

3.3 Historical Overview

3.3.1 General

According to The Economist (1999e), electronic commerce first developed in the

United States and started to become significant in 1998 with further increases over the

following years (see Figure 6). ITF (1999) states that estimates of the value of world-wide

Figure 6: Volume of eCommerce, Economist (1999c)

electronic commerce in 2001 ranges from 1.3% to 3.3% of the world gross domestic

product. The main advances have not been made with the sale of goods but rather the

distribution of services and the creation of new services, including software, finance,

entertainment and education (ITF, 1999).

From the $1.3 trillion estimate of electronic commerce for 2003 about $1 trillion is

expected to be B2B market share (Computerworld, 1999). Of this share of electronic

commerce that takes place between business and consumers (B2C), according to the

Economist (2000c), 75% of this trade occurs between the five marketplaces of Amazon,

24

eBay, AOL, Yahoo and Buy.com. The existence of these strong market participants

supports the thesis stated by The Economist (2000c), that internet-based start-ups can

successfully challenge established traditional firms, if market capitalisation is considered as

a measure for success (Figure 7).

Figure 7: Early Mover Advantage (Economist, 2000c)

Figure 8: Assessment of Internet's Impact (Economist, 1999d)

25

However, about 60% of senior executives surveyed by the Economist Intelligence

Unit (Figure 8) estimate that the internet including electronic commerce will only have

some impact, with about 30% seeing a major impact. These numbers are forecasted to

change to close to 50% for a major impact and less then 10% for some impact.

KPMG Consulting has established a series of annual studies to examine

developments in electronic commerce. The study (KPMG, 1999a) is the third study in this

series, using the KPMG stage model to analyse the developments in terms of the two

dimensions complexity/interoperability and value-added (Figure 9).

Figure 9: eCommerce 4-Stage Model (KPMG, 1999a)

Their model divides the process of turning a traditional organization into an

eCommerce organization into four stages:

1. Marketing: Information and communication technologies are used for

marketing purposes, online-brochures are generated and webpages are

usually static.

26

2. Publications: The organization uses its information and communication

technologies to generate reports and statistical analyses. For users this

implies that webpages now have dynamic content based on these dynamic

reports.

3. Transaction: Organizations move parts of their transactions to the net, thus

customers can generate client specific reports like information about the

status of their order or their balances. Transactions like reservations and

orders can be entered using a web interface.

4. Interactivity: The goal of eCommerce at the customer interface is the

implementation of a one-to-one marketing system that enables the

organization to make customer-specific offers that take available information

about the customer into account.

According to KPMG (1999a) the studies in ’97, ’98, and ’99 in Germany show that

most companies see themselves in stages one to three, although especially the study in 1999

shows that first efforts exist to move the organization into the fourth stage and to integrate

interaction-capability into their electronic interfaces. Furthermore, more organizations

make efforts to integrate their electronic commerce and their back office systems, extending

customer-oriented systems along the value chain. The result that most companies are still in

stages one to three is supported by Figure 10. While more than half of the websites are able

to monitor users’ surfing behaviour, less then one third are integrated with back office

systems.

27

Figure 10: Websites' Capabilities (Economist, 1999b)

3.3.2 Nations/Regions

Although the Internet has an influence on commercial activities in Europe with

25.7% of total sales of Scandinavian firms expected to be attributable to the internet by

2002 (KPMG, 1999b), in 1999 75% of the respondents of the KPMG study still considered

Europe to be lagging behind the United States. This is supported by Figure 11 (The

Economist, 2000b) that shows strong differences in the share of online transactions. The

absolute value of ‘internet commerce’ given by Figure 12 shows a time gap of about two

years between Europe and the United States in terms of e-commerce turnover.

28

Figure 11: Differences in Online Market Shares (Economist, 2000b)

Figure 12: Amounts of E-Commerce (Economist 1999c

Apart from the existence of a time gap between the time when countries meet the

eCommerce threshold (Figure 13), several publications point to further aspects like culture

that has relevance for the success of electronic commerce in different countries.

Figure 13: eCommerce Thresholds (Economist, 1999e)

29

Rasmusson (2000) states that “understanding how the Web fits into a country’s

culture is crucial to successfully customer relationships.” She points out that while people

in the United States are prepared to buy cars online, most European customers will refuse to

spend that much money without interacting with humans. A further issue that causes

problems for cross-border expansion of electronic commerce are logistical problems in a

wider sense that include transportation, taxes and duties, payment standards, import and

export restrictions, as well as liability and warranty issues. An additional challenge is the

language, e.g. Dell Computer created its websites in twelve different languages

3.4 How eCommerce Differs from Traditional Approaches

If electronic commerce is compared to traditional approaches of exchanging goods

and services, it becomes clear that electronic commerce offers new possibilities for both

buyers and sellers.

For the buyer the key advantages of electronic commerce consist of (1) a greater

flexibility that usually enables him or her to enter orders any time or in the case of software

or some services, even receive the product, independent of office hours. Furthermore (2),

the availability of price and product information on the net in combination with organized

web-based marketplaces and software agents increases the market transparency. The

potential buyer is able to access the prices and information about potential substitutes that

can result in a substantial reduction in costs. The third key advantage of electronic

commerce is the creation of new services that are offered on the web. These include web-

based inventory management systems where suppliers have access to inventory information

and maintain a certain level of stock. Providing information is the task of infomediaries,

30

that generate useful information from available data, thereby providing a valuable service

either for free or on a fee-based basis.

On the sellers’ side, businesses, or even customers in the case of C2B or C2C, face

greater pressure from the increased market efficiency, that forces them to become more cost

efficient or provide additional services to enable their customers to create value from their

products. Apart from the effects on services and products offered by a firm, eCommerce

can also affect the firm itself in its structure and boundaries. Plant (2000, p. 3) describes “a

new organizational form – the e-consortia – whose aim is to leverage the unique strength

associated with each company and partner through the “virtual structure” of an online

organization.” Different companies concentrate on their core competencies and use the

possibilities of eCommerce to integrate that much that they can act on the market as if they

were one firm. A further interesting aspect is that this need not just happen between firms,

eCommerce can also be used to establish internal competition for resources by establishing

internal marketplaces for scarce resources like capital, personnel, space or machine

capacity. By using information from external eCommerce marketplaces, internal service

providers like logistics or procurement can be forced to compete with external providers.

31

4 Strategic Challenges of eCommerce

The following section attempts to analyse the specific changes to the competitive

environment of a firm that arises from electronic commerce and possible strategies that

firms should follow when facing competitive pressure from electronic commerce.

In this context, Porter’s five forces are analysed for eCommerce-specific changes,

followed by an analysis of how electronic commerce affects the value chain and of how the

generic strategies (Porter, 1985) change under an eCommerce environment.

4.1 Five Forces

4.1.1 Threat of New Entrants

The force ‘Threat of New Entrants‘ describes the competitive pressure that arises

from the possible entry of new competitors. The threat of new entrants is determined by

likely reactions of established competitors to new competition and barriers of entry that

prevent new possible competitors from entering the market. The likely reaction of

established firms usually depends on how far they can reduce profit margins either short-

term, accepting losses, or long-term, accepting reduced profits, to make a possible entry of

new competitors unprofitable. This constellation appears to be rather industry specific,

however, in the case where established competitors use outdated processes and a non-

optimized value-chain, possible competitors, using new technology can pose a serious

threat since they can build their value-chains from scratch using more efficient technology,

32

like using web-interfaces for buying and selling processes or even for their internal

processes to profit from low transaction costs and leverage their technology investment.

Concerning possible barriers of entry (Section 2.3.1.1), economies of scale and

capital requirements seem to be the most relevant under an eCommerce perspective. As

mentioned above, capital requirements to enter a new market might be high if the new firm

faces ‘dumping practises’ by competitors in addition to capital requirements to set up the

value-chain components and create a brand.

A further significant aspect arises for products and services that are either delivered

using the web or easily distributed using existing logistic networks like UPS. Instead of

only needing to watch the local market for possible competition, firms can face competition

from many possible sources if those are able to master eCommerce technologies and

strategy.

4.1.2 Threat of Substitutes

Section 2.3.1.2 describes substitutes as similar products that could replace the

produced product in case that it is financially feasible. In an eCommerce-influence

environment there are not necessarily more substitutes for products, although the

geographic range of competition is wider as mentioned under 4.1.2. It seems that the threat

of substitutes changes if potential substitutes, in this case both products and services, can be

delivered cheaper than the existing product or service, using eCommerce. This also applies

to the case where competitors create substitutes by increasing the potential value of their

products or services to the buyer, which is the case if the use of eCommerce technologies

33

enables them to provide better customers service in terms of pre-sales, after-sales, and

fulfilment.

4.1.3 Bargaining Power of Suppliers

Depending on the industry the cost of material and intermediates delivered by

suppliers can be one of the most significant components of the overall product costs. In the

retail sector where margins are rather thin like a margin of 3.1% at Barnes and Noble in

1998 (Plant, 2000 p. 17) small differences in costs can have significant influence on profits.

The bargaining power of suppliers is therefore an important force. In the case of imperfect

competition, the party that has a more transparent view of the market, meaning it has more

information about price, service and quality of competing products, can usually use this

advantage to charge a price higher than the price achievable under perfect competition.

Furthermore, eCommerce can usually make a wider selection of potential suppliers

accessible since marketplaces can connect buyers and sellers from far apart. If a deal is

financially feasible depends on prices, taxes, tariffs, and fulfilment, so not all potential

suppliers will fulfil the requirements, but eCommerce should increase the choice, especially

since it can reduce transaction costs by exchanging data electronically and using established

electronic marketplaces that provide an efficient environment for transactions.

A common perception of eCommerce is that it makes more data available, both for

buyers and sellers. But only in the case of marketplaces or through infomediaries, the data

becomes valuable information that enables the parties to choose the best trading partner.

34

However, although eCommerce might increase competitive pressure on suppliers, it

can also enhance integration with suppliers. Automatic procurement simplifies just in time

delivery and lowers the cost of material in stock.

Therefore, although eCommerce intensifies competition, it also offers possibilities

of strategic dimensions to integrate suppliers and spread the gains of eCommerce in terms

of lower transaction costs.

4.1.4 Bargaining Power of Customers

When interacting with potential customers, a firm faces the inverted situation then

when interacting with suppliers. In the usual constellation with a limited number of

suppliers and a larger number of potential customers eCommerce it will face competitive

pressure to lower prices. This demands strategic decisions to either compete on price, a

decision that usually demands a highly efficient value chain, or on service. The competitive

market requires a firm to shift their attention from price and product towards the value

created for the customer. As Plant (2000, p.7) describes it, “[a]n e-marketspace is driven by

price and service, where

• Price will be driven by volume and by operating efficiencies.

• Service will be driven by added-value information.”

These two factors are the drivers by which a firm can provide value for a customer.

Since eCommerce enables firms to provide new web-based services for their customers in

throughout the ‘Internet Service Value Chain’ (Plant, 2000 p. 138).

35

Figure 14: Internet Service Value Chain, Plant (2000, p. 138)

Furthermore, eCommerce often enables a firm to bypass intermediaries. The use of

the Internet as a new channel can reduce the costs of distribution and enable the firm to

offer the product at lower costs while at least maintaining its profit margin.

4.1.5 Industry Competitors

As already pointed out in the previous section, eCommerce enables firms to provide

new services and products. Within-industry competition can therefore mainly arise from

• Changes in price and service of competitors that arise from their use of

eCommerce tools,

• The creation of additional products and services that enable competitors to

create more value for customers.

These are basically no eCommerce-specific problems, since every industry faces a

certain market dynamic where improved products and services improve outdated models.

Customer Continuance

Support (Postpurchase)

Customer

Acquisition (Prepurchase

Support)

Customer Support (During

Purchase)

Customer Fulfilment (Purchase Dispatch)

Customer Service Channel

36

However, the speed of change in an eCommerce environment makes these changes more

dangerous for a firm’s survival than usual. For example, a Forrester study quoted in

Microtimes (2000) thates that “only three of the dominant national portals backed by deep-

pocketed telcos will triumph on a Pan.-European level.”

4.1.6 Are the Five Forces Still Sufficient to Analyse an Industry?

Plant (2000, p. 14) discusses the suitability of Porter’s model of five forces in an

eCommerce environment. “[B]usiness plans created using this static snapshot approach are

potentially flawed, because their assumptions are based on linear time planning horizons in

which everyone’s watches run at the same speed. Traditional industries and organizations

that have followed and accepted this approach have, as a consequence, potential

weaknesses in their management thinking and planning.”

As he further states, “[s]ociety has focused customers to expect the move from

conceptualization of a trade to execution to occur in one step.” However, Plant (2000)

provides no evidence that other approaches do not lack these potential weaknesses, neither

does he prove that Porter’s model cannot be used in a more dynamic environment. As

Porter’s model focuses on analysing the competitive situation of a firm, it gives a picture of

the current situation but can basically also be used to analyse hypothetical scenarios. Porter

(1996) himself addresses this topic but calls it a “dangerous half-truth”, since firms can

optimise their value-chains to produce to even lower prices but still need to position

themselves based on their customer’s needs.

If one accounts for faster changes in the competitive environment that makes a more

frequent re-evaluation of the competitive analysis necessary, Porter’s model of five forces

37

seems to be applicable to eCommerce environments. Plant (2000) implicitly supports this,

since he demands strategic decisions to position a firms along his seven dimensions of

eCommerce strategy, further discussed in section 4.3.

4.1.7 Conclusions

eCommerce influences competitive environments in many ways :

1. eCommerce can create a more competitive marketplace that forces firms to

evaluate their strategic position in terms of the two drivers price and service

more carefully.

2. eCommerce enables the creation of new services and products that enable

firms to provide better ways of providing value to customers.

3. eCommerce creates a fast changing competitive environment that requires

firms to react, or rather act, fast and frequently to market changes.

4. eCommerce does not create a truly global marketplace but it usually enlarges

the competitive market that firms need to observe and compete on.

On a more abstract level, eCommerce increases the difficulties of strategic planning

and development by requiring executives to deal with more information from an increased

number of sources in less time. However, this does not make strategy obsolete but rather

requires a much stronger focus on a firm’s strategic position and a more frequent

revaluation.

38

4.2 Value Chain

As discussed in section 2.3.2 the value chain consists of primary and support

activities or processes that create the value of the product or service offered to the

customer. What is not considered in the model is the value chain can extend over more than

one organization, creating new challenges for managing the processes. As Plant (2000, p.

18) writes, “Amazon is creating its processes from scratch and in a way that matches its

business model. The reason that Amazon has to create this infrastructure is that, for a

virtual organization to function effectively, all organizations associated with that

organization need to have highly efficient value chains based upon information

technology.” Existing, established value chains can prevent organizations to establish a

successful web presence, e.g. department stores have established their value chains to

deliver bulk orders to a limited number of stores to cover demand for a number of days. If

they decide to serve individual customers through an eCommerce website, their value chain

needs to be able to deliver small orders to a large number of customers. Even if their

website offers the necessary combination of service and price that satisfies customers,

content alone will not guarantee success without a value chain whose activities are web-

oriented (Plant, 2000, p. 56).

Figure 15 : Information Intensity Matrix, Plant (2000, p.85)

Low High Added Value of Information to Customer

Efficiency of the Value Chain to

Reduce Production Costs

39

The Information Intensity Matrix (Figure 15) by Plant (2000) proposes that efficient

value chains strongly increase the value for the customer of information provided for him.

4.3 Positioning

Porter (Generic Competitive Strategies) introduces three competitive strategies: (1)

Cost Leadership, (2) Differentiation, and (3) Focus, with its two subcategories (3a) Cost

Focus and (3b) Differentiation Focus. Cost leadership implies that the firm attempts to be a

low- if not lowest-cost producer in its industry, usually by producing s rather standardized

product at high volume. Firms following a differentiation strategy provide a wide range of

products and services at a higher price that at least offsets the higher production costs.

According to Porter (1985) “[I]n contrast to cost leadership […] there can be more than one

successful differentiation strategy.” A firm following a focus strategy customizes its offer

to a market niche by following cost and differentiation strategies to certain degrees.

From the analysis of first eCommerce and second strategy especially generic

strategies, some basic conclusions can be deduced. As proposed above, eCommerce is

likely to increase competitive pressure in an industry and make price differences more

transparent. Since according to Porter only one cost leadership strategy can be successful, a

firm following this strategy will be exposed to high competitive pressure where most likely

only very few firms survive. According to Plant (2000) firms need to attempt to leverage

their channels by getting more and more customers. This goal of gaining market share

might reduce possibilities for niche players.

On the other hand eCommerce offers new possibilities for firms to offer services to

their customers and tailor their offers to their customers’ needs. Different differentiation

40

and focus strategies can successfully coexist within an industry. A firm that follows either a

differentiation or a focus strategy should therefore be in a safer competitive position.

Providing a unique product or service with values that are desired by the customers will be

better suited to exclude direct competition. Plant (2000, p. 5) writes, “[d]ifferentiation in

the new e-commerce sector is the key success factor.”

Porter’s generic strategies consider two dimensions, cost and product specificity.

Plant (2000), stressing the importance of differentiation, introduces a new model of seven

strategic factors, the four positional factors of technology, service, market, and brand as

well as the three bonding factors of leadership, infrastructure, and organizational learning.

4.3.1 Positioning Factors

Firms need to follow a positioning strategy along the four positional dimensions and

need to manage the bonding factors in order to achieve a sustainable competitive

advantage.

The dimension of technology describes the extend to which a firm uses

technological leadership to compete on markets. This includes being a pioneer at

implementing new technologies as well as developing new technologies itself.

Emphasising service means building relationships with customers or even potential

customers in order to customise the product to provide the most value-adding effect for

customers.

The positional factor ‘market’ is most difficult to describe. Market leadership means

that a firm aims for a strong position within the market and also focuses on expanding the

existing market, usually to gain most of the additional market.

41

Firms that use eCommerce as a new channel need to establish a brand image. Plant

(2000, p. 156) mentions that the “key to the creation of a successful e-commerce strategy is

the careful crafting of a balanced branding strategy” that consists of brand reinforcement,

brand creation, brand reposition and brand follower. The combination partly depends on

whether the firm is first to the market or faces a last-mover disadvantage.

4.3.2 Bonding Factors

The bonding factors proposed by Plant (2000) provide the organization with the

necessary resources to follow the eCommerce strategy outline by the four positional factors.

Leadership is needed to focus the organizations on the necessary projects and

changes that come with eCommerce. Leadership needs to communicate the strategic vision

and the desire position throughout the company and motivate employees.

Infrastructure, at the strategic, organizational, and physical level, is needed to

support a firm’s growth. Strategic infrastructure aims to enable a firm to react to changes in

business plans by providing flexibility. Organizational infrastructure enables the firm to

execute its processes, work flow and practises. The physical level consists of both hard-

and software for computing and communication.

The third bonding factor, organizational learning, focuses on making the collected

knowledge and experience of the organization available to learn from earlier mistakes and

successes. Moving up the learning curve can move a firm into a position where its

competitive edge deters competitors (Welge and Al-Laham).

42

5 Conclusions

The intention of this paper was to analyse if traditional strategic models still apply

to the so called ‘new-economy’ that is based on electronic commerce and what effects

electronic commerce has on the competitive situation of firms.

The discussion above has shown that a strategic direction is still needed, the drive

for operational efficiency is not sufficient to gain a sustainable competitive advantage.

Chapter 4 shows that the special environment of an eCommerce environment changes the

competitive situation. Of the three generic strategies named by Porter, the strategy of cost

leadership is not feasible anymore since it usually will not be a sustainable position.

Electronic Commerce focusing on value for customers, as a combination of costs, product

and services. Possibilities to mass-customize products enable firms to follow focus

strategies in a new way, by not serving a small group of customers, but rather individuals.

43

6 Bibliography

• Baker, Sunny, 1999, Global e-commerce, local problems, Journal of Business Strategy,

Vol. 20 Iss.4, pp. 32-38

• Barney, J. B., 1997, Gaining and Sustaining Competitive Advantage, New York

• Besanko, D., D. Dranove and M. Shanley, 1996a, Vertical Boundaries of Firms, in:

Economics of Strategy, Wiley

• Besanko, D., D. Dranove and M. Shanley, 1996b, Horizontal Boundaries: Scale and

Scope, in: Economics of Strategy, Wiley

• Cambridge International Dictionary, 2000, http://dictionary.cambridge.org/ (last accessed

Jan. 10th, 2001)

• Chandler, A. D., 1962, Strategy and Structure, Chapters in the History of Industrial

Enterprise, Cambridge MA.

• Computerworld, 1999, E-Commerce Expands, p. 78, Dec. 6th, 1999

• Economist, 1999a, Cisco@Speed, in: Business and the Internet, Jun 24th, 1999

• Economist, 1999b, The Net Imperative, in: Business and the Internet, Jun 24th, 1999

• Economist, 1999c, ERP RIP?, in: Business and the Internet, Jun 24th, 1999

• Economist, 1999d, The Real Revolution, in: Business and the Internet, Jun 24th, 1999

• Economist, 1999e, You’ll Never Walk Alone, in: Business and the Internet, Jun 24th,

1999

• Economist, 2000a, Define and Sell, in: E-Commerce Survey, Feb 24th, 2000

• Economist, 2000b, First America, then the World, in: E-Commerce Survey, Feb 24th,

2000

44

• Economist, 2000c, Something Old, Something New, in: E-Commerce Survey, Feb 24th,

2000

• Economist, 2000d, Shopping Around the Web, in: E-Commerce Survey, Feb 24th, 2000

• ITF, 1999, International Trade Forum Geneva; 1999, Iss. 2; pg. 16,

• KPMG, 1999a, Electronic Commerce: Status Quo und Perspektiven ’99, KPMG

Consulting

• KPMG, 1999b, Electronic Commerce Research Report 1999, KPMG Consulting

• KPMG, 2000, Die Wertschöpfungskette des eBusiness, KPMG Consulting, eBusiness

Competence Center, Munich

• Microtimes, 2000, News Feed October 2000,

http://www.microtimes.com/newsfeeds/October2000/oct3100.html (last accessed Jan.

11th, 2001)

• Mintzberg, H., 1990, The Decision School: Reconsidering the Basic Promises of

Strategic Management, In: Strategic Management Journal, Vol. 11, pp. 171-195

• Porter, M., 1985, Competitive Advantage: The Value Chain and Competitive

Advantage, Free Press, New York

• Porter, Michael E., 1990, Wettbewerbsvorteile. Methoden zur Analyse von Branchen

und Konkurrenten, 6th edition, Frankfurt/M., Germany

• Porter M., 1996, What is Strategy, Harvard Business Review, Nov-Dec 1996

• Porter, Michael E., 1997, Wettbewerbsvorteile. Methoden zur Analyse von Branchen

und Konkurrenten, 9th edition, Frankfurt/M., Germany

• Quinn,J.B., 1988, Strategic Change. Logical Incrementalism, in: The Strategy Process,

J.B. Quinn, H. Mintzberg and R.M. James (eds.), Englewood Cliffs

45

• Rasmusson, Erika, 2000, E-commerce around the world, Sales and Marketing

Management, Vol. 152 Iss. 2, p. 94

• Romer, Paul M., 1986, Increasing Returns and Long-Run Growth, Journal of Political

Economy, 98(5)

• Welge, Martin K. and Andreas Al-Laham, 1999, Strategisches Management, Gabler,

Wiesbaden, Germany