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E-Commerce and Its Effect on Pricing and Strategic Positioning

Explore the impact of e-commerce on pricing and strategic positioning. Discover how it affects communication, logistics, and service costs, as well as the profitability of different types of sellers. Learn how large companies are outperforming small companies in profit growth.

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E-Commerce and Its Effect on Pricing and Strategic Positioning

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  1. E-Commerce and Its Effect on Pricing and Strategic Positioning July 30, 2001 216-792

  2. Impact of E-Commerce • Good news and Bad news!

  3. Smart competitors grow stronger, dumb competitors grow weaker

  4. Past Differences Between Choices Profit Option1 Option II

  5. Current Differences Between Choices Profit Option III Option IV

  6. Competition

  7. Profits will increasingly diverge!

  8. Performance Linkages Human Performance Operating Performance Financial Performance

  9. Profitability Dispersion

  10. E-Commerce Impacts • Lower communication costs for sellers • Sometimes lower logistics & service costs for sellers • Lower search & acquisition costs for buyers • More exposure to buyers for sellers • More exposure to sellers for buyers • Less “total friction” in the transaction system

  11. Changes in Transportation & Communication Time & Cost • The wheel • Domesticated animals • Sails • Roads • Engines • Rails • Telegraph • Telephone • Electronic media

  12. Interesting Examples • Swift replaces Allan’s Butcher Shop • Amazon.com clips Barnes & Noble • FreeMarkets OnLine cuts supplier margins 15% • E-mail reduces usage for Post Office

  13. Transportation & Communication Costs [Past, Present & Future]

  14. Speculation on the E-Commerce Impact • Custom structural steel • Business software upgrades • Pornographic videotapes • Retail landscaping services • Construction services: large commercial buildings • Remote diagnostic services for industrial machinery • Commercial crushed rock • Worldwide travel weather information • Rare stamps for serious collectors • Retail fruits & vegetables

  15. E-Commerce Impact High Highest Impact E-Commerce Usefulness in Search & Acquisition Processes Many Situations Lowest Impact Low Low E-Commerce Usefulness in Logistics & Service Processes High

  16. Where E-Commerce Won’t Work High Low E-Commerce Penetration Need for Personal Physical Inspection Many Situations Low Low Entertainment Value of Personal Physical Acquisition Process High

  17. E-Commerce Diagnostic E-Commerce will impact if: • Search & acquisition costs are high. • Search & acquisition personal pleasure is low. • Personal inspection is not necessary. • Internet can improve search & acquisition process. • Internet can provide delivery and/or service. • Sales, delivery and service are not real differentiators. • Product/core service differentiation is low. • Personal relationship adds little real value.

  18. E-Commerce Test Vehicles • Catalogues • Direct Mail • Telemarketing • EDI • Fax

  19. Derivative E-Commerce Impacts • Sellers of differentiated specialties will be exposed to more buyers at lower cost-sales and margins will improve • Buyers of commodities will be exposed to more sellers at lower cost-margins will decrease

  20. Current Situation Buyer Seller Has cost advantage, is protected by search cost, or is in big trouble Commodity Has Power limited by search cost Has very limited power Has power but is limited by communication, logistics and service costs Specialty

  21. E-Commerce Situation Buyer Seller Has cost advantage, or is in bigger trouble Commodity Has Power not limited by search cost Has very limited power, but great reach Has power and is no longer limited by communication, logistics, and service costs Specialty

  22. E-Commerce Outcome Buyer Seller Feels greater price pressure Commodity Creates automated mass bargaining, gets lower prices Can find, acquire and receive desired products/services Unit sales and prices increase Specialty

  23. Bottom Line Buyer Seller Bad Commodity Good Good Good Specialty

  24. Order Profitability Buyer Seller High High Profit Order Gross Margin % Low Profit Order Low Low Transaction Cost (as a % of Revenue) High

  25. Order Profitability: Commodities Buyer Seller High High Profit Order Gross Margin % Low Profit Order Low Low Transaction Cost (as a % of Revenue) High

  26. Order Profitability: Specialties Buyer Seller High High Profit Order Gross Margin % Low Profit Order Low Low Transaction Cost (as a % of Revenue) High

  27. Why are large companies generally doing better than small companies in profit growth, and stock price-to-earnings ratios?

  28. For Commodities Only Buyer Seller Has economies of scale and scope if they exist Big Companies Lots of power: gets concessions Buys at list price Is in a difficult position Small Companies

  29. Likely Outcome • Specialty sellers make more money: higher unit volume at higher gross margins with lower transaction costs. • Commodity sellers make less money unless they have a cost advantage: lower gross margins but with lower transaction cost. • Low cost commodity sellers prosper : if their increased unit volume and lower transaction costs more than compensate for lower gross margins. High fixed cost structures help.

  30. E-Commerce Questions: Offense • Can I use E-Commerce to reach new prospects? • Can I use E-Commerce to manage order flow? • Can I add value to my sales effort (e.g., customer advice, design, etc.) with E-Commerce? • Can I deliver products/services with E-Commerce? • Can I provide post sales service with E-Commerce? • Can I support distributors/dealers/salespeople with E-Commerce? • Can I influence influentials with E-Commerce? • Can I reduce costs with E-Commerce?

  31. E-Commerce Questions: Defense • Are my products/services differentiated? • Is my differentiation increasing or decreasing? • What are my competitors doing with E-Commerce? • What are potential competitors doing with E-Commerce? • What are my suppliers, customers and distributors doing with E-Commerce? • Will I be “commoditized”? • Will I be “disintermediated”?

  32. Some Emerging Traps • Customers price shop • Customers product/service shop • Competitive myopia • Relationship to incumbent distribution channels • Relationship to incumbent sales forces • Relationship to service organizations • Obsolete logistics/support thinking • Customer value & differentiation distraction • Non-system thinking • Ignoring profits

  33. Leverage Points • Customer Value • “Go to Market” architecture • Precision Pricing • Jurisdictional Integration • Execution Speed & Precision • Relationship “Equity”

  34. Customer Value • Convenience • Availability • Function • Relationship • Price

  35. Go-to-Market Architecture • Independent distributors • Sales agents • Sales force • Telemarketers • Catalogues • Fulfillers • Logistics services • E-Commerce agents

  36. Leverage Points • Customer Value • “Go to Market” architecture • Precision Pricing • Jurisdictional Integration • Execution Speed & Precision • Relationship “Equity”

  37. Integrating Jurisdictions • Common understanding • Unified, explicit strategy • Organizational structure • Formal management processes • Information technology • Informal social network • People

  38. Execution • Speed” The enduring first mover advantage • Precision: Unforgiving customers, influentials, partners, & investors • Patience is dead: it is a Type A world

  39. Relationship Equity: The Enduring Assets • Customer relationships: “brand” equity • The organization & its people

  40. Attention!! Tectonic Changes Ahead • Great Opportunity • Catastrophic Threats

  41. Questions?

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