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

1. 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 chen@jepson.gonzaga.edu

2. TYPES of COMPETITION 1. PURE COMPETITION 2. MONOPOLISTIC COMP. 3. OLIGOPOLY 4. MONOPOLY

3. 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

4. Transaction cost reductions • Six types of transaction cost: • search cost, • information costs, • bargaining costs, • decision costs, • policing costs and • enforcement costs

5. 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

6. 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)

7. 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

8. 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.

9. Metcalfe’s law Figure 3.3

10. Innovation diffusion curve Figure 3.4

11. Other issues • Law of increasing returns • Building critical mass (early liquidity) • “First-mover” advantage • “Loss-leaders” • “Sustainability of competitive advantage”

12. Diminishing returns Output Fig. 5.10 (p.166) Input

13. Increasing Returns Output Fig. 5.11 (p.166) Input

14. Other issues • Law of increasing returns • Building critical mass (early liquidity) • “First-mover” advantage • “Loss-leaders” • “Sustainability of competitive advantage”

15. 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

16. Other issues • Law of increasing returns • Building critical mass (early liquidity) • “First-mover” advantage • “Loss-leaders” • “Sustainability of competitive advantage”

17. Relationship between profits and time of market introduction 300 Profits relative to competitions (%) 250 200 150 100 50 0 Time of market introduction relative to competition (months) Figure 7.10 (p.227)

18. First major move Customer acceptance Competitor catch-up moves First-mover expansion moves Keen’s Six-Stage Competitive Advantage Model Stimulus for action Commoditization

19. The new technology adoption curve Impact Readiness Intensification Level of Activity Which stage is the current e-Business? Time

20. Other issues • Law of increasing returns • Building critical mass (early liquidity) • “First-mover” advantage • “Loss-leaders” • “Sustainability of competitive advantage”

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

22. Other issues • Law of increasing returns • Building critical mass (early liquidity) • “First-mover” advantage • “Loss-leaders” • “Sustainability of competitive advantage”

23. Digital Products and Services • Characteristics of DPS • Ease of manipulation • Durability • Sharing • Product differentiation • Bundling and subscription • Durable goods monopoly

24. 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.

25. Intermediation and Syndication in E-Commerce Why needs intermediaries? (Five important limitations of direct interaction) • Roles and value of intermediaries in e-markets • Search costs • Lack of privacy • Incomplete information • Contract risk • Pricing inefficiencies

26. 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

27. Infomediaries and Information Flow Model Information Flow Infomediaries Sellers Buyers • Infomediary Services • Matching • Search/complexity • Privacy • Informational • Infrastructural • Content • Community • Infomediary Services • Matching • Search/complexity • Privacy • Informational • Infrastructural • Content • Community Flow of Products/Services • Revenue from Buyers • Membership/Subscription fee • Transactions • Fee for Services • Revenue from Sellers • Advertising • Transactions • Membership/Subscription fee Exhibit 2.2

28. Competitive (Value) Advantage The Value Chain: Process View of the Firm N

29. Virtual value Chain Inbound Logistics Production Process Outbound Logistics Marketing Sales Information Capture Physical Value Chain Virtual Value Chain Figure 7.2 (p.186)

30. Downstream value The Value System: Interconnecting relationships between organizations Firm value Upstream value N

31. The three Ds model. Digital convergence Disintermediation Disaggregation Figure 6.2 (p.187)

32. Disintermediation Supplier Intermediary Customer Disintermediation Why go through a middleman? Figure 6.3

33. Transaction Cost Theory • The disintermediation hypothesis rests on two key assumptions: • e-Commerce will reduce all transaction costs to _______ (i.e., become insignificant) • transactions are atomic (i.e., unitary and not further decomposable into small units) zero Ch.6; p.190

34. Disintermediation hypothesis I T3 T2 C P T1 I= intermediary P= producer C= customer T1,T2,T3= transactions Figure 6.5 (p.190)

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

36. Other Possibilities Pre-Internet T1<T2+T3 T1>T2+T3 Supplemented direct market Disintermediation T1’<T2’+T3’ Post-Internet Supplemented intermediaries T1’>T2’+T3’ Cybermediaries Figure 6.6 (p.191)

37. Richness Reach Disaggretgation/Reaggregation: Richness versus Reach (Bandwidth, Customization, Interactivity) (Connectivity) Figure 6.8 (p.194)

38. Editors Journalists Internet Readers Columnists Deconstruction of the newspaper industry Old newspaper industry value chain Journalists Distributors Readers Printers Editors Columnists New newspaper industry value chain Figure 6.9 (p.196)

39. 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.

40. 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.

41. 2. Quantifiable objectives 6. Business model 3. Value creation 5. Organizational set-up 4. Target market The Development of an e-Business Strategy addresses Six Interpreted Issues 1. Vision Fig. 10.1 (P184)

42. Future Trend • Instead of defining the business mission in terms of product or position in a value chain, the question in the future may be • what does the firm serve or • what does the firm possess and • what other products and services can be firm provide? function core competencies • If this trend continues, instead of the linear value chains we see in most industries in future in many industries we may see multiple and interlinked value chains or firms offering a variety of content over multiple media.

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

44. 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