Industry Perspective of E-Commerce IEEE MNGN 2006

1. Industry Perspective of E-CommerceIEEE MNGN 2006 Arindam Mukherjee AMS Solutioning Team Global Business Services IBM India

2. The World Wide Web • The most participatory marketplace ....that this country, and indeed the world, has ever seen.” United States Court of Appeals for the Third Circuit, Philadelphia, in granting an injunction against the Communications decency Act. June 12, 1996

3. The World Wide Web • Is the web a medium for advertising? • It is also a medium for: • Direct Marketing • Retailing and Distribution • Delivery of service and product elements • Marketing Research • Testing price • A Comprehensive Marketing Environment

4. STRUCTURE OF INDUSTRY SUPPORTING INTERNET COMMERCE

5. What is Electronic Commerce? • From a communications perspective: delivery of goods, services, payment and information over computer networks • From a business process perspective: application of technology towards automation of business processes and workflow • From a services perspective: cut service costs while improving the quality of goods and increasing the speed of service delivery

6. What is Electronic Commerce? [continued] • From an online perspective: the capability of buying and selling of products and information on the Internet • From a collaborations perspective: as the framework for inter and intra-organisational collaboration • From a community perspective: provides a gathering place for community members to learn, transact and collaborate

7. How is E-business different from Electronic Commerce? • Electronic Commerce is widely understood by many as transactions conducted between business partners • Transaction where buyers actually buy and shoppers actually shop • Transaction such as a support enquiry or an online catalogue search • Includes etailing, online banking and shopping

8. How is E-business different from Electronic Commerce? • E-business • not just buying and selling of goods and services • Also servicing customers • Collaborating with business parters • Conducting electronic transactions within an organisation • Thus, a much broader definition • Automation of all business processes in the value chain • From procurement or purchasing of raw materials, to production, to stock holding, distribution and logistics, to sales and marketing, after sales invoicing, debt collection and more • Includes e-commerce and e-marketing

9. Case: Amazon

10. Case Facts : Background Expanded from books to offering 28 million items across numerous categories Acquired 29 million global customers In 1999, Amazon’s founder and CEO Jeff Bezos named Time magazine’s Man of the year By 2000, Amazon.com became the 48th most valuable brand in the world (Interbrand)

11. Global Growth : Price Late 2000, Amazon’s US books/music/movies segment lost $2.3 billion Amazon borrowed $2.1 billion for the sake of its international investments A few analysts were questioning Amazon’s ability to survive until it reached profitability Dotcom burst – Internet stock shakeout stripped billions of dollars from the valuations of Internet-related stocks

12. The Beginning An online bookseller has virtually unlimited online shelf space and can offer customers a vast selection through an efficient search and retrieval interface. This is particularly valuable in the book market because the extraordinary no. of different items precludes even the largest physical bookstore from economically stocking more than a small minority of available titles. In addition, by serving a large and global market through centralised distribution and operations, online booksellers can realise significant cost advantages relative to traditional booksellers. Amazon IPO

13. Key advantages of Online Business model to the traditional book retailing industry Physical store-based book retailers must make significant investments in inventory, real estate and personnel for each retail location. This capital and real estate intensive business model limits the amount of inventory that can be carried in any location. The average superstore stocks less than 10 % of the estimated 1.5 million English language books believed to be in print, which limits customer selection. Finally, publishers and retailers cannot easily obtain demographic and behavioural data about customers.

14. Get Big Fast Audacious start – 1 million titles! 1999, entirely new businesses (electronics, toys and software in US and music in Europe) Co-branded auctions and zShops Revenue models fundamentally different from its initial model Its storefront model, though more efficient than brick and mortar competitors, had a significant capital component Investments in inventory and fulfillment New businesses – acted as an agent facilitating transactions and taking a fee zShops were virtual shopping malls Amazon Payments monitored zShop transactions

15. Joy of a Negative Operating Cycle Received credit card payment from customres within a few days of purchase Did not pay its vendors for 30 – 60 days of sale Did not actually carry inventory in many of its products relied on suppliers for fast fulfillment shifted inventory risks to vendors Typical operating cycle (order to cash) was around (-) 41 days Typical book retailing operating cycle was around (+) 78 days Generated interest on the full sale price (cost of goods sold and gross margin) for over a month

16. Amazon’s Business Model Comparative lack of physical infrastructure a minimum of bricks carries minimal inventory relies on rapid fulfillment from major distributors and wholesalers distributors and wholesalers carry a broad selection of titles Ingram, the single largest supplier, accounted for 59% of the company’s inventory purchases (1996) Used automated interfaces for sorting and organising orders Electronically ordered books often shipped by distributors within hours of receipt of order from Amazon.com

17. Amazon’s Business Model A mix of Web skills e-commerce platform and payment mechanisms Fulfillment expertise Amazon’s distribution facility a key competitive advantage (Bezos) Yet, Amazon enjoyed a much higher valuation than even the best of breed retailers with state-of-the-art distribution skills What then separates Amazon from other retailers?

18. Getting Personal We use collaborative filtering, a statistical method that looks at your purchase history, compares it to other customers, builds a statistical aggregage “soul mate” that tells you what your soul mates has purchased that you have not. Bezos

19. Amazon.com Annual Income StatementMillions of US Dollars

20. Case: Dell Online

21. Case: Dell Online Highlights the emerging components of Internet success: a customer friendly value-added sales interface (website) a cost-effective product procurement (or production) and distribution system

22. Case: Dell Online Two major drivers for Dell’s online success Michael Dell’s support for the channel Envisioned the channel Created the organisational focus for the effort Stepped in and provided direction when in problems Internal and external public relations blitz by the online team Goals for the public relations campaign Create internal awareness Legitimise and build momentum for the E-commerce initiative with customers and thought leaders

23. Case: Dell Online • Dell is successful on the online channel because the Internet was a direct extension of the highly successful Dell Direct model • similar to the ATM in the banking industry • the substitution of Internet for telephone • The Internet allowed Dell to expand its reach without tampering with its product delivery system • The reach of direct to consumer sales has been limited to 20% of the pc market, although the Dell direct model continues to be successful

24. How would you judge Dell's online success? Transaction channel Mid 90s: Dell retreated from this channel Individuals and small business customers were less sophisticated; they required more intensive sales and service support Late 90s: This segment began to change Unsophisticated first-time computer buyers of the late 80s sought replacement computers Web was an opportunity to educate this unsophisticated users Dell capitalised on this opportunity Gaining about 50% of its transaction business conducted via the Internet channel

25. How would you judge Dell's online success? Relationship channel The Internet was an opportunity to create differentiation in the market ultimately increase switching costs between Dell and its competitors The Premier pages can become the basis of competitive advantage for Dell With Dell’s emphasis on this market, this was a breakaway opportunity

26. What advantages does Dell derive from its online success? Transaction segment The Internet has created for Dell a point of access to the consumer market There is potential to expand the market going through the direct channel Majority of Sales conducted through Dell online were from BSD and DCS segments Transaction customers attracted to the website were the more sophisticated users Dell deisres (Market Research findings)

27. How substantial and sustainable are these advantages in comparison to its competitors? Dell will continue to have a sustainable competitive advantage in the Internet space even after its first mover advantage is eroded Dell has created considerable awareness of the company and its Internet-based commerce capabilities Has a `high-velocity’ direct to consumer supply chain model behind its webpage a model highly tuned to deliver efficiencies surpassing industry norms Only Dell can deliver in the fulfilment side with its proven direct supply-chain from the manufacturer through to the consumer

28. Case: Dell Online The Dell way To remain entrepreneurial To launch a concept, and refine the process based on market response

29. Priceline.com Case

30. Introduction • Fundamental change made possible by Internet, change in the basic mechanism of “making the market” • Most products are sold via a process in which the manufacturer/service provider offers a good at a stated price • Consumers accept or reject the offer of the unit of supply at the given price

31. Introduction • Priceline “flipped a conventional system on its head” • A potential buyer advertises a unit of demand at a given price to potential suppliers • Suppliers then choose whether or not to meet this demand • How significant is this move towards buyer driven commerce?

32. Economic Logic for “buyer driven commerce” • Lead to greater social welfare and greater supplier profits • “Posted price” on items have the benefit that a transaction can take place without any additional information exchange between buyer and seller • Downside: All buyers pay the same price despite perhaps vast differences in their reservation values • To tap the high reservation values of some, by setting a high price, the seller keeps others from buying despite their reservation value well above the firm’s cost

33. Much more than a new pricing mechanism • Moving away from uniform pricing to customised pricing • Buyers pay different prices depending on their perceived value of the product • Allows a potential buyer to express his willingness-to-pay • What the buyer is willing to reveal is not actually his valuation of the product • Then no consumer surplus • Since customer cannot increase his named price, some correlation with “named price” and true willingness-to-pay

34. Priceline Airlines ticket model • Priceline’s brilliance is in creating not only a new model of “name your pricing” only • Rather, there is a product story here as well • Priceline creates a new product in the airlines space: • An unbranded seat with a routing selected to the convenience of the airline, not to the convenience of the traveler

35. Priceline Airlines ticket model • There is a price-sensitive segment in the Airlines industry • “I want low price” • The Airlines are perfectly capable of finding this type of customer on their own • There is another untapped segment • “I want low price and I am willing to fly a convoluted routing, on any Airlines, at any time of the day to get it”. • Priceline finds them and permits them to communicate their willingness to pay

36. PrivateJet First Class Senior Executive Middle Management Regular Leisure Travel Bus People Customer Segment in Airlines

37. Priceline model – Airlines industry Consumer benefits • Economic • Access to unpublished fares / cheap • No advance purchase requirements • No Saturday night stay necessary to get a cheap seat • Easy to do • Non-economic • “I was in control” • “Named my own price/Got what I wanted” • “Beat the Airlines pricing scheme”

38. Priceline model – Airlines industry Key Supplier benefits • No cannibalisation/Incremental demand • Sell off low marginal cost inventory, which would "perish" otherwise • Block low-end "no-name" carriers • Preserve existing price structure

39. Why Airlines Industry was a very good initial setting for Priceline to target? • Generic demand was price sensitive; so low prices expanded demand rather than cannibalised high price seats • Low industry load factors • 50,000 seats flew empty each day • With a near zero marginal cost, airlines were looking for incremental demand even at low prices as long as it did not upset the rest of their price structure • Consumers have relatively low brand preference • Traditional airline pricing generally looked upon as unfair • The idea of “name your own price” and empowerment over the airlines was very appealing – a feeling that “I won” • Huge potential market

40. Competing Long term • Patents on buyer driven commerce • Microsoft is posing steep challenge • How well will this hold up? • If patent protection is ineffective, idea can be easily copied • Brand building • A brand which empowers customers and puts them in control • Priceline’s ability to attract customers by presenting itself as a brand would be critical

41. Lessons • Priceline is in effect an intermediary between suppliers and potential customers • The Internet introduced a new player in the system • in contrast to the more usual disintermediation story where the Internet eliminates middleman • The real success of Priceline is not in a new pricing mechanism, but rather a way in which an unattractive market segment becomes attractive • By now having a mechanism to express its willingness to accept a lower quality product in return for the low price

43. Top Ten Internet Brands

44. Case CNET 2000

45. CNET “Our mission is to be the most important company to the most important industry in the world – the IT industry…. If you become the leading information intermediary, you have great power.” Shelby Bonnie

46. CNET – High points as on June 99 • Relies on advertising and “lead generated” revenue • derived when CNET referred prospective customers to its e-commerce partners • Positioned itself as a leading market maker for technology-savvy individuals scouting for technology products • Posted revenue gains and quarterly profits in each of five succeeding quarters • Tenfold increase in share price between April 1998 and April 1999 • CNET announced an aggressive marketing campaign of $100 million • Immediately following the announcement, stock price got a hit!

47. CNET 2000 – the process • An ambitious undertaking for a young Internet company • Many of CNET’s peers lacked the discipline to reflect systematically on their competitive position and strategy • A year long planning process, completed in 1999 • A team spent six months in highly interactive small group sessions, involving each employee • Did SWOT analysis • Did extensive consumer research • Presented their findings in a series of workshops to every employee

48. CNET 2000 objectives • Determined which product markets and customer segments to serve • Concluded that they had defined the technology market too narrowly • Faced an enormous untapped opportunity in their core business • Decided to avoid diversifying beyond technology into other vertical markets • Resolved to extend their coverage beyond PC computing into new segments such as enterprise computing, consumer electronics and telecommunications equipment • Decided to extend CNET’s reach beyond computer hobbyists and corporate IT professionals to encompass managers who were “technology novices”

49. CNET 2000 objectives • Re-articulated their business model from that of content provider to an information intermediary • Sized up the competitive landscape • Embarked on an aggressive $100 million marketing campaign • Research indicated that CNET’s brand awareness was low within the customer segments the company planned to target

50. CNET Business Model Business Model • A business model is the method of doing business by which a company can sustain itself -- that is, generate revenue Content provider • Produces original information, or repurposes for Internet distribution content originally created for another medium