Determinants of Firm Performance

1. Determinants of Firm Performance

2. Learning Objectives • Describe the ten properties of Internet • Describe the eight unique features of E-commerce technology • Understand Michael Porter’s five forces of framework • Understand the impact of internet on the five forces

3. Properties of Internet • 1. Mediating Technology – interconnect parties that are interdependent or want to be. Can be firm to consumers or within firms. Think of its functionality like bank or TV media • 2. Universality – ability to reach everyone across the globe

4. Properties of Internet • 3. Network Externalities/effect – when technology becomes more valuable if more people take advantage of it • 4. Distribution Channel – distribution of digital products or information • Replacement effect – serve the same customers • Extension effect – bring in new customers

5. Properties of Internet • 5. Time Moderator – no temporal restriction • 6. Information Asymmetry Shrinker – • Information asymmetry exist when one party of the transaction has information that the other does not

6. Freakonomics : Steven D. Levitt and Stephen J. Dubner’s book • Information is the currency of the Internet. As a medium, the Internet is brilliantly efficient at shifting information from the hand of those who have it into the hands of those who do not. • the information existed but in a woefully scattered way. (In such instances, the Internet acts like a gigantic horseshoe magnet waved over an endless sea of haystacks, plucking the needle out of each one.) • The Internet has accomplished what no consumer advocate could: it has vastly shrunk the gap between the experts and the public. • Car buying guide: http://www.edmunds.com

7. Properties of Internet • 7. Infinite Virtual Capacity– Moore’s law applicable to storage and network technologies • 8. Low Cost Standard – formation • Easy Adoption – same communication protocol • Lower cost – lower than proprietary EDI

8. Properties of Internet • 9. Creative Destroyer – innovation unleashes a force that creates new businesses and destroys, over and over • 10. Transaction Cost Reducer

9. Unique Features of E-commerce Technology • Ubiquity: It is available just about everywhere and at all times • Global Reach: The potential market size is roughly equal to the size of the online population of the world • Universal standards: The technical standards of the Internet and therefore of conducting e-commerce, are shared by all of the nations in the world • Richness: Information that is complex and content-rich can be delivered without sacrificing reach • Interactivity: E-commerce technologies allow two-way communication between the merchant and the consumer

10. Unique Features of E-commerce Technology (continued) • Information density: The total amount and quality of information available to all market participants is vastly increased and is cheaper to deliver • Personalization/Customization: E-commerce technologies enable merchants to target their marketing messages to a person’s name, interests and past purchases. They allow a merchant to change the product or service to suit the purchasing behavior and preferences of a consumer • Social technology: User content generation and social networking technologies

11. Friction free economy • Information symmetry • No middle man • Low transaction cost • Prices adjust dynamically adjusted to demand

12. Macro Environment • Political and legal – subsidies, taxes, monopoly legislation and environmental laws • Economic –interest rate, inflation rate unemployment rate • Social Environment – population demographics, income distribution, and social mobility • Technological

13. Profitability of firms depends on ? • Firm needs to create higher value than its rivals • Capture the value in the form of price that exceed its cost Poor profitability industry: airline, PC makers

14. Porter’s Model • Whether an industry is old or new, its structural attractiveness is determined by fives forces • In combination, these forces determine how value created by the product or service is divided among companies in an industry • Analyzing these forces illuminates an industry’s fundamental attractiveness, expose the underlying drivers for industry profitability, and provides insight into how profitability will evolve in the future • The framework provide a guide to explain the sustainability of profits against bargaining and competition

15. Porter’s Model – figure Video: http://www.youtube.com/watch?v=4R60P_KeA44

16. High intensity of industry rivalry • Large number of competitors • geographic boundaries limitation reduced by Internet • Little differentiation between products • Commodity products • Low growth rate of the industry

17. Barriers to entry/Threat of New Entrants • High fixed cost • Deter would-be competitor • Trust and brand loyalty • Customer acquisition and retention • High switching cost and network effect • Keep customers • Strong intellectual property protection • Products with high development and low reproduction costs

18. Substitute products • Substitute products place a ceiling on prices that firms can charge for their products • Internet increase the variety of products available to customer • MP3 replace traditional CDs

19. Bargaining power of buyers (high) and suppliers (low) • High concentration of buyers • Aggregation of buyers • Strong fragmentation of suppliers • A high degree of market transparency • Allow buyer easily compare prices • Products are increasing becoming commodities • No extensive purchasing advice and after sale service • Low switching cost and weak network effect

20. Examples • PC manufacture industry • Hong Kong property industry

21. Competitive Strategies • Product differentiation - develop brand loyalty by creating unique new products and services • Focused differentiation- create new market niches by identifying a specific target for a product or service that it can serve in a superior manner • Developing tight linkages to customer and suppliers - raises “switching cost” and reduces bargaining power of customer and suppliers • Becoming a low-cost producer - produces goods and services at lower price than competitors

22. Impact of Competitive Forces

23. In a nutshell • The Internet can change industry structure by introducing substitute products, increasing the bargaining power of suppliers or of consumers and buyers, and by changing existing barriers to entry • But it is necessary to analyze the impact on each industry individually

24. How the Internet Influences Industry Structure* *adapted from “Strategy and the Internet” HBR, March 2001

25. Relevancy of the Porter’s model in E-Commerce • Change the basis of competition within the industry • Use Internet to reduce cost or increase price by providing a unique product • Change the balance of power in the relationship that a company has with customer suppliers • Creating tightly integrated system with suppliers, requiring them to invest in proprietary system or EDI to become a supplier. E.g Wal-Mart. • Provide the basis for new products and services, new markets or other new business opportunities • On-line electronic banking