E-C Strategies

1. E-C Strategies • Value Realization • Changing Industry Structures • Conclusion

2. Value Creation vs. Value Realization • Who captures the value? Buyer or the Seller? • Example: ATM case in Banking • Competitive advantage or necessity?

3. Buyer’s Strategies 1. Transaction cost reduction 2. Dictate price 6. Induce commoditization 3. Control Transaction 5. Cost transparency 4. One-to-one Negotiation

4. 1. Buyer’s Transaction Costs Search Costs Information Costs Reduction of Buyer’s Transaction Costs Bargaining Costs Decision Costs Policing Costs Enforcement Costs

5. 2. Buyer Dictates Price • Priceline.com started this tactic • Its stock price is down • It abandoned grocery and gas businesses • But it created an idea • Shop2gether.com for small businesses • Can buyers band together like never before?

6. 3. Buyer Controls Transactions • FreeMarkets example • Select and train suppliers • Select lot size • Design bid event • Increase competitive intensity • Reverse auction has become popular!

7. 4. Return to 1-1 Negotiation • Bargaining was common before the industrial era. • Mass markets led to fixed-price trades. • Cost of negotiation was deemed too high! • That may be changing, thanks to agent technology. • Automate part or all of the negotiation process?

8. 5. Cost transparency • The Internet equips the buyer with lot more information! • Why is cost transparency bad for seller?

9. 6. Commoditization • Buyer posts product requirements on the web • Two sellers meet requirements by modifying existing products • Buyer sees no difference between vendors • Buyer wants to pick the lower cost vendor • So, customization may lead to commoditization!

10. Supplier’s Strategies 2. Buyer’s total costs 1. Pricing alternatives 3. Customer retention 6. Reconfigure channel 4. Lock-in strategies 5. Value Proposition

11. 1. Pricing Alternatives • Differentiated pricing • Not uniform pricing • FordDirect.com to practice regional pricing • Dynamic Pricing • Price changes with time • Airline industry as the prime example

12. 2. Consider Buyer’s Total Costs Transaction Cost Workflow Cost Carrying Cost Customer incurs multiple costs Product Cost Fulfillment Cost

13. 3. Customer Retention • Increasing customer retention by 5% increases profit by more than 25% (Bain & Company)! • How can we retain customers on the Web? • What are the drivers? (e.g., on-time delivery, product performance, and service) • How can the Web help? • How may the Web hurt?

14. 4. Seller’s Lock-in Strategies • Principles: • Use extranets to create lock-in • Create custom content • Customer Benefits: • Reduce cycle time • Reduce errors • Increase control • Examples: • Dell’s Premier Page • OfficeDepot.com

15. 5. Value Proposition • Redefine product by adding new value • Create new product combination thru • bundling and versioning • Reduce buyer’s risks

16. 6. Reconfigure Channel • Provide on-line customer service • Supplant intermediaries • Find new customers • Generate new revenue

17. E-C Strategies • Value Realization • Changing Industry Structures • Conclusion

18. Origins of Current Distribution Systems • Market Revolution: • Geographical Reach • Trade Regulations • Industrial Revolution: • Mass Production • Economy of Scale • Transportation Revolution: • Rail & Road • Air and Sea Right products at right place at the right time

19. Distribution Functions Reassortment and sorting Routinization Searching Internet Impact Death of distance Homogenization of time Irrelevance of location The New Landscape of Distribution

20. Distribution Functions • Reassortment and sorting • Producers: Few goods of large quantities • Customers: Many goods of small quantities • Routinization • Standardize size, delivery, payment • Automate ordering • Searching • Search buyers for seller • Search sellers for buyer

21. Internet Distribution Grid Reassortment and sorting Routinization Searching Death of distance Music Maker: Customer selects songs Product Catalog On Web Search from anywhere Sell anytime on the Web Routine updates vs. Web access Job sites with links to companies Homogenization of time Direct selling to customers Supplier/Buyer location not limited Bidding on the Web Irrelevance of location

22. Changing Economics of Information Richness (Bandwidth, customization, interactivity) Reach: How many can you reach?

23. Changing Organization Structure Hierarchy: Rich information exchange, rigid Hyperarchy: Amorphous, permeable boundaries, alliances

24. Old Model Back office Customer Teller Transformation of Retail Banking New Model Search Engine Investment Database Browser Fund Manager Your Bank Competitor

25. Transforming the Value Chain Current Value Chain Buyers Sellers Shrinking It Sellers Buyers New Intermediaries Buyers Sellers Virtual Marketplace Buyers Sellers

26. E-C Strategies • Value Realization • Changing Industry Structures • Conclusion

27. What did we learn? • E-Commerce may begin with buying and selling. But its not just e-procurement or e-marketing. It changes customer expectations, encourages new entrants, and changes the dynamics of competition. • E-Commerce leads to the reconfiguration of the industry value chain requiring strategic rethinking. While the dot-coms struggle to find their strategic bearing, incumbents face managing Web led changes. • Ultimately, E-Commerce may change industry structure. Retailers may use the Internet as a channel. Exchanges may redefine buyer-supplier relations. Buyers may attempt to grab more power. Supply chains may or may not support the e-commerce strategy.

28. What challenges lie ahead?

29. Conclusion Create and sustain the advantage! Value Creation Value Realization + Competitive Advantage

30. Conclusion: Four Questions • What is the value proposition? • How much can we capture? • Can we execute the strategy? • Can we sustain the advantage?