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

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Title: 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 (???), Ph.D. Professor of
MIS Graduate School of Business Gonzaga
University Spokane, WA 99223 USA chen_at_jepson.gonza
ga.edu
2
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

3
Transaction cost reductions
  • Six types of transaction cost
  • search cost,
  • information costs,
  • bargaining costs,
  • decision costs,
  • policing costs and
  • enforcement costs

4
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

5
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)

6
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 consumers willingness to pay.
  • Impact
  • a) desirable increases the efficiency of the
    economy and is frequently promoted by
    government
  • b) opposition from the public

7
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.

8
Metcalfes law
Figure 3.3
9
Innovation diffusion curve
Figure 3.4
10
Other issues
  • Law of increasing returns
  • Building critical mass (early liquidity)
  • First-mover advantage
  • Loss-leaders
  • Sustainability of competitive advantage

11
Diminishing returns
Output
Input
Fig. 5.10 (p.166)
12
Increasing Returns
Output
Fig. 5.11 (p.166)
Input
13
Other issues
  • Law of increasing returns
  • Building critical mass (early liquidity)
  • First-mover advantage
  • Loss-leaders
  • Sustainability of competitive advantage

14
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 companys
    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

15
Other issues
  • Law of increasing returns
  • Building critical mass (early liquidity)
  • First-mover advantage
  • Loss-leaders
  • Sustainability of competitive advantage

16
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)
17
Keens Six-Stage Competitive Advantage Model
Stimulus for action
Commoditization
18
The new technology adoption curve
Impact
Readiness
Intensification
Level of Activity
Which stage is the current e-Business?
Time
19
Other issues
  • Law of increasing returns
  • Building critical mass (early liquidity)
  • First-mover advantage
  • Loss-leaders
  • Sustainability of competitive advantage

20
Winner takes all
100
Winner
Market share
Loser
0
Time
Fig. 5.12 (P167)
21
Other issues
  • Law of increasing returns
  • Building critical mass (early liquidity)
  • First-mover advantage
  • Loss-leaders
  • Sustainability of competitive advantage

22
Digital Products and Services
  • Characteristics of DPS
  • Ease of manipulation
  • Durability
  • Sharing
  • Product differentiation
  • Bundling and subscription
  • Durable goods monopoly

23
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 cant 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.

24
Intermediation and Syndication in E-Commerce
  • Roles and value of intermediaries in e-markets
  • Search costs
  • Lack of privacy
  • Incomplete information
  • Contract risk
  • Pricing inefficiencies

Why needs intermediaries? (Five important
limitations of direct interaction)
25
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
26
Infomediaries and Information Flow Model
Information Flow
Infomediaries
Buyers
Sellers
  • 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
27
The Value Chain Process View of the Firm
N
28
Virtual value Chain
Physical Value Chain
Virtual Value Chain
Figure 7.2 (p.186)
29
The Value System Interconnecting relationships
between organizations
Firm value
Upstream value
N
30
The three Ds model.
Digital convergence
Disintermediation
Disaggregation
Figure 6.2 (p.187)
31
Disintermediation
Why go through a middleman?
Figure 6.3
32
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
33
Disintermediation hypothesis
I
T3
T2
C
P
T1
I intermediary P producer C customer T1,T2,T3
transactions
Figure 6.5 (p.190)
34
Types of Transactions
  • Different classes of transactions are affected in
    different ways
  • Disintermediation
  • Supplemented direct market
  • Supplemented intermediaries (Network-based
    transactions)
  • Cybermediaries

35
Other Possibilities
Pre-Internet
T1gtT2T3
T1ltT2T3


Supplemented direct market
Disintermediation
T1ltT2T3
Post-Internet
Supplemented intermediaries
Cybermediaries
T1gtT2T3
Figure 6.6 (p.191)
36
Disaggretgation/Reaggregation Richness versus
Reach
(Bandwidth, Customization, Interactivity)
(Connectivity)
Figure 6.8 (p.194)
37
Deconstruction of the newspaper industry
Old newspaper industry value chain
Journalists
Distributors
Readers
Editors
Printers
Columnists
New newspaper industry value chain
Figure 6.9 (p.196)
38
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.

39
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.

40
The Development of an e-Business Strategy
addresses Six Interpreted Issues
1. Vision
Fig. 10.1 (P184)
41
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.

42
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)
43
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
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