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Projections called for an estimated 325 million people worldwide to be using the Internet regularly by year-end 2000about 150 million in North America, close to 100
million in Europe, 58 million in the Asia-Pacific region, 11 million in Latin America,
and over 7 million in the rest of the world.1 Associated with each of the technological
components and activities comprising the Internet infrastructure and value chain are a
diverse and growing number of firms and industries. The major groups of firms that
comprise the supply side of the Internet economy include:
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that governs the functioning of cable modems, wireless devices, PCs, workstations,
and LANs. DoubleClick is a developer of specialized software that collects bits of
demographic information residing on the PCs of Web surfers and, then, using criteria provided by advertisers, delivers targeted ads to the Web pages popping up on
Web surfers screens; DoubleClicks software also provides its advertising clients
with reports on the frequency with which surfers click particular ads and their profiles. 1ClickCharge, part of CMGI, develops payment software that allows online retailers to charge consumers a few cents per click for product reviews, music, or
articles online. An entrepreneurial start-up named Blaxxun develops software for
building three-dimensional Web sites, an attractive feature for some retailers. Engage Technologies, also a start-up, specializes in software that tracks Web traffic
from site to site, enabling the creation of anonymous user profiles of Web surfers
information that guides users in targeting their online marketing strategies. Critical
Path, another start-up, develops and markets software that allows Web sites to offer
e-mail service. Other important developers of software and e-commerce systems include Microsoft, IBM, SAP, Commerce One, Seibel Systems, Ariba, Oracle, Inktomi, Baan, Sun Microsystems, Macromedia, and Novell.
E-commerce enterprisesThis category of businesses includes (1) business-tobusiness merchants (Cisco, Intel, and Dell Computer conduct most of their business with corporate customers online; General Electric does all of its business with
its suppliers online); (2) business-to-consumer merchants like Emusic.com, eBay,
CarParts.com, Furniture.com, MotherNature.com, Priceline.com, Buy.com, and
Charles Schwab; (3) media companies such as Disney, Nintendo, Electronic Arts,
and Sony that provide online entertainment; and (4) content providers like America Online, Yahoo!, Briefing.com, The Motley Fool, and iVillage.
Not surprisingly, some companies have staked out business positions in more than
one of the above categories. CMGI, part holding company and part venture capitalist,
consists of a portfolio of 52 Internet enterprises; among others, it owns or has equity
interests in 9 content companies, 12 companies that provide software and other tools
for facilitating e-commerce, and 12 e-commerce retailers. Softbank Corporation, a
Japanese conglomerate headed by Masayoshi Son, is a venture capital enterprise with
stakes in 100-plus high-tech enterprises whose offerings include e-commerce software,
Web publishing, e-retailing, online brokerage, Web portals, assorted e-commerce services, and media and content providers. Softbank has ownership interests in Yahoo!,
E*Trade, E-Loan, Critical Path, TheStreet.com, and several other U.S.-based enterprises, but the company is focusing most of its energies on commercializing the Internet in Japan, other parts of Asia, and Europe.
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more to spring up around the world in years to come.2 In many markets and industries, entry barriers are low enough to make additional entry both credible and
likely.
Online buyers gain bargaining power because they confront far fewer obstacles to
comparing the products, prices, and shipping times of rival vendors. Vendor Web
sites are only a few clicks apart and are open for business 24 hours a day, every
day of the year, giving buyers unprecedented ability to compare offerings and find
the best value. Using online networks, a multinational manufacturers geographically scattered purchasing groups can easily pool their orders with parts and components suppliers and bargain for volume discounts. Likewise, it is feasible for
wholesalers to use online systems to research the products, prices, and features of
competing manufacturers and for retailers to shop around and bargain for the best
deals from manufacturers and distributors who supply them. Individual consumers
can readily get reviews of products, compare the features and prices of rival
brands, and put up bids for how much they are willing to pay for items. The Internet eliminates the geographic protection of distance that has traditionally given
small-town businesses the advantage of being the only source within reasonable
driving distance. Using the Internet, buyers can readily negotiate car purchases
with dealers hundreds of miles away, order from Furniture.com, purchase music
CDs at EMusic.com, or borrow money at E-Loan or Mortgage.com. Buyers of all
typesmanufacturers, wholesalers, retailers, and individualscan join a buying
group to pool their purchasing power and approach vendors for better terms than
could be gotten individually. Purchasing agents are banding together at Web sites
operated by Wells Fargo and Chase Manhattan to pool corporate purchases to get
better deals or special treatment. PurchasingCenter.com operates a buying pool for
industrial goods such as drill bits and motors. (Sellers are not entirely disadvantaged by buying pools, however, because they gain quick access to large, welldefined pools of buyers, allowing them to save on selling and marketing costs.)
The Internet makes it feasible for companies to reach beyond their borders to find
the best suppliers and, further, to collaborate closely with them to achieve efficiency gains and cost savings. While a number of companies have relied on foreign suppliers for low-cost components and assembly for some years, in an
e-commerce environment companies can use the Internet to integrate foreign suppliers into their supply chain networks more tightly, boosting savings and speeding new products to market. All companies can extend their geographic search for
suppliers and can collaborate electronically with chosen suppliers to streamline ordering and shipping of parts and components, improve just-in-time deliveries,
work in parallel on the designs for new products, and communicate speedily and
efficiently. But the chief point here is that new competitive pressures can spring
from the e-commerce relationships between companies and their supplierscompanies not only gain added bargaining power over their suppliers but efficient online collaboration with chosen suppliers can also be a basis for gaining an edge
over rivals.
Internet and PC technologies are advancing rapidly, often in uncertain and unexpected directions. For example, a few years ago, both Intel and Microsoft were
For a discussion of how e-commerce is attracting entrepreneurs and capital, see Gary Hamel, Bringing
Silicon Valley Inside, Harvard Business Review 77, no. 5 (SeptemberOctober 1998), pp. 7084.
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Growing use of
the Internet and
e-commerce technology can produce
important shifts in
one or more of an
industrys five competitive forces.
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The e-commerce
world is characterized by highvelocity, rapid-fire
change.
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focusing all their energies on expanding the role of the personal computer as a
multifunctional appliance in both businesses and households. Both companies
misjudged the technological and business significance of the Internet and had to
initiate crash programs to redirect their efforts. Also, a few years ago, investors
considered Iomega one of hottest growth stocks because of the potential for
Iomegas Zip drives and high-capacity Zip disks to displace the standard 3.5-inch
floppy disk. Iomega signed up numerous PC makers to include its Zip drive as an
option on PCs. Its business model called for keeping prices attractively low on Zip
drives to gain greater market penetration while making money on the sale of Zip
disks, which retailed for about $10 each. Just as the Zip drive was gaining a solid
foothold in the market, the makers of computer hard drives unexpectedly hit upon
ways to greatly increase hard drive capacity (to unheard of levels10 to 25 gigabytes) and, at the same time, lower hard drive production costs dramatically. PC
makers and PC users quickly shifted to PCs with bigger hard drives and bypassed
significant use of Iomegas Zip drives and Zip disks. Iomegas stock price declined
steadily, and the company has fallen on hard times.
The Internet results in much faster diffusion of new technology and new ideas
across the world. Companies in emerging countries and elsewhere can use the Internet to monitor the latest technological developments and to stay abreast of what
is transpiring in the markets of Europe, Japan, and North America and what the
leading companies in these areas are doing. Distance and location matter less in a
connected world; indeed, the Internet is a globalizing force that promotes the formation of a world community and, from a business perspective, reduces the importance of national boundaries.
The e-commerce environment demands that companies move swiftlyin Internet
time or at Internet speed. Just a few years ago, companies that were nimble
and operated with short response times could expect to have a competitive advantage over slower-moving rivals. In the exploding e-commerce world, speed is a
condition of survival. New developments on first one front and then another occur
daily. Market and competitive conditions change very quickly. Late-movers are
doomed.
E-commerce technology opens up a host of opportunities for reconfiguring industry and company value chains. For instance, using the Internet to link the orders of
customers with the suppliers of components enables just-in-time delivery to manufacturers, slicing inventory costs and allowing production to match demandfor
both components and finished goods. It also allows more accurate demand forecasting. Tight supply chain management starting with customer orders and going
all the way back to components production, coupled with the use of enterprise resource planning (ERP) software and manufacturing execution system (MES) software, can make custom manufacturing just as cheap as mass production, and
sometimes cheaper. It can also greatly reduce production times and labor costs.
J. D. Edwards, a specialist in ERP software, teamed with Camstar Systems, a specialist in MES software, to cut Lexmarks production time for computer printers
from four hours to 24 minutes. Many of the worlds leading motor vehicle producers are moving rapidly to incorporate e-procurement technologies into their
supply chain systems in preparation for customized mass production. Another example of how the use of e-commerce systems alters manufacturing and industry
value chains to increase efficiency, reduce costs, and streamline the production
process is provided in Illustration Capsule 29.
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29
Corporate
customer
Ingram
Micro
Step
2
PC
Company
(Compaq
computer or
H-P)
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All of the different value chain activities associated with procuring items from
suppliers and collaborating with them can be streamlined and tightened. With software from Commerce One, Oracle, SAP, Ariba, and others, company procurement
personnel canwith only a few mouse clickscheck materials inventories against
incoming customer orders, check suppliers stocks, check the latest prices for parts
and components at auction Web sites, and check FedEx delivery schedules, all
within one seamless system. Electronic data interchange software permits the relevant details of incoming customer orders to be instantly shared with the suppliers
of needed parts and components and arrangements made for just-in-time deliveries.
The instant communications features of the Internet, combined with all the
real-time data-sharing and information availability, have the further effect of
breaking down the need for corporate bureaucracies and reducing overhead costs.
The whole back-office data management process (order processing, invoicing,
customer accounting, and so on) can be handled fast, accurately, and with less paperwork and fewer personnel.
Radical impacts are also occurring in the distribution portion of industry value
chains. In Chapter 5, Figure 5.2 showed how software developers can use the Internet to create a low-cost value chain system for marketing and delivering their
software online, thus bypassing the costs and markups of traditional software distributors and retailers. Online retailers also have other cost-saving advantages over
traditional brick-and-mortar retailers. For instance, as of 1999 Amazon.com had
invested about $56 million in fixed assets to achieve sales of $1.2 billion (equal to
the sales of about 235 Barnes & Noble bookstores), whereas Barnes & Noble had
invested about $462 million in 1,000-plus stores and was paying additional sums
in rent and leasing fees.3
All told, the impact of e-commerce technology on industry and company
value chains is profound, paving the way for fundamental changes in the ways
business is conducted both internally and with suppliers and customers.
The Internet can be an economical means of delivering customer service. The Internet provides innovative opportunities for handling customer service activities.
Companies are discovering ways to deliver service online, thus curtailing the need
to keep company personnel at the facilities of major customers, reducing staffing
levels at telephone call centers, and cutting the time required for service technicians to respond to customer faxes and e-mail messages. For example, using specially designed software, Dell Computer can take a digital reading of a customers
troubled computer system, pinpoint the problem, and send repairs over the Internetall without human intervention.4 Direct online customer support systems
may well prove less expensive and just as effective in a number of industries.
The capital for funding potentially profitable e-commerce businesses is readily
available. In the brick-and-mortar world, getting the capital for a new business can
sometimes be difficult. In the Internet age, e-commerce businesses have found it
relatively easy to raise hundreds of millions, even billions, of dollars to fund a
promising new venture.5 More capital was raised through initial public offerings
(IPOs) of stock in the 1990s than in all previous decades combined.6 Investor excitement about the business potential of the Internet has created a climate where
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venture capitalists are quite willing to fund start-up enterprises provided they have
a promising technology or idea, an attractive business model, and a well thoughtout strategic plan. Furthermore, Internet IPOs are commonplace and their stock
prices have been quickly bid up in many instances, putting such companies in a
strong position to raise additional equity capital or to make acquisitions. But beginning in 2000, investors in start-up enterprises began pressuring dot-com executives to prove their business models were capable of producing near-term
profitability; the stock prices of companies with sizable losses and little prospect
of near-term profitability were sliding and start-up companies looking for capital
infusions were experiencing much tougher scrutiny from potential investors.
The needed e-commerce resource in short supply is human talentin the form of
both technological expertise and managerial know-how. While some e-commerce
companies have their competitive advantage lodged in patented technology or
unique physical assets or brand-name awareness, many are pursuing competitive
advantage based on the expertise and intellectual capital of their personnel and on
their organizational competencies and capabilities. Two of the most valuable competitive assets a company can have are dominating depth in a particular technology and a workforce with exceptional know-how and experience that gives a firm
uniquely strong skills and competitive capabilities. E-commerce firms are thus
competing aggressively for talent and intellectual capital; individuals with attractive qualifications and know-how can command premium compensation, including equity ownership or lucrative stock options in start-up enterprises.
233
If an e-commerce
venture has merit, it
will attract both
money and capital
immediately. Capital requirements
have not proved a
significant barrier
to entering the
e-commerce arena.
This listing should make clear that growing use of e-commerce technology can
produce important shifts in an industrys competitive forcesintensified rivalry,
greater entry threats, a blurring of traditional industry and geographic boundaries,
shifts in the balance of bargaining power both between sellers and their suppliers and
between sellers and their customers, and incentives for all kinds of sellersupplier and
sellercustomer collaboration. Internet technology and newly emerging products and
services that enable e-commerce further have the effects of altering industry value
chains, spawning substantial opportunities for increasing efficiency and reducing costs,
and affecting a companys resource strengths and weaknesses. Moreover, the pace of
technological change is rapid and its direction is often uncertain. Market developments
occur swiftly, compelling companies to make decisions at Internet speed or risk getting
left behind in the dust.
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Invest aggressively in R&D to win the technological race against rivals; spending
can be aimed at improving performance features, curing performance weaknesses,
and reducing the costs of installing and maintaining the companys technological
approach.
Form strategic alliances with suppliers, potential customers, and those with complementary technologies to build consensus for favored technological approaches
and industry standards.
Acquire other companies with complementary technological expertise to broaden
and deepen the companys technological base and thereby drive advances in the
companys technology faster than rivals are able to advance theirs.
Hedge the companys bets by investing sufficient resources in mastering one or
more of the competing technologies; the company can then shift to the technological approach that wins out.
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technological and competitive challenges for all the various market participants in establishing mobile systems capable of connecting all users irrespective of location.
Cisco Systems, the worlds largest provider of Internet hardware and technology,
is providing start-up phone companies in Europe with the latest Internet technology at
subsidized prices in a strategic offensive aimed at developing high-quality voice transmission over the Internet. If Ciscos Internet telephony effort proves successful, Europes largest local telephone companies would be induced to purchase significantly
larger amounts of Cisco equipment. And Cisco would be able to siphon revenues and
market share away from the European suppliers of traditional telephone equipment
Alcatel, Siemens, and Ericcson.
Another recent technological development allows telephone calls to be routed over
the Internet rather than through existing telephone lines; gateways can be installed
that link phone systems to the Internet. The result is much cheaper rates for international phone calls and significant new competition for the worlds telephone monopolies that have charged very hefty fees for handling cross-border calls.
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last-mile products and services. The last-mile market is attracting attention primarily
because it is viewed as such a potentially lucrative marketmonthly subscriptions and
fees for all four last-mile services could easily exceed $100 per month per household
and several hundred dollars more for small business customers.
Name recognition and advertising have recently emerged as important elements of
strategy in the just-starting battle for market share among last-mile providers. To gain
attention in the race to provide high-speed Internet access, Covada small Silicon
Valley company in the business of providing high-speed Internet access using DSL
technologylaunched a $40 million year-long coast-to-coast advertising campaign in
late 1999 to win a place in the ranks of the leading last-mile providers; at the time,
Covad had annual sales of only $20 million. Within weeks, other rivals launched advertising initiatives of their own.
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to perform millions of transactions and the number of Web sites requiring such software is relatively small (thus limiting the potential number of copies that can be sold).
The size of the transactions fee that a developer can charge is a function of competitionwhether competing software is available and whether the software developers
own product is decidedly superior to alternative products. Buyers may not object
strongly to a fee-per-transaction arrangement because it lowers their front-end costs
for the software and they end up paying only for services rendered. Inktomi is the
worlds leading search-technology provider, supplying software for conducting
searches, compiling directories of subject categories, doing comparison shopping, and
delivering Web pages faster. Inktomi sells its search engine software to companies
and Web portals, collecting a fee of about half-a-cent per Web page retrieved from
each query.
Recently, software providers have launched strategies to convince PC users to rent
the software they want by logging on to a Web site, connecting to a server with the
desired programs, and paying a user fee, thus avoiding having to buy software, install it
on their computers, and run applications from hard disks. The idea of software rental or
leasing has appeal to some business users because it allows them to outsource information technology (IT) and pay IT providers a fixed fee per PC for software use and support; this can prove cheaper than having their own IT departments perform all the
necessary functions in-house at costs that often overrun budgeted amounts. It can also appeal to home users who want to try out a new application or use certain applications only
occasionally; pay-per-use can also make good economic sense for game and entertainment programs and educational programs for children. For about $3, customers can log
on to Arepa.coms PlayNow site and run a program as often and as long as they like for
a 48-hour period.
MP3.com has shaken up the music industry with its software technology that allows Web users to compress a song in digital form, download it to their computer
drive, and then copy it to a recordable disk; its business model involves signing up
artists to record songs and albums, then selling downloadable single songs for 99 cents
and albums for $8. MP3 also distributes the songs of aspiring bands for free. MP3s
technology has the potential to cut into the market shares of the five largest studios
(which account for 80 percent of the music on radio and in stores) and to redefine how
music is produced and distributed.
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Other merchants use the mostly traditional model of purchasing goods from manufacturers and distributors, marketing them to buyers at their Web store, and filling orders from stocks held in inventory in their warehousetheir innovation is one of
simply using the Internet as the sales site instead of brick-and-mortar retail outlets. Still
other e-tailers operate only a Web site for marketing and selling, using contract manufacturers to make the products, and outsourcing the distribution and delivery functions
to warehousing and shipping specialists. Buy.com obtains the products it sells from
name-brand manufacturers and uses outsiders to stock and ship what it sells; all it does
is operate an online superstore consisting of some 30,000 items.
Once an e-tailer settles on a basic business model, it can use any of the following
strategy elements to undergird its competitive success:
On the Internet, shelf space is unlimited. The one-stop shopping strategy (like
that of Amazon.com, described above) has the appealing economics of helping spread
many one-time costs over a wide number of items and a larger customer base; it can
also help an online retailer establish itself as a household name and facilitate marketing
an ever-greater selection of goods to frequent visitors to the site. In contrast, some
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e-tailers such as eToys have adopted classic focus strategiesbuilding a Web site
aimed at a sharply defined target audience shopping for a particular product or product
category. Focusers seek to build customer loyalty based on attractively low prices, better value, wide selection, convenient service, nifty options, or some other differentiating attribute. They pay special attention to the details that will please their target
audience; eToys, for example, gives customers the option of having each selection giftwrapped separately and affixed with an appropriate To/From tag; it also has removed
its name from the outside of shipping cartons to lessen the clamor from children to
open arriving boxes immediately.
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illustration capsule
30
Source: Why Office Depot Loves the Net, Business Week, September 27, 1999, pp. EB-66, EB-68; and Fortune, November 8, 1999, p. 17.
buyers can shop anonymously with thousands of sellers, comparing prices and avoiding
the potential of price gouging from sellers when they learn of a buyers perhaps urgent
need for supplies. The convenience and efficiency of online buying and selling of natural gas has proved so popular that Altras e-market site has emerged as the leading
place to trade natural gas liquids, handling about $12 billion in trades, equal to a 40 percent market share. Altra makes its money by charging a small commission on each
trade.
Priceline.com creates an e-market for the buyers and sellers of airline tickets, hotel rooms, cars, mortgages, and other items. Airline ticket buyers submit a guaranteed
offer (typically the lowest price they think they can get away with) to Priceline. Priceline compares the bids to confidential discounted fares on unsold seats supplied to it by
participating airlines. If Priceline can buy a ticket from an airline and resell it to the
buyer, it executes the transaction.
Springstreet, a San Franciscobased company, provides a free listing of some 6
million apartment rentals available in the United States, along with quotes on furniture,
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illustration capsule
241
31
Source: The Wall Street Journal, September 3, 1999, pp. B1, B3; and Fortune, November 8, 1999, p. 117.
moving-truck rentals, and loan possibilities. It makes money by selling ads on its site,
and collecting transaction fees and commissions from about 35 partners linked to its
Web site, including truck rental companies, car insurance companies, and credit card
companies.
Visa, American Express, and MasterCard provide credit card services to
e-commerce firmsthe Internet represents a potentially huge money-making opportunity for credit card companies because credit cards are the standard mode of payment
for online business-to-consumer transactions. Exodus Communications, Dell Computer, and Micron Technology offer Web hosting services to business customers. DowJones (the owner of The Wall Street Journal), McGraw-Hill (the parent of Business
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Week and Standard & Poors), Quote.com, Briefing.com, Bloomberg, The Motley Fool,
and numerous other enterprises are providers of financial and business news to electronic brokerage firms, America Online, the Microsoft Network (MSN), and various
Web portals. Some information providers charge a fee for their service, while others do
not in hopes of building awareness and goodwill among users and attracting subscribers for their more complete print versions. Greenfield Online is an Internet marketing research firm that gathers data on the behavior of a proprietary panel of over 1
million Internet users across the world; using its database, it can perform surveys of either prospective or actual users of particular products for clients, help them identify
which of several ad alternatives communicates best, and guide clients in enhancing
their Web sites. Greenfields competitive advantage is being able to provide clients
with timely and inexpensive empirical information compared to traditional marketing
research firms that rely on telephone and mail surveys.
These examples are indicative of how companies are employing focus strategies
and zeroing in on particular market niches, pursuing competitive advantage based on
first-mover mastery of a particular technology, product superiority, unique product attributes, convenience and ease of use, speed, or more value for the money. As with
other e-commerce businesses, there is competitive value in being first to market with
an innovative product or service and trying to become the dominant market leader in a
particular niche.
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243
In the years to
come, companies
now on the fringes
of the Internet
economy will make
the use of Internet
technology such a
core part of their
business that the
distinction between
e-businesses and
traditional businesses will become
nonexistent.
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Adopting the Internet as an integral distribution channel for accessing new buyers and geographic marketsHowever, the struggle that many traditional companies are having with a combination click-and-mortar strategy is the nettlesome
issue of undermining their existing dealer networks if they initiate a big push for
online sales. The partnerships that many manufacturers have forged with wholesale and retail dealers are central to their marketing and sales strategies; a manufacturer that aggressively pursues online sales to consumers is signaling weaker
strategic commitment to its dealers and a willingness to cannibalize their sales and
growth potential in order to protect its own flanks. Needless to say, taking advantage of online sales opportunities without making traditional dealers angry can be
a very tricky road to negotiate.
Gathering real-time data on customer tastes and buying habits, doing real-time
market research, and using the results to respond more precisely to customer
needs and wantsThe behavior of Web surfers is a veritable gold mine of
information.
An innovative business modelOne of the factors that sets e-commerce enterprises apart from traditional businesses is their use of new and different business
models. This newness is only partly attributable to the creative nature of Internet
entrepreneurs. The fact is that Internet technology is conducive to doing business
in radically different and innovative waysthe rules of business in an Internet
world are different from traditional business rules.
The capability to adjust the companys business model and strategy quickly in response to changing conditions and emerging opportunitiesOperating at Internet speed is essential because the pace of technological and market change is so
fast. Rapidly evolving business models and strategies are thus the norm, not the
exception.
Focusing on a limited number of competencies and performing a relatively specialized number of value chain activitiesThe remaining value chain activities
can be delegated to outside specialists. Outsourcing enhances organizational speed
and flexibility, and it allows an enterprise to concentrate on what it can do best.
Hence, there is merit in outsourcing many activities from specialistsdesigning
and managing Web sites, manufacturing, warehousing, and shipping are prime
examples.
Staying on the cutting edge of technologyAt this stage in the development of
e-commerce, technological change is a dominant and pervasive driving force. No
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e-commerce enterprise can hope to succeed for long without moving first or early
to incorporate state-of-the-art technology. Technological expertise has to be developed and maintained internally, provided by suppliers, or accessed via new acquisitions or strategic partnerships.
Using innovative marketing techniques that are efficient in reaching the targeted
audience and effective in stimulating purchases or whatever other actions are
needed to produce a profitable revenue streamCompetition for eyeballs is already fierce and will grow even more so as the number of e-commerce enterprises
risesa 1999 study conducted by the University of Texas found that 2,000
e-commerce sites were being added every month. Marketing campaigns that just
result in page views alone are seldom sufficient; the best marketing test is the ratio at which page views are converted into revenues and profits (the look-to-buy
ratio). For example, in mid-1999 the traffic at Charles Schwabs Web site averaged
6 million page views per day and generated an estimated $4.7 million in revenues;
in contrast, Yahoo!s site traffic averaged 385 million page views daily but generated only about $1.7 million in revenues.
Engineering an electronic value chain that enables differentiation or lower costs
or better value for the moneyStriving for sustainable competitive advantage is
just as essential in e-commerce as in traditional markets. This means employing
strategies and value chain approaches that hold potential for low-cost leadership,
competitively valuable differentiating attributes, or a best-cost provider advantage. If a firm is positioning itself as a low-cost provider, then it must possess
cost advantages in those activities it performs, and it must outsource the remaining activities to low-cost specialists. If an e-commerce company is going to
differentiate itself on the basis of superior customer service, then it needs to concentrate on having an easy-to-use Web site, an array of functions and conveniences for customers to use at the Web site, adequate Web reps, and logistical
capabilities to deliver products in the time frame promised. If it is going to deliver more value for the money, then it must manage value chain activities in a
manner calculated to yield a cost advantage in providing customers with upscale
product attributes.
key points
The Internet is an integrated network of banks of servers and high-speed computers,
digital switches and routers, telecommunications equipment and lines, and individual
users computers. The major groups of e-commerce firms that comprise the supply side
of the Internet economy include the makers of specialized communications components and equipment, providers of communications services, suppliers of computer
components and computer hardware, developers of specialized software, and an assortment of e-commerce enterprisesbusiness-to-business merchants, business-toconsumer-merchants, media companies, and content providers.
Growing use of e-commerce technology produces important shifts in an industrys competitive forcesintensifying rivalry, posing greater entry threats, shifting
the balance of bargaining power both between sellers and their suppliers and between
sellers and their customers, and providing a new basis for all kinds of sellersupplier
and sellercustomer collaboration. The Internet and e-commerce further have the
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effects of altering industry value chains and affecting a companys resource strengths
and weaknesses. Technology, market conditions, and competitive pressures change
rapidly, often in unexpected directions. The e-commerce world is a high-velocity environment in which companies are compelled to move quickly and late-movers are
left in the dust.
The rush to capture the opportunities presented by the Internet economy is prompting entrepreneurial companies to employ innovative new business models for making
money and radically different approaches to competitive strategy. A crucial key to
e-commerce success is business model innovation. The business models and strategies
of various types of participants in the Internet economy vary rather significantly. The
manufacturers of Internet-related communications equipment, PC hardware, and PC
components use a fairly traditional business model: selling their manufactured products to customers at prices that are attractively above costs. Suppliers of communications services have business models based on profitably selling their services for a
feewhere the fee can be based on a flat rate per month or on volume of use. The
business model of many developers of e-commerce software involves making money
by investing resources (principally, the efforts of talented programmers) in designing
and developing specialized software, then marketing and selling the software to other
companies (e-commerce retailers, Internet service providers, content providers, and
others) at what they hope will prove to be a profitable price per copy. However, some
software developers that market transaction-based software have adopted a business
model whereby they sell their software based on a small fee for every transaction
rather than a set price per copy.
E-commerce retailers are utilizing perhaps the most revolutionary and unorthodox
business model. A number of e-tailers sell products at cost (or below) and make
money by selling advertising on the merchants Web site. Other merchants apply the
traditional model of purchasing goods from manufacturers and distributors, marketing
them to buyers at their Web store, and filling orders from stocks held in inventory in
their warehouse. Still others operate only a Web site for marketing and selling, outsourcing the distribution and delivery functions to warehousing and shipping specialists. Theres also a variety of business models in play among the different providers of
e-commerce services.
There are several important factors underlying the competitive success of
e-commerce enterprises: (1) use of an innovative business model, (2) the capability to
adjust the companys business model and strategy quickly in response to changing conditions and emerging opportunities, (3) focusing on a limited number of competencies
and performing a relatively specialized number of value chain activities, (4) staying on
the cutting edge of technology, (5) using innovative marketing techniques that are efficient in reaching the targeted audience and effective in stimulating purchases or
whatever other actions are needed to produce a profitable revenue stream, and (6) engineering an electronic value chain that enables differentiation or lower costs or better
value for the money.
suggested readings
Evans, Philip and Thomas S. Wurster. Getting Real about Virtual Commerce. Harvard Business Review 77, no. 6 (NovemberDecember 1999), pp. 8494.
Ghosh, Shikhar. Making Business Sense of the Internet. Harvard Business Review 76, no. 2
(MarchApril 1998), pp. 12635.
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Chapter 7
Griffith, David A., and Jonathan W. Palmer. Leveraging the Web for Corporate Success. Business Horizons 42, no. 1 (JanuaryFebruary 1999), pp. 310.
Gulati, Ranjay, and Jason Garino. Get the Right Mix of Bricks and Clicks. Harvard Business
Review 78, no. 3 (MayJune 2000), pp. 10714.
Hamel, Gary. Bringing Silicon Valley Inside. Harvard Business Review 77, no. 5 (SeptemberOctober 1999), pp. 7084.
Kaplan, Steven, and Mohanbir Sawhney. E-Hubs: The New B2B Marketplaces. Harvard
Business Review 78, no. 3 (MayJune, 2000), pp. 97103.
Rosenoer, Johnathan; Douglas Armstrong; and J. Russell Gates. The Clickable Corporation:
Successful Strategies for Capturing the Internet Advantage. New York: Free Press, 1999.
Tapscott, Don; David Ticoll; and Alex Lowy. Digital Capital: Harnessing the Power of Business Webs. Boston, MA: Harvard Business School Press, 2000.
Timmers, Paul. Business Models for Electronic Markets, Electronic Markets (www.
electronicmarkets.org/netacademy/publications.nsf/all_pk949) 8, no. 2 (July 1998).
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