CHAPTER 2 : THE REVIEW OF LITERATURE

2.1 Overview

Introduction technological progress of information & communication technologies

( ICTs) have led to speculation about frictionless economies in which transfer cost are
nearly zero, barriers to entry disappear & markets clear instantly. Some also think that
when producer sells directly to customers, existing intermediaries will be eliminated and
thus drastically reduce transaction cost. These lower production cost will encourage entry
of new business & thus increase competition & pressure to pass lower costs to consumer
as lower prices.

In general it is thought that e-business can significantly improve the efficiencies of

economics, enhance their competitiveness, improve allocation of resources and increase
long term growth. However since e-business is at such an early stage in it developments,
much of this thinking is based on speculation or anecdotal evidence.

While information on the internet interaction remains less personal than human to human
interaction, it has several characteristics that make it potentially more valuable in many
circumstances. First is the low of providing very detailed content. Secondly, the internet
allows for effective asynchronous communication, so thus information access can take
place at an time. Thirdly the internet allows considerable flexibility in dealing with
information with far greater interactivity & search capability than catalogues for instance.
This reduce the cost of customizing the service the service, example of which include
amazon.com, which make recommendation of likely books of interested tailored to the
characteristics of the customer. In this chapter we shall examine the impact of virtual
business development & the economy as a work
2.2 Lack of Internet Access

One major reason that contributes towards the slow growth of online retailing is Malaysia
is due to the lack of Internet access in general. According to the CIA, The World
Factbook, as per year 2002, Malaysia’s Internet users were 5.7 million with only 7
Internet Service Providers (ISPs). Based on this number, Malaysia was ranked as number
20 among other developing countries in the world. This shows that with a population of
over 23 million, Malaysia is far behind other countries in terms of numbers of Internet
users (CIA – The World Factbook, 2003).

As for October 2005, Malaysia’s Internet users hiked up to 10.04 million out of a total
population of 24 million with still only 7 Internet Service Providers (ISPs) operating.
Based on this number, Malaysia is ranked as number 17 among other developing
countries in the world. This shows that the concentration of Internet users in Malaysia
stands at 41.6% (CIA – The World Factbook, 2005).

Nevertheless, compared to other developing countries which have a larger scatter of

population and a higher degree of Internet user concentration, Malaysia can be
categorized as still falling back from the front runners. For example, the number of
population in the United States is 295.35 million while the number of Internet users’
stands at a staggering 185.55 million (over 60% of Internet user concentration). In
Germany, the concentration of Internet users stands at 57% with a total population of
over 80 million while Sweden has a total population of 9.04 million with 6.7 million of
its population being constant Internet users (CIA – The World Factbook, 2005).

2.3 The impact of electronic business on growth

Economists are debating whether information technology can explain the acceleration in
productivity growth. This debate is linked to the productivity paradox, which states the
productivity statistics do not seem to provide any evidence of impact of computer &
information technology. This was coined by professor Robert Solow (1988) who also
said that “we see the computer age everywhere except in productivity statistics”.

There main positions amongst economist to explain the productivity paradox 1) is

mismeasurment problem 2) nothing paradoxical and 3) observation of positive macro
economics effects need decades rather than the years as the economy is in the process of
transition. As work on this question progress, it is becoming clear that the paradox is
unlikely to have a single solution & the issue of whether /not computer significantly
increases productivity hasn’t been resolved.

A study by the Australian government – commonwealth of Australia, Australian

Electronic Commerce Board (2005) estimated e-business will increase GDP by 29
percentage (direct & indirect effect ) by the year 2007. it would also increase import &
export, improve terms of trade & increase real wages brooes & wah jai (2001) estimated
the macroeconomics impact of e- commerce in some developed countries ( US,UK,
Japan) & found that b2b e- commerce will raise GDP by 8% with half of this increase
expected within the next 10 years.

The largest impact of business to business virtual commerce is likely to be on small &
medium sized enterprises because many large business already have electronic data
interchange (EDI) system in place. The accessibility of the internet makes electronic
commerce a realistic possibility to SME’s & is likely to lead to its wider spread diffusion.

APEC was one of the first regional forums to put e-commerce high of the agenda. In their
blue print for action for electronic commerce, confirmed by the APEC ministerial
meeting in 1998, APEC minister recognized “ the enormous potential of electronic
commerce to expand business opportunities, reduce costs, increase efficiency ignore the
quality of ….. & facilitate the greater participation of small business in commerce, APEC
(2000) united states in current leading country in term of virtual business. It has shown
impressive …… & productivity growth has accelerated significantly, reaching an annual
rate of 2.5 % , which is significantly high than the rate of past two decades. Much of this
growth has been largely attributed to the use of information technology, in particular
electronic commerce.

The potencial size of b2b virtual business is vast. Jupiter communication (2002)
estimate that overall transactions of goods ( excluding services ) in the US should amount
to USD 11.5 trillion in 2003, of which 336 billion are traded electronically. By 2009
Jupiter expects the online components to represent 6.9 trillion out of 15.1 trillion

Online retail B2C e-commerce is projected to grow from 45 billion in 2000 or 1.5 percent
of total retail sales to 269 billion in 2005 or 7.8% or total retail sales projected for that
year, Dykema (2000). In addition to this consumers are relying increasingly more on on-
line to research a lot of purchases that are concluded over traditional ‘brick and mortar’
channels, especially for high value durable goods such as electronics automobiles. Such
purchases influenced by the internet are expected to grow from USD 13 billion in 2000 to
378 billion in 2005 or 10.8% of projected retail sales, Dykema (2000). This would bring
total retail sales affected by e-commerce to 18.5% of total retail sales.

A concept highly relevant to the analysis of electronic commerce is the function of

variable costs or the law of increasing returns. US economists Shapiro and Varian
(1999) noted that: Economists say that production of information good (including an
electronic transaction) involves high fixed costs but low marginal cost. The costs of
producing the first copy of information good may be substantial, but the cost of
producing or reproducing additional copies is negligible. Therefore, you must price our
goods according to consumer value and not according to your production costs. Since
people have widely different values for a particular piece of information (or transaction)
value based pricing leads naturally to differential pricing.

According to Hagel And Amstrong (1997), The law of increasing returns in information
economics involves three core features namely: high up front
2.4 Networks externalities

The distinctive nature of networked business is the operation of demand side economics
of scale associated with positive feedback loops known as network externalities. The
value of a network increases the move people are connected to it. The law of network
externalities holds that a ten-fold increase in size of the network leads to a hundred-fold
increase in its value, (Shapiro & Varian 1997).

2.5 impact on inventory costs.

In the B2B sectors virtual business transaction reduce costs by linking industries &
supplies electronically along the supply chain. It increases efficiency because greater
competition among supplies will reduce monopolistic profits and the number of
intermediaries. Also, a better flow of information reduces inventory costs.

Directly related to savings in time associated with procurement are savings in inventory
carrying costs: the faster we can order and deliver inputs the lesser need for a large
inventory. Each stage of the value chain holds considerable inventories. It is estimated
that for retailers the cost for carrying an inventory for a year is equivalent to at least 25%
what the receive in payment for the product, Taylor, JC (2000). Therefore two week
reduction in inventories represent a cost saving of 1% of sales. As most retailer work on
margins of 3-4% which is significant.

Dell computer has done this very successfully through for 8 days before being shipped
out directly to the customers, enjoying a 100% advantage in inventory turnover compared
to traditional competition, resulting in 10-15% price advantage.

Another factor in reducing the cost ogf inventory is improving the ability to forecast
demand move accurately as the electronic commerce merchant knows exactly what the
customers prefers & adjust their product line accordingly.
2.6 Impact on traction costs.

It is also widely known that electronic commerce reduce transaction cost, increases
efficiency, generates important changes in the production processes of business B2C
commerce has the potential to reduce transaction costs, increases access information to
consumers thus reducing search costs, and allows consumers to find the lowest cost for a
product/ services. B2C e-commerce also reduce s market entry barriers due to the lower
cost of setting up a website compare to setting up a brick mortar company.

According to Garicano & Kaplan (2000) transaction cost is classified as coordination

are related to the determination of prices & the details of a transaction. Coordination
costs are reduced when e-commerce allow access to direct information to get lower prices
at lower search costs, & improving the efficiency of the business process. (through
internet instead of conducting business by phone / fax)

Meanwhile motivation costs are related to the cost of information incompleteness (when
buyers & suppliers have incomplete information on whether the terms of agreement are
fulfilled.), and imperfect commitment (when buyers and sellers do not have the ability to
bind themselves.) e-commerce contributes to reducing these cost by standardizing
processes & allow electronic trading of products.

The must cost reduction related to B2B e-commerce will be in production costs.
Goldman sachs analysts estimated that US’s percentage saving in the cost of input that
results from migrating from traditional procurement systems to B2B e-commerce.

Commerce varies from 2 percent in for coal to 39 percent electronic components.

E- Commerce transactions aim to reduce the costs of procurement before, during and
after a transaction. At every stage, e- commerce automates processes that involve errors,
delay and costly personal costs through websites and electronic data interchanges.
Before the transaction, the internet lowers the cost of searching for suppliers or buyers.
Search costs may be significant relative to the value of the product. Sales representatives
that have spent lots of man- hours pn such a task as tracking product availability and
pricing could be relived with the usage of the internet, allowing them to concentrate on
account management and marketing strategy, Slade (2000).

E- Commerce can reduce the costs of dealing with counterparts regarding transaction
details. Transactions over the internet avoid many costs of travel, time spent on
communication, physical space for meetings and processing paper documents. After the
transactions electronic commerce allows companies to lower costs of communication,
monitoring contract performance or delivery confirmation.

The potential cost savings are substantial. Processing a purchase order manually can be
quite expensive & online transactions might easily reduce costs by factor of 5/10. British
Telecom estimated that moving external procurement to electronic commerce has
reduced it costs from 113 to 8 per transaction , Phillip & Meeka (2000), Master Card
estimated the cost of processing purchase orders has …….. from 125 to 40 with the time
involved cut from 4 days to 1.25 days, Alainz & Robert (1999) . A financial transaction
is 1.27% for teller, 0.27 % far an ATM & 0.01% for an online transaction , internet
economics (2005).

Despite the fact that maybe these estimated savings are greater than the average across
many industries, their aggregate impact will be enormous. In the business to business
domain there are also large potential cost savings from a better distribution process.
When firms automate purchasing from other companies some savings to firms comes in
the form of volume discounts, which …… send shifting of rents rather than aggregate
cost savings, borenstein and solner (2002)
2.7 Disintermediation

B2B e-commerce is likely to transform the traditional patterns of intermediation. Ronald

Ho Coase’s (1998) article introduced the concept of transaction costs which explains
that the cost of using the market were an important determined of whether firms should
carry out an economics activity within their organization or rely on purchases from other
firm. companies have an incentive to vertically integrade when the cost og using the
market is costly to management costs. Outsourcing is compelled by the buyers need for
flexibility & focus, suppliers economies of scale and scope & suppliers expertise.

2.8 Marketing Mix

In order to understand the efficiencies on development of virtual market place, the author
has selected Marketing Mix (4p’s) and discuss on the 4 different elements in the theory.

The marketing mix principles (also known as the 4 p’s.) are used by business as tools to
assist them in pursuing their objectives. The marketing mix principles are controllable
variables, which have to be carefully managed and must meet the needs of the defined
target group. The marketing mix is apart of the organizations planning process and
consists of analyzing the defined:

Chart 2.1 : The Marketing Mix Principle

Marketing mix aassesses the strength of a product or service within a particular market
segment and consumer group; also helps identify products with high growth potential.

Marketers keep trying to improve on the 4 P's Model, but its simplicity has kept it a
useful and durable marketing tool for product analysis. One of the most useful
refinements was proposed by B. H. Booms and Mary-Joe Bitner in Marketing Strategies
and Organisation Structures for Service Firms, published in 1981 by the American
Marketing Association.

The discussion about 4P’s marketing mix covers two aspects. On the one hand, marketing
mix activities are used to apply product or services into market and attract customers. Its
activities are matched with every single market in different way. Managers are focused
on country specification, customers’ demands and potential competitors. They analyse all
factors, which can influence on future product’s or services adaptation. Enterprise’s
success is measured by amount of selling as well as customer satisfaction and behaviour.
On the other hand, it is not obviously that companies need to change their marketing
strategies every time, when they want to expand their market to being more international.
From this point of view differentiation among marketing mix activities are useful for at
first gain new target group and meet their requirements. Subsequently, product or
services can be customized.

2.81 Product - A tangible object or an intangible service that is mass produced or

manufactured on a large scale with a specific volume of units. Intangible products are
often service based like the tourism industry & the hotel industry. Typical examples of a
mass produced tangible object are the motor car and the disposable razor. A less obvious
but ubiquitous mass produced service is a computer operating system.

2.82 Price – The price is the amount a customer pays for the product. It is determined
by a number of factors including market share, competition, material costs, product
identity and the customer's perceived value of the product. The business may increase or
decrease the price of product if other stores have the same product.
2.83 Place – Place represents the location where a product can be purchased. It is often
referred to as the distribution channel. It can include any physical store as well as virtual
stores on the Internet.

2.84 Promotion – Promotion represents all of the communications that a marketer may
use in the marketplace. Promotion has four distinct elements - advertising, public
relations, word of mouth and point of sale. A certain amount of crossover occurs when
promotion uses the four principal elements together, which is common in film promotion.
Advertising covers any communication that is paid for, from television and cinema
commercials, radio and Internet adverts through print media and billboards. One of the
most notable means of promotion today is the Promotional Product, as in useful items
distributed to targeted audiences with no obligation attached. This category has grown
each year for the past decade while most other forms have suffered. It is the only form of
advertising that targets all five senses and has the recipient thanking the giver. Public
relations are where the communication is not directly paid for and includes press releases,
sponsorship deals, exhibitions, conferences, seminars or trade fairs and events. Word of
mouth is any apparently informal communication about the product by ordinary
individuals, satisfied customers or people specifically engaged to create word of mouth
momentum. Sales staff often plays an important role in word of mouth and Public
Relations (see Product above).

In that article, they added three additional P's to the above four, bringing the total to
seven. These extra P's are:

2.85 People -- From consumers to marketers to the people who manufacture a product,
people exert a great impact on its marketplace success.

2.86 Process -- The procedures and mechanisms that consumers use to acquire
products(e.g., retail, Internet, direct-response or other buying systems) are essential to
bring the product to market. Examples: Retail, Internet, direct-response or other buying
systems.
2.87 Physical evidence -- The "real world" factors that influence buying behavior, such
as advertising and customers' prior experience with a brand or specific product will also
determine success in the marketplace.

Broadly defined, optimizing the marketing mix is the primary responsibility of

marketing. By offering the product with the right combination of the four Ps marketers
can improve their results and marketing effectiveness. Making small changes in the
marketing mix is typically considered to be a tactical change. Making large changes in
any of the four Ps can be considered strategic.

The term "Marketing Mix" however, does not imply that the 4P elements represent
options. They are not trade-offs but are fundamental marketing issues that always need to
be addressed. They are the fundamental actions that marketing requires whether
determined explicitly or by default.

2.9 Conclusion

In term of social welfare , there are number of reasons to believe that e-commerce will
increase social welfare. It will benefigt consumers by helping them enjoy lower price &
giving them more choices. The savings on search costs for buyers & sellers are likely to
be substantial. Increasing the number of product offering can also result in a first order of
welfare , Hoteling (1929), Salop (1979)

The key impediments in capturing the cost saving of e-commerce and the internet will not
involve technical issues but rather inertial forces what to organizational issues, the
important compatibility with legacy systems & non technological transaction cost. In
addition if communication across firms is to work well, each industry must undertake a
great deal of work to agree on specific information templates suited to that industry, and
as with most consensus standards processes, these are offer lengthy & political.
The finding of this thesis will highly base on the Marketing mix or 4P’s theory since it is
closely related into marketing of services or products in relation of introducing new
system and methods.

2.10 Summary

This chapter two contains theories being applied to find on the development of virtual
market development or known as online retailing. Marketing mix or commonly known as
4p’s theory will be applied in findings of these thesis. Since the author found that this
will be most appropriate theory, the finding of this research highly dependent on
marketing mix. Questions on research questions being also drafted based on the
marketing mix theory. In the next chapter it is clearly explained methods used to hold on
the research project by author. Also explained ways data’s collected to proof the research
topic.