E-commerce

business. technology. society.

Chapter 1
The Revolution Is Just
Beginning
E-commerce Developments and Themes—2006

More and more people and businesses are using the
Internet to conduct commerce

The e-commerce channel is deepening as more
products and services come online

Broadband and wireless Internet access are growing

E-commerce business models are being refined to
achieve higher levels of profitability
 E-commerce Defined

E-commerce involves digitally enabled
commercial transactions between and among
organizations and individuals

Digitally enabled transactions include all
transactions mediated by digital technology

Commercial transactions involve the exchange
of value across organizational or individual
boundaries in return for products or services
 E-commerce vs. E-business

We use the term e-business to refer
primarily to the digital enablement of
transactions and processes within a firm,
involving information systems under the
control of the firm

E-business does not include commercial
transactions involving an exchange of value
across organizational boundaries
 Why Study E-commerce?

E-commerce technology is different and more
powerful than any of the other technologies that we
have seen in the past century.

E-commerce has challenged much traditional
business thinking

Information asymmetry

From mass marketing to customization

E-commerce has a number of unique features that
help explain why we have so much interest in e-
commerce
Seven Unique Features of E-commerce Technology
and Their Significance


Is ubiquitous (available everywhere, all the time)

Offers global reach (across cultural/national boundaries)

Operates according to universal standards (lowers market entry
for merchants and search costs for consumers)

Provides information richness (more powerful selling
environment)

Is interactive (can simulate face-to-face experience, but on a
global scale)

Increases information density (amount and quality of information
available to all market participants)

Permits personalization/customization
Seven Unique Feature of E-Commerce
Technology
 Ubiquity
 Alters industry structure by creating new marketing
channels and expanding size of overall market
 Creates new efficiencies in industry operations and
lowers cost of firms’ sales operations
 Enables new differentiation strategies
 Global Reach
 Changes industry structure by lowering barriers to
entry, but greatly expands market at the same time
 Lowers cost of industry and firm operations through
production and sales efficiencies
 Enables competition on global scale
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 Seven Unique Features of E-Commerce
Technology
 Universal Standards
 Changes industry structure by lowering barriers to entry
and intensifying competition within an industry
 Lowers costs of industry and firm operations by
lowering computing and communications costs
 Enables broad-scope strategies
 Richness
 Alters industry structure by reducing strength of
powerful distribution channels
 Change industry and firm operations costs by lessening
reliance on sales force
 Enhances post-sale support strategies
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 Seven Unique Features of E-Commerce
Technology
 Interactivity
 Alters industry structure by reducing threat of
substitutes through enhanced customization
 Reduces industry and firm costs by lessening reliance
on sales force
 Enable differentiation strategies
 Personalization/Customization
 Alters industry structure by reducing threats of
substitutes, raising barriers to entry
 Reduces value chain costs in industry and firm by
lessening reliance on sales forces
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 Seven Unique Features of E-
Commerce Technology

 Information Density
 Changes industry structure by weakening
powerful sales channels, shifting bargaining
power to consumer
 Reduces industry and firm operations costs by
lowering costs of obtaining, processing, and
distributing information about suppliers and
consumers

11
 Types of E-commerce
Classified by nature of market relationship

Business-to-Consumer (B2C)

Amazon.com

Business-to-Business (B2B)

Alibaba.com

Consumer-to-Consumer (C2C)

Ebay.com

Classified by type of technology used


Peer-to-Peer (P2P)

Mobile commerce (M-commerce)
Potential Limitations on the Growth of B2C
E-commerce

Expensive technology

Complex software interface

Sophisticated skill set

Persistent cultural attraction of physical
markets and traditional shopping experiences

Persistent global inequality limiting access to
telephones and computers
Assessing E-commerce: Successes, Surprises and
Failures


E-commerce has been a stunning technological
success

Early years of e-commerce have been a mixed
success from a business perspective

Many visions developed during early days of e-
commerce not fulfilled
 Predictions for the Future


Technology of e-commerce will continue to propagate
through all commercial activity

E-commerce prices will rise to cover the real cost of doing
business on the Web and pay investors reasonable rate of
return

E-commerce margins and profits will rise to levels more
typical of all retailers

In B2C and B2B, traditional Fortune 500 companies will
play growing and dominant role

Number of successful pure online companies will decline
and most successful e-commerce firms will adopt mixed
“clicks and bricks” strategies

Growth of regulatory activity worldwide
 Amazon @ 15


Story of Amazon in many ways mirrors story of e-
commerce itself

Jeff Bezos, VP, D.E SHAW

Started in July 1995

Process of continuous change and exploration for profits

What are the reasons why people shop at Amazon?

Why wasn’t it profitable from Day 1?

When did it become profitable?

How many of you have used Amazon recently?

What was your experience?

Do you think Amazon will remain profitable?
Chapter 2 E-commerce Models
 Components of e-commerce
Business Models
BusinessModel
Business Model
--Customer
Customervalue
value
--Scope
Scope
--Price
Price
--Resources
Resources
--Capabilities
Capabilities
--Implementations
Implementations

Internet
Internet Performance
Performance

Environment
Environment
 E-Commerce Business Models
 Business model
 a set of planned activities designed to

result in a profit in a marketplace

 E-commerce business model
 a business model that aims to use and

leverage the unique qualities of the

Internet and the World Wide Web.

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Eight Key Ingredients of a Business Model

Business Model
Key Questions
Components
Value Proposition Why should the customer buy from you?
Revenue model How will you earn money?
Market opportunity What marketspace do you intent to serve, and what is its size?
Competitive environment Who else occupies your intended marketspace?
Competitive advantage What special advantages does your firm bring to the marketspace?
Market strategy How do you plan to promote your products to attract customer?
Organizational What types of organizational structures within the firm are
development necessary to carry out the business plan?

What kinds of experiences and background are important for

Management team
the company’s leaders to have?
 Value Position
 Defines how a company’s product or
service fulfills the needs of customers.
 Questions
 Why will customers choose to do business with
your firm instead of another company?
 What will your firm provide that other firms do
not and cannot?

21
 Revenue Model
 Describes how the firm will earn revenue,
produce profits, and produce a superior
return on invested capital.
 E-commerce revenue models include:
 advertising model – Yahoo.com
 subscription model –wsj.com
 transaction fee model –ebay.com
 sales model – Doubleclick.net
 affiliate model – Mypoints.com
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 Revenue Model
 Advertising revenue model
 a company provides a forum for advertisements
and receives fees from advertisers (Yahoo)
 Subscription revenue model
 a company offers it users content or services
and charges a subscription fee for access to
some or all of it offerings (Consumer Reports
or Wall Street Journal)

23
 Revenue Model
 Transaction fee revenue model
 a company receives a fee for enabling or
executing a transaction (eBay or E-Trade)
 Sales revenue model
 a company derives revenue by selling goods,
information, or services (Amazon or
DoubleClick)
 Affiliate revenue model
 a company steers business to an affiliate and
receives a referral fee or percentage of the
revenue from any resulting sales (MyPoints)
24
 Market Opportunity
 Market opportunity
 refers to the company’s intended marketspace
and the overall potential financial opportunities
available to the firm in that market space
 defined by the revenue potential in each of the
market niches where you hope to compete
 Marketspace
 the area of actual or potential commercial value
in which a company intends to operate

25
 Competitive Environment
 Refers to the other companies operating in
the same marketplace selling similar
products
 Influenced by:
 how many competitors are active
 how large are their operations
 the market share of each competitor
 how profitable these firms are
 how they price their products
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 Competitive Advantage
 Achieved by a firm when it can produce a
superior product and/or bring the product to
market at a lower price than most, or all, of
its competitors
 Achieved because a firm has been able to
obtain differential access to the factors of
production that are denied their competitors
-- at least in the short term

27
 Competitive Advantage
 Asymmetry
 exists whenever one participant in a market has
more resources than other participants
 First mover advantage
 a competitive market advantage for a firm that
results from being the first into a marketplace
with a serviceable product or service

28
 Competitive Advantage
 Unfair competitive advantage
 occurs when one firm develops an advantage based

on a factor that other firms cannot purchase

 Brand name

 Perfect Market
 a market in which there are no competitive

advantages or asymmetries because all firms have

equal access to all the factors of production
 when a company uses its competitive advantage to

achieve more advantage in surrounding markets

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 Market Strategy
 The plan you put together that details
exactly how you intend to enter a new
market and attract new customers
 Best business concepts will fail if not
properly marketed to potential customers

30
 Organizational Development
 Describes how the company will organize
the work that needs to be accomplished
 Work is typically divided into functional
departments
 Move from generalists to specialists as the
company grows

31
 Management Team
 Employees of the company responsible for
making the business model work
 Strong management team gives instant
credibility to outside investors
 A strong management team may not be able
to salvage a weak business model
 Should be able to change the model and
redefine the business as it becomes
necessary
32
Major Business-to-Consumer (B2C)
Business Models

33
Major Business-to-Consumer (B2C)
Business Models

34
 Major Business-to-Consumer (B2C)
Business Models
 Portal
 offers powerful search tools plus an integrated
package of content and services
 typically utilizes a combines
subscription/advertising revenues/transaction fee
model
 may be general or specialize (vortal)

35
 Major Business-to-Consumer (B2C)
Business Models
 E-tailer
 online version of traditional retailer
 includes
 virtual merchants (online retail store only)
 clicks and mortar e-tailers (online distribution
channel for a company that also has physical stores)
 online malls (online version of mall)
 Manufacturers selling directly over the Web

36
 Major Business-to-Consumer (B2C)
Business Models
 Content Provider
 information and entertainment companies that
provide digital content over the Web
 typically utilizes an advertising, subscription, or
affiliate referral fee revenue model
 Transaction Broker
 processes online sales transactions
 typically utilizes a transactions feel revenue
model
37
 Major Business-to-Consumer (B2C)
Business Models
 Market Creator
 uses Internet technology to create markets that
bring buyers and sellers together
 typically utilizes a transaction fee revenue
model
 E.g. Auction
 English auction
 Dutch auction
 Sealed-bid auction
 Double auction

38
 English Auctions

The bidders announce their bids until no
higher bid is forthcoming

‘going . . . going . . . gone!’

Ascending-price auctions

Typically set a closing time in advance

Minimum bid plus a reserve price

Early buyout price
 Dutch Auctions

Bidding starts at a high price and drops until a
bidder accepts the price

Descending price auctions
 Sealed-Bid Auctions

Bidders submit their bids independently and
are usually prohibited from sharing
information with each other

First-price sealed-bid auction

The winner pays his amount

Second-price sealed-bid auction

The winner pays one increment over the second-
highest bid received
 Double Auctions

Buyers and sellers submit bids to an auctioneer

The auctioneer matches the seller’s offers to
the buyer’s offer

E.g. New York Stock Exchange
 Major Business-to-Consumer (B2C)
Business Models
 Service Provider
 offers services online
 Community Provider
 provides an online community of like-minded
individuals for networking and information
sharing
 revenue is generated by referral fee,
advertising, and subscription

43
 e-Business Models


Dynamic Pricing Models

Name-Your-Price Model

Comparison-Pricing Model

Demand-Sensitive Pricing Model
 Name-Your-Price Model

Allows customers to state the price they are
willing to pay

Priceline.com

Demand collect systems

Use shopping bot that takes customer’s bid to the
Priceline partners to see whether they will accept the
prices for the requested products/services

Intelligent agents
 Comparison-Pricing Model

Allows customers to poll a variety of
merchants and find a desired product/service at
the lowest price

Mysimon.com

Uses intelligent-agent technology

Offers discussion groups, customer ratings, and
comparison shopping
 Demand-Sensitive Pricing Model

Group purchasing

Individual buyers to shop in large groups to obtain group
discount

The more people who buy a product in a single purchase, the lower
the cost per person becomes

Mercata.com, mobshop.com, demandline.com

How it works

Buyers create requests for quotes (RFQs)

Purchasing manager monitors all aggregated RFQs

Manager negotiates through suppliers.
Major Business-to-Business (B2B)
Business Models

48
 Major Business-to-Business (B2B)
Business Models
 B2B Hub
 also known as marketplace/exchange
 electronic marketplace where suppliers and
commercial purchasers can conduct
transactions
 may be a general (horizontal marketplace) or
specialized (vertical marketplace)
 E-distributor
 supplies products directly to individual
businesses
49
 Major Business-to-Business (B2B)
Business Models
 B2B Service Provider
 sells business services to other firms
 Matchmaker
 links businesses together
 charges transaction or usage fees
 Infomediary
 gather information and sells it to businesses

50
 Case Studies

Should we integrate our Internet business with
our traditional business or should we keep the
two separate?
 Seamless Model: Office Depot

Two reasons

Existing catalog-sales support an Internet store

Existing information systems made it easy to
coordinate online stores and physical stores

Customers’ Benefit

Make shopping simple and convenient

Company’s Benefit

Cheaper to reach customers
 Seamless Model: Office Depot

Added Value

Each customer has its own specialized view of the
OfficeDepot.com site

authorization

Provide additional discount for larger customers if
they place order on online

Actually increased the traffic at its physical
outlet
 Joint Venture Model: KB Toy

Reasons

Don’t have much experience with catalog retailing

Tend to focus exclusively on their physical stores

KB Toy and Kbkids.com

KB Toy joined with BrainPlay.com to create
Kbkids.com

$80 million
 Joint Venture Model: KB Toy

Operation

Separation

Kbkids headquarter: Denver

KB Toy headquarter: MA

Integration

Share brand: promotion

Customer service

Purchasing function
 Virtual Partnership

Rite Aid and Drugstore.com

Customer benefit

Customers can pick up their Drugstore.com
prescriptions at their local Rite Aid
 A Spectrum of Choices

Model Brand Management Operation

Seamless Fully integrated Fully integrated Fully integrated

Mostly Slightly Moderately

Joint Venture
integrated integrated integrated

Slightly Moderately
Partnership Separate
integrated integrated