1 Prentice Hall, 2002 Chapter 2 The Digital Economy.

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Chapter 2

The Digital Economy

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Learning Objectives

Describe the major characteristics of the digital economyCompare marketplaces with marketspacesDescribe the nature of competition in marketspacesDescribe some economic rules of the digital economy

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Learning Objectives (cont.)

Describe the impacts of the digital economy on trading and intermediariesDescribe the impacts of the digital economy on business processes and functional areas in organizationsUnderstand the role of m-commerce in the digital economy

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Opening Case: Rosenbluth International

Threats to international travel agency industry

Online booking by airlines, hotels, etc.

Commission caps for agents reduced

Online companies penetrating corporate market as well as individual travelers

Competition among major players is rebate-based

Innovative business models (i.e., name your own price, auctions) embraced by companies in the industry

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Rosenbluth International (cont.)

SolutionBecame a purely corporate travel agencyRebate customers with entire commissionStrategic Information Systems

DACODA: optimizes corporation's travel savingsE-messaging services: reservation requests and results via e-mailE-ticket tracking: deals with and reduces number of unused e-tickets

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Rosenbluth International (cont.)

Strategic Information SystemsRes-Monitor: low-fare search system, finds additional savings for 1 of 4 reservationsGlobal distribution network: enables instant access to traveler’s itinerary, travel preferences, corporate travel policy

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Rosenbluth International (cont.)

Strategic Information Systems (cont.)Custom-Res:ensures policy compliance, consistent service, accurate reservationsIntelliCenters: innovative telecommunications technology was to manage multiple accountsNetwork Operations Center (NOC): monitors weather, current events, air traffic

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The Digital Economy

Complete change of business models and strategies for success in digital economyWeb-based IT and EC facilitate competitive advantageGlobal competition: price, quality, service

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The Digital Economy (cont.)

Extensive networked computing infrastructure is expensiveWeb-based applications provide customer service, online selling, and procurement supportInnovative systems must be patented

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Digital Economy Defined

Digital communication networks (Internet, intranets)Computers

SoftwareRelated information technologies

Also Known As: Internet economy, new economy, Web economy

Economy based largely on digital technologies

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Digital Economy Defined (cont.)

Economic revolutionUnprecedented economic growth (USA)

IT growth more than doubles that of overall economyProvided over ¼ of total economic growth

Longest period of uninterrupted economic expansion in history

High-paying jobsVery low to negative unemployment in IT industry

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Marketspaces vs. Marketplaces

Marketplace: 3 main objectivesMatch buyers and sellersFacilitate exchange of information, goods, services, payments (transactions)Provide institutional infrastructure enabling efficient functioning of the market

EC in the marketplaceIncreased efficienciesDecreased cost of executing business functions

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Marketspaces vs. Marketplaces (cont.)

Marketspaces: electronic marketplaces (especially Internet-based)

Changed processes used in trading and supply chainsChanges driven by IT

Increased effectivenessLower transaction and distribution costsMore efficient markets

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Marketspaces vs. Marketplaces (cont.)

Doing business in the real world

Process raw materialsDistribute raw materials

Doing business with EC

Gathering informationSelecting informationSynthesizing informationDistributing information

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Components ofDigital Ecosystems

Digital productsInformation and entertainment products

Paper-based products: books, newspapers, magazinesProduct information: catalogs, training manualsGraphics: photographs, maps, calendarsVideo: movies, TV programsSoftware: programs, games, development tools

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Components of Digital Ecosystems (cont.)

Symbols, tokens, iconsTickets and reservations: airline, concertFinancial instruments: checks, credit cards, electronic currencies

Processes and servicesGovernment services: forms, benefits, licensesE-messaging: letters, faxesBusiness processes: ordering, inventoryingAuctions: bidding, barteringOthers

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Components of Digital Ecosystems (cont.)

ConsumersSearch for detailed informationCompare products/pricesBid or negotiate prices

SellersInnumerable products and services availableWeb sites, marketplaces

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Components of Digital Ecosystems (cont.)

IntermediariesCreate and manage online marketsMatch buyers and sellersProvide infrastructure servicesAid transactions

Support services: address implementation issues

Certification and trust servicesKnowledge providers

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Components of Digital Ecosystems (cont.)

Infrastructure companies: provide hardware, software, EC supportContent creators: create and maintain Web sitesBusiness partners: Internet collaboration usually along the supply chain

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Components of Digital Ecosystems (cont.)

Electronic marketplacesExchanges—many-to-manySell-side—one-seller-many-buyersBuy-side—one-buyer-many-sellersPublic—open to allPrivate—open to invited traders only

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Competition in Marketspaces

Competition in the Internet ecosystem (business model of the online economy)

Inclusive with low barriers to entrySelf-organizingOld rules may no longer apply

Competition is tenseLower buyers’ search costSpeedy comparisonsDifferentiation and personalization

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Competition in Marketspaces (cont.)

Consumers like differentiation and personalization

Lower pricesCustomer service

Size of company no longer significantGeographical location insignificantLanguage barriers are being removedDigital products do not have normal wear and tear

Figure 2-1

Porter’s Competitive Analysis

Source: Reprinted with the permission of the Free Press, a Division of Simon & Schuster, Inc. , from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter, p. 67. Copyright © 1985, 1998 by Michael E. Porter.

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Figure 2-2Cost Curve of Regular and Digital Products

Cost curvesBundling products/servicesBuying vs. renting

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Issues and Success Factors (cont.)

Critical Mass of Buyers & SellersHigh fixed costs of deploying ECMarket efficiencyDevelopment of strong, fair competition

Quality uncertainty and quality assurance

Provide free samplesReturn if not satisfied

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Issues and Success Factors (cont.)

Pricing on the InternetDetermines: sales volume, market share, product profitabilityPrice discrimination: different prices to different buyers through customization of productsProduct differentiation: price based on value to the customer, not cost of production

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Issues and Success Factors (cont.)

Online vs. off-line pricingClick-and-mortar—available online and off-lineBrokerage houses—50% commission discount for online trades

Economic Impacts of ECProduction function—can substitute capital for labor for same quantity of productionLower the labor needed, higher required investmentsEC lowers amount of labor/capital needed to produce the product

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Figure 2-3Economic Effects of EC

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Issues and Success Factors (cont.)

Contributors to E-market successProduct characteristics

Type: digitized, non-digitizedPriceStandards and product information available allows sale of most items: cars, computers, groceries

Industry characteristicsBrokers currently necessaryIntelligent systems may replace brokers

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Issues and Success Factors (cont.)

Seller characteristicsConsumers find sellers with the lowest pricesLow-volume, higher-profit-margin transactions

Consumer characteristicsImpulse buyersPatient buyersAnalytical buyers

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Impacts on Trading Processesand Intermediaries

Industry structureConsumers are aware of competitor’s prices through searches; intermediaries become obsoleteDigitization of more products; reduction in shipping costsSeller and customer activities converge in 1 place

Marketing Order processingDistribution PaymentsProduct development

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Impacts on Trading Processesand Intermediaries (cont.)

Industry structure (cont.)Roles and value of intermediaries in e-markets

Search costs: brokers with access to customer preferences can predict demand for productsLack of privacy: anonymity of buyer and/or sellerIncomplete information: gathers product information from many sourcesContracting riskPricing inefficiencies

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Impacts on Trading Processesand Intermediaries (cont.)

Industry structure (cont.)Disintermediation and reintermediation

Disintermediaries: match and provide informationReintermediatiaries: provide value-added services (consulting)

Syndication: sale of the same good to many customers, who integrate it with other offerings and redistribute it (virtual stock brokers)

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Impacts on Trading Processesand Intermediaries (cont.)

Syndication supply chainSyndication of information is critical to the success of ECDistributors provide free information to consumers, and package and sell the same informationContent creators sell the same information to many syndicators and distributors

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Figure 2-5The Supply Chain of Syndication

Figure 2-6The Analysis Framework

Insert Fig 2-6 here

Source: Block and Segev (1996). Reproduced with permission of the authors.

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Impacts on Trading Processesand Intermediaries (cont.)

Potential Winners and Losers in ECWinners

Internet access providersDiversified portal service providersEC software companiesProprietary network ownersOthers

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Impacts on Trading Processesand Intermediaries (cont.)

Winners in ECInternet access providersDiversified portal service providersEC software companiesProprietary network ownersOthers

Losers in EC Wholesalers (particularly small ones)BrokersSalespeopleNondifferentiated manufacturers

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Impact on Business Processesand Organizations

Improving direct marketingProduct promotionNew sales channelsDirect savingsReduced cycle timeCustomer serviceBrand or corporate image

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Impact on Business Processesand Organizations (cont.)

Other marketing-related impactsCustomization AdvertisingOrdering systemsMarkets

Transforming organizationsTechnology and organization learningChanging nature of work

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Impact on Business Processesand Organizations (cont.)

Redefining organizationsNew product capabilitiesNew business models

Impacts on manufacturingBuild-to-order

Impact on finance and accountingHuman resource management, training, and education

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Mobile Commerce

Online stock tradingOnline bankingMicropaymentsOnline gambling

Ordering and serviceOnline auctionsOthers

Applications of M-commerce

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Mobile Commerce (cont.)

A successful vendorI-mode customers can

Receive train timetableDiscount coupons for shopping and restaurantsPurchase music onlineSend or receive photosPurchase airline ticketsLocate information about books and buy them

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Managerial Issues

New business modelsCompetition in the digital economyHow to transform to digital economyDisintermediation and reintermediationGoing globalOrganizational changesAlliances