1

E-C Strategies

• Value Realization

• Changing Industry Structures

• Conclusion

2

Value Creation vs. Value Realization

• Who captures the value? Buyer or the Seller?

• Example: ATM case in Banking

• Competitive advantage or necessity?

3

Buyer’s Strategies

3. Control Transaction

6. Induce commoditization

5. Cost transparency

1. Transaction cost reduction

2. Dictate price

4. One-to-one Negotiation

4

Bargaining Costs

Enforcement Costs

Decision Costs

Policing Costs

Reduction of Buyer’s

Transaction Costs

Search Costs

Information Costs

1. Buyer’s Transaction Costs

5

2. Buyer Dictates Price

• Priceline.com started this tactic

Its stock price is down

It abandoned grocery and gas businesses

But it created an idea

• Shop2gether.com for small businesses

• Can buyers band together like never before?

6

3. Buyer Controls Transactions

• FreeMarkets example

Select and train suppliers

Select lot size

Design bid event

Increase competitive intensity

• Reverse auction has become popular!

7

4. Return to 1-1 Negotiation

- Bargaining was common before the industrial era.

- Mass markets led to fixed-price trades.

- Cost of negotiation was deemed too high!

- That may be changing, thanks to agent technology.

- Automate part or all of the negotiation process?

8

5. Cost transparency

The Internet equips the buyer with lot more information!

Why is cost transparency bad for seller?

-

-

-

9

6. Commoditization

– Buyer posts product requirements on the web

– Two sellers meet requirements by modifying existing products

– Buyer sees no difference between vendors

– Buyer wants to pick the lower cost vendor

– So, customization may lead to commoditization!

10

Supplier’s Strategies

3. Customer retention

6. Reconfigure channel

5. Value Proposition

1. Pricing alternatives

2. Buyer’s total costs

4. Lock-in strategies

11

1. Pricing Alternatives

Differentiated pricing • Not uniform pricing• FordDirect.com to practice regional pricing

Dynamic Pricing• Price changes with time• Airline industry as the prime example

12

Workflow Cost

Fulfillment Cost

Carrying Cost

Product Cost

Transaction Cost

Customer incurs

multiple costs

2. Consider Buyer’s Total Costs

13

Increasing customer retention by 5% increases profit by more than 25% (Bain & Company)!

How can we retain customers on the Web?

• What are the drivers? (e.g., on-time delivery, product performance, and service)

• How can the Web help?

• How may the Web hurt?

3. Customer Retention

14

4. Seller’s Lock-in StrategiesPrinciples:

- Use extranets to create lock-in

- Create custom content

Customer Benefits:

- Reduce cycle time

- Reduce errors

- Increase control

Examples:

- Dell’s Premier Page

- OfficeDepot.com

15

5. Value Proposition

• Redefine product by adding new value

• Create new product combination thru bundling and versioning

• Reduce buyer’s risks

16

6. Reconfigure Channel

• Provide on-line customer service

• Supplant intermediaries

• Find new customers

• Generate new revenue

17

E-C Strategies

• Value Realization

• Changing Industry Structures

• Conclusion

18

Industrial Revolution:

• Mass Production

• Economy of Scale

Transportation Revolution:

• Rail & Road

• Air and Sea

Market Revolution:

• Geographical Reach

• Trade Regulations

Origins of Current Distribution Systems

Right products at right place at the

right time

19

The New Landscape of Distribution

Distribution Functions

– Reassortment and sorting

– Routinization

– Searching

Internet Impact

– Death of distance

– Homogenization of time

– Irrelevance of location

20

Distribution Functions

• Reassortment and sorting Producers: Few goods of large quantities Customers: Many goods of small quantities

• Routinization Standardize size, delivery, payment Automate ordering

• Searching Search buyers for seller Search sellers for buyer

21

Internet Distribution Grid

Reassortment and sorting Routinization Searching

Death of distance

Homogenization of time

Irrelevance of location

Music Maker: Customer

selects songs

Product Catalog On

Web

Direct selling to customers

Sell anytime on the Web

Supplier/Buyer location not

limited Bidding on the

Web

Search from

anywhere

Routine updates vs. Web access

Job sites with links to

companies

22

Reach: How many can you reach?

Ric

hnes

s (B

andw

idth

, cu

stom

izat

ion,

inte

ract

ivity

)Changing Economics of Information

23

Hierarchy: Rich information exchange, rigid

Hyperarchy: Amorphous, permeable boundaries, alliances

Changing Organization Structure

24

Old Model

Browser

Search Engine

Investment Database

Fund Manager

Your Bank Competitor

Back officeTellerCustomer

New Model

Transformation of Retail Banking

25

Sellers Buyers

Buyers

Buyers

Buyers

Sellers

Sellers

Sellers

Current Value Chain

Shrinking It

New Intermediaries

Virtual Marketplace

Transforming the Value Chain

26

E-C Strategies

• Value Realization

• Changing Industry Structures

• Conclusion

27

What did we learn?

• E-Commerce may begin with buying and selling. But its not just e-procurement or e-marketing. It changes customer expectations, encourages new entrants, and changes the dynamics of competition.

• E-Commerce leads to the reconfiguration of the industry value chain requiring strategic rethinking. While the dot-coms struggle to find their strategic bearing, incumbents face managing Web led changes.

• Ultimately, E-Commerce may change industry structure. Retailers may use the Internet as a channel. Exchanges may redefine buyer-supplier relations. Buyers may attempt to grab more power. Supply chains may or may not support the e-commerce strategy.

28

What challenges lie ahead?

Dot-coms Incumbents

Strategic

Sales/Marketing

Supply chain

29

Conclusion

Create and sustain the advantage!

Value Value CreationCreation

Value Value RealizatioRealizatio

nn

CompetitivCompetitive e AdvantageAdvantage

+

30

• What is the value proposition?

• How much can we capture?

• Can we execute the strategy?

• Can we sustain the advantage?

Conclusion: Four Questions