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e-business basics - Moore's Law

Moores Law is based on an observation originally made by Gordon Moore, a co-founder of Intel. He noted that the number of transistors that could be fitted on an integrated circuit doubled approximately every two years. More recently, this phenomenon has been observed in a number of fields related to e-Commerce that, The power (or capacity, or speed) of the following that can be bought for a given sum doubles approximately every 18 months: 1. 2. 3. 4. Computer Processor speed Telecommunications bandwidth Computer memory Hard disk storage

As with Metcalfes Law, this is really a rule of thumb and the exact period of time is much less important than the general principle, which is that many of the core technologies that form the bedrock of the Internet and of e-Commerce, continue to advance at a steady rate. Firms that sell products and services that rely on on-line devices should consider the speed and capacity available for on-line services not just as they are now, but as they will be in what is quite a short time span. This would provide useful input into a PEST analysis or similar, so that, for example an online retailer ought to be considering the capacity of mobile telephones to carry out Ebusiness transactions. Furthermore, this tends to be a self-fulfilling prophecy of device obsolescence that computers and other related devices become obsolete quickly as they are unable to keep up with applications. Author: Steve Whiteley, January 2007

e-business basics - Metcalfe's Law and the Networked Economy One key determinant of the success of networks is the umber of users connected to the network. Originally proposed as a rule of thumb to explain the value of a telecommunications network; Metcalfe's law states that the value of a telecommunications network is proportional to the square of the number of users of the system (n2). First formulated by Robert Metcalfe in regard to Ethernet, Metcalfe's law explains many of the network effects of communication technologies and networks such as the Internet and World Wide Web. The law has often been illustrated using the example of fax machines: A single fax machine is useless, but the value of every fax machine increases with the total number of fax machines in the network, because the total number of people with whom each user may send and receive documents increases. Error: Reference source not found This diagram from Wikipedia shows how the number of possible connections grows rapidly as more users adopt a network. Others have suggested that the formula significantly underestimates the value of adding new users to a network and have refined Metcalfes Law. Nevertheless, it is the principle that is important, that on-line networks and communities derive more value, the more users they have. This principle also helps to give an economic reason why there can be a benefit in one technology vendor or standard dominating a marketplace because otherwise, the potential users can be split across multiple incompatible platforms. Social networking and peer-to-peer systems such as eBay, You tube and MSN derive considerable benefit from being more or less the de facto standard for their particular online service. This represents a direct challenge to certain principles of economics with regard to monopoly; the benefits of users adopting one standard technology may far outweigh any disadvantages that may accrue from the monopoly power of the firm that controls the standard. In fact, these benefits might justify the existence of a natural monopoly. Author: Steve Whiteley, January 2007

e-business basics -Interactivity

EBusiness offers the possibility of creating interactive services between the customer and the provider of the product or service, that is to say by a two-way flow of information. Ries & Ries (2002) describe a progression over time of the reach of the mass media. Books multiplied the number of people an individual could reach; Periodicals added the element of news, radio added the human voice, and television added motion; The Internet is the first mass medium to add interactivity. We believe that history will rank the Internet as the greatest of all media. And the reason is simple. The Internet is the only mass-communications medium that allows interactivity. Ries & Ries (2002) p.1281. Interactivity helps create a feeling that the retailer cares about or knows the individual customer, something that is very difficult to do in high street retailing, where the customer is usually a stranger to the sales assistant. Interactivity helps to make the experience more entertaining and compelling, some exampled follow: The website for ordering Smart cars: as the user selects the bodywork and interior colours, the picture on the screen changes. Some clothing sites show clothing on a model that helps the client imagine the overall look of their purchases together on a virtual model. Complementary products and services, or alternatives, can be offered at the point of sale in a way that might become obtrusive in a face-to-face situation the electronic shopper can merely click no thanks at any point. Almost instantaneous calculation of pricing is a major development in on-line air travel booking. Job search sites offer psychological profiling services and aptitude tests. Book retailers suggest other titles also bought by customers who have also selected the item selected. And, more recently, forums, blogs and sites such as Youtube and Myspace allow users to post their own content to websites. Amazon allows customers to rate their purchases by adding user reviews, both fo the products themselves and also for third party marketplace sellers that sell products through Amazons website. There are endless ways to engage online customers through interactivity. The challenge is to come up with functionality that is fun, worthwhile and that genuinely adds value to the website, without ever becoming cumbersome or intrusive. Ries A, Ries L (2002): The 22 immutable laws

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e-business basics - transaction costs

It is interesting to note the ways in which eBusiness is driving down the costs of transactions, as it is relatively easy to check prices (price discovery) and then to transact the deal on-line; of course these are two of the key attractions of eBusiness. These phenomena challenge some of the economists key notions about firms. However, with a little consideration, it can be seen that established economics models can deal with eBusiness, it is just that some of the rules of the game have changed. Participation in many markets is no longer the sole preserve of large firms, which used to be the only organisations that had the necessary resources and know-how. Indeed, eBusiness can lead one can question the need for large firms at all. Useful insight can be gained from the work of Ronald Coase (1937), which describes transaction costs, arguing that firms exist precisely because these costs were reduced compared with conducting these key tasks in the open market. In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on. (Coase, R. 19371) To summarise Coases article, these transaction costs are: Search and information costs Most of us have experience of using services like eBay, Google and Kelkoo to check out prices for a range of goods and services within a few minutes. This simply was not possible before the Internet, and seeking out suppliers, product details and prices would have entailed telephone calls, writing for catalogues or perhaps looking at lists and advertisements in trade magazines. Search and information are two of the key abilities and enablers of eBusiness. Major websites such as Google, Amazon, Ebay and BBC depend heavily upon a search engine that represents a main differentiator from old economy businesses that sold advertising, books and videos, auctions or news. Information itself, by being digitised can be distributed more cheaply and efficiently and old information that was perhaps uneconomic to maintain in printed form, can still yield revenues. Evans and Wurster (2000) describe Navigation as being characterised by: abundant connectivity, common information standards, infinite choice, negligible searching and

switching costs, fluidity (tasks or functions can be achieved in different ways or with different combinations of participants), and lack of a centre which all adds up to a system that is more like an eco-system rather than a traditionally engineered system. They see that there is no longer any reason that a physically defined industry would continue to enjoy the privileged position of offering the navigation. If the navigation function drives a large portion of competitive advantage, then a business loses control of a main source of profit if the navigation is recast as a separate entity. Bargaining and decision costs Marketplaces, auction sites and simple online stores enable buyers and sellers to agree a deal and to transact it quickly. In the past, businesses would have had to rely on credit references (which may still be advisable), personal introductions and so on, and might then spend some time meeting or on the telephone to agree a deal. An individual in one country can now agree a deal on eBay with someone in another country based on his or her feedback ratings and then make and receive payment instantly. A process that is potentially more efficient and viable with e-Business reduces bargaining and decision costs. Price discovery, necessary for perfect competition, becomes far more easily accessible through comparison-shopping, portals and industry marketplaces. This is possibly a double-edged sword for retailers, many of which have competed solely on price, but it has surely been the driver of much of the early on-line shopping volumes. Auctions (e.g. eBay) and Dutch Auctions (e.g. Letsbuyit.com) have created a market with millions of private and commercial participants who are able to trade worldwide from their own p.c. The following quote from eBay gives an illustration of the sheer scope of their business. EBays mission is to provide a global trading platform where practically anyone can trade practically anything. Our Marketplace: On any given day, there are more than 12 million items listed on eBay across 18,000 categories. In 2002, eBay members transacted $14.87 billion in annualized gross merchandise sales (GMS, the value of goods sold on eBay). http://pages.ebay.com/community/aboutebay/overview/index.html A look at eBays 3rd quarter 2006 results shows that the above figures have grown approximately five-fold since 2002, with 60 million items for sale and 212 million users accounting for 13% of global Ecommerce. Policing and enforcement costs. E-Business gives rise to its own set of problems for regulation and enforcement, especially with regard to intellectual property rights, which will be dealt with in a separate learning note. However, services like eBay have largely automated their systems for policing and enforcement and actually rely on their members to point out instances of fraud or other bad practice.

Low marginal costs

In some kinds of e-Business, the marginal cost of serving a customer can tend to zero, especially when the product or service is delivered as a download a good example would be supply of software. Development costs can be spread across many millions of copies which are then downloaded online and for which the firm pays very little in telecommunications charges. Such business models are likely to have high fixed costs and very low variable costs. This means that there is much to be gained from market domination. There is also likely to be scope for price discrimination, if the firm is able to separate customers into separate groups that are willing to pay different prices. Asymmetries of information One of the classical causes of market failure is asymmetries of information in which parties with access to poorer information are disadvantaged by the effect of higher costs. Evans & Wurster (2000) cite the example of motor dealers that traditionally had sole access to market prices and other information that would be useful, such as data on reliability and customer satisfaction, yet this was not freely available and integrated into the buying process. In the market for relatively new used cars, in which quality and specifications are reasonably consistent, on-line services have been developed that help consumers decide what to buy, and to seek the best deal for the vehicle they want. This is an example, in economics terms, of e-Business reducing asymmetries of information as a cause of market failure in some industries or sectors. Price discovery remains a challenge and in one study, the difficulty in establishing true prices including delivery and taxes was cited as the biggest frustration found by some consumers, although the biggest attraction of electronic commerce was nevertheless the speed of searching for products (Malaga, 20012). 1Coase, R. (1937): The Nature of the Firm Economica Nov 1937 Vol 4 no.16 p 390 2Malaga, R, (2001): Consumer Costs in Electronic Commerce: An empirical Examination of Electronic versus traditional markets, Journal of Organizational Computing and Electronic Commerce, Volume 11, Number 1 (March 1, 2001). Pp 47-58 Author: Steve Whiteley, January 2007

e-business strategy - virtual value chain

Historical context

Over the years, some businesses have controlled almost all factors of production and distribution (Ford in its early days) whereas others have outsourced almost everything (Dell). In the early days of industry, large enterprises controlled and owned most factors of production and businesses like Ford Motor Company in the USA had their own foundries, railroad, forestry and electricity generating plants, In the UK, Cadburys and Lever Brothers went so far as to build villages and amenities for their workers. The motivation for this vertical integration was varied but included cost and quality control, worker loyalty and protection of proprietary processes. As well as control of production, resources and employees, businesses like Ford also controlled the retail sales and service network. Ford Motor Company developed its structure over many decades of steady growth but, even prior to the advent of eBusiness, this kind of structure was being broken down, as a monolithic type of organisation like this is less able to respond to changing market requirements. Furthermore, external specialized organisations may be able to offer ancillary services such as transport and power more cheaply than a business like Ford Motor Company could do it for itself. Ford was an extreme case of internal control of all factors of production and distribution, whereas most other businesses had long maintained a mixture of some in-house capabilities together with services sourced from other businesses. Porters Value Chain One model to help understand this network of processes and services is what Michael Porter (1985) calls the Value Chain. Porters work on competitive strategy suggests that organisations should re-evaluate their value chain and concentrate on the operations that they can do best. Other processes should out-sourced to specialists. EBusiness has facilitated this by providing a set of standards for participants to work with. Evans & Wurster (2000) outline the progress of Dell from a business that in 1984 offered a simplified product offering with orders taken by fax/telephone a simplified service with wide reach. In moving to Internet delivery, Dell then offered individualized configurations, price combinations and technical support. These enhancements could only previously have been obtained from specialized dealers or direct agents at a premium price and Dell now offers these to a wide audience at a very competitive price. The customer wins as their needs are at the centre of the process. Porter distinguishes between primary activities and support activities. Primary activities are directly concerned with the creation or delivery of a product or service. They can be grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service. Each of these primary activities is linked to support activities, which help to improve their effectiveness or efficiency. There are four main areas of support activities: procurement, technology development (including R&D), human resource management, and infrastructure (systems for planning, finance, quality, information management etc.). The chain consists of a series of activities that create and build value. They culminate in the total value delivered by an organisation. The margin depicted in the diagram is the same as added value which expresses the way a

business differentiates itself through configuration of its value chain. Error: Reference source not found Porter & Millar (1985) p. 151 The drivers for product differentiation and value creation are policy choices (what activities to perform and how), linkages (within the value chain or with suppliers and channels), timing (of activities), location, sharing of activities amongst business units learning, integration, scale and institutional factors. Porter and Millar (1985) argue that information technology creates value by supporting differentiation strategies. The Virtual Value Chain Businesses that are evaluating the value chain have been observed to go through three phases (Rayport & Sviokla, 1995). The first, Visibility, is where businesses co-ordinate, measure and sometimes control business processes. Over the last 30 years, information systems have become powerful tools in management of the physical value chain. The authors claim that this phase is a necessary precursor to moving towards what they term a virtual value chain. The second phase is Mirroring capability in which physical steps in the value chain may be substituted with virtual ones to create a parallel value chain in the marketplace, with steps that are faster, better, more flexible or lower cost. The third stage occurs when companies use the flow of information in their virtual value chain to create new customer relationships by delivering value to customers in new ways. The Value chain has also become increasing transparent (Riddestrale & Nordstrom 2002) and this has a tendency to reveal and expose those who are not really adding any value. Intermediaries are being replaced with Infomediaries who are people and firms who eliminate unnecessary actors in the value chain by simultaneously acting as purchase agents for customers and sales departments for sellers, so complacent or entrenched organisations could find eBusiness to be a threat if they do not embrace it. Evans and Wurster (2000) argue that the shifting trade-off between reach and richness of information has led to the deconstruction of previously integrated value chains and supply chains. Banking and Newspapers are examples of businesses that are both horizontally and vertically integrated. Some commentators had expected the newspaper itself to go electronic with content delivered to an electronic tablet. Whilst this has not happened, elements of the value chain have changed. In newspapers, the quality press has developed the appointments advertisements service into an interactive service for candidates with daily email alerts. In banking, whereas banks offered a limited portfolio of services of variable quality and profitability, personal finance packages such as Quicken, and account aggregators and personal finance portals offer access to hundreds of competitive offerings. This means that critical pieces of a business are definitely vulnerable to new entrants or to the supply of key elements by a monopoly. Intermediation

One thing that does become clear in looking at different cases in eBusiness is that there are different approaches to changing the value chain, and it does not always become shorter. In some cases, it has been desirable to remove one or more links in the value chain. To take a simple example, a business that had previously sold to retailers via distributors could take a decision to sell direct electronically, an approach known as Disintermediation. Part of the rationale is that by shortening the Value Chain, there may be benefits in reduced costs or a more responsive and efficient service. Seemingly paradoxically, eBusiness has also allowed the apparent opposite of Disintermediation in which a new step or steps are introduced to the value chain as new players find fresh ways to add value to the process. This is known as Reintermediation and examples here include shopping portals and electronic insurance brokers. Cybermediation (Giaglis et al, 2002) refers to the creation of new kinds of intermediaries that simply could not have existed prior to the advent of eBusiness and the Internet, in categories including Searching, Price Discovery, Logistics, Settlement and Trust. Obvious examples include comparison-shopping sites such as Kelkoo and bank account aggregation services like Citibank. Some on-line businesses find they need to control much of the value chain in order for their proposition to function correctly. In on-line clothing retail, customers can order bespoke outfits based on their exact measurements and preferences, choosing from a range of over 100 colours. Businesses such as Beyond Fleece and French Rags have seen astonishing growth around 500% customer growth in 2002 based on this model (Rogers 2003). These businesses control all manufacture including the yarns, so that customers can order other items in future in exactly matching colours. Interestingly, sales consultation is done by agents personally, but once on board, the personal nature of the relationship can be exploited efficiently through direct control of the design, marketing and manufacture This mass customization has proved profitable because every item is made to order, contrasting with the existing model in which styles are ordered a year in advance and stockpiled, which often sees product being marked down and sold off at the end of the season. In another example, Amazon decided at the outset to build its own warehouses in order to increase the speed and reliability of its delivery of online orders. Amazon has sought to add value in the sales and fulfillment activities, seeing this as a core competency (Amit & Zott 2001). However, the investment in new facilities required to serve new markets or to offer a step change in capacity have carried a crippling cost, and indeed Amazon has closed several facilities where capacity has been under-utilised. More recently, Amazon has adopted a more flexible approach and also acts as a marketplace for other sellers that supply other goods and services alongside its own, even offering lower prices from other suppliers on goods it sells itself. Of course, with greater analysis and experience of these markets, it has been found that to serve markets in volume, whilst there may have been disintermediation, there has also been reintermediation. Businesses like Amazon have had to build new distribution capabilities that have been by no means cheaper than traditional methods.

References: Porter, M (1985): Competitive Advantage: Creating and Sustaining superior Performance N.Y. Free Press Evans P, Wurster T (2000): Blown to bits: How the new economics of Information transforms strategy Harvard Business School Press Porter M, Millar VE (1985): How information gives you competitive advantage Harvard Business Review Vol 63 Issue 4 Jun/July 1985 pp 149-160 Rayport, J Sviokla, J (1995): Exploiting the virtual value chain Harvard Business Review Vol 73 Issue 6 November/December 1995 pp 75-85 Ridderstrale, J Nordstrom K (2002): Funky Business Financial Times Prentice Hall Giaglis, G, Klein S and OKeefe R (2002): Disintermediation, Reintermediation, or Cybermediation? The Future of Intermediaries in Electronic Marketplaces Brunel University Rogers, M (2003): Custom Clothing sets one to one retail examples http://www.1to1.com Author: Steve Whiteley, January 2007