How E-commerce Changes Business: Strategy, Structure, and Process 85
is a digital network (often but not always Internet-based) designed to coordinate the
flow of communications among firms engaged in business together. The network is
owned by a single large purchasing firm. Participation is by invitation only to
trusted long-term suppliers of direct inputs. These networks typically evolve out of
a firm’s own enterprise resource planning (ERP) system, and are an effort to include
key suppliers in the firm’s own business decision making. For instance, Walmart
operates one of the largest private industrial networks in the world for its suppliers,
who on a daily basis use Walmart’s network to monitor the sales of their goods, the
status of shipments, and the actual inventory level of their goods.
We discuss the nuances of B2B e-commerce in more detail in Chapter 12.
2.4 E-commerce Enablers: The Gold Rush Model
Of the nearly 500,000 miners who descended on California in the Gold Rush of 1849,
less than 1% ever achieved significant wealth. However, the banking firms, shipping
companies, hardware companies, real estate speculators, and clothing companies such
as Levi Strauss built long-lasting fortunes. Likewise in e-commerce. No discussion
of e-commerce business models would be complete without mention of a group of
companies whose business model is focused on providing the infrastructure necessary
for e-commerce companies to exist, grow, and prosper. These are the e-commerce
enablers: the Internet infrastructure companies. They provide the hardware, operating
system software, networks and communications technology, applications software,
Web design, consulting services, and other tools that make e-commerce (see Table 2.5
on page 86). While these firms may not be conducting e-commerce per se (although
in many instances, e-commerce in its traditional sense is in fact one of their sales
channels), as a group they have perhaps profited the most from the development of
e-commerce. We discuss many of these players in the following chapters.
2.5 How E-COmmerce Changes Business: Strategy,
Structure, and Process
Now that you have a clear grasp of the variety of business models used by e-commerce
firms, you also need to understand how e-commerce has changed the business envi-
ronment in the last decade, including industry structures, business strategies, and
industry and firm operations (business processes and value chains). We return to these
concepts throughout the book as we explore the e-commerce phenomenon. In general,
the Internet is an open standards system available to all players, and this fact inher-
ently makes it easy for new competitors to enter the marketplace and offer substitute
products or channels of delivery. The Internet tends to intensify competition. Because
information becomes available to everyone, the Internet inherently shifts power to
buyers who can quickly discover the lowest-cost provider. On the other hand, the
86 C H A P T E R 2 E - c o m m e r c e B u s i n e s s M o d e l s a n d C o n c e p t s
Table 2.5 E-commerce Enablers
INFRASTRUCTURE P L AY E R S
Infrastructure Players
Hardware: Web Servers IBM, HP, Dell, Oracle
Software: Server Software Microsoft, Red Hat Linux, Apple
Cloud Providers Amazon Web Services, Rackspace, Google, IBM,
Hosting Services Rackspace, Webintellects, 1&1 Internet, HostGator, Hostway
Domain Name Registration Go Daddy, Network Solutions, Dotster
Content Delivery Networks Akamai, Limelight
Site Design GSI Commerce, Fry, Oracle
E-commerce Platform Providers GSI Commerce, Magento, IBM, ATG, Demandware
Mobile Commerce Hardware Platform Apple, Samsung, Google
Mobile Commerce Software Platform Apple, Google, Adobe, Usablenet, Unbound Commerce,
Branding Brand
Streaming, Rich Media, Online Video Adobe, Apple, Easy 2 Technologies, Channel Advisor
Security and Encryption VeriSign, Checkpoint, GeoTrust, Entrust, EMC, Thawte, McAfee
Payment Systems PayPal, Authorize.net, Chase Paymentech, Cybersource
Web Performance Management Compuware Gomez, Smartbear, Keynote Systems
Comparison Engine Feeds/Marketplace Channel Advisor, Mercent, CPC Strategy
Management
Customer Relationship Management Oracle, SAP, GSI Commerce, Salesforce.com, NetSuite
Order Management JDA Software, GSI Commerce, Stone Edge
Fulfillment JDA Software, GSI Commerce, CommerceHub
Social Marketing Buffer, HootSuite, SocialFlow
Search Engine Marketing iProspect, Channel Advisor, Rimm-Kaufman Group
E-mail Marketing Constant Contact, Experian CheetahMail, Bronto Software,
MailChimp
Affiliate Marketing Commission Junction, Google Affiliate Network, LinkShare
Customer Reviews and Forums Bazaarvoice, PowerReviews, BizRate
Live Chat/Click-to-Call LivePerson, BoldChat, Oracle
Web Analytics Google Analytics, Adobe Omniture, IBM Coremetrics
Internet presents many new opportunities for creating value, for branding products
and charging premium prices, and for enlarging an already powerful offline physical
business such as Walmart or Sears.
Recall Table 1.2 in Chapter 1 that describes the truly unique features of e-com-
merce technology. Table 2.6 suggests some of the implications of each unique feature
How E-commerce Changes Business: Strategy, Structure, and Process 87
Table 2.6 Eight Unique Features of E-commerce Technology
SELECTED IMPACTS ON BUSINESS
FEATURE ENVIRONMENT
Ubiquity Alters industry structure by creating new marketing channels and
expanding size of overall market. Creates new efficiencies in
industry operations and lowers costs of firms’ sales operations.
Enables new differentiation strategies.
Global reach Changes industry structure by lowering barriers to entry, but greatly
expands market at same time. Lowers cost of industry and firm
operations through production and sales efficiencies. Enables
competition on a global scale.
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. Changes industry and firm operations costs by
reducing reliance on sales forces. Enhances post-sales support
strategies.
Interactivity Alters industry structure by reducing threat of substitutes through
enhanced customization. Reduces industry and firm costs by
reducing reliance on sales forces. Enables differentiation strategies.
Personalization/ Alters industry structure by reducing threats of substitutes, raising
Customization barriers to entry. Reduces value chain costs in industry and firms by
lessening reliance on sales forces. Enables personalized marketing
strategies.
Information density Changes industry structure by weakening powerful sales channels,
shifting bargaining power to consumers. Reduces industry and firm
operations costs by lowering costs of obtaining, processing, and
distributing information about suppliers and consumers.
Social technologies Changes industry structure by shifting programming and editorial
decisions to consumers. Creates substitute entertainment products.
Energizes a large group of new suppliers.
for the overall business environment—industry structure, business strategies, and
operations.
industry structure
Industry Structure
refers to the nature of the
E-commerce changes industry structure, in some industries more than others. Indus- players in an industry and
try structure refers to the nature of the players in an industry and their relative their relative bargaining
bargaining power. An industry’s structure is characterized by five forces: rivalry among power
88 C H A P T E R 2 E - c o m m e r c e B u s i n e s s M o d e l s a n d C o n c e p t s
existing competitors, the threat of substitute products, barriers to entry into the industry,
the bargaining power of suppliers, and the bargaining power of buyers (Porter, 1985).
industry structural When you describe an industry’s structure, you are describing the general business
analysis
environment in an industry and the overall profitability of doing business in that
an effort to understand
environment. E-commerce has the potential to change the relative strength of these
and describe the nature of
competitive forces (see Figure 2.4).
competition in an industry,
the nature of substitute When you consider a business model and its potential long-term profitability, you
products, the barriers to should always perform an industry structural analysis. An industry structural analy-
entry, and the relative sis is an effort to understand and describe the nature of competition in an industry,
strength of consumers and the nature of substitute products, the barriers to entry, and the relative strength of
suppliers consumers and suppliers.
Figure 2.4 How E-Commerce Influences Industry Structure
E-commerce has many impacts on industry structure and competitive conditions. From the perspective of a
single firm, these changes can have negative or positive implications depending on the situation. In some
cases, an entire industry can be disrupted, while at the same time, a new industry is born. Individual firms
can either prosper or be devastated.
How E-commerce Changes Business: Strategy, Structure, and Process 89
E-commerce can affect the structure and dynamics of industries in very different
ways. Consider the recorded music industry, an industry that has experienced signifi-
cant change because of e-commerce. Historically, the major record companies owned
the exclusive rights to the recorded music of various artists. With the entrance into the
marketplace of substitute providers such as Napster and Kazaa, millions of consum-
ers began to use the Internet to bypass traditional music labels and their distributors
entirely. In the travel industry, entirely new middlemen such as Travelocity entered
the market to compete with traditional travel agents. After Travelocity, Expedia,
CheapTickets, and other travel services demonstrated the power of e-commerce mar-
keting for airline tickets, the actual owners of the airline seats—the major airlines—
banded together to form their own Internet outlet for tickets, Orbitz, for direct sales
to consumers (although ultimately selling the company to a private investor group).
Clearly, e-commerce creates new industry dynamics that can best be described as the
give and take of the marketplace, the changing fortunes of competitors.
Yet in other industries, e-commerce has strengthened existing players. In the chemi-
cal and automobile industries, e-commerce is being used effectively by manufacturers to
strengthen their traditional distributors. In these industries, e-commerce technology has
not fundamentally altered the competitive forces—bargaining power of suppliers, barriers
to entry, bargaining power of buyers, threat of substitutes, or rivalry among competi-
tors—within the industry. Hence, each industry is different and you need to examine
each one carefully to understand the impacts of e-commerce on competition and strategy.
New forms of distribution created by new market entrants can completely change
the competitive forces in an industry. For instance, consumers gladly substituted free
access to Wikipedia for a $699 set of World Book encyclopedias, or a $40 DVD, radi-
cally changing the competitive forces in the encyclopedia industry. As we describe in
Chapter 10, the content industries of newspapers, books, movies, games, and television
have been transformed by the emergence of new distribution platforms.
Inter-firm rivalry (competition) is one area of the business environment where
e-commerce technologies have had an impact on most industries. In general,
e-commerce has increased price competition in nearly all markets. It has been relatively
easy for existing firms to adopt e-commerce technology and attempt to use it to achieve
competitive advantage vis-à-vis rivals. For instance, e-commerce inherently changes the
scope of competition from local and regional to national and global. Because consumers
have access to global price information, e-commerce produces pressures on firms to
compete by lowering prices (and lowering profits). On the other hand, e-commerce has
made it possible for some firms to differentiate their product or services from others.
Amazon patented one-click purchasing, for instance, while eBay created a unique, easy-
to-use interface and a differentiating brand name. Therefore, although e-commerce has
increased emphasis on price competition, it has also enabled businesses to create new
strategies for differentiation and branding so that they can retain higher prices.
It is impossible to determine if e-commerce technologies have had an overall
positive or negative impact on firm profitability in general. Each industry is unique,
so it is necessary to perform a separate analysis for each one. Clearly, e-commerce
has shaken the foundations of some industries, in particular, information product
industries (such as the music, newspaper, book, and software industries) as well as
90 C H A P T E R 2 E - c o m m e r c e B u s i n e s s M o d e l s a n d C o n c e p t s
other information-intense industries such as financial services. In these industries, the
power of consumers has grown relative to providers, prices have fallen, and overall
profitability has been challenged. In other industries, especially manufacturing,
e-commerce has not greatly changed relationships with buyers, but has changed rela-
tionships with suppliers. Increasingly, manufacturing firms in entire industries have
banded together to aggregate purchases, create industry exchanges or marketplaces,
and outsource industrial processes in order to obtain better prices from suppliers.
Throughout this book, we document these changes in industry structure and market
dynamics introduced by e-commerce.
Industry Value Chains
While an industry structural analysis helps you understand the impact of e-commerce
technology on the overall business environment in an industry, a more detailed indus-
try value chain analysis can help identify more precisely just how e-commerce may
change business operations at the industry level. One of the basic tools for understand-
ing the impact of information technology on industry and firm operations is the value
value chain chain. The concept is quite simple. A value chain is the set of activities performed
the set of activities in an industry or in a firm that transforms raw inputs into final products and services.
performed in an industry or Each of these activities adds economic value to the final product; hence, the term value
in a firm that transforms chain as an interconnected set of value-adding activities. Figure 2.5 illustrates the six
raw inputs into final generic players in an industry value chain: suppliers, manufacturers, transporters,
products and services
distributors, retailers, and customers.
By reducing the cost of information, e-commerce offers each of the key players
in an industry value chain new opportunities to maximize their positions by low-
ering costs and/or raising prices. For instance, manufacturers can reduce the
costs they pay for goods by developing Internet-based B2B exchanges with their
Figure 2.5 E-commerce and Industry Value Chains
Every industry can be characterized by a set of value-adding activities performed by a variety of actors.
E-commerce potentially affects the capabilities of each player as well as the overall operational efficiency of
the industry.
