E-Commerce ©David Whiteley/McGraw-Hill, 2000 1

e c o m m e r c e

electronic commerce

strategy

technologies and

applications

Chapter 3: Competitive advantage

Competitive

Rivalry

Entrants

Supplier

Buyers

Substitution

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e c o m m e r c e

electronic commerce

strategy

technologies and

applications

Competitive advantage Three basic strategies:

Cost leadership:Prices lower than the competition.

Differentiation:Products with some quality that makes them more attractive than the competition.

Focus:Concentration on a single aspect of the market (a niche).

(Porter, 1980)

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IT and competitive advantage Information and communications technologies (ICTs) can:

Cost leadership:• Reduce administrative cost

(including the logistics supply chain)

Differentiation:• quality of service• responsiveness to customer requirements.

Focus:• Target information on the selected segment.• Gather customer data from that segment.

Quick response and just-in-time can:• Evolve new products and services.• Facilitate customisation.

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IT and competitive advantage cases

American Hospital Supplies (AHS): Customers given online access to the order

processing systems.

Airline booking systems: American Airline’s Sabre system and United’s

Apollo system.

Federal Express: Web site for customers to track the progress of

packages whilst in transit.

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e c o m m e r c e

electronic commerce

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Porter’s model of competitive rivalry

Competitive

Rivalry

Entrants

Supplier

Buyers

Substitution

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e c o m m e r c e

electronic commerce

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technologies and

applications

Porter’s model of competitive rivalry

The model helps a firm identify threats to its competitive position and to lay plans, that may include IT and e-Commerce, to protect or enhance that position.

The five forces identified by the model are: Competitive rivalry among existing players. Threat of potential new entrants to the sector. Threat of a substitute product or service. The bargaining power of the buyers. The bargaining power of the suppliers.

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Porter’s model – new entrants The ease with which a company can enter a given

trade sector.

Barrier to entry include the need for: Capital Knowledge Skills

The need for IT investment can be a barrier to entry.

Internet e-Commerce can facilitate entry, e.g.: Internet bookshops Internet banks

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electronic commerce

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Porter’s model – substitution A new product or service that becomes available

and supplies the same function as the existing product: Substitution of natural fibres by synthetic fibres Replacement of glass bottles by a plastic

alternative Replacement of the typewriter by the word

processor

e-Commerce substitution: Online banking Down-loadable music

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e c o m m e r c e

electronic commerce

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Porter’s model – bargaining power of buyers

Buyers have bargaining power where: There are a number of competitors. There is a surplus of supply.

Defences include: Low production cost. Product branding. Efficient service (ICTs facilitated). Value added services (ICTs facilitated).

e-Commerce defences: Reshaped supply chain (dis-intermediarisation).

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Porter’s model – bargaining power of suppliers

Suppliers have bargaining power where: There are few or no competitors. There is a shortage of supply.

(The mirror image of the buyer’s position)

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Porter’s model – existing players

The competition between existing players is won on the basis of the generic competitive advantage of price, differentiation or focus.

The use of e‑Commerce can: Reduce the administrative costs of trading. Increase the logistic efficiency of the supply chain. Meet any requirements to trade electronically. Differentiate the product or service. Cut out intermediaries in the supply chain. Provide a new marketing channel.

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First mover advantage The first organisation to implement a new type of ICT system

can gain the price advantage or differentiation while competitors are still operating with traditional methods and systems.

e-Commerce first movers include: amazon.com eBay

First mover take a big risk: New business models. New (expensive) technologies

Second/late movers copy proven ideas and technological applications. 

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First mover advantage To gain competitive advantage using IS and IT

usually needs an element of surprise; the system needs to be out in the market place before competitors make a start in copying the idea.

Sustaining that competitive advantage requires either: Converting the technical advantage into brand

advantage. Sustaining the technical lead by continuous

product and service development.

The development of many e-Commerce systems, cannot be entirely private – customers had to become involved and competitors can copy.

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Competitive advantage using e-commerce

Force System Competitive advantage

New entrants/substitution

Internet e-commerce

Reduced entry costs New sales channel New service opportunities

Suppliers (& trade buyers)

e-commerce logistics (EDI/IeC)

Cost reductions Quick response Lockin

Buyers Internet e-commerce

New sales channel dis-intermediarisation Customer Information

Competitive rivalry E-commerce Cost leadership Differentiation Focus

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e c o m m e r c e

electronic commerce

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Chapter 3 – Exercise 1 Use Porter’s model to assess the competitive

position of a large online trader. It is suggested that the assessment is of amazon.com (as an online bookstore) against its online and conventional competitors.

The external forces are: Suppliers, principally the publishers; Buyers, the book buying public; New Entrants, the possibility of new (large scale)

online bookshops being set up; Substitution, that there would be a new sales

channel for books or that the book itself would be replaced by alternative media.

Consider all five forces separately, making notes on amazon’s competitive position in each case.

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Chapter 3 – Exercise 2

Continuing with the online bookshop theme, consider ways in which a bookshop could seek to achieve cost leadership, differentiation and focus. Make notes suggesting the strategy that could be applied in each case. Note that simple discounting is not to be considered a satisfactory strategy if the result is that the bookshop ends up in bankruptcy.