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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 marketspaces

Describe the nature of competition inmarketspaces

Describe some economic rules of the digitaleconomy

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Learning Objectives (cont.)

Describe the impacts of the digital economyon trading and intermediaries

Describe the impacts of the digital economyon business processes and functional areasin organizations

Understand the role of m-commerce in thedigital 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 aswell as individual travelers

Competition among major players is rebate-basedInnovative business models (i.e., name your ownprice, auctions) embraced by companies in theindustry

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Rosenbluth International (cont.)

Strategic Information Systems

Res-Monitor: low-fare search system,finds additional savings for 1 of 4reservations

Global distribution network: enables

instant access to travelers 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: innovativetelecommunications technology was tomanage multiple accounts

Network Operations Center (NOC):monitors weather, current events, airtraffic

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The Digital Economy

Complete change of business models andstrategies for success in digital economy

Web-based IT and EC facilitate competitiveadvantage

Global competition: price, quality, service

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The Digital Economy (cont.)

Extensive networked computing

infrastructure is expensiveWeb-based applications provide customerservice, online selling, and procurementsupport

Innovative systems must be patented

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Digital Economy Defined

Digitalcommunicationnetworks (Internet,intranets)

Computers

Software

Related informationtechnologies

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 overalleconomy

Provided over of total economic growth

Longest period of uninterrupted economic

expansion in historyHigh-paying jobs

Very low to negative unemployment in ITindustry

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Marketspaces vs. Marketplaces

Marketplace: 3 main objectives

Match buyers and sellers

Facilitate exchange of information, goods, services,payments (transactions)

Provide institutional infrastructure enablingefficient functioning of the market

EC in the marketplaceIncreased efficiencies

Decreased 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 supplychains

Changes driven by IT

Increased effectiveness

Lower transaction and distribution costs

More efficient markets

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Marketspaces vs. Marketplaces (cont.)

Doing business in thereal world

Process rawmaterials

Distribute rawmaterials

Doing business with EC

Gathering information

Selecting information

Synthesizinginformation

Distributinginformation

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Components of

Digital Ecosystems

Digital productsInformation and entertainment products

Paper-based products: books,

newspapers, magazinesProduct information: catalogs, trainingmanuals

Graphics: photographs, maps, calendars

Video: movies, TV programsSoftware: programs, games, developmenttools

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Components of

Digital Ecosystems (cont.)

Symbols, tokens, icons

Tickets and reservations: airline, concert

Financial instruments: checks, credit cards,

electronic currencies

Processes and services

Government services: forms, benefits,licenses

E-messaging: letters, faxes

Business processes: ordering, inventorying

Auctions: bidding, bartering

Others

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Components of

Digital Ecosystems (cont.)

Consumers

Search for detailed information

Compare products/prices

Bid or negotiate prices

Sellers

Innumerable products and services availableWeb sites, marketplaces

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Components of

Digital Ecosystems (cont.)

Intermediaries

Create and manage online markets

Match buyers and sellers

Provide infrastructure services

Aid transactions

Support services: address implementation

issuesCertification and trust services

Knowledge providers

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Components of

Digital Ecosystems (cont.)

Infrastructure companies: provide

hardware, software, EC supportContent creators: create and maintainWeb sites

Business partners: Internet collaborationusually along the supply chain

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Components of

Digital Ecosystems (cont.)

Electronic marketplaces

Exchangesmany-to-manySell-sideone-seller-many-buyers

Buy-sideone-buyer-many-sellers

Publicopen to all

Privateopen 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-organizing

Old rules may no longer apply

Competition is tense

Lower buyers search cost

Speedy comparisons

Differentiation and personalization

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Competition in Marketspaces (cont.)

Consumers like differentiation andpersonalization

Lower pricesCustomer service

Size of company no longer significant

Geographical location insignificant

Language barriers are being removed

Digital products do not have normal wearand tear

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Figure 2-1

Porters

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 2-2

Cost Curve of Regular and Digital Products

Cost curves

Bundling products/services

Buying vs. renting

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Issues and Success Factors (cont.)

Critical Mass of Buyers & Sellers

High fixed costs of deploying EC

Market efficiency

Development 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 Internet

Determines: sales volume, market share, productprofitability

Price discrimination: different prices to differentbuyers through customization of products

Product differentiation: price based on value tothe customer, not cost of production

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Issues and Success Factors (cont.)

Online vs. off-line pricing

Click-and-mortaravailable online and off-line

Brokerage houses50% commission discount foronline trades

Economic Impacts of EC

Production functioncan substitute capital for labor

for same quantity of productionLower the labor needed, higher required investments

EC lowers amount of labor/capital needed to producethe product

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Figure 2-3

Economic Effects of EC

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Issues and Success Factors (cont.)

Contributors to E-market success

Product characteristics

Type: digitized, non-digitized

Price

Standards and product information availableallows sale of most items: cars, computers,groceries

Industry characteristics

Brokers currently necessary

Intelligent systems may replace brokers

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Issues and Success Factors (cont.)

Seller characteristics

Consumers find sellers with the lowestprices

Low-volume, higher-profit-margintransactions

Consumer characteristics

Impulse buyersPatient buyers

Analytical buyers

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Impacts on Trading Processes

and Intermediaries

Industry structure

Consumers are aware of competitors prices throughsearches; intermediaries become obsolete

Digitization of more products; reduction in shippingcosts

Seller and customer activities converge in 1 place

Marketing

Order processing

Distribution

Payments

Product development

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Impacts on Trading Processes

and Intermediaries (cont.)

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

marketsSearch costs: brokers with access to customerpreferences can predict demand for products

Lack of privacy: anonymity of buyer and/orseller

Incomplete information: gathers productinformation from many sources

Contracting risk

Pricing inefficiencies

i

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Impacts on Trading Processes

and Intermediaries (cont.)

Industry structure (cont.)Disintermediation and reintermediation

Disintermediaries: match and provideinformation

Reintermediatiaries: provide value-addedservices (consulting)

Syndication: sale of the same good tomany customers, who integrate it withother offerings and redistribute it(virtual stock brokers)

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Impacts on Trading Processes

and Intermediaries (cont.)

Syndication supply chainSyndication of information is critical to the

success of ECDistributors provide free information toconsumers, and package and sell the sameinformation

Content creators sell the same information tomany syndicators and distributors

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Figure 2-5

The Supply Chain of Syndication

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Figure 2-6

The 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 Processes

and Intermediaries (cont.)

Potential Winners and Losers in EC

WinnersInternet access providers

Diversified portal service providers

EC software companies

Proprietary network owners

Others

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Impacts on Trading Processes

and Intermediaries (cont.)

Winners in EC

Internet accessproviders

Diversified portalservice providers

EC softwarecompanies

Proprietary networkowners

Others

Losers in EC

Wholesalers(particularly smallones)

Brokers

Salespeople

Nondifferentiated

manufacturers

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Impact on Business Processes

and Organizations (cont.)

Other marketing-related impacts

Customization

AdvertisingOrdering systems

Markets

Transforming organizationsTechnology and organization learning

Changing nature of work

Impact on Business Processes

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Impact on Business Processes

and Organizations (cont.)

Redefining organizations

New product capabilities

New business models

Impacts on manufacturing

Build-to-order

Impact on finance and accounting

Human resource management,training, and education

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Mobile Commerce

Online stock

trading

Online banking

Micropayments

Online gambling

Ordering and service

Online auctions

Others

Applications of M-commerce

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Mobile Commerce (cont.)

A successful vendorI-mode customers can

Receive train timetable

Discount coupons for shopping andrestaurants

Purchase music online

Send or receive photos

Purchase airline ticketsLocate information about books and buythem

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Managerial Issues

New business models

Competition in the digital economy

How to transform to digital economy

Disintermediation and reintermediation

Going global

Organizational changesAlliances