Thanh Luan Nguyen

CHAPTER 2

THE DIGITAL

ECONOMY

Thanh Luan Nguyen

CON

TEN

T

2.1 Rosenbluth International- A new way to compete2.2 The digital economy-An Overview2.3 Marketspaces vs. Marketplaces2.4 The Components of Digital Ecosystems2.5 Competition in Marketspaces2.6 Issues and Success Factors in the Digital Economy2.7 Impacts on Trading Processes, Intermediaries and the Others2.8 Impacts on Business Processes and Organizations2.9 Mobile Commerce2.10 Managerial Issues

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2.1 Opening Case:

Rosenbluth International

“..is a major international

player in the competitive

travel agency industry”.

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The problem:Threats to international travel agency industry

Airlines, hotels and others moving to direct electronic distribution systems(online booking)

Commission caps for agents reduced Online companies penetrating corporate market as

well as individual travelers Competition among major players is rebate-based Adding competitive pressures because of innovative

business models (i.e., name your own price, auctions) embraced by companies in the industry

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The Solution: Get out of leisure travel business, becoming a pure

corporate travel agency. Rebate customers with entire commission Uses several innovative e-commerce applications. The

specific tools are:• DACODA(Discount Analysis Containing Optimal Decision

Algorithms): optimizes corporation's travel savings, enabling travel managers to decipher complex airline pricing and identify the most favorable airline contracts.

• E-messaging services: reservation requests and results via e-mail.

• E-ticket tracking: tracks, monitors, reports on and collects the appropriate refund or exchange for unused e-tickets.

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The specific tools(cont.)

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

• Global Distribution Network: enables instant access to traveler’s itinerary, travel preferences, corporate travel policy

• Custom-Res: : a global e-reservation system ensuring policy compliance, consistent service, accurate reservations

• IntelliCenters: advanced reservation centers using innovative telecommunications technology to manage multiple accounts

• NOC( Network Operations Center): monitors weather, current events, air traffic

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The Results

In 1979, the company had $ 40 mil in sales By 1997 that figure had grown to over $ 3 bil. Today, the company operates in 24 countries

and has about 4500 employees. Since the introduction of the Web-based

solutions in 1997, sales increased to about $ 5 bil in 3 years (60% increase).

The company not only survived the threats of elimination but increased its market share and profitability.

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2.2 The Digital Economy

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Rosenbluth’s eperience illustrates the following points:• Complete change of business models and

strategies for success in digital economy• Web-based IT and EC facilitate competitive

advantage• Global competition: price, quality and

service• Extensive networked computing

infrastructure is expensive• Web-based applications provide customer

service, online selling, and procurement support• Innovative systems must be patented

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The Digital Economy Defined

Also Known As: Internet economy, new economy, or the Web economy.

Economy based largely on digital technologies including Digital

communication networks (Internet, intranets)

Computers

SoftwareRelated

information technologies

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The digital economy has created an economic

revolution• I.T growth more than double the rate of the overall

economy• I.T industry provided over one-quarter(¼) of total

economic growth (1996-2000)• In 1997, the US enjoys susstainable growth with almost

no inflation• In the late 1990s, IT’s share rose to 45 percent each

year• High-paying jobs. At $ 60,000/year• Very low to negative unemployment in IT industry. In

1999, over 8.5 mil people worked in the IT sector in the US workforce.

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2.3 Marketspaces

vs. Marketplaces

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Marketplace has three main functions:• Matching buyers and sellers• Facilitating the exchange of

information, goods, services and payment associated with market transactions• Providing an institutional infrastructure EC in the marketplace• Increasing market efficiencies by

expediting• Decreasing the cost of executing these

functions.

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Marketspaces : electronic marketplaces (especially Internet-based)• Changed processes used in trading and

supply chains• Changes driven by IT Increased effectiveness Lower transaction and distribution costs More efficient ,” friction-free” markets

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Marketplaces vs. Marketspaces

Doing business in the real world* Process raw materials* Distribute raw materials

Doing business with EC* Gathering information*Selecting information*Synthesizing information*Distributing information

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2.4 The components

of Digital

Ecosystems

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Digital Product Information and entertainment products• Paper-based products: books, newspapers,

magazines• Product information: catalogs, training manuals• Graphics: photographs, maps, calendars• Video: movies, TV programs• Software: programs, games, development tools Symbols, tokens and concepts• Tickets and reservations: airline, concert• Financial instruments: checks, credit cards,

electronic currencies

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Processes and services• Government services: forms,

benefits, licenses• E-messaging: letters, faxes• Business processes: ordering,

inventorying• Auctions: bidding, bartering• Others

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Consumer Search for detailed information Compare products/prices Bid or negotiate prices Sellers Innumerable products and services availableSell direct from Web sites, marketplaces Intermediaries Create and manage online markets Match buyers and sellers Provide infrastructure services Aid transactions

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Support services: address implementation issues

Certification and trust services Knowledge providers

Infrastructure companies: provide hardware, software, EC supportContent creators: create and maintain Web sitesBusiness partners: Internet collaboration usually along the supply chain

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Electronic marketplaces: several types of elechtronic marketplaces

Exchanges—many-to-many Sell-side—one-seller-many-buyers Buy-side—one-buyer-many-sellers Public—open to all Private—open to invited traders only

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2.5 Competiton

in marketplaces

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Competition in the Internet ecosystem (business model of the online economy)• Inclusive with low barriers to entry• Self-organizing• Old rules may no longer apply

Competition is intense for the following reasons• Lower buyers’ search cost• Speedy comparisons• Differentiation and personalization

Consumers like differentiation and personalization• Lower prices• Customer service

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Other competitive factors to consider Size of company no longer significant Geographical location insignificant Language barriers are being removed Digital products do not have normal wear and

tear In perfect competition No barriers to entry Not allow large sellers or buyers to individually

influence the market No product differentiation Supply buyers and sellers with comprehensive

info

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2.6 Issues and

success factors in

the Digital Economy

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Cost curves: Regular products and Digital products

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Buying vs. rentingBundling products/ services Critical Mass of Buyers & Sellers A critical mass of buyers is needed for an EC company or initiative to survive.

• High fixed costs of deploying EC• Market efficiency• Development of strong, fair competition

Quality uncertainty and quality assurance• Provide free samples• Return if not satisfied

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Pricing on the Internet• Pricing in many case determines sales volume, market

share, and product profitability.• Price discrimination: different prices to different

buyers through customization of products• Product differentiation: price based on value to the

customer, not cost of production Online vs. offline pricing• Click-and-mortar—available online and offline• Examples: Most brokerage houses offer almost a 50%

commission discount per trade if the trade is conducted online.

In contrast, most banks do not offer any discounts for going online. Some banks, however, whose strategy is to aggressively go online, provide discount, as do virtual bank.

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Economic Impacts of EC - Economic Effects of EC• Production function—can substitute capital for labor

for same quantity of production• Lower the labor needed, higher required investments• EC lowers amount of labor/capital needed to produce

the product

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Contributors to E-market success• Product characteristics

Type: digitized and non-digitizedPrice is an important determinantStandards and product information

available allows sale of most items: cars, computers, groceries

• Industry characteristicsBrokers currently necessaryIntelligent systems may replace brokers

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Seller characteristics• Consumers find sellers with the lowest

prices• Low-volume, higher-profit-margin

transactionsConsumer characteristics

• Impulse buyers• Patient buyers• Analytical buyers

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2.7 Impacts on industry structure,

intermediaries and others

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Industry structure• Search costs. Searching reduces the likelihood that

sellers will be able to charge significantly higher prices than their competitors.

• Consumers are aware of competitor’s prices through searches; intermediaries become obsolete• Digitization of more products; reduction in shipping

costs• Seller and customer activities converge in 1 place• The digitization of the product itself as well as its

distribution.• Wide range of seller and customer activities:

marketing, order processing, distribution, payments, product development.

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Roles and value of intermediaries in E-markets• Search costs: brokers with access to customer

preferences can predict demand for products• Lack of privacy: anonymity of buyer and/or seller• Incomplete information: gathers product information from

many sources• Contracting risk• Pricing inefficiencies

Disintermediation and reintermediation• Disintermediaries: match and provide information• Reintermediatiaries: provide value-added services

(consulting)

Syndication: sale of the same good to many customers, who integrate it with other offerings and redistribute it (virtual stock brokers)

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Syndication supply chain• Syndication of information is critical to the success

of EC• Distributors provide free information to

consumers, and package and sell the same information• Content creators sell the same information to

many syndicators and distributors The internet and the Value Chain• The value chain is a framework that

identifies the activities that an organization perform is order to create its products or services.

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Potential Winners and Losers in ECIt is still unclear who will be the final winners and losers in ECWinner

s*Internet access provider*Providers of diversified portal services*EC software companies*Proprietary network owner*Midsize manufactures*Others

Losers

*Manywholesalers,especially small ones* Brokers*Salespeople*Nondifferentiated manufactures

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2.8 Impact on Business Processesand Organizations

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Improving direct marketing Impacts of direct marketing• Product promotion• New sales channels• Direct savings• Reduced cycle time• Customer service • Brand or corporate image

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Other marketing-related impacts• Customization • Advertising• Ordering systems•Markets

Transforming organizations• Technology and organization learning• Changing nature of work

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Redefining organizationsSome of changes that will redefine organizations• New product capabilities• New business models

Impacts on Manufacturing• An interesting concept is that of virtual

manufacturing, which is the ability to run your global plants as though they were one single plant. • Build-to-Order: The biggest change in

manufacturing will be the move to build-to-order systems

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Impact on finance and accounting• Back-office transactions include buyer’s

credit checks, product avaibility checks, confirmation, movement in accounts payable and receivable, billing and much more

• Virtual close project of Cisco SystemsHuman resource management,

training, and education• EC is changing the manner in which

people are recruited, evaluated, promoted and developed

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2.9 Mobile

Commerce

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Mobile Commerce (m-commerce) refers to the conduct of e-commerce via wireless devices

Applications of M-commerce• Online stock trading• Online banking• Micropayments• Online gambling• Online auctions• Ordering and service• Messaging systems• B2B

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A successful vendorI-MODE, the pioneering wireless service. Some interesting apps of I-MODE

• Receive train timetable• Discount coupons for shopping and

restaurants• Purchase music online• Send or receive photos• Purchase airline tickets• Locate information about books and buy

them

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2.10 Managerial Issues

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The following issues are germane to management New business models Competition in the digital economy How to transform to digital economy Disintermediation and reintermediation Going global Organizational changes Alliances

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