What are the New Business Models For Internet Economy ?
The method of managing a business with the aid of infrastructure based on Internet and World Wide Web is called as Internet Economy. There are various distinguishing factors in an internet economy in comparison with the traditional economy including market segmentation, price, distribution costs, communication, etc. Thus, the traditional economy is different than the internet economy. In every industry, the nature of competition is drastically changing in the virtual world of internet. One needs to do all activities at a faster pace in today's competitive internet age.
A business environment where purchasing, selling and transportation of goods and services are done through electronic means is termed as E-commerce. The technology which helps an enterprise to conduct business electronically is included in e-commerce. E-commerce includes various services over the internet like customer service, retailing, banking, marketing, billing, secured distribution of data, corporate sector purchasing and other value added services.
Internet based technology undoubtedly constitute as the basic influencing factor for conducting business and functioning of markets. Consumers and business enterprises use internet on daily basis for connecting key distribution channels. It acts as a technological tool for enhancing some value chain activities by deviating other activities and changing the five competitive forces.
Internet is the reason behind generation of several sew industries like website hosting, online brokerage, online auctions, internet service provision and online commodity markets which help find buyers and sellers for products like chemicals, steel and natural gas. A company can hold an advantageous position through advanced e-commerce abilities as it enables to build up competitively valuable resource strength. On contrary, if a company is unable to use internet technology as an intrinsic part of the strategy and business activities, then it might lead to competitive fragility. Internet is an integral part of the company's business strategy and can be used by every industry in a learned or wise manner. The use of planned expertise to establish internet technology by a company and making internet as an essential part of the company's strategy can influence competition on a large scale.
Strategy Shaping Characteristics of E-Commerce Environment
1) Impact Competitive Rivalry :
The on geographic market of companies has been expanded with the help of internet which has increased the number of competitors and surged competition in the adjoining areas to exceptional levels. Internet has also condensed the geographical barriers and induced companies to compete with each other and facilitating correspondence between the two companies. An internet technology has added to the fixed cost of technology infrastructure and customer attainment whereas cost of procuring materials, marketing of goods and services has been reduced. Thus, due to mounting pressures, organizations have to offer competing prices. As a result, internet minimizes the life cycle of the products and of strategic initiatives by empowering the competitors to find out methods that enable them to quickly pursue the products and strategies of the opponent in a systematic manner.
2) Impact on Barriers to Entry :
Barriers created for entering the world of e-commerce are less in number. Online firms find it easy to enter the dot com industry and the prevailing industries. It simpler to extend the operations into new geographic marketplaces with the help of online selling portals. The new entrants do not find difficult to enter the existing industries because of internet technology. The requirement of various resources and abilities is removed or reduced considerably because of the presence of internet technology which are expensive and time consuming to generate.
3) Impact on Bargaining Power of Buyers :
A buyer's bargaining power can be increased largely with the help of internet. Customers using internet can hunt for best products or services across the world. It assists the customers to obtain more information, for example, actual costs incurred by the firm which can be recovered by lowering the mediator's costs. Internet minimizes the switch over costs as buyers can measure the differences between competing goods by visiting several websites offering similar products. There are many professional consultants or mediators who not only offer free or inexpensive services but also differentiate between various services offered by several business entities.
4) Impact on Supplier Bargaining Power and Supplier-Seller Collaboration :
Reaching the best suppliers located beyond the local boundaries is possible via internet technology. It also associates with them to attain cost effectiveness and cost savings. Companies can prolong their search for suppliers beyond the local or regional markets via internet, and explore other options of suppliers providing better quality, prices and abilities than the existing suppliers.
5) Overall Influence on an Industry's Competitive Structure :
Internet technology is a major reposition in competitive forces involving industries present in the market and comprising of the following consequences namely, increased competition, considerable threats at the entry level, considerable bargaining power over the vendors, a superior position in terms of bargaining from the buyer's end and also includes incentives for seller-supplier and seller distributor types of alliances. The extent of competitive pressure of a company increases due to the presence of internet technology, which is diminishing the industry attractiveness from profit making perspective.
Strategy-Shaping Features of Internet Technology
1) Global Competition and Wider Market :
Internet has compelled firms to compete at the international level by developing the geographic areas where the company has its presence. Buyers across the globe have an easy access to the online web store of firms. Language is no more an obstruction as visitors can select and browse the website in any language as per their convenience. Companies which offer features and quality suitable to the international standards have wider opportunities in the overseas market at comparatively low incremental costs.
2) Technological Advancements :
The technologies related to internet and personal computers are progressing at an undetermined pace and in unanticipated ways.
3) Lowers Variable Costs :
Variable costs have been reduced due to internet technologies and have inclined more towards fixed costs. Internet technologies and applications arranged are mainly considered as fixed costs identified by the kind of application and the range of a firm's operations. After establishing the applications, the costs incurred on the usage are variable in nature. The reduction in the costs achieved due to these applications can be considered as labour savings, inexpensive transaction costs, and other operating incomes which which are otherwise considered as variable costs as they are directly proportional to unit sales volume.
4) Diffusion of Technological Innovation :
Internet results in quick and wide spread of new technology and innovative ideas around the world. Companies across the world utilize internet communication to observe the recent technological and market developments. The continuously increasing number of websites is a good source to monitor new technologies and market updates. Business concepts and products which are widely adopted in one part of the world are either replicated or accommodated by companies exploiting potential markets in other parts of the world. Companies taking the initial moves in the new markets may have a brief advantage over others.
5) Speedy Operations :
With the increased use of internet technology companies find speed as an essential condition for continuing existence with the fast pace of events happening in the market. Several types of developments are taking place every day. Many times, competitive situations and quick moving markets place the late movers at a risk area.
6) Economical :
Internet is a low budget option for customer service. It provides unconventional ways of managing customer service and substituting on-site personnel. Companies manage customer problems with the help of internet which leads to less number of human resources. These human resources are used mostly to visit consumer's locations, and to manage customer issues by communicating with them through their call centers or directly.
7) Facile Financing :
E-commerce business having concrete business models strategies and voluntarily receive funds but businesses having uncertain prospects do not receive much funding opportunities. Internet encouraged the investors to anticipate various business opportunities. This enables venture capitalists to finance new business enterprises with effective business ideas and plans.
Internet and Competitive Advantage
The internet has redefined productivity norms in many industries. In this environment, companies will maintain their competitive edge only if they are distinct from their competition. Companies can build a sustainable competitive advantage by either being the cost leader or by differentiating their products and services from competitors so that they are able to charge a premium from customers. The company can achieve cost or price leadership in two ways:
1) Operational Effectiveness :
The advent of the internet has strengthened the productivity in the industry substantially. Being real time in nature the internet disseminates information across companies and industries. Also since it is an open stage which has practically no entry barriers, it can be accessed by all companies who can reap the benefits of new advancements in technology and methods. However since it is open source in nature, it also means that it is very difficult for companies to sustain their advantage. Best practices are copied by all companies on a real time basis and thus the company cannot reap the benefits of innovation for a long time. Therefore, though the internet has increased operational effectiveness of organizations, this has not led to a competitive advantage since the entry barriers are very low on the internet. Companies can copy new practices and methods very fast and thus there is a convergence in the industry which reduces the chances of any company from enjoying a competitive advantage. Since all products and services are alike, the customers base their decision on the price, and as a result, the profitability of the industry gets impacted.
2) Strategic Positioning :
Since it is very hard to sustain a competitive advantage through operation effectiveness, it becomes very Important for the company to create a distinct strategic position. This has to be totally different from its competitors. This different strategy can either be in the form of 'cost leadership' or 'price leadership'. A problem of the internet age is that companies seek to improve their operational effectiveness by focusing on speed and agility. However, in the absence of a unique and distinct strategy, focusing just on speed does not help the organisation. By doing this, the organisation. is not able to carve a distinct position in the industry and ends up being a "me too" company.. It is not easy to create a unique strategic position. It requires the company to have discipline in its approach. The company also needs to have patience in the strategy. It needs to stick with the strategy when the environment is not conducive. The company needs to make a trade-off between various competing activities and consciously choose profitability over growth. It is only then that the company is able to create a distinct strategic position in the industry.
E-Commerce Business Model and Strategies
The business model of a company is the methodology that it follows to earn revenue and profits. For example, the business model of Hewlett Packard involves selling printers at cost price to customers whereas the cartridges are sold at a premium of cost to customers. The cartridges therefore subsidize the printers. It is based on razor and razor blades business model of Gillette. Here, the razors are sold at cold to customers whereas the company makes money on the blades that customers buy subsequently.
When a company adopts a new business model, it can cause a lot of upheaval in the industry. Customers may whip existing businesses and adopt the new product or service. In this sense, a new business model can be said to cause a paradigm shift in the industry.
E-Commerce Model
E-commerce is becoming a very part of the established business models and is making a great impact on the performance of companies. Companies have been forced to look at their e-commerce models and make the internet the basis of their competitive and business strategies. It thus makes sense to look at the various e-commerce models that companies have adopted nowadays. Some of these models are as follows :
1) Pure Dot-com Strategies :
A strategy that revolves around a pure dot com model has the following features:
i) Distinctive Strategy that Delivers Unique Value to Buyers and Makes Buying Online Very Appealing :
Successful strategies in a pure e-commerce model revolve around delivering value to customers. This involves more than just offering the lowest prices to customers. A low price strategy helps in bringing customers but not long-term brand loyalty. Many e-commerce companies are shifting from a low price model to one which focuses customization. convenience to customers (like next day greater delivery), greater information on products and excellent customer service. This aims at making the overall online shopping behavior of the customer a wow experience.
ii) Deliberate Efforts to Engineer Value Chain that Enables Differentiation or Lower Costs or Provides Better Value for the Money :
Like brick-and-mortar businesses, online companies have the same need to create a space for competitive advantage. This involves adopting strategies and methods that enable it to be a low cost leader, ability to differentiate its products or services or be a low cost provider of products and services. Even if a company adopts a strategy of pricing its products lower than competition so as to get market share, it needs to ensure that its operations also have low cost advantages or that it outsources activities to other who can do the same at a lower cost.
iii) Focus on Limited Number of Competencies :
The companies which follow a pure e-commerce model follow a strategy of focusing on a set of key activities which allow it to develop proprietary internet applications. Non-core and low-value-adding activities are outsourced to other organizations who can execute the same at a lower cost. By developing proprietary internet software in house rather than getting it done from outside agencies, gives the organisation the opportunity to develop its competitive advantage over rivals. On the other hand, by outsourcing the non-core activities, the organisation is able to focus on activities in which it can differentiate itself from its competitors and hence create a sustainable competitive advantage.
iv) Strong Capabilities in Cutting-Edge Internet Technology :
Compared to other technologies, internet technology is still a new science and subjected to rapid technological advancements. Hence, it is very essential that a company which exists in the internet technology space should adopt new technology very quickly.
v) Innovative Marketing Techniques that are Efficient in Reaching Targeted Audience and Effective in Stimulating Purchases :
Internet marketing is a very expensive proposition. Companies should not be happy with the traffic that their websites generate or increased number of page views. The emphasis should be on the actual conversions. which take place and which ultimately lead to the revenue and profits for the organisation. This is called the look-to-buy ratio.
vi) Minimal Reliance on Ancillary Revenues :
The companies should charge the full price to the customers. The company should not resort to the practice of charging a low price and then covering up the revenue shortfall through other sources like advertising or cross promotions. Any revenue which the company gets from advertising or other streams should be used to increase the revenues and not subsidize the product sales of the company.
vii) Innovative, Fresh, and Entertaining Website :
The online companies need to adopt the same strategies adopted by "brick and mortar" companies with respect to merchandising and display. The traditional retail stores pay a lot of attention to the display of products. Likewise, online companies should also engage web merchandisers 80 that the product is displayed properly on the website, new shopping features are incorporated in the website (e.g. shopping cart), the product prices and promotions are regularly updated, no technology glitches occur during the buying experience, etc. Moreover, the website must be appealing, catch the attention and engage the customers and also be a source of entertainment.
2) "Brick-and-Click" Strategies :
Offline retailers have been forced in recent times to launch online versions as they were losing customers to online rivals.
For example, toy retailer Toys 'R' Us was forced to launch an online store to combat e-Toys. Similarly in India, offline stores like Big Bazaar and Reliance retail have entered the online space because of the immense popularity of online shopping with Indian customers.
This type of strategy is called combination of brick and click strategy in which the customer has the option to shop both online and offline. This type of strategy is very effective to counter the threat from pure online competitors. It also helps those customers who also want to have a look and feel of the product before they purchase the product. Banking is a very good example of a brick and click model. In this, the customer can combine offline features like ATM, convenience and personal banking as well as online features like online payment, fund transfers and check their account balances. In India, ICICI bank has a very good online presence and effectively combines brick and click features in its strategy.
Brick and mortar companies can get into online business at a very less cost. This is because they have already an established brand image and all they need to do is to create a website and a mechanism to process customer orders. Brick and click strategies have two major benefits They allow the company to penetrate more markets where currently the company may not be having stores. It also offers the customers of the company the chance to experience the company's products, seek information, make purchases, solve their problems/grievances, etc.
3) Other E-Commerce Business Models :
The other e-commerce models are :
i) Merchant Model :
The merchant model is similar to the traditional retail model. It aims at doing transactions of goods and services over the web. An example of this is the business model followed by Flipkart and Amazon in India. In this, the company utilizes the web to sell goods and services to the customers.
ii) Brokerage Model :
In the brokerage model the company charges a commission from buyers and sellers and enables a transaction between them. For example, eBay is a very good follower of brokerage model in which it charges a commission from buyers and sellers who transact on its platform. Online stockbrokers like icicidirect.com and sharekhan.com are also examples of companies which operate the brokerage model.
iii) Advertising Model :
The advertising model is similar to the traditional advertising business. For example, Google which provides content absolutely free to the customers. However since Google is so effective in creating traffic to individual websites, it charges advertisers for banner ads and online advertising space. In fact Google has a very innovative pay per use model of advertising in which subscribers can chose how much-money they want to spend on advertising.
iv) Mixed Model :
In the mixed model the company has revenues both from subscriptions and advertising. For example, Internet Service providers like Time Warner and America On-Line operate on mixed model.
v) Infomediary Model :
In the infomediary model, the company gathers information on the customers through various web analytic tools and then sells it to companies which are selling on the internet.
vi) Subscription Model :
In the subscription model, the company sells its digital products to other customers. For example, America On-Line sells its digital products on its network.
Key Success Factors in E-Commerce
Several factors have a key role in the success of any e-commerce venture. These are:
1) Providing Value to Customers :
The vendor who is providing the product or service to the customer should strive to provide value to the customer. The product should be attractively priced so that it attracts the maximum potential customers.
2) Providing Service and Performance :
The vendor should aim to provide a service which is responsive to the customer's needs and also creates a user friendly purchasing interface.
3) Providing Attractive Website :
The website should be attractively designed. The effective use of features like colors, graphics, special effects, text and content will help in this regard.
4) Providing Incentive for Customers to Buy and to Return :
The customer should be incentivized to buy and also to repeat purchases on the website. The company can do this by effectively utilizing sales promotion tools like coupon. discount coupons and codes and special discounts. The effective use of affiliate marketing also helps.
5) Providing Personal Attention :
The company should aim to provide personalized care to customers. The use of personalized websites, special purchase offers, etc., can also replace the human interface.
6) Providing Sense of Community :
The company can make use of Chat rooms, discussion boards, inviting customer input, customer loyalty programs in this regard.
7) Providing Reliability and Security :
The company should provide a service which is reliable and also maintains the security of customers who shop on the website. The company can employ parallel servers; make use of fail-safe technology and firewalls to this effect.
8) Providing 360-degree view of Customer Relationship :
This aims to provide a total view of the customer's experience to all the stakeholders of the organisation, i.e., customers, suppliers and the partners. However the flip-side is that some customers may find this intrusive.
9) Owning Customer's Total Experience :
The organisation treats all interactions with the customer as a part of the total customer experience.
10) Streamlining Business Processes :
The organisation makes alterations in the business processes so that they are more effective. This is done through business process re-engineering and the use of Information Technology.
11) Letting Customers help Themselves :
The endeavor is to make the customer self sufficient. This can be done by incorporating easy to use features in the websites and also by building a culture of quick response in the organisation.
12) Helping Customers do Job of Consuming :
The e-tailor can help the customer by providing him with information of consumption opportunities. This is done through the provision of comparative information and excellent search properties.
13) Constructing Commercially Sound Business Model :
It is very necessary that the business model followed by the e-commerce venture is sound. This will ensure the success of the enterprise.
14) Engineering an Electronic Value Chain :
The organisation aims to create an electronic value chain which focuses on a few core competencies.
Internet Strategies for Traditional Business
1) Operating Website to Handle Transactions :
Many companies which have established dealer and retail networks often find it difficult to venture into online sales because of conflict issues with channel. The approach these companies use is implementing the internet as an order or transaction generating medium. These orders and transactions are then passed on to the channel execute. This helps the manufacturer/wholesaler to avoid channel issues that will crop up if they execute online orders directly. A company which aggressively employs online sales and also has a robust retail network is guilty of not fulfilling its commitment to the channel. Adopting such a strategy can have the problem of pricing issues, discounting issues and will affect the relations of the company with the retailers and wholesalers. Since wholesalers and retailers are very important constituent of the distribution network of a company and play a very vital role in the reach of the company's products to end consumers, the company has to pay a lot of attention to the implications of a "brick and click strategy".
2) Using Online Sales :
Companies can also employ an incremental approach to online sales. In this, online sale is used by the company to gain some incremental revenue, to do some market research on the needs and preferences of customers and to get market feedback to new product launches. In this scenario, the reaction from the channel not much since the fraction of sales coming from the online channel is negligible when compared t the overall sales volume. In some cases the channel son also benefits as it gets the benefit of increased customer acceptance which gets reflected through repeat buyers of the product. For example, Nike uses this strategy to seek the specific requirements of customers about the design and type of shoe that they want. In other words, they try to customize their product through online sales.
3) Employing Brick-and-Click Strategy :
Here, the company employs a strategy to sell to customers directly through online sales vertical. In other words, the online sales vertical is in direct competition with the traditional channel of retailers and wholesalers. Selling the product through online sales has the advantage of cutting down on all the channel commissions that the total company pays (this is close to 35% of the t cost). The software industry employs this method to sell its software products directly to customers. Also as customers are able to download directly from the web, it also helps the company to save on packaging costs. Another industry which employs this method is is the music industry. However, both the software and the music industry rely on traditional brick mortar business of retailers and wholesalers in reaching the end consumers. This is because of the reach that a traditional channel enjoys and also some customers do not buy online. Even though online sales can cause channel conflicts, companies can still actively pursue this for two reasons :
- The profit margin made from online sales is much higher.
- Customers are also attracted by the case and convenience of transacting online. With increased word of mouth, the percentage of online sales goes up and also the profitability of the company.
4) Greater Use of Build-To-Order Manufacturing :
In this strategy, the company. uses the internet to build custom made products and ships them directly to end users. In this strategy, the company totally ignores the traditional channel of wholesalers and retailers. For example, this strategy has been employed by many PC manufacturers like Dell for instance. Many automobile companies have also utilized the net to make custom made components and have brought the delivery time down drastically. This strategy requires a high level of customization and flexibility in the company's manufacturing processes.
5) Building Systems to Pick and Pack Products :
The organisation also needs to select systems which pick and pack products that must be shipped individually. They can also employ specialist contract manufacturers for this job. The art of order fulfillment is a must for success in a brick and click strategy.