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Chapter 1

Framework

for

e-Commerce

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

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Key questions covered in this chapter:

• What are the categories of e-commerce?• What are the new views of strategy in the

networked-economy?• What is the framework for the field of e-

commerce?• Why does a senior manager need to know all

four infrastructures?• What are the roles and responsibilities of senior

e-commerce managers?• What key challenges do senior leaders face

today?

1-4e-Commerce as the Networked Economy

The networked economy business traits can be summarized as:

• Create value largely through gathering, synthesizing and distribution of information

• Formulate strategies that make management of the enterprise and technology convergent

• Compete in real time rather than in “cycle time” • Operate in a world characterized by low barriers to entry,

near-zero variable costs of operation and shifting competition• Organize resources around the demand side rather than

supply side• Manage better relationships with customers through

technology

1-5Definition

– It is about the exchange of digitized information between parties

– It is technology-enabled– It is technology-mediated– It includes intra- and interorganizational

activities that support the exchange

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How Do We Define e-Commerce?

Technology-mediated exchanges between parties as well as electronically-based intra- or inter-organizational activities that facilitate such exchanges

1-7Distinct Categories

• Business-to-Business– The full spectrum of e-commerce that can occur between

two organizations.

• Business-to-Consumer– Exchange between businesses and consumers, such as

those managed by Amazon, Yahoo etc.

• Peer-to-Peer– Exchanges between and among consumers e.g. eBay.

• Consume-to-Business– Consumers can band together to present themselves as a

buyer group in a C2B relationship.

1-8Exhibit 1.1: Four Categories of e-Commerce

Business originating from…

Business Consumers

An

d S

elli

ng

to…

Con

sum

ers

Bu

sin

ess

B2B

B2C P2P

C2B

1-9Distinct Categories of e-Commerce

• Business to Business (B2B) refers to the full spectrum of e-commerce that can occur between two organizations.

This includes purchasing and procurement, supplier management, inventory management, channel management, sales activities, payment management &service and support.

Examples: FreeMarkets, Dell and General Electric • Business to Consumer (B2C) refers to exchanges

between business and consumers, like the ones managed by Amazon Yahoo and Charles Schwab & Co.

The activities tracked are consumer search, frequently asked questions and service and support.

1-10Distinct Categories of e-Commerce (cont’d)

• Peer to Peer (C2C) exchanges involve transactions between and among consumers. These can include third party involvement, as in the case of the auction website Ebay.

Examples: Owners.com, Craiglist, Monster

• Consumer to Business (C2B) involves when consumers band together to present themselves as a buyer in group.

Example: www.speakout.com

1-11Converging Categories of e-commerce

• A single chain of e-commerce will ultimately emerge

• The chain will be superset of categories noted above.

• Important to think of a single demand-and-supply chain

• The categories of e-commerce are not distinct , but rather intimately linked in a broader network of supply and demand

1-12Exhibit 1.2: Convergence of e-Commerce Categories

Business originating from…

Business Consumers

An

d S

elli

ng

to…

Con

sum

ers

Bu

sin

ess

Publishers order paper supplies from

paper companies

Amazon orders from publishers

Consumers aggregate to bulk

purchase from Amazon

Consumers resell copies on eBay

Consumers buy thousands of Harry Potter books from

Amazon

1-13Strategy Making in a Rapidly Changing Environment

Classical Strategic planning

• This begins with the specification of the mission and vision of the firm.

• A careful balance of internal and external analysis leads to a choice of strategy for the company as a whole called “corporate strategy”.

• Strategies that relate to specific divisions within a company are termed as “business-unit strategies”.

How can a company faced with the changing online environment set a strategy?

1-14Exhibit 1.3: Classic Framework for Strategy Management

Mission

Goals

Implementation

Control and Monitoring

StrategyFormulation

•Corporate•Business-unit

•Functional•Operating

External

Analysis

Internal

(Company)

Analysis

1-15New Views of e-Commerce Strategy

• Speed of change and adaptation must be figured into the classical strategic management equation.

1-16New Views of e-Commerce Strategy (cont’d)

Sense and respond paradigm:

• It provided an approach to strategic thinking that was intuitive, actionable and easy to implement.

• It made companies focus on listening in a new manner to customers to reduce the high levels of uncertainty.

Drawbacks:

• Its very reactive and the starting point is always the customer.

• This is more appropriate for traditional offline companies.

1-17New Views of e-Commerce Strategy (cont’d)

Strategy as rules: Focus on “simple rules” rather than complex strategic planning exercises.

• Simple rules help the senior e-commerce manager recognize positive (or negative) situations and react accordingly.

• Psychologists – or , more specifically , decision scientists – term these cognitive approaches “patterned recognition”

• For example chess players intuitively recognizes various board patterns as they emerge and can anticipate the reactions of competitors.

1-18The Three Approaches to Strategy

• Position approach: “Where should we be vs. our competition?”

• Resources approach: “what resources should we possess?”

• Simple rules approach: “What processes should we follow?”

1-19Exhibit 1.4:Three Approaches to Strategy

Position Resources Simple Rules

Strategic Logic

Strategic Steps

Strategic Question

Source of Advantage

Works Best In

Duration of Advantage

Risk

Performance Goal

• Establish position • Leverage resources • Pursue opportunities

• Identify an attractive market• Locate a defensible position• Fortify and defend

• Establish a vision• Build resources•Leverage across markets

• Jump into the confusion•Keep moving•Seize opportunities•Finish strong

• Where should we be? • What should we be? • How should we proceed?

• Unique, valuable position with tightly integrated activity system

• Unique, valuable, inimitable resources

• Key processes and unique simple rules

• Slowly changing, well-structured markets

• Moderately changing, well structured markets

• Sustained

• It will be too difficult to alter position as conditions change

• Sustained • Unpredictable

• Company will be too slow to build new resources as conditions change

• Managers will be too tentative in executing on promising opportunities

• Profitability • Long-term dominance • Growth

• Rapidly changing, ambiguous markets

1-20Factors of Consumer Behavior in the Online Environment

The 2 key factors that are of paramount importance in the online environment are:

• Customization: This refers to the personalization of communications between users and a website.

• Interactivity: is defined as the user’s ability to conduct two-way communications. This includes user to user and firm to user communication.

1-21The Process of Emergent Strategy

• Internet has forced companies to react more quickly• Henry Mintzberg observed what he terms “emergent strategy”• These emergent strategies are the unplanned responses to

unseen changes• Not the classical top-down analyses of the formal planning

process• Real time changes in strategy that are often felt and initiated

by the troops.• Sense-and-respond approach is typically directed by senior

managers• Emergent strategy often comes from the executives who are

at the front lines executing the strategy.• The firms often modify their intended strategy as the forces of

the four infrastructures change.

1-22Exhibit 1.5: A Comprehensive Framework

Media Infrastructure

e-Commerce Strategy

Public Policy

Technology Infrastructure

Capital Infrastructure

1-23The Strategy Formulation Process

There are six interrelated, sequential decisions to strategy:

• Framing the Market Opportunity

• Business Model

• Customer Interface

• Market Communication and Branding

• Implementation

• Metrics

1-24Exhibit 1.6: e-Commerce Strategy

Framing the Market

Opportunity

Business Model

Customer Interface

Market Communication and Branding

Implementation Metrics

1-25The Context of Strategy Formulation: The Four Infrastructures

• Successful strategies emerge from a deep understanding of where the market – and , hence, the cash flow – will be in both the short-term and long-term future.

• Market is the important word in this sentence• Market certainly involves the customers –

indeed , the customer is at the center – a market also includes the buyers and sellers as well as the broader contextual forces shape the nature of the marketplace exchange

• There are four critical forces that the e-commerce manager must know and manage

1-26The Context of Strategy Formulation: The Four Infrastructures

• Technology infrastructure: This is both an enabler and driver of change.The hardware backbone of computers, routers, servers, fiber optics, cables, modems, etc. provide half of the technology equation.The other half includes the software and communication standards including the core protocols for the www.

• Capital Infrastructure: Deals with getting the money to launch new businesses and finding the right people to build the business plan and seek funding sources.

1-27The Context of Strategy Formulation: The Four Infrastructures (cont’d)

• Media infrastructure: The e-commerce managers must make choices about the types of media employed(e.g., print, audio , video), the nature of the media and editorial policy(including style, content, look and feel).

• Public Policy Infrastructure: All the decisions related to strategy, technology, capital and media are influenced by laws and regulation, i.e., public policy decisions. It not only affects specific business but also direct and indirect competitors.

1-28Why a senior Manager Needs to Know All four Infrastructures

• Consider media company Bertelsmann and in particular Bertelsmann Music Group (BMG)

• One of the largest music companies in the world

• Music companies are organized around several functions

1-29Functions of Music Companies

• 1 Artist and repertoire

• Recording

• Manufacturing

• Distribution

• Marketing

• Music sales

1-30Types of questions for BMG executives

• E-commerce strategy– Has the digitization of music revealed

unmet or underserved needs that MBG can exploit?

– Has the internet brought new , indirect competitors?

– Can BMG find a sustainable revenue model on the internet?

– Etc.

1-31Roles and Responsibilities of a Senior e-Commerce Manager

Senior managers need to have the basic business skill set of traditional managers but must also incorporate new knowledge, skills and capabilities. The roles and responsibilities include:

Cross Discipline, Integrative position: • Entrepreneurship is at the heart of any online business.The manager should be

able to make strategic decisions quickly and authoritatively.

• They should be trained in a variety of disciplines including marketing, logistics, accounting, and finance.

• They should also add two new disciplines to the mix: technology sophistication and media knowledge.

• They should also understand the role of mass communication in a media business.

1-32Exhibit 1.7: Relevant Disciplines for a Senior e-Commerce Executive

Entrepreneurship

Strategic Management

MarketingFinance

Operations and LogisticsAccounting

Technology New Media

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• The day to day responsibilities of a senior e-commerce manager include:

• Provide vision for the online business.– One the most important tasks of e-commerce manager is to

establish the vision for the online business.

– Superior visions often reflect something more than simple revenue or business goals.

– “We want to be the largest online supplier of ethical, over-the-counter drugs”

– “We want to help people recover from illness to improve their social, medical, and family welfare”

Roles and Responsibilities of a Senior e-Commerce Manager (cont’d)

1-34Roles and Responsibilities of a Senior e-Commerce Manager (cont’d)

– Strong visions provide direction for employees to rally around ,encourage investors to “bet” on the company , and send a signal to the market that the firm is able to provide leadership in the evolution of industries.

• Set process and outcome goals by specifying clear performance targets.

• Formulate strategic direction and choice by making concrete choices- and associated tradeoffs- related to each phase of the e-commerce strategy process, including market opportunity, business model specification and design of the customer interface.

1-35Roles and Responsibilities of a Senior e-Commerce Manager (cont’d)

• Drive implementation: Strategy implementation is about making the right choices related to people, structure, systems and processes to execute the strategy.

• Accountable for performance: The senior manager is responsible for the performance of the organization.

1-36Exhibit 1.8: A Flow Diagram of the Strategic Responsibilities

Set Vision

Establish Goals

Formulate Strategy

Drive Implementation

Be Accountable for Performance

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• Line Executive: The senior manager may be a line executive who is responsible for the profit and loss of an online initiative.

• Staff Executive: A staff executive does not have formal profit and loss responsibility for a business. Their role is to support the efforts of the line executives in the execution of their strategy.

Location of the Sr. Manager in the Organization

1-38Exhibit 1.9: Where to Find Senior e-Commerce Managers Within Existing Bricks-and-Mortar Companies

Corporate Business Unit Stand-Alone

Line Executive

Staff Executive

•Corporate site management

•Cross-business-unit integration site

•Supports corporate-wide initiatives

•Report to general manager of business unit

•Separate business from corporate parent

•Supports and advises strategic business unit e-commerce initiatives

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• Understanding Customer Evolution: The challenge here is to invest heavily in understanding the customer needs and invest in advance so that the launch of the innovation coincides exactly with the customer needs.

• Charting Changing Technology: The senior executive must be well schooled in the basic and emergent technologies. Picking the right technologies and investing ahead of the curve is a constant, high-stakes gamble for the senior management team.

Key Challenges for Senior Leadership in Today’s Environment

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• Balancing Irrational Exuberance and Irrational Doom: The executive must continually reassure that the business model makes sense, spell out the path to profitability and paint a vision that can rally all relevant stake holders, including partners, customers and employees.

• Integration of Offline and Online Activities: Customer- facing activities need to be made ready for the web.

• Identifying the Key Levers of Competitive Advantage: The best senior leaders are able to reallocate their resources and capabilities in anticipation of evolving competitive landscape.

Key Challenges for Senior Leadership in Today’s Environment (cont’d)