Impact of eCommerce in Today’s Business World

By Sam Jayanetti

Virtual companies and the internet are changing traditionally accepted economic practices and making competition even fiercer than it has ever been in the past. As the internet opens up larger markets to take advantage of, more and more flexible competitors are entering your market, all offering better priced value propositions in order to steal market share.

eBusiness: changing the landscape of your industry, the threat is real and it is here to stay!

Being an industry leader today is in no way a security blanket to confirm tomorrow’s success. In order to maintain competitive advantage and emerge as an industry leader tomorrow, established old school companies must be ready to take on the challenge of some difficult and painful changes.

Not only in leveraging IT to its limit but also to change the way employees and administration think and work to a whole new level.

ebusiness-1A new threat to traditional enterprise has arrived and established vertically integrated companies are caught off guard on how to defend successfully and win the war to retain exiting market share while expanding to new markets. Why has the world of eCommerce caused such a problem to established enterprise? The reason being that most brick and mortar companies are still strategizing to win according to old rules that do not apply in today’s eMarket. Today’s truly successful companies must embrace Information Technology and leverage it in order to achieve great results. Traditional Economic truths are no longer applicable in the virtual world of the Internet and in eBusiness, as accepted principles in Physics are not applicable with the inversed world of a black hole.

Following are some major changes to basic traditional economic thinking and business strategy that should be looked at carefully in order to adapt successfully into the future and experience growth.

Vertical Integration is the way, or maybe not…

Vertical Integration was tried tested and true in the past. The idea being that if you want something done right, do it yourself. Companies as they grew larger decided to include more and more processes to be completed in house. The entire process from R&D all the way down the chain to the retail level was handled in house in order to ensure that it be done exactly according to the requirements set forth at the offset. However this mentality is costing companies large unnecessary overheads making them inefficient and inflexible. In today’s marketplace there is an immergence of many smaller highly specialized firms who can execute these processes much more efficiently.

Stick to your core activities. If you are not the absolute best in the industry for performing a function that can be bought from another provider, DO NOT DO IT YOURSELF

Today’s economy is a truly global one. Outsourcing to another company specializing in a given function can help reduce unnecessary overheads, capital costs and investments, allowing a lot more room to maneuver and focus on providing customers with a value product ensuring success.

Traditional companies proud of the costly infrastructure and processes implemented through years of painful implementation and careful thinking are finding themselves being out-matched by smaller, leaner companies, even startups, based on the eCommerce model. eCommerce allows new startups to grab a hold of market share previously held by traditional companies very quickly as, in most cases, they do not carry inventory and do not have to deal with large overheads. Most eCommerce enterprises will sell items that are shipped directly to customers from distributors. This allows more fund allocation to finding out what the market is asking for and to ensuring superior customer service.

Amazon.com is a good example of how a virtual company challenged traditional enterprise and grabbed a fair market segment, forcing tradition book stores to also offer their products online often at a reduced price to what they would be sold at in store.

This is easier said than done as major investments have been made in the past into the production and supply chain in order to add value to the process. Therefore the disintegration of an enterprise is an extremely scary thought; however, the alternative is even bleaker.

Careful thinking and forging of the right partnerships is a must in order to ensure success.

Decreasing or Increasing Returns to scale?

A classic economic theory is that of Decreasing Returns to Scale, which states that no enterprise can continue to grow forever profitably. However, this principle does not apply directly to eBusiness, which has been shown to be able to sustain incredible growth extremely fast while increasing returns the whole way. The reason being that eCommerce is based heavily on information and communication and travels light.
As most eBusinesses have minimal infrastructure and inventory, it is possible to minimize the effect of this classically accepted economic theory. The bulk of investment can be allocated to R&D, IT Infrastructure (made upfront) and client relations/support. After which the cost per unit decreases dramatically compared to traditional models.

Increased returns to scale are also clearly evident for companies in the information based product industries; where distribution and sale through eCommerce can bring the cost per unit to almost zero. A good example of such enterprise would be software vendors who allow customers to research and purchase products and added licenses directly online. This allows a higher level of customer involvement, support and satisfaction. Most vendors allow clients to download a trial version of the latest release directly online after filling out a simple questionnaire that can be later used for R&D and marketing efforts. These trial versions are either limited time trials or with limited functionality, the former being more popular. The concept of try it before you buy it can truly be applied in this case.

Other products can also experience what is known as network effects causing the value of each unit to go up as number of individuals using each unit increases. A good example is how the common use of flash as a medium to display videos online has caused most users to have the flash plug-in installed on their computer. There are other platforms for displaying videos online provided by competitors to Adobe; however, as the popularity of Flash grows it is becoming more and more of an industry standard and therefore benefiting from the network effect.

Another major factor resulting in Increased Returns to Scale is an industry locking in to a specific vendor’s products. In any given industry, established standards are imperative for collaboration, therefore markets will converge towards the technology that is most likely to win out; this effect allowing popular vendors to grab a strong hold of a given market. In most markets there will be two or three top vendors who are enjoying such loyalty from clients. Microsoft products, for instance, have such a market share on commonly used software applications and eBay is a good example of an online auction house.

Another example was in the case of Beta vs. VHS – VHS dominating the market and never allowing BETA to gain popularity in the marketplace.

The flexibility and scalability of eCommerce allows companies to grow rapidly and adapt quickly to satisfy the market demands without suffering from Decreasing Returns to Scale.

Once vertical integration is re-assessed and quality partnerships are forged, a successful online initiative can result in much greater Increased Returns to Scale than could be expected through traditional methods. It is important to understand that the online venture for an established enterprise should always be part of a complete business model and not always intended to replace existing methods of distribution and sales but rather to act as an additional venue to gain exposure and increase returns. Some vendors chose to abandon traditional storefront for a complete virtual storefront. DELL Computers are a good example of such a company that has experienced incredible growth while showing Increased Returns to Scale while focusing their efforts on customer service, customer specific solutions and made to measure products. However this is definitely not a solution for every company.

This is not to say that Decreasing Return to Scale is no longer applicable as it is still the case when dealing with tangible physical assets. However this economical principle has less effect when it comes to intangible intellectual property and is only applicable to intangible value components of a business. In traditional business models it is almost impossible to think of such intangibles and customer service without the consideration of physical assets, capital as well as recurring costs. In eCommerce it is possible to easily separate these components from the physical and therefore allow easy scalability and flexibility with minimal added cost. A good example is the outsourcing of customer service to offshore providers, driving the cost down dramatically while allowing easy scalability without added cost in infrastructure, HR and training.

The result being that in any given industry the choices are made early on by customers. First on the scene will always gain a stronghold on the market, giving it enough momentum to carry on successfully into the future. This trend can only be upset by either the vendor making serious strategic mistakes or a competitor offering a revolutionary new solution with added value at a lower cost making the transition between vendors worthwhile.

Return on Intangibles

The centrality of physical assets is becoming less important in today’s commercial reality. In the past, the intangible assets helped businesses be competitive in their industry but strong emphasis was also put on their physical assets such as plants and equipment along with good management(HR), customer relations & support and IT infrastructure to achieve competitive advantage. However these intangibles have had little or no value when separated from a business’s physical core. Intellectual property added value and was considered as part of the cost of doing business but not a source of revenue to the business in itself. Developers were not be able to effectively collaborate with manufacturers to produce the goods causing returns to be small and the manufacturers would eat into the developer’s profits during the negotiations; the cost of collaborating between developers and manufacturers was too high.

The internet has allowed companies to give more emphasis to the intangibles and bring them to the front line and turn their value into revenue. Making communications and collaboration between companies easy and inexpensive, eCommerce allows intangible assets to be leveraged across a much larger buyer base. As eCommerce offers a model with no more time and space constrains, companies no longer have to co-locate with the tangible means of production.

A good example is eBay. With almost no physical assets, eBay was valued at $1.88 billion dollars at the IPO, surpassing Sotheby’s value of $1.02 billion dollars. Physical assets are not important to businesses within the eEconomy as was in the Industrial age. But instead it is a company’s intellectual property and customer relationships that drive eCommerce businesses and result in positive cash flow and returns.

Once again a sour note to more established enterprises with large physical assets and overhead. Such businesses also have great intellectual property, loyal customer base and market insight gained through years of experience. However the profit margins that can be leveraged through these intangibles are all minimized by the inefficiency and high cost of their physical assets.

The assumption of “Perfect” Information

One of the basic traditional assumptions in Economics is the assumption that actors in an economy have access to ‘perfect’ information. Meaning that vendors know what buyers want and the buyers know exactly what all the vendors are offering. This assumption has never been truer than in the internet era.

Information has never been perfect and accurate, as it is difficult and expensive to acquire quality information with some players having more than others. Not all vendors are equal and have access to the same quality of information. For instance, consumer goods manufacturers have spent large amounts of money in an attempt to gain insight into the likes, dislikes, needs and behaviors of their respective markets. In the past it was considered a breakthrough when marketing personnel were able to understand and dissect a large vague client base into smaller less vague customer bases.

Customers also had very little insight about the quality, price, availability and alternative sources before making a choice in purchasing a product or soliciting a service. A customer’s primary source of information was advertising, provided directly by the manufacturers designed to entice a potential client to buy, and through word of mouth reference from a known party, both sources being not objective and/or accurate.

The introduction on the internet allows sellers to be able to get insight on their customer’s habits and hopes, not only at a segment level, but an individual level, translating into quality targeted products and services being offered to clients. The web is having an enormous impact on how customer-driven businesses conduct R&D, service and market their products to existing and potential clients.Having such information allows vendors to be able to offer clients exactly what they want, developing a loyal client base that is fully satisfied. A good example is Dell Computer Corporation. Before, clients would step into a retail storefront and purchase a pre-configured PC that had been designed to appeal to a given broad market segment. In today’s world of design your own PC, Dell offers clients the opportunity to purchase exactly the PC they are looking for, having 100% customer satisfaction.

The other main aspect that the internet has revolutionized is the availability of an extensive array of resources about any given product to the client. Comprehensive information regarding a vendor, their product lines and even reviews made by countless individuals and its price relative to almost all of its competitors are available online, usually free of charge. As a result, sellers have lost the power they have gained from the inequality of information, to the extent where price is no longer the main prerogative, but rather client satisfaction. Customers are always being bombarded with better propositions from competitors and vendors must always stay a step ahead to maintain their client base.

As a result the customers are always searching and finding great bargains. Priceline.com for instance, invites their clients to ‘make on offer’ to airlines and hotels for their air travel and accommodations at a desired destination, which airlines and hotels with otherwise empty seats or rooms can decide to take or leave.

Today’s buyers and sellers are both living in an Information Age. We see companies offering clients more and more transparency in terms of their offers vs. that of their competitors, with some even going as far as to provide this information within their own website. For instance, Progressive.com has made it the center of their marketing strategy to show their clients the offers they would get from competitors, something unheard of in the past.

The term ‘Perfect’ is still not applicable, but we are the closest today than we have ever been in the past. Marketers and strategists now must learn to make sense of the vast volume of information they are faced with on a daily basis and learn to read trends and filter garbage quickly enough to act faster than ever before.

No Time To Spare

The last revolutionary effect of eCommerce on strategy stems directly from the fact of its very virtuality. In the past businesses wanting to enter the marketplace had to depend upon the design, means of production, marketing, planning and sales being coordinated by a central vertical enterprise converging finally at a physical location; the storefront. This meant a daunting and expensive task for new sellers wishing to enter the market. If they did not have the right elements all in place and a proper vision of the future and were unable to bring all the necessary elements together, it meant that they would not be able to participate in the game and succeed. All these individual elements had to be performed under one roof, creating the vertical model thanks to the limiting nature of traditional business in terms of the high costs of collaboration and poor communications between partners.

These classical restrictions do not apply in the eCommerce business model as coordination can be achieved easily, virtually, at a very low cost. Entire supply chains can be created quickly through linking desktops together. The physical locations of the seller, the warehouse and the payment processor and whether it is three independent companies is a fact that is immaterial to the buyer of eCommerce storefronts. All the buyer expects is that the quality, price and service are met according to their wants.

This all looks like a great opportunity for any business person looking to carve out a small piece of the market. Unless you are an established enterprise, in which case the online eCommerce sellers are a real dangerous threat. What is to prevent any random person from registering a URL and entering your market and stealing your share? Not much, and it is being done everyday, putting established businesses on their knees. On the other hand, with the industry experience and expertise that established firms have, along with their existing customer base, what is stopping these businesses from doing the same? The answer is fear of change and the costs involved in adapting. But unfortunately there is not much choice in the matter. If you want to survive you must adapt and evolve. Forward thinking CEO’s will always maintain their competitive advantage and survive in an even fiercer marketplace.

Senior executives are notorious for not being proactive. Always being reactive and not willing to embrace the changes in the marketplace, especially in terms of the real threat posed by the online sellers. Always thinking in brick and mortar terms and being unable to process the virtual world of eCommerce. Meeting the new challengers in the marketplace and emerging victorious can only be achieved by beating the new comers at their own game. It’s time to start thinking outside the box and restructuring your business to adapt to the new market.

A prime example of an established enterprise having difficulty competing with the newly emerging eBusinesses is that of Blockbuster vs. Netflix. Blockbuster is an enterprise that has enjoyed many years of success within the market, as one of the largest video rental and sales franchises in the world. Netflix, being a new eCommerce enterprise offering a value proposition to the customers of Blockbuster, has managed to steal a segment of their market. As the threat was perceived to be real and dangerous, Blockbuster has implemented a value added feature to their regular in store rentals by allowing customers to rent films online (which they receive in the mail) and exchange them at a physical storefront if they wish, giving them the added option of exchanging the viewed DVD for a new one at a local Blockbuster franchise. Whereas the clients of Netflix have no such option but to mail the DVDs back and eagerly wait for their newly selected films to arrive in the post.

The first step in such a frightening evolution is to re-evaluate your business model, putting less emphasis on the physical infrastructure. Keep in mind the golden rule : ‘Stick to your core activities. If you are not the absolute best in the industry for performing a function that can be bought from another provider, DO NOT DO IT YOURSELF”

List of points that you should review carefully:

  • What are the expectations of the market?
  • What are the products customers want to buy?
  • Am I competitive within my industry?
  • What is the most effective value proposition I can offer to customers in the short, medium and long run?
  • What roles should I play-make, sell or service-and who are my customers?
  • Who are my competitors, and how do I need to be positioned?
  • What is my operating model?
  • With whom should I partner/network?

Your answers, if they are assisted by a good understanding of your market and industry, as well as the economic implications and the opportunities of the eEconomy, will result in a very clear and different vision of your business and its model for the future. With this in mind you must implement an enterprise wide vision for your future which has to be identified and defined thoroughly; one that will help you get your staff on board and bring you to your final destination successfully.

For most businesses, achieving such vision will require a greater understanding and expertise in the strategic and operation applications of Information Technology, which is the driving force of the quick evolution of eCommerce. You will definitely need to incorporate cross-industry, cross-functional perspectives and expertise as the businesses of the future will be molded by customer needs and relations and not by core competencies.

When the smoke clears and the dust settles in the end, strategy is only as good as its execution. This newly constructed economic strategy will have to be translated into changes not only related to Technology but also to processes and HR. Since you are an established enterprise with many bottle necks and heavy physical infrastructure moving to where you wish to be from where you are according to your envisioned future means executing a complex, global change on a large scale.

At the end it involves a great deal of work and innovative vision which needs to be shared at all levels of your enterprise. The first step is to take this threat seriously and begin planning for the defense.

A whole new leaner, meaner breed of competition has arrived at your doorstep ready to take your market share away, hungrier than ever.

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