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Finishing off my posts on this blog, I conclude with some final thoughts about e-business / e-commerce and the associated challenges faced by businesses in managing innovation and change in the context of the impact of Web/Internet on business competition. These bring together various topic strands from previous weeks.

For completeness sake:
• E-business refers to the integration, through the Web/Internet, of all an organization’s processes from its suppliers through to its customers. For example, a company may use a website to manage information about sales, capacity, inventory, payment and so on – and to exchange that information with their suppliers or business customers. In other words, they use the internet to connect all the links in their supply chain, so creating an integrated process (what is termed “Management in Practice’).
• E-commerce refers to the activity of selling goods or services over the Web.

As discussed last week, networked information systems enable companies to coordinate joint processes with other organizations across great distances. Transactions such as payments and orders can be exchanged electronically, thereby reducing the cost of obtaining products and services. Many such systems use Web/Internet technology, with labels such as extra-organizational systems, e-commerce, e-business systems and supply chain management systems (collectively, inter-organizational systems).

The relationship between a company and its channel partners can be fundamentally shifted by the Web/Internet (or by other applications of inter-organizational systems). They can create new relationships between an organization, its customers, suppliers and business partners, redefining organizational boundaries. Firms are using these systems to work jointly with suppliers and other business partners on product design and development and to schedule work in manufacturing, procurement and distribution.

This fact is because electronic networks can help to bypass channel partners – so-called disintermediation. Disintermediation is when intermediaries, such as distributors or brokers (whose function is to link a company to its customers), are removed. For example, a manufacturer and a wholesaler can bypass other partners and reach customers directly. The benefits of disintermediation are that transaction costs are reduced and that it enables direct contact with customers. This also makes it possible to increase the reach of companies, e.g. from a local presence to a national or international presence.

Disintermediation can be contrasted with reintermediation (the creation of new intermediaries between customers and suppliers by providing (new) services such as supplier search and product evaluation helping customers to compare offers and link them to suppliers: examples are Yahoo and Amazon).

From a management perspective, the challenge of transforming a company into an e-business lies in reorganizing all the internal processes. A major concern of companies moving towards e-commerce or e-business has been to ensure they can handle the associated physical processes. These include handling orders, arranging shipment, receiving payment and dealing with after-sales service. This gives an advantage to traditional retailers who can support their website with existing fulfilment processes. Given the negative effects of failure once processes are supported by inter-organizational systems, it seems advisable to delay connecting existing systems to the new system until robust and repeatable processes are in place.

Kanter (2001) found that the move to e-business for established companies involves a deep change. She found that top management absence, short-sightedness of marketing people and other internal barriers are common obstacles. Based on interviews with more than 80 companies on their move to e-business, her research provides ‘deadly mistakes’ as well as some lessons, including:
• Create experiments and act simply and quickly to convert the sceptics.
• Create dedicated teams, and give them autonomy. Sponsor them from the wider organization.
• Recognize that e-business requires systemic changes in many ways of working.

Earlier, I identified the management job as being to add value through the tasks of planning, organizing, leading and controlling the use of resources. In particular:

• Planning – this deals with the overall direction of the business, and includes forecasting trends, assessing resources and developing objectives. I also introduced Porter’s five forces, widely used as a tool for identifying the competitive forces affecting a business. Information technology can become a source of competitive advantage if a company can use them to strengthen one or more of these forces. Managers also use IS to support their chosen strategy – such as a differentiation or cost leadership. IS can support a cost leadership strategy when companies substitute robotics for labour, use stock control systems to reduce inventory, use online order entry to cut processing costs, or use systems to identify faults that are about to occur to reduce downtime and scrap. A differentiation strategy tries to create uniqueness in the eyes of the customer. Managers can support this by, for example, using the flexibility of computer-aided manufacturing and inventory control systems to meet customers’ unique requirements economically.
• Organization – This is the activity of moving abstract plans closer to reality, by deciding how to allocate time and effort. It is about creating a structure to divide and coordinate work. Information systems enable changes in structure – perhaps centralizing some functions and decentralizing others. For example, Siemens have used the Internet to bring more central control.
• Leading – This is the activity of generating effort and commitment towards meeting objectives. It includes influencing and motivating other people to work in support of the plans. Computer-based IS can have significant effects on work motivation, by changing the tasks and the skills required. >>>
• Controlling – Computer-based monitoring systems can constantly check the performance of an operation, whether the factor being monitored is financial, quality, departmental output or personal performance. Being attentive to changes or trends gives the business an advantage as it can act promptly to change a plan to suit new conditions.

The Web, like other new technologies, also enable processes of international business, since firms can disperse their operations round the globe, and manage them economically from a distance. The technology enables managers to keep in close touch with dispersed operations – though at the same time raising the dilemma between central control and local autonomy. This internationalisation effect also makes possible working interdependently with other organizations: previously this was constrained by physical distances and the limited amount of information that was available about the relationship. As technology has advanced, interdependent operations become more cost effective – most obviously through outsourcing and other forms of joint ventures. Companies can routinely exchange vast amounts of information with suppliers, customers, regulators and many other elements of the value chain. This implies that managers need to develop their skills of managing these links (to foster coordination and trust between network members).

In summary, the Web enables radical changes in organizations and their management. It enables management to erode the boundaries between companies, through the use of inter-organizational systems. They can then develop systems for e-commerce and e-business, ultimately connected with all stages in their supply chain.

As well as transforming the internal context of organizations, the Web also affects the external context (hand in hand with internationalization and other factors) to transform the competitive landscape in which firms operate. The Web has enabled companies offering high-value/low-weight products to open new distribution channels and invade previously protected markets. These forces have collectively meant a shift of economic power from producers to consumers, many of whom now enjoy greater quality, choice and value. Managers wishing to retain customers need continually to seek new ways of adding value to resources if they are to retain their market position. Unless they do so, they will experience a widening performance gap (when people believe that the actual performance of a unit or business is out of line with the level they desire).

I have also considered how people introduce change to alter the context, with management attempting to change elements of its context to encourage behaviours that close the performance gap. For example, when supermarkets introduced on-line shopping, their management needed to change technology, structure, people and business processes to enable staff to deliver the new service. Thus there is an interaction between context and change: with change affecting context but also context (organisational culture) affecting change.

This week I looked at the workings of competitive markets: first in basics, before turning more specifically to my research question around how the Web has changed competition between businesses from an economic viewpoint. I continue to refer to the Sloman, Hinde and Garratt book, ‘Economics for Business’ (5th ed).

As outlined in my posts on management studies from previous weeks, firms are greatly affected by market environments (particularly when it comes to pricing strategies). The more competitive the market, the greater the domination of the market over firms (e.g. resulting in ‘price takers’ nearer the model of the ‘perfectly competitive’ market when price is entirely outside a firm’s control, rather than ‘price setters’ nearer the model of the monopolistic, ‘imperfect’ market).

Although price is often at the heart of competitive strategy, the significance of non-price factors of competition should also not be underestimated. By differentiating one firm’s products from another’s, such as through design and marketing/advertising, firms seek to influence demand. Of course, the most dramatic growth in advertising expenditure over the last decade or so is on the internet (which increased from virtually nothing in 1998 to nearly 20% of all UK total advertising expenditure in 2008 based on data in the Advertising Strategic Yearbook 2009).

The better a firm’s knowledge of a market, the better it will be able to plan its output to meet demand. In particular, knowledge related to the size and shape of current and future demand choices by consumers is critical to the investment decisions that businesses make (Philip Collins, OFT Chairman, Speech 2009). Such predictions include the strength of demand for a firm’s products followed by responsiveness to any changes in consumer tastes (particularly when the economic environment is uncertain). Collecting data on consumer behavior is therefore highly valued by businesses, assuming it can be analyzed properly so it can be used to estimate price elasticity and forecast market trends and changes in demand. Price elasticity as a concept is the measure of the responsiveness of quantity demanded to a change in price. Methods for measurement include market observations, market surveys and market experiments.

Conversely, consumers face a similar problem when they have imperfect information about, in particular complex, products/services. In finding ways for consumers to trust information provided by sellers, establishing a reputation and third parties helping firms to signal high quality can assist. For example, Sloman, Hinde and Garratt refer to the online auction site eBay providing a feedback system for buyers and sellers so they can register their happiness or otherwise with sales.

The supply side of the market is just as important as the demand side. Businesses can increase their profitability by increasing their revenue or by reducing their costs of production. Both these concepts are subject to economic theorizing to discover the particular output at which profits are maximized. The answer in any one case is heavily dependent on the amount of competition in the market which is measured, in turn, by concentration levels.

E-commerce is a force at work undermining concentration (dominance by large consumers) and bringing more competition to markets. Its effects include:

• Bringing larger numbers of new, small firms to the market (‘business to consumer’/B2C and ‘business to business’/B2B e-commerce models), which can take advantage of lower start-up and marketing costs.

• Opening up competition to global products and prices, resulting in firms’ demand curves becoming more price elastic particularly when transport costs are low.

• Adding to consumer knowledge, through greater price transparency (e.g. through price comparison websites) and online shopping agents giving greater information on product availability and quality.

• Encouraging innovation, which improves product quality and range.

On the other hand, e-commerce disadvantages still include – for example – issues around delivery (such as timing) and payment security. Furthermore, larger producers may still be able to undercut small firms based on low cost savings from economies of scale.

Sloman, Hinde and Garratt provide an interesting case study of the challenges to Microsoft by the antitrust authorities in the EU and the US – something which I am very familiar with as a former competition lawyer. This example is illustrative of the balancing exercise required when assessing the virtues of allowing very large firms to be unfettered in terms of their potential exclusionary practices, versus allowing smaller firms a more even playing field to challenge such large firms which could dampen the latter’s investment in innovation over the long-term.

Of course, new internet-only firms (such as Facebook and Google) have very different business models from that of Microsoft, including the provision of numerous free products as part of a desire to create large networks of users and heavy dependence on tailored advertising revenues.

Next week, I will look at business strategy this time from an economic (rather than management) perspective.

Last week I wrote about organization contexts. This week I wanted to change tack to consider business planning and marketing, and how they fit within the competitive process (in particular, in the online world). Changes in the external world create uncertainty and management planning is a systematic way to cope with that and to adapt to new conditions.

Strategic plans apply to the whole organization or business unit, setting out the long-term goals and objectives of an enterprise (effectively, where it wants to be and how to get there). It will usually combine an analysis of external environmental factors with an internal analysis of the organization’s strengths and weaknesses. This can be referred to as a SWOT assessment (bringing together reflection on internal Strengths and Weaknesses and external Opportunities and Threats). It includes drawing information as described in last week’s post as Porter’s five forces analysis of the competitive environment in which organizations are situated.

Forecasting is relevant in dynamic and complex situations but encounters problems when the sector is marked by rapidly changing trends. So-called scenario planning is an attempt to create coherent and credible alternative stories about the future. For example, consideration might be given to how the internet (as a major force in the external environment) might affect a company’s business over the next 5-10 years. According to Boddy, this process can bring together new ideas about the environment into the heads of managers, thus enabling them to recognize new and previously unthinkable possibilities. This, in turn, facilitates the development of contingency plans to cope with outcomes that depart from the most likely scenario. On the downside, the scenario planning process is time-consuming and costly.

Once a plan has been formulated, the next stage is to identify what needs to be done by whom. New technological projects often fail, for example, because planners pay too much attention to the technological aspects and too little to the human aspects of structure, culture and people. Good communication and implementation structure are therefore key.

Hand-in-hand with planning is the topic of decision-making under management theory, including the ability to recognize a problem and set objectives in trying to find a solution. A company facing rapidly changing technological and business conditions needs to be able to make decisions quickly. Boddy gives the example of managers at Microsoft being slow to realize that Linux software was a serious threat which caused a delay in competitive reaction.

There are various decision-making management models, including: computational strategy (rational model); compromise strategy (political model); judgmental strategy (incremental model); and, inspirational strategy (garbage can model). It is interesting to make comparisons between economics and the first aforementioned model which suggests that the manager’s role is to maximize economic return to the company by making decisions based on economically rational criteria. Developments in technology have encouraged some observers, says Boddy, to anticipate that computers would be able to take over certain types of decisions from managers. It is true that new applications are used in many organizational settings when decisions depend on the rapid analysis of large quantities of data with complex relationships by using rational, quantitative methods (such as in utility companies). Such automated decision-making systems “sense online data or conditions, apply codified knowledge or logic and make decisions – all with minimum amounts of human intervention” (Davenport and Harris, 2005). Of course, a behavioral theory of management decision-making – as well as economics in general – is also possible.

Understanding strategic management decisions also helps to analyze an organization’s perceived relationship with the outside world set against the particular features of the market in which it competes. In the early stages of a market’s growth, there are often few barriers to entry and establishing customer loyalty is all-important, but this changes as the market matures and customers become familiar with the products being sold. Markets also vary in their rate of technological change. At one extreme, firms experience a slow accumulation of minor changes, while at the other they face a constant stream of radical new technologies that change the basis of competition. Managers need to identify the core competences that an organization has or needs to compete effectively. Analysis of the separate activities in the value chain can assist in this respect: the firm’s cost position and its basis of differentiation from its competitors to add value being two main sources of competitive advantage.

It is a moot question to what extent strategy perspectives developed when the competitive landscape contained only offline firms are still relevant in the internet age. The Web allows firms to overcome barriers of time and distance, to serve large audiences more efficiently while also targeting groups with specific needs, and to reduce many operating costs. However, it has been argued (Kim 2004) that some things stay the same – such as the need to invest in a clear and viable strategy. On that basis, generic strategies of differentiation and cost leadership still apply to online business. Nonetheless, a focus strategy (involving targeting a narrow market segment, either by consumer group or geography) is not as relevant to online firms as it is to offline ones because the Web enables companies to reach both large and tightly defined companies very cheaply. Indeed, Kim (2004) argues that online strategies may be proposed as forming a continuum of cost leadership and differentiation as an integrated competitive strategy rather than as alternatives as they are sometimes conceived (think of how Ryanair and British Airways now compete in closer proximity to one another due to the online effect).

Marketing has been defined as a social and managerial process by which individuals and groups obtain what they want through creating and exchanging products and value with each other (Kotler and Keller 2006). Its basic function is to attract and retain customers at a profit.

In order to identify customers, and select the marketing mix that will satisfy customer demands and succeed in achieving organizational objectives, managers need information about consumer demands, competitor strategies and changes in the marketing environment. Marketing is, therefore, an information-intensive activity involving understanding buyer behavior. Aware of a need, consumers also search for information that will help them decide which product to buy.

A marketing channel decision for companies is whether to make purchases of their products available online. This channel allows easy gathering of data for marketing purposes. This decision has been embraced by many businesses such as easyjet and lastminute.com. Using electronic channels of distribution is a differentiation tool, on the grounds that consumers prefer online convenience and see this as a product feature. Indeed, for many companies, online product distribution is a complementary channel used to widen product access to geographically remote markets (e.g. supermarkets, which often offer discounts over store prices).

This point ties in more generally to issues around how existing physical businesses can take advantage of the opportunities that the Web offers. For example, Virgin managers were quick to pick up on the fact that their businesses were ideally suited to e-commerce in the early internet years. To exploit this potential, they decided to streamline their online services with a single Virgin web address. This general topic is one to which I would like to return (in particular, I have taken out a book from the library by Groucutt and Griseri entitled ‘Mastering e-business’ which I would like to work through).

However, in the interests of balance, next week I turn to my other discipline and field of interest: economics 101.