E-Business: Models, Strategies, and Value Creation

Posted on Sep 5, 2024 in Economy

Key Terminology

m-commerce, e-commerce, e-business

E-commerce describes the process of buying, selling, transferring, or exchanging products, services, and/or information via computer networks, including the internet.

M-commerce is a subset of electronic commerce and refers to online activities similar to those in e-commerce, but it is limited to mobile telecommunication networks accessed through wireless hand-held devices.

What is E-business?

IBM Definition: The transformation of key business processes through the use of internet technologies.

E-business refers to a broader definition of e-commerce, not just the buying and selling of goods and services. It is the use of electronic means to conduct an organization’s business internally and externally.

Internal e-business activities include linking an organization’s employees with each other to improve information sharing, facilitate knowledge dissemination, and support management reporting.

External e-business activities include supporting after-sales service activities, collaborating with business partners, conducting e-learning, joint research, developing new products, formulating sales promotions, and processing electronic transactions.

Processes Enhanced in E-business

1. Production processes: procurement and ordering, payments, links with suppliers’ production control processes
2. Customer-focused processes: promotional and marketing efforts, selling over the internet, processing customers’ purchase orders and payments, and customer support
3. Internal management processes: employee services, training, internal information sharing, video conferencing, and recruiting

The Evolution of E-business

1. The Grassroots of E-business Period

Before the internet became widely used, companies were using other ICT infrastructures:

• EDI: Electronic Data Interchange
• IOS: Interorganizational Information Systems
• Public IT platforms: Minitel videotext system

The main weaknesses of these platforms were the high costs and limited benefits.

2. The Rise of the Internet

(Internet boom period 1995-2000 started with the launch of Amazon.com)

• The number of visitors was the main determinant for stock market success.
• Internet boom – new “gold rush”, companies were trying to generate scale effects and network effects.
• The main weakness was untested and unproven business models.

3. The Crash or Burst of the Dotcom Bubble

(Took place in March and April 2000 and caused a 45% decline of the NASDAQ by the end of that year)

Reasons:

• Internet ventures subsidized customers’ purchases.
• Online buying was more out of curiosity.
• Costs were not represented realistically.
• Bankruptcy or acquisition by a traditional competitor (eToys).

4. The Synergy Phase

The deployment period of e-business followed the stock market crash and continues until today.

Return to business fundamentals: industry structure, value creation, and how to create profits and sustainable competitive advantage through the internet.

If firms have consistent e-business strategies and implement them superiorly, they can create significant value for their customers while at the same time being highly profitable. (Ducati, eBay, Google, Tesco.com, Nordea)

The Concept of Strategy

Michael Porter on the Internet:

‘The key question is not whether to deploy internet technology – companies have no choice if they want to stay competitive – but how to deploy it.’

What is Strategy?

“Without a strategy, the organization is like a ship without a rudder, going around in circles.” Joel Ross and Michael Kami

A company’s strategy consists of the set of competitive moves and business approaches that management is employing to run the company.

Strategy as a Key for Successful E-business

The Aspects Crucial for Strategy Formulation:

• Strategy is concerned with the long-term direction of the firm.
• Strategy deals with the overall plan for deploying the resources that a firm possesses.
• Strategy entails the willingness to make tradeoffs, to choose between different directions and between different ways of deploying resources.
• Strategy is about achieving unique positioning vis-à-vis competitors.
• The central goal of strategy is to achieve sustainable competitive advantage over rivals and ensure sustainable profitability.
• Corporate level strategy – the highest strategy level is concerned with the overall aims and scope of the firm. CEO and top-level management. Main issues – allocation of resources between different business units, mergers, acquisitions, partnerships, and alliances. (Acquisition AOL and Time Warner)
• Business unit strategy – how to operate within individual markets – market segmentation (Dell operates distinct business units that target large corporate customers, private households, and public sector customers)
• Operational strategy – issues like optimal website design, hardware and software requirements, and management of the logistic process

The Concept of Value Creation and Capturing

The ability of a firm to create value for its customers is a prerequisite for achieving sustainable profitability.

The concept of value creation deserves special attention in e-business because many internet startups that did not pay attention to this issue ended in bankruptcy.

It is imperative that strategies focus on what value to create and for whom, how to create it, and how to capture the value in the form of profit.

Value created = Benefit provided to the customer – Costs

E-business Advantages and Disadvantages

Tangible and Intangible Benefits from E-business

1. Tangible Benefits

• Increased revenue from:
  • New customers, new markets
  • Existing customers (repeat selling and cross-selling)
• Marketing cost reduction from:
  • Reduced time in customer services
  • Online sales
  • Reduced costs of marketing communications
• Supply chain cost reduction from:
  • Reduced level of inventory
  • Increased competition from suppliers
  • Shorter cycle time in ordering
• Administrative cost reduction

2. Intangible Benefits

• Corporate image communication
• Enhancement of brand
• More rapid, more responsive marketing communications
• Faster product development lifecycle enabling faster response to market needs
• Improved customer service
• Meeting customer expectations to have a website
• Identifying new partners, supporting existing partners better
• Better management of marketing information and customer information
• Feedback from customers on products

E-market

E-markets are electronic exchanges where firms can register as buyers or sellers and undertake business activities using the internet.

There are many different types of e-marketplaces, and each one operates a business model that suits the aims and objectives of the proprietor.

There are a large number of services offered by e-marketplaces, including business directories, transaction services, and electronic catalogs for listing inventory of products and services.

Three Main Types of E-marketplaces

1. Public exchanges: independently-operated B2B trading platforms for facilitating online transactions between trading partners. These are open to any business or group of businesses.
2. Consortium exchanges: an exchange owned and operated by a group of competing businesses who combine their buying power to gain group-wide savings on the supply of materials.
3. Private exchanges: an exchange owned and operated by a single firm to link its trading system directly to that of its suppliers.

Defining E-business Model

An e-business model is an approach to conducting electronic business through which a company can generate profitable revenue growth and sustainable advantage. It is a set of processes that combine to achieve a company’s primary goal – profit.

It includes a specific collection of business processes used to identify customers, market to those customers, and generate sales to those customers.

A company’s policy, operations, technology, and ideology define its business model.

Fundamental E-business Models

• Business-to-Business model (B2B)
• Business-to-Consumer model (B2C)
• Consumer-to-Business model (C2B)
• Consumer-to-Consumer model (C2C)
• Business-to-Government model (B2G)
• Government-to-Business (G2B)
• Government-to-Citizens (G2C)
• Citizens-to-Government (C2G)

B2B Model

• Describes transactions conducted between businesses on the Web. Business sells products or services to other businesses.
• B2B systems reduce costs and create a structure that makes dealing between firm-buyer and firm-supplier easier and simpler.
• B2B activity is associated with the operation and management of supply chains. Advances in ICT have facilitated the development of real-time supply chains, that is, orders for goods and services that are activated immediately.

Major B2B Models

• B2B hub – a central source of information known as a marketplace. It may be general (horizontal marketplace) or specialized (vertical marketplace). (HotelResource portal site of the hotel industry network) (Ford)
• B2B exchanges – multiple buyers and sellers together in a virtual centralized marketplace (Covisint in the automotive industry)
• E-distributor – brings together product manufacturers with wholesalers and retail buyers
• B2B Service Provider – supports companies through online business services (payment solutions, logistics systems, maintenance or product advice services, after-sales support services)
• Infomediaries – Gathering valuable information about customers and selling it on to third parties.
• Matchmaker – links businesses together

B2C Model

• A business model in which firms use the internet mainly to conduct business with consumers. B2C includes retail sales, often called e-retail, of goods and services, as well as online purchases of items such as airline tickets, entertainment venue tickets, hotel rooms, and shares of stock.
• Firms like
• Firms often make efforts to build long-term relationships with customers.

Major B2C Models

• Portal offers powerful search tools and an integrated package of content and services such as news, e-mail, chat, music downloads, etc. (Yahoo, AOL.com, msn.com)
• E-tailer offers added value to the customers. Virtual Merchant (Amazon.com), Clicks and Mortar (Walmart.com), Catalog Merchant, Online Mall (fashionmall.com), manufacturer direct (DELL)
• Information and entertainment providers such as newspapers, sports sites, and others that offer up-to-date news
• Transaction Broker – processors of online sales transactions, such as stock brokers and travel agents
• Market creator – Auctions and other forms of dynamic pricing (eBay.com) – Web-based businesses that use internet technology to create markets
• Community provider – sites where individuals with particular interests, hobbies, and common experiences come together and compare notes

C2 Models

• Consumer-to-Business (C2B) – implies individuals selling goods and services to companies (sale of cars by individuals to companies)
• C2C model implies the sale of goods and services between individuals, often via auction sites such as eBay. This model involves the use of peer-to-peer (P2P) software that allows individuals to exchange data directly over the internet without the use of a central computer server.

G2B, G2C, G2G Models

• E-governance refers to interactions between government, citizens, and business entities.
• G2B refers to the interaction between the government and business enterprises.
• G2C refers to the interaction between the government and citizens.
• G2G refers to interaction between two government departments.

E-government and E-public Services

• After e-commerce and e-business, the next internet revolution will be e-government. The Economist, 28 June 2000
• USA – $600 billion annual procurement spending
• EU – euro720 billion
• Big private sector companies typically achieve 20% savings by procuring online.
• Slashing purchasing and fulfillment cycles and lower admin costs by up to 75%

Case Studies

1. E-Government in Estonia – best practice for citizens and for civil servants
2. Beijing’s Business E-Park Zhongguancun
   • Over 30 G2B and G2C functions such as “apply for license”, “submit tax reports”, or “file monthly statements”
   • Software solution for e-application, e-registration, e-reporting, e-administration, and e-consulting

Three Critical Success Factors in Developing and Implementing an E-business Model

1. Understand and exploit the e-marketspace characteristics (supply and demand characteristics and competitive structure of each industry sector, more or less competitive market, barriers to entry, number and characteristics of the customers, market research)
2. Add value to customers (the design or application of the products or services, distinct advantages that the internet offers as a means of communication and transacting, convenience, continuous availability, interactivity, personalization, customization)
3. Achieve economic viability (The profit model comprises the profit and loss results, the cost structure, and the revenue generated through the application of the e-business model. The financial model centers on the cash flow of the firm, the value of assets owned by the firm, and the financial structure of the business)

Factors Important to Achieve Economic Viability

1. Achieving a Critical Mass of Customers

The most successful e-business models have been able to gain the trust of customers by offering low prices, quick and efficient service, a wide choice of products and services, and security of transactions.

2. Continuing to Innovate and Add Value

The e-business model must be able to continue to add value to customers by innovation and creativity.

3. Design for Flexibility

The e-business model must be able to be adapted to suit related and unrelated business opportunities.

E-business Companies are Impacted by Their Industry and Macro-environment

The Political and Legal Environment

• Taxation as one of the major issues
• Monopoly legislation (ex. Microsoft)
• Price-fixing regulation (Amazon.com)
• Copyrights Law

The Economic Environment

The economic environment refers to broader economic developments within a country, region, and globally.

• Interest and exchange rates
• Stock markets
• Economic growth rates

The Social Environment

The social environment considers the following factors:

• Population demographics
• Income distribution
• Social mobility
• Attitudes to work and leisure
• Online usage patterns

Technological and Natural Environment

• The technological environment refers to the technological innovations that led to the emergence of new market opportunities and business models.
• The natural environment refers to environmentally friendly laws.

The industry environment is defined as a group of firms that produce products or provide services that are close substitutes for each other.

What Does the Profitability of Any Given Firm Depend On?

1. A firm needs to be able to create higher value than its rivals.
2. It needs to be able to capture the value that it creates in the form of prices that exceed its costs.

Personal computer industry vs. software development industry

What Determines the Ability of a Company to Capture Value?

Five forces influence the attractiveness of an industry.

Industry Rivalry

It occurs when firms within an industry feel the pressure or opportunity to enhance their existing market position. Factors of rivalry include:

1. Large number of competitors
2. High fixed costs
3. High strategic relevance
4. Little differentiation between products
5. Low growth rate of the industry

Barriers to Entry

Barriers to entry determine the threat of new competitors entering the market of a specific industry. High barriers to entry result mainly from the following factors:

1. High fixed costs
2. Trust and brand loyalty
3. A steep learning curve
4. High switching costs and strong network effects
5. Strong intellectual property protection

Substitute Products

Substitute products refer to the availability of similar products that serve essentially the same or a similar purpose as the products from within the industry.

As the availability and quality of substitute products increase, the profits generated within the industry tend to decrease.

The internet has helped to increase the pressure from substitute products, as it tends to increase the variety of products available to customers.

Example: The software arena between Microsoft and substitutes in the form of mobile devices

Bargaining Powers of Buyers and Suppliers

The bargaining power of buyers tends to be high in the industry displays the following characteristics:

1. High concentration of buyers
2. Strong fragmentation of suppliers
3. A high degree of market transparency
4. Products are increasingly becoming commodities.
5. Low switching costs and weak network effects

The situation is opposite in the case of suppliers. The case of Google’s acquisition of the online advertising company DoubleClick

Complementing the Five Forces Framework with the Co-opetition Framework

The co-opetition framework highlights the positive impact on profitability that comes from the interaction with other players within an industry. This interaction can include:

1. Joint setting of technology and other industry standards – a prerequisite for ensuring the growth of an industry (Wireless marketing company YOC)
2. Joint developments between firms can offer the opportunity for improving quality, increasing demand, or streamlining procurement (Covisint platform, Amazon’s Zshop).
3. Joint lobbying for favorable legislation

The role of competitors and complements can change depending on the context.

Case studies: Zshops of Amazon.com, Covisint of car manufacturers General Motors, Ford, and Daimler Chrysler

The Main Players in the Market Environment

Defining Industries, Segmenting Markets, and Targeting Markets in E-business

Narrowly or broadly defining an industry?

Depending on the industry definition, there could be different customers and competitors that need to be considered.

Case study: Networking platform Open BC

A narrow definition of the market limits the industry to online networking platforms focused on a very small set of companies like LinkedIn in the USA or Stayfriend.com in Germany. A broader definition includes all companies that offer one or more functionalities that Open BC offers.

Segmenting Markets in an Industry

Differences in customer preferences are the foundation for market segmentation.

A market segment is defined as a group of customers who have similar needs.

More sophisticated production technologies and the internet contribute to segmenting markets in a much finer way and to tailoring different products and services to different customer segments.

The E-commerce Market Segmentation Matrix

Two Main Reasons for Segmenting Markets

Insights into customer preferences – enhances the understanding of the target customer group and its preferences. Helpful in determining how to shape a product and what kind of features to include. Which distribution channels to select

Information about the potential segment size – to assess the potential market. Determining how many customers might be using a product or a service.

Main Requirements of a Market Segment

Measurable – to measure the size to determine its purchasing power

Substantial – to be large enough to justify separate attention

Differentiable – must be exclusive and react differently to a variety of marketing approaches

Actionable – to be possible to develop sales and marketing approaches to serve specific segments

Segmentation Variables

Targeting Specific Markets in an Industry

• Need to determine which market segment to target
• Need to determine how many different products and services to offer to the selected market segments
• Is the market segment or the group of market segments attractive?
• Can we compete successfully in this market segment?

Possibilities to Target Market Segments

Single segment concentration – concentrate on a single segment of the market, which allows gaining profound knowledge of customers, developing specialized production know-how, and catering exactly to the needs of the specific customer segment. The downside refers to the possibility of not generating the required revenues; then, the whole firm is in danger.

Selective specialization – targets different market segments with different product types. Spreading the business risk. The disadvantage is connected with the loss of focus, thereby becoming vulnerable to attacks by more focused competitors.

Product specialization – focuses on providing one type of service to a wider market. Generates economies of scale or special learning effects. The risk is connected with the inability to make up for a fall in revenue through other products.

Market specialization – concentrates on a specific market segment, aiming at gaining a strong reputation and trust with members of the targeted segment and then expanding by offering a range of products to the same segment

Full market coverage – a wide variety of product types to the whole spectrum of target segments. To create economies of scope by leveraging existing production capacities, technological platforms, or a strong brand name

Target market selection depends on the number of markets served and the number of different products and services offered.

Understanding Core Competencies in E-business

A competence is a combination of different resources and capabilities.

1. Resources are all tangible and intangible assets of a firm that can be used in the value-creation process.
   • Tangible resources refer to the IT infrastructure, bricks and mortar infrastructure, and financial capital.
   • Intangible resources include employee knowledge, licenses, patents, brand name, and reputation of the firm.
2. Capabilities represent the ability of a firm to use resources efficiently and effectively (design of processes, systems, and organizational structure).

Case study: DELL had built significant skills through its direct sales model.

To Be Core, E-commerce Competencies Need to Be:

Valuable – the value the competence produces (lowering of costs or the increasing of customer benefit)

Unique – allows the firm to capture the value it creates in the form of profit

Hard to imitate – other firms find it difficult to imitate the competence

Valuable across different products or markets – not limited to one product or one market (ex. Amazon.com)

Analyzing the Internet-impacted Value Chain

The internal value chain of a company revolves around value creation where value is created through individual activities of the value chain.

Competitive advantage rests on activities that a firm can perform better or more efficiently than its competitors.

Criteria That Determine the Importance of Activities in a Company’s Value Chain

Display different economics – economies of scale (the development activity of a new software program displays very large economies of scale since the software can be replicated at a negligible cost)

Provide high differentiation potential – activities that can greatly increase tangible and intangible consumer benefits.

Present sizeable costs – activities that add significantly to the overall cost structure of the firm

DELL’s Case Study

A company’s value chain contains primary and support activities.

Dell Value Chain

Primary Activities Include:

Inbound logistics – receiving, storing, and distributing incoming goods within the company (checking inventory levels and order placement)

Operations – activities necessary for making products or services

Outbound logistics – activities required for getting the product to the buyer physically or electronically.

Marketing and sales – activities targeted to persuade customers to buy a product and services (online catalogs, online marketing campaigns)

Service activities – after-sales services (installation, supplying spare parts, exchanging faulty products)

Support Activities:

Procurement – purchasing of inputs for different processes

Technology development – specific R&D for product design, optimizing the functioning of other activities

Human resource management – recruiting, managing, training, and developing people. (online recruiting, web-based training)

Infrastructure – firm’s physical premises, offices, plants, warehouses, and distribution centers.

Leveraging the Virtual Value Chain

• VVC emphasizes the importance of information in the value creation process.
• Information captured in the physical value chain should be used to offer enhanced quality of customer service (throughout its physical value chain to create value).
• Concept of recycling information.
• Increasing the value created is the main goal of VVC.

Customer Relationship Management (CRM)

• An approach to building and sustaining long-term relationships with customers
• A key element of e-business.
• Failure to build relationships largely caused the failures of many dot-coms.
• E-CRM: Using digital communications technologies to maximize sales to existing customers and encourage continued usage of online services.

‘Wikinomics’ is a term that explains how businesses can generate business value through using the internet to facilitate participation by individuals and collaboration by individuals. Examples:

• Dell Ideastorm (www.ideastorm.com). Dell customers, or even non-customers, can suggest new products and features. Rightly, Dell has a separate ‘Ideas in Action’ section where they update consumers on actions taken by the company. As well as improvements to customer service, they have explained how they have introduced systems with a non-Windows Linux operating system in response to suggestions on Ideastorm.
• Procter and Gamble’s Innocentive site (www.innocentive.com) where freelance scientists, students, and academics can work on problems posed by industry and sell solutions in return for cash rewards.

Case Studies for VVC:

• Through the club card, Tesco company collects detailed customer information about purchasing patterns and preferred products in the bricks and mortar environment.
• Nordea bank allows pension statements to be sent electronically to its customers.
• Amazon.com uses information captured throughout its physical value chain to create value – the personalized book recommendations list.

The Virtual Value Chain

Selecting Activities for Online Interaction with Customers – ICDT Model

The ICDT model describes the four main features that a firm can offer to its customers in the virtual market space.

Information Activities

Include advertising and posting information on the company website, but it is no longer of a static nature. Offer links closely to warehousing and production planning systems, enabling customers to find out when their order will be fulfilled and delivered.

Communication Activities

Two-way communication between a company and its online visitors and customers (e-mail, real-time chat)

Example: Online fashion retailer Landsend.com has included a live icon on its website.

e-Diets.com provides the possibility to interact in real-time with nutrition experts.

The internet facilitates communication between customers and members of a virtual online community. (eBay)

Transaction Activities

Include the acceptance over the internet of online orders and electronic payments (commercial and financial transactions)

E-payment considered as too dangerous, so as payment mechanisms mature and trusted e-payment companies evolve, online transaction activities are becoming more commonplace.

Online micro-payment systems are economically feasible for low-priced products and services.

Distribution Activities

Online delivery of digital goods (software, music, video, films, and e-books)

The main limitation for online distribution is the limited bandwidth of online connections.

Online distribution will become the norm over time, replacing physical distribution. Online shop iTunes.

Service providers of lectures, presentations, and services to their customers and students

Moving Beyond the Value Chain to Value Networks

• E-Business ventures do not operate in isolation from other companies.
• Intertwined with the value chains of suppliers and external partners who provide other support activities
• The group of partners that a company works with to deliver a product or a service to its customers is called a value network.
• Companies outsourced numerous non-core activities to outside partners.
• Managing external value networks
• Which activities should be maintained in-house, off-shored to different geographic locations, or completely outsourced to an external provider

Main Partners in a Value Network

Upstream value chain partners (direct suppliers, B2B exchanges)

Downstream value chain partners include (wholesalers, distributors, retailers, and customers). Tesco Direct cooperates with the logistics services company CEVA and Export Logistics to deliver to customers the products ordered through the Tesco catalog and website.

Strategic core value chain partners fulfill core value chain activities (Tesco cooperated with the mail-order company Grattan, which administered all back-end processes ranging from product selection to delivery).

Non-strategic service partners (finance, accounting, or travel)

Value chain integrators provide electronic infrastructure for a company (application service providers, electronic infrastructure providers)

Value Networks vs. Value Chains

• Value networks have a more dynamic nature; it is easier to introduce or remove partners from a value network than to add or remove functions and employees from a value chain.
• Linking external service providers with the internal value chain through advanced electronic communication

The strategic triangle addresses the main drivers of competitive advantage.

Understanding the Fundamentals of Competitive Advantage in E-business

Four Questions Regarding the Drivers of Competitive Advantage:

1. Is the price/benefit ratio that we offer better than the price/benefit ratio of our best competitor?
2. Is the value that we offer to our customers perceivable and important to them?
3. Are our costs for making the product or service lower than the costs that we incur?
4. Is this advantageous position sustainable into the future?

Two Kinds of Benefits Perceived by Customers

1. Threshold features – minimum requirements that a firm must fulfill in any product and service (marginal impact on customer satisfaction)
   • (ex. a website with functioning links or a secure payment mechanism for online payment)
2. Critical success factors – crucial for a customer’s decision to purchase a product (ex. Amazon.com; large selection of books, their reviews, convenient and fast shopping experience through one-click ordering application; Nordea Bank critical success factors the ease of use of the online banking site and a variety of e-business services)

Impact of Threshold Features and Critical Success Factors on Consumer Benefit

The Landscape of Strategy Options for E-business

Two Generic Strategies Built on Two Distinct Types of Advantage:

1. A price advantage – Cost leadership strategies
2. A performance advantage – Differentiated strategy

Hybrid Strategy

3. Outpacing strategy as a third strategy option – a combination of cost leadership and a differentiation strategy.

Cost Leadership Strategy

A firm has to be able to produce its products and services at substantially lower costs than its competitors.

A firm that wants to attain a cost leadership position needs to fulfill two requirements:

1. Lowest cost position – able to produce its products or services at substantially the lowest cost than its competitors
2. Benefit proximity – to achieve benefit proximity relative to its competitors, to fulfill at least all threshold criteria

How to Achieve a Cost Leadership Position

1. Economies of scale as a firm increases its product output, it decreases its unit production cost. 

Production process consists of :

                Fixed cost- do not changes as output increases

                Variable cost-go up with an increase of output

High economies of scale usually exist in production processes that have high fixed costs and low variable costs. As the production quantity increases fixed costs are spread out over a larger number of products, so reducing the unit production costs.

(ex. Wal-Mart in USA, Amazon.com, Internet based grocery retailers Tesco.com and Webvan)

Economies of scale are valuable only if they can be realized.

                2. Economies of scope – result from expanding the variety of products sold using the same R&D, production and delivery assets.

To spread fixed costs over a wider basis by adding new products or services to the existing offering

Extending into different markets and sectors of an industry

(ex. Amazon.com have achieved through the introduction of additional categories of goods on its website using the same technology platform and delivery infrastructure)

3. Factor costs – the ability to bargain down input prices.

Important especially for intermediaries.

A large market share is prerequisite for being a low-cost provider

4. Learning effects – lower costs due to the improvement the efficiency by reducing slack and wasteful activities.

Differentiation strategies

A DS can be achieved by providing comparatively more consumer benefit than competitors

1.What creates consumer benefit?

2.What is unique?

3.What can not be imitated?

Benefit varies according to:

1.Personal preferences

2.Place

3.Time

Tangible sources of consumer benefit include:

1.Product/service quality – functionality, durability, reliability and ease of installation.

2.Degree of product or service customization –adapted to specific customer’s needs

3.Convenience – some aspects (mental energy, effort and time) that have to be spent during the process of purchasing.

4.Speed of delivery – the ability to deliver products and services quickly. Depends on the availability of products, location of the seller and quality of the logistical process.

5.Product range – a broad and deep selection provides an important source of differentiation since it allows convenient and quick one stop shopping.

Intangible sources of consumer benefit:

1.Brand – need to be built and nurtured in order to use it as a differentiating characteristic in the marketplace. A strong brand can result from:

•Products that meet high quality standards

•Intensive and innovative marketing activities

2.  Reputation – past performance of the company is a major factor influencing reputation;

•It decreases the purchasing risk

•Especially critical for making online payments

Outpacing strategies

Outpacing or hybrid strategy refers to the combination of cost and differentiation advantage .

Examp. Quality management of Toyota company

Toyota production system increases the perceived use value of Toyota’s cars, have proven to be more reliable and functional than the others manufacturers. To improve Toyota’s cost position by reducing the number of expensive call-backs

Tesco’s strategy “Pile it high and sell it cheap” and adding differentiating elements like the online grocery retailing channel

Factors that are in favor of reaching outpacing strategy

1. Development of new technologies (Amazon in period 1999-2003 has reduced warehouse operation cost from 20 to 10%)

2. Many firms and industries are wasteful in their activities- optimization between quality and cost reduction.

3. Scale economies and learning effects – allow a firm to generate significant cost advantages while still pursuing a differentiated strategy. To achieve low costs and superior product offering.

Developing strategy alternatives

The strategic game board helps to formulate consistent business strategies

Three key questions in formulation business strategy

1. Which type of competitive advantage?

Low-cost provider, differentiated product offering or outpacing strategy

2. Where does the company want to compete (which market or market segment it wants to target)

a.Niche strategy by offering highly specialized products for special customer segments or for limited regions (specific know how or specific customer knowledge).

b.To address the whole market with a given strategy type

3. How do we want to achieve the competitive advantage?

a. Old game – using business models that have been used by other companies in industry

b. Playing a new game – using a business model that is fundamentally different from before in the industry

Creating a fit between the chosen strategy and the value chain

Ability to create a better and unique fit between activities in the value chain

The fit of activities within a firm is determined by three main levers:

1.Consistency between activities – build on each other instead of cancelling themselves out

2. Reinforcement of activities

One activity influences the quality of other activities to create higher quality in products and services.

Ex. If a company has a highly motivated and skilled sales force, it is more effective if the company also has excellent R&D and production facilities to produce a high quality product.

Sophisticated website of Amazon.com becomes more valuable when it is combined with a warehouse system that allows fast, reliable and efficient deliveries.

3. Optimization of efforts

Optimization emphasizes the importance of cost reduction through the elimination of redundancy and wasted activity.

Ex. Internet companies that have optimized their order-taking process can reduce their costs for truck fleet and personnel. Dell presents the best practice in optimization efforts

Case study:

Easy Jet –setting up an organization for a low-cost strategy.

Keeps costs low by eliminating the unnecessary costs and features which characterize traditional airlines.

1.Use of Internet to reduce distribution costs

2.Maximize the utilization of the substantial assets

3.Ticketless travel

4.No free lunch

5.Efficient use of airports

6.Paperless operations