Determinants of firm performance
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Determinants of Firm Performance. Learning Objectives. Describe the ten properties of Internet Describe the eight unique features of E-commerce technology Understand Michael Porter’s five forces of framework Understand the impact of internet on the five forces. Properties of Internet.

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Determinants of firm performance

Determinants of Firm Performance

Learning objectives

Learning Objectives

  • Describe the ten properties of Internet

  • Describe the eight unique features of E-commerce technology

  • Understand Michael Porter’s five forces of framework

  • Understand the impact of internet on the five forces

Properties of internet

Properties of Internet

  • 1. Mediating Technology – interconnect parties that are interdependent or want to be. Can be firm to consumers or within firms. Think of its functionality like bank or TV media

  • 2. Universality – ability to reach everyone across the globe

Properties of internet1

Properties of Internet

  • 3. Network Externalities/effect – when technology becomes more valuable if more people take advantage of it

  • 4. Distribution Channel – distribution of digital products or information

    • Replacement effect – serve the same customers

    • Extension effect – bring in new customers

Properties of internet2

Properties of Internet

  • 5. Time Moderator – no temporal restriction

  • 6. Information Asymmetry Shrinker –

    • Information asymmetry exist when one party of the transaction has information that the other does not

Freakonomics steven d levitt and stephen j dubner s book

Freakonomics : Steven D. Levitt and Stephen J. Dubner’s book

  • Information is the currency of the Internet. As a medium, the Internet is brilliantly efficient at shifting information from the hand of those who have it into the hands of those who do not.

  • the information existed but in a woefully scattered way. (In such instances, the Internet acts like a gigantic horseshoe magnet waved over an endless sea of haystacks, plucking the needle out of each one.)

  • The Internet has accomplished what no consumer advocate could: it has vastly shrunk the gap between the experts and the public.

  • Car buying guide:

Properties of internet3

Properties of Internet

  • 7. Infinite Virtual Capacity– Moore’s law applicable to storage and network technologies

  • 8. Low Cost Standard – formation

    • Easy Adoption – same communication protocol

    • Lower cost – lower than proprietary EDI

Properties of internet4

Properties of Internet

  • 9. Creative Destroyer – innovation unleashes a force that creates new businesses and destroys, over and over

  • 10. Transaction Cost Reducer

Unique features of e commerce technology

Unique Features of E-commerce Technology

  • Ubiquity: It is available just about everywhere and at all times

  • Global Reach: The potential market size is roughly equal to the size of the online population of the world

  • Universal standards: The technical standards of the Internet and therefore of conducting e-commerce, are shared by all of the nations in the world

  • Richness: Information that is complex and content-rich can be delivered without sacrificing reach

  • Interactivity: E-commerce technologies allow two-way communication between the merchant and the consumer

Unique features of e commerce technology continued

Unique Features of E-commerce Technology (continued)

  • Information density: The total amount and quality of information available to all market participants is vastly increased and is cheaper to deliver

  • Personalization/Customization: E-commerce technologies enable merchants to target their marketing messages to a person’s name, interests and past purchases. They allow a merchant to change the product or service to suit the purchasing behavior and preferences of a consumer

  • Social technology: User content generation and social networking technologies

Friction free economy

Friction free economy

  • Information symmetry

  • No middle man

  • Low transaction cost

  • Prices adjust dynamically adjusted to demand

Macro environment

Macro Environment

  • Political and legal – subsidies, taxes, monopoly legislation and environmental laws

  • Economic –interest rate, inflation rate unemployment rate

  • Social Environment – population demographics, income distribution, and social mobility

  • Technological

Profitability of firms depends on

Profitability of firms depends on ?

  • Firm needs to create higher value than its rivals

  • Capture the value in the form of price that exceed its cost

    Poor profitability industry: airline, PC makers

Porter s model

Porter’s Model

  • Whether an industry is old or new, its structural attractiveness is determined by fives forces

  • In combination, these forces determine how value created by the product or service is divided among companies in an industry

  • Analyzing these forces illuminates an industry’s fundamental attractiveness, expose the underlying drivers for industry profitability, and provides insight into how profitability will evolve in the future

  • The framework provide a guide to explain the sustainability of profits against bargaining and competition

Porter s model figure

Porter’s Model – figure


High intensity of industry rivalry

High intensity of industry rivalry

  • Large number of competitors

    • geographic boundaries limitation reduced by Internet

  • Little differentiation between products

    • Commodity products

  • Low growth rate of the industry

Barriers to entry threat of new entrants

Barriers to entry/Threat of New Entrants

  • High fixed cost

    • Deter would-be competitor

  • Trust and brand loyalty

    • Customer acquisition and retention

  • High switching cost and network effect

    • Keep customers

  • Strong intellectual property protection

    • Products with high development and low reproduction costs

Substitute products

Substitute products

  • Substitute products place a ceiling on prices that firms can charge for their products

    • Internet increase the variety of products available to customer

    • MP3 replace traditional CDs

Bargaining power of buyers high and suppliers low

Bargaining power of buyers (high) and suppliers (low)

  • High concentration of buyers

    • Aggregation of buyers

  • Strong fragmentation of suppliers

  • A high degree of market transparency

    • Allow buyer easily compare prices

  • Products are increasing becoming commodities

    • No extensive purchasing advice and after sale service

  • Low switching cost and weak network effect



  • PC manufacture industry

  • Hong Kong property industry

Competitive strategies

Competitive Strategies

  • Product differentiation - develop brand loyalty by creating unique new products and services

  • Focused differentiation- create new market niches by identifying a specific target for a product or service that it can serve in a superior manner

  • Developing tight linkages to customer and suppliers - raises “switching cost” and reduces bargaining power of customer and suppliers

  • Becoming a low-cost producer - produces goods and services at lower price than competitors

Impact of competitive forces

Impact of Competitive Forces

In a nutshell

In a nutshell

  • The Internet can change industry structure by introducing substitute products, increasing the bargaining power of suppliers or of consumers and buyers, and by changing existing barriers to entry

  • But it is necessary to analyze the impact on each industry individually

How the internet influences industry structure

How the Internet Influences Industry Structure*

*adapted from “Strategy and the Internet” HBR, March 2001

Relevancy of the porter s model in e commerce

Relevancy of the Porter’s model in E-Commerce

  • Change the basis of competition within the industry

    • Use Internet to reduce cost or increase price by providing a unique product

  • Change the balance of power in the relationship that a company has with customer suppliers

    • Creating tightly integrated system with suppliers, requiring them to invest in proprietary system or EDI to become a supplier. E.g Wal-Mart.

  • Provide the basis for new products and services, new markets or other new business opportunities

    • On-line electronic banking

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