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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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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: http://www.edmunds.com
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

Video: http://www.youtube.com/watch?v=4R60P_KeA44

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
examples
Examples
  • 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
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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