MD253 - E-Commerce

Module 2: E-Commerce & the Undulating

Distribution Channel

Spring 2002

Issues Covered• Assessing the Marketplace

– Disruptive Technologies, Porter’s Five Forces

• Collapsing Channels– failures, successes, the role of value gaps

• Shifting Channels– marketplace to marketspace, channel pressure, innovation

• New Intermediaries– examples, impact, threats, market creation

• Auction Models– markets of first choice and last resort

HyperCompetition

Profits from a competitive advantage

launch

exploitation

counter-attack

Profits from a competitive advantage

Pro

du

ct

Pe

rfo

rma

nc

e

Time

Performance demanded at the high

end of the market

Performance demanded at the low

end of the market

Progre

ss due to

susta

ining tech

nologies

Disruptive technological

innovation Progre

ss due to

susta

ining tech

nologies

Existing profit, staffing, and customer pressures stall innovation

Traditional market & financial analysis cause blindness

Why Do Leaders Fail?

Creating the Killer-App• Blindness & Pressures

– marketing blindness: existing initially don’t want it– financial blindness: smaller market share & margins

• Identify Technologies– external conversations (VCs, academics, technologists)– internal conversations (engineering, mktg, planning)

• Managing an Options Portfolio of Innovations– investments in separate organizations– benefits: hedge financial risk, market focus, incentive

ICA: Industry & Competitive Analysis

(Porter’s Five Forces)

Industry Competitors

Potential New Entrants

Substitute products or services

Power of Suppliers

Power of Buyers

– from Benjamin & Wigand (1995)Price

Unit Sales

Producer Wholesaler Retailer Consumer

Producer Wholesaler Retailer Consumer

Producer Wholesaler Retailer Consumer

Price/Shirt Savings

$52.72

$41.34

$20.45

0%

28%

62%

Disintermediation

Value Gaps

customersretailerdistributorsource firm

Value Added = A,Expense = X

Value Added = B,Expense = Y

Expense Savings = (X+Y) - Cost of New EffortValue Gap = (A+B) - Value Added by New Effort

Channel Shifts

• Shifts from physical to virtual– human intermediaries replaced by interfaces to

back-end systems (internal disintermediation)– physical distribution replaced by virtual

distribution– physical stores replaced by virtual stores– physical content replaced by virtual content -

atoms to bits

Channel Pressure

supplier distributor retailer customermanufacturer

Traditional Channels

Online Channels

supplier customermanufacturer

suppliermanufacturer customernew intermediaries

“We recognize that a vendor has the right to sell through whatever distribution channels it desires. However, we too have the right to be selective in regard to the vendors we select and we trust that you can understand that a company may be hesitant to do business with its competitors.”

HomeDepot memo to suppliers

Channel Extending Intermediaries

supplier customer

CEIsupplier

supplier

supplier

customer

customer

customer

Search for opportunities to add value: e.g. high customer search costs, switching costs, low customer satisfaction

Wield new power by consolidating traditional buyers & customers. Become the first-line interface with consumers.

Auction FormatsLiquidation Auctions: (e.g. Priceline, OnSale)

suppliers customersauction

Market Efficiency Auctions: (e.g. eBay)

Seek lowest price on widely available goods and services

auction

disincentives to use auction shrink supply over time

Seek first to maximize existing

channels & reduce inventory

suppliers customersSeek access to unique / rare products or services

incentives to use auction increase supply over time

Auction format is favored over the

inefficiency of existing channels

Network Externalities(a.k.a. Network Effects, Metcalfe’s Law)

• A product or service becomes more valuable as its installed base expands• Why do consumers care about installed base?

– Exchange opportunities– Stability– Extrinsic, complementary benefits

More Exchange Opportunities

More Members

Why are Markets for Network Goods Different?

• Market competition occurs very early and is particularly fierce

• Markets are ‘tippy’ and subject to bandwagons

• Markets exhibit monopolistic tendencies

• The ‘best’ technology or highest quality product doesn’t always win