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MG209 E-Business

Lecture 1 - E-Business Strategies & Competitive Positions Management Issues

* What are the implications of changes in marketplace structures for how companies trade with customers and other partners?

* Which business and revenue models should we consider in order to exploit the Internet?

* What will be the importance of online intermediaries and marketplace hubs to companies' business and what actions should they take to partner these intermediaries?
E-Business Environment Micro-Environment

* Customers - which services are they offering via their web site that your organisation could support them in?

* Competitors - need to be benchmarked to review online services offered - do they have a competitive advantage?

* Intermediaries - are new or existing intermediaries offering products or services from your competitors while you are not represented?

* Suppliers - are suppliers offering different procurement methods to competitors that give them a competitive advantage?
Macro-Environment

* Society - what is the ethical and moral consensus on holding personal information?

* Legal (country specific, international) - what are the local and global legal constraints for example, on holding personal information, or taxation rules on sale of goods?

* Economic (country specific, international) - what are the economic constraints of operating within a country or global constraints?

* Technology - what new technologies are emerging by which to deliver online services such as interactive digital TV and mobile phone-based access?
Strategy & Tactics

* Strategy: Direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill Stakeholder expectations
- Strategy provides LT goals, tactics define set of actions undertaken to fulfill goals (i.e. many tactics can be part of same business strategy)
- Tactics: Daily operations put in place to achieve the ultimate organisations goals
- e.g. strategy of using ICT investments to gain competitive advantage; individual ICT investments tactics to achieve strategy - ICT important in definition of tactics

* Intelligence: All the information we have about the competitors and the business environment, that is, the basis for our own plans actions - produced and collected during execution of companies' tactics.

* Fog: Contradictory information top managers receive - must make strategic decisions without having all required information and/or with unreliable information

* Friction: Concept that best approximates distinction of real business and business plans ICTs increase intelligence, reduces fog and frictions - better decision making!
Strategy defines tactics but tactics redefine strategy (feed-back loop - provide information) E-business can be considered in broader strategy context in which firms compete, moves to better position company, one of many tactics to gain market share

MG209 E-Business

Market Structure (Wentzel, 2001) Perfect Competition

* Factor mobility, perfect knowledge, many sellers, homogenous, no market power, free entry

* Price-taker - only relevant strategic variable is output - no need for strategic planning

* Good for consumers, bad for producers; to break out of PC consider other variables From PC to Monopolistic Competition

* Factor mobility, heterogeneous products, imperfect knowledge, many sellers, free entry

* Important strategic variables are ones that create product variety (and subsequently condition of imperfect knowledge)

* Potential strategies - both result in more market power: (1) Differentiate product and establish brand based on those differences (2) Structuring the market offering according to different elements From MC to Oligopoly

* Homo/heterogenous products, few sellers, restricted entry, imperfect knowledge, restricted factor mobility

* Potential strategies - top 3 build on imperfect knowledge; bottom 4 reduce sellers: (1) Customer loyalty programme (2) Advertise products with special emphasis on brand image and differentiated aspects (3) Exploit lower price sensitivity (as a result of customer loyalty and diminishing product comparability) (4) Expansion strategy based on acquisitions (5) Creating less formal alliances (linkages) e.g. exclusive contracts - value chain to value creation (6) Strengthen barriers to entry (e.g. through branding/advertising, EOS) (7) Increase difficulty for factors of production to leave firm

* More secrecy and variety - competitive & uncertain environment - better to create uncertainty (e.g. via innovation) than wait for uncertainty

* Resource-Based View (RBV): Firms gain competitive advantage because they possess combination of inimitable and durable resources that can generate value no other rival can match - successful firms require architecture, reputation, innovation From Oligopoly to Pure Monopoly

* Homogenous, one seller, blocked entry, perfect knowledge, restricted factor mobility

* Potential strategies: (1) Acquisition strategy - eliminating substitutes for firms products (2) Limit-pricing i.e. reducing prices pre-emptively to make it unviable for newcomers (3) Continuous environmental scanning, scenario planning, competitive intelligence (4) Build political capital by engaging in social responsibility projects Beyond Pure Monopoly

* Potential strategies: (1) Maintain and enhance its relationships with the government and regulatory bodies (2) Increase labour mobility to limited extent to prevent it from becoming overdependent on single source (3) Awareness of other firm's innovation even outside industry boundaries (4) Innovate ruthlessly (5) Segment the market to allow us of price discrimination

MG209 E-Business

READING 1: Realistic Business Strategies From Unrealistic Micro Theories (Wentzel, 2001) Introduction

* Microeconomic theory often criticised for irrelevant assumptions (i.e. success dependent on price and quantity), however countered by notion the all of firm's strategic and operational decisions will be reflected in price

* Contradiction - 'microeconomic theory is not used but seen as useful' - resolved if theories is separated into content (substance) and approach (method)

* Paper shows that while theory is unrealistic, it can still be useful to business strategy development by focusing on gaps between the assumption Basic Concepts in Economic and Strategy

* Corporate Strategy: How firms should manage their future in order to attain success

* Economics: How to solve scarcity problem - satisfy as many needs as possible with limited resources
- Divided into macroeconomics (aggregate variables at the level of the economy as a whole) and microeconomics (behaviour of the individual firm and consumer)

* Strategic Planning: Divided into 3 parts - Theory of analysis: Analysing internal & external environment of the firm to determine what its current state is (e.g. SWOT analysis)
- Theory of search: Development of a picture of the firm's desired future and generating alternative ways of reaching this future
- Theory of choice: Evaluation and choosing among alternatives to find ones consistent with the firm's mission and most likely to lead it to bridge the gap between its current state and desired future Relationship Between Economics and Strategy: Expected Relationship

* Both concerned with notion of 'value' and 'success'

* Economics: Success of firm depends on extent to which it solves scarcity problem -
solved by understanding what determines value
- Neoclassical Microeconomics: Explains how firms should maximise value they create and capture under different industry conditions
- Macroeconomics: Enables firms to understand key variables in the economic environment that will affect value-creating and value-capturing ability

* Strategy: Management of value explains firms success - find strategies that lead to maximising of value; understanding of value developed by microeconomic theory

* Economics offers language that describe realities of business world (Wentzel, 2001c):
- Trade-Offs: By-product of scarcity
- Opportunity Cost: Gives better indication of a factor's true value, not by measuring value added by additional unit, but by measuring value lost when a unit is removed
- Relativity: Leads to concepts such as comparative advantages - absolute terms meaningless unless compared to absolute terms
- Marginality: Better decision making when focused on changes in absolute values rather than absolute values itself
- Inherent Correction Mechanism: Under scarcity, cannot grow indefinitely - when variety of goal-seeking participants, inherent forces will counteract any change

* Wentzel (2001b) distinguished between strategic thinking (uses same tried & tested frameworks) and meta-strategy (language for thinking to create new frameworks)

MG209 E-Business

Actual Relationship

* External Analysis: Macroeconomic analysis = 'E' in PEST analyst (i.e. business cycle, leading indicators, inflation etc.); Microeconomics = Porter's 5 Forces Analysis (1979)

* Internal Analysis: Porter's Value Chain and System analysis (Porter, 1985) - integration of economic concept of value integrate with strategic analysis

* Search: Economic theory play new role in finding new opportunities

* Choice: Surprisingly small role - limited to improving quality of decision-making by setting assumption & constraints within chosen opportunities; unrealistic assumptions Microeconomic theory limited to improving allocative or productive efficiency of current operations - Porter (1996) argues this is not considered part of strategic planning (PPF) Restoring the Relationship 1) Make substance (content) more realistic 2) Demonstrate method (approach to thinking) guides strategists regardless of substance Second option more feasible Microeconomics as a Framework for Strategic Thinking Perfect Competition

* Price-taker - only relevant strategic variable is output - no need for strategic planning

* Good for consumers, bad for producers; to break out of PC consider other variables From PC to Monopolistic Competition

* Heterogeneous products, imperfect knowledge

* Important strategic variables are ones that create product variety (and subsequently condition of imperfect knowledge)

* Potential strategies - both result in more market power: (1) Differentiate product and establish brand based on those differences (2) Structuring the market offering according to different elements From MC to Oligopoly

* Number of sellers, entry conditions, factor mobility

* Potential strategies - top 3 build on imperfect knowledge; bottom 4 reduce sellers: (1) Customer loyal programme (2) Advertise products with special emphasis on brand image and differentiated aspects (3) Exploit lower price sensitivity (as a result of customer loyalty and diminishing product comparability) (4) Expansion strategy based on acquisitions (5) Creating less formal alliances (linkages) e.g. exclusive contracts (6) Strengthen barriers to entry (e.g. through branding/advertising, EOS) (7) Increase difficulty for factors of production to leave firm

* More secrecy and variety - competitive & uncertain environment - better to create uncertainty (e.g. via innovation) than wait for uncertainty

* Resource-Based View (RBV): Firms gain competitive advantage because they possess combination of inimitable and durable resources that can generate value no other rival can match - successful firms require architecture, reputation, innovation From Oligopoly to Pure Monopoly

* Number of sellers, degree of knowledge, government regulation

* Potential strategies: (1) Acquisition strategy - eliminating substitutes for firms products (2) Limit-pricing i.e. reducing prices pre-emptively to make it unviable for newcomers (3) Continuous environmental scanning, scenario planning, competitive intelligence (4) Build political capital by engaging in social responsibility projects

MG209 E-Business

Beyond Pure Monopoly

* Potential strategies: (1) Maintain and enhance its relationships with the government and regulatory bodies (2) Increase labour mobility to limited extent to prevent it from becoming overdependent on single source (3) Awareness of other firm's innovation even outside industry boundaries (4) Innovate ruthlessly (5) Segment the market to allow us of price discrimination The Meta-Strategy of the Theory of the Firm

Strategies have two main types of dispositions:

Conclusion Economic theory has a much larger contribution to make to strategic planning than is seen in the theory and practice of strategic planning

MG209 E-Business

Reading 2: The Business Model: Recent Developments & Future Research (Zott et al, 2011)

* Despite surge in literature on business models, scholars do not agree on what a business model is - researchers frequently adopt idiosyncratic definitions that fit purposes of their studies but are difficult to reconcile with each other

* Literature is developing in isolation from each other, according to the interest to the respective researchers. The main interest areas identified are: (1) E-business and the use of information technology in organisations (2) Strategic issues (value creation, competitive advantage, and firm performance) (3) Innovation and technology management

* Despite conceptual differences between researchers there are some emerging themes: (1) Business model as a new unit of analysis (2) Emphasis on activities (3) Holistic perspective on how firms do business (4) Business models seek to explain both value creation and value capture Emergence of Business Model Concept and Definitions

* At general level business model has been referred to as a statement, description, representation, architecture, conceptual tool or model etc.

* Often studied without explicit definition Business Models for E-Business

* E-Business: Doing business electronically (e.g. e-commerce, e-markets etc.); does not include firms which use websites to display information for products/services

* Recent advances in ICT (Internet, declining in computing costs) - new ways to create value (e.g. unconventional exchange mechanisms) - changed interaction between firm and suppliers/consumers Business Model Representations

* Weill and Vitale (2001) - Set of schematics to provide tool for analysis of e-business initiatives; based on 3 classes of objects: (1) participants (2) relationships (3) flows

* Tapscott et al (2000) - Value map for depicting how business web operates depicting key classes of participants and value exchanges between them

* Business model ontology - conceptualisation and formalisation of elements, relationships, vocabulary, and semantics of a business model Strategic Marketing in E-Business

* Focused on changing nature of customer-firm relationships (specifically monetisation of ebusiness - free to fee)

* Degree of Internet advertising effectiveness

* Convergence of different media channels onto one digital platform Business Models and Strategy: Value Creation and Value Capture Through Activity Value Creation in Networked Markets

* Digital economy gives firms potential to experiment with new forms of value creation mechanisms, which are networked (value created by a firm/partners for multiple users)

* Potential sources of value creation: (1) novelty (2) lock in (3) complementaries (4) efficiency - presence of each driver can enhance effectiveness of others

* Also created through revolutionary business models where value creation and capture occur in value network

MG209 E-Business

Business Model and Firm Performance

* Firms can compete through business models - potential source of competitive advantage allowing for superior value creation

* Afuah, 2004: 'method by which a firm builds and uses its resources to offer its customer better value and to make money in doing so' - conceptual definition

* Zott & Amit, 2007: 'design of a focal firm's set of boundary-spanning transactions with external parties' - empirical definition
- How do the firm's business model and product market strategy interact to impact the firm performance?
- Results: (1) business models that emphasize novelty and are coupled with either differentiation or cost leadership can have a positive impact on the firm's performance (2) novelty-centered business models together with early entry into a market have a positive effect on performance.

* IBM, 2006: 'firms that were financial outperformers put twice as much emphasis on business model innovation as did underperformers'

* Giesen et al, 2008: Identified 3 types of innovation - industry models, revenue models, enterprise models - (1) reported each model can generate success (2) innovation in enterprise models that focuses on external collaboration/partnerships is particularly effective in older companies as compared to younger ones Strategy and the Business Model

* Business model design and product market strategy are complements, not substitutes, two differentiation factors: (1) Strategy has emphasis on competition, value capture, competitive advantages, whereas business model focuses on cooperation, partnership, joint value creation (2) Strong focus on role of customer in business model concept

* However business model can play an important role in a firm's strategy:
- Richardson, 2008: Business model explains how activities of the firm work together to execute its strategy, thus bridging strategy formulation and implementation
- Shafer et al, 2005: Business model is a reflection of the firm's realised strategy
- Teece, 2007: "hypothesis about what customers want, and how an enterprise can best meet those needs, and get paid for doing so" Summary of literature on business models in the strategy field Difficulty defining business model, but generally accept that a business model does not: (1) Involve a linear mechanism for value creation from suppliers to the firm to its customers
- interconnected set of exchange relationships & activities among multiple players (2) Not the same as product market strategy or corporate strategy (3) Cannot be reduced to issues that concern the internal organisation of firms Business Models, Innovation and Technology Management

* Companies commercialise innovative ideas and technologies through business models
- Cherbrough & Rosenbloom, 2002: Xerox Corporation grew by employing effective business model to commercialise a technology rejected by other leading companies
- Calia, Guerrini, and Moura, 2007: Technological innovation can trigger changes in the company's operational and commercial activities, hence in the business model
- Johnson & Suskewics, 2009: Importance of the business model for entire industries large infrastructural change needed to create whole new systems

* Technological innovation important for firms, but might not suffice to guarantee success Business Model Innovation

* Business model represents a new subject of innovation - vehicle for corporate transformation and renewal

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