Chapter 2
The Digital Economy
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Learning Objectives
Describe the major characteristics of the
digital economy
Compare marketplaces with marketspaces
Describe the nature of competition in
marketspaces
Describe some economic rules of the digital
economy
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Learning Objectives (cont.)
Describe the impacts of the digital economy
on trading and intermediaries
Describe the impacts of the digital economy
on business processes and functional areas
in organizations
Understand the role of m-commerce in the
digital economy
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Opening Case: Rosenbluth International
Threats to international travel agency industry
Online booking by airlines, hotels, etc.
Commission caps for agents reduced
Online companies penetrating corporate market as
well as individual travelers
Competition among major players is rebate-based
Innovative business models (i.e., name your own
price, auctions) embraced by companies in the
industry
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Rosenbluth
Car Rental
Cus1
QANTAS
Cus2
THAI AIR
UAL
Agency
Agency
Travel
Agencies
news/
web
Cus3
Rental contract
delivery
ticket
Cus.n
payment
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Rosenbluth International (cont.)
Solution
Became a purely corporate travel agency
Rebate customers with entire commission
Strategic Information Systems
DACODA: optimizes corporation's travel
savings
E-messaging services: reservation requests
and results via e-mail
E-ticket tracking: deals with and reduces
number of unused e-tickets
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Rosenbluth International (cont.)
Strategic Information Systems
Res-Monitor: low-fare search system,
finds additional savings for 1 of 4
reservations
Global distribution network: enables
instant access to traveler’s itinerary,
travel preferences, corporate travel policy
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Rosenbluth International (cont.)
Strategic Information Systems (cont.)
Custom-Res:ensures policy compliance,
consistent service, accurate reservations
IntelliCenters: innovative
telecommunications technology was to
manage multiple accounts
Network Operations Center (NOC):
monitors weather, current events, air
traffic
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The Digital Economy
Complete change of business models and
strategies for success in digital economy
Web-based IT and EC facilitate competitive
advantage
Global competition: price, quality, service
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The Digital Economy (cont.)
Extensive networked computing
infrastructure is expensive -> Internet only
Web-based applications provide customer
service, online selling, and procurement
support
Innovative systems must be patented (to
assure competitive advantage)
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Digital Economy Defined
Also Known As: Internet economy, new
economy, Web economy (by Don Tapscotts)
Economy based largely on digital
technologies
Digital communication
networks (Internet,
intranets)
Computers
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Software
Related information
technologies
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Example platforms
Products made of digital bits that are
delivered over the digital infrastructure
Conduct financial transaction digitally
through digital currencies or financial tokens
downloaded and carried on smart cards via
network and mobile devices
Physical goods are embedded with
Microprocessors and networking capabilities
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Digital Economy Defined (cont.)
Economic revolution
Unprecedented economic growth (USA)
IT growth more than doubles that of overall economy
(GDP 4.9%:1985 to 9%:2000)
Provided over ¼ of total economic growth
Longest period of uninterrupted economic expansion in
history
High-paying jobs (1999:av 29K, IT 49K)
Very low to negative unemployment in IT industry
*GDP: Gross Domestic Product
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Marketspaces vs. Marketplaces
Marketplace: 3 main objectives
Match buyers and sellers
Facilitate exchange of information, goods, services,
payments (transactions)
Provide institutional infrastructure enabling
efficient functioning of the market
EC in the marketplace
Increased efficiencies
Decreased cost of executing business functions
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Marketspaces vs. Marketplaces (cont.)
Marketspaces: electronic marketplaces
(especially Internet-based)
Changed processes used in trading and supply
chains
Changes driven by IT
Increased effectiveness
Lower transaction and distribution costs
More efficient markets
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Marketspaces vs. Marketplaces (cont.)
Doing business in the real
world
Process raw materials
Distribute raw materials
Doing business with EC
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Gathering information
Selecting information
Synthesizing information
Distributing information
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Components of
Digital Ecosystems
Digital products
Information and entertainment products
Paper-based products: books,
newspapers, magazines
Product information: catalogs, training
manuals
Graphics: photographs, maps, calendars
Video: movies, TV programs
Software: programs, games, development
tools
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Components of
Digital Ecosystems (cont.)
Symbols, tokens, icons
Tickets and reservations: airline, concert
Financial instruments: checks, credit cards,
electronic currencies
Processes and services
Government services: forms, benefits,
licenses
E-messaging: letters, faxes
Business processes: ordering, inventorying
Auctions: bidding, bartering
Others
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Components of
Digital Ecosystems (cont.)
Consumers
Search for detailed information
Compare products/prices
Bid or negotiate prices
Sellers
Innumerable products and services available
Web sites, marketplaces
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Components of
Digital Ecosystems (cont.)
Intermediaries: infomediaries, eintermediaries (computerized systems)
Create and manage online markets
Match buyers and sellers
Provide infrastructure services
Aid transactions
Support services: to ensure security
Certification and trust services
Knowledge providers
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Components of
Digital Ecosystems (cont.)
Infrastructure companies: provide
hardware, software, EC support
Content creators: create and maintain Web
sites
Business partners: Internet collaboration
usually along the supply chain
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Components of
Digital Ecosystems (cont.)
Electronic marketplaces
Exchanges—many-to-many
Sell-side—one-seller-many-buyers
Buy-side—one-buyer-many-sellers
Public—open to all
Private—open to invited traders only
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Competition in Marketspaces
Internet ecosystem : business model of the online
economy (previous Industrial Economy)
Competition in the Internet economy
Inclusive with low/no barriers to entry
Self-organizing: company profit and value to customers
Old rules may no longer apply
Competition is tense
Lower buyers’ search cost : just click
Speedy comparisons : e.g. compare books
Differentiation and personalization : e.g. notify when a
new book, review, favorite subjects
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Competition in Marketspaces (cont.)
Consumers like differentiation and
personalization
Lower prices due to low cost of operation
Customer service
Size of company no longer significant
Geographical location insignificant
Language barriers are being removed
Digital products do not have normal wear and
tear
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Competition between company…
Being replaced by competition between
networks
Better networks, advertisement capabilities
and relationships has a strategic advantage
Better business model will win
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Porter’s Competitive Analysis
“how the Internet influences an
industry structure”
Source: Reprinted with the permission of the Free Press, a Division of Simon & Schuster, Inc. , from
Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter, p. 67.
Copyright © 1985, 1998 by Michael E. Porter.
Issues and Success Factors
Digital and regular products
Cost curves : cost/unit decline as quantity increase
Bundling products/services : more opportunities
Buying vs. renting : can be rented and shared
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Issues and Success Factors (cont.)
Critical Mass of Buyers & Sellers(initialtive to
survive, liquidity) is needed because
High fixed costs of deploying EC
Market to be truly efficient
Development of strong, fair competition
Quality uncertainty and quality assurance
: Buyers cannot see/feel what they puschase
Provide free samples e.g. shareware
Return if not satisfied, more complicate e.g.
products(information) are fully consume
twice time transport/transaction
Insurance, escrow and other services e.g. ebay.com
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Issues and Success Factors (cont.)
Pricing on the Internet : Enable new type of
prices discovery in different markets e.g.
auction last-minute unsold seat
Determines: sales volume, market share, product
profitability
Price discrimination: different prices to different
buyers through customization of products
Product differentiation: price based on value to
the customer, not cost of production
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Issues and Success Factors (cont.)
Online vs. off-line pricing
Click-and-mortar—available online and off-line
Brokerage houses—50% commission discount for
online trades
Economic Impacts of EC
Production function—can substitute capital for labor
for same quantity of production
Lower the labor needed, higher required investments
EC lowers amount of labor/capital needed to produce
the product
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Economic Effects of EC
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Issues and Success Factors (cont.)
Contributors to E-market success
Product characteristics
Type: digitized, non-digitized
Price: higher price greater level of risk
Standards and product information available
allows sale of most items: cars, computers,
groceries
Industry characteristics
Brokers currently necessary but …
Intelligent systems may replace brokers
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Issues and Success Factors (cont.)
Seller characteristics
Consumers find sellers with the lowest
prices
Low-volume, higher-profit-margin
transactions(be reduced in the long run)
Consumer characteristics
Impulse buyers : most purchasing
Patient buyers : some comparison
Analytical buyers : do research
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Impacts on Trading Processes
and Intermediaries
Industry structure
Consumers are aware of competitor’s prices through
searches; reduced search costs(money, time and effort)
intermediaries become obsolete
Digitization of more products; reduction in shipping
costs
Seller and customer activities converge in 1 place;
reduced costs, cycle time:improve customer satisfaction
Marketing
Order processing
Distribution
Payments
Product development
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Traditional Supply Chain…
Delivery
Supplier
Manufacturer
Buyer
Supplier
Manufacturer
Buyer
Supplier
Seller
Buyer
Supplier
a. Direct relationship(point-to-point)
Manufacturer
Wholesaler
Delivery
Sub
Supplier
Service
b. Traditional intermediary
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Retailer
Buyer
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Become Hub-based Chain
Other
Service
Logistic,
delivery
Buyer
Technology
Buyer
Electronic
Hub
Managed by
Infomediary
Supplier
Bank
Payment
Consultant
Manufacturer
Logistic
Sub
Supplier
Support
c. Hub-based chain
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Impacts on Trading Processes
and Intermediaries (cont.)
Industry structure (cont.)
Roles and value of intermediaries in emarkets
Search costs: brokers with access to customer
preferences can predict demand for products
Lack of privacy: anonymity of buyer and/or
seller
Incomplete information: gathers product
information from many sources(competing one)
Contracting risk : escrow agency ; provide
information for both sides, arrange transaction
and insurance
Pricing inefficiencies: dealing with an imbalance
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Impacts on Trading Processes
and Intermediaries (cont.)
Industry structure (cont.)
Disintermediation and reintermediation
Disintermediaries: match and provide
information
Reintermediatiaries: provide value-added
services (consulting)
Syndication: new EC model;sale of the
same goods to many customers, who
integrate it with other offerings and
redistribute it
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Disintermediation/Reintermediation
Role of intermediation e.g brokers
1. Matching and providing information
2. Value added service, consultant
For EC,a phenomina would be happened:
Brokers who provide only 1st type of service
may be eliminate “disintermediation”
Brokers who provide 2nd type or manage
electronic intermediation,infomediation, will
survive called “reintermediation”
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Reintermediation opportunities
Brokers are valuable when the number of
participants is enormous or complex
information products are exchanged
Many brokering services require
information processing;That would better
to use an electronic version
For delicate negotiations, computer
mediator may be more predictable,
trustworthy than human
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Impacts on Trading Processes
and Intermediaries (cont.)
Syndication supply chain
Syndication of information is critical to the
success of EC
Distributors provide free information to
consumers, and package and sell the same
information
Content creators sell the same information to
many syndicators and distributors
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The Supply Chain of Syndication
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Value Chain:The Analysis Framework
Insert Fig 2-6 here
Source: Block and Segev (1996). Reproduced with permission of the authors.
Impacts on Trading Processes
and Intermediaries (cont.)
Potential Winners and Losers in EC
Winners
Internet access providers
Diversified portal service providers
EC software companies
Proprietary network owners
Others
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Impacts on Trading Processes
and Intermediaries (cont.)
Winners in EC
Losers in EC
Internet access
providers
Diversified portal
service providers
EC software
companies
Proprietary network
owners
Others
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Wholesalers
(particularly small
ones)
Brokers
Salespeople
Nondifferentiated
manufacturers
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Impact on Business Processes
and Organizations
Improving direct marketing
Product promotion
New sales channels : bidirectional
Direct savings
Reduced cycle time
Customer service
Brand or corporate image
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Impact on Business Processes
and Organizations (cont.)
Other marketing-related impacts
Customization
Advertising : one-to-one marketing
Ordering systems
Markets
Transforming organizations
Technology and organization learning
Changing nature of work
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Impact on Business Processes
and Organizations (cont.)
Redefining organizations
New product capabilities : creating products in an
innovative way
New business models
Impacts on manufacturing
Build-to-order
Virtual manufacturing : run global plants as a
single plant
Impact on finance and accounting
Human resource management, training, and
education
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Mobile Commerce
Applications of M-commerce
Online stock
trading
Online banking
Micropayments
Online gambling
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Ordering and service
Online auctions
Others
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Mobile Commerce (cont.)
A successful vendor
I-mode customers can
Receive train timetable
Discount coupons for shopping and
restaurants
Purchase music online
Send or receive photos
Purchase airline tickets
Locate information about books and buy
them
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