Internet Influences on the Marketing Environment General characterization Marketplace v. marketspace Environment effects

How does the Internet change the marketing environment? General effects What does the marketplace look like? How do companies organize themselves and their activities? Specific effects What activities can be carried out in the new environment? How do the processes change?

What forces create change? Technology Hardware (infrastructure) Software (things to do with hardware…) People In the aggregate Acceptance of technology Resistance to technology In the specific Interactions between consumers and marketers Involvement of policy makers

Conceptualizing effects of change: population ecology General framework to organize concepts and effects Taken from biology Adopted by business Management: structure of firms Marketing: modeling competition Used by us To characterize the Internet environment To describe environment effects on marketing

A population ecology primer Rule 1: things don’t exist in a vacuum Importance of context For existence For growth Importance of others in the context Rule 2: “nice” guys finish last Ecological imperative Natural selection Adaptation Centrality of competition

Some useful jargon Population ecology - systematic explanation of environmental factors that affect size and growth of a population Translation: Internet as the ecosystem, industry as the population Biotic potential - expected growth under optimal conditions Example: Microsoft???????????? Environmental resistance - constraints to growth, checks to biotic potential Example: Microsoft Carrying capacity - point where resistance stops growth

From biology to business… Marketing + technology = environment viz., a virtual ecology With different types of populations DNS as classification system Industries in .com domain as species populations Environmental resistance = constraints to industry growth E.g., available technologies E.g., imposed regulations

Classifying constraints Impediments to industry growth Natural circumstances (density [in]dependence) Limits to production (resources) Supply-side (product components) Demand-side (consumers) Limits to implementation (technology) Cultural conditions Acceptance of technology Imposition of regulation

Competition and the Internet ecology Concepts from population ecology in marketing Who succeeds, and how do they do it? Nature of competition as function of… Company characteristics Industry characteristics Product life cycle Strategic activity Application to the Internet ecology Internet as product market Internet as environment for product markets

Specialist Strategy in Action

Evolution and business ecosystems Resource competition affects population structures Competition => interaction => resource allocation => interbreeding => genetic variation Industries also exhibit interbreeding Mingled capabilities confer competitive advantage “ “ blur industry boundaries “ “ create business ecosystems E.g., Time-Warner and AOL

Business Ecosystems

The Internet as a marketing environment Characteristics Virtual From physical to digital From marketplace to marketspace Interactive Person interactivity (via CME) Machine interactivity Constraints Environmental (e.g., experiential limits) Cultural (e.g., societal expectations)

Managing Experiential Constraints

Managing Cultural Constraints

Evolving Market Structures The value chain notion Set of activities undertaken to move a product from development to market Each “link” is an opportunity to add value Aka., “value-added” chain Value chain structure can lead to competitive advantage Example McDonald’s in Russia (bought the farm…)

The Virtual Value Chain Ma t r i x Product Design Manufacture Customer Support Product Distribution Marketing Sales Structure information (e.g., databases) Collect information Select information Analyze information Distribute information Process opportunity Product opportunities Targeted Email Advertising Customizable Products (e.g, Dell, RealPlayer) Customer Relationship Management Tools PHYSICAL VALUE CHAIN VIRTUAL VALUE CHAIN

Adapting Structure to Add Value Two basic mechanisms for moving materials through the value chain Hierarchies (internal focus) Movement controlled by managerial decisions Related to vertical integration High asset specificity, complex product description Markets (external focus) Movement via supply and demand Low asset specificity, simpler product description

The Internet and Structure Shift General effects of IT Generally faster integration of value chain links Enhanced communication between chain participants Structure specific effects of IT Changes to relative costs Production costs (Development and distribution) High for hierarchy, low for market Coordination costs (Movement through chain links) High for market, low for hierarchy

More About Internet Effects on Structure Better communication leads to… Simplified product descriptions Decreased asset specificity (e.g., due to flexible manufacturing technologies) Shifts in cost tradeoffs: one hypothesis Lower production costs ==> hierarchies have less value Lower coordination costs ==> markets have more value