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

Product Performance Time Performance demanded at the high end of the market Performance demanded at the low end of the market Progress due to sustaining technologies Disruptive technological innovation Progress due to sustaining technologies 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) Disintermediation

Value Gaps customersretailerdistributorsource firm Value Added = A, Expense = X Value Added = B, Expense = Y Expense Savings = (X+Y) - Cost of New Effort Value 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 supplierdistributor retailer customer manufacturer Traditional Channels Online Channels suppliercustomer manufacturer supplier manufacturer customer new 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 suppliercustomer CEI supplier 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 Formats Liquidation Auctions: (e.g. Priceline, OnSale) supplierscustomers auction 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 supplierscustomers Seek 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