MP3 / MM740: Strategy & IS Fall 2001 Module 4: E-Commerce & Distribution Channels

Issues Covered 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 and last resort

–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

Issue Price vs. First Day Close