Internal Organization of a Firm’s e-Business Activities

This post is a summary of chapter 9 of the book “Strategies for E-business: Creating Value through Electronic and Mobile Commerce by Tawfik Jelassi and Albrecht Enders.”

Options for online interactions with customers

As companies have developed their e-business activities, they have started to offer increasingly elaborate e-business capabilities. The ICDT (information, communication, distribution and transaction) model describes the main features that a firm can offer to its customers. Essentially there are four options:

• Information activities
• Communication activities
• Transaction activities
• Distribution activities

Online/offline distribution channels

To understand whether manufacturers should fear distribution channel conflicts, they need to analyze how new online channels affect their offline channel, and whether the various channels actually serve the same customer segments. There are two main dimensions that determine how to deal with possible channel conflict:

• The prospect of destructive conflict between different channels
• The importance of the existing channel that is threatened by the new online channel

Separate e-business organization

Many companies chose to separate their ‘real-world’ and online activities, or spinning off their e-business, because they believed that it gave them the following advantages:

• Greater focus
• More flexibility and faster decisions
• Entrepreneurial culture
• Access to venture capital

Integrated e-business organization

Today, it seems that in most cases the benefits of an organizational structure that combines online and offline channels, or an in-house integration, outweigh those of a separated organization. These benefits include:

• Established and trusted brand
• Shared information
• Cross-promotion
• Purchasing leverage
• Distribution efficiencies
• Shared customer service

There are also some hybrid options spanning the two extreme choices of full separation and full integration. These include setting up joint ventures and strategic partnerships.

Impact of the Internet on the Vertical Boundaries of a Firm

This post is a summary of chapter 8 of the book “Strategies for E-business: Creating Value through Electronic and Mobile Commerce by Tawfik Jelassi and Albrecht Enders.”

Companies can choose from a variety of options available to them for making a product or service. The different options are as follows:

• Market transactions
• Long-term contracts
• Alliances
• Parent/subsidiary constellations
• Internal production

Many e-business analysts have argued that the increased use of the Internet makes it more attractive to rely more heavily on external providers and perform fewer activities internally.

Reasons favouring ‘make’ decisions

Three main reasons that favour performing activities in-house are:

• Strong linkage between activities
• Confidentiality of information
• High transaction costs, influenced by:
  • Asset specificity
  • Information asymmetry

Reasons favouring ‘buy’ decisions

Today, many companies rely heavily on sourcing parts and services from external suppliers. There are four main reasons for doing so:

• High economies of scale
• High capital requirements
• Specialized know-how
• Higher efficiency of the open markets

Value-chain deconstruction through the Internet

Value-chain can be disconstructed through the Internet. This deconstruction results from the separation of the economics of physical goods and that of digital goods, and from dissolving the traditional trade-off between richness and reach. Overall, this deconstruction leads to a development called de-averaging of competitive advantage. Here, a firm picks out individual parts of the value chain and decides to compete on only one dimension through larger scale, higher degrees of competition, or other factors that contribute to competitive advantage, while outsourcing other activities to external providers.

However there are limitations of deconstruction and unbundling:

• Lack of linkage between externally and internally performed activities
• Increased convergence and ease of limitation

Unbundling the corporation through the Internet

The unbundling concept recognizes that a corporation consists of the following three core businesses:

• Customer relationship management
• Product innovation
• Infrastructure management

The reason why the different businesses conflict with one another is that they have differing economic, cultural and competitive imperatives.

The problem for integrated firms is the difficulty of optimizing simultaneously scope, speed and scale; therefore, firms need to make trade-offs.

Impact of the Internet on the Horizontal Boundaries of a Firm

Summarized from chapter 7 of the book “Strategies for E-business: Creating Value through Electronic and Mobile Commerce by Tawfik Jelassi and Albrecht Enders.”

Economies of scale

The basic concept of economies of scale is that as a firm increases its product output, it decreases its unit production cost. High economies of scale usually exist in production processes that have high fixed costs and low variable costs.

Economies of scope

The logic behind economies of scope is similar to that of economies of scale. Economies of scope result from expanding the variety of products sold using the same R&D, production and delivery assets. The main goal is to spread fixed costs over a wider basis by adding new products or services to the existing offering.

Timing of market entry

Early mover advantages can result from:

• Learning effects
• Brand and reputation
• Switching costs from these sources:
  • Relearning
  • Customized offerings
  • Incompatible complementary products
  • Customer incentive programmes
• Network effects, both direct and indirect

Early mover disadvantages are:

• Market uncertainty
• Technological uncertainty
• Free-rider effects

Virtual communities

The concept of this community stems from the idea of moving a community from the physical marketplace to the digital market space in order to create network effects among participants.

The four essential purposes of communities are:

• Communication
• Information
• Entertainment
• Transaction

Building on these purposes, there are distinguishable community types that focus on invidual purposes. Members of virtual community provide the following benefits:

• User-generated content
• Data mining
• Commercial content

Revenues in virtual communities are typically generated from the following sources:

• Advertising
• Usage fees
• Subscription fees
• Content fees
• Transactions