Strategy, Electronic Commerce and Partners

© 2004 Leslie Martinich, Competitive Focus

Strategy, Electronic Commerce and Partners.. 1

Abstract.. 1

1.        Electronic Commerce and Strategy.. 1

2.        Strategy Formulation and Industry Structure. 1

3.        The Role of Partners. 64

References. 115

Abstract

Companies can improve their competitive advantage by integrating electronic commerce with their corporate strategy, rather than having a separate e-business unit, and by including partners in their strategy.  The first part of this paper explores the integration of electronic commerce strategies into corporate strategy.  The second part of this paper extends the framework for strategy formulation to include partners and provides concrete examples from the e-Learning industry.

1.         Electronic Commerce and Strategy

Companies can enhance their competitive advantage by integrating electronic commerce initiatives into their strategic positioning, rather than having a separate electronic commerce strategy.  Further, strategy formulation uses a traditional model of industry structure which omits partners. Companies can improve their competitive position by enhancing the model to include partners and by using electronic commerce strategically with their partners.

Why is it important to have an integrated electronic commerce strategy?  Providing an on-line order entry system no longer  provides a competitive advantage.  The situation is analogous to that of banks and ATMs in 1979.   Citibank pioneered ATMs, and initially gained a competitive advantage.  Over time, however, every bank provided access to accounts through ATMs, so no one bank gained an advantage.  Industry finds itself in a similar situation regarding electronic commerce.   Infrastructure for electronic commerce is ubiquitous, so every competitor is on relatively level ground.  Simply having order entry for customers provides no competitive advantage, although it may have had such at an earlier time.  Just as banks integrated their ATM strategy into their corporate strategy years ago, it is time for industries to integrate their electronic commerce strategy.

Electronic commerce is a tool.  To use it effectively in their strategy, companies must understand how its use subtly shifts their relative strength with respect to that of their suppliers, customers and competitors.  Moreover, companies can use electronic commerce in ways designed to fit with their strategic plans (1)  to differentiate or (2) to compete through operational effectiveness.

The first part of this paper explores the integration of electronic commerce strategies into a company’s overall strategy.  To understand how to integrate electronic commerce into strategy, we need first to understand the competitive forces that shape strategy.  We will examine competitive forces and  explore how Dell has very effectively integrated electronic commerce into its strategy.

The second part of this paper expands the model of industry structure to include partners. Partners play an important role, especially in the software industry.  We will examine the e-Learning industry in order to fully explore the role of partners and how to gain competitive advantage through the effective use of the Internet.

2.         Strategy Formulation and Industry Structure

How can companies integrate their electronic commerce strategy into their overall strategy?  Let’s examine the process of strategy formulation.

Firms formulate a strategy by answering two critical questions: What business will we be in?  And how we will compete?

In order to answer the first question, firms must consider the structural attractiveness of an industry.  For any given industry, there are suppliers, buyers, competitors, potential substitutes and threats of new entrants.  The relative strength of each of these groups determines whether a business is structurally attractive or unattractive.

Porter (1979) portrays industry structure as shown in Figure 1.

 Figure 1: Industry Structure (adapted from Porter, 1979)

These competitive forces determine the profitability or attractiveness of an industry.  The strength of the competitive forces limits the overall profitability of an industry.  Let’s look at each force in turn.

Suppliers.  In an industry where suppliers are concentrated, suppliers’ products are differentiated, switching costs are high, the suppliers pose a credible threat of integrating forward into the industry’s business, or where the industry is not an important customer to the supplier, industry participants are relatively weak, which will keep costs up and profits down.

Buyers.  In an industry where buyers are concentrated, earn low profits, or purchase in high volumes, buyers are able to exert high pressures on the industry which tends to keep industry profits low.  Buyers who are capable of integrating backward into the industry’s business, or who have sources for alternative products, keep the industry profit level in check.

Competitor Rivalry.  A mature or slow growing industry limits the potential profitability of that industry, as do high fixed costs, exit barriers and product standardization.

New Entrants. Standardized products with low capital requirements and access to distributors increase  the threat of new entrants.

Substitutes. Low switching costs and a favorable price/performance ratio for substitutes further limit industry profitability. 

Table 1 summarizes these characteristics.

Table 1: Characteristics limiting industry attractiveness.

Porter (2001) looks at how the Internet affects the relative power of each of the structural elements and finds that, on balance,  the Internet lowers the power of firms.  Electronic commerce improves suppliers’ ability to integrate forward and in general reduces barriers to entry.  It tends to reduce switching costs.  Porter’s findings are generalized to industry as a whole.

Once a company decides which industry it will be in, it must then go on to consider the second question, “How will we compete?” Firms consider factors such as their relative strengths and weaknesses and the maturity of the industry.   A firm can find a sustainable competitive advantage in operational effectiveness or in strategic positioning and differentiation.  Once it has decided how it is going to compete, it can then incorporate the use of the Internet to effect that strategy.

Let’s consider Dell’s situation.  The industry is personal computer manufacturing.  Table 2 shows the relative power of each structural element.

Table 2: Relative power in the personal computer manufacturing industry.

This is a structurally unattractive business.  What is Dell doing that allows it to be successful in an unattractive industry?  Dell defined its business as build-to-order, standards-based personal computer manufacturing.  Its corporate strategy is to build only those products that are standards.  Dell could have chosen to compete on technical innovation, as Compaq, Apple and HP do.  However, Dell is not a technology innovator; it has chosen not to focus its efforts on technology strength or differentiation.  Dell’s answer to the question “How will we compete?” is,  “operational effectiveness.”

Dell has used the Internet to improve its operational effectiveness, especially in its procurement and manufacturing.  Dell maintains less than one day’s worth of inventory.  Dell’s suppliers have warehouses located near its manufacturing facilities in order to make frequent, even multiple times per day, deliveries.  In order to facilitate that, Dell utilizes electronic commerce strategies to keep a very tight information flow with its suppliers.

Dell also makes good use of customer relationship management tools.  Dell moved from selling primarily by telephone to selling primarily via electronic commerce and telephone.  Dell’s web site includes order entry and product configurators.    The integration of Dell’s on-line order entry with its back end manufacturing contribute to its operational effectiveness as well as provide a low cost of sales.

All personal computer manufacturers utilize electronic commerce for order entry for customers.  All have product configurators.  There is a possibility for some differentiation here in ease of use.  But when products are at this mature stage, the right place to compete is operational effectiveness, because competition has shifted to price.

Dell’s strategy and integration of electronic commerce into its basic business has helped it to mitigate some of the unattractive features of the personal computer manufacturing industry.

Let’s consider the general case and some potential uses that a company might make of the internet.

For differentiation,  a company might choose to:

·         Use Customer Relationship Management tools to enhance the customer experience.

·         Use e-Learning tools for customer education.

·         Use electronic security features to increase customer trust and loyalty as described in Reichheld and Schefter (2000).

·         Provide personalized information for users, such as UPS allowing a customer to track where his shipment is, or Dell allowing a customer to track the status of his order as it goes through the manufacturing line.

·         Maintain and provide personalized information for users, such as Amazon maintaining an address book for  customers, increasing the customer’s switching costs.

·         Use virtual communities to increase customer loyalty and trust (Schubert and Ginsberg (2000)).

For operational effectiveness, a company might choose to:

·         Use e-Learning to train customers in the use of its products.

·         Use extranets and digital marketplaces to increase its power relative to suppliers.

·         Leverage the existing Internet infrastructure to expand globally.

·         Track customer behavior, use data mining to uncover root cause of support calls.

·         Use internal knowledge management systems.

Table 3 summarizes some of the ways that companies can use electronic commerce to compete on differentiation or on operational effectiveness.

Table 3: Strategic uses of electronic commerce.

3.         The Role of Partners

Porter’s model of competitive forces that shape strategy includes channel partners, in the role of buyers.  And it includes partners who are primarily competitors but who focus on a different service or segment.  It does not, however, include a kind of partner which plays an important role, especially in software companies.

Consider the relationship of Microsoft and Lotus from 1983 through the early 1990s.  Lotus’s product, 1-2-3, drove significant sales of personal computers, which in turn drove significant sales of Microsoft’s operating system at the time, DOS.   So application developers can sometimes be partners of platform developers, without being competitors or suppliers or buyers, in any real sense.

In order to understand how to use the Internet and partners to improve competitive advantage, let’s look more closely at e-Learning.  Comments are transferable to other electronic commerce platforms.

In order to analyze the industry, let’s divide the e-Learning industry into three distinct functional areas.

1. Platform providers, building a Learning Management Systems (LMS)
2. Content providers, creating training content
3. Delivery providers, such as training institutions

Platform providers create Learning Management Systems (LMS) and Authoring Tools.  LMSs support for example, online enrollment, user profiles, assessment and student transcripts. 

Content providers use Authoring Tools to create chunks of information and assemble the chunks into courses.

Delivery service providers perform the organizational and individual needs assessment, provide branded training materials, facilitate peer and expert interaction, and deliver the training and measurement.

In 2004, some companies, such as Click2Learn, actually provide all three functions, and other companies provide two of the three functions.  However, for the purpose of analyzing the industry, we make this distinction.

Let’s look at the value chain.

Figure 2: e-Learning Value Chain

Without the content or delivery services, the platform alone has little value to learners, just as DOS had little value to personal computer users without applications such as word processors and spreadsheets.   So platform providers very much need the content provider partner.  The delivery service provider is more like a channel, comparable to system integrators.

How can platform providers leverage the internet to gain competitive advantage with content providers?

·         Provide training in the form of examples, tutorials and sample code, to assist content providers in using their platform.

·         Provide content developers with information regarding standards.

·         Provide a database of component content which is available for re-use.

·         Provide certification of content as compliant with standards.

·         Provide certification of  the content provider as “Certified Platform-X Courseware Developer”, where Platform-X is the firm’s LMS product.

In the early stages of any industry, differentiation is a better strategy than price competition.  So platform providers can use the Internet to add value for customers, raising barriers to entry and raising switching costs.

This is strictly analogous to developer programs provided by major platform software developers such as Microsoft or Oracle.

How can platform providers use the Internet to gain a competitive advantage with delivery service partners?

Both content providers and platform providers have increased power over delivery service providers in that they can integrate forward and go directly to the end user (the learner).

Platform providers can also

·         Provide training and examples of how to set up and make use of the administrative services.

·         Provide certification of a delivery provider as a “Certified Platform-X Delivery Provider.”

·         Provide a database of content to the delivery provider.

·         Facilitate the relationship between the content providers and the delivery providers.

Although end users are fairly removed from the platform, platform providers can also improve their relative position with their partners by driving demand from the end users, the learners, by strong branding (not unlike the “Intel Inside” campaign) and by providing something of value to the end users.  For example, platform providers could

·         Provide users with a Personal Lifetime Transcript, which lists all certifications and training courses completed.

·         Make the end user system easy to use.

Table 4 categorizes several strategic uses of electronic commerce to improve the platform provider’s position relative to the content developer and delivery service partners.

Table 4: Strategic uses of electronic commerce to improve position relative to partners.

In conclusion, firms can integrate the use of electronic commerce into their strategies in order to improve their competitive positions.  In mature industries, such as personal computer manufacturing, use of the Internet can improve a firm’s operational effectiveness.  In emerging industries, where competing through differentiation is a better strategy, firms can leverage the Internet to better differentiate.  The e-Learning industry illustrates this point, and the lessons are transferable to other industries.

References

Porter, Michael E. (1979), “How Competitive Forces Shape Strategy,” Harvard Business Review, March-April, pp. 137-145.

Porter, Michael E. (2001), “Strategy and the Internet,” Harvard Business Review, March, pp. 63-78.

Reichheld, Frederick F. and Schefter, Phil (2000), “E-Loyalty: Your Secret Weapon on the Web,” Harvard Business Review, July-August, pp. 105-113.

Schubert, Petra and Ginsburg, Mark (2000), “Virtual Communities of Transaction: The Role of Personalization in Electronic Commerce,” Electronic Markets 10 (1), pp. 45-55.