2009

EBusinessEnablement:
ImplicationsforBusiness Strategy

Abstract:Intheemergingglobaleconomy,ecommerceandebusiness haveincreasinglybecomeanecessarycomponentofbusinessstrategy andastrongcatalystforeconomicdevelopment.Thisstudyfocuseson the various models of business strategy and how they get impacted through ebusiness enablement. The five frameworks studied, virtual market conceptualization, value chain model, resource based model, Portersgenericstrategyframeworkandthefiveforcesmodelingofthe industry, all address various aspects of the firm which functions in a particular market which is its industry. The 5 frameworks studied providethepractitionersaperspectiveofhowinternetenablementcan affectthefirmsoverallcompetitivenessandstrategy.

ArpanKumarKar RollNo:B07F02 XLRIJamshedpur

Electronic copy available at: http://ssrn.com/abstract=1432433

EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY INTRODUCTION Ebusiness is a term used to describe businesses run on the Internet, or utilizing Internet technologiestoimprovetheproductivityorprofitabilityofabusiness.Inamoregeneralsense, thetermmaybeusedtodescribeanyformofelectronicbusinessthatistosay,anybusiness which utilizes information technology. This usage is somewhat archaic, however, and in most contextsebusinessrefersexclusivelytoInternetenabledbusinesses. In the emerging global economy, ecommerce and ebusiness have increasingly become a necessary component of business strategy and a strong catalyst for economic development. The integration of information and communications technology (ICT) in business has revolutionizedrelationshipswithinorganizationsandthosebetweenandamongorganizations andindividuals.Specifically,theuseofICTinbusinesshasenhancedproductivity,encouraged greatercustomerparticipation,andenabledmasscustomization,besidesreducingcosts. With developments in the Internet and Webbased technologies, distinctions between traditionalmarketsandtheglobalelectronicmarketplacesuchasbusinesscapitalsize,among othersaregraduallybeingnarroweddown.Thenameofthegameisebusinessstrategy,and theabilityofacompanytodetermineemergingopportunitiesandutilizethenecessaryhuman capitalskills(suchasintellectualresources)tomakethemostoftheseopportunitiesthroughan ebusiness strategy that is simple, workable and practicable within the context of a global informationmilieuandneweconomicenvironmentismakingallthedifferences.Withitseffect of leveling the playing field, ecommerce coupled with the appropriate strategy and policy approach enables small and medium scale enterprises to compete with large and capitalrich businesses. Inthisstudy,anattemptisbeingmadetostudyvariousindividualstudiesthathavefocusedon ebusinessstrategies,andonhowtechnologyimpactsthevariouspopularmodelsofstrategy. For the same, a literature survey has been done to show case theemerging business models andhowtheareasofdifferenceforvariousmodelsofstrategyarise,withtheadventofinternet technology,andtheirusageinbusinesses,andthustheirimplications.

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Electronic copy available at: http://ssrn.com/abstract=1432433

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EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY VIRTUALMARKETVIEWOFTHEBUSINESS Virtual markets refer to settings in which business transactions are conducted via open networks based on the fixed and wireless Internet infrastructure. Dutta and Segev (1995) examined the ways commercial organizations are exploiting the Internet and suggested that suchmarketsarecharacterizedbyhighconnectivitythatimprovestheiroveralleffectiveness. Theyinsistedthatthefocusonthecustomeristhecorrectprescriptionwhich,however,isnot easy to implement. All sectors of industry must seek to exploit the Internet for competitive advantage. Balakrishnan, Kumara, and Sundaresan (1999) suggested that these newly created markets have a greater focus on transactions. The new environment facing manufacturingenterprises will involve more customer engagement, transitory partnerships with global companies, and greater emphasis on agility. This environment is also characterized by increasing reach and connectivity through the worldwide web, distributed processing, greater enterprise integration, micro transaction tracking and intelligence, and new multimedia capabilities. To succeedinthisenvironment,manufacturingorganizationsmustexploitthenewdevelopments in information technology to streamline and transform their activities. They suggested that collaboration and coordination, learning and improvement, integration, and information gathering are the most pressing among organizational needs in the wake of ebusiness enablementandtheneedsandprioritiesvarybystageintheproductrealizationprocess. ShapiroandVarian(1999)suggestedthatsuchmarketshaveagreaterfocusontheimportance on information goods and networks. As more information about products and services becomesinstantlyavailabletocustomers,andasinformationgoodsaretransmittedoverthe Internet, traditional inter mediary businesses and information brokers are circumvented the guiding logic behind some traditional industries (e.g., travel agencies) begins to disintegrate. Theyarguethatifmanagersseriouslywanttodevelopeffectivestrategiesforcompetinginthe new economy, they must understand the fundamental economics of information technology. Whetherinformationtakestheformofsoftwarecodeorrecordedmusic,ispublishedinabook or magazine, or even posted on a website, managers must know how to evaluate the

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EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY consequences of pricing, protecting, and planning new versions of information products, services,andsystems. EvansandWurster(1999)suggestedthatsuchmarketshavegreaterreachtomorenumberof probableconsumerscheaplyandeffectivelywithagreaterdepthanddetailofinformationthat can be accumulated, offered, and exchanged between market participants. Virtual markets have unprecedented reach because they are characterized by a near lack of geographical boundaries. They argue that with the spread of connectivity and common standards, a businesscustomerswillincreasinglyhaverichaccesstoauniverseofalternatives,itssuppliers will exploit direct access to its customers, and focused competitors will pick off the most profitablepartsofyourvaluechain. HagelandArmstrong(1997)proposedthatanelectronicnetworkwithopenstandards,likethe Internet supports the emergence of virtual communities and commercial arrangements that disregardtraditionalboundariesbetweenfirmsalongthevaluechain.Businessprocessescan be shared among firms from different industries, even without any awareness of the end customers. These virtual market conceptualization would enable customers to talk to one another regarding the products and services and eventually form reverse markets, where customers seeks out vendors and play them off against themselves. These would enable companiestoknowtheneedsofthecustomersbetterandalsotheircompetition. AccordingtoAmitandZott(2001)virtualmarketconceptualizationofbusinesseshaveenabled theeaseofextendingabusinessproductrangetoincludecomplementaryproducts,improved access to complementary assets, new forms of collaboration among firms, the potential reduction of asymmetric information among economic agents through the Internet medium, and realtime customizability of products and services. Industry boundaries are thus easily crossed as value chains are being redefined. This in turn may affect the scope of the firm as opportunitiesforoutsourcingariseinthepresenceofreducedtransactioncostsandincreased returnstoscale.Thusthecharacteristicsofvirtualmarketscombinedwiththevastlyreduced costsofinformationprocessingallowforprofoundchangesinthewayscompaniesoperateand inhoweconomicexchangesarestructured.

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EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY VALUECHAINMODELOFTHEBUSINESS To analyze the specific activities through which firms can create a competitive advantage, Michael Porter (1985) proposed the value chain model of a firm to analyze its sequence of primary activities that ultimately creates value for the firm, like the inbound logistics, operations,outboundlogistics,marketingandsalesandfinallyservice,tonameafewinorder. Value chain analysis identifies the activities of the firm and then studies the economic implications of those activities. It involves defining the strategic business unit, identifying criticalactivities,definingproducts,andfinallydeterminingthevalueofanactivity.Theoverall valuecreating logic of the value chain with its generic categories of activities is valid in all industries.Whatactivitiesarevitaltoagivenfirmscompetitiveadvantage,however,isseenas industrydependent. Withtheadventofwebenablementofbusinesses,thestandardsequencesofprocessesinthe value chain has come under scrutiny. Two major questions, as suggested by Amit and Zott (2001)thatariseduetothesechangesareasfollows: 1. Whatactivitiesshouldafirmperform,andhow? 2. Whatistheconfigurationofthefirm'sactivitiesthatwouldenableittoaddvaluetothe productandtocompeteinitsindustry? Stabell and Fjeldstad (1998) found that the value chain model of analysis of businesses are more suitable for the analysis of production and manufacturing firms than for service and e business firms where the resulting chain does not fully capture the essence of the value creationmechanismsofthefirm.Theystatethatstrategyisandwilllargelyremainanart;their study was directed at contributing to the development of the science of value creation. By introducingtwoadditionalvalueconfigurations,theyhavearguedthattheconceptspromoted invaluechainanalysisareadaptablebeyondthetraditionalmanufacturingcontexttowhichits descriptionandsequencingofactivitiesarebestsuited.Theyalsosuggestedthatthechoiceof value configuration is an additional dimension or third option beyond Porters two basic strategies of cost advantage and differentiation (1980, 1985). According to their study, the notionofalternativevalueconfigurationsisinpartmotivatedbytheproblemsofapplyingvalue EBusinessProject

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EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY chainanalysis,bothasaneffectiveconceptualtoolandasameanstobenchmarkandimprove afirmscompetitiveposition. RayportandSviokla(1995)proposea'virtual'valuechainthatincludesasequenceofgathering, organizing, selecting, synthesizing, and distributing information and thus is more suitable for analyzingwebenabledbusinessesaswassuggestedbyShapiroandVarian(1999).Rayportand Sviokla state that to create and extract value with information, managers must turn to the virtualworldofthemarketspace.Oncecompaniescanmanagevalueaddingactivitiesacross bothchains,theycandevelopnewcustomerrelationships.Theystatethatdigitalassets,unlike physicalones,arenotusedupintheirconsumption.Companiesthatcreatevaluewithdigital assets may be able to reharvest them through a potentially infinite number of transactions, thus changing the competitive dynamics of their industries. Also the virtual value chain redefineseconomiesofscale,allowingsmallcompaniestoachievelowunitcostsforproducts and services in markets dominated by big companies. In the marketspace, businesses can redefineeconomiesofscopebydrawingonasinglesetofdigitalassetstoprovidevalueacross manydifferentanddisparatemarkets.Transactioncostsalongthevirtualvaluechainarelower than their counterparts, and they continue to decline sharply as the processing capacity per unit of cost for microprocessors doubles. Also the world of business increasingly demands a shift from supplyside to demandside thinking. As companies gather, organize, select, synthesize, and distribute information in the marketspace while managing raw and manufacturedgoodsinthemarketplace,theyhavetheopportunityto"senseandrespond"to customers'desiresratherthansimplytomakeandsellproductsandservices. Aplacewhichcurrentstudieslackedwasthattheremaystillberoomtocapturetherichnessof ebusinessactivitymorefullythroughthevaluechainmethodofanalysis.AmitandZott(2001) proposed that value creation opportunities in virtual markets may result from new combinations of information, physical products and services, innovative configurations of transactions, and the reconfiguration and integration of resources, capabilities, roles and relationshipsamongsuppliers,partnersandcustomers.

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EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY RESOURCEBASEDMODELOFTHEBUSINESS Theresourcebasedview(RBV)isaneconomictoolusedtodeterminethestrategicresources available to a firm. Andrews (1971) stated that while traditional concepts of strategy are phrased in terms of the resource position (strengths and weaknesses) of the firm, whereas mostofourformaleconomictoolsoperateontheproductmarketside. ThefundamentalprincipleoftheRBVisthatthebasisforacompetitiveadvantageofafirmlies primarily in the application of the bundle of valuable resources at the firms disposal, as was suggestedbyWernerfelt(1984)andRumelt(1984). Wernerfelt(1984)arguedthatresourcesoffirmsleadtodifferentimmediateinsightsthanthe traditional product perspective, especially in diversified firms. He called entry barriers as resource position barriers. Strategy for a bigger firm involves striking a balance between the exploitation of existing resources and the development of new ones, and this he called a resourceproductmatrix.Hearguesthatacquisitioncanbeseenasapurchaseofabundleof resourcesinahighlyimperfectmarketwhichcanbeleveragedtomaximizethisimperfection andone'schancesofbuyingcheapandgettinggoodreturns. Barney (1991) and Peteraf (1993) suggested that this transforms a shortrun competitive advantageintoasustainedcompetitiveadvantage,andalsorequiresthattheseresourcesare heterogeneous in nature and not perfectly mobile, as in the ebusiness scenario. Effectively, this translates into valuable resources that are neither perfectly imitable nor substitutable withoutgreateffort.Ifthesehold,thefirmsbundleofresourcescanassistthefirmsustaining aboveaveragereturns.Peteraf(1993)inparticulardevelopedageneralmodelofresourcesand firm performance which at once integrates the various strands of research and provides a commongroundfromwhichfurtherworkcanproceed.Hearguesthatresourcebasedtheoryis aunifyingtheorywhichallowsustoviewbothrelatedandunrelateddiversificationthrougha commonlens.Itaddressesdiversificationextentaswellastype.Itgoesfurtherthancompeting theoriesinsimultaneouslyexplainingthedifferencesinprofitabilitywhichareobservedacross firms, while also offering an explanation about why all firms do not and cannot pursue strategieswhichintheaggregateofferthehighestreturns.Instead,firmsareseenasadopting EBusinessProject

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EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY strategies which their resources can support. Just as all resources supporting single business strategies do not have equal profit generating potential, neither do the resources supporting various diversification strategies. For an individual firm, whether it is a singlelinebusiness or widelydiversified,thecriticaltaskistouseitsavailableresourcestothegreatestendtheycan support.Theseargumentsarewelljustifiedinthewakeofvirtualmarketsafterbusinessesare transformingthemselvestoebusinesses. Amit and Schoemaker (1993) proposed that marshalling and uniquely combining a set of complementaryandspecializedresourcesandcapabilities(whichareheterogeneouswithinan industry,scarce,durable,noteasilytraded,anddifficulttoimitate),mayleadtovaluecreation. Barney(1997)proposedthatafirm'sresourcesandcapabilities'arevaluableif,andonlyif,they reduceafirm'scostsorincreaseitsrevenuescomparedtowhatwouldhavebeenthecaseif thefirmdidnotpossessthoseresources,andthisiswherewebenablementinebusinesshelps to create value for the firm. Transformation of businesses to ebusinesses does both value creations (by improving reach to more customers) and reducing costs (transaction costs of supplychainmanagement). AssuggestedbyAmitandZott(2001),theemergenceofvirtualmarketsopensupnewsources of value creation since relational capabilities and new complementarities among a firm's resources and capabilities can be exploited. But at the same time as informationbased resourcesandcapabilities,whichhaveahigherdegreeofmobilitythanothertypesofresources andcapabilities,increaseintheirimportancewithinebusinessfirms,valuemigrationislikely toincreaseandthesustainabilityofnewlycreatedvaluemaybereduced.Webenablementfor a business through application of advanced technology is likely to deliver maximum returns onlyifthebusinessstrategycanbealignedwiththeITcapabilitiesofthefirm.Theprospectof value preservation or sustainability is an important incentive for value creation and this is ensured by the individual business models of the firms that focus on web enablement. Accessingsuchresourcesthroughpartneringandresourcesharingagreementsismoreviablein virtualmarketsyetthepreservationofvalue,andhenceitscreationbecomesmorechallenging, becauserivalsmayhaveeasyaccesstosubstituteresourcesaswell.

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EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY PORTERSGENERICSTRATEGYMODELS Michael Porter (1980) has argued that a firm's strengths ultimately fall into one of two headings:costadvantageanddifferentiation.Byapplyingthesestrengthsineitherabroador narrowscope,threegenericstrategiesresult:costleadership,differentiation,andfocus.These strategiesareappliedatthebusinessunitlevel.Theyarecalledgenericstrategiesbecausethey arenotfirmorindustrydependent. EonsooKim,DaeilNamandJ.L.Stimpert(2004)studiedhowPortersgenericstrategieswould workinthelightofICTenablementofbusinesses.Byapplyingclusteranalysis,theywereable todifferentiate5strategytypes,whichwouldbesignificantinebusinesses.Thefirststrategy, which they call the "Hybrid Strategy", was pursued by firms which were engaged in diverse marketdomainswithdiverseproducts,takeadvantageofonlinespecificdifferentiationfactors, andatthesametime,pursuecostadvantage.Thesecondstrategythatfirmsfocusedonhada positive and distinctive value only on the cost leadership dimension. The third strategy type occupiesalessthanevenmediocrepositiononeverystrategicdimensionandthesefirmshave only a poor focus on internet specific differentiation. This may reflect lack of clear strategic directionandresourcecommitment.ThefourthstrategytyperesemblesPorter'sdifferentiation strategy. This type scores high on market leadership and product proliferation dimensions, indicating an emphasison staying sensitive to customer needs through diverse products with short life cycle. The last strategy type is high on both the focus and Internetspecific differentiationdimensions,whilealsorankingverylowontheotherdimensions.Thesefirmsdo notappeartobeconcernedwithpricecompetitionoroverallmarketleadership.Instead,they appear to aim at a small segment of online customers, emphasizing Internetspecific factors such as transaction security and payment convenience. This strategy type is labeled "Online Focus."Basedontheirstudy,theyconcludedthat,amongebusinessfirms,ahybrid,integrated strategy is a must, and that a traditional cost leadership strategy is unlikely to be associated withsuccess.Theyalsosuggestthatfocusedstrategiesthosethatareeithernarrowlydefined differentiationstrategiesorthosethatfocusonInternetspecificcharacteristicssuchassecurity and convenience of transaction may have a better chance of success than cost leadership strategies. EBusinessProject

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EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY PORTERS5FORCESMODELOFTHEINDUSTRY Porter(1980)usesconceptsdevelopedinIndustrialOrganization(IO)economicstoderivefive forceswhichdeterminethecompetitiveintensityandthereforeattractivenessofamarket.This model describes the attributes of an attractive industry and thus suggests that opportunities willbegreater,andthreatsless,inthesekindsofindustries.Attractivenessinthiscontextrefers totheoverallindustryprofitability.An"unattractive"industryisonewherethecombinationof forces acts to drive down overall profitability. A very unattractive industry would be one approaching"purecompetition". Porters industrial organization competitive analysis framework (fiveforces model) is challengedinresourcebasedcritiquesbyBarney(1991)andWernerfelt(1984).Resourcebased views were argued to be more suitable than the 5 forces model as a tool for analysis in the wakeofwebenablementofbusinesses. Garbi (2002) found that the rate of unique visitors, the ebusinessspecific measure, showed significant correlations with market value, net income growth, and employee growth. This implies that cyberspacespecific indicators, such as page views, stickiness, clickthrough rate, andconversionrate,maynotbeunreliableasperformancemeasures.Inthestudy,thesewere added as indicators of industry specific profitability indicators besides those in the Porters framework. Inthelightoftechnologyenablementofbusinesstoebusiness,thefiveforces,asdepictedby Porter are significantly affected. The bargaining power of both suppliers and customers increaseastheinformationaccessibilityisincreasedandtheinformationgapisnarrowed.This leadstolowerbargainingpowerforthefirm,andmaytranscendintolowerprofits.Againase business enablement increases customer reach, the bargaining power of the customers are negatively impacted by this change. Also, ebusiness models will enable easier entry into the industry, as now, companies may only look to perform very few activities inhouse, and outsourcetheresttootherfirmsinthevaluechain.Thisdecreasesthemanagementcomplexity amongnewentrants,andthusthethreatofnewentrantsmaygoup.

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EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY CONCLUSION A total of five theoretical frameworks have been discussed in this study with extensive references to existing literature for the same. Each theoretical framework discussed above makesvaluablesuggestionsaboutpossiblesourcesofvaluecreationandstrategicorientation that firms in any industry may look upon to gain competitive advantage from the rest of the competitors. Ascouldbeseen,manyoftheinsightsarefromcumulativeresearchinstrategicmanagement and are equally applicable to ebusiness settings. However, the multitude of value drivers suggested in the literature raises the question of precisely which sources of value are of particularimportanceinebusiness,andwhetheruniquevaluedriverscanbeidentifiedinthe contextofebusiness.Suchhasbeendiscussedindetailinthestudy. The five frameworks, virtual market conceptualization, value chain model, resource based model, Porters generic strategy framework and the five forces modeling of the industry, all addressvariousaspectsofthefirmwhichfunctionsinaparticularmarketwhichisitsindustry. The virtual market conceptualization focuses on the market where a firm generates revenue. Thevaluechainmodelandtheresourcebasedmodelfocusesonthesourcesthroughwhicha firmisabletogeneratevalueforitsbusinessinternallyorexternally.ThePortersgenericforces framework focuses on how genericforces are shaped by web enablement of businesses. The Porters5forcesmodeladdresseshowwebenablementaffectsthecompetitivenatureofthe industryatlargeandhowitmayimpacttheprofitabilityofthefirminaparticularindustry. Attentionhasalsobeendrawntothefactthateachtheoreticalframeworkthatmightexplain value creation or strategic inclination of firms has limitations when applied in the context of highly interconnected electronic markets, especially if they are expected to be self standing, without backup from other frameworks. This reinforces the need for identification and prioritizationofthesourcesofvaluecreationandstrategicmanagementtoolsinebusiness. EBusinessProject

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EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY REFERENCES Amit R, Schoemaker P. 1993. Strategic assets and organizational rent. Strategic ManagementJournal Andrews,K.1971.TheConceptofCorporateStrategy.DowJoneslrwin,Homwood BalakrishnanA,KumaraS.R.Tand.SundaresanS.1999.Manufacturinginthedigitalage: exploiting information technologies for product realization. Information Systems Frontier Barney JB. 1991. Firm resources and sustained competitive advantage. Journal of Management DuttaS,SegevA.1999.BusinesstransformationontheInternet,EuropeanManagement Journal Eonsoo Kim, Daeil Nam and J. L. Stimpert. 2004. Testing the applicability of porter's generic strategies in the digital agea study of Korean cyber malls. Journal of Business Strategies Evans PB, Wurster TS. 1999. Blown to Bits: How the New Economics of Information TransformsStrategy.HarvardBusinessSchoolPress Garbi,E.2002.Alternativemeasuresofperformanceforecompanies,Acomparisonof approaches.JournalofBusinessStrategies. Hagel J, Armstrong AG. 1997. Net Gain: Expanding Markets through Virtual Communities.HarvardBusinessSchoolPress PeterafMA.1993.Thecornerstonesofcompetitiveadvantage:aresourcebasedview. StrategicManagementJournal Porter ME. 1985. Competitive Advantage: Creating and Sustaining Superior Performance.FreePress:NewYork.

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EBUSINESSENABLEMENTIMPLICATIONSFORBUSINESSSTRATEGY Porter,M.E.1979."Howcompetitiveforcesshapestrategy",HarvardBusinessReview Porter,M.E.1980."CompetitiveStrategy",TheFreePress,NewYork,1980. Raphael Amit and Christoph Zott, 2001, Value creation in ebusiness. Strategic ManagementJournal RayportJF,SvioklaJJ.1995.Exploitingthevirtualvaluechain.HarvardBusinessReview Shapiro C, Varian HR. 1999. Information Rules: A Strategic Guide to the Network Economy.HarvardBusinessSchoolPress StabellCB,FjeldstadOD.1998.Configuringvalueforcompetitiveadvantage:onchains, shops,andnetworks.StrategicManagementJournal WernerfeltB.1984.Aresourcebasedviewofthefirm.StrategicManagementJournal ZoraydaAndam,2003,eCommerceandeBusiness.UNDPAPDIP

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