Chapter 1

A Framework for E-Commerce

Required Chapter Readings

1. The Global Battle High Tech Hopes

2. Management The Corporation of the Futu
re
Must be connected to the Internet

What is E-Commerce?
Kevin Kelly describes the new business landscape in New Rules for the
New Economy:
It is global. It favors intangible things --- ideas, information, and
relationships. And it is intensely interlinked. These three attributes
produce a new type of marketplace and society, one that is rooted in
ubiquitous electronic networks.
That is, the New Economy has been transformed by digital technology
in the postindustrial period.
Value creation for consumers has shifted from physical goods to
an economy that favors service, information, and intelligence as the
primary sources of value creation.

What is E-Commerce?

E-commerce is characterized by several attributes:

1. It Is About Exchange of Digitized Information Between
Parties. This information exchange can represent communication
between two parties, coordination of the flows of goods and services, or
transmission of electronic orders. These exchanges can be between
organizations, individuals, or both.

2. It Is Technology-Enabled. E-commerce uses technology-enabled

transactions. The use of Internet browsers in the World Wide Web to
make these transactions is perhaps the best known example of
technology-enabled customer interfaces. However, other interfaces such
as ATMs, electronic data interchange (EDI) between business-to-business
partners, and electronic banking by phone also fall in the general category
of e-commerce. Businesses used to manage such transactions with
customers and markets strictly through human or face-to-face interaction;
in e-commerce, such transactions can be managed using technology.

What is E-Commerce?
3. It Is Technology-Mediated. Furthermore, e-commerce is moving away
from simply using technology-enabled transactions to a more technologymediated relationship. The difference now is that transactions in the
marketplace are managed or mediated not so much through human contact
but largely by technology --- and, in that sense, so is the relationship with the
customer. The place where buyers and sellers meet to transact is moving from
the physical world marketplace to the virtual world marketplace. Hence,
the success of a business rests on how well screens and machines manage
customers and their expectations.

4. It Includes Intra- and Interorganizational Activities That

Support the Exchange. The scope of electronic commerce includes all
electronically based intra- and interorganizational activities that directly or
indirectly support marketplace exchanges. In this sense, e-commerce affects
both how business organizations relate to external parties customers,
suppliers, partners, competitors, and markets and how they operate internally
in managing activities, processes, and systems.

What is E-Commerce?
In summary, E-COMMERCE can be defined as:

Technology-mediated (managed) exchanges between parties

(individuals, organizations, or both) as well as the electronically
based intra- or interorganizational activities that facilitate such
exchanges.

E-BUSINESS

EB = EC + BI + CRM + SCM +ERP

E-Commerce
Business Intelligence
E-Business =

Customer Relationship Management

Supply Chain Management
Enterprise Resource Planning

E-Commerce
Uses digital technologies such as the Internet and bar
code scanners to enable the buying and selling process.
In other words, e-commerce is about transactions.

Business Intelligence
Refers to the gathering of secondary and primary
information about competitors, markets, customers, and
more.

Customer Relationship Management

Involves retaining both business and individual customers
through strategies that ensure their satisfaction with the firm
and its products. CRM seeks to keep customers for a long
time and to increase the number and change the timing of
transactions they conduct with the firm.
CRM uses digital processes and integrates customer
information collected at every customer touch point.
Customers interact with firms: (1) In person, (2) By mail,
(3) By telephone, or (4) Over the Internet.

Supply Chain Management

Happens behind the scenes. Involves coordination of the
distribution channel to deliver products effectively and
efficiently to customer.

Enterprise Resource Planning

Also refers to back office operations such as order entry,
purchasing, invoicing, and inventory control. ERP systems
allow organizations to optimize business processes while
lowering costs. ERP systems such as SAP predate the Web as
do many of the other technologies.

Distinct Categories of E-Commerce

Business Originating From
BUSINESS

M
A
R
K
E
T
I
N
G

T
O

B
U
S
I
N
E
S
S
C
O
N
S
U
M
E
R
S

CONSUMERS

B2B

C2B

B2C

C2C

How E-Commerce Differs From Traditional Commerce

Each B2B and B2C company must make fundamental choices about how to
compete in its chosen market. Some of these choices represent the traditional
blocking and tackling of business strategy, as in:
How do we segment our market?
Does our offering add value to these targeted customers?
How do we outperform competitors in our chosen market?
A number of strategic choices are unique to the New Economy, such as which type
of a technology-enabled customer interface to use.
Prior to the further discussion of these key strategic decision areas, it is first
important to consider what makes an e-commerce business unique or different from
a traditional brick-and-mortar business.
1. Strategic Decisions -Technology-Based

4. Technology-Based Customer Interface

2. Real-Time Competitive Responsiveness

5. Customer Controls the Interaction

3. The Store is Always Open

6. Knowledge of Customer Behavior

7. Network Economics

The combination of screen-to-customer interfaces, network

effects, real-time competitive responses, and one-to-one
customizations leads to value increases for both the customer
and the firm.
Both parties have increased access to unique, heretofore
inaccessible information; The customer gets more availability,
convenience, ease of use, and full information, while the firm
obtains objective behavioral data on customers and
competitors behaviors.
This combination leads to a highly dynamic, new competitive
marketplace.

What is the E-Commerce Decision-Making Process?

Assume you are in charge of a new e-commerce business. Early on in the life cycle of
the business, you must make a set of decisions related to the items below:
1. Which customer groups should I serve?
2. How do I provide a compelling set of benefits to my targeted customer? How do I
differentiate my value proposition versus online and offline competitors?
3. How do I communicate with customers?
4. What is the content, look-and-feel, level of community, and degree of
personalization of the website?
5. How should I structure my organization? What business services and applications
software choices do I need to consider?
6. Who are my potential partners? Whose capabilities complement ours?
7. How will this business provide value to shareholders?
8. What metrics should I use to judge the progress of the business? How do I value
the business?

E-COMMERCE STRATEGY
To find the answers to these questions, we need an organizing framework within
which to craft and implement an online strategy. This process can be divided into
several interrelated, sequential decisions:
Framing the
Market
Opportunity

Business
Model

Customer
Interface

Market
Communication
and Branding

Implementation

Evaluation
Metrics and
Valuation

E-Commerce
Strategy

Technology Infrastructure
Capital Infrastructure
Media Infrastructure
Market
Infrastructure

Public Policy Infrastructures

Roles and Responsibilities of a Senior E-Commerce Manager

Senior managers need to have the basic business skill set of traditional managers but
must also incorporate new knowledge, skills, and capabilities.
The roles and responsibilities include:
Cross Disciplinary and Integrative Position
Entrepreneurship is at the heart of any online business. The manager should be able
to make strategic decisions quickly and authoritatively. He/she should be trained in a
variety of disciplines including marketing, logistics, accounting, finance, technology,
and media.
Drive implementation: Strategy implementation is about making the right choices
related to people, structure, systems and processes to execute the strategy.
Accountable for performance: the senior manage is responsible for the performance
of the organization.
The day-to-day responsibilities of a senior e-commerce manager include:
Provide vision for the online business
Set process and outcome goals by specifying clear performance targets
Formulate strategic direction and choice by making concrete choices and associated
tradeoffs related to each phase of the e-commerce strategy process, including market
opportunity, business model specification and design of the customer interface.

Key Challenges for Senior Leadership in Todays Environment

1. Understanding Customer Evolution: The challenge here is to invest
heavily in understanding the customer needs and invest in advance so that the
launch of the innovation coincides exactly with the customer needs.

2. Charting Changing Technology: The senior executive must be well

schooled in the basic and emergent technologies. Picking the right
technologies and investing ahead of the curve is a constant, high-stakes
gamble for the senior management team.

3. Balancing Irrational Exuberance and Irrational Doom: The

executive must continually reassure that the business model makes sense, spell
out the path to profitability and paint a vision that can rally all relevant
stakeholders, including partners, customers and employees.

4. Integration of Offline and Online Activities: Customer-facing activities

need to be made ready for the web.

5. Identifying the Key Levers of Competitive Advantage: The best senior

leaders are able to reallocate their resources and capabilities in anticipation of
an evolving competitive landscape.

Market Orientation
+
Customer Satisfaction
=
Profitability and Growth

 In todays globally competitive world, customers expect

more, have more choices, and are less brand-loyal.
IBM, Sears, and GM at one time seemed invincible in terms
of their market domination.
In each case, these companies have had to restructure their
organizations to address changing customer needs and emerging
competitive forces.

In the long run, every business is at risk for survival.

Although companies such as Dell, Microsoft, and Wal-Mart were
business heroes of the nineties, there is no guarantee that these same
companies will continue to dominate over the next decade.

The only thing that is constant. . . is change.

 Customers will continue to change in needs, demographics,

lifestyle, and consumption behavior.
Competitors will change as new technologies emerge and
barriers to foreign competition shift.
The environment in which businesses operate will continue
to change as economic, political, social, and technological
forces shift.
The companies that survive and grow will be the ones that
understand change and are out in front leading, often
creating, change. Others slow to comprehend change, will
follow with reactive strategies, while still others will
disappear, not knowing that change has even occurred.

THREE TYPES OF COMPANIES

1. Those that make things happen.

2. Those that watch things happen.
3. Those that wonder what the hell
happened.

I skate to where the puck is going, not to where it is. Wayne Gretzky
Businesses that can sense the direction of change, and
position themselves to lead in the change, prosper and grow.
Those that wait to read about it in the Wall Street Journal
are hopelessly behind the play of the game and, at best, skate
to catch up.
Businesses that are able to skate to where the puck is going
have a strong (external) market orientation. They are
constantly in tune with customers needs, competitors
strategies, changing environmental conditions, and emerging
technologies, and they seek ways to continuously improve the
solution they bring to target customers. This process enables
them to move with --- and often lead --- change.

One of the benefits of a strong market orientation is long-run

survival.
Western cultures have long been critized for being exremely
short-term in perspective.
Consequently, long-run survival of a business may not be a
strong management motive in developing a strong market
orientation.
Managers are often judged on the last quarters results and
not on what they are doing to ensure the long-run survival of
the businesses.
Likewise, shareholders can be more interested in immediate
earnings than in the long-run survival of a business.

Businesses with a strong market orientation not only

outperform their competition in delivering higher levels of
customer satisfaction, they also deliver higher profits in the
short run.
Businesses driven by a strong market orientation create
greater customer value and, ultimately, greater shareholder
value.
To understand this logic, lets investigate the sequence of
events that evolves when a business has little or no marketing
orientation.

Poor Understanding of
Customers & Competition
Pressure for
Short Run Profits

Unfocused
Competitive Position

Stagnant
Shareholder Value

Me-too
Customer Value

Accounting Maneuvers
Drive Financial Results

Excessive
Customer Turnover

Sporadic Business
Unit Profits

Market Share
Instability
High Cost of Customer
Retention &Acquisition

Contrary to the presented scenario, a market-oriented

business has three management characteristics that make it
unique:
1. CUSTOMER FOCUS: An obsession with
understanding customer needs and delivering
customer satisfaction.
2. COMPETITOR ORIENTATION: Continuous
recognition of competitors sources of advantage,
competitive position, and marketing strategies.
3. TEAM APPROACH: Cross-functional teams
dedicated to developing and delivering customer
solutions.

The real benefit of a strong market orientation and higher

levels of customer satisfaction is a higher level of customer
retention.
Keeping good customers should be the first priority of marketbased management!!
Customer satisfaction and retention drive customer revenue
and the cost of doing business. Ultimately, they are key forces
in shaping the profitability of a business.

Business
Profitability
Customer Satisfaction
& Retention
Market Orientation

A business with a strong

market orientation works to
create, communicate, and
deliver superior customer
solutions. This approach
translates into higher levels of
customer satisfaction and
profitability.

75% Retained

25% Exit

5% Retained

95% Exit

91
100

4%
Complain

100 Dissatisfied
Customers
96% Do Not
Complain

Each of the 100 dissatisfied customers tells 8 to 10 other people of

their dissatisfaction. This communication chain makes both
retention of existing customers and acquisition of new customers
very difficult.

Assume a firm has a 10% market share of a 2-million customer

market. That is 200,000 customers. Assume further that 15% of
these customers are dissatisfied (30,000 dissatisfied customers).
From the prior slide, 92% of these people will exit. This is 27,600
customers. To maintain the 10% market share they would have
to get 27,600 new customersa very expensive way to hold
market share.

It gets worseeach of these 30,000 dissatisfied customers tells 810 others. That is around a quarter of a million other
individuals. These all may not be potential customers, but this
level of negative word-of-mouth communication makes new
customer retention much more difficult and more expensive.

One of the jobs of market-based management is not only

to track customer satisfaction but also to
ENCOURAGE DISSATISFIED CUSTOMERS TO
COMPLAIN!

Customer satisfaction is an excellent market-based

performance metric and barometer of future revenues and
profits:
Customer satisfaction is a forward-looking indicator of business success that
measures how well customers will respond to the company in the future. Other
measures of market performance, such as sales and market share, are backwardlooking measures of success. They tell how well the firm has done in the past, not
how well it will do in the future. (Jones and Sasser, Harvard Business Review)

Thus, customer satisfaction is a good leading indicator of future operating

performance. A business may have produced excellent financial results
while underwhelming and disappointing a growing number of its
customers.
Because customers cannot always immediately switch to alternative
solutions, customer dissatisfaction often precedes customer exit and
reductions in sales and profitability.

Customer Performance
Number of Customers
Revenue per Customer
Sales Revenue (millions)

Retained
Lost
New
Overall
Customers Customers Customers Performance
150,000
$800
$120.0

50,000
$200
$10.0

50,000
$400
$20.0

250,000
$150.0

Variable Cost per Customer

Margin per Customer
Total Contribution (millions)

$400
$400
$60.0

$150
$50
$2.5

$300
$100
$5.0

$67.5

Marketing Expense per Customer

Total Marketing Expense (millions)
Net Marketing Contribution (millions)

$60
$9.0
$51.0

$100
$5.0
-$2.5

$300
$15.0
-$10.0

$29.0
$38.5

Operating Expenses (millions)

Net Profit before Taxes (millions)
Return on Sales
Assumes: 75% Customer Retention On A Customer Base of 200,000

$30.0
$8.5
5.67%

What would be the profit impact of improved customer

satisfaction? Assume that $1 million was dedicated to reducing
the number of dissatisfied customers so that 80% of the
businesss customers could be retained each year.

If the business can retain 80 percent of its customers instead of

75 percent, the business will reduce the cost associated with
customer dissatisfaction and exit and will not have to spend as
much on marketing efforts to attract new customers. Also,
because retained customers produce a higher annual revenue
and margin per customer than do lost or new customers, the
total profits of the business should increase.

Customer Performance
Number of Customers
Revenue per Customer
Sales Revenue (millions)

Retained
Lost
New
Overall
Customers Customers Customers Performance
160,000
$800
$128.0

40,000
$200
$8.0

40,000
$400
$15.0

240,000
$152.0

Variable Cost per Customer

Margin per Customer
Total Contribution (millions)

$400
$400
$64.0

$150
$50
$2.0

$300
$100
$4.0

$70.0

Marketing Expense per Customer

Total Marketing Expense (millions)
Net Marketing Contribution (millions)

62.5
$10.0
$54.0

100.0
$4.0
-$2.0

300.0
$12.0
-$8.0

$26.0
$44.0

Operating Expenses (millions)

Net Profit before Taxes (millions)
Return on Sales
Assumes: 80% Customer Retention On A Customer Base of 200,000

$30.0
$14.0
9.20%

The incremental gain in net profits is derived from a larger

number of retained customers, the reduced cost of serving
dissatisfied customers, and reduced expenses associated with
acquiring new customers to maintain the same customer base.
This is a 64 percent increase in net profits with essentially no
change in market share or sales revenue
One can readily see the enormous potential for increased
profits and cash flow that centers around customer satisfaction
and retention. For each additional customer that is retained,
net profits increase. Inefficient costs associated with serving
dissatisfied customers and the cost of acquiring new customers
to replace them are reduced. Thus, there is tremendous
financial leverage in satisfying and retaining customers.

The ultimate objective of any given marketing strategy should be to attract,

satisfy, and retain target customers. If a business can accomplish this
objective with a competitive advantage in attractive markets, the business
will produce above-average profits.
The customer is a critical component in the profitability equation but is
completely overlooked in any financial analysis or annual reports.
Customers are a marketing asset that businesses have yet to quantify in their
accounting systems.
Businesses that lack a market orientation look at customers as individual
purchase transactions. A market-based business looks at customers as
lifetime partners.
The Cadillac division of GM estimates that a Cadillac owner will spend
around $350,000 over a lifetime on automotive purchases and maintenance.
If Cadillac loses that customer early in this customer life cycle, it forgoes
hundreds of thousands of dollars in future cash flow.
In general, it costs five times more to replace a customer than it costs to
keep a customer!

CR Percent
50%
60%
70%
80%
90%
100%

Avg Life
2.0
2.5
3.3
5.0
10.0
Infinite

Customer Life Calculation

N = 1.00 / (1.00 - CR)

Customer Life (purchase

periods)

Customer Life Expectancy

10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
40%

50%

60%

70%

80%

90%

100%

Customer Retention

As customer retention increases, the customers life

expectancy exponentially increases.

Customer Lifetime Value

Average Profit Per Customer

Period
0
1
2
3
4
5

Cash
Flow
-$51
$30
$42
$44
$49
$55

$80
$60
$40

$42

$44

$49

$55

$30

$20
$0
-$20

-$40
-$60

-$51
Years Customer Retained

Cash
10% PV
Period
Flow
Discount
0
-$51
1.00000
1
$30
0.90909
2
$42
0.82645
3
$44
0.75131
4
$49
0.68301
5
$55
0.62092
Present Value of Cash Flows

PV
Today
-$51.0
$27.3
$34.7
$33.1
$33.5
$34.2
$111.7

The higher the rate of customer retention, the longer the average customer life
expectancy and the greater the customer value.

Why do some companies have a strong market orientation and

others cannot seem to develop one?
There are three fundamental forces that drive the degree to
which a business has a market orientation
* MARKETING KNOWLEDGE: The degree to which managers and
employees have been educated and trained in the area of marketing that
directly affects the market orientation of a business.
* MARKETING LEADERSHIP: The market orientation of a business starts
at the top. If the senior management and key managers of a business do not
have a strong market orientation, it is difficult for a business to establish
any level of marketing excellence.
* EMPLOYEE SATISFACTION: If employees are unhappy and uninformed
as to how they affect customers, the business market orientation will never
achieve even minimal effectiveness regardless of senior management
speeches and statements if mission and philosophy.

Profitability
Customer
Retention
Market
Orientation

Market Orientation (0-100)

Market Knowledge & Market Orientation

95
90
85
80
75
70
65
60
55
50
Bottom

Middle

High

Marketing Knowledge

Marketing
Knowledge

From a database of 8,000 managers in over 150 Fortune 500 businesses:

The higher ones level of marketing knowledge, the stronger that individuals
market orientation
Also that marketing knowledge and market orientation could be directly linked
to formal marketing education, participation in marketing training programs, and
marketing experience.

Another study involved assessing marketing attitudes and

practices at several layers of a mid-sized hi-tech businesss
management hierarchyQ: How often do you see customers?
Company CEO: I really dont have too much time for that. I have many
financial issues, administrative tasks, and many meetings. So I leave it to my
vice-president of marketing.
VP of Marketing: Well, I have a rather considerable staff and many
responsibilities with regard to marketing plans and day-to-day decisions
regarding our sales force and advertising. So I really dont have the time.
But we have a very highly trained sales force and they are talking to
customers all the time.
Sales Force: Sure, we are in continuous contact with our customers and we
bring back new ideas all the time. But nobody in management has the time
to listen.

Employee
Retention

Employee
Satisfaction

Profitability
Growth

Service
Quality

Customer
Satisfaction

Customer
Retention

Employee
Productivity

Marketing is too important to be left to

Marketing alone. (Bill Marriott)

End of
Chapter 1

Refers to the full spectrum of e-commerce that can occur

between two or more organizations. Among other
activities, B2B includes purchasing and procurement,
supplier management, inventory management, and
service and support.
Some of the more familiar B2B pioneers are:

B2B

Covisint (www.covisint.com)
FastParts (www.fastparts.com)
FreeMarkets (www.freemarkets.com)
One recently announced venture is composed of the Big
Three automakers working with Oracle and Commerce
One to provide auto parts sourcing. This venture is
forecasted to create a $250 billion market.
Other similar initiatives are under way with industry
groups including commercial real estate developers and
manufacturers of pharmaceuticals and electronic
subcomponents.

B2C

Refers to exchanges between businesses and consumers,

e.g., Amazon.com. Yahoo.com, and Schwab.com.
Similar transactions that occur in business-to-business ecommerce also take place in the business-to-consumer
context.

C2C

Involve transactions between and among consumers.

These can include third party involvement, as in the case
of the auction website Ebay.
Example: www.numberoneclassifieds.com

C2B

Involves when consumers band together to present

themselves as a buyer in a group
Example: www.speakout.com

1. CORE STRATEGIC DECISIONS ARE TECHNOLOGY-BASED

In the New Economy, strategic decisions about the virtual storefront, customer
service, the look and feel of the customer experience, the content of the site are
commingled with the technological decisions.
These decisions relate to the selection of service providers, common business
systems, approaches to Web design, and so on.
In contrast to various brick-and-mortar businesses, digital businesses cannot
extract technological choices from the strategic decision-making process.
This observation is not to suggest that technology is unimportant to traditional
businesses, rather their technological decisions are not as tightly linked to strategy.

2. A REAL-TIME COMPETITIVE RESPONSIVENESS

Recent strategy writers have introduced the notion of speed-based competition
and hyper-competition to denote the increasing importance of speed in the
brick-and-mortar world.
However, as the New Economy emerges, the speed of decision making has been
reduced from months to minutes.
In a virtual world, the B2C storefronts are frequently engaged in dynamic
dialogues on the public platform of the Web.
Hence, it is easier for companies to duplicate their competitors success.
This does not mean that the e-commerce marketplace will eventually evolve to
commodity-like status, with price being the only consideration.
Quite the contrary, speed of innovation, branding, ease of use, operational
effectiveness, product assortment, affiliate agreements, and other levers can be
used by companies to maintain or increase differentiation.

3. THE STORE IS ALWAYS OPEN

The Web storefront is expected to be open 7 days a week, 24 hours a day, and 365
days a year (24 x 7)
This level of access has significant implications for both customers and the firm.
On the customer side, the buyer is always able to gather information, conduct
product searches, compare prices across multiple sites, and order products.
As such, 24 x 7 has significantly altered customer notions of convenience and
availability.
On the firm side, the level of access has forced businesses to adjust both tactical
responsiveness to competitive moves and strategic responsiveness, e.g., it is not
possible to close the factory for retooling or the storefront for a strategic relaunch.
When retooling or a relaunch has to occur, businesses must do so in real time and
in ways that are immediately visible to the outside world.

4. A TECHNOLOGY-BASED CUSTOMER INTERFACE

In a brick-and-mortar business, customers conduct transactions either face-toface or over the phone with store clerks, account managers, or other individuals.
In contrast, the customer interface in the electronic environment is a screen-toface interaction. This includes PC-based monitors, ATM machines, PDAs, or
other electronic devices, not to mention the exploding field of wireless application
protocol devices.
Operationally, these types of interfaces place enormous responsibility on the
organization to capture and represent the customer experience because there is
often no opportunity for direct human intervention during the encounter. If the
interface is designed correctly, the customer will have no need for a simultaneous
or follow-up phone conversation.
Thus, the screen-to-customer interface has the potential to both increase sales
and decrease costs. In fact, a number of innovators are entering the e-commerce
markets with solutions that reintroduce humans into the process (www.liveperson
.com)

5. THE CUSTOMER CONTROLS THE INTERACTION

At most websites, the customer is in control during screen-to-face interactions, in
that the Web largely employs a self-service model for managing commerce- or
community-based interactions.
The customer controls the search process, the time spent in various sites, the
degree of price/product comparison, the people with whom he or she comes in
contact, and the decision to buy.
The virtual store can attempt to shape the customer experience with uniquely
targeted promotions, reconfiguration of storefronts to reflect past search behavior,
recommendations based on previous behavior of other similar users, and access to
proprietary information.
However, the seller has much less power in the online environment due to the
control and information flows that the online world puts in customers hands.

6. KNOWLEDGE OF CUSTOMER BEHAVIOR

While the customer controls the interaction, the firm has unprecedented access to
observe and track individual consumer behavior.
Companies, through third-party measurement firms, such as Vividence and
Accrue, can track a host of behaviors, websites visited, length of stays on a site,
page views on a site, contents of wish lists, and shopping carts, purchases, dollar
amounts of purchases, repeat purchase behavior, conversion rates of visitors who
have completed transactions, and other metrics.
The level of customer behavior tracking is not possible (or, when it is, costeffective) in the brick-and-mortar world.
Armed with this information, companies can provide one-to-one customization of
offerings. In addition, companies can dynamically publish their storefronts on the
Web to configure offerings to individual customers.

7. NETWORK ECONOMICS
In information-intensive industries, a key competitive battleground centers on the
emergence of industry standard products, services, components, and/or
architectures. Network effects, as described by Metcalfes Law, can best be
expressed as the situation where the value of a product or service rises as a
function of how many other users are using the product. Classic examples are the
fax machine and the telephone. The value to the customer is largely determined
by the number of other people who adopt the technology.
A key characteristic of network economics is positive feedback. That is, as the
installed base grows, more and more users are likely to adopt the technology
because of the installed base. Many commercial wars in the digital economy
revolve around setting a standard growing the installed based and attempting to
lock-in customers to the standard because of rising switching costs. This applies
to both hardware (e.g., cable modems versus DSL lines) and software (e.g., MP3
versus streaming audio).
This means, too, that traditional realities of marketing, such as the importance of
word-of-mouth among potential customers, become greatly magnified.

METCALFES LAW
Named after Bob Metcalfe (founder of 3Com), the inventor of the network
technology known as Ethernet, Metcalfes Law states that the value of a network
to each of its members is proportional to the number of other users (which can be
expressed as (n2 n)/2). The near universal adoption of Windows as an operating
system for PCs is a good example of network economics. The more users adopted
Windows, the more software companies wrote Windows compatible products,
making Windows more and more valuable to its users.
Network economics is a fundamental driving force in the New Economy. This law
of economics states, that users of network products tend to value those products
more highly (because they get more utility from them) when there are a large
number of users. In fact, the value of a product to each of its users increases with
the addition of each new user. Telephones are an example of a product subject to
network economics. The first purchaser of a telephone had no use for it it was
impossible to call anyone. The second purchaser made the telephone valuable for
the first purchaser (they could now call each other), and the third purchaser
increased the utility of the telephones purchased by the other two (it was now
possible to make conference calls).

E-COMMERCE STRATEGY
To find the answers to these questions, we need an organizing framework within
which to craft and implement an online strategy. This process can be divided into
several interrelated, sequential decisions:
Framing the
Market
Opportunity

Business
Model

Customer
Interface

Market
Communication
and Branding

Implementation

Evaluation
Metrics and
Valuation

E-Commerce
Strategy

Technology Infrastructure
Capital Infrastructure
Media Infrastructure
Market Opportunity Analysis answers the question Where
will I play? While traditional market analysis focuses on
customers (question 1) and competitors (question 2), the
online environment places a significant amount of emphasis
Infrastructures
on potentialPublic
businessPolicy
partners
(question 6)

Market
Infrastructure

E-COMMERCE STRATEGY
To find the answers to these questions, we need an organizing framework within
which to craft and implement an online strategy. This process can be divided into
several interrelated, sequential decisions:
Framing the
Market
Opportunity

Business
Model

Customer
Interface

Market
Communication
and Branding

Implementation

Evaluation
Metrics and
Valuation

E-Commerce
Strategy

Technology Infrastructure
Capital Infrastructure
Media Infrastructure

Business model selection involves four choices: (1) the value

proposition or cluster to offer to the segment (question 2),
(2) the specific product offering, (3) the associated resource
system to deliver the benefits, and (4) the financial model to
pursue (question 7). Collectively, these choices should
PublicHow
Policy
answer the question
willInfrastructures
I win?

Market
Infrastructure

E-COMMERCE STRATEGY
To find the answers to these questions, we need an organizing framework within
which to craft and implement an online strategy. This process can be divided into
several interrelated, sequential decisions:
Framing the
Market
Opportunity

Business
Model

Customer
Interface

Market
Communication
and Branding

Implementation

Evaluation
Metrics and
Valuation

E-Commerce
Strategy

Technology Infrastructure
Capital Infrastructure
Media Infrastructure

The customer interface refers to the screen-to-customer

interface. Among other dimensions, it includes the lookand-feel, content, transaction capability, and community
building aspects of the screen-to-customer interface
(questions 3 and 4). These decisions address the question of
Public Policy
How will customers
perceiveInfrastructures
my business?

Market
Infrastructure

E-COMMERCE STRATEGY
To find the answers to these questions, we need an organizing framework within
which to craft and implement an online strategy. This process can be divided into
several interrelated, sequential decisions:
Framing the
Market
Opportunity

Business
Model

Customer
Interface

Market
Communication
and Branding

Implementation

Evaluation
Metrics and
Valuation

E-Commerce
Strategy

Technology Infrastructure
Capital Infrastructure

Market communications considers all of the online and

Media
Infrastructure
offline methods that
the firm
used to reach its customers.
Branding captures all of the firm-level choices (e.g., logos,
slogan, distribution outlet) that affect the meaning of the
brand. Brand equity captures all of the assets linked to the
brand, thus providing value for both customers (e.g.,
reassurance)Public
and the Policy
firm (e.g.,
high margins). Marketing
Infrastructures
communications and branding answer the question How do
I attract and retain customers?

Market
Infrastructure

E-COMMERCE STRATEGY
To find the answers to these questions, we need an organizing framework within
which to craft and implement an online strategy. This process can be divided into
several interrelated, sequential decisions:
Framing the
Market
Opportunity

Business
Model

Customer
Interface

Market
Communication
and Branding

Implementation

Evaluation
Metrics and
Valuation

E-Commerce
Strategy

Technology Infrastructure
Capital Infrastructure
Media Infrastructure
Once a strategy is agreed upon, the firm must decide How
do we go to market? The answer to this question involves a
discussion of the delivery system of the firm and how to
continually innovate to serve customers (question 5).

Public Policy Infrastructures

Market
Infrastructure

E-COMMERCE STRATEGY
To find the answers to these questions, we need an organizing framework within
which to craft and implement an online strategy. This process can be divided into
several interrelated, sequential decisions:
Framing the
Market
Opportunity

Business
Model

Customer
Interface

Market
Communication
and Branding

Implementation

Evaluation
Metrics and
Valuation

E-Commerce
Strategy

Technology Infrastructure
Capital Infrastructure

The establishment of metrics to chart the performance of

Media
Infrastructure
the business answers
the question
How are we doing?
(questions 7 and 8). This involves a consideration of
financial metrics as well as metrics that map onto the entire
strategy formulation process. Hence, we consider customer,
business model, branding, and implementation metrics as
well.
Public Policy Infrastructures
Valuation answers the question How do we create value for
stakeholders or shareholders?

Market
Infrastructure

E-COMMERCE STRATEGY
To find the answers to these questions, we need an organizing framework within
which
to craft
and implement
This backbone
process can
be divided into
This is both
an enabler
and driveran
of online
change.strategy.
The hardware
of computers,
several
interrelated,
sequential
routers, servers,
fiber optics,
cables,decisions:
modems, etc. provide half of the technology equation.
The other half includes the software and communication standards including the core
protocols for the World Wide Web.
Framing the
Market
Opportunity

Business
Model

Customer
Interface

Market
Communication
and Branding

Implementation

Evaluation
Metrics and
Valuation

E-Commerce
Strategy

Technology Infrastructure
Capital Infrastructure
Media Infrastructure
Market
Infrastructure

Public Policy Infrastructures

E-COMMERCE STRATEGY
To find the answers to these questions, we need an organizing framework within
which to craft and implement an online strategy. This process can be divided into
several
interrelated,
sequential
decisions:
Deals with
getting the money
to launch
new businesses and finding the right people to build
the business plan and seek funding sources.
Framing the
Market
Opportunity

Business
Model

Customer
Interface

Market
Communication
and Branding

Implementation

Evaluation
Metrics and
Valuation

E-Commerce
Strategy

Technology Infrastructure
Capital Infrastructure
Media Infrastructure
Market
Infrastructure

Public Policy Infrastructures

E-COMMERCE STRATEGY
To find the answers to these questions, we need an organizing framework within
which to craft and implement an online strategy. This process can be divided into
The
e-commerce
managers
must make
choices about the types of media employed (e.g.,
several
interrelated,
sequential
decisions:
print, audio, video), the nature of the media and editorial policy (including style, content,
look and feel).
Framing the
Market
Opportunity

Business
Model

Customer
Interface

Market
Communication
and Branding

Implementation

Evaluation
Metrics and
Valuation

E-Commerce
Strategy

Technology Infrastructure
Capital Infrastructure
Media Infrastructure
Market
Infrastructure

Public Policy Infrastructures

E-COMMERCE STRATEGY
To find the answers to these questions, we need an organizing framework within
which to craft and implement an online strategy. This process can be divided into
All
the decisions
relatedsequential
to strategy,decisions:
technology, capital and media are influenced by laws
several
interrelated,
and regulation, e.g., public policy decisions. It not only affects specific businesses but also
direct and indirect competitors.
Framing the
Market
Opportunity

Business
Model

Customer
Interface

Market
Communication
and Branding

Implementation

Evaluation
Metrics and
Valuation

E-Commerce
Strategy

Technology Infrastructure
Capital Infrastructure
Media Infrastructure
Market
Infrastructure

Public Policy Infrastructures