Abstract
We review the macroeconomic and microeconomic impacts of e-business on organizations. E-business improves the economic efficiency of national economies through greater capital formation and long-run efficiency gains. E-business affects many aspects of the economy, from international trade to monetary and fiscal policies. At the microeconomic level, we use Porter’s Five Forces to organize our discussion of how e-business changes the creation of value and its division among market players. ICT affects industry through many channels and at many levels, from how inputs are purchased to how final goods and services are sold and delivered. The corporate strategist must consider how e-business may change the nature of rivalry among the competitors. Changes in upstream and downstream interactions in the market and expanded opportunities for substitutes and potential entrants also influence strategy. Thus, e-business can alter strategy by changing the nature of entry threats, suppliers’ power, buyers’ power, threats from substitutes, and rivalry among existing firms. We discuss empirical results from the literature wherever possible to illustrate the importance of e-business for a firm’s strategy. We close with a brief look at e-business and non-profit organizations.
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Notes
- 1.
We use the term e-business to refer to any use of ICT by organizations. We reserve the term e-commerce to refer specifically to ICT use in commercial transactions among organizations and consumers.
- 2.
We note some exceptions in Sect. 3.
- 3.
We mainly focus on the US and European economies, but include estimates for developing nations when available.
- 4.
In growth accounting, TFP is a measurement of changes in output that are not directly attributed to changes in the supply of labor, capital, or other factors of production (Jorgenson et al. 2006).
- 5.
The US consumer price index (CPI) overstated inflation by as much as 1.1 % annually during the 1990s (Boskin et al. 1996), and (despite improved methodology) probably still overstates inflation by as much as 0.8 % points per year (Gordon 2006). Likewise, European price indices largely neglected quality improvements (Timmer and van Ark 2005).
- 6.
See also the survey on online price dispersion research by Baye et al. (2007).
- 7.
Originally, the definition of e-money only included payment methods that stored monetary value on a device in the possession of the consumer. New types of e-money have instead largely been server-based, where funds are stored on the issuer’s servers or a distributed network and consumers access their funds remotely (Hartmann 2006).
- 8.
- 9.
One reason for the slow acceptance of e-money are its strong network effects: demand is contingent on merchants’ willingness to exchange goods and services for the e-money, but merchants have little incentive to accept new sources of money that are not popular among consumers (Hartmann 2006).
- 10.
Online retailer Amazon.com responded to the California law by ending its relationship with its California affiliates. California lawmakers have subsequently repealed the law in exchange for Amazon’s cooperation with future efforts to streamline the nation’s sales tax system.
- 11.
Unsurprisingly, Bruce et al. (2009) find that states with larger than average percentage losses include states like California and New York who have been particularly aggressive in redefining what counts as a “physical presence” within a state.
- 12.
It is important to note that the strategic approach taken here differs from a normative economic approach. While the Five Forces are organized to help a corporate strategist assess competition and profitability from the industry participant’s point of view, a typical normative economic approach instead emphasizes social efficiency and welfare. See Prieger and Heil (2010a, b) for the economic view of the impact of e-business.
- 13.
We also set aside another factor affecting the threat of entry, government policy that raises entry barriers, because policy regarding e-business is an extensive field of academic study that is largely separate from the strategy literature. See Kraemer et al. (2006) for an overview of policy toward e-business across countries.
- 14.
See also the many other studies cited in Sect. 3.3 of Forman and Goldfarb (2006).
- 15.
Mitra and Singhal (2008) define B2B hubs as “virtual marketplaces that enable any-to-any transactions between buyers and sellers, aggregate demand and supply, and enable price determination through a variety of mechanisms such as catalogs, real-time negotiation, auctions, and reverse auctions. These hubs [provide an infrastructure for commerce by] matching buyers and sellers, facilitating product comparisons”.
- 16.
However, sellers may obfuscate their offerings precisely to avoid such transparency, as we explain below in Sect. 3.4.2.
- 17.
As examples of hubs in which sellers hold the upper hand, Ravichanran et al. (2007) point to “forward aggregation sites typically associated with either supplier aligned or neutral hubs with the primary role of enabling suppliers to reach a larger set of buyers.” See those authors for specific examples of such B2B hubs.
- 18.
For a contrary view, see Cordella (2006), who argues that in some situations ICT increases transaction costs due to information overload and other market, organizational, or managerial imperfections.
- 19.
See Sect. 4.2 of Katz (1989).
- 20.
Susarla et al. (2011) measure trust with the extent of collaboration between suppliers and buyers, attitudinal willingness to transact with the exchange partner, and the comfort-level reported by exchange partners in their survey data. Performance of the supply chain was measured with the incidence of stock-outs.
- 21.
See Prieger and Heil (2010b) for a review of other empirical studies of the benefits of VSCI.
- 22.
- 23.
To illustrate mass customization, consider just one line of residential garage doors out of the several offered through HomeDepot.com: Clopay’s Coachman line. With the various options for style, color, materials, and hardware, there are 844,800 combinations for a doublewide door from which to choose (authors’ calculations, as of March 2012).
- 24.
Rensmann and Smits (2008) describe CareAuction, a reverse auction platform in The Netherlands supporting the allocation of requests from individual maternity care patients (via their insurance companies) to care providers.
- 25.
If the substitute good is more profitable to the large bundler than to a stand-alone rival, then the fundamental idea of gains from trade imply that, absent other considerations, the two parties will be able to agree upon a transaction that transfers sale of the product to the bundler, gives a payment to the rival, and makes both sides better off.
- 26.
With a demand elasticity of -20, the theory of pricing with market power suggests that the relative markup (or Lerner Index, defined as the ratio of price less marginal cost to price) a firm could set is just 5 %.
- 27.
In particular, Augereau et al. (2006) show that ISPs were less likely to adopt a particular modem standard the more that competitors adopted it.
- 28.
- 29.
Given the high degree of comfort with and the prevalence of search engine usage today in most developed nations, this result may have current relevance only to emerging markets where e-commerce is in a nascent stage.
- 30.
Given that Porter’s (2008) Five Forces model is rooted in the older “Structure-Conduct-Performance” view of an industry, his work pays less attention to the ways that rivalry itself shapes market structure, as the “New Industrial Organization” focuses on (see, for example, Jacquemin (1987) and Tirole (1988)).
- 31.
See Pepall et al. (2005, p.364).
- 32.
A firm’s hazard rate is its probability of exiting in the current period, conditional on surviving up to that period. See also evidence from Goldfarb et al. (2007), who show that even though the “Get Big Fast” strategy pursued during the dot.com boom may not have been optimal, it may not have led to increased chances of a firm’s failure due to counteracting effects.
- 33.
See also Zorn et al.’s (2011) survey of the literature on ICT adoption and use among nonprofits.
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Appendix: Summary Table of e-Business Factors and Implications for Strategy
Appendix: Summary Table of e-Business Factors and Implications for Strategy
Subject and place in chapter outline | Summary | Implication for strategy |
---|---|---|
2. Macroeconomics | ||
2.1. Size of e-commerce | E-commerce has increased considerably in the developed world in the last 20 years. B2B e-commerce, the predominant form of e-commerce, accounts for nearly a third of all B2B transactions. B2C e-commerce accounts for only 2.8 % of B2C e-commerce. Developing nations have yet to witness considerable gains from e-commerce | E-business is increasing in importance and cannot be ignored by strategists. First-mover advantages may be available in developing countries |
2.2. Productivity and economic growth | E-business affects economies by increasing productivity (through additional capital formation) and may spur innovations in processes that will further increase productivity over the long term. Investments in ICT have clearly increased economic growth in many developed countries. The evidence is mixed in developing nations | While adopting ICT by itself may not confer lasting competitive advantage, failure to do so will surely put an organization at a disadvantage |
2.3. International trade | E-business improves opportunities for increased specialization which increase the gains from international trade. Little research, however, exists on the impacts of e-business on trade. A lack of infrastructure, poorly trained workforces, and regulatory obstacles may reduce any potential gains from trade for developing nations | Firms could find international trade more profitable with e-business. Trading opportunities in developing nations may not prove profitable in the short-run |
2.4. Monetary policy | ||
2.4.1. E-business and prices | Overall, e-commerce is expected to increase competition and reduce search and transaction cost. The net effect will be lower prices. In the long run, these lower prices will represent a onetime change in the price level | In the aggregate, firms will face increased pressure to lower prices, but individual industries may avoid price reductions through product differentiation and increased customization |
2.4.1. E-business and menu costs | The costs associated with inflation, namely menu costs (the cost of physically changing prices) could be dramatically reduced with e-commerce. Nevertheless, price rigidities will likely remain a fact of business even with greater adoption of e-commerce | Firms can more readily change prices in the wake of inflation and other price shocks. However, e-business does not eliminate all costs associated with price changes |
2.4.2. E-business and the money supply | E-payments and e-money present futures challenges for policymakers who may find normal monetary policy tools less effective with the proliferation of e-payments and e-money. Practically speaking, e-commerce has had little effect on monetary policy to date | Sellers must consider whether to adopt e-payment systems for online and offline sales to avoid falling behind rivals |
2.5 Fiscal policy and taxation | E-commerce reduces geographical constraints and increases interstate and international transactions. Governments fear these transactions will reduce sales tax revenue. Revenue losses are small to date, but policymakers are increasingly exploring options to tax these transactions | Firms conducting interstate or international transactions will likely face increased pressure to collect sales tax revenue on behalf of their buyer’s governments |
3. Microeconomics | ||
3.1. Threat of entry | ||
3.1.1. Economies of scale and scope | E-business may increase economies of scale in industries where fixed costs are unchanged, but variable costs are reduced | Minimum efficient scale increases and the threat of entry falls |
E-business may decrease economies of scale in industries where e-business reduces fixed costs | Minimum efficient scale decreases and the threat of entry rises | |
E-business may increase economies of scope and aggregation, particularly in information goods | The threat of entry decreases because rivals must enter with a bundle of goods | |
3.1.2. Network effects | E-business may increase the importance of network externalities enjoyed by incumbents | The threat from entrants on competing networks is reduced |
E-business may encourage subsidization of one side of a platform market | Entry barriers in the subsidized side of the platform fall | |
E-business encourages the proliferation of two-sided (platform) markets, which may be subject to “lock in” of complementary goods | Application barriers to entry may arise from such vertical restraints | |
3.1.3. Capital requirements and sunk costs | E-business enables ICT outsourcing, converting fixed, sunk cost into variable cost | The threat from entrants increases as the importance of sunk costs declines |
3.1.4. Unequal access to distribution channels | E-business decreases the importance of physical location in prime real estate | Entry barriers fall |
E-business B2B vertical hubs may be owned and controlled by large incumbents | B2B vertical hubs may be able to dominate supply and distribution channels, effectively limiting opportunities for new rivals | |
3.1.5. Other advantages of incumbency | E-business decreases the importance of face-to-face trained sales force | Entry barriers fall |
E-business and outsourcing decrease the importance of physical nearness to skilled labor | Entry barriers fall | |
Early entry into e-commerce confers initial but not necessarily lasting advantages to incumbents | Entry barriers decrease over time | |
3.2. Power of Suppliers | ||
3.2.1. Concentration of the supplier group | E-commerce may increase the number of sellers and facilitate greater transparency of product prices and cost structures | Suppliers could see reduced power over industry |
Suppliers (incumbents) may maintain control over B2B vertical hubs | Suppliers could see increased power over industry | |
3.2.2. Dependence of the supplier group on the industry | E-business reduces transaction costs between supplier and industry | Suppliers lose ability to extract rents from industry, as firms can more easily contract with competing suppliers |
E-business and vertical supply chain integration tightens bonds between supplier and buyer | Supplier loses bargaining power due to the hold-up problem | |
3.2.3. Switching costs | E-business reduces switching costs through the brokerage effect. | Lower switching costs of buyers reduce supplier power. |
Buyers may make significant investments in vertical supply chain integration | Higher switching costs of buyers increase supplier power | |
3.2.4 Downstream integration by the supplier group | E-business can increase vertical disintegration through outsourcing | Reduced incentives for suppliers to enter downstream markets lowers supplier power |
3.3. Power of buyers | ||
3.3.1. Intermediaries and B2B hubs | E-business spurs disintermediation in industries such as travel agency service and brokerages | Intermediaries’ power (and even existence) is threatened |
E-business spurs reintermediation through B2B vertical hubs | Intermediaries’ power is strengthened | |
3.3.2. B2C e-commerce and product differentiation | Information and search costs are reduced with e-commerce, and branding may become less important | Product differentiation through branding decreases, and buyer power increases |
E-business allows new forms of product differentiation, such as online ratings supplied by past customers | Product differentiation increases, and buyer power decreases | |
E-business allows firms to offer greater customization of products and services, such as computers sold to order | Product differentiation increases, and buyer power decreases | |
Informational problems such as adverse selection E-business allows firms to offer greater customization of products and services, such as computers sold to order | Product differentiation increases, and buyer power decreases | |
3.3.3. B2C e-commerce and other factors | E-business enables gathering information about customers and resonance marketing | Sellers can ability to extract value from buyers |
Consumers might be able to aggregate demand (Groupon, LivingSocial, etc.) | Buyer power increases, resulting in lower prices and higher quality | |
3.4. Threat of substitutes | ||
3.4.1. Good substitutes versus poor substitutes | E-commerce enables consumers to more quickly identify and purchase substitutes for a firm’s products | The power of any one seller decreases |
Increasingly informed customers can easily find firms offering unique products filling gaps in the marketplace | Firms selling unique products can market share | |
3.4.2. Buyer switching costs | E-commerce reduces search costs and therefore decreases switching costs for consumers in markets where they are willing to search for alternatives | Seller power declines, and price levels and dispersion fall |
E-commerce allows firms to reduce the efficacy of search engines (through sponsored search) and to obfuscate prices and products | The consumer’s ability to compare prices and products falls, allowing firms to raise profits | |
3.5. Rivalry among existing competitors | ||
3.5.1. General factors affecting the intensity of rivalry | ICT, electronic market exchanges, and e-business vertical hubs may enhance the market share of the largest incumbents | Where significant differences exist between firms, the impact of e-commerce on market share will likely be greater |
E-business-enabled outsourcing and reduced capital requirements for entry may make market structure more competitive | Incumbent suppliers lose power and market share | |
In the wake of e-commerce innovations, firms may attempt to capture a significant portion of the market share through aggressive pricing strategies, particularly for goods with very low marginal costs (e.g., information goods) | Competitive rivalry among sellers in the industry heats up, and seller power in general decreases | |
3.5.2. Factors specifically affecting price competition | Firms may join a coalition of competing firms selling less close substitutes in a B2C exchange | The coalition can attract more customers to its site than any one company could, and seller power increases |
E-business lowers variable cost relative to fixed cost, making overcapacity problems relatively greater | Overcapacity in industry leads to cutthroat pricing; competition among sellers increases and prices fall | |
4. Nonprofit organizations | Nonprofits attempt to adopt e-commerce practices from the for-profit sector, such as using terms like “checkout” when soliciting donations online | The commercialization of the donation process leads philanthropists to decline to contribute to the nonprofit |
Nonprofits adopt ICT as a symbolic resource | The nonprofit establishes legitimacy and improves its reputation among donors and accountability organizations |
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Prieger, J.E., Heil, D. (2014). Economic Implications of e-Business for Organizations. In: Martínez-López, F. (eds) Handbook of Strategic e-Business Management. Progress in IS. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-39747-9_2
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