e-business strategy - competitive forces

In their groundbreaking book about the eBusiness, Downes and Mui (1998) 1 identified three ‘New Forces’ to consider alongside Porter’s Five Forces of competitive strategy.

These new forces, Globalisation, Digitalisation and Deregulation, each describe certain characteristics of the environment of an eBusiness economy.

Globalisation
Globalisation describes the way that businesses using eCommerce as a channel in its various forms, potentially reach a global audience. Globalisation offers the chance to grow a market beyond the locale of the business.

This means that depending upon the nature of the product or service offered, there are issues of language, culture and local regulations to consider as well as the practicalities of fulfilment and customer service.

Importantly, as information is so freely available, millions of individuals and firms from around the world become potential partners, customers and competitors – when only a couple of decades ago, it would have been practically impossible to communicate with them, let alone transact with them.

Note that although economists would cite the growth of the Internet as a factor in ‘globalisation’, Downes and Mui have coined a rather different meaning for the term in describing the drivers of eBusiness that that used by economists.

Digitalisation,
Digitalisation describes the way in which storage, processing and transmission of information impacts processes such as sales and customer service, and in many cases, the product or service itself can be re-packaged or delivered electronically.

Information is costly to produce but cheap to reproduce (Shapiro & Varian 1999 2), in fact the marginal cost may reach zero.

There have been many examples of established suppliers of information seeing their market share attacked and undermined by cheap competition, including telephone directory CD-ROMs and encyclopaedias.

Encyclopaedia Britannica is a very stark example of how a market can be transformed completely. For over 200 years a direct sales force sold sets of encyclopaedias, recently from around £1500 per set. Microsoft recognised the possibilities of a CD-ROM based product and initially approached Britannica to create an electronic version of their product. Britannica was concerned about the impact on their revenues and their business structure, so Microsoft went ahead and created their own Encarta product based on a lower cost published encyclopaedia, and public domain media (Evans & Wurster 2000) 3.

When Encarta was offered at $100 or even bundled with new computers free of charge or at a lower price, Britannica rapidly saw its market eroded. Ultimately, Britannica abandoned its business model and copied the Encarta approach but it has never regained its market share, and the company has changed hands several times.

More recently, the free online Wikepedia, which anyone can contribute to, or edit, has completely turned the encyclopaedia model on its head and effectively made printed encyclopaedias redundant.

Deregulation
Deregulation broadly represents the opening up of markets that were previously closed by factors such as monopoly, state owned or controlled production or by restrictive legislation or trade practices.

Key industries affected by Deregulation and which are vital to eBusiness include telecommunications and broadcasting. As new operators have entered the markets, there have been notable innovations created, as these new entrants have not necessarily had the benefit or burden of legacy systems and processes.

The pressures of having to compete have forced new operators to consider fresh ways of doing things. In particular, in the UK, we now see a vast array of telephone services; prior to deregulation, BT held an effective monopoly and offered a very narrow range of services and pricing options.

Now, in addition to landlines, there are also telephone service options via cable, mobile and VOIP telephony, as well as a multitude of tariffs, many of which are carefully tailored to different niche target marks.

1 Downes, L, Mui, C (1998): Unleashing the killer app digital strategies for market dominance Harvard Business School Press

2 Shapiro C, Varian H (1999): Information rules: A strategic guide to the network economy Harvard Business School Press.

3 Evans P, Wurster T (2000): Blown to bits: How the new economics of Information transforms strategy Harvard Business School Press

Author: Steve Whiteley, January 2007

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e-business strategy - competitive forces

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