Effect of the Internet on Business Development

Effect of the Internet on Business Development The internet is a network of computers who can share data and communicate between them. Its reach is almost every place in this world (see table 1). Any other technology has never changed a business as fast as internet has done. There are many stories of how a business been transformed on internet. EBay, the biggest e-shop was created by his founder to trade niche goods but now, one can buy or sell almost everything in this world to virtually everywhere. You can transform your business if you are nicely connected to your customers, suppliers and other trade partners. Internet is the best possible connector in a business who is at your service for virtually nothing. There is whole world at your disposal and you dont need to open a shop everywhere. Only thing you need is internet connection with some computer system. If you are able to offer a better deal you are in business otherwise, irrespective of how big or small you are, you are going to run out of business. The impact of interne t includes: Less importance of economies of scale. Fewer barriers to internationalization. Lower marketing communication costs. Greater price standardization. Less information floating time. Easy and fast communication between buyer and sellers. Changes in intermediary relationships. The internet lowers transaction costs in three ways: Search costs: The amount of information available to the buyer and the seller can be increased with the help of internet and that can be accessed conveniently and timely. Contracting costs: The internet helps to establish better communication and monitor the performance of partners in business relationship. It is easier to negotiate and compare prices via internet. Co-ordination costs: The cost of sharing information is reduced due to internet and is helpful in integrating business operations. What is e-business? (Kotler and Keller, 2009) e-business describes the use of electronic means and platform to conduct a companys business. E-business is short form of electronic business, where internet and related technology is used for normal business operations. Here internet is used to increase productivity, reduce costs and thus to increase turnover. The effect of Internet on business Internet has changed the business immensely. It has made the world come closer and trade economically and efficiently. It has created a virtual market where everything is available, not physically but virtually. The greatest effect internet has done on business is that it made trade price sensitive and more logical. A customer now is able to do the research work or comparisons before buying a product or services. Not only customer but it has benefited firm as well. Now firm is able to reach distant customer easily and cheaply. They can create awareness about their product and can interact directly with customer to know their preference, problem and potential solution. There is lot more to come and has impact on almost every sector of business. In further chapters we will discuss about these impacts in detail. Dissertation Objective The objective of writing this dissertation is as follows: To analyse the role of internet in development of business. To highlight the way a firm can effectively use internet technology to gain competitive advantage over their competitors. Project Structure This dissertation is divided in seven chapters with each chapter dealing with a specific topic dealing how internet helps in developing a business. First chapter Introduction contains the basic detail about the internet and their business application. Chapter 2 with heading literature review discusses about the internet and its impact on international marketing, the internet and the e-value chain and international marketing strategy and e-business. Here, the things discussed are the essence of the academic work of known writers. Chapter three discusses about the virtual market (market space) and their different aspects (like how this market can be exploited, what the possible pitfall are and where opportunities lies). Chapter four is about marketing on internet. Here some of the important discussions are on interactive marketing, push marketing and advertising via internet. There is also discussion about global business strategy and driver that need to be adopted for international ma rketing via internet. In chapter five, the academic analysis of internet as a tool for development of business is done. Here porters generic competitive advantage model, Rayport and Sviokla model of marketspace and Dutta and Segevs market space model has been discussed in brief. Further a SWOT analysis of inter is done with some suggestions. In chapter sis a very brief case study of eBay is done. Chapter seven is about the managerial implication of the changing scenario due to internet and in marketplace. Literature Review The Internet and its impact on International Marketing The Internet (Fletcher et al, 2005) The internet is a global network of interlinked computers operating on a standard protocol that allows information exchange. (Carolyn Siegel, 2004) It is the worlds largest network of interconnected distributed computer networks. Thus we can infer that any system which is able to share information to other system through a globally accepted protocol is part of internet and this whole interconnection may be called as internet. Internet commerce (Kotler and Keller, 2009) e-commerce means that the company or site offers to transact or facilitate the selling of products and services online. The internet user in the world is growing fast and so is the market scope for the marketers. According to Internet World Stat, 23.8% of total world population are active internet user. Thus, a vast population of more than 1.5 billion is ready to buy and sell on internet given a better deal. It can be only imagined the vastness and growth of market that within 8 year (2000 à ¢Ã¢â€š ¬Ã¢â‚¬Å" 2008) the world internet users grew by 342% and out of those users, 85% have purchased something on internet (Source, Nielsen, Feb 2008). The Internet and International Marketing (Carolyn Siegel, 2004) Marketing is a collection of activities that bring buyers and sellers together to make exchanges that satisfy and give value to all parties. (Carolyn Siegel, 2004) Internet marketing or e-marketing (electronic marketing) is marketing on internet with the help of emails, World Wide Web or other means. It also includes production and selling of internet related products. According to Fletcher in 2005, the introduction of electronic business has changed the fundamental principles of international marketing. He pointed out certain things that internet has changed are: Size of firm is no longer a barrier to internationalization. No need of overseas intermediaries as it became easier to locate customer and deal directly with them. No longer is traditional way of internationalization (moving from familiar to less familiar country) applicable as information became easily available and the communication medium is interactive. The internet (as a low cost medium) allows small and medium firms to become global marketer at their early stage. This is due to the fact that internet can help establishing better communication among overseas customers, suppliers, agents and distributors. We will discuss more about drivers of internet business model, impact of internet on international marketing in chapter 5. Characteristics According to Richard Fletcher et al, 2005, the internet is both communication and a marketing intelligence tool. As a communication tool it helps to build and maintain effective communication with overseas suppliers, distributors and customers. The internet has good information processing capability which acts as link between firm and external environment (discussed later). This ability of internet used as marketing intelligence tool. The internet is used as marketing channel and has following characteristics: Ability to store vast amount of data (information) inexpensively at virtually different location. Interactivity and ability to provide information on demand. Relatively low entry and establishment costs for sellers. Serve as distribution medium for goods like software, e-books etc. Powerful and cheap tool for searching, organizing and processing information. The ability to provide better insight of a product than that of other form of printed catalogue. The Internet and the e-value chain Netchising or Virtual value chain According to Beck and Morrison (2000), the physical value chain activity while globalization has not seen good results. This is due to the fact that a firm uses their resources in overseas activity at the expense of opportunities of domestic market. Not only that, there are other problem faced by an organisation like coordination of physical operations across the globe, the cultural differences, the cost of expatriates and vulnerability to environmental risk that can damage reputation of the firm. Most of these problems can be effectively solved by netchising, a term coined by Beck and Morrison (2000). Netchising is the practice of handing over overseas operations to partners (generally overseas) by outsourcing, subcontracting or franchising. Netchising has following advantages: Efficiency: generally overseas partners are more efficient and are specialized in carrying out the outsourced activities than the outsourcing firm. Convenience: exchange of information becomes easy. Now, orders can be directly placed to the firm without any local agent and a firm can also share information to the customers directly. Reduction in Transaction cost: It reduces the cost of carrying business operations which ultimately benefit the profitability of firm. International value chain According to Plumley (2000), international e-business value chain is the combination of e-commerce platform and secure transaction support (see figure 2.1). The e-commerce platform builds on the countries business rules and language where as secure transaction support builds on currency clearing and legal requirement. According to Gartner Group, internet affects the supply chain (see figure 2.2). It shows that a customer can buy and pay for the product or services easily and at the same time a supplier can also communicate directly with customer and with their own other internal departments. International information chain According to Karmarkar (2000), internet value chain is closely linked with international information chain. The language and cultural differences is the main hurdle in the path of globalization of a firm. When a firm deals with information product (like music, e-books or software) then it becomes easier to go global. In certain cases when product or services are not much attached to language or cultural factors (for ex. Technical publishing and industrial services), then also it is easy to become global. In production of information product and services low labour cost is the key as relative cost of hardware and software has come down. Now, firms look for low cost labour market (like India, China) to develop information products. Outsourcing of information services (customer care service such as call centres) and software development cell are some examples. Thus we can say that in information value chain, the physical infrastructure doesnt play a vital role. International Marketing Strategy and e-business Internet issue and foreign market entry According to Oxley and Yeung (2000), the e-commerce readiness of a market is determined by three factors: The rule of law: A customer is not able to see the original product while purchasing online. Therefore, they need to be assured that if they purchase a product or service online; they will get them as they were told or shown online in given time limit. According to survey by e-consultancy in 2008, 84% buyers look for the sign that a website is secure before making a purchase. Thus, a market (country) must be able to provide an environment where property rights are well defines, courts are efficient in resolving disputes and consumer credits and consumer protection regulations are well established and enforced (i.e. strong tradition of the rule of law). The transactional integrity of online business: It is difficult to track a e-business trader by their e-mail address or website. Also, the entry and exit barrier in e-business is low and this is used as a weapon by dishonest e-traders. They can execute fraud and again be able to do it with a new name (as they can entre again in market with new identity). When dispute arises, it is hard to practise legal action in a different country and can be costly. The availability of infrastructure: migration from traditional market to online market is not possible until customers have access to personal computer and internet connection at reasonable price. Apart from these facilities, they do have the facility of credit card or online payment system. Thus, internet related infrastructure and financial infrastructure are essential Electronic Marketplace Internet a virtual market According to Garrison, (1996), the internet acts as a catalyst for sociological change. It has changed the nature of market, the way of business operation and the mode of communication with customers and other business partners. It has created a market space which has affected the traditional marketplace and consumer preferences by providing greater facilities to them. Internet has become the largest market available to mankind where almost everything is been sell or bought. This market space doesnt exist in physical terms but can get everything available in physical market. Physical vs. Virtual Value Chain Value chain is nothing but a set of value adding activity for the product or services. Rayport and Sviokla, 1996, argued about a new value chain termed as virtual value chain where product or services exist as a piece of information and can be delivered through information based channel of communication. This virtual value chain is different from physical or traditional value chain where one can see or touch products. He said the virtual world as market space while the physical world as marketplace. According to Fletchar et al 2005, the virtual value chain is a realm where products and services exist as digital information delivered through information based channel. He also differentiates virtual value chain and physical value chain on the basis of information used. The virtual value system uses information as the source of value while in physical value chain it is used as a supporting element of value adding process. Thus we can say that now a day a firm has to compete in two busin ess environment, one is traditional and other is virtual business environment. The distinction between the two can be understood by this example. when consumers use answering machines to leave a message, they are using an object that is both made and sold in the physical world, however when they buy electronic answering services from the phone company they are using the market space à ¢Ã¢â€š ¬Ã¢â‚¬  a virtual realm where products and services are digital information and are delivered through information-based channels. (Rayport and Sviokla, 1996) Figure 2: The Virtual Value Chain in relation to The Physical Value Chain (source: Hollensen, 2001). Adoption of Value Adding Activities: Company adopts value adding information activities in the following three stages: Visibility: Here large scale information systems are used to coordinate activities in the physical value chain. Mirroring Capability: It is the capability of substituting physical activities with virtual and thus creating a parallel virtual value chain in the marketspace (see figure 2). New Customer Relationship: This is the flow of information to customer to deliver value in new ways. This parallel physical and virtual value chain operation allow firms to deliver value to their customer in both marketspace and marketplace. These operations create marketspace based relationship with customers. The virtual value chain consists of five steps, say, gathering, organising, selecting, synthesizing and distributing information. These value adding activity allow company to identify customers desires more effectively and fulfil them more efficiently. This happens, for example, when a car manufacturer shifts its RD from the physical to the virtual value chain. By doing so, they involve customers of different locations in the new product development process. The physical value chain is linear (a sequence of activities with defined input and outputs), whereas the virtual value chain is non-linear (a matrix of potential inputs and outputs that can be accessed and distribute by a wide variety of channels). Relationship marketing It is a way of marketing where marketers or firm try to attract, maintain and enhance relationship with customers and other business partners. Internet (or website) acts as the best medium to communicate with people related to business. Firms now focus on relationship marketing to gather information from customers, to develop customized product or services for a focussed customer group. The internet helps firms to improve relationship with their customers and suppliers; and help them to work effectively. Now a firm doesnt need a middleman or a agent as they can sell directly to the customer via internet. Thus the distance with customer is decreasing and a firm need a smaller supply chain which can increase their profitability. The lesser distance also allows firms to establish a close relationship with customer and provide those customized products or services as per their need. The firms (like eBay, Google etc) involved in innovative business have always realized the power of customer relationship. They bank on the ability to process large relationship database. With the help of this relationship database they formulate their strategy and develop innovative way of marketing. The relationship marketing not only benefit the firm but also the customers. The customers are benefitted because firm can develop customized and focussed marketing message. Mattsson, (1996), has described a relationship as combination of three main components, which affect the parties involved in a business. Those components are legal(L), behavioural(P), and atmospheric (E). These three factor determines the success and failure of a relationship marketing in a particular market. Thus it is possible to have a successful buyer-seller relationship in domestic market totally failure in overseas market. Finally we can say that relationship marketing includes the management of a firm and thus it must be included in the business plan Marketing on the Internet Internet and Global Business Strategy (Kotler and Keller, 2006) e-marketing describes company offers to inform buyers, communicate, promote and sell its products and services over the internet. Drivers of Internet Adoption in International Marketing Once a firm establishes an internet portal (website), they automatically become a MNC (Multi National Company). Quelch and Kelvin (1996) describe two evolutionary paths of a website: Information to Transaction Model (figure 4.1) adopted by existing MNCs where they offer information to address the needs of existing customers. Transaction to Information Model (figure 4.2) adopted by internet start-up companies where they begin with transaction and use the medium to build brand image and secure repeat orders. The basic purpose of these models is either to reduce cost or to increase revenue. According to Quelch and Kelvin (1996), these drivers fall into four quadrant as given in figure 4.3. Internal customers focus/ cost reduction (quadrant 1): This is applicable to the companies who use website as a tool to communicate with their customers. Their main focus is to provide customer services for domestic market. They just happen to attract international traffic. Internal customer focus/ revenue generation (quadrant 2): This is applicable to the companies who use website not only to communicate with their domestic customers but also offer transactions online. This enables a firm to reach those international customers who might be inaccessible via other media. External customer focus/ cost reduction (quadrant 2): This is applicable to the companies whose main aim is to attract international audience through their website. This happens to benefit all customers because of the international scope of operations. External customer focus/ revenue generation (quadrant 3): This is applicable to the firms who not only focus on attracting international audience but also offer transactions worldwide. Here transaction involves connecting buyers and sellers. Company target providing services to existing customers and attract new customers from global market. Impact of Internet on International Marketing Variables The modification in marketing mix variables is necessary while using internet for international marketing. The impacts of internet on application of marketing mix while going to international market are as follows: Pricing: Due to internet customers are more aware of prices in different countries and thus there is increase in price standardization across borders and price differential become narrow. One advantage of this is that price can be customized easily with customers need and their profile (segment). Distribution Channels: Internet has dramatically reduced the number of intermediaries earlier needed for worldwide distribution channels. As now, less capital is needed for inventory and thus the role of intermediaries has been changed. The new roles of intermediaries include collection, spreading, interpretation and distribution of information rather than traditionally handling and distribution of products. Creation of new Market: Internet offers new opportunities for firms to create market by helping buyers and sellers to locate and negotiate trade terms with each other (ex. eBay etc). There is also a market developed for executing transaction between traders (ex. PayPal etc). New Product Diffusion: The traditional test as you go practice where shifting products from one country to another is now outdated. Now, new product announcement or launch generates immediate demand (as information travel faster on internet) and that requires immediate availability of goods. Customization: Due to internet, getting demographic and purchasing profile of customer became easy. This allows firms to customize products for local adaption as per local market demand. Advertising on internet Internet is a low cost advertising medium having reach to global audience. Advertising on internet includes banner advertising on website, email, blogs and links to search engines. As traditional media of advertising is quite expensive and at the same time internet infrastructure is improving day by day and able to prove support to video and graphics on web. With this improvement a firm can successfully launch an online advertisement campaign. Interactive advertising According to Haeckel, Marketing interactivity is a person-to-person or person-to-technology exchange designed to effect a change in the knowledge or behaviour of at least one person. He also point out that interactivity is function of certain dimensions, which is given as: I = Æ'(N, C, F, SI, CI, T, CT, SY, M) Where, I = impact of interaction, M = Type of media involved (Other factors not discussed as not relevant to current topic). Now, as a technology, internet is the strongest media for interactive marketing. The reason for that is Internet is used by almost a quarter of the total world population. It is not limited to a particular geographic reason. The growth of user is fast. Cheapest and fastest way of interacting with majority of population (both for customer and marketers). Haeckel also pointed out that there is going to be much more business and marketing use through internet. He made a graph which shows how we find usage of a new technology with time (see graph below) and thus we can say there is more in store than what we are seeing and using presently. Even interactive marketing may see turnaround with this technology. Marketing with push technology (Wetzel, 2008) defined push marketing as, customers are provided information by receiving or viewing advertisements digitally, such as: e-mail, SMS, RSS, phone calls, etc., as subscribers of the latest product and service information provided by the company. The internet is the cheapest and most effective media that is used for push marketing. Advantages of Push Marketing via Internet Tracking of Customer Preference: It is easier to track user preference with the help of push technology (internet) and customize according to their preferences. A good example of this is Google AdSense that tracks the users visited website or keywords in mail and according to those criteria it shows advertisement (related link). Increase Accessibility: With the help of push marketing a firm can increase customer accessibility by the firms marketing and advertisement of the products. Subscribers get pushed by built in developed software called PointCast that enable users to receive automatic content updates via their internet connection and web presence as the channel to get information when their computers are not in use. Corporate identity in cyberspace Firms are now using web to extend and reinforce their companies brand image in a cost efficient manner. This serves as a complementary media device that re-establishes a firm in consumers mind. By providing valuable information to users a firm can expand their brand image. The regular updating of information may attract customers to visit website regularly, which will reinforce firms image and provide them a chance to create a new and extended cyber image. Analysis and Methodology Competitive Advantage via Internet Porters three generic strategies for competitive advantage According to Porter (1985), a firm can earn high return if they are able to position themselves well enough, irrespective of the structure of the industry and profitability of the industry. He pointed out the fundamental basis for above average performance is sustainable competitive advantage in long run. For that sustainable competitive advantage he gave three generic competitive strategies. Cost Leadership: According to porter (1985), a firm is having cost advantage over his competitors if the cumulative cost of performing value activity is less than the competitors. He further discussed that a firms cost position is a function of; (a) the composition of their value chain to their competitors, (b) their relative position in cost drivers. Now, we see that how internet helps them to achieve them cost leadership by affecting the above two functions. Differentiation: Porter (1985) describes another strategy for competitive advantage is to differentiate their product with competitors products. This means raising the quality with ignoring the cost for the sake of quality. Now internet can help them to do that by interacting directly with customer and customizing products according to target group. Many firms now use blog site to interact with customers and promoting their new or customized product. Focus: Porter describe this as customizing products or services to suit a focused or small segment of consumer group. The internet helps firms to focus on different aspects of the products and customer group. Internet even allow firm to receive specification from each and every customers and according to them they can produce customized products or services. As discussed in chapter 3, the relation of physical and virtual value chain (Hollensen, 2001), we find there is virtual value chain corresponding to each physical value chain. By applying this value chain a firm can become cost leader as it depends on two factors discussed above. A firm can shift to virtual value chain to gain cost advantage over their competitors physical value chain. For example Federal Express (FedEx), a shipment company allows consumer to track their parcels. This tracking system via internet is very efficient and economical. The FedEx has now reduced more than a million query calls per month by providing online shipment tracking system. This is one of the way of reducing cost and step towards cost leader position and at the same time it differentiate FedEx from their competitors. But this is not enough as sooner or later others will follow same practice and FedEx lose the competitive edge. The real edge lies on the innovative and creative way of finding or chang ing physical value chain to virtual value chain. So now apart from technology, innovative idea of using technology is the key for success of a firm. Stuck in the middle Porter (1985) points out a situation, where a firm try to achieve both generic strategy (cost leadership and differentiation) but fails to achieve any of them. He calls this situation as stuck in the middle. According to him, a firm stuck in the middle will compete at disadvantage as others competitors (cost leader, differentiators) will be better positioned to compete in any segment. In case of Google AdSense, Google is offering a differentiated advertising tool at very low cost (usually one get this via auction, where price is driven by customer not producer) is offering a differentiated (highly unique and effective) advertisement. Here both cost leadership and differentiation is achieved by Google with the help of technology. Johnson et al (1998) discuss about the core competency of a firm may be difficult to imitate because they are complex. The google is doing the same thing by making the internal structure complex, which is hard to imitate by competitors. Thus, they can put the mselves in a position where for an advertisement position (ex. Out of five position or space, advertisers bid for first position then second and so on), firms bid among themselves. Thus, it is possible to achieve a position where a firm can achieve cost leadership and differentiation without compromising one for the other with the help of technology (say internet) and their own creativity (say way of using internet). E-business marketing Models and International Competitiveness Rayport and Sviokla Model According to Rayport and Sviokla (1995), the internet has changed the nature of trade. Internet has made both physical location of inventory and the actual place (marketplace) of trade irrelevant. They argued that traditional marketplace (the physical market) transaction has been replaced by markets place (virtual market or e-market) transaction. They concluded that brand equity is created in marketplace through content (i.e. the product offering), context (the communication programmes) and infrastructure (i.e. the pricing and value chain activity related to distribution). While in market space (internet marketing); content, context and infrastructure has been transformed to innovate new ways of creating value. The changes are: Content: Now, everything possible is delivered electronically whether it is product, service or information. Even though operating system (Microsoft window) are available online. They tim