Creating and capturing value
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
FONDAMENTAL QUESTIONS
How can companies add value to their existing
business practices?
How can they capture part of the created value ?
They must reinvent the way they are doing
business and avoid reproducing existing processes
as is on Internet
Requires Imagination
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
• Success stories
….
• Value created
….
Jacques Robert & Jean Talbot, HEC Montréal
CASE 1: NEWSPAPER
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
APPROACH WITHOUT ADDEDVALUE
Place the Daily Edition on the Web As Is
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
HOW CAN ONLINE
NEWSPAPERS ADD VALUE?
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•
•
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•
•
•
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Continuous publishing
Personalization
Multimedia
Archives
Disaggregate
New revenue model
New Partners
B2C  B2B
More Complex
Business
Model
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
What are the benefits of going electronic
Characteristics of the
Internet
Impact of online news
• Reach
• Flexible device and easy to
use
• Personalization
• Interactivity
• Asynchronous
communication
• Encyclopedic Nature
• Media Richness
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•
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Worldwide 7/24
Continuous publishing
Personalization of news
Versioning
Chat rooms/ polling
e-mail notice of news
Searchable engines of
retrievable Archives
• Multi-Media
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
The concept of the economic value
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•
•
•
A consumer is ready to pay A$ for a product.
A producer is ready to produce it at a cost of B$.
Transaction costs are C$
If A>B+C, there are potential gains from trade of
(A-B-C)$.
• An economic system is effective if transaction
costs are low and all the gain from trade are
carried out.
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
Creation of value
• For potential gains of (A-B-C)$, one can create
value by:
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–
–
–
Reducing of the production cost, B.
Reducing of the transaction and search cost, C.
Increasing value of the good for customers, A.
Creating new products – transforming old products in
new ones.
– Allowing exchanges that would not have be made
otherwise.
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
Transformation of informational products
• An information goods is a product that can be
reduced digital information:
– Text, video, music, software or combinations of the
above.
• The informational technologies allow to
disentangle the information and its physical
support. This fundamentally changes the nature
of the product.
• Better design of products through better
information on customers’ needs.
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
Increase in the value for the customers
• Better design of products through better
information on customers’ needs.
• Increase the selection of products – reduction of
compromise.
• Matching buyers and sellers (production and
needs)
– Information on the available products
– Increasing the visibility of one’s product
– Providing information on sellers (and buyers)
• " Customization"
– Adaptation of product to customer
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
Reduction of production costs
• Facilitate the coordination of production teams
• Economies of scale in the management of the
inventories.
• Moving from a push strategy to a pull strategy
• Reduction in the production of unwanted
products
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
Reduction in the cost of transaction and
distribution
• Personalization
– Presentation of information according to individuals
• Facilitating after-sales services.
– Complementary services
– Online assistance
• Economies of scale in distribution
– Eliminate the cost of retailing
• Price comparison tools
• Reducing administrative cost of purchasing
Jacques Robert & Jean Talbot, HEC Montréal
Capturing Value
•The concept of market power
•Particularities of the Internet
economy
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
The difficulty of capturing value
• Consider a new gain from trade of (A-B-C)$
• Who will capture it ?
–
–
–
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Both buyer and seller equally ?
Only the consumer ?
Only the producer ?
Note that the producer may even lose (cannibalization
of existing markets)
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
What determines the producer’s share ?
• The market structure
– (number of competitors)
– Flexibility of supply
• Barriers to entry
– (cost structure)
• Differentiation of products
• Information on prices
• Flexibility in the pricing strategy
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
Particularities of the Internet economy
• Low distribution and reproduction costs of the
informational goods
• Economies of scale in supply
• Price comparison tools
• Network effects (externality in demand)
• Superior tools for collaborative work
• More open markets
• Less segmented markets
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
How the Internet affects
competition in industries
Entry of new
products
Market power of
suppliers
Competition
among rivals
Market power of
buyers
Barriers to entry
Inspired from Porter (2001)
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
How the Internet affects
competition in industries
Market power of
suppliers
Entry of new
products
(+) Limits the
power of
conventional
distribution
channels
Competition
(-) Consumers
among rivals
have more
information
(-) Reduction in
switching costs
Barriers to entry
Market power of
buyers
Inspired from Porter (2001)
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
How the Internet affects
competition in industries
Market power of
suppliers
Entry of new
products
(+) Increased
efficiency of
the industry,
increases its
size
Competition
among rivals
(-) Internet
allows the
creation of new
products
Market power of
buyers
Barriers to entry
Inspired from Porter (2001)
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
How the Internet affects competition in
industries
Entry of new
products
Market power of
suppliers
Competition
among rivals
Barriers to entry
Market power of
buyers
(-) Technology
has allowed
new entrants
Inspired from Porter (2001)
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
How the Internet affects competition in
industries
Market power of
suppliers
Entry of new
products
(±) Online
procurement
(-) Limits the
need for
intermediaries
Competition
(-) Limits
among rivals
differentiation
(access to the
same products
Market power of
buyers
Barriers to entry
Inspired from Porter (2001)
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-02 E-Commerce
How the Internet affects competition in
industries
Entry of new
products
Market power of
suppliers
Competition
among rivals
(-) reduction in
differentiation
(-) More
information on
price
Market power
(-)Increase
in theof
buyers
geographical
scope of the firms
(-)reduction in
variable costs
Barriers to entry
Inspired from Porter (2001)
Jacques Robert & Jean Talbot, HEC Montréal