Strategic Management and Online Selling

Creating Competitive Advantage with Intangible Web Goods

Susanne Royer

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134270446
• Edition: 1
• Topic: Business
• Subtopic: E-commerce
• Index: Business

Focusing on Business to Customer (B2C) internet business, and on firms that offer intangible products and/or services that can be directly consumed via the world wide web, Strategic Management and Online Selling also covers immaterial products and online news information or home banking.

Considering how firms with similar specific characteristics are able to realize competitive advantages, this topical book discusses an area of particular contemporary importance and increasing academic study.

1 Introduction

Even though it is not long ago that the Internet¹ was the exclusive domain of scientists and computer experts, in the last decade it has emerged as a device which many people in the industrialized world cannot imagine being without. More and more people have started to use the Internet. Not only firms and universities make active use of the new medium; also many sport clubs, various interest groups and fellow-sufferers of certain diseases use the Internet as a forum. All this has led to a hardly comprehensible net with diverse facets.

It is seen as natural to surf the web for information and to use various online services. What is still not natural is to pay for the offered content. Also, not as many people as expected use the Internet to do their physical shopping. While there are still high growth rates in the Business-to-Business (B2B) segment, in the Business-to-Customer (B2C) area enthusiastic early expectations have not, up to now, been fulfilled. Forecasts expect online retail in the B2C area to be less than 7 percent of total retail in 2004. However, the entire US online business trade is estimated to reach almost seven trillion US dollars by 2006. Worldwide online trade is expected to reach 12.8 trillion US dollars by 2006. Experts estimate that B2B e-business² will grow to 27 percent of products and services sold in the US in 2006 (Forrester Research, 2003).

B2C global e-business is expected to hit 562 billion US dollars by 2006. After a slowdown following the end of the first hype of online retailing, since the end of 2002 B2C online business has begun to increase again. Changing behavior and demographics are seen as being responsible for this development. For the US market, for example, 63 million projected users made online purchases in the fourth quarter of 2002, and at the same time more consumers are making a larger portion of their purchases online. In addition, not only more early adopters (mostly young adults) have enough income to buy online, but also an increasing number of late adopters (such as working-class adults, or seniors) are going online and using the Internet for shopping purposes (ITAA, 2002).

After the crash of the dot.com bubble in the year 2000, many start-ups that exclusively engaged in e-business disappeared. Growth of e-business transactions since then has been less spectacular than predicted (OECD, 2002a: 7).³ The Internet is often seen as an immense costless source of information rather than as a distribution channel for payable physical and virtual or non-material products and services in the B2C segment. So, even though many publications have appeared in recent times with regard to business on the Internet,⁴ knowledge is still lacking in relevant areas⁵ with regard to the B2C segment. Questions such as “Which firms can succeed in B2C e-business?” and “How can they succeed in this area?” are being researched in theory and practice.

Practitioners as well as academics believe that the possibilities of doing business on the Internet are revolutionary and will transform known business structures and strategies.⁶ However, after many Internet firms could not justify the very high investors’ expectations in the recent past, the question as to how they can perform successfully in the future is highly relevant. This book wants to serve as a contribution from a strategic management perspective to the complex range of questions that go along with this situation for Internet firms. This perspective can contribute to the answers of the outlined questions because the lack of strategic development and implementation⁷ in Internet firms was a crucial aspect that led to the observable loss of trust by investors. A better recognition of the possibilities of how competitive advantages⁸ can be realized in the area of the Internet would help firms to come to a convincing value evaluation, taking into account that different kinds of firms with different value-creation potentials do exist.⁹ Strategic management theory addresses such questions in general and could be applied to the specific range of problems that are outlined in more detail in the following sections.

The business environment for firms since the early 1960s has been more and more posited to various and intensifying changes, e.g. in the field of transportation and communication, and confronted with the speed of technological innovations. This development has increased the relevance of strategic management as a managerial perspective that goes beyond the analysis of separate business functions. Strategic management can be seen as the management model that has emerged in the 1990s to dominate the literature. However, strategic management theory still offers hardly any sound conceptual models or frameworks applicable for the specific requirements of Internet firms.¹⁰

The reason for the existence of strategic management lies in the increasingly rapidly changing environment for firms since the 1960s.¹¹ One facet of these changes is certainly due to the various possibilities offered by the Internet itself. This novel facet of the Internet cannot be ignored and must be taken into consideration when thinking about the creation of competitive advantages for firms doing business on the Internet. Strategic management is an area in which theory and practice have become increasingly interested recently. It has its origins in principles that different companies started to develop at the beginning of the twentieth century. At the beginning of the development process in the field of strategic management, planning was the center of attention. Very stable conditions of the environment in the form of seller markets mostly limited the necessary “strategic” activities of firms to budgeting models. However, increasingly, planning has had to be extended to a long-term perspective. This perspective has evolved from so-called long-range planning with instruments such as long-term prognosis and planning for several periods, to strategic planning. Strategic planning became adequate when the growing capital industry not only had to compete on international markets, but also seller markets transformed to buyer markets with increasing discontinuities. In this context, analyses of future opportunities and threats as well as company strengths and weaknesses became relevant activities for reaching company success.

In the 1960s social movements arose which questioned traditional forms of authority and sought new ways of defining and expressing individual freedom. There was the expectation that future growth in existing markets would be restricted largely to the effects of population growth and the replacement of goods and products at the end of their effective life (e.g. Donohue, 2001).¹² To avoid the prospect of limited future growth some firms started major rationalizations and tried to achieve a greater penetration of existing markets as well as investing in the development of new products and processes. In addition, they improved existing products and entered new markets, predominantly by direct foreign investment. Increasing foreign aid as well as decreasing transportation costs can be seen as factors that extended the willingness of business firms either to internationalize their activities or to increase the scope of their international activities. The immense improvements with regard to communication technology worked in the same direction and helped business enterprises to increase the capacity to control and coordinate activities in geographically dispersed locations.

The improvements in transportation and communication systems did not only impact on the international level; they were also responsible for the scope of individual domestic markets expanding beyond largely local and regional boundaries to encompass national and international dimensions. The emergence of protective measures combined with these increasing opportunities encouraged the development of planning models of strategy (such as budgeting models or operations research methods). Scale and scope economies, particularly in US firms, dictated the nature of internationalization. From the previously mentioned aspects it can be concluded that from a business perspective the rise in national protection contributed to the further internationalization of dominant firms that tended to operate in emerging oligopolistic markets in their domestic economies, operating behind protective walls. Their presence in protected economies in turn created circumstances for oligopolistic markets to develop in these economies at the expense of more competitive economic market structures. Corporations in the United States had a competitive advantage over corporations from most other nations engaged in this internationalization process in the 1950s and 1960s.¹³

From the 1970s onwards, competition became more and more global.¹⁴ That led to a new situation for the US firms that no longer just competed with each other; one where many of their formerly successful strategies no longer worked. Firms from many industries relied on cost advantages in combination with economies of scale. These firms often adapted only slowly to the new situation, where specialized niche firms offered tailor-made goods at low cost. The recent past can be described by rapid and unpredictable change combined with increasing competition in many industries. This new situation led to new strategy development procedures in businesses – e.g. questions of “make or buy” in a world of changing patterns of value chain organization became relevant (Bresser et al., 2000). Smaller and flatter forms of business organization increasingly dominate in many industries today as a reaction to the outlined developments.

The infrastructure of the twenty-first century implies sophisticated communication, transportation and computing technologies. These technologies enable the effective coordination of extensive activities, even on a global scale. Opportunities as well as threats are the consequences of the outlined development since the 1970s; while the growth of global markets has enormously increased the possibilities to sell products, it has also let powerful new entrants appear in all markets. While changes in capital markets have enabled firms to have easier and better access to financial resources, large industrial firms nowadays are at the same time potential targets of hostile take-overs. While technological innovation and computerization enable businesses to control production processes better, they are also responsible for the fact that smaller firms are possible competitors. And while management skills are seen as increasingly crucial for business success, at the same time outsourcing and downsizing activities lead to fewer management ranks.¹⁵

Strategic management concepts have taken the outlined developments into consideration. Approaches such as the resource-based view (e.g. Barney, 1991; Grant, 1991; Peteraf, 1993) and the dynamic capabilities view (e.g. Eisenhardt and Martin, 2000; Rindova and Kotha, 2001; Teece et al., 1997) evolved from the outlined development. These concepts took over from the concepts of strategic positioning (e.g. Porter, 1980, 1981, 1985) that previously dominated the field. However, the “new” concepts partly integrate the knowledge from the former approaches to come to useful strategic approaches in the context of increasingly dynamic and competitive markets. In this phase, dynamic strategic management theories are required. In the field of activities that translates into creating flexible organizations and taking into account the increasing relevance of networks and other disintegrated forms of value chain organization (e.g. Benjamin and Wigand, 1995: 63; Bovel and Martha, 2000: 24–8; Evans and Wurster, 2000: 24; Krüger, 2002: 68). Table 1.1 summarizes the development to the strategic management of today by attaching the relevant aspects to the different time phases.

Table 1.1 The development process to contemporary strategic management

Source: First four phases, adapted from Bea and Haas, 1995: 13 (translated by the author).

1.1 Relevant questions of online selling

Strategic management can be characterized as a managerial perspective providing powerful explanations to account for managerial practices and their consequences. Strategic management deals with the performance of business enterprises.¹⁶ The fundamental question in the field is, how do firms achieve and sustain competitive advantages? “Strategic management, in both theory and practice, tries to understand how firms may improve their performance in competitive interactions with other firms” (Sanchez and Heene, 1997: 303). Firms in the changing environment are mostly unable to be successful any more and cannot achieve sustainable competitive advantages by just reacting passively to their environment(s).

The objective of strategic management in this context is to help firms actively to organize or design internal structures, as well as the relations to the external environment, in a systematic fashion (e.g. Teece et al., 1997). This objective of strategic management is the starting point for this book. It is the aim to generate explanations of the realization of competitive advantages for a specific range of firms doing business on the Internet. These explanations should enhance the lacking theoretical knowledge in this area and help organizations to find optimal internal structures in relation to their specific Internet environment. It is the objective of this book to analyze and furthermore explain the generation of competitive advantages for one specific group of Internet firms, namely such firms that provide products and services in the B2C segment that can be directly consumed via the PC, such as online news or stockbroking.

Firms doing business in the Internet environment have attracted much interest from practitioners as well as academics from many different fields in recent years.¹⁷ However, it does not seem possible to come to general conclusions with regard to the realization of competitive advantages for all firms doing business on the Internet, because very different firms do very different things via the web. It is obvious that there will be major differences between strategic necessities for firms coordinating their supply chains via Internet solutions and competing in, say, the automobile industry, and firms such as Yahoo that offer a portal and thus a rather virtual Internet service. Before thinking about the creation of strategic value in the Internet age a clear understanding about types of firms competing in this area has to be created in order to explain which firms are included here and achieve a clearer image of these firms. One possibility to achieve such clarification is to segment “Internet activities” into different groups of firms which produce different outputs (i.e. services or products with various characteristics).

In the following paragraphs an initial broad categorization of firms doing business on the Internet takes place to come to a deeper understanding of the variance in this field and thereafter to explain the features of the firms that are at the center of this book. In the first step, four different output categories for Internet firms can be differentiated:

1 Physical products. Internet firms such as Amazon.com or libri...