Business On The Web: Strategies and Economics

1. Introduction

The advent of the Internet as a viable business tool is likely to have the same impact on businesses and their information systems as the spread of personal computers during the early 1980s. The literature falls short of discussion of two important aspects of this technology: strategies and economics of doing business on the Internet. Amid the myriad of practices, lessons, and anecdotes, there is a clear need for developing an understanding of the commonalty as well as the uniqueness of Web-based business with respect to the traditional general business. In particular, it is important to know whether or not the strategic planning methods of general business still apply to this new branch of business, and if so, how?

Striving towards answering this question, we mainly delve into two classic representative paradigms, viz., value chain analysis and transaction cost economics, and our previous research on Strategic Information Systems[6, 11] and the Value of Information [5] to come up with a strategy formulating framework for doing business on the Internet. We first analyze and apply these paradigms to Internet-based business in the next two sections and then present the planning framework in Section 6 with examples.

2. From Strategic Thinking to Strategic Planning

Even before the businesses realized the potentials of the Web to attain competitive advantage, they realized the strategic importance of information systems and planning for such systems. Strategic Information Systems Planning (SISP), is the analysis of a corporation's information and processes using business information models together with the evaluation of risk, current needs and requirements. The result is an action plan showing the desired course of events necessary to align information use and needs with the strategic direction of the company [1]. Some characteristics of strategic IS planning which help in providing a framework for doing business on the Web are:

• Main task: strategic/competitive advantage, linkage to business strategy.
• Key objective: pursuing opportunities, integrating IS and business strategies
• Direction from: executives/senior management and users, coalition of users/management and information systems.
• Main approach: entrepreneurial (user innovation), multiple (bottom-up development, top down analysis, etc.) at the same time.

Strategic Information Systems Planning, with or without the Web, is not an easy task because such a process is deeply embedded in business processes. These systems need to cater to the strategic demands of organizations, i.e., serving the business goals and creating competitive advantage as well as meeting their data processing and MIS needs. The key point here is that organizations have to plan for information systems not merely as tools for cutting costs but as means to adding value. The major impact of information technology is in re-defining, re-engineering businesses rather than in data processing/MIS roles. Web-based business opportunities open a new set of possibilities in the use of Information Technology in an organization. The technology transforms the business, even becoming business in some cases. As Keen [7] has morbidly but realistically pointed out that organizations not planning for strategic information systems may fail to spot the business implications of competitors' use of information technology until it is too late for them to react. In situations like this, when information technology changes the basics of competition in an industry, 50% of the companies in that industry disappear within ten years. This observation of Keen's assumes more sinister proportions for Web-based businesses because the present technology of putting a business on the Web is well within the technical and financial reach of even very small businesses.

3. Two Frameworks for Strategic Systems Planning

Vitale, et al. [16] classify SISP methodologies into two categories: impact and alignment. Impact methodologies help create and justify new uses of IT, while the methodologies in the "alignment" category align IS objectives with organizational goals. These two views of SISP are shown in figure 1.

Which perspective of planning for Internet connection for an organization and doing business over the Web will be used will depend on the proposed use for the Internet/WWW in the business. If the Internet is used merely for e-mail/Usenet or even intra-firm connectivity, the alignment perspective will apply. However, if the Web is used as an alternative medium for doing business -- reaching out to customers, suppliers and vendors, creating virtual organizations and teams, transacting actual commerce including financial transactions, then the impact view will prevail. And this is what doing business on the Web is mostly about -- an electronic alternative to the real marketplace, which is not only viable, but is also far more efficient, cuts across geographical boundaries and time zones, is growing at an unprecedented rate, has low entry barriers, is innovating fast, and to confound matters further, relies on different business paradigms. This is what the media attention is all about ; the Boston Globe reported over three thousand articles in the press about Internet in nine months in 1995 [2] and this is where the emerging visions of Electronic Data Interchange (EDI), Virtual Corporations (VC), and the National Information Infrastructure (NII) (Information Superhighway), etc., have their roots.

4. Value Chain -- A Framework For Internet Strategy Formulation

The value chain analysis is a powerful tool used by strategists to diagnose and enhance competitive advantage. Value chain analysis allows the managers to separate the underlying activitiesa firm performs in designing, producing, marketing and distributing its product or service. It is these activities from which competitive advantage ultimately stems. By showing how all the firms activities can be examined in this integrated way, Porter [13] provided an original, practical perspective of competitive advantage.

Value Chain Analysis provides an appropriate framework for planning Web based businesses because it deals with the value added (and not merely cost saving) aspect of a system and thus helps in assessing the impact of an information technology on the business. The concept of value chain is to treat every firm as a collection of activities that are performed to design, produce, market, deliver, and support its product with information technology being one major support activity for the value chain. Information systems technology is particularly pervasive in the value chain, since every value activity creates and uses information and therefore can substantially affect competitive advantage of firms. A firm that can discover a better technology for performing an activity than its competitors gains competitive advantage [13]. A typical value chain is summarized in the figure 2.

Thus, essentially, value chain analysis is a form of business activity analysis which decomposes an enterprise into its parts and helps in adopting a technology which increase the overall profit available to a firm. It also helps in identifying the potential for mutual business advantages of component businesses, in the same or related industries which is available from information interchange. Value chain analysis concentrates on value-adding business activities and is independent of organizational structure.

Internet positively affects all parts of the value chain of a firm. In respect of Primary Activities, namely, Inbound logistics, Operations, Outbound logistics, Marketing and sales and service noticeable impact of the Internet is as follows:

• Inbound logistics -- fast, inexpensive, reliable connection to suppliers.
• Operations -- Intrafirm connectivity-- Lotus Notes like connectivity through the Web -- customer participation, quicker response to changing needs.
• Outbound logistics -- fast, inexpensive, reliable connection to suppliers.
• Marketing and sales -- greatest value added in this area at present. Cost of advertising a product on the Web is just a fraction of the cost of a newspaper advertising[8]. Similar cost comparisons will hold for the cost of advertising the same product over TV/radio versus the Internet.
• Service -- high impact, similar to that on marketing and sales.

The Internet also affects the Support activities like Corporate structure, Human resources, Technological development and Purchasing positively. Some examples of such positive impact of the Internet are:

• Corporate structure -- flatter organizations, disappearing middle layer, whole organization becomes externally oriented.
• Human resources -- Internet as a vast training and recruiting tool kit.
• Technological development -- faster, richer interaction with the rest of the world, sharing of information, software. Collaborative advantage.
• Purchasing -- similar advantages as in marketing.

Besides the above visible effects of the Internet on the value-adding activities of a firm, the Internet offers many other significant benefits, namely:

• customization of information as per user needs.
• interactivity
  • helps the seller to understand the consumer's needs fully.
  • product promotion and transaction processing is possible in one step. Because of this capability of the Web, it can be considered to perform the entire marketing function by itself[8].
• unusual feed back, not only what consumers buy, but also what they don't buy, might buy.
• timeliness of information put out by a firm.
• information updated frequently.
• market niche coverage -- can be made very specific by targeting product promotion towards very specific target groups.

However, associated with the apparent low cost of marketing a product on the Web is the issue that a big chunk of the marketing cost is passed on to the consumer (it is s/he who buys the computer, modem, Internet connection, etc.). It is likely that as the technology matures and becomes widespread, a large number of consumers will have Internet connectivity through moderately priced, perhaps dedicated, Internet computers. When that happens, the cost function will be similar to that applied to TV and marketing channels on TV, where consumers invest in technology and services for their entertainment/educational value of the technology as well as the convenience of shopping from home.

Thus, a detailed value chain analysis as outlined above will help a firm in formulating its Web-based business strategy in many important ways:

1. it will provide a robust and intuitive framework for assessing the impact of Internet in a firm.
2. lay out innovative ways of forward and backward chaining to derive maximum value from using the Internet.
3. with sufficient insight gained into the inter and intra-firm information interchange, a firm can also devise ways to re-engineer its business. [9].
4. by studying the customization and interactivity potentials of the Web, firms can attempt to implement all the emerging visions of just-in-time, total quality management, mass customization, involving customers in the design of products and services, quicker turn around time in responding to changing customer demands, etc. However, firms doing the above analysis need to keep in mind that a number of the above benefits, as in case of most new technology investments, are qualitative and cannot be measured with the precision of traditional accounting systems. That, however, is a limitation of accounting systems and not of the technology [12].
5. give better insight into the augmentation of the value chain whereby some information flows themselves be marketed as products. Such crystallization and marketing of information products is greatly facilitated by interactive connectivity achieved through the Internet[14].

PRIYA KUSHWAHA
P.G.D.M
3rd sem