Economic Implications of e-Business for Organizations

Abstract

We review the macroeconomic and microeconomic impacts of e-business on organizations. E-business improves the economic efficiency of national economies through greater capital formation and long-run efficiency gains. E-business affects many aspects of the economy, from international trade to monetary and fiscal policies. At the microeconomic level, we use Porter’s Five Forces to organize our discussion of how e-business changes the creation of value and its division among market players. ICT affects industry through many channels and at many levels, from how inputs are purchased to how final goods and services are sold and delivered. The corporate strategist must consider how e-business may change the nature of rivalry among the competitors. Changes in upstream and downstream interactions in the market and expanded opportunities for substitutes and potential entrants also influence strategy. Thus, e-business can alter strategy by changing the nature of entry threats, suppliers’ power, buyers’ power, threats from substitutes, and rivalry among existing firms. We discuss empirical results from the literature wherever possible to illustrate the importance of e-business for a firm’s strategy. We close with a brief look at e-business and non-profit organizations.

Appendix: Summary Table of e-Business Factors and Implications for Strategy

Subject and place in chapter outline	Summary	Implication for strategy
2. Macroeconomics
2.1. Size of e-commerce	E-commerce has increased considerably in the developed world in the last 20 years. B2B e-commerce, the predominant form of e-commerce, accounts for nearly a third of all B2B transactions. B2C e-commerce accounts for only 2.8 % of B2C e-commerce. Developing nations have yet to witness considerable gains from e-commerce	E-business is increasing in importance and cannot be ignored by strategists. First-mover advantages may be available in developing countries
2.2. Productivity and economic growth	E-business affects economies by increasing productivity (through additional capital formation) and may spur innovations in processes that will further increase productivity over the long term. Investments in ICT have clearly increased economic growth in many developed countries. The evidence is mixed in developing nations	While adopting ICT by itself may not confer lasting competitive advantage, failure to do so will surely put an organization at a disadvantage
2.3. International trade	E-business improves opportunities for increased specialization which increase the gains from international trade. Little research, however, exists on the impacts of e-business on trade. A lack of infrastructure, poorly trained workforces, and regulatory obstacles may reduce any potential gains from trade for developing nations	Firms could find international trade more profitable with e-business. Trading opportunities in developing nations may not prove profitable in the short-run
2.4. Monetary policy
2.4.1. E-business and prices	Overall, e-commerce is expected to increase competition and reduce search and transaction cost. The net effect will be lower prices. In the long run, these lower prices will represent a onetime change in the price level	In the aggregate, firms will face increased pressure to lower prices, but individual industries may avoid price reductions through product differentiation and increased customization
2.4.1. E-business and menu costs	The costs associated with inflation, namely menu costs (the cost of physically changing prices) could be dramatically reduced with e-commerce. Nevertheless, price rigidities will likely remain a fact of business even with greater adoption of e-commerce	Firms can more readily change prices in the wake of inflation and other price shocks. However, e-business does not eliminate all costs associated with price changes
2.4.2. E-business and the money supply	E-payments and e-money present futures challenges for policymakers who may find normal monetary policy tools less effective with the proliferation of e-payments and e-money. Practically speaking, e-commerce has had little effect on monetary policy to date	Sellers must consider whether to adopt e-payment systems for online and offline sales to avoid falling behind rivals
2.5 Fiscal policy and taxation	E-commerce reduces geographical constraints and increases interstate and international transactions. Governments fear these transactions will reduce sales tax revenue. Revenue losses are small to date, but policymakers are increasingly exploring options to tax these transactions	Firms conducting interstate or international transactions will likely face increased pressure to collect sales tax revenue on behalf of their buyer’s governments
3. Microeconomics
3.1. Threat of entry
3.1.1. Economies of scale and scope	E-business may increase economies of scale in industries where fixed costs are unchanged, but variable costs are reduced	Minimum efficient scale increases and the threat of entry falls
	E-business may decrease economies of scale in industries where e-business reduces fixed costs	Minimum efficient scale decreases and the threat of entry rises
	E-business may increase economies of scope and aggregation, particularly in information goods	The threat of entry decreases because rivals must enter with a bundle of goods
3.1.2. Network effects	E-business may increase the importance of network externalities enjoyed by incumbents	The threat from entrants on competing networks is reduced
	E-business may encourage subsidization of one side of a platform market	Entry barriers in the subsidized side of the platform fall
	E-business encourages the proliferation of two-sided (platform) markets, which may be subject to “lock in” of complementary goods	Application barriers to entry may arise from such vertical restraints
3.1.3. Capital requirements and sunk costs	E-business enables ICT outsourcing, converting fixed, sunk cost into variable cost	The threat from entrants increases as the importance of sunk costs declines
3.1.4. Unequal access to distribution channels	E-business decreases the importance of physical location in prime real estate	Entry barriers fall
	E-business B2B vertical hubs may be owned and controlled by large incumbents	B2B vertical hubs may be able to dominate supply and distribution channels, effectively limiting opportunities for new rivals
3.1.5. Other advantages of incumbency	E-business decreases the importance of face-to-face trained sales force	Entry barriers fall
	E-business and outsourcing decrease the importance of physical nearness to skilled labor	Entry barriers fall
	Early entry into e-commerce confers initial but not necessarily lasting advantages to incumbents	Entry barriers decrease over time
3.2. Power of Suppliers
3.2.1. Concentration of the supplier group	E-commerce may increase the number of sellers and facilitate greater transparency of product prices and cost structures	Suppliers could see reduced power over industry
	Suppliers (incumbents) may maintain control over B2B vertical hubs	Suppliers could see increased power over industry
3.2.2. Dependence of the supplier group on the industry	E-business reduces transaction costs between supplier and industry	Suppliers lose ability to extract rents from industry, as firms can more easily contract with competing suppliers
	E-business and vertical supply chain integration tightens bonds between supplier and buyer	Supplier loses bargaining power due to the hold-up problem
3.2.3. Switching costs	E-business reduces switching costs through the brokerage effect.	Lower switching costs of buyers reduce supplier power.
	Buyers may make significant investments in vertical supply chain integration	Higher switching costs of buyers increase supplier power
3.2.4 Downstream integration by the supplier group	E-business can increase vertical disintegration through outsourcing	Reduced incentives for suppliers to enter downstream markets lowers supplier power
3.3. Power of buyers
3.3.1. Intermediaries and B2B hubs	E-business spurs disintermediation in industries such as travel agency service and brokerages	Intermediaries’ power (and even existence) is threatened
	E-business spurs reintermediation through B2B vertical hubs	Intermediaries’ power is strengthened
3.3.2. B2C e-commerce and product differentiation	Information and search costs are reduced with e-commerce, and branding may become less important	Product differentiation through branding decreases, and buyer power increases
	E-business allows new forms of product differentiation, such as online ratings supplied by past customers	Product differentiation increases, and buyer power decreases
	E-business allows firms to offer greater customization of products and services, such as computers sold to order	Product differentiation increases, and buyer power decreases
	Informational problems such as adverse selection E-business allows firms to offer greater customization of products and services, such as computers sold to order	Product differentiation increases, and buyer power decreases
3.3.3. B2C e-commerce and other factors	E-business enables gathering information about customers and resonance marketing	Sellers can ability to extract value from buyers
	Consumers might be able to aggregate demand (Groupon, LivingSocial, etc.)	Buyer power increases, resulting in lower prices and higher quality
3.4. Threat of substitutes
3.4.1. Good substitutes versus poor substitutes	E-commerce enables consumers to more quickly identify and purchase substitutes for a firm’s products	The power of any one seller decreases
	Increasingly informed customers can easily find firms offering unique products filling gaps in the marketplace	Firms selling unique products can market share
3.4.2. Buyer switching costs	E-commerce reduces search costs and therefore decreases switching costs for consumers in markets where they are willing to search for alternatives	Seller power declines, and price levels and dispersion fall
	E-commerce allows firms to reduce the efficacy of search engines (through sponsored search) and to obfuscate prices and products	The consumer’s ability to compare prices and products falls, allowing firms to raise profits
3.5. Rivalry among existing competitors
3.5.1. General factors affecting the intensity of rivalry	ICT, electronic market exchanges, and e-business vertical hubs may enhance the market share of the largest incumbents	Where significant differences exist between firms, the impact of e-commerce on market share will likely be greater
	E-business-enabled outsourcing and reduced capital requirements for entry may make market structure more competitive	Incumbent suppliers lose power and market share
	In the wake of e-commerce innovations, firms may attempt to capture a significant portion of the market share through aggressive pricing strategies, particularly for goods with very low marginal costs (e.g., information goods)	Competitive rivalry among sellers in the industry heats up, and seller power in general decreases
3.5.2. Factors specifically affecting price competition	Firms may join a coalition of competing firms selling less close substitutes in a B2C exchange	The coalition can attract more customers to its site than any one company could, and seller power increases
	E-business lowers variable cost relative to fixed cost, making overcapacity problems relatively greater	Overcapacity in industry leads to cutthroat pricing; competition among sellers increases and prices fall
4. Nonprofit organizations	Nonprofits attempt to adopt e-commerce practices from the for-profit sector, such as using terms like “checkout” when soliciting donations online	The commercialization of the donation process leads philanthropists to decline to contribute to the nonprofit
	Nonprofits adopt ICT as a symbolic resource	The nonprofit establishes legitimacy and improves its reputation among donors and accountability organizations