How will the Internet change market relationships
Riding with the technology wave, many firms invested in the Internet and related technologies in an attempt to try to gain competitive advantage over rivals by being the first to offer their products or services online. Many firms have found serious problems with pursuing this. The profitability of the industry was often undermined as companies competed on price in order to try to build up market share. Many firms also saw the development of Internet capabilities as a separate strategy and not an integrated part of the firm’s strategy, often resulting in failure of its online operations.
The widespread adoption of the Internet that has occurred has meant that market relationships are changing. The two main relationships are business-to-consumer and business-to-business relationships which have significantly been changed by the Internet. Business-to-consumer relationships have, in general, been enhanced by the Internet. The Internet has widened the choice available to customers because search costs, that occur as buyers are trying to find what they need, are significantly reduced and less determined by geography.
The Internet allows buyers to search worldwide for the best deal giving them more power. Increased competition between online retailers led to competition being based on price. “The monetizing concept argues that online businesses must first capture large audiences f users or shoppers, and then later monetize those audiences through subscription fees, advertising and e-commerce” (Rayport – 1999). Many firms followed this and were selling their products at or below cost to try to build up brand loyalty.
Several of them failed illustrating that there is a need for them to compete by conducting business in a distinctively better way. The Internet allows them to do this. “Online retailers are able to increase the number of product offerings and the information provided about each product because they are not constrained by physical shelf space” (Bakos – 2001). The increase in product variety offers the possibility of customisation. When this is combined with modern production techniques, using the Internet to take customised orders can prove to be a serious competitive advantage.
Customers ordering a Dell computer online are able to customise several product features such as the internal processor, memory, capacity of the hard disk and monitor, resulting in thousands of potential combinations. Dell is able to do this because the computer is manufactured after the order is placed so the company does not need to carry inventories of all the possible variations. Dell’s online information policy is another good example of the extensive use of customisation by the firm.
There are four main categories of customer – ‘all customers’, ‘registered customers, ‘contracted’ and ‘platinum customers’. Everyone who visits the website is automatically put into the first category. Some of the services available are product information, order and lead-time information, PC ordering, configuration and pricing. Successive classes have more in-depth relationships. Registered customers can say which pieces of information they want and can receive e-mail newsletters telling them about it. Contracted customers, amongst other things, receive discount pricing and order history details.
Platinum customers receive customisation of all the services and are approached to have online discussions with designers to ensure that new products reflect the needs of customers. Customisation of other products is also significantly easier on the Internet. Bakos (2001) argues that “information-rich products lend themselves to cost-effective customisation. ” It becomes possible to deliver electronic newspapers containing just information that the customer is interested in. Information technology can be used to sift out irrelevant information before the newspaper is sent to the customer at little extra cost to the firm.
Software that can do this is bought by the firm and employed for each newspaper order – the marginal cost of doing this is therefore very low. Another example of customisation can be seen in the US power utility industry which uses the Internet to buy and sell natural gas and pipeline capacity. Entergy and Florida, Power and Light group try to reduce their customer’s power consumption and can use the Internet to help them do this. “Internet technology has boosted the utilities’ ability to monitor customers’ usage (even individual appliances can be monitored) and to make suggestions on energy saving…..
The ultimate aim, via the Internet, is to get closer to customer, and to create wider market coverage” (Willcocks and Plant – 2000). Customisation therefore results in an improvement of the relationship between businesses and customers, as firms are able to answer to the customer’s needs much more closely, resulting in substantial benefits to both parties. Customers receive what they want and firms gain from satisfied customers who are likely to use their services again in the future. There is potential for brand loyalty to be built up in this way.
The Internet has also reduced the search costs for sellers by allowing them to communicate product information through a website cost effectively to potential buyers and by offering sellers new ways to reach buyers through targeted advertising and one-to-one marketing. The Internet has enabled the widespread use of profiling technology. These allow the creation and sharing of consumer profiles, the matching of consumer identities with relevant demographic information, or comparison with the known preferences of similar consumers, allowing product recommendations to be made.
The creation of profiles is more likely to occur on the Internet than in traditional ‘bricks and mortar’ businesses because of the ease of implementation of these technologies into the existing computer system. Profiles can be stored cheaply on the computer, whereas, in some traditional businesses, they would be written down and have to be stored somewhere. Also, information collection is easier – when customers are registering with the site, they can provide this information conveniently. Profiles are also more easily used by online retailers.
They are able to use databases to categorise their products and so if a customer buys a certain product, automatic recommendations can be sent via e-mail without employees having to do anything. This improves the service that the firm offers. Recommendations can also be based on demographic characteristics and ‘collaborative filtering’ systems that compare customer profiles and offer recommendations based on similarity of previous goods bought or search behaviour. Profiling results in a much more ‘personalised’ service for the customer.
Although human contact does not occur, the service offered is still much more personalised than it would be in a physical store. New technological advancements such as improvements in streaming video and greater availability of low-cost bandwidth could mean that in the near future customer service representatives will speak directly to customers through their computers with the customer’s profile in front of them. Once again, in this way, firms are able to provide goods that more closely fit the customer’s needs, enhancing the business-to-consumer relationship.
The use of profiling can provide further benefits in that customers are then likely to only use a few online retailers in order to receive a better service, as the more orders that they place, the better the profile is built and the more accurate the recommendations will be. This is an example of a switching cost. In general, switching costs on the Internet can be much lower than in traditional businesses – for example, switching suppliers may involve breaking contracts and so this is unattractive when there is a threat of legal action.
So far in this essay I have concentrated on the business-to-consumer relationship. The business-to-business relationship has also significantly been changed by the Internet. Internet technologies have made it easier for companies to coordinate with their suppliers and resulted in more out-sourcing. In the same way that consumers realise benefits from shopping online, businesses do to. They are able to build stable business relationships with their suppliers and put through their orders much faster than by mail.
Also, suppliers can predict future orders of component parts or machine parts and send out a regular shipment of them without the buyer having to specify this. E-mail has increased the ease of communication between the two parties and can be used to submit and confirm orders. The Internet has also made payment for goods relatively safe and secure. All these features make it quicker and more convenient for buyers to shop online. In some industries, the adoption of Internet as another method of conducting business has resulted in disintermediation.
In traditional supply chains, typically a number of intermediaries handle distribution between the original producer of a product and the ultimate consumer: for example, a wholesaler, a distributor and a retailer. “It has been argued that as online marketplaces lower the cost of market transactions, it will become easy to match the original producer and the ultimate buyer directly” (Bakos – 2001). Using the Internet, a supplier can reach its ultimate buyer much more cost effectively. Therefore a trend has been observed in some industries of disintermediation as supply chains are shortened.
For example, in the future, it may be that physical distribution chains of items such as newspapers and music are significantly reduced as these can be delivered over the Internet to customers. This means that retail firms will no longer need to hold inventories of CDs or magazines, and will no longer need the services of certain wholesalers or distributors. However, in other industries, reintermediation has been observed. Internet firms can be used to aggregate aspects of purchasing a good together.
For example, if a consumer were to buy a car, they would have to research on the various types on offer, find cars with product features that matched the their needs, find the best deal and buy insurance. Firms such as Auto-by-Tel are able to do all this for the consumer. This has resulted in a new level in the supply chain. “New intermediaries are emerging with expertise in running transportation and payment networks that will be especially important to retail e-commerce. For instance, FedEx and UPS have become major Internet intermediaries because of their logistics expertise and their economies of scale in distribution” (Bakos – 2001).
Firms such as the ones mentioned above will benefit from increased orders from businesses to deliver their goods because of the reputations they have for fast delivery. There is therefore scope for expansion in this field. The Internet can also be used to bring different suppliers together so that buyers do not have to search extensively. An example of this is Nets, Inc. which is an emerging market space that aggregates buyers and sellers of certain kinds of engineering products used by manufacturers. Nets brings together more than 200,000 buyers with 4500 sellers of industrial products.
In this way, suppliers are able to reach potential customers much more easily, and the need for middlemen is erased. Other market relationships exist that have also been changed by the Internet. For example, the Internet has made job searching and personnel recruitment easier for employees and employers. Jobs are cheaper to advertise on the Internet as they can be put onto a company’s website which means that people interested in working for a specific firm and in a specific position are able to see if vacancies are present very easily.
Consumer-to-consumer relationships have also been enhanced thanks to the Internet. People are able to trade and participate in auctions of goods that regular consumers are selling more easily than before. Consumers are able to reach a larger potential market for their goods. Internet technology has resulted in significant changes in some market relationships. Most affected are the business-to-consumer and business-to-business relationships. Consumers find that they are offered and receive a more personalised service in general than when shopping using traditional ways.
Supply chains have been changed with some levels disappearing and new ones appearing. The future capabilities of the Internet are interesting. If the Semantic web can be developed and implemented, it could mean further customisation and increasingly ‘electronic’ relationships between suppliers. For example, ‘software agents’ could take on many routine business chores like helping manufacturers find and negotiate with lowest-cost parts suppliers and handling help-desk questions. The Semantic web could make business on the Internet simpler still.