Lecture 3 EC Value and Implementation

Lecture 3EC Value and Implementation Jifeng Luo Antai College of Management, SJTU jifengluo@gmail.com

Strategy Implementation • E-C Value Creation • E-C Value Realization • Change Management and Process Redesign

E-C Value Creation: Five Levers – Scheme 1 • Time (cycle time reduction) • Distance (overcome distance) • Relationships (trust and loyalty) • Interactions (chat, board, community) • Product (enhancements, new products) • Social networking demand (cry for socialization in Cyber world)

Value Creation: Time

Value Creation: Distance • Long distance learning; video-conferencing; etc

Value Creation: Relationships

Value Creation: Interactions

Value Creation:Product

Value Creation: social networking

Value Creation - Scheme 2 • The eight C’s • Content • Make vs. buy vs. package (e.g., Yahoo!, youtube.com, qidian.com) • Context • Localization and Personalization (e.g., Yahoo!, Amazon) • Community • Affinity groups (e.g., Tripod, Geocities) • Connectivity • Networks (e.g., AOL Instant Messaging, Facebook) • Commerce • Transactions in information or physical goods (e.g., Amazon) • Cost • Costs to consumers and to seller (google shopping) • Convenience • Provide ways for consumer to search/find (e.g., dianping.com, google.com)

Value Creation vs. Value Realization • Who captures the value? Buyer or the Seller? • Example: ATM case in Banking • Competitive advantage or necessity?

Buyer’s Strategies 1. Transaction cost reduction 2. Dictate price 6. Induce commoditization 3. Control Transaction 5. Cost transparency 4. One-to-one Negotiation

1. Buyer’s Transaction Costs Search Costs Information Costs Reduction of Buyer’s Transaction Costs Bargaining Costs Decision Costs Policing Costs Enforcement Costs

2. Buyer Dictates Price • Priceline.com started this tactic • Its stock price was down from the $974 • It abandoned grocery and gas businesses • But it created an idea • Shop2gether.com for small businesses • Can buyers band together like never before? • Group purchasing

3. Buyer Controls Transactions • FreeMarkets example • Select and train suppliers • Select lot size • Design bid event • Increase competitive intensity • Reverse auction has become popular!

auction auction Auction Formats Liquidation Auctions: (e.g. Priceline) Seek lowest price on widely available goods and services Seek first to maximize existing channels & reduce inventory suppliers customers disincentives to use auction shrink supply over time Market Efficiency Auctions: (e.g. eBay) Auction format is favored over the inefficiency of existing channels Seek access to unique / rare products or services suppliers customers incentives to use auction increase supply over time

4. Return to 1-1 Negotiation • Bargaining was common before the industrial era. • Mass markets led to fixed-price trades. • Cost of negotiation was deemed too high! • That may be changing, thanks to agent technology. • Automate part or all of the negotiation process?

5. Cost transparency • The Internet equips the buyer with lot more information! • Why is cost transparency bad for seller?

6. Commoditization • Commoditization occurs as a goods or services market loses differentiation, and the competition is reduced to price competition. • Customization to avoid it. But cautions: • Buyer posts product requirements on the web • Two sellers meet requirements by modifying existing products • Buyer sees no difference between vendors • Buyer wants to pick the lower cost vendor • So, customization may lead to commoditization!

Supplier’s Strategies 2. Buyer’s total costs 1. Pricing alternatives 3. Customer retention 6. Reconfigure channel 4. Lock-in strategies 5. Value Proposition

1. Pricing Alternatives • Differentiated pricing • Not uniform pricing • FordDirect.com attempted regional pricing • Dynamic Pricing • Price changes with time • Airline industry as the prime example

2. Consider Buyer’s Total Costs Transaction Cost Workflow Cost Carrying Cost Customer incurs multiple costs Product Cost Fulfillment Cost

3. Customer Retention • Increasing customer retention by 5% increases profit by more than 25% (Bain & Company)! • How can we retain customers on the Web? • What are the drivers? (e.g., on-time delivery, product performance, content, and service) • How can the Web help? • How may the Web hurt?

Retention Emphasis Acquire 3 customers: $60 Retain 20 customers: $80 Total Cost: $140 Total Customers: 23 Acquisition Emphasis Acquire 6 customers: $120 Retain 5 customers: $20 Total Cost: $140 Total Customers: 11 Customer Retention Arithmetic Cost to acquire one new customer: $20 Cost to retain one current customer: $4

4. Seller’s Lock-in Strategies • Principles: • Use extranets to create lock-in • Create custom content • Increase switching costs • Customer Benefits: • Reduce cycle time • Reduce errors • Increase control • Examples: • Dell’s Premier Page • OfficeDepot.com

5. Value Proposition • Redefine product by adding new value • Create new product combination thru • bundling and versioning • Reduce buyer’s risks

6. Reconfigure Channel • Provide on-line customer service • Supplant intermediaries • Find new customers • Generate new revenue

Channel Extending Intermediaries supplier customer customer supplier CEI supplier customer customer supplier Search for opportunities to add value: e.g. high customer search costs, switching costs, low customer satisfaction Wield new power by consolidating traditional buyers & customers. Become the first-line interface with consumers.

Business Process Process:how should employees do their work? A set of activities to produce output for customer/market - Set of inputs + Ordered activities - Cost, time, quality, customer satisfaction (internal & external) - Dynamic view of how value is created Focus:How, not just what Organizational Structure:Cross functional teams

Competitor Analysis & Market Research R & D Marketing Manufacturing NewProduct New Product Development New Product Development Examples of Cross-Functional Processes Business Proposal Commitment Configuration Credit Delivery Billing Collection Processes Business Sales Manufacturing Finance Logistics Functions Order Management

Competitive Advantages Enabled by Process Innovation • “Product innovation gives less than three months competitive advantage.” • “Process innovation gives at least 12 months competitive advantage.” • “产品创新带来的竞争优势少于三个月。” • “流程创新能至少带来十二个月的竞争优势。” • - Sir John Bond, Chairman HSBC

MRO Procurement Process

MRO Procurement Process Redesigned

Ford Purchasing (1) Purchase Order Vendor Goods (2) Purchase Order Copy (3) Receiving Document Ford Receiving (4) Invoice Accounts Payable (500) (5) Payment Before Ford’s Procurement Process After Ford Purchasing Vendor EDI Goods Ford Receiving EFT Accounts Payable (125) EFT Ford & Vendor Banks Procurement Database

Mortgage Loan Processing at BANC ONE Closing Loan Input Desk-to-Desk Approach: 17 days Laptop Closing Team Approach: 2 days Kodak’s “Concurrent Engineering” uses the same principle

Lecture 3 EC Value and Implementation