E-commerce: Digital Markets, Digital Goods

Chapter 10E-Commerce: Digital Markets, Digital Goods

Learning Objectives

1. What are the unique features of e-commerce, digital markets, and digital goods?

2. What are the principal e-commerce business and revenue models?

3. How has e-commerce transformed marketing?

4. How has e-commerce affected business-to-business transactions?

5. What is the role of m-commerce in business, and what are the most important m-commerce applications?

6. What issues must be addressed when building an e-commerce Web site?

Chapter Outline

10.1 E- Commerce and the Internet

E-Commerce TodayWhy E-commerce Is DifferentKey Concepts in E-commerce: Digital Markets and Digital Goods in a Global Marketplace

10.2 E-Commerce: Business and TechnologyTypes of E-CommerceE-Commerce Business ModelsE-Commerce Revenue ModelsSocial Networking and the Wisdom of CrowdsE-Commerce MarketingB2B E-Commerce: New Efficiencies and Relationships

10.3 The Mobile Digital Platform and Mobile E-CommerceLocation-based Services and ApplicationsOther Mobile Commerce Services

10.4 Building an E-Commerce PresencePieces of the Site-Building PuzzleBusiness Objectives, System Functionality, and Information RequirementsBuilding the Web Site: In-House Versus Outsourcing

Key Terms

The following alphabetical list identifies the key terms discussed in this chapter. The page number for each key term is provided.

Advertising revenue model, 386 Long tail marketing, 391

Affiliate revenue model, 390 Market creator, 385

Copyright © 2014 Pearson Education, Inc.10-1

Behavioral marketing, 391 Market entry costs, 378

Business-to-business (B2B), 383 Marketspace, 375

Business-to-consumer (B2C), 383 Menu costs, 380

Co-location, 407 Micropayment systems, 389

Community providers, 386 Mobile commerce (m-commerce), 383

Consumer-to-consumer (C2C), 383 Net marketplaces, 400

Cost transparency, 378 Personalization, 378

Crowdsourcing, 390 Podcasting, 385

Customization, 379 Prediction market, 391

Digital goods, 381 Price discrimination, 378

Direct goods, 400 Price transparency, 378

Disintermediation, 380 Private exchange, 400

Dynamic pricing, 380 Private industrial networks, 400

Electronic data interchange (EDI), 399 Revenue model, 386

E-tailer, 384 Richness, 378

Exchanges, 401 Sales revenue model, 388

Free/freemium revenue model, 389 Search costs, 378

Geoadvertising, 403 Social graph, 395

Geoinformation services, 403 Social shopping, 390

Geosocial services, 403 Streaming, 385

Indirect goods, 400 Subscription revenue model, 389

Information asymmetry, 379 Transaction costs, 375

Information density, 378 Transaction fee revenue model, 389

Intellectual property, 385 Wisdom of crowds, 390

Location-based services, 402

Teaching Suggestions

The opening case, “Groupon’s Business Model: Social and Local,” illustrates the evolution of e-commerce from that of simply buying goods or services online to creating social experiences shared by hundreds, thousands, or millions of people. It also shows how e-commerce is becoming more “localized” because of the vast amounts of data collected about users and because technology allows more targeted ad campaigns. Mobile e-commerce has grown by leaps and bounds the last few years. However, it’s still questionable if some of the business strategies will work in the long run.

Students are probably very familiar with most of the ideas presented in this chapter from a user’s standpoint. The task is to look behind the scenes and analyze how businesses are using technology to gain a competitive advantage and expand their operations to incorporate new channels that e-commerce provides.


Section 10.1, “E-Commerce and the Internet” This part of the text stresses the use of the Internet and the World Wide Web for electronic commerce and business. Ask your students to identify several of the many benefits that the Internet offers to organizations. Ask them to provide specific examples that they have read about in the text or have personally observed. If you have a student in your class who works for a company that participates in electronic business and electronic commerce ask him/her to explain the company’s activities.

Section 10.1 discusses the importance of e-commerce in the business world today. It discusses the benefits of using Internet technology to lower transaction and agency costs, bypass intermediaries, allow trading partners to directly communicate with each other and connect disparate systems, reduce delivery time for goods and services, make e-commerce available 24 hours a day, and replace existing distribution channels.

Table 10-3 provides a good way to compare digital markets with traditional markets. To help students understand the true impact of digital markets have them name companies or products/services for each line item in the table. For instance, information asymmetry exposes the difference in shopping for cars or insurance. A good example of delayed gratification can be found in shopping for clothes or toys. The difference in switching costs can be found with banks or stock brokers who have all your assets and/or liabilities combined into one account.

Discuss with your students how the Internet has unbundled the information about products and services from the actual products and services. Ask the students to compare how they would shop for a car today, as opposed to how they might have shopped for a car ten years ago. Use this discussion to illustrate how the unbundling of information is disrupting traditional business models. If you have the time, ask your students to visit the Carmax.com Web site and determine how these kinds of sites reduce information asymmetry.

The most striking aspect of this section is that mobile phones are predicted to become the most common Internet access device vs. traditional desktop or laptop computers. Engage students in a discussion of the implications to both businesses and consumers of this trend.

Section 10.2, “E-Commerce: Business and Technology” Students are introduced to electronic commerce categories and related terminology. Even though millions of people use the Web everyday, many companies have found ways to personalize their interfaces with individual customers. That is a remarkable feat when you think about it. Have students visit Web sites that offer such personalization and report on the products or features they find. For instance, Web portals like Yahoo! and Google let users customize the home page to fit their personal needs. Other e-commerce sites like Shutterfly (www.shutterfly.com) and Walgreen’s (www.walgreens.com) Web site specialize in customers ordering one-of-a-kind items that have been personalized just for them with their own photos. Ask students to investigate how retailers can afford to offer these kinds of services.

This section reviews business models and revenue models that have emerged on the Web in the last ten years. Table 10-5 is especially useful for exploring Internet business models and gives excellent examples to help discern the ways businesses generate revenues. The section about


social networking and the wisdom of crowds helps students understand the most popular Web 2.0 service—social networking. Rather than looking at social networking sites from a personal, user point of view, students should explore the business opportunities these kinds of Web sites provide. Students will understand behavioral targeting techniques businesses use to market their products more effectively and at lower costs. They should pay close attention to the section of business-to-business e-commerce because most of them will probably use some form of it in their careers.

Interactive Session: Organizations: Walmart, Amazon, and eBay: Who Will Dominate Internet Retailing?

Case Study Questions

1. Analyze each of these companies using the value chain and competitive forces models.

Walmart arguably wins over Amazon and eBay in the Traditional Competitor category of Porter’s Competitive Forces Model. However, Amazon could be classified as a traditional competitor in e-commerce because it’s been around the longest and has the biggest presence and name-brand in online retailing. Because Amazon and eBay can draw from thousands of partner merchants through their online auction sites and general merchandise, they can compete effectively with Walmart in the Substitute Products and Services category. All three compete head-to-head for customers but Walmart probably wins the Supplier category in Porter’s model with its legendary continuous inventory replenishment system. Amazon is doing a better job than in the past with its increased focus on faster delivery times and its same-day delivery in select cities and its Saturday delivery offer. eBay needs to improve its delivery system and time-to-customer but that may prove difficult because the company only holds so much control over its partner merchants who are often responsible for shipping.

Amazon and eBay probably have done more to extend the value chain to the value Web. Along with their strategic partners they have made it easy for suppliers to display goods and open storefronts on their sites. Because these partners can use Amazon’s own payment system it’s easy for customers to pay for goods even if the products are from different sellers. eBay owns PayPal, one of the most popular payment systems on the Web so it has a leg up on the other two. Amazon coordinates the shipment of goods to customers along with shipment tracking systems for customers. That relieves the individual merchants from bombarding customers with different shipment messages and processes. On the other hand, Walmart doesn’t have to go to great lengths to build the kind of systems that Amazon has because all products come from a single supply chain.

2. Compare the three companies’ e-commerce business models. Which is strongest? Explain your answer.

Amazon primarily uses an e-tailer business model. Walmart combines the traditional bricks-and-mortar model with an e-tailer model. eBay primarily uses the Market Creator business model although it is moving more toward the e-tailer business model with its fixed-prices feature. However, Amazon adds to its mix a Market Creator business model that provides a


digital environment in which buyers and sellers can meet, display products, search for products, and establish prices. By partnering with other businesses and acting as a middleman for other sellers, Amazon and eBay can offer a wider variety of products/services than Walmart. That gives both of them a slight lead in e-commerce. Amazon also uses a Service Provider business model with its cloud computing service. Walmart has some presence in this category by offering photo sharing services and in-store pickup of photo prints.

Determining which is the strongest model may actually lie in the eye of the beholder. Some customers absolutely swear by one over the others based on their personal preferences, past experiences, and expectations. The important thing to remember is that all three of these online giants are continually refining their business model to maintain a healthy lead over competitors and new market entrants.

3. Which company is likely to have the strongest retail e-commerce growth in the future? Why?

All three companies are considered huge success stories in the history of online e-commerce. And all of them have had their rough spots, only to come through stronger and better.

However, when people think of online shopping, Amazon and eBay are the companies that come to mind, not Walmart. But Walmart provides more convenience for customers who return purchases by allowing them to take items to the brick-and-mortar stores. Neither Amazon nor eBay can offer that option.

On the other hand, when it comes to selection and wide array of product offerings, Walmart can’t match the other two. With eBay’s acquisition of GSI Commerce, it can expand its product lines to match or beat the other two. Amazon is spending much of its cash building more fulfillment centers, expanding its technology offerings, and building data centers. Walmart sees highly competitive price cuts as a way to gain market share quickly as it enters the online marketplace.

Interactive Session: People: Social Commerce Creates New Customer Relationships


1. Assess the management, organization, and technology issues for using social media to engage with customers.

Management: Levi’s creating a “Levi’s Guy” to help build interest in the company’s brand. Personalizing the company was a huge success. The company also created a personalized Friends Store where shoppers can see what their friends “Liked” and bought.

Organization: Best Buy uses a dedicated team of Twitter responders to answer user questions and respond to complaints. The company then mines the data through text mining and converts the data to useful information about the company’s products. The company uses


the information to gauge the success of promotions, which products are hot and which are duds, and the impact of advertising campaigns.

Technology: The online ad for the Mrs. Meyers cleaning brand used a different kind of technology in which viewers placed their cursor over the ad, exposing an area that display Facebook wall posts, Twitter postings, or a company video, all without leaving the Web page being visited. Consumers were also more likely to click on a “learn more” button to go to Mrs. Meyers’ own Web site, with 35 of every 1,000 users clicking through, compared with an average of just one in 1,000 for traditional online ads. Those kinds of technical tricks differentiate a company from its competitors.

2. What are the advantages and disadvantages of using social media for advertising, brand building, market research, and customer service?

Advantages:

Advertising: Twitter has developed new offerings for advertisers like Promoted Tweets and Promoted Trends. These features give advertisers the ability to have their tweets displayed more prominently when Twitter users search for certain keywords.

Brand building: The Levi’s Facebook page has 500,000 “Like” messages posted by friends sharing their favorite jeans.

Market research: Wrigleyville Sports has been building a Facebook following for over three years. It also uses email campaigns and Twitter postings to announce promotions. It tracks purchases related to its promotions and is able to tell which promotions yield the most profitable new customers.

Customer service: Best Buy’s Twitter responders, called the “Twelp Force,” answer user questions and respond to complaints. That keeps customers satisfied and away from posting negative tweets on their own.

Disadvantages:

Starbucks’s social media contest backfired on the company when people posted negative pictures of protesters holding signs criticizing its labor practices.

3. Give some examples of management decisions that were facilitated by using social media to interact with customers.

Wrigleyville knows which customers respond to its promotions, how much they spent, and what they purchased. It can measure conversion rates, the value of keyword buys, and the ultimate return on advertising campaigns. It knows exactly where and how to spend its advertising dollars most effectively.

Best Buy uses its central analytical platform to analyze unstructured data and make decisions about which products to promote, which are duds, and how effective its advertising campaigns are. JCD Repair encourages customers to post reviews of its service on Facebook,


Yelp, and Google+. That helps the small company know what it’s doing right and when it makes a mistake that it can quickly rectify.

4. Should all companies use Facebook and Twitter for customer service and advertising? Why or why not? What kinds of companies are best suited to use these platforms?

Before a company jumps into using Facebook and Twitter it needs to make sure the “back room” mechanics are in place to process customer service requests. Best Buy did it right by using a dedicated tame of Twitter responders. If the company’s employees are not available for the unanticipated response volume, the plan could backfire.

The same goes for advertising volume. Wrigleyville effectively uses Facebook and Twitter for product promotions and contests that draw customers in and makes the company’s offerings more interactive with customers.

Companies who interface directly with consumers are probably more suited to using Facebook and Twitter promotions. But, as Starbucks discovered, the promotions must be well-thought out.

Section 10.3, “The Mobile Digital Platform and Mobile E-Commerce” M-commerce consists of selling anything over a mobile wireless device or Net appliance. It is also a method used by marketers to target advertising more directly to consumers. Wireless mobile devices are turning up everywhere. The newer appliances integrate a number of features traditionally only found in specialized products. For example, cell phones are equipped with cameras, Internet options, text messaging, games, downloadable ring tones, etc. No doubt most students have used one or all of these m-commerce products or services.

M-commerce is the fastest growing form of e-commerce with six main areas of growth: location-based services, software application sales, entertainment downloads, mobile display advertising, direct shopping services, and e-book sales. It might be interesting to take a vote of your students to see which one they think is the most popular service now and which one they think will be most popular two years from now.

Section 10.4, “Building an E-Commerce Presence” This may be the first time students are exposed to the mechanics of designing and building an e-commerce Web site. No doubt they all have used e-commerce Web sites before but probably have never thought about the challenges facing business managers who are responsible for building a successful online business. While this section doesn’t offer a step-by-step guide to building a Web site, it does outline some of the organizational and technological decisions that need to be made before the site goes live. Successful e-commerce sites take into account business objectives and use the right technology to meet them. Table 10-7 is an excellent list of issues students will face if they are part of building an e-commerce site in the future. Figure 10-10 provides alternatives to consider about building and hosting an e-commerce site in-house or outsourcing part or all of the operation.


If you have time, divide students into teams and have them work through the decisions associated with developing business objectives for an e-commerce site and then choosing the right technology to meet the objectives. They don’t need to actually build the site—just complete all the preliminary work that must be done ahead of time.

Review Questions

1. What are the unique features of e-commerce, digital markets, and digital goods?

Name and describe four business trends and three technology trends shaping e-commerce today.

Students can answer this question by including information outlined in Table 10-1, which lists several business and technology trends shaping e-commerce today.

List and describe the eight unique features of e-commerce.

Table 10-2 outlines eight unique features of e-commerce which include: E-commerce technology is ubiquitous, meaning that it is available just about

everywhere a computer can connect to the Internet. It has global reach, permitting commercial transactions to cross cultural and national

boundaries far more conveniently and cost effectively than is true in traditional commerce.

It operates according to universal standards shared by all nations around the world, whereas most traditional commerce technologies differ from one nation to the next.

It provides information richness, enabling an online merchant to deliver to an audience of millions complex and rich marketing messages with text, video, and audio in a way not possible with traditional commerce technologies, such as radio, television, or magazines.

It is interactive, meaning it allows for two-way communication between merchant and consumer and enables the merchant to engage a consumer in ways similar to a face-to-face experience but on a much more massive, global scale.

It increases information density (the total amount and quality of information available to all market participants).

It permits personalization and customization—merchants can target their marketing messages to specific individuals by adjusting the message to a person’s name, interests, and past purchases.

Social technology enables user content creation and distribution and supports social networks.

Define a digital market and digital goods and describe their distinguishing features.

Digital markets are said to be more “transparent” than traditional markets. Table 10-3 describes distinguishing features of digital markets. The Internet has created a digital marketplace where millions of people are able to exchange massive amounts of information


directly, instantly, and for free. Information asymmetry is reduced. Digital markets are very flexible and efficient, with reduced search and transaction costs, lower menu prices, and the ability to change prices dynamically based on market conditions. Digital markets provide many opportunities to sell directly to the consumer, bypassing intermediaries, such as distributors or retail outlets. Other features include delayed gratification, price discrimination, market segmentation, switching costs, and network effects.

Digital goods are goods that can be delivered over a digital network and include music, video, software, newspapers, magazines, and books. Once a digital product has been produced, the cost of delivering that product digitally is extremely low. New business models based on delivering digital goods are challenging bookstores, publishers, music labels, and film studios that depend on delivery of traditional goods.

2. What are the principal e-commerce business and revenue models?

Name and describe the principal e-commerce business models.

Table 10-5 identifies seven Internet business models. E-tailer: Sells physical products directly to consumers or individual businesses. Transaction broker: Saves users money and time by processing online sale

transactions and generates a fee each time. Market creator: Provides a digital environment where buyers and sellers meet,

search for and display products, and establishes prices for those products; it can provide online auctions and reverse auctions.

Content provider: Creates revenue by providing digital content, such as digital news, music, photos, or video over the Web.

Community provider: Provides an online meeting place where people with similar interests can communicate and find useful information.

Portal: Provides an initial point of entry to the Web along with specialized content and other services.

Service provider: Provides Web 2.0 applications such as photo sharing, video sharing, and user-generated content as services. Provides other services such as online data storage and backup.

Name and describe the e-commerce revenue models.

There are six e-commerce revenue models: Advertising revenue: Generates revenue by attracting a large audience of visitors

who can then be exposed to advertisements. It’s the most widely used revenue model in e-commerce.

Sales revenue: Companies derive revenue by selling goods, information, or services to customers.

Subscription revenue: A Web site offering content or services charges a subscription fee for access to some or all of its offerings on an ongoing basis.

Free/freemium revenue: Basic services or content are free while advanced or special features cost extra.


Transaction fee revenue: A company receives a fee for enabling or executing a transaction.

Affiliate revenue: Sites that steer customers to an affiliate business receive a referral fee or percentage of the revenue from any resulting sales.

3. How has e-commerce transformed marketing?

Explain how social networking and the “wisdom of crowds” help companies improve their marketing.

Networking sites sell banner, video, and text ads; sell user preference information to marketers; and sell products such as music, videos, and e-books. Corporations set up their own social networking profiles to interact with potential customers and “listen” to what social networkers are saying about their products, and obtain valuable feedback from consumers. At user-generated content sites, high-quality video content is used to display advertising. Online communities are ideal venues to employ viral marketing techniques.

Creating sites where thousands, even millions, of people can interact offers business firms new ways to market and advertise products and services, and to discover who likes or dislikes their products. In a phenomenon called “the wisdom of crowds” some argue that large numbers of people can make better decisions about a wide range of topics or products than a single person or even a small committee of experts. In marketing, the wisdom of crowds concept suggests that firms should consult with thousands of their customers first as a way of establishing a relationship with them, and second, to better understand how their products and services are used and appreciated. Actively soliciting customer comments builds trust and sends the message to customers that the company cares what they are thinking and that customer advice is valuable.

Define behavioral targeting and explain how it works at individual Web sites and on advertising networks.

Behavioral targeting refers to tracking the click-streams of individuals for the purpose of understanding their interests and intentions, and exposing them to advertisements which are uniquely suited to their behavior. Ultimately, this more precise understanding of the customer leads to more efficient marketing and larger sales and revenues. Behavioral targeting of millions of Web users also leads to the invasion of personal privacy without user consent.

Behavioral targeting takes place at two levels: at individual Web sites and on various advertising networks that track users across thousands of Web sites. Most e-commerce Web sites collect data on visitor browser activity and store it in a database. They have tools to record the site that users visited prior to coming to the Web site, where these users go when they leave that site, the type of operating system they use, browser information, and even some location data. They also record the specific pages visited on the particular site, the time spent on each page of the site, the types of pages visited, and what the visitors purchased. Firms analyze this information about customer interests and behavior to develop precise profiles of existing and potential customers.


Define the social graph and explain how it is used in e-commerce marketing.

A social graph is a depiction of all the people you know and all the people they know. A digital social graph is a mapping of all significant online social relationships. It’s synonymous with the idea of a “social network” used to describe offline relationships. The small world theory believes any person is only six links away from any other person on earth.

The products and services you buy will influence the decisions of your friends, and their decisions will in turn influence you. It’s the “word of mouth is the best advertising” theory in digital format. Marketers’ target audience is not the one isolated individual but millions of connected people all talking to each other and swapping information. Marketers will spend over $3 billion on social network marketing in 2012. That’s twice the amount of money spent in 2010 and about nine percent of all online marketing.

Table 10-7 has four features of social commerce that include: social sign-on, collaborative shopping, network notification; and social search recommendations.

4. How has e-commerce affected business-to-business transactions?

Explain how Internet technology supports business-to-business electronic commerce.

Business-to-business transactions can occur via a company Web site, net marketplace, or private exchange. Web sites make it easy to sell and buy direct and indirect goods over the Internet, compare suppliers, products, and prices, and even find out how others feel about the product. Further, supply chain linkages through intranets and extranets can support JIT, reduce cycle times, and other practices of continuous improvement. Because of the ease and efficiencies brought by the Internet, business-to-business participants can save a significant amount of money and time.

Define and describe Net marketplaces and explain how they differ from private industrial networks (private exchanges).

A net marketplace is a single digital marketplace based on Internet technology linking many buyers to many sellers. The net marketplace is an important business model for B2B e-commerce because some net marketplaces serve vertical markets for specific industries and other net marketplaces serve horizontal markets, selling goods that are available in many different industries. Also, net marketplaces can sell either direct goods or indirect goods. Net marketplaces are more transaction-oriented and less relationship-oriented than private industrial networks.

5. What is the role of m-commerce in business, and what are the most important m-commerce applications?

List and describe important types of m-commerce services and applications.


The most popular categories of m-commerce services and applications for mobile computing include:

Location-based services: Users are able to locate restaurants, gasoline stations, local entertainment, or call a cab.

Banking and financial services: Users can manage their bank accounts, checking account balances, transfer funds, and pay bills using their cell phones.

Wireless advertising: Cell phones provide another avenue for advertisers to reach potential customers. Cell phone service providers can sell advertising on phones.

Games and entertainment: Users can download video clips, news clips, weather reports, live TV programs, and short films designed to play on mobile phones.

Personalized services: Services that anticipate what a customer wants based on that person’s location or data profile, such as updated airline flight information or beaming coupons for nearby restaurants.

6. What issues must be addressed when building an e-commerce Web site?

List and describe each of the factors that go into the building of an e-commerce Web site.

Remain aware of the main areas that require decisions. Form a team of individuals who possess the skill sets needed to make key

decisions about technology, site design, and the social and information policies that will be applied at the site.

Managers must make decisions about hardware, software, and telecommunications infrastructure.

Customer demands should drive technology choices. The technology should enable customers to find what they want easily, view the

product, purchase it, and then receive it quickly from warehouses. The site design must be carefully considered. A project plan should then be developed.

List and describe four business objectives, four system functionalities, and four information requirements of a typical e-commerce Web site.

Table 10-8 lists nine business objectives with accompanying system functionalities and information requirements necessary for each. Four of the most common are:

Display goods (objective) using a digital catalog (system functionality) for dynamic text and graphics catalog (information requirements).

Provide product information (objective) using a product database (system functionality) to provide a product description, stocking numbers, and inventory levels (information requirements).

Execute a transaction payment (objective) using a shopping cart/payment system (system functionality) to provide secure credit card clearing (information requirements).


Understand marketing effectiveness (objective) using a site tracking and reporting system (system functionality) to provide the number of unique visitors, pages visited, products purchased, and identified by the marketing campaign (information requirements).

List and describe each of the options for building and hosting e-commerce Web sites.

Figure 10-10 depicts the alternatives to consider when building and hosting an e-commerce site. They include:

Completely hosting and building the site in-house. Completely outsourcing the hosting and building functions. Hosting the site in-house and outsourcing the building function. Building the site in-house and outsourcing the hosting function.

Discussion Questions

1.How does the Internet change consumer and supplier relationships?

One clear change is that consumers can research products and services online and then make their purchases either on the Internet or in physical stores. As the Internet increases the richness and range of information that is available, it shrinks information asymmetry.

The Internet is responsible for creating new business models and promoting customer-centered retailing, direct sales over the Web, interactive marketing and personalization, m-commerce, and customer self-service.

In today’s competitive environment, suppliers must increasingly offer consumers and businesses a variety of products and services offering mass customization and personalization without increased delivery times. However, delivery performance depends on many different factors, such as finished parts inventory levels and work-in-progress. Suppliers can track these factors inexpensively through the use of information systems.

The Internet changes information density available to consumers. Price transparency and cost transparency disrupt the typical relationship between suppliers and customers, giving customers more power to control prices. On the other hand, the Internet gives suppliers more price discrimination over customers. Suppliers and customers can deal with each other directly over the Internet and cause disintermediation for the traditional middleman.

2.The Internet may not make corporations obsolete, but the corporations will have to

change their business models. Do you agree? Why or why not?

Most students will probably agree, but whichever way they go, they must support their case. If you have students on both sides of the issue, lead a discussion that challenges the position of both sides.


The Internet is certainly driving tremendous changes, and it is important to note that these changes are self-perpetuating and happening much faster than ever before. There are seven megatrends where the Internet’s impact is changing how businesses operate. These trends are found in every industry and every country around the world.

The megatrends include:

New channels are revolutionizing sales and brand management. The balance of power may be shifting to the customer. Competition is intensifying across all dimensions. The pace of business is fundamentally accelerating. Companies are transforming into extended enterprises. Companies are re-evaluating how they, their partners, and their competitors add

value. Knowledge is becoming more of a key strategic asset.

Instead of inwardly-focused companies “sticking to their knitting,” we will see extended enterprises; instead of companies with circumscribed relationships with their suppliers and customers, we will see a myriad of electronic relationships and shared processes; instead of a hierarchical chain of command, we will see virtual teams, empowered to make decisions on behalf of the company. Without the Internet, none of this would be possible.

3. How have social technologies changed e-commerce?

The sheer numbers of people using social networking, over 120 million users every day in the United States, changes e-commerce business models and strategies. The networking sites sell banner, video, and text ads; sell user preference information to marketers; and sell products such as music, videos, and e-books. Corporations have begun establishing a prominent presence on social networking sites to market or sell products/services, gain insight into customer preferences, or engage customers in new ways not available through any other conduit. User-generated content sites provide new ways for companies to produce videos that advertise and promote their products. Social networks create a new “front door” for customers to reach businesses and either learn about or purchase products/services. Online viral marketing provides new ways for people to obtain information— both positive and negative— about products/services.

The wisdom of crowds and crowdsourcing was not possible prior to the rise of social technologies. Now businesses can use both to interact with customers to discover who likes or hates their products, and to advertise and market products/services. By actively soliciting comments from customers, businesses can build trust and send the message that it cares what its customers think. Crowdsourcing allows customers to “help” companies solve problems or generate new ideas

Hands-On MIS Projects

Management Decision Problems


1. Columbiana: A small, independent Caribbean island that wants to develop its tourist industry and attract more visitors. How can a Web presence help? What Internet business model would be appropriate? What functions should the Web site perform?

A Web site has the potential to introduce thousands and millions of people to a little known resort destination at a significantly lower cost than other forms of marketing. The Web site can highlight the island’s accommodations and show off its attractions. Web-cams could be established around the island to give potential tourists and visitors insight into the island’s main attractions. A Web site makes it easier for potential visitors to contact hotels and book accommodations. The Web site can connect with airlines and provide information about flights with the ability to purchase airline tickets on partnering Web sites. Potential business models, depending on the features available on the site, include information broker, transaction broker, and even a social network where people with similar interests in these kinds of destinations can meet and discuss.

2. Company-sponsored blog: Visit Blue Nile, J.Crew, Lowe’s, and Priceline. Determine which of these Web sites would benefit most from adding a company-sponsored blog to the Web site. List the business benefits of the blog. Specify the intended audience for the blog. Specify the intended audience for the blog. Decide who in the company should author the blog, and select some topics for the blog.

Blue Nile: This company would probably benefit from a blog that would discuss different kinds of diamond products and other jewelry. The blog written by one of the company’s diamond experts could help educate customers on what to look for, how to evaluate products, and what some of the latest products are.

J.Crew: The Web site appears to market apparel to 20- and 30year old men and women who reside primarily in major metropolitan areas. A blog, dedicated to the social scene in various cities, written by employees or marketing managers, could address the best places to eat, meet other people, or attend nightclubs.

Lowe’s: The site has a separate section titled “Lowe’s for Pros” that includes a business replenishment program, calculators to develop bid specifications, leverage worksheets to help contractors develop bids, and a special Pro Help desk. A blog in this specialized area would help contractors get answers, find products, or become aware of specialty products.

Priceline.com: A blog written by a travel expert would review vacation destinations and provide travelers and tourists with tips and tricks of traveling to different locations. The site would sell more tickets to those destinations and increase profits for the site.

Improving Decision Making; Using Spreadsheet Software to Analyze a Dot-Com Business

Software skills: Spreadsheet downloading, formatting, and formulasBusiness skills: Financial statement analysis

Answers will vary, depending on the company they select and the time period over which it is analyzed. The files provided here are merely for purposes of illustration and the income


statement and balance sheet have been simplified. If students lack prior knowledge of financial statements, the instructor may have to devote extra time to explaining income statements, balance sheets and financial ratios. Alternatively, students can find material on understanding financial statements on financial Web sites such as Ameritrade (www.ameritrade.com) or the Small Business Knowledge Base (www.bizmove.com/finance/m3b2.htm).

The suggested answer files are ch10_solutionfiles.ppt and ch10_solutionfiles.xls.

Achieving Operational Excellence: Evaluating E-Commerce Hosting Services

Software skills: Web browser softwareBusiness skills: Evaluating e-commerce hosting services

You would like to set up a Web site to sell towels, linens, pottery, and tableware from Portugal and are examining services for hosting small business Internet storefronts. Your Web site should be able to take secure credit card payments and to calculate shipping costs and taxes. Initially you would like to display photos and descriptions of 40 different products. Visit Yahoo! Small Business, GoDaddy, and Comcast and compare the range of e-commerce hosting services they offer to small businesses, their capabilities and costs. Also examine the tools they provide for creating an e-commerce site. Compare these services and decide which you would use if you were actually establishing a Web store. Write a brief report indicating your choice and explaining the strengths and weaknesses of both.

YAHOO! Small Business Merchant SolutionsStarter Standard Professional

$39.95/month1.5% transaction fee$50.00 setup fee

$99.95/month1.0% transaction fee$50.00 setup fee

$299.95/month.75% transaction fee$50.00 setup fee

GoDaddy.comEconomy Plan Deluxe Plan Unlimited Plan

3 month:$4.99/month 1 month:$6.99/month 1 month:$14.99/month12 month: $4.74/ month SAVE 5%‡

12 month: $6.64/ month SAVE 5%‡








Comcast.com

Starter Business Commerce ProfessionalNo extra charge $19.95 $39.95 $79.95


http://www.ameritrade.com/

In addition to writing a report explaining the strengths and weaknesses, ask them to apply the concepts of this chapter to their reports or at least to discuss them. Some of the topics should be electronic payment systems, dynamic pricing, banner and pop-up ads, and the Internet business models.

Video Cases

You will find video cases illustrating some of the concepts in this chapter on the Laudon Web site at www.pearsonhighered.com/laudon along with questions to help you analyze the cases.

Collaboration and Teamwork: Performing a Competitive Analysis of E-Commerce Sites

Form a group with three or four of your classmates. Select two businesses that are competitors in the same industry and that use their Web sites for electronic commerce. Visit these Web sites. You might compare, for example, the Web sites for iTunes and Napster, Amazon and BarnesandNoble.com, or E*Trade and Scottrade. Prepare an evaluation of each business’s Web site in terms of its functions, user friendliness, and ability to support the company’s business strategy. Which Web site does a better job? Why? Can you make some recommendations to improve these Web sites? If possible, use Google Sites to post links to Web pages, team communication announcements, and work assignments; to brainstorm; and to work collaboratively on project documents. Try to use Google Docs to develop a presentation of your findings for the class.

Answers for this project will vary as students will select different businesses from which to complete the comparison. The simplest method would be to go directly to each of the company’s main Web page as listed in the question.

In their analysis, students could set up a spreadsheet table to evaluate each of the two businesses they are making their comparisons against. They should include fields for functions, user friendliness, and ability. By using a simple weighted factor scale and assigning weights to each feature in order of their perceived importance they will arrive at a score that they can use to determine which Web site they feel does a better job.

The main Web pages for the companies listed in the question are:

www.apple.com/ituneswww.napster.comwww.amazon.combarnesandnoble.com/http://etrade.comhttp://scottrade.com/

Here are some criteria for evaluating the Web sites:


http://scottrade.com/

http://etrade.com/

http://barnesandnoble.com/

http://www.amazon.com/

http://www.napster.com/

http://www.apple.com/itunes

Richness—does the site include video, audio, and text message integrated into a single marketing message and consumer experience?

Interactivity—does the site engage the user in a dialog that dynamically adjusts the experience to the individual?

Information density— is the information on the site current, accurate, and timely? Personalization/customization— are the products and services based on individual

characteristics? Social technology—does the site enable user content creation and distribution and

support social networks?

Case Study: To Pay or Not to Pay: Zagat’s Dilemma


1. Evaluate Zagat using the competitive forces and value chain models.

Zagat was the victim of two competitive forces, new market entrants and substitute products and services, when Yelp, Groupon, Google Places, and other similar services offering free content surpassed Zagat’s online content that stood behind a pay wall. Food blogs and similar sites abound on the Web but Zagat was in a unique position to get there first and establish itself as a market leader. It failed to do so.

Zagat’s primary activities remained mostly offline with its printed restaurant guide book. Even though Zagat was one of the first companies to popularize user-generated content, it botched its well-established strategic advantage when it chose to establish a pay wall for its online content. Most people using the Web are used to getting free access and aren't yet willing to pay for content no matter how popular it is.

2. Compare Zagat’s and Yelp’s e-commerce business models. How have those models affected each company's Web strategy?

For much of 2011, Zagat trailed Yelp and other free review sites in the battle for eyeballs. Yelp drew much greater traffic than Zagat.com. From January to April 2012, Zagat.com only had 310,000 while Yelp had 31 million. The Zagat Web site claims it has more users, but the disparity is still significant.

A quick visit to the two sites highlights some of the differences. Zagat.com’s home page is streamlined, with a minimal number of search boxes and links immediately available. Yelp’s front page is much busier and less streamlined than Zagat’s, but has a great deal more content available immediately. The front page has lists of the most popular restaurants, retail outlets, bars and clubs, and many other categories, all free to the user.

The main focus of Zagat's Web site is restaurant reviews organized by major “hub” cities. Its primary income stream is from customers paying for extra content associated with the reviews. Yelp focuses on more than just restaurants, including retail outlets, bars and clubs,


and other categories in major cities and smaller cities and towns. Its primary income stream comes from advertisers.

Many analysts believe that there is much more potential for growth with Yelp’s business model than with Zagat’s, because it is a useful advertising vehicle for small businesses everywhere, not just major cities. Zagat may also have hurt itself with its slow response to the emergence of the mobile digital platform.

3. Why was Zagat’s content well suited for the Web and for the mobile digital platform?

Zagat’s content is appealing to people on the move. When visiting major cities, people may not know the best places to eat, the kinds of food served in particular restaurants, or the hours of operations. Zagat’s mobile app features access to Zagat premium ratings and reviews and the ability to find nearby restaurants using geolocation. The latest version, released in early 2011, includes a full visual overhaul to increase ease of use and integration with Foodspotting and Foursquare and to provide photos of dishes and meal tips based on diners with tastes similar to the user’s own. These changes are intended to make the application more social. Another compelling feature of Zagat’s app is the ability to download its guides directly to phones. That way, users can access the information even if the Internet is unavailable or if they are outside the United States.

4. Do you think Zagat’s decision to use a pay wall for its Web site was a mistake? Why or why not?

In all likelihood, the decision to use a pay wall severely harmed Zagat’s position as the premier food and restaurant guide and gave its competitors an easy opportunity to infringe on its territory. People are used to getting free content and tend to bypass pay-for-view sites in favor of those providing content for free - even if it may be inferior.

Perhaps realizing this, in February 2011, Zagat Survey re-launched its Web site featuring more free content in response to the rising popularity of Yelp and similar sites. The site features revamped search tools that allow users to find restaurants in particular neighborhoods or near prominent landmarks. Members receive more recognition for being active and respected reviewers, including their own quotes in Zagat’s previously anonymous reviews. Users can now “like” reviews similarly to Facebook, and they can also upload their own photos to the site. Full access to the site, however, still costs $24.95 per year.

5. Will Zagat’s acquisition by Google make it more competitive? Explain your answer.

Google purchased Zagat.com in September, 2011. The acquisition strengthens Google’s position in mobile and local search, helping it to compete against Yelp for high-volume searches for restaurants and hotels. It also means that Google will own some of the media content it serves up for searches, and the content will be of higher quality than in the past.

So far, the pairing of Google and Zagat has been successful. Google hopes that incorporating Zagat’s user-generated content model into Google+ will help its fledgling social network to


better compete with Facebook by providing uniquely valuable services to its users. From Zagat’s perspective, the Google acquisition represents another phase in a long e-commerce journey, and illustrates the difficulty of developing just the right business model.
