Creating and capturing value

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal FONDAMENTAL QUESTIONS How can companies add value to their existing business practices? How can they capture part of the created value ? They must reinvent the way they are doing business and avoid reproducing existing processes as is on Internet Requires Imagination

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Success stories ….Success stories …. Value created ….Value created ….

CASE 1: NEWSPAPER

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal APPROACH WITHOUT ADDED- VALUE Place the Daily Edition on the Web As Is

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal HOW CAN ONLINE NEWSPAPERS ADD VALUE? Continuous publishingContinuous publishing PersonalizationPersonalization MultimediaMultimedia ArchivesArchives DisaggregateDisaggregate New revenue modelNew revenue model New PartnersNew Partners B2C  B2BB2C  B2B More Complex Business Model

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal What are the benefits of going electronic Characteristics of the Internet ReachReach Flexible device and easy to useFlexible device and easy to use PersonalizationPersonalization InteractivityInteractivity Asynchronous communicationAsynchronous communication Encyclopedic NatureEncyclopedic Nature Media RichnessMedia Richness Impact of online news Worldwide 7/24Worldwide 7/24 Continuous publishingContinuous publishing Personalization of newsPersonalization of news VersioningVersioning Chat rooms/ pollingChat rooms/ polling notice of news notice of news Searchable engines of retrievable ArchivesSearchable engines of retrievable Archives Multi-MediaMulti-Media

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal The concept of the economic value A consumer is ready to pay A$ for a product.A consumer is ready to pay A$ for a product. A producer is ready to produce it at a cost of B$.A producer is ready to produce it at a cost of B$. Transaction costs are C$Transaction costs are C$ If A>B+C, there are potential gains from trade of (A-B-C)$.If A>B+C, there are potential gains from trade of (A-B-C)$. An economic system is effective if transaction costs are low and all the gain from trade are carried out.An economic system is effective if transaction costs are low and all the gain from trade are carried out.

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Creation of value For potential gains of (A-B-C)$, one can create value by:For potential gains of (A-B-C)$, one can create value by: – Reducing of the production cost, B. – Reducing of the transaction and search cost, C. – Increasing value of the good for customers, A. – Creating new products – transforming old products in new ones. – Allowing exchanges that would not have be made otherwise.

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Transformation of informational products An information goods is a product that can be reduced digital information:An information goods is a product that can be reduced digital information: – Text, video, music, software or combinations of the above. The informational technologies allow to disentangle the information and its physical support. This fundamentally changes the nature of the product.The informational technologies allow to disentangle the information and its physical support. This fundamentally changes the nature of the product. Better design of products through better information on customers’ needs.Better design of products through better information on customers’ needs.

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Increase in the value for the customers Better design of products through better information on customers’ needs.Better design of products through better information on customers’ needs. Increase the selection of products – reduction of compromise.Increase the selection of products – reduction of compromise. Matching buyers and sellers (production and needs)Matching buyers and sellers (production and needs) – Information on the available products – Increasing the visibility of one’s product – Providing information on sellers (and buyers) " Customization"" Customization" – Adaptation of product to customer

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Reduction of production costs Facilitate the coordination of production teamsFacilitate the coordination of production teams Economies of scale in the management of the inventories.Economies of scale in the management of the inventories. Moving from a push strategy to a pull strategyMoving from a push strategy to a pull strategy Reduction in the production of unwanted productsReduction in the production of unwanted products

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Reduction in the cost of transaction and distribution PersonalizationPersonalization – Presentation of information according to individuals Facilitating after-sales services.Facilitating after-sales services. – Complementary services – Online assistance Economies of scale in distributionEconomies of scale in distribution – Eliminate the cost of retailing Price comparison toolsPrice comparison tools Reducing administrative cost of purchasingReducing administrative cost of purchasing

Capturing Value The concept of market powerThe concept of market power Particularities of the Internet economyParticularities of the Internet economy

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal The difficulty of capturing value Consider a new gain from trade of (A-B-C)$Consider a new gain from trade of (A-B-C)$ Who will capture it ?Who will capture it ? – Both buyer and seller equally ? – Only the consumer ? – Only the producer ? – Note that the producer may even lose (cannibalization of existing markets)

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal What determines the producer’s share ? The market structureThe market structure – (number of competitors) – Flexibility of supply Barriers to entryBarriers to entry – (cost structure) Differentiation of productsDifferentiation of products Information on pricesInformation on prices Flexibility in the pricing strategyFlexibility in the pricing strategy

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Particularities of the Internet economy Low distribution and reproduction costs of the informational goodsLow distribution and reproduction costs of the informational goods Economies of scale in supplyEconomies of scale in supply Price comparison toolsPrice comparison tools Network effects (externality in demand)Network effects (externality in demand) Superior tools for collaborative workSuperior tools for collaborative work More open marketsMore open markets Less segmented marketsLess segmented markets

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Market power of buyers Competition among rivals Entry of new products Market power of suppliers Barriers to entry Inspired from Porter (2001) How the Internet affects competition in industries

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Market power of buyers Competition among rivals Entry of new products Market power of suppliers Barriers to entry Inspired from Porter (2001) (+) Limits the power of conventional distribution channels (-) Consumers have more information (-) Reduction in switching costs How the Internet affects competition in industries

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Market power of buyers Competition among rivals Entry of new products Market power of suppliers Barriers to entry Inspired from Porter (2001) How the Internet affects competition in industries (+) Increased efficiency of the industry, increases its size (-) Internet allows the creation of new products

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Market power of buyers Competition among rivals Entry of new products Market power of suppliers Barriers to entry Inspired from Porter (2001) How the Internet affects competition in industries (-) Technology has allowed new entrants

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Market power of buyers Competition among rivals Entry of new products Market power of suppliers Barriers to entry Inspired from Porter (2001) How the Internet affects competition in industries (±) Online procurement (-) Limits the need for intermediaries (-) Limits differentiation (access to the same products

HEC MONTRÉAL – MBA E-Commerce Jacques Robert & Jean Talbot, HEC Montréal Competition among rivals Entry of new products Market power of buyers Market power of suppliers Barriers to entry How the Internet affects competition in industries (-) reduction in differentiation (-) More information on price (-)Increase in the geographical scope of the firms (-)reduction in variable costs Inspired from Porter (2001)