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2004:102 CIV MASTER’S THESIS Affects of the Internet on Customer Value and Competition in Business-to-Business Markets

2004:102 CIV

MASTER’S THESIS

Affects of the Internet on Customer Value and Competition in Business-to-Business Markets

MIKAEL HEDLUND

MASTER OF SCIENCE PROGRAMME

Department of Business Administration and Social Science Division of Industrial Marketing and e-Commerce

2004:102 CIV • ISSN: 1402 - 1617 • ISRN: LTU - EX - - 04/102 - - SE

Abstract
Abstract
Abstract

Abstract

Abstract

The Internet is a new and important technology for companies. They have to learn and adapt to the new ways of doing business if they want to stay competitive in the future. Therefore was the purpose of this master thesis to gain knowledge about how the Internet has affected the industry competition within a business-to-business market with regards to buyers’ value, power of buyers, and threat of new entrants. This research explore, describe and starts to explain how the Internet has affected an old industry and how the Internet can strengthen a firms position within the market. This thesis has completed a qualitative case study, mainly based on interviews. The case for this research was the stated research problem. How has the Internet affected the competitiveness and the industry competition within a business-to- business market? The interviews were conducted within a manufacturing firm and with three distributors. Findings from this thesis showed that the Internet has improved the distribution chain, given actors on a market access to more information, expanded the market place, and tied companies within a distribution chain closer to each other.

Table of Content
Table of Content

Table of Content

  • 1 INTRODUCTION

1

  • 1.1 BACKGROUND

2

 
  • 1.1.1 Competitiveness

2

  • 1.1.1.1 Competitive Advantage

3

 
  • 1.1.1.2 Customer Value

3

  • 1.1.1.3 Competitiveness Connection to Competitive Advantage and Customer Value

.............................

4

  • 1.1.2 Internet and Competitiveness

5

  • 1.1.2.1 Different Business Models for the Internet

.....................................................................................

5

  • 1.1.2.2 Internet Impact on Firms

6

  • 1.2 PILOT STUDY

....................................................................................................................................................

7

  • 1.3 RESEARCH PROBLEM ........................................................................................................................................

7

  • 1.4 DISPOSITION OF THE THESIS .............................................................................................................................

9

  • 2 LITERATURE REVIEW

...................................................................................................................................

10

  • 2.1 THE INTERNET

10

  • 2.1.1 Computer Networking and Internet History

10

  • 2.1.2 The World Wide Web

.............................................................................................................................

11

  • 2.2 INDUSTRY COMPETITION

12

  • 2.2.1 Threat of New Entrants

..........................................................................................................................

13

  • 2.2.2 Pressure from Substitute Products

........................................................................................................

14

  • 2.2.3 Intensity of Rivalry among Existing Competitors

15

  • 2.2.4 Bargaining Power of Buyers

15

  • 2.2.5 Bargaining Power of Suppliers

.............................................................................................................

16

  • 2.2.6 Industry Competition and the Internet

18

  • 2.3 CUSTOMER VALUE

19

  • 2.3.1 Customer value and the Internet

20

  • 2.3.2 Value Focused Thinking

21

  • 2.3.3 Value Focused Thinking and the Internet

23

  • 2.4 BUSINESS MODELS FOR THE INTERNET

23

  • 2.4.1 Changing Internet Focus

.......................................................................................................................

25

  • 2.4.2 The Strategic Internet Application Model (SIAM)

................................................................................

26

Customisation

  • 2.4.2.1 ................................................................................................................................

27

  • 2.4.2.2 .........................................................................................................................

Current Customers

27

  • 2.4.2.3 ..............................................................................................................................

New Customers

27

  • 2.4.2.4 Network Repositioning

..................................................................................................................

28

  • 2.4.3 The Customer Interaction Cycle (CIC) model

28

Purchase

  • 2.4.3.1 .........................................................................................................................................

29

Order

  • 2.4.3.2 ..............................................................................................................................................

29

Exchange

  • 2.4.3.3 ........................................................................................................................................

29

  • 2.4.2.4 Use (After sales services)

30

Relationship

  • 2.4.2.5 ...................................................................................................................................

30

  • 2.4.3 Accessibility Design Offer Fulfilment (ADOF) model

..........................................................................

31

Accessibility

  • 2.4.3.1 ...................................................................................................................................

31

Design

  • 2.4.3.2 ............................................................................................................................................

32

Offer

  • 2.4.3.3 ...............................................................................................................................................

32

  • 2.4.3.4 Fulfilment

.......................................................................................................................................

33

  • 3 FRAME OF REFERENCE

................................................................................................................................

34

  • 3.1 RESEARCH PROBLEM

34

  • 3.2 RESEARCH QUESTIONS (RQ)

..........................................................................................................................

34

  • 3.2.1 The First Research Question

.................................................................................................................

35

  • 3.2.2 The Second Research Question

35

  • 3.2.3 The Third Research Question ................................................................................................................

36

  • 3.2.4 Summary of Research Questions

...........................................................................................................

37

  • 3.3 EMERGED FRAME OF REFERENCE

38

  • 4 METHODOLOGY

..............................................................................................................................................

39

  • 4.1 PURPOSE OF RESEARCH

39

  • 4.1.1 Thesis Research Purpose

.......................................................................................................................

39

 
Table of Content
Table of Content

Table of Content

4.2

RESEARCH APPROACH

40

4.2.1

Deductive or Inductive Reasoning

........................................................................................................

40

4.2.2

Qualitative or Quantitative Research

40

4.2.3

Thesis Research Approach

40

4.3

RESEARCH STRATEGY

41

4.3.1

Thesis Research Strategy

.......................................................................................................................

41

4.4

SAMPLE

SELECTION

42

4.4.1

AB Volvo Penta

......................................................................................................................................

42

4.5.1

Thesis Data Collection Method

.............................................................................................................

44

4.5.2

Sample Selection of Respondents

..........................................................................................................

45

4.5.3

Thesis Sample Selection of Respondents

...............................................................................................

45

4.6

ANALYSIS OF DATA

46

4.6.1

Thesis Data Analysis

47

4.7

QUALITY STANDARDS

47

4.7.1

Thesis Quality Standards

.......................................................................................................................

48

4.8

VISUALISATION OF METHODOLOGY ...............................................................................................................

49

  • 5 EMPIRICAL DATA PRESENTATION

 

50

5.1

WIST LAST OCH BUSS AB

50

5.1.1

How the Internet can Increase the Buyer’s Value

50

5.1.2

How the Internet can affect the Power of Buyers

.................................................................................

51

5.1.3

How the Internet can affect the Threat of New Entrants

52

5.2

AB DREVIA

52

5.2.1

How the Internet can Increase the Buyer’s Value

52

5.2.2

How the Internet can affect the Power of Buyers

.................................................................................

53

5.2.3

How the Internet can affect the Threat of New Entrants

53

5.3

BIL OCH TRAKTOR, TUNGA FORDON

54

5.3.1

How the Internet can Increase the Buyer’s Value

54

5.3.2

How the Internet can affect the Power of Buyers

.................................................................................

55

5.3.3

How the Internet can affect the Threat of New Entrants

55

  • 6 ANALYSIS

56

6.1

USAGE OF THE INTERNET TO INCREASE THE BUYERS VALUE

56

6.1.1

within Analysis of Wist Last och Buss AB

.............................................................................................

56

6.1.2

within Analysis of Drevia

......................................................................................................................

57

6.1.3

within Analysis of Bil och Traktor, Tunga Fordon Luleå

.....................................................................

58

6.1.4

Cross Analysis

........................................................................................................................................

59

6.2

INFLUENCE OF THE INTERNET ON THE POWER OF BUYERS

60

6.2.1

within Analysis of Wist Last och Buss AB

.............................................................................................

60

6.2.2

within Analysis of Drevia

61

6.2.3

within Analysis of Bil och Traktor, Tunga Fordon Luleå

.....................................................................

61

6.2.4

Cross Analysis

........................................................................................................................................

62

6.3

INFLUENCE FROM THE INTERNET ON THE THREAT OF NEW ENTRANTS

63

6.3.1

within Analysis of Wist Last och Buss AB

.............................................................................................

63

6.3.2

within Analysis of Drevia

64

6.3.3

within Analysis of Bil och Traktor, Tunga Fordon Luleå

.....................................................................

64

6.3.4

Cross Analysis

........................................................................................................................................

65

  • 7 CONCLUSIONS

..................................................................................................................................................

67

7.1

HOW THE INTERNET CAN BE USED TO INCREASE THE BUYERS VALUE

67

7.2

HOW THE INFLUENCE OF THE INTERNET CAN BE DESCRIBED ON THE POWER OF BUYERS

69

7.3

HOW THE INFLUENCE OF THE INTERNET CAN BE DESCRIBED ON THE THREATS FROM NEW ENTRANTS

70

7.4

GENERAL CONCLUSIONS DRAWN FROM THIS THESIS

71

  • 8 RECOMMENDATIONS

 

72

8.1

RECOMMENDATIONS FOR MANAGEMENT

......................................................................................................

72

8.2

RECOMMENDATIONS

FOR

FURTHER RESEARCH .............................................................................................

72

8.3

RECOMMENDATIONS

FOR

THEORY .................................................................................................................

73

REFERENCES

74

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Table of Content

Table of Content

ARTICLES ..............................................................................................................................................................

74

BOOKS

76

INTERNET ..............................................................................................................................................................

..........................................................................................................................................................

77

INTERVIEWS .......................................................................................................................................................... APPENDIX A

77

78

Table of Content List of Figures Chapter 1 FIGURE 1.1 C OMPETITIVENESS CONNECTION TO C USTOMER

Table of Content

List of Figures

Chapter 1

FIGURE 1.1 COMPETITIVENESS CONNECTION TO CUSTOMER VALUE

4

FIGURE 1.2 DISPOSITION OF THE THESIS

9

Chapter 2

FIGURE 2.1 FORCES GOVERNING COMPETITION IN AN INDUSTRY

12

FIGURE 2.2 HOW THE INTERNET INFLUENCES INDUSTRY STRUCTURE

18

FIGURE 2.3 PERCEIVED VALUE AND COMPETITIVE ADVANTAGE

19

FIGURE 2.4 THE EVOLUTION OF INTERNET MODELS: FROM A TECHNOLOGY PUSH TO A BUSINESS FOCUS

25

FIGURE 2.5 THE STRATEGIC INTERNET APPLICATIONS MODEL (SIAM)

26

FIGURE 2.6 THE CUSTOMER INTERACTION CYCLE (CIC) MODEL

29

FIGURE 2.7 THE ADOF MODEL

31

Chapter 3

FIGURE 3.1EMERGED FRAME OF

38

Chapter 4

FIGURE 4.1 COMPONENTS OF DATA ANALYSIS: INTERACTIVE MODEL

46

FIGURE 4.2 VISUALISATION OF METHODOLOGY

49

Chapter 5

FIGURE 5.1 SUMMARY OF WIST LAST OCH BUSS AB SWEDEN

50

Chapter 7

FIGURE 7.1 COMPONENTS OF CUSTOMER PERCEIVED VALUES FROM THE INTERNET

68

Table of Content List of Tables Chapter 4 T ABLE 4.1 R ELEVANT S ITUATIONS FOR

Table of Content

List of Tables

Chapter 4

TABLE 4.1 RELEVANT SITUATIONS FOR DIFFERENT RESEARCH STRATEGIES

41

TABLE 4.2 ECONOMIC FIGURES OF AB VOLVO PENTA

42

TABLE 4.3 SIX SOURCES OF EVIDENCE: STRENGTHS AND WEAKNESSES

43

TABLE 4.4 CASE STUDY TACTICS FOR FOUR DESIGN TESTS

47

Chapter 5

TABLE 5.1 ECONOMIC FIGURES OF WIST LAST OCH BUSS AB

51

TABLE 5.2 ECONOMIC FIGURES OF AB DREVIA

53

TABLE 5.3 ECONOMIC FIGURES OF BIL & TRAKTOR TUNGA FORDON LULEÅ AB

...................................................

54

Chapter 6

TABLE 6.1 INTERNET AFFECT ON CUSTOMERS VALUE

59

TABLE 6.2 INTERNET INFLUENCE ON THE POWER OF

62

TABLE 6.3 INTERNET INFLUENCE ON THE THREAT OF NEW ENTRANTS

65

Introduction
Introduction
Introduction

Introduction

1 Introduction

K urose and Ross (2002) observed that the Internet is a world-wide computer network that interconnects millions (and soon billions) computing devices. The Internet is the

infrastructure that is used by the information travelling between the communicating computers. To make use of this infrastructure Berners-Lee and associates developed the World Wide Web during the years 1989-1991. Alsop (1999) observed that the World Wide Web has opened up a classic window of opportunity for new companies to challenge the existing old companies. Evans and King (1999) forecast that the Web’s potential for business- to-business marketers is vast, as long as it is properly used. Dai and Kauffman (2002) stated that there has been an amazing growth of Internet-based business-to-business (B2B) electronic markets and on-line B2B sales.

Keeney (1999) noticed that it is clear that there is no value proposition per se offered from Internet transactions. Keeney supported this argument by claiming that Internet transactions are not a product that one purchases but rather a way to conduct business. Keeney further claimed that there is however a value proposition to a buyer of purchasing a specific product on the Internet. Keeney (1999, p.533) defined the value proposition associated with Internet as the net value of the benefits and cost of both a product and the processes of finding, ordering, and receiving it. Keeney also observed that different customer may view the value of the same Internet purchase very differently.

Keeney (1999) detected that the Internet has the potential to offer customers a better deal compared to purchases by usual methods in many situations. Keeney claimed that if this potential should become a reality business must focus on the values delivered to their customers.

According to Porter (2001) the Internet is not necessarily a blessing for the companies. Internet tends to alter industry structures in ways that dampen overall profitability. But the companies has no option according to Porter, they must deploy Internet technology if they want to stay competitive in the future. Porter further observed that the Internet is a powerful set of tools that can be used wisely or unwisely. Porter (2001) further argued that the Internet provide buyer’s with more and better information and therefore strengthen the bargaining power of buyer’s. Porter (2001, p.66) further reasoned, “Because the strength of each of the five forces varies considerably from industry to industry, it would be a mistake to draw general conclusions about the impact of the Internet on long-term industry profitability, each industry is affected in different ways”.

Verona and Prandelli (2002) realised that the Internet has made it easy to create business models, but hard to make the business models successful in the long run. The authors claimed that recent academic literature has not been able to agree on how to maintain competitive advantage on the Web.

In the light of the discussion above, this thesis will discuss how the Internet affects the competitiveness and the industry competition within an industry. Thurlby (1998, p.19) realised that, “There is a continuing interest in the study of the forces that impact on an organisation, particularly those that can be harnessed to provide competitive advantage”.

Introduction
Introduction
Introduction

Introduction

This thesis will use the business-to-business environment because of the vast potential in that market. Furthermore will this thesis focus on a manufacturing market in an old-market because it is important to gain an understanding about how the Internet has affected an old industry. A further criterion is that the chosen company should be a part of the World Wide Web and conduct some sort of business activity through the Internet.

1.1 Background

Porter (1979) proposed that the state of competition in an industry depends on five basic forces. These forces are according to Porter, bargaining power of suppliers, bargaining power of customers, threats of new entrants, threats of substitute products or service, and finally competition among current competitors. Porter stated that the collective strength of these forces determines the ultimate profit potential of an industry. Knowledge of these underlying sources of competitive pressure provides the groundwork for a strategic agenda of action. Porter believed that these forces highlight the critical strengths and weakness of the company, animate the positioning of the company in its industry, clarify the areas where strategic changes may yield the greatest payoff, and highlight the places where industry trends promise to hold the greatest significance as either opportunities or threats. Porter also proposed that understanding these sources also proves to be of help in considering areas for diversification.

1.1.1 Competitiveness

Neill (1999) observed that competitiveness could be defined as the ability to sell goods and services under free and fair market conditions while maintaining and increasing living standards over the long run. Neill further claimed that competitiveness could be described as continuous, very long run progressive change in product and production processes. Neill also observed that companies need new technologies, new production structures and use a framework that encourages restructuring if they want to stay competitive.

Feurer and Chaharbaghi (1994) highlighted that an organization is competitive in the eyes of its customers if it is able to deliver a better value when compared with its competitors. The authors claim that this could be done through continuous improvement of the offerings and capabilities of an organization. The authors proposed that a model of competitiveness should consist of customers, shareholders, competitors and the firm under consideration. Feurer and Chaharbaghi also recognized that another side of competitiveness is the organizations ability to act and react within its competitive environment.

Carneiro (2000) stated that companies should be able to combine their innovation efforts, updated IT, and knowledge development in order to achieve a set of capabilities to increase competitiveness. Carneiro believed that when this combination is adequately managed, the company could formulate competitive strategies, which integrate innovative products and new technological weapons to face its competitors.

Introduction
Introduction
Introduction

Introduction

1.1.1.1

Competitive Advantage

O´Connell, Clancy and van Egeraat (1999) claimed that competitive advantage is the means by which firms achieve success. Porter (1995) brought attention to the fact that the firm’s performance within the industry depends on its competitive advantages. Competitive advantage is according to Porter manifested either in lower costs than those of rivals or in the ability to differentiate and command a premium price that exceeds the extra cost of differentiating. Porter also recognised that some competitive advantages arise because of differences in operational effectiveness, but the most sustainable advantage come from occupying a unique competitive position.

Porter (1985, p.3) claimed that competitive advantage grows primarily out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Leidecker and Bruno (1984, p.25) defined competitive advantage as a company’s competencies versus its competitors. Value is according to Porter (1985) what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price.

The authors Aguila Obra, Cámara, and Meléndez (2002) tried to find out if Internet technologies have led to competitive advantage for companies operating in traditional industries. The authors used the resource-based view (RBV) constructed by Wernerfelt (1984) as their main framework for the study. But since the RBV model demands that a sustainable competitive advantage should have limitations of imitations, the authors did of course discover that the Internet does not give a company a sustainable competitive advantage. The authors stated however that, “the Internet, which is the universal media par excellence, such barriers to mobility and imitation do not appear to exist “. The authors observed that other theoretical frameworks could be used to explain the impact of Internet usage on organisational success.

Jemmeson (1997) observed that there existed a need to define competitive advantage coming from the Internet. Jemmeson proposed that if any or all of the following holds true, then the firm has achieved competitive advantage trough the Internet.

The Internet lets a firm carry out relevant business activities quicker and or cheaper

than before The Internet allows a firm to carry out relevant business activities it was previously

unable to do The Internet allows a firm to originate a previously untaught method of doing business

1.1.1.2

Customer Value

Lapierre (2000) defined customer-perceived value as the difference between scarifies and the benefits perceived by customers in terms of their expectations. Lapierre observed that customer scarifies includes both monetary and non-monetary costs. Lapierre defined non- monetary costs as the time, effort, energy, and conflict invested by the customer to obtain the products or services or to establish a relationship with a supplier. Lapierre further stated that the majority of researchers defines customer value in terms of get (benefit) and give (sacrifice) components.

Introduction
Introduction
Introduction

Introduction

Porter (1980, pp.108-110) observed that most companies do not sell their products and services to a single buyer but to a range of buyers. These buyers differ widely in their volumes of purchases, the importance of the product as an input to their production processes, and so on. Therefore, these buyers will value the offerings differently. Porter (1985, p.3) recognised that value is what buyers are willing to pay. Porter claimed that superior value comes from either offering lower prices than competitors for equal benefits or providing unique benefits from differentiation. Porter (1985, pp.36-61) further introduced the concept of the value chain. Porter observed that all companies conduct a set of activities that are performed to design, produce, to market, deliver, and support its products. All these activities could be represented as a value chain. The importance is to understand that buyers also have value chains and that a company’s product represents a purchased input to the buyers’ chain. Porter argued that value is created when a company creates competitive advantage for its buyers, either by lowering the buyer’s costs, or raise the buyer’s performance. Porter stressed the fact that the buyer must perceive the value created for the buyer if the seller should be reward with a premium price.

According to Doyle (1998) customers buy from those suppliers they perceive as offering the best value. Doyle proposed that perceived value consist of three factors.

1)

The perceived benefits offered by the company’s brand

2)

The products price

3)

Other cost of owning the product

Therefore, a company can gain competitive advantage through offering superior benefits, lower prices or a reduced cost of ownership. Doyle recognised that the perceived benefits are a function of the products performance and design together with the services that augment it and the staff that deliver it. Furthermore a competitive advantage is of limited value if it is easily copied. A company needs strategies to sustain their competitive advantage by building barriers to entry.

1.1.1.3 Competitiveness Connection to Competitive Advantage and Customer Value

Doyle (1998, pp 49-51) observed that competitiveness comes from competitive advantages, and that competitive advantage requires more than being able to meet customer’s needs, it requires meeting them better than competitors. Doyle stated that customers choose those suppliers, which offer the best value. If a company does not have a competitive advantage, it will lose market share or have to cut prices and profit margins to retain it. Figure 1.1 displays the connections.

FIGURE 1.1 Competitiveness connection to Customer Value

Competitiveness Customer Value Competitive Advantage Source: Authors own conception
Competitiveness
Customer Value
Competitive
Advantage
Source: Authors own conception
Introduction
Introduction
Introduction

Introduction

1.1.2 Internet and Competitiveness

In pre-Internet time, information gathering typically involved a patchwork of telephones, faxes, and EDI. Frohlich and Westbrook (2002) pointed out that this made information slow and expensive. But the Internet has changed this and makes information available to all. Kippenberger (2000) claimed that the Internet has an enormous quantity of rich information and that rich information also has an enormous reach.

In the rush to go on-line and capture first-mover advantage many start-ups have offered untenably low prices. Baker, Lin, Marn and Zawand (2001) believed that the reason for this has been that the Internet is the most transparent and efficient of markets, so a low price outweighs such factors as product benefits, quality and service. But now, the primary goal of business that buys on-line is cutting the total cost. The authors observed that B2B purchasing managers expected that that the primary benefits from the Internet should be lower transaction costs and search costs. Jelassi and Leenen (2003) proposed that manufactures should sell a combination of products and services that minimise the customers overall costs associated with owning and using the product while maximising its utility.

Porter (2001) observed that customers can go on-line and search for products and services all over the world and that buyers often can switch suppliers with just a few mouse clicks. Companies need to adapt to this new situation. To make this adaptation to the Internet companies need to gain knowledge about how their customer uses the Internet and also about their customers buying behaviour and how their customer uses the Internet for information retrieval. Companies also need to know who offers what on the Internet. Porter claimed that if a company can find this information then the Internet could be used to build a competitive advantage.

1.1.2.1 Different Business Models for the Internet

Jelassi and Leenen (2003) observed that, “The Internet is more than just another communication or distribution channel”. The author’s stated that the Internet offers companies a new business platform, which allows them to quickly respond to customer needs, and better predict future market demands. It also allows them in a cost-effective way to become fast-to-market, fast-to-produce, fast-to-deliver and fast-to-service their customers.

Jelassi and Leenen (2003) argued that a sales model for manufacturing companies on the Internet consist of three stages. These stages are according to the authors, pre-sales service, transactions (commercial and financial) and physical order fulfilment and finally after-sales service. During the pre-sales phase, the customer should receive online information. The customer should also be able to use the Internet to design and customize their products. To impress customers’ manufactures should offer their customer to use the Internet for a simple and risk-free transaction. Companies need to cost-effectively fulfil the product delivery at the right time, to the right place and person in the way the customer wants it. Finally the authors claimed that delivering a great product is not enough to gain customer loyalty. The manufactures also need to provide online and offline after-sales service. The authors also proposed that, “manufactures should sell a combination of products and services that minimize the customer’s overall costs associated with owning and using the product while maximizing its utility”.

Introduction
Introduction
Introduction

Introduction

Oliva (2001) claimed that there exist three potent e-business models for the B2B market that has been proven online. Oliva proposed that they are infomediaries, market makers and communities. Infomediaries are third parties that aggregate and sort through information about alternatives, specification, and solutions tailored to a particular buyer. Market makers are third parties that seek customer and producers, set specifications, and assemble transactions. And finally communities of customers that are an electronic meeting place for customers where they can swap tales about supplier’s products and services, the quality of support, the strength of competitors and other information relevant for themselves.

The Internet has also created new marketplaces called electronic hubs or e-hubs. Kaplan and Sawhney (2000) proposed that an e-hub is a business-to-business (B2B) marketplace, which bring a huge number of buyer and seller together. By letting the buyers and sellers pay fees for their transactions the market makers can earn vast revenues.

Wise and Morrison (2000) pointed out that the business model of the Internet today has three fatal flaws. First, most companies have come to realise that getting supplies at the lowest price may not be in their best economic interest. Secondly the exchange delivers little benefits to sellers. And finally, the business models of most B2B exchanges are at best half-baked today.

1.1.2.2 Internet Impact on Firms

Porter (2001) recognised that the Internet is an extremely important new technology. But according to Porter many of the pioneers of Internet business have competed in ways that violate almost every aspect of good strategy. Rather than focus on profit companies has sought to maximise revenue and market shares at all costs and pursuing customers through discounting, give-aways, promotions, channel incentives and heavy advertising. Porter claimed that the worse thing yet by the Internet is that price has been defined as the primary competitive variable. Instead of emphasising the Internet’s ability to support convenience, service, specialisation, customisation and other forms of value that justify attractive prices, companies have turned competition into a race to the bottom.

Porter (2001) observed that well establish and well run companies has been thrown of track by the Internet. Forgetting what they stand for or what makes them unique, they have rushed to implement hot Internet applications and copy the offerings of dot.coms. Porter further stressed that industry leaders have compromised their existing competitive advantage by entering market segments to which they bring little that is distinctive. Porter suggested that it did not have to be this way and does not have to be in the future. The companies should make the Internet technology a responsibility for all mainstreams units of the company. With support from IT staff and outside consultants, companies should use the technology strategically to enhance service, increase efficiency, and leverage existing strengths. Porter also mentioned that everyone in the organisation must have an incentive to share in the success of Internet deployment. Porter also brought attention to the fact that “In our quest to see how the Internet is different, we have failed to see how the Internet is the same. While a new means of conducting business has become available, the fundamentals of competition remain unchanged. The next stage of the Internet’s evolution will involve a shift in thinking from e-business to business, from e-strategy to strategy. Only by integrating the Internet into overall strategy will this powerful new technology become an equally powerful force for competitive advantage”.

Introduction
Introduction
Introduction

Introduction

Alsop (1999) argued that old markets are being influenced and changed by the Internet. Alsop claimed that the Web has forever changed the way companies and customers buy and sell to each other, learn about each other, and communicate. Boyle (2001) acknowledged that there is little doubt that the Internet has made a substantial and lasting impact on both consumer and industry.

Porter (2001) stated that the Internet could be used for strategic positioning which is a way of building a competitive advantage. Strategic positioning is a strategy about doing things a different way from your competitors, and doing so you can deliver a unique type of value to your customer, and this will increase y our competitiveness on the market place.

According to McCormack and Kasper (2002) has the Internet raised the customer’s expectations. The customers want more information, speed, flexibility, co-operation, collaboration, and service. According to the authors Jelassi and Leenen (2003) the Internet can help the customers when choosing a product and or service. A customer can easily compare offers on the Internet and focus on their value-adding proposition as well as product utility, price and order fulfilment.

  • 1.2 Pilot Study

Porter (2001) observed that the Internet will affect all industries, but all industries will be affected in different ways. This research conducted a pilot study with the purpose to gain knowledge about both the industry and the chosen company. The chosen company (Client Company) for the thesis was Volvo Penta. The pilot study took place at Volvo Penta in Gothenburg.

Through the Pilot study several interviews and discussions were held recursively within Volvo Penta. During the pilot study the client stressed the fact that the interesting part for them was to find out if and how the Internet has affected their market in terms of new entrants, offerings to customers from competitors, and how the Internet has affected the bargaining power of customers.

  • 1.3 Research Problem

Porter and Millar (1985, p.149) stated, “The information revolution is sweeping through our economy. No company can escape its effect. Dramatic reduction in the cost of obtaining, processing, and transmitting information is changing the way we are doing business”. According to the author’s the information revolution is affecting competition in three vital ways, it changes industry structure and, in doing so, alters the rules of competition, secondly it creates competitive advantage by giving companies new ways to outperform their rivals, and finally it spawns whole new businesses, often from within a company’s existing operations. Porter and Millar furthermore observed that information technology is reshaping the product itself, the entire package of physical goods, services, and information companies provide to create value for their buyers.

Introduction
Introduction
Introduction

Introduction

Ling and Yen (2001) claimed that the Internet could be used for increasing the loyalty, commitment and confidence among customers and partners. They also claimed that the Internet can be used for automate the supply chain, develop new products jointly and transform business processes. All this drives revenue and creates competitive advantages for the companies involved.

According to Jelassi and Leenen (2003), the Internet allows companies to quickly respond to customers needs and better predict future market demands. It also allows them to become fast- to-produce, fast-to-market, fast-to-deliver, and fast-to-service their customers. A problem with this new technology according to McCormack and Kasper (2002) is that the customers are becoming more demanding. The customers want more information, speed, flexibility, co- operation, collaboration, and service. So far the company’s counter measurement to this problem has been to compete on price. But as Wise and Morrison (2000) pointed out, many companies has come to realise that getting supplies at the lowest price may not be in their best economic interest.

Porter (2001) stated that the Internet has thrown many well establish and well-run companies of track, mainly just because they have competed on price. But Porter stated that it did not need to be this way, and it does not need to be so in the future. Porter claimed that the Internet could be used for building a competitive advantage and by doing so companies can shift the attention away from price and into more rewarding areas such as product development, support convenience, specialisation, and services.

Porter (1985, pp.1-4.) brought attention to the fact that the firm’s performance within the industry depends on its competitive advantages. Porter (1990) also argued that international successful companies use innovation and improvement to achieve success and build competitive advantages. Porter further stressed the fact that information plays a large role in the process of innovation and improvement.

In the light of the discussion above in this chapter, the research problem of this thesis is,

How has the Internet affected the competitiveness and the industry competition within a business-to-business market?

Introduction
Introduction
Introduction

Introduction

1.4 Disposition of the Thesis

This section illustrates the disposition of the thesis.

Chapter one includes the introduction, the problem area, the background, and the problem discussion of the thesis. Chapter one has also introduced the research problem of this thesis.

Chapter two contains a review of the literature that is related to the research problem of this thesis, i.e. literature regarding the Internet, industry competition, business models for the Internet, competitive advantage, and customer value.

Chapter three states the research questions for this thesis and describes the framework chosen for this thesis. At the end of this chapter the emerged frame of reference is visualised.

Chapter four consists of the description of the methodology procedure of this thesis. This chapter also reviews some of the available techniques for conducting business research.

Chapter five cover the empirical data gathered for this thesis work.

Chapter six contains the analyse of the data collected for this thesis.

Chapter seven surround the conclusions drawn from this thesis work.

Chapter eight holds the recommendations for management, further research and theory, drawn from this thesis work.

FIGURE 1.2 Disposition of the thesis

Introduction 1.4 Disposition of the Thesis This section illustrates the disposition of the thesis. Chapter one

1

2

3

4

Introduction

  • Literature

  • Frame of

  • Methodology

Introduction Literature Frame of Methodology

Review

Reference

5

6

7

8

Empirical Data

  • Analysis

  • Conclusions

  • Recommendations

Presentation

Source: Authors own creation

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2 Literature Review

T he previous chapter covered the introduction and lead down to the research problem of this thesis. To help solve the research problem various theories, models, and frameworks

are needed. Therefore will this chapter review the literature and theories that are needed for

solving this research problem.

2.1 The Internet

Today is the Internet a world-wide computer network of networks that interconnects millions of computing devices throughout the world. Kurose and Ross (2002, pp. 1-45) recognised that most of these computing devices are desktop PCs, UNIX-based workstations or servers. The authors described a server as a device that store and transmit information such as Web pages or e-mails. All these devices are called for hosts or end systems (host = end system). According to Kurose and Ross are hosts connected to each other by communications links and routers. A router is a switching device that takes a chunk of information arriving on one of its incoming communication links and forwards that chunk of information on one of its outgoing communications links. Hosts or end systems can be divided into two subgroups, clients and servers. Kurose and Ross (2002) observed, “A client program is a program running on end system that requests and receives a service from a server program running on another end system”. Krajewski and Ritzman (1999 p.15) noted that the Internet has emerged as a vital tool linking firms internally and linking firms externally with customers and strategic partners.

2.1.1 Computer Networking and Internet History

Kurose and Ross (2002, pp.58-65) observed that the field of computer networking and today’s Internet trace their beginnings back to the early 1960s. Back then researcher was working on packet-switching techniques that are used today on the Internet. Packet switching is an effective method for “bursty” traffic. Bursty means that there are intervals of activity such as sending or receiving information followed by periods of inactivity while ponder on the received response. By the year of 1969 the hatchling ancestor to the Internet consisted of four nodes. By 1972 the ARPAnet (Advanced Research Projects Agency) had grown to 15 nodes and the same year the first public demonstration took place. The first e-mail program was also written in 1972. By the end of 1970s, approximately 200 nodes were connected to the ARPAnet and by the end of the 1980s approximately 100 000 hosts were connected to the public Internet that back then was a confederation of networks almost like today’s Internet. In 1986 NSFNET (National Science Foundation) was created as an access provider with the primary task to link together regional networks. NSFNET replaced ARPANET as the main government network linking universities and research facilities. In 1991 the restrictions for using the NSFNET for commercial purposes was lifted and in 1995 NSFNET was decommissioned with the Internet backbone traffic now being carried by commercial Internet service providers (ISP).

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Clark (1988) brought attention to the fact that when the architecture of the Internet was put together the engineers had a list of different goals. Clark stressed that the list was not a checklist of all the desirable network features. It is important to understand that these goals were in order of importance and entirely different network architecture would be the result if the order of importance were changed. Clark recognized that architecture primarily for commercial deployment would have an entirely different list of importance than what the Internet has today.

2.1.2 The World Wide Web

According to webopedia is the World Wide Web a system of Internet servers that support specially formatted documents. The documents are formatted in a script called HTML (Hyper Text Markup Language) that supports links to other documents, as well as graphics, audio, and video files. This means that a user can jump from one document to another by clicking on hot spots. Not all Internet servers are part of the World Wide Web. There are several applications called Web browsers that make it easy to access the World Wide Web. Two of the most popular are Netscape Navigator and Microsoft’s Internet Explorer. The World Wide Web is not synonymous with the Internet. But since it is so common in academic literature this thesis will sometimes use these terms interchangeable.

Kurose and Ross (2002, p.63) stated that during 1989-1991 Tim Berners-Lee and associates invented the Web. Berners-Lee and his associates developed initial versions of HTML, HTTP (Hypertext Transfer Protocol), a Web server, and a browser. According to Krajewski and Ritzman (1998, p.134), the Web is a collection of thousands of independently owned computers. These computers are called Web servers and are located all around the world. Web browser like Netscape and Internet Explorer makes the Web user-friendly. Alsop (1999) pointed out that the Web has forever changed the way companies and customers buy and sell to each other. Alsop also claimed that the Web has changed the way we communicate and the way we collect information.

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2.2 Industry Competition

Porter (1980) observed that every firm competing in an industry has a competitive strategy. Porter further observed that the essence of formulating competitive strategy is relating a company to its environment. Porter stated that industry structure has a strong influence in determining the competitive rules of the game as well as the strategies potentially available to the firm. Porter further claimed that competition in an industry is rooted in its underlying economic structure and goes well beyond the behaviour of current competitors.

Porter (1979) proposed that the state of competition in an industry depends on five basic competitive forces.

Threat of new entrants

Bargaining power of suppliers

Bargaining power of customers

Threat of substitute products or services

Jockeying for position among current competitors

These forces and their internal relationship is shown in figure 2.1. The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long run return on invested capital.

FIGURE 2.1 Forces Governing Competition in an Industry

Suppliers

Bargaining power of

suppliers

Potential Entrants

Threats of new entrants

Industry Competitors Rivalry among Existing Firms

Industry Competitors

Rivalry among Existing Firms

Rivalry among Existing Firms

Industry Competitors Rivalry among Existing Firms

Substitutes

Threat of substitute

products or services

Buyers

Bargaining power of

buyers

Literature Review 2.2 Industry Competition Porter (1980) observed that every firm competin g in an industry
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Source: Porter, 1979, p.141

Porter (1979) claimed that the strongest competitive force or forces determine the profitability of an industry and so are of greatest importance in strategy formulation.

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Porter (1979, p.143) argued that when the forces affecting an industry have been recognised the strengths and weaknesses of a company could be identified. Thereafter could a plan of action that include the following stages be deployed,

1)

Positioning the company so that its capabilities provide the best deafens against the

2)

competitive force Influencing the balance of the forces through strategies

2.2.1 Threat of New Entrants

Porter (1980) recognised that new entrants to an industry bring new capacity, the desire to gain market share, and often-substantial resources. This can lead to reduced price and lover margins for a company in the industry. Porter claimed that the threat of entry into an industry depends on the barriers to entry that are present on the market. Porter observed that if barriers are high and/or the newcomer can expect sharp retaliation from entrenched competitors, the threat of entry is low. Porter put fort six major sources of barriers to entry.

Economies of Scales. Refer to declines in unit costs of a product as the absolute volume per period increases. Economies of scales deter entry by forcing the entrant to come in at large scale and risk strong reaction from existing firms or come in at a small scale and accept a cost disadvantage, both undesirable options. Scale economies may relate to an entire functional area, as in the case of a sales force. Units of multibusiness firms may be able to reap economies similar to those of scale if they are able to share operations or functions subject to economies of scale with other businesses in the company. The benefits of sharing are particularly potent if there are joint costs. Joint costs occur when a firm that is producing product A must inherently have the capacity to produce product B. A common situation of joint costs occurs when business units can share intangible assets such as brand names and know how. The cost of creating an intangible asset need only be borne once; the asset may then be freely applied to other business.

Product Differentiation. Established firms have brand identification and customer loyalties, which stem from past advertising, customer service, product differences, or simply being first into the industry. Differentiation creates a barrier to entry by forcing entrants to spend heavily to overcome existing customer’s loyalties. This effort usually involves start up losses and often takes an extended period of time. Such investments in building a brand name are particularly risky since they have no salvage value if entry fails.

Capital Requirements. The need to invest large financial resources in order to compete creates a barrier to entry, particularly if the capital is required for risky or unrecoverable up-front advertising or research and development. Capital may be necessary not only for production facilities but also for things like customer credits, inventories, or covering start up losses. Even if capital is available on the capital market, entry represents a risky use of that capital which should be reflected in risk premiums charged the prospective entrants; these constitute advantages for going firms.

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Switching Costs. A one time cost facing the buyer of switching from one supplier’s product to another. Switching costs may include employee retraining costs, cost of new ancillary equipment, cost and time in testing or qualifying a new source, need for technical help as a result of reliance on seller engineering aid, product redesign, or even psychic costs of severing a relationship. If these switching costs are high, then new entrants must offer a major improvement in cost or performance in order for the buyer to switch from a current supplier.

Access to Distributions Channels. A barrier to entry can be created by the new entrant’s need to secure distribution for its product. The more limited the wholesale or retail channels for a product are and the more existing competitors have these tied up, obviously the tougher entry into the industry will be. Existing competitors may have ties with channels based on long relationships, high-quality service, or even exclusive relationships in which the channel is solely identified with a particular manufacturer. Sometimes this barrier to entry is so high that to surmount it a new firm must create an entirely new distribution channel.

Government Policy. Government can limit or even foreclose entry into industries with such controls as licensing requirements and limits an access to raw materials. More subtle government restrictions on entry can stem from controls such as air and water pollution standards and product safety and efficacy regulations.

Porter further stated that the potential entrant’s expectations about the reaction of existing competitors would also influence the threat of entry. If the existing competitors are expected to respond forcefully and drive away the entrant’s then Porter claimed that the entry might well be deterred. Porter put forth some signals of strong likelihood’s of retaliation.

A history of vigorous retaliation to entrants

Established firms with substantial resources to fight back, including excess cash and

unused borrowing capacity, adequate excess productive capacity to meet all likely future needs Established firms with great commitment to the industry and highly illiquid assets

employed in it Slow industry growth, which limits the ability of the industry to absorb a new firm without depressing the sales and financial performance of established firms

Savoie and Raisinghani (1999) claimed that the absence of borderlines on the Internet makes it possible for any business to go global with exceptional ease and low costs. The authors claimed that the Internet will “reduce the barriers that distribution channels traditionally offered the market leaders”.

2.2.2 Pressure from Substitute Products

Porter (1980) observed that all firms in an industry are competing with industries producing substitute products. Porter claimed that substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge. Porter further claimed that substitute products are a matter of searching for other products that can perform the same function as the product of the industry. Substitute products that deserve the most attention are those that,

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1)

Are subject to trends improving their price performance trade-off with the industry’s

2)

product. Are produced by industries earning high profits.

  • 2.2.3 Intensity of Rivalry among Existing Competitors

Porter (1980) observed that rivalry among existing competitors takes the familiar form of jockeying for position. Porter recognised that companies are using tactics like price competition, advertising battles, product introductions, and increased customer services or warranties to gain market shares. Porter claimed that rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve position. Porter claimed that price cuts are quickly and easily matched by rivals, and once matched they lower revenues for all firms unless industry price elasticity of demand is high enough. Advertising battles, on the other hand, may well expand demand or enhance the level of product differentiation in the industry for the benefit of all firms.

The authors Rodgers, Yen, and Chou (2002) claimed that the Internet could create inter- connectivity between companies that previous had no contact. This could be both positive and negative for a firm. The positive trend is that a firm can gain more customers and the negative trend is that a company can face lower margins and a lost of customers.

  • 2.2.4 Bargaining Power of Buyers

Porter (1980) proposed that buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other, all at the expense of industry profitability. Porter claimed that the power of each of the industries important buyer group depends on a number of characteristics of its market situation and on the relative importance of its purchases from the industry compared with its overall business. Porter realised that a buyer group is powerful if the following circumstances hold true,

The buyer group is concentrated or purchases large volumes relative to seller sales. If a large portion of sales is purchased by a given buyer this raise the importance of the buyers business in results.

The products the buyer group purchases from the industry represent a significant

fraction of the buyer’s costs purchases. Buyers are prone to expand the resources necessary to shop for a favourable price and purchase selectively. When the product sold by the industry in question is a small fraction of buyer’s costs, buyers are usually

much less price sensitive.

The products the buyer group purchases from the industry are standard or

undifferentiated. If the buyer is sure to find an alternative supplier they may play one company against another.

The buyer group faces few switching costs. Switching costs lock the buyer to the seller. Conversely, the buyer’s power is enhanced if the seller faces switching costs.

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The buyer group earns low profits. Low profit creates great incentives to lower purchasing costs. Highly profitable buyers however are generally less price sensitive.

Buyers pose a credible threat of backward integration. If buyers either are partially integrated or pose a credible threat of backward integration they are in a position to demand bargaining concessions. Buyer power can be partially neutralised when firms in the industry offer a threat of forward integration into the buyer’s industry.

The industry’s product is unimportant to the quality of the buyer’s products or services. When the quality of the buyer’s products is very much affected by the industry’s product, buyers are generally less price sensitive.

The buyer has full information. Where the buyer has full information about demand, actual market prices, and even suppliers costs, this usually yields the buyer greater bargaining leverage than when information is poor. With full information, the buyer is in a greater position to insure that it receives the most favourable prices offered to others and can counter supplier’s claims that their viability is threatened.

Porter claimed that most of these sources of buyer powers could be attributed to consumers as well as to industrial and commercial buyers. Only a modification of the frame of reference is necessary.

Verona and Prandelli (2002, p.299) observed that the Internet has created a friction-less economy “where transaction cost is low and customers can float freely from competitor to competitor”. The authors further argued that the Internet has caused information scarcity to evolve into information democracy. This has empowered the customers and now can the customers more easily initiate and control information.

2.2.5 Bargaining Power of Suppliers

Porter (1980) claimed that suppliers could exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services. Powerful suppliers can thereby squeeze profitability out of an industry unable to recover cost increases in its own price. Porter observed that the conditions making suppliers powerful tend to mirror those making buyers powerful. A supplier group is powerful if the following applies,

The supplier group is dominated by few companies and is more concentrated than the industry it sells to. Suppliers selling too more fragmented buyers are usually able to exert considerable influence in prices, quality, and terms.

The supplier group is not obligated to contend with other substitute products for sale

in the industry. The power of even large, powerful suppliers can be checked if they compete with substitutes.

The industry is not an important customer of the supplier group. When suppliers sell to a number of industries and a particular industry does not represent a significant fraction of sales, suppliers are much more prone to exert power. If the industry is an

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important customer, supplier’s fortunes will be closely tied to the industry and they will want to protect it through reasonable pricing and assistance in activities like R&D and lobbying.

The supplier’s product is an important input to the buyer’s business. If the input is important for the buyer than the supplier’s power is raised.

The supplier group’s products are differentiated or it has built up switching costs. If the buyer faces differentiation or switching costs the supplier’s power is increased. If the supplier faces switching costs the effect is reverse.

The supplier group poses a credible threat of forward integration. This provides a check against the industry’s ability to improve the terms on which it purchases.

Porter observed that the conditions determining supplier’s power are not only subject to change but also often out of the firm’s control. However Porter reasoned, as with buyer’s power the firm can sometimes improve its situation through strategy. It can enhance its threat of backward integration and try to eliminate switching costs.

Porter (1985, pp. 1-2) argued that competition is at the core of the success or failure of firms. Competitive strategy is the search for a favourable competitive position in an industry. Competitive strategy aims to establish a profitable and sustainable position against the forces that determine industry competition. Porter claimed that both industry attractiveness and competitive position can be shaped by a firm, and according to Porter, this is what makes the choice of competitive strategy both challenging and exciting. Porter further claimed that competitive strategy not only responds to the environment but also attempts to shape that environment in a firm’s favour.

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2.2.6 Industry Competition and the Internet

In 2001 Porter modernised his framework of industry competition to embrace the Internet. Figure 2.2 displays how the Internet has affected industry structure. Porter observed that the Internet is a new and extremely important technology. Porter (2001, p.63) observed problems with the Internet, “Some companies have used Internet technology to shift the basis of competition away from quality, features, and service, towards price, making it harder for anyone in their industries to turn a profit”.

FIGURE 2.2 How the Internet Influences Industry Structure

Threat of substitute products or services
Threat of substitute
products or services
  • - Makes offerings more allike

  • - Competition on price

  • - Widens the market, increased number of competitors

+ Expanding the size of the market - Creates new substitutes threats

Buyers Bargaining Bargaining power of power of channels end users + Eli minates - Shifts powerfu
Buyers
Bargaining Bargaining
power of
power of
channels
end users
+ Eli minates - Shifts
powerfu l

channels

bargaining power to end consumers - Reduces switching costs.

  • - Lowers variable cost relative to fixed cost, pressure for discounting

Bargaining power of suppliers Rivalry among existing competitors
Bargaining power
of suppliers
Rivalry among
existing competitors

+ Internet tends to raise the buyers bargaining power over the supplier

  • - Internet reduces the number of intermediaries

  • - Internet tends to standardise products

Barriers to entry
Barriers to entry
  • - Internet reduces barriers to entry and therefore shifts the power towards the suppliers

- Reduces barriers to entry - Difficult to keep a unique position on the Internet - Internet has invited new entrants into many industries

Source: Porter, 2001, p.67

Porter (2001, p.64) observed that gaining competitive advantages through the Internet does not require a radically new approach to business, “It requires building on the proven principles of effective strategy. The Internet per se will rarely be a competitive advantage. Many of the companies that succeed will be ones that use the Internet as a complement to traditional ways of competing, not those that set their Internet initiatives apart from their established operations”. Rodgers, Yen, and Chou (2002, p.186) observed, “Many companies do admit that they are inclined to implement an e-business solution in order to operate more efficiently, but a larger percentage of executives indicate that improved customer service is their primary reason”.

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Galbraith (2001) observed that the Internet has reduced the industry entry barriers, particularly in the area of product specific marketing and channel assets. Galbraith claimed that previously most of the marketing and distribution functions involved a combination of matching, but somewhat loosely linked physical assets, such as a sales force, catalogue printing and mailing, sales ordering staff, billing and accounts receivable staffs, distribution network, and advertising and marketing staff. Galbraith observed that the establishment, maintenance, and management of these traditional channel assets could be very expensive and long-term. Galbraith claimed that the Internet makes these channel-specific assets less expensive and the management relatively easy.

2.3 Customer Value

Feurer and Chaharbaghi (1994) highlighted the fact that an organization is competitive in the eyes of its customers if it is able to deliver a better value when compared with its competitors. The authors claimed that superior value is a result of either lower prices for equivalent benefits or differentiated benefits that justify a higher price. Customer value can therefore be considered as the benefit perceived by the customer in relation to the demanded price.

Customer Value =

benefit

price

Doyle (1998 pp. 20-21) brought attention to the fact that customers buy from those suppliers they perceive as offering the best value. Doyle noted that perceived value consist of three elements, the perceived benefits offered by the company’s brand, other cost of owning and the price. A company can therefore gain competitive advantage through offering superior benefits, lower prices or a reduced cost of ownership. Figure 2.3 will show the connection between the perceived value and the perceived benefits, ownership costs, and price.

FIGURE 2.3 Perceived value and competitive advantage

 

Perceived

   

benefits

+

 
 

Perceived

   

Ownership

value

   

costs

-

   
 

Price

-

     

Source: Doyle, 1998, p.21

 

Feurer and Chaharbaghi (1994) further stated that customer values are the combination of several benefits offered for a given price, and include all aspects of the physical product and the accompanying services. The authors furthermore recognized that customer values should be viewed not only in terms of product characteristics, but also in terms of processes, which

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deliver the product. Both the product and process concept have to be right if customer satisfaction is to be achieved.

Lapierre (2000) observed that it is critical for organisations to understand their offerings and learn how they can be enhanced to provide value to their customers. The author further proposed that a firm must understand what drivers create value for their customers in order to build competitive advantage.

Value Chain

Porter (1985) observed that a firms competitive advantages appears from the way the firm choose to organise and perform discrete activities such as salespeople making sales call, engineers inventing and designing new products, and so on, because it is these activities that creates value for their customers. If the firm should stay competitive the value created for and paid by the customer should exceed the collective cost of performing all the required tasks to create the value for the buyer. Porter claimed that a firm could gain competitive advantage over its rivals by either performing activities more efficiently (lower cost), or by performing activities in a unique way that creates superior buyer value and commands a premium price (differentiation). Porter proposed that all these activities performed by a firm could be thought of as a value chain. Porter claimed that all these activities contribute to buyer value. The activities could be divided into primary activities, and support activities. Porter claimed that primary activities include ongoing production, marketing, delivery, and service of the product. Support activities include providing purchased inputs (procurement), technology development, human resources management, and firm infrastructure (financing, planning). Porter stressed the fact that strategy should guide the way a firm chooses to perform individual activities and the way they organise their entire value chain. Porter observed that in different industries activities fluctuate in their importance.

Porter observed that the value chain is connected through linkages. Linkages exist when the way in which one activity is performed affects the cost or effectiveness of other activities. Porter observed that linkages demand that activities are co-ordinated. On-time delivery for example demands that several different activities run smoothly together. Porter claimed that careful management of linkages could be an important base of competitive advantage.

2.3.1 Customer value and the Internet

Grewal, Iyer, Krishnan, and Sharma (2003) observed that perceived value consists of different value components.

Acquisition value, which is associated with the benefits customers think they will

receive by acquiring the product relative to the money given up to acquire the product. Transaction value, which is the pleasure of getting a good deal.

In-use value, which refer to the actual usage of the product.

Redemption value, which is the price of the product at the time of trade in or end of life.

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The authors claimed that the Internet is proficient of having a deep impact on all these value components. Internet improves acquisition value because of the ability to provide greater reach and access. Transaction value is enhanced by Internet’s ability to search out the best deals. In-use value is improved by the Internet’s capability to provide extensive support and information about how to use the product. Finally the authors claimed that redemption value is enhanced by the Internet’s ability to provide outlets for exchanging the product when there is less perceived benefit from using the product.

Grewal et al. (2003) observed that a problem with Internet transactions is that it still has to rely on traditional methods of shipping, which adds to the time between the transaction and the receipt of the products by customers. This problem is even more severe in cases where the buyer requires immediate fulfilment and is making a seasonal purchase and has less time to wait before possessing the product.

Verona and Prandelli (2002, p.300) observed that keepers of a Website should follow these principles to increase the customers’ value from the Internet.

Creating navigational services that solve problems, not just pushing products.

Providing comprehensive information.

Adding decisions support software on content.

2.3.2 Value Focused Thinking

Keeney (1996) proposed that values should be the driving force for decision-making. Therefore proposed the author a value-focused thinking model to help decisions makers. “Value –focused thinking is designed to identify desirable decisions opportunities and create alternatives”. The differences between value-focused and the normal alternative-focused way (the decisions-maker concentrates first on alternatives and only afterwards addresses the objectives or criteria to evaluate the alternatives) are the following,

Significant effort allocated to make values explicit. Logical and systematic

concepts are used to qualitatively identify and structure the values appropriate for a decisions situation. Articulation of values in decisions situations comes before other activities.

The articulated values are explicitly used to identify decision opportunities and to create alternatives.

Keeney (1996) observed that decisions often are embodied by multiple objectives. Each objective is a statement of something that one wants to achieve in that decision context. Keeney claimed that an objective explicitly requires three features, the decision context, an object, and a direction of preference. The author gave an example of a forest products company, “One objective is to ‘minimize environmental impacts’. With this objective, the decisions context is harvesting natural resources, the objective is environmental impact, and less impact is preferred to more”. The author distinguished between fundamental objectives and means objectives. “Fundamental objectives concern the ends that decisions makers’ value in a specific decision context, means objectives are methods to achieve ends”.

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Keeney (1996) observed that it is important to list objectives. The value-focused thinking model does so by,

1)

Identifying objectives and create an initial list of objectives

2)

Structuring objectives

3)

Creating alternatives

4)

Identify decisions opportunities

Keeney (1996) observed that the most apparent way to identify objectives is to engage in a discussion of the decision situation. The first question to a decision-maker should be “What do you like to achieve in this situation?” the answer provides the researcher with a list of potential objectives and a base for further probing. Keeney observed that the initial list of objectives would contain many items that really not are objectives. The list will include alternatives, constraints, and criteria to evaluate alternatives. These items should with care be transformed into objectives. Now the researcher has a list with both fundamental and means objectives. “It is important to separate these types of objectives and establish their relationship by examining the reason for each”. Keeney proposed that the researcher should ask “why is this objective important in the decisions context?” Keeney noticed that two types of answers are possible. “One answer is that the objective is one of the essential reasons for interest in the situation. Such an objective is a fundamental objective. The other response is that the objective is important because of its implication for achieving some other objectives. In this case, it is a means objective”.

Keeney (1996) detected that when it comes to creating alternatives people are often constrained. Keeney proposed several reasons for this. “There is a tendency in problem solving to move away from the ill-defined to the well-defined, from constraint-free thinking to constrain thinking. There is a need to feel, and perhaps even measure progress toward reaching a solution to a decision problem. To get a feeling of progress, one often quickly identifies some viable alternatives and proceeds to evaluate them, without making the effort to broaden the search for alternatives”. Keeney claimed that managers must broaden their set of alternatives but they should use some rules,

Alternatives should be created that best achieve the values specified for the decisions

situation. Create the best possible alternative using the least amount of time, effort, and resources.

When it comes to decisions Keeney (1996, p.545) observed “Decisions makers usually think of decisions as problems to be solved, not as opportunities to be taken advantage of. Thus, it is not surprising that decisions makers do not systematically hunt for decisions situations. Who needs yet another problem?” Keeney claimed that value-focused thinking helps managers to make better decisions because the problems are shifted into decision opportunities.

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2.3.3 Value Focused Thinking and the Internet

Keeney (1999) observed that the Internet has the potential to offer customers a better deal compared to purchases by usual methods in many situations. Keeney claimed that if this potential should become a reality business must focus on the values delivered to their customers. Keeney (1999, p.533) defined Internet commerce as the sale and purchase of products and services over the Internet. Keeney observed that the offer given by Internet commerce is valued differently by different customers. Keeney observed that business commonly use the concept of a value proposition. According to Keeney (1999, p.533) value proposition is the combination of end result benefits weighted towards a product or service price. Customers are seeking the offers that are giving them the best value, meaning the best combination of benefits and price. When it comes to Internet commerce Keeney (1999, p.533) observed that there is no value proposition per se offered from the Internet, “since Internet commerce is not a product that one purchases but a means to purchasing products. However, we can speak of a value proposition to a customer of purchasing a specific product on the Internet”. Keeney (1999, p.533) defined the value proposition derived from the Internet as the net value of benefits and cost of both a product and the process of finding, ordering, and receiving it. Keeney observed that different customer could view the value of the same Internet purchase very differently.

Keeney (1999) observed that the competitors to a specific Internet purchase are other products purchased on the Internet, other means (stores, mail order) of purchasing the same product, or no purchase. Keeney claimed that the best way to find out what customers value is to ask them. Keeney observed that it is useful to ask many customers because they will have different views of values derived from the Internet. Keeney (1999, p.534) claimed that managers should

1)

Develop a list of customer’s values.

2)

Express each value in a common form, and convert each value into an objective.

3)

Organize the values to indicate their relationship, reorganisation of means-end relationships and articulating the fundamental objectives.

Keeney (1999) proposed that the first step involves asking people about their perceptions of values derived from the Internet. An analyst should do the second and third step. The analyst should make sense of the values identified.

2.4 Business Models for the Internet

Porter (1980, p.171) recognised that, “Most new industries are initially characterised by a great deal of uncertainty about such things as the potential size of the market, optimal product configuration, nature of potential buyers and how they can best be reached, and whether technological problems can be overcome. This uncertainty often leads firms to a high degree of experimentation, with many different strategies adopted representing different bets about the future. Rapid growth provides slack to allow these differing strategies to coexist for long periods of time. Over time, however, there is a continual process by which uncertainties are resolved. Technologies are proven or disproved, buyers are identified, and indications are gleaned from the industry’s growth about its potential size. Hand in hand with such reduction

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of uncertainty is a process of imitation of successful strategies and the abandonment of poor ones”.

Rodgers, Yen, and Chou (2002) observed that every firm that seeks to be successful in the future has to implement a successful e-business strategy. The authors claimed that e- commerce focus on firm’s customers and the buying and selling of goods and services over the Internet while e-business expands the connectivity of the organisation to include its suppliers, employees, and business partners. The authors claimed that e-business provides links to customers, suppliers, business partners, and employees through the Internet, intranets, and extranets. According to the authors is Web solution systems handling transactions for the customers and providing them with e-commerce solutions

Huizingh (2002) realised that both managers and management scientists has been fascinated for more than a decade now about the commercial potential of the Internet. Huizingh stated that the Internet has the potential to forever change the reach and depth possible with marketing activities. Internet may break the traditionally trade-off between the number of customers reachable and the richness of the information. Internet has also the possibility to make marketers more closely observe the customer purchase process. Further Huizingh observed that some companies have chosen to organise their online activities in a separate organisation unit. The reasons for this was accordingly to Huizingh to speed up the decision making process, to maintain flexibility, to create an entrepreneurial culture, to attract quality management, and to tap into the huge pool of capital available for Internet start-ups. Huizingh observed “it took some time, and a fascinating crash at stock markets, before it was realized that the Internet is a tool and not a strategy, and that organizational separation could undermine companies’ ability to gain competitive advantage”. Therefore proposed Huizingh that marketing managers need to understand how the Web can be used to develop and market offerings that are satisfying their customers needs.

Lin (2003, p.206) proposed four disadvantages of Internet commerce.

1)

Lack of physical contact and human interaction. This prevents inspection of products

2)

and face-to-face interaction. Communication is conducted via the Web site and this is often a one-way

3)

communication, the Web site providing information to the buyer. It is difficult to capture buyer’s attention as the Internet offers millions of Web pages.

4)

Buyer’s that use the Internet are technically oriented making them ideal for some products but less ideal for others.

Lin (2003) proposed the following advantages of Internet commerce,

Open 24-hour, 365-day a year

Lower costs and efficiency gains

Extended market reach

Quick adjustments to market conditions

Improved customer service

Lin (2003) claimed that the Internet has made it convenient for customers to buy, and they have access to more information and are struggling with fewer hassles. The Internet has also decreased the procurement costs and streamlined processes. The Internet has also made transactions easier.

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Savoie and Raisinghani (1999) observed that the cost savings from the Internet would come from three sources:

Elimination or reduction of the sales function.

Access to more suppliers with elimination of significant buying costs.

Enhanced communication by consolidating information, which will empower the buyers.

2.4.1 Changing Internet Focus

Internet is a new technology and according to Huizingh (2002) could its introduction to the market be described like other new technologies. Figure 2.4 shows the authors thoughts about the introduction of the Internet into the market. The first phase is the hype; the focus was on the new amazing Internet technology. Huizingh (2002) observed that during the years 1994- 1995 the popular press created a real Internet hype. The future would be totally different from past; managers were told that the Internet was a global medium, fast and cheap with shops open 24 hours a day seven days a week for customers all over the world. The second phase is according to Huizingh business as usual. “Managers realize that today’s world is not radically different from yesterdays, however it includes a new tool that enables them to do the same things better, faster, and cheaper”. In this phase managers learn which functions or activities there are that could benefit from the Internet. In the third phase, companies consider the Internet as a means to an end. Increased customer value is the result of integrating Internet capabilities with business processes. Currently many companies are according to Huizingh trying to leverage their marketplace assets into the Web and turn their ‘bricks and mortars’ operations into effective ‘clicks and mortar’ firms.

FIGURE 2.4 The Evolution of Internet Models: From a Technology Push to a Business Focus

Focus on: 3. Business Business as unusual Business processes 2. Business as usual Web functions 1.
Focus on:
3.
Business
Business as unusual
Business processes
2. Business as usual
Web functions
1. The Hype
Web capabilities
Technology
Time

Source: Huizingh, 2002, p.725

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Huizingh (2002) observed, “The crux of e-business is to effectively match the efforts to create superior customer value with the technical capabilities of the new medium”. Huizingh observed that in order to manage the transformation from a regular company into an e- business company manager need help. Therefore was three different models proposed by Huizingh to guide the managers in the transformation.

2.4.2 The Strategic Internet Application Model (SIAM)

The first model proposed was the Strategic Internet Applications Model (SIAM). This model explains the possibilities the Internet offers for new strategic directions. According to Huizingh (2002) the model distinguishes between four strategic choices.

1)

To use the Internet to offer customised products or services

2)

To provide added value to current customers

3)

To attract new customers

4)

To reposition the company in its business network

Figure 2.5 visualise the SIAM model. The SIAM model could be used to help managers structure their main objectives about e-business initiatives. Huizingh claimed that the strategic choices in the SIAM model do overlap each other, thinking about how to strengthen the relationship with current customers may lead to innovative services that are also attractive for new customers and current customers may be interested in services that are developed to attract new customers.

FIGURE 2.5 The Strategic Internet Applications Model (SIAM)

Customized Products New Business Current New Customers Customers Network Repositioning
Customized
Products
New Business
Current
New
Customers
Customers
Network
Repositioning

Source: Huizingh, 2002, p 727

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  • 2.4.2.1 Customisation

Huizingh (2002) realised that there are many ways to customise a product or a part of a product. The easiest product to customize is a product that is digitized. These products can be customized at nearly zero cost according to Huizingh. For non-digital products a company can offer components that customers can combine into tailor-made products. Huizingh observed that recently companies started to exploring opportunities to supplement non-digital products with digital attributes. The advantage of using the Internet for customization is according to Huizingh that the Internet offers very low cost solution to the problem of the extensive communication that is often necessary between the buyer and the seller. Huizingh further observed that the Internet also gives the companies the opportunity to extend mass customization to other elements of the marketing mix, such as price, distribution, and communication. According to Huizingh is mass customization increasing the customer value of the core product, but at the same time is the complexity of the purchase increased for the buyer. The buyer’s choices shift from limited to almost infinite number of different products.

Jelassi and Leenen (2003) observed that both customers and manufacturers could benefit from online customization. Customers appreciate customised products and services and are willing to pay a premium price. Manufactures can decrease product configuration costs because customers mainly specify their product themselves without the help of a salesperson.

Grewal, Iyer, Krishnan, and Sharma (2003) observed that the Internet could be used to enhance the price-value-loyalty framework. The authors claimed that customization could be used to build loyalty through improvement in perceived value. Lee (2001) proposed that if the customers are involved in the actual design and production processes switching costs are increased.

  • 2.4.2.2 Current Customers

Huizingh (2002) observed that a company’s current customers could be served through a Website in many different ways. Huizingh believed that companies should continuously increase the value offered to the buyer on the Website to prevent the buyer to switch to other suppliers. Huizingh claimed that when markets become saturated and competitive pressure increase, the necessity to provide added value becomes inevitable to retain market shares. Huizingh stated that the customer interaction cycle model could be used as a tool to determine how to add value to customers.

  • 2.4.2.3 New Customers

Huizingh (2002) observed that the Internet enables companies to attract new customers. Since the cost per contact is reduced by the Internet companies can reach previously margin customers, and since the Internet is a global medium geographic boundaries that previously limited the market is disappearing. Huizingh also observed that the Internet is a suitable medium to reach thin markets, niche markets in which buyers and sellers are small and geographical dispersed.

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2.4.2.4 Network Repositioning

Huizingh (2002) put forth the ability of the Internet to strengthen or change the relationships within a business network. Huizingh claimed that Web sites could support intermediaries by:

1)

The services offered to intermediaries

2)

The co-operation among intermediaries

3)

The services intermediaries provide to the final customers

Huizingh claimed that companies could use the Internet to reconsider their role in the business network by altering the ways they receive and deliver value to other parties in that network or by redefining their position in the network.

2.4.3 The Customer Interaction Cycle (CIC) model

The customer interaction cycle is a model that according to Huizingh (2002) concentrates on how a strategic focus can translate into applications that deliver added value to new or current customers. The CIC model is a tool to discover Web applications that can lead to superior customer value. The rational behind this model is that a Web site should support the entire customer’s purchase process. Huizingh claimed that customers would only use the Web site if they think they can do a better job by using it. Figure 2.6 visualises the CIC model.

Bertsch, Busbin, and Wright (2002) observed that the key benefits that should be offered to customers when they purchase on the Internet are speed of access, transactions, and delivery.

Huizingh proposed that managers must ask themselves these questions during each phase of the CIC model.

1)

Current support activities. How do we support customers in their selection process,

2)

their buying process, or their product use process? Evaluation of these activities, from both a supplier and a customer point of view. Are

3)

there any services with which important customers are unsatisfied or that lead to high costs? Possible replacement by Web applications. Which of these customer support activities

4)

can be performed also or even better in a Web site? Unfulfilled needs and wants and Web capabilities. What current unfulfilled needs and wants can be identified and what possibilities offer the Web to meet them?

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FIGURE 2.6 The Customer Interaction Cycle (CIC) model

1. Purchase 5. Relationship 4. Use 2. Order After Sales 3. Exchange
1. Purchase
5. Relationship
4. Use
2. Order
After Sales
3. Exchange

Source: Huizingh, 2002, p 731

  • 2.4.3.1 Purchase

Huizingh (2002) observed that purchasing could be divided into different steps, and that a corporate Website should be designed to support the different phases of the purchasing process. Huizingh claimed that purchasing often starts with making a first round assortment of products and suppliers and then making the final choice among the alternatives in the evoked set. Huizingh proposed that knowledge of the customer purchase decision process should compose the design of a Website and the information for the preliminary selection should be on the top of the page and not stored deep down in the Website.

  • 2.4.3.2 Order

Huizingh (2002) proposed that customers should be able to order products from a company website and then should the supplier confirm the order by sending the buyer an automatically generated e-mail. Rodgers, Yen and Chou (2002) observed that the increased speed of fulfilling orders is a benefit from the Internet. The authors claimed that by interconnecting with suppliers orders will be received faster and should be filled at a quicker speed. This allows firms to substantially reduce its inventory levels.

  • 2.4.3.3 Exchange

Huizingh (2002) stated that information about the delivery should be available within the Website. Jelassi and Leenen (2003) proposed that manufactures should offer their customers a safe and risk free transaction online. Jelassi and Leenen further observed that it is important to fulfil the transaction quickly, reliably and rewardingly. The authors observed that manufactures could make use of the following transaction mechanisms:

Literature Review An online catalogue with continuously updated prices and features Bundled offers, a combination of

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An online catalogue with continuously updated prices and features

Bundled offers, a combination of multiple products sold in a package with a lower

price than the sum of the single prices Discount or limited online edition products that can be offered on the manufactures

Website Auctions

Porter (2001, p.66) observed, “Its greatest impact has been to enable the reconfiguration of existing industries that had been constrained by high costs for communicating, gathering information, or accomplishing transactions”.

Savoie and Raisinghani (1999) proposed that by feeding transactions into existing order entry systems, as well as inventory, shipping, billing, and other related subsystems the Internet can be used to control costs and gain monetary savings benefits.

Rodgers, Yen, and Chou (2002) observed that the increased speed of fulfilling orders is a benefit coming from the Internet. The authors claimed that the Internet connection between suppliers and buyers would increase the speed in the distribution chain so that orders are received faster and delivered faster. This has a positive impact on firms inventory level and can lead to a just in time (JIT) inventory scheme. This gives that storage costs as well as the cost related to obsolete inventory would become near to non-existing, and this gives a positive impact on the profit figures of a corporation.

Demand Chain Management (DCM)

Frohlich and Westbrook (2002) proposed that companies that link their customers and suppliers together into a network are building something called demand chain management (DCM). DCM is defined as “the practise that manage and co-ordinates the supply chain from end-customers backwards to suppliers”. Frohlich and Westbrook observed that although the benefits with DCM have been known for many years it has been impossible to make it work. DCM requires an extensive amount of fast travelling information. This amount of information can be accessed via the Internet. The authors claimed, “DCM is perceived in many industries as one of the most powerful tools presently available for creating real competitive advantage”.

  • 2.4.2.4 Use (After sales services)

Huizingh (2002) observed that the company Website should help the buyer to make use of the purchased product. Jelassi and Leenen (2003) observed that the Internet makes it possible for manufactures to get in contact with the end users of their products. Therefore claimed the authors should a manufacturer carry out many downstream activities such as offering financing and maintenance. The manufactures could also train the users and supply spare parts and consumable products.

  • 2.4.2.5 Relationship

Huizingh (2002) observed that many companies have developed Website activities that are not directly aimed at transactions. These activities are aimed at strengthen the relationship with the customers. According to Huizingh there are three possible Web strategies that do this and they are,

Literature Review 1) Community building 2) Image building 3) Offering services that enable the customer to

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1)

Community building

2)

Image building

3)

Offering services that enable the customer to do a better job

Community building is a platform that allows a company’s customers to directly interact with each other. Huizingh believed that if managed the right way online communities could strengthen brand names. Image building Web applications should strengthen the brand name. Many producers of fast moving consumer goods are including games on their Website in hope to strengthen the brand name.

2.4.3 Accessibility Design Offer Fulfilment (ADOF) model

Huizingh (2002) proposed that the ADOF model describes the factors that determine the operational success of a Website. The ADOF model supports management thinking for traffic generation, the design and the offer given from the Website. Figure 2.7 visualises the ADOF model. According to Huizingh are these three factors determining the short run success of the Website. The fourth factor that determines the long run success is according to Huizingh fulfilment. Huizingh stated, “Only if customers experience that a company is able to deliver what it has promised, they may become loyal (e-) customers”.

FIGURE 2.7 The ADOF model

Accessibility Design Offer Fulfilment
Accessibility
Design
Offer
Fulfilment

Success of Web site

Source: Huizingh, 2002, p.737

2.4.3.1 Accessibility

Huizingh (2002) observed that the difference between Web sites and classical media is its non-intrusiveness. Huizingh claimed that now are the customers visiting the suppliers instead of the other way around. Therefore is accessibility crucial, and with accessibility Huizingh referred to the extent which customers can easily find the Web site. Grönroos, Heinonen, Isoniemi and Lindholm (2000) proposed that accessibility refer to how customers could

Literature Review purchase and consume a service, i.e. how easily they get access to the company.

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purchase and consume a service, i.e. how easily they get access to the company. Huizingh observed that Web sites become easier to find if they have URL-addresses that make sense like (www.companyname.com or www.brandname.com). Web sites should be promoted both on-line and off-line. On-line promotion can be banners and links. Off-line promotion can be advertisements in broadcasting and print media and to print the URL-address on product packages and on business cards.

Rodgers, Yen, and Chou (2002) observed that the Internet allows firms to get in touch with suppliers who never had access to them before. The authors further observed that this has increased the competition among suppliers and thus resulted in lower profit margins.

  • 2.4.3.2 Design

Huizingh (2002) observed that the content of a Web site should be organized and presented in such a way that visitors can easily find what they are looking for. Nielsen (1999, p.9) observed, “Usability rules the Web. Simply stated, if the customer can’t find a product, then he or she will not buy it”. Evans and King (1999) claimed that design is critical. If the Website isn’t fascinating there may be a quick exit by the visitor with little hope of return. The authors claimed that when a user (buyer) enters a Website there should be an overview of the site, where the firm is located, contact names, and what activities can be done through the Website.

  • 2.4.3.3 Offer

Huizingh (2002) claimed that on the Internet the quality of an offer is determined similarly to the way an offer is determined in the terrestrial world, where the ratio of price and quality determines attractiveness of an offer. According to Huizingh Web sites can influence both elements. Quality refers to according to Huizingh to the perceived value of the product and that includes both supporting services and information. Therefore claimed Huizingh could quality be increased by means of easier access to information, increased availability, and tools to speed up the purchase process. According to Huizingh could these tools be search engines, comparison facilities, or the ability to personalize the search process. Further Huizingh stated that instant information by e-mails or through the Web site could increase the perceived quality.

The other factor that determines the attractiveness of an offer is according to Huizingh the price. Huizingh observed that the price on-line could be lower because the customers takes over the data entry process and thereby releases the supplier of the time consuming processes of data entry and the correction of data entry errors. Huizingh further claimed that disintermediation could lead to lower prices.

Huizingh (2002) observed that strategies like customisation, bundling and providing information can lead to higher switching costs for the buyer and thereby give the seller a chance to increase the price.

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2.4.3.4 Fulfilment

Huizingh (2002) observed that fulfilment on the Internet is concerned about two major factors the extent to which a company is able to meet its own promises with the regard to the product in a broad sense and the service standard on the Internet. When the term broad sense is used about a product Huizingh claimed that it in cludes the primary product or service and supporting services as well as the information communicated to customers about these elements and their use. A company should according to Huizingh deliver within 24 hours if they have promised that on the Website and the product should have the features described on the Website. Huizingh observed that fulfilment on the Internet is similar to that in the ordinary market. Huizingh further stated that the quality of the organisation behind the Web site often determines the quality of the fulfilment. The company Web site can support the fulfilment process by providing information about the delivery. Companies could also use their Websites to allow their buyers to make payments through them.

Huizingh (2002) observed that the other part of fulfilment refers to the standard on the Internet. Service standards refer to for example the time it takes for companies to answer on incoming e-mails.

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3 Frame of Reference

T he theories in chapter two were chosen to give a theoretical foundation and to help solve the research problem of this thesis. To solve the research problem of this thesis three

research questions (RQ) were constructed. The research questions will be introduced, presented, and explained in this chapter. Each research question will start with a discussion to guide the reader. Thereafter with both the theories from chapter two in mind and also with the research question in mind will the emerged frame of reference for this thesis be constructed. The emerged frame of reference will be used in the data collection and in the analyse of this thesis. As a reminder for the reader will the research problem of this thesis start this chapter.

  • 3.1 Research Problem

The research problem of this thesis is the following.

How has the Internet affected the competitiveness and the industry competition within a business-to-business market?

The literature review has made it clear that there are not many studies done about customer value and industry competition connected to the Internet. Therefore is it justified to conduct a study that closer focus on this problem.

  • 3.2 Research Questions (RQ)

In 1979 Michael E Porter wrote an article called “How competitive forces shape strategy”. In this article the author introduced a framework of five basic forces. The author claimed that the state of competition in an industry depends on these five forces. The framework is included in chapter two. Since the research problem is related to the area presented by Porter, this thesis will construct the research questions around the theories presented by Porter.

Porter (2001) recognised that the Internet affects every industry. But all industries are affected in different ways. Porter (1979) claimed that the strongest competitive force or forces determine the profitability of an industry and so are of greatest importance in strategy formulation. The research questions needed for this thesis was found after several interviews with knowledgeable persons within the industry.

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3.2.1

The First Research Question

Porter (1985, p.3) recognised that value is what buyers are willing to pay. Porter claimed that superior value comes from either offering lower prices than competitors for equal benefits or providing unique benefits from differentiation. Porter (1985, pp.36-61) further introduced the concept of the value chain. Porter observed that all companies conduct a set of activities that are performed to design, produce, market, deliver, and support its products. All these activities could be represented as a value chain. The importance is to understand that buyers also have value chains and that a company’s product represents a purchased input to the buyer’s chain. Porter argued that value is created when a company creates competitive advantage for its buyers, either lower the buyers’ costs, or raise the buyers’ performance. Porter stressed the fact that the buyer must perceive the value created for the buyer if the seller should be reward with a premium price.

With this in mind will the first research question be the following.

How can the Internet be used to increase the buyer’s value?

To find out if the buyers costs has changed due to the Internet this thesis will try to find out if the Internet has affected the following costs.

Ordering

Delivery

Financing and payment

Search for information

To find out if the performance of the buyer has increased on the market this thesis will try to find out if the turnover has increased. This thesis will also try to find if the buyers has any perceived values coming from the Internet. If so, the model from Keeney, presented in chapter two will be applied on the values so they can be organised.

3.2.2

The Second Research Question

Porter (1980) proposed that buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other, all at the expense of industry profitability. Porter (1980, pp.108-110) further observed that most companies do not sell their products and services to a single buyer but to a range of buyers. These buyers differ widely in their volumes of purchases, the importance of the product as an input to their production processes. Therefore will these buyers value the offerings differently. Porter (2001) claimed that the Internet has provided the customers with more and better information and has therefor strengthened the bargaining power of buyers.

Therefore will the second research question of this thesis be the following.

How can the influence of the Internet on the power of buyers be described?

To find out if the buyers bargaining power has increased, these factors or queues proposed by Porter (1980) will be search for in this thesis.

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When a buyer increases its purchasing volume from a supplier that buyer will become

more important for the seller and the bargaining power for that buyer will increase. If the buyer is sure to find an alternative supplier they can use this to enhance their

bargaining power and play suppliers against each other. Are the customers buying from more suppliers today, due to the Internet? If a buyer wishes to change suppliers they may face fixed, shopping, transactions, and negations costs. Has the Internet decreased these costs and therefore increased the bargaining power of buyers?

Porter (1980) observed that more factors then those above have an influence on the bargaining power of buyers. But since all industries are different, the influence from each factor will vary from industry to industry. After interviews with knowledgeable persons within the industry these factors were rejected for this thesis work.

The product purchased forms a component of the product and is expensive.

The buyer earns low profit, which create great incentive to lower purchasing costs.

The product purchased is unimportant to the quality of the buyer’s product.

The purchased product does not save the buyer money.

The buyer poses a credible threat of integrating backward to make the purchased product.

These factors were rejected because they are of no importance within the distributor net of the studied industry.

3.2.3 The Third Research Question

Porter (1980) recognised that new entrants to an industry bring new capacity, the desire to gain market share, and often-substantial resources. This can lead to reduced price and lover margins for a company in the industry. Porter claimed that the threat of entry into an industry depends on the barriers to entry that are present on the market. Porter observed that if barriers are high and/or the newcomer can expect sharp retaliation from entrenched competitors, the threat of entry is low.

Galbraith and Merrill (2001) observed that the Internet has reduced the industry entry barriers, particularly in the area of product specific marketing and channel assets. Galbraith and Merrill claimed that previously most of the marketing and distribution functions involved a combination of matching, somewhat loosely linked physical assets, such as a sales force, catalogue printing and mailing, sales ordering staff, billing and accounts receivable staffs, distribution network, and advertising and marketing staff. Galbraith and Merrill observed that the establishment, maintenance, and management of these traditional channel assets could be very expensive and long-term. Galbraith and Merrill claimed that the Internet makes these channel-specific assets less expensive and the management relatively easy.

Savoie and Raisinghani (1999, p.249) claimed that the absence of borderlines on the Internet makes it possible for any business to go global with exceptional ease and low costs. The authors claimed that the Internet will “reduce the barriers that distribution channels traditionally offered the market leaders”.

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Therefore will the third and final research question be the following.

How can the influence of the Internet on the threat from new entrants be described?

To find out if the threat of new entrants into the market has increased due to the Internet these factors or queues proposed by Porter (1980) will be searched for in this thesis.

Economies of scale. Can the Internet reduce or facilitate the possibility to achieve the

power of scale? Product differentiation. Can the Internet reduce or increase the power of brand

identification? Access to distribution channels. Do new entrants need access to the old channels or can the use the Internet to bypass old existing channels.

Porter (1980) did also put forth these factors as important for the threat of new entrants.

Capital requirements, the need to invest large financial resources in order to compete

Cost disadvantages independent of size

Government policy, the government can limit or even foreclose entry to industries

These factors were rejected as not important for this thesis work after interviews with knowledgeable persons within the industry.

3.2.4 Summary of Research Questions

As a reminder will all three research questions be presented together.

1)

How can the Internet be used to increase the buyer’s value?

2)

How can the influence of the Internet on the power of buyers be described?

3)

How can the influence of the Internet on the threats from new entrants be described?

With the chosen framework constructed by Porter in mind, the inquisitive reader will ask why are not the other forces made into research question. The answer is that during the interviews with knowledgeable persons within the industry those forces were rejected as not interesting with regard to the Internet. Other industries would most certainly demand other research questions than those constructed for this thesis.

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3.3 Emerged Frame of Reference

This section will present the emerged frame of reference. In figure 3.1 a visualisation is presented of how the theoretical areas, the research questions and how the Internet are perceived to relate to each other. As can be seen in figure 3.1, theories related to each research question will serve as a base for the data collection. Much emphasis in the literature review is focused on strategy literature. Several authors discuss the lack of studies that focus on competitiveness and the Internet (Grönroos et al., Aguila Obra et al.). This thesis will be based on the framework constructed by Porter (1979) as a model for data collection. This framework is chosen because it fits well to the Internet environment. It focuses on the connections between the different player’s in the industry and it is easy to incorporate the value concept into this framework.

FIGURE 3.1 Emerged Frame of Reference

Barriers to Entry

Threat of New Entrants (RQ 3)

Rivalry among Existing Competitors

Industry Competitors

Offerings (RQ 1)

Bargaining Power (RQ 2)

Buyers
Buyers
Internet
Internet

Source: Authors own conception

Methodology
Methodology
Methodology

Methodology

4 Methodology

T he previous chapters included the literature review and the selection of theoretical tools needed for this thesis. This chapter will describe the methodology used in this thesis. The

selection of methodology is based on the research problem and the research questions. Motivations for the selected strategies will be given in each section.

4.1 Purpose of Research

Zinkmund (2000) claimed that depending of the nature of the problem the research would be exploratory, descriptive, or causal. Exploratory research is conducted to explain and identify the nature of a problem. Zinkmund (2000) claimed that exploratory research is used to help managers to better understand a problem. Zinkmund (2000, p.103) proposed, “Exploratory research may be a single research investigation or a series of informal studies to provide background information”. Zinkmund (2000) claimed that the purpose of exploratory research could be.

Diagnosing a situation

Screening alternatives

Discovering new ideas

Descriptive research is intended to explain distinctiveness of a population or an observable fact. Descriptive research seeks to determine the answers to who, what, when, where, and how questions. Zinkmund (2000, p.51) brought attention to the fact that “descriptive studies are based on some previous understanding of the nature of the research problem”.

Causal research is conducted to recognise cause-and-effect relations between variables where the research problem has been intently defined. A causal study normally has an anticipation of the relations to be explained. Causal research tries to establish that when we do one thing, another thing will happen.

4.1.1 Thesis Research Purpose

The research purpose of this thesis is a combination of exploratory and descriptive research. The aims were to find out if and how the Internet has affected the competitiveness and the industry competition within an industry. This involves both identifying the nature of the problem, which is exploratory research, and explains distinctiveness of an observable fact, which is descriptive research.

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4.2 Research Approach

This section will consider the research approach for this thesis.

  • 4.2.1 Deductive or Inductive Reasoning

Zinkmund (2000) discovered that theories could be developed with either a deductive or inductive reasoning. Deductive reasoning is according to Zinkmund (2000, p. 43) “the logical process of deriving a conclusion from a known premise or something known to be true”. Inductive reasoning is according to Zinkmund (2000, p.43) “the logical process of establishing a general proposition on the basis of observation of particular facts”.

  • 4.2.2 Qualitative or Quantitative Research

Zinkmund (2000, p.103) mentioned that the focus of qualitative research is not on numbers but rather on words, and observation. Zinkmund (2000, p.103) claimed, “Any source of information may be informally investigated to clarify which qualities or characteristics are associated with an object, situation, or issue”. Miles and Huberman (1994, p.10) noticed the following about qualitative data, “One major feature is that they focus on naturally occurring, ordinary events in natural settings, so that we have a strong handle on what ‘real life’ is like”.

Zinkmund (2000, p.103) acknowledge, “The purpose of quantitative research is to determine the quantity or extent of some phenomenon in the form of numbers”.

  • 4.2.3 Thesis Research Approach

This thesis started with a problem area, a research problem, and a literature review. Since the emerged frame of reference constructed for this thesis is derived from the literature review, which is something, known to be true (facts, figures, and theories from old research), the research of this thesis was deductive.

The choice of qualitative or quantitative research approach naturally depends on the research problem and the data needed to solve the research questions and research problem. The research of this thesis focused on words and not on quantity, therefore was the research of this thesis qualitative.

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4.3 Research Strategy

Yin (1994) put forth five different research strategies to use when conducting social science research. These strategies provided with a three conditions criteria to determine which strategy to use is displayed in table 4.1. Yin (1994) proposed that a study concerning ‘how’ or ‘why’ questions, should use a case study, histories, or an experiment. Yin (1994) proposed that during a case study the researcher could use primary and secondary documents, direct observations, and interviews.

Table 4.1 Relevant Situations for Different Research Strategies

Strategy

Form of research question

Requires control over behavioural events?

Focuses on contemporary events?

Experiment

how, why

yes

yes

Survey

who, what, where, how

no

yes

Archival Analysis

many, how much who, what, where, how

no

yes/no

History

many, how much how, why

no

no

Case Study

how, why

no

yes

Source: Yin, 1994, p.6

4.3.1 Thesis Research Strategy

The purpose of this thesis was to gain an understanding about how the Internet has affected the competitiveness and the industry competition within a B2B market. Therefore was the research strategy chosen to solve this problem a case study. Yin (1994) proposed that the unit of analysis is the case. The case for this thesis was the stated research problem.

How has the Internet affected the competitiveness and the industry competition within a business-to-business market?

The sub units of analysis were the research questions.

1)

How can the Internet be used to increase the buyer’s value?

2)

How can the influence of the Internet on the power of buyers be described?

3)

How can the influence of the Internet on the threats from new entrants be described?

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4.4 Sample Selection

The chosen company for the case study was Volvo Penta. This company was chosen because it fulfils all the criteria stated in chapter one, i.e. a business-to-business company in a manufacturing market with a presence on the World Wide Web and they are using the Internet to conduct business. Other reasons for choosing this company were that they gave access to needed information and that they also gave support for the thesis.

4.4.1 AB Volvo Penta

Volvo Penta is a part of the Volvo group. Volvo Penta is a manufacturer of engines and complete drive systems. Volvo Penta has three different areas of business, marine leisure, marine commercial and industrial customers. Table 4.2 displays economic figures of Volvo Penta.

Volvo Penta provides power for customers who produce leisure boats, work boats, and power generating equipment and forklifts. Manufacturing is concentrated in Sweden and the US, while sales and service are conducted worldwide. The products are found all over the world, with an exporting amounting to more than 90 percent of company business and with dealers in some 120 countries.

Genuine Volvo Penta parts are offered for servicing needs at least 15 years after serial production has been stopped. The parts services are important from a customer satisfaction standpoint as well as from a business standpoint (internal document).

Table 4.2 Economic figures of AB Volvo Penta

<

Period

200201-200212

200101-200112

200001-200012

199901-199912

Turnover (kkr)

4718300

4281700

3589700

3215200

Turnover change

10.20

19.28

11.65

18.27

Employed

621

599

636

524