Lecture 3EC Value and Implementation

Jifeng LuoAntai College of Management, SJTU

jifengluo@gmail.com

Strategy Implementation

E-C Value Creation

E-C Value Realization

Change Management and Process Redesign

E-C Value Creation: Five Levers – Scheme 1

Time (cycle time reduction)

Distance (overcome distance)

Relationships (trust and loyalty)

Interactions (chat, board, community)

Product (enhancements, new products)

Social networking demand (cry for socialization

in Cyber world)

Value Creation: Time

Reduce cycle time

Quick order entry

Example: Amazon’s 1-click shopping; Google shopping

Extend business hrs.

24X7 Service

Example: 25% Grainger’s Web sales

Value Creation: Distance

Virtual presence Virtual network

Example: ziprealty.com; autobytel.com

Location independence Real-time chat

Example: AOL’s Instant Messenger; Skype

Long distance learning; video-conferencing; etc

Value Creation: Relationships

New intermediaries

Alter Role of Intermediaries

Example: Alibaba.com; ctrip.com; FreeMarkets.com

Lock-in User Create switching costs

Example: OfficeDepot.com

Value Creation: Interactions

Get feedback Extensive User Feedback

Example: McGraw-Hill (betabooks)

Give control User Controls Information Access

Example: Otis e*Direct (Plan Your ProjectSM)

Value Creation: Product

Transactions to solutions

Help buy/sell used equipment

Example: Milacron

Decision support

Online Decision Support Tools

Example: Turner mania for media managers

Value Creation: social networking

Instant contact

Instant contact with friends

Example: QQ, MSN messenger

Virtual life Bring Virtual Life into Real Life

Example: Facebook, secondlife …

Value Creation - Scheme 2

The eight C’s• Content

• Make vs. buy vs. package (e.g., Yahoo!, youtube.com, qidian.com)

• Context• Localization and Personalization (e.g., Yahoo!, Amazon)

• Community• Affinity groups (e.g., Tripod, Geocities)

• Connectivity• Networks (e.g., AOL Instant Messaging, Facebook)

• Commerce• Transactions in information or physical goods (e.g.,

Amazon)• Cost

• Costs to consumers and to seller (google shopping)• Convenience

• Provide ways for consumer to search/find (e.g., dianping.com, google.com)

Strategy Implementation

E-C Value Creation

E-C Value Realization

Change Management and Process Redesign

Value Creation vs. Value Realization

Who captures the value? Buyer or the Seller?

Example: ATM case in Banking

Competitive advantage or necessity?

Buyer’s Strategies

3. Control Transaction

6. Induce commoditization

5. Cost transparency

1. Transaction cost reduction

2. Dictate price

4. One-to-one Negotiation

Bargaining Costs

Enforcement Costs

Decision Costs

Policing Costs

Reduction of Buyer’s

Transaction Costs

Search Costs

Information Costs

1. Buyer’s Transaction Costs

2. Buyer Dictates Price

• Priceline.com started this tactic

Its stock price was down from the $974

It abandoned grocery and gas businesses

But it created an idea

• Shop2gether.com for small businesses

• Can buyers band together like never before?

• Group purchasing

3. Buyer Controls Transactions

• FreeMarkets example

Select and train suppliers

Select lot size

Design bid event

Increase competitive intensity

• Reverse auction has become popular!

Auction Formats

Liquidation Auctions: (e.g. Priceline)

suppliers customersauction

Market Efficiency Auctions: (e.g. eBay)

Seek lowest price on widely available goods and services

auction

disincentives to use auction shrink supply over time

Seek first to maximize existing

channels & reduce inventory

suppliers customersSeek access to unique / rare products or services

incentives to use auction increase supply over time

Auction format is favored over the

inefficiency of existing channels

4. Return to 1-1 Negotiation

- Bargaining was common before the industrial era.

- Mass markets led to fixed-price trades.

- Cost of negotiation was deemed too high!

- That may be changing, thanks to agent technology.

- Automate part or all of the negotiation process?

5. Cost transparency

The Internet equips the buyer with lot more information!

Why is cost transparency bad for seller?

-

-

-

6. Commoditization

–Commoditization occurs as a goods or services market loses differentiation, and the competition is reduced to price competition.

–Customization to avoid it. But cautions:

– Buyer posts product requirements on the web

– Two sellers meet requirements by modifying existing products

– Buyer sees no difference between vendors

– Buyer wants to pick the lower cost vendor

– So, customization may lead to commoditization!

Supplier’s Strategies

3. Customer retention

6. Reconfigure channel

5. Value Proposition

1. Pricing alternatives

2. Buyer’s total costs

4. Lock-in strategies

1. Pricing Alternatives

Differentiated pricing

• Not uniform pricing

• FordDirect.com attempted regional pricing

Dynamic Pricing

• Price changes with time

• Airline industry as the prime example

Workflow Cost

Fulfillment Cost

Carrying Cost

Product Cost

Transaction Cost

Customer incurs

multiple costs

2. Consider Buyer’s Total Costs

Increasing customer retention by 5% increases profit by more than 25% (Bain & Company)!

How can we retain customers on the Web?

• What are the drivers? (e.g., on-time delivery, product performance, content, and service)

• How can the Web help?

• How may the Web hurt?

3. Customer Retention

Customer Retention Arithmetic

Retention Emphasis

Acquire 3 customers: $60

Retain 20 customers: $80

Total Cost: $140

Total Customers: 23

Acquisition Emphasis

Acquire 6 customers: $120

Retain 5 customers: $20

Total Cost: $140

Total Customers: 11

Cost to acquire one new customer: $20Cost to retain one current customer: $4

4. Seller’s Lock-in Strategies

Principles:

- Use extranets to create lock-in

- Create custom content

- Increase switching costs

Customer Benefits:

- Reduce cycle time

- Reduce errors

- Increase control

Examples:

- Dell’s Premier Page

- OfficeDepot.com

5. Value Proposition

• Redefine product by adding new value

• Create new product combination thru

bundling and versioning

• Reduce buyer’s risks

6. Reconfigure Channel

• Provide on-line customer service

• Supplant intermediaries

• Find new customers

• Generate new revenue

Channel Extending Intermediaries

supplier customer

CEIsupplier

supplier

supplier

customer

customer

customer

Search for opportunities to add value: e.g. high customer search costs, switching costs, low customer satisfaction

Wield new power by consolidating traditional buyers & customers. Become the first-line interface with consumers.

Strategy Implementation

E-C Value Creation

E-C Value Realization

Change Management and Process Redesign

Process: how should employees do their work? A set of activities to produce output for customer/market

- Set of inputs + Ordered activities

- Cost, time, quality, customer satisfaction (internal & external)

- Dynamic view of how value is created

Focus: How, not just what

Organizational Structure: Cross functional teams

Business Process

Examples of Cross-Functional Processes

Competitor Analysis &

Market Research

R & D Marketing ManufacturingNew

ProductNew Product Development

Business Proposal Commitment Configuration Credit Delivery Billing Collection Processes

Business Sales Manufacturing Finance Logistics Functions

New Product Development

Order Management

Competitive Advantages Enabled by Process Innovation

“Product innovation gives less than three months competitive advantage.”

“Process innovation gives at least 12 months competitive advantage.”

“产品创新带来的竞争优势少于三个月。”

“流程创新能至少带来十二个月的竞争优势。”

- Sir John Bond, Chairman HSBC

MRO Procurement Process

MRO Procurement Process Redesigned

Ford Purchasing

(1) Purchase Order

Vendor

Vendor

(2) Purchase Order Copy

(3) Receiving Document

Ford Receiving

Accounts Payable (500)

(5) Payment

Goods

(4) Invoice

Ford Purchasing EDI

GoodsFord Receiving

Accounts Payable (125)

EFT

EFT

Ford & Vendor Banks

Procurement Database

Ford’s Procurement ProcessBefore

After

Mortgage Loan Processing at BANC ONE

Closing

Closing

Laptop

Loan Input

Desk-to-Desk Approach: 17 days

Team Approach: 2 daysKodak’s “Concurrent Engineering” uses the

same principle