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This chapter is from the book

The Net Economy Meets the Global Economy

The global village is truly coming to be a reality. While governments are trying to find new rules for taxation, customs, and security, the forces of globalization are continuing to dominate the Internet. According to Forrester Research, the rules of the Internet Economy are as follows:

  1. Customer service eclipses the product.

  2. Real-time demand drives production.

  3. Pricing matches market conditions.4

Essentially, this model of business on the Internet is based on the relatively new idea of a network economy based on both "richness" and "reach." In traditional network models, being able to reach a mass audience usually meant an inability to customize any function for smaller or even individual portions of the network's customer base. Television, cinema, and telecommunications rely on sheer volume to make their numbers. Demographics and content targeting help, but out of three million people who watch the same commercial, only about 10 percent take any serious interest in the product being offered. The ideal would be to have all three million people see precisely the commercial on the product they would be interested in, whatever their individual interest. In other words, instead of driving the product to the customer, let the customer drive the product he or she wants.

Although this promise has yet to be fully realized, even on the Internet, the following business dynamics described in the following sections are becoming a reality right now.

Global Competition

Competition is now unrestrained. The barriers to enter an e-business have been somewhat reduced: information is readily available, resources are available via communities and intermediaries, and communication is almost instantaneous. The velocity of new entrants is often mind-boggling. The marketplace is also behaving like the stock market, auction-oriented business models are getting popular, fixed pricing is being challenged, and price differences due to geography are fading away.

Non-Traditional Competition

The Internet is giving opportunity to all and in very different ways. Since the barrier to entry to most businesses is lower because there is very little cost associated with using the Internet, it is easier for one type of business to get into other types of businesses. Banks are becoming investment brokers, and vice versa. Booksellers are not only selling CDs and other products, but they are also becoming auctioneers. The classic example is Amazon.com, which sells books, CDs, hardware tools, software, and more. Amazon.com is also aggressively pursuing auctioning. So, the traditional question, "What business are you in?" is taking on new meaning. It is also a debatable business model: Is this model sustainable long-term, or is it just an experiment of a new world that will ultimately fizzle away?

Communities

The Internet is providing the infrastructure of a true electronic bazaar. Communities-of-interest are cropping up and a very different set of rules for interaction is being established. These communities are interacting with each other, exchanging information, and generating value. Chat sessions, electronic billboards, and Web meetings are powerful tools that are giving communiti?es the information they need, when they need it. Communities are also creating a strong market demand for products and services. For example, there are investment communities, engineering communities, sales communities, and project management communities that help foster communication among people with common interests. There are portal sites that bring certain ethnic communities together; for example, Satyam infoway has a portal (www.satyam.com) that brings the Indian community together to share their interests and ideas, regardless of their geographic location. There are similar portals for all social groups, religions, ethnic groups, and so on.

The dynamics of these communities and their influence on markets, on the purchase of products and services, and in bringing social changes have yet to be understood fully. However, their impact seems to be quite profound.

In the Old Economy, capital and labor drove the economy according to the following equation:

E ff = (Labor + Capital)

This gradually transformed into the equation:

E ff = (I sn * H)

where I stands for information and knowledge through social networking and H represents human skill sets.

The Internet is defining economic efficiencies in terms of this equation:

E ff = (I dn * H* T ff)

where I dn stands for information and knowledge through social and digital networking, H represents human skill sets, and T ff is for technology effectiveness. It is evident that digital communities are playing a major role in e-business.

Channels

In the initial wave of e-business models, people argued that the Internet would eliminate different "brick-and-mortar" channels and intermediaries and pass on the savings to customers. While this is true in certain industries, this has not always been the case. E-commerce intermediaries are becoming an industry by themselves. In either B2B commerce or business-to-consumer (B2C) commerce, there is a need for a complete solution. With the proliferation of products and services over the Internet, it makes sense to have some kind of solutions provider that gives value in terms of cost, efficiency, and quality. Cyber-mediation is providing this solution. For example, an Internet-based escrow company (escrow.com) is providing compelling value to a lot of e-sellers, especially from auction sites. In fact, all the portals like America Online (AOL) or Yahoo! are some sort of intermediary. The Old Economy intermediaries are also rushing into the Net Economy and providing value through meaningful aggregation.

Real-Time Demand and Supply

The availability of real-time data from internal sources like inventory and external sources like competitive pricing is creating a real-time demand/supply model, leading to price variations almost like the stock market. Companies are using auction strategies that are challenging fixed pricing. For instance, Sun recently introduced auction pricing on certain product lines.

New business models are emerging that allow prices to change in real time; for example, vending machines that vary price based on external temperature, season, or time of day. Forrester Research calls this mode of trading and price determination dynamic trade.

Auctions

The above discussion leads to online auctions. The online auction is a multi-billion-dollar market and growth is exponential. There are two types of auctions prevalent over the Internet. The English auction, where open bidding starts with a lower price and the highest bidder is the winner is the most popular model. Most e-auctioneers like eBay do this low-to-high bid-type English auctioning. Reverse auctioning is just the opposite—it starts with a high bid and then lets the bidders bid down the price. The lowest bidder gets the deal. This is a good model for vendors bidding for a contract.

Auctioning is becoming a part of the business model of most companies selling over the Internet. It seems to be the closest approximation of a free-market economy as we see markets getting closer to "perfect information."

Several companies started auctioning their own products via the Web. One of the pioneers in product auctioning was Sun Microsystems, when they announced this in September of 2000. CEO Scott McNealy signed a few limited edition Sun Blade 1000 workstations to hit it off.

Buying and selling products or services via English and reverse auctions have become extremely valuable vehicles for companies. Choosing to sell an item or service by auctioning it off is more flexible than setting a fixed price. It is also less time-consuming and less expensive than negotiating a price.

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