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IMPACT OF E-COMMERCE Learning Objectives In this lesson you will learn,
- that ICT can have a lot of consequences in the area of ethics and morale,
- that E-Commerce has positive as well as negative impacts on human beings and society,
- that E-Commerce changes the economic world significantly. ETHICS, MORALE & TECHNOLOGY Ethics (sometimes known as moral philosophy) is a branch of philosophy that involves systematizing, defending and recommending concepts of right and wrong conduct, often addressing disputes of moral diversity. Philosophical ethics investigates what is the best way for humans to live, and what kinds of actions are right or wrong in particular circumstances. (Wikipedia 2015) Morality (from the Latin moralitas “manner, character, proper behaviour”) is the differentiation of intentions, decisions, and actions between those that are “good” (or right) and those that are “bad” (or wrong). Morality can be a body of standards or principles derived from a code of conduct from a particular philosophy, religion, culture, etc., or it can be derived from a standard that a person believes should be universal. (Wikipedia 2015) The development of Information and Communication Technology (ICT) is breath taking. We see a doubling of computer power every 18 months. Business processes and business activities are increasingly based on ICT systems or even completely taken over by ICT systems. The firm without any employee seems to be a realizable vision. What does this mean for employment? Costs for data storage are still decreasing. Databases with detailed profiles of human beings are built and used at acceptable costs. How much can the customer be manipulated? We see an on-going progress in the area of data analysis. Human beings can be considered from different perspectives and they also will be assessed and valued (only economically?). The behaviour of human beings can be forecasted. What about the freewill of customers? Significant progress is also made in the area of networks and data communication. Data can be transferred and analysed all over the world. Do we see the end of privacy? Questions:
- Are we allowed to do everything we are able to do (See Immanuel Kant: Act beyond that dictum which you would like to be actual law.)?
- All, which is thought, will be done – sooner or later (See the Swiss author Friedrich
Dürrenmatt: The physicists). How can we protect ourselves?
- In which society do we want to live – ethics-driven, technology-driven, economics- driven?
- What is the right balance between ethics, technology and economics? ETHICAL ASPECTS OF ICT INFORMATION RIGHTS & INFORMATION DUTIES Stakeholders of information management are single persons as well as organizations. Privacy protection must have a high priority in E-Commerce. The bases are the human rights and constitutions of states. For example we will find Article 10 clause 1 in the German constitution: “Privacy of correspondence, posts and telecommunication is invulnerable.” However, clause 2 of the same constitution says: “Restrictions are only allowed on the basis of a law.” Further on the German constitution says in article 13 clause 1: “The sanctities of a home is invulnerable.” There are a lot of privacy concerns around E-Marketing, because technology has become so powerful, see for example data mining and data usage, platforms like Facebook or the advantages in the area of biometrics. Several questions have to be asked:
- Under which circumstances may it be allowed to invade someone’s private sphere?
- How is the private sphere defined? Where are the boundaries? Due to content? In time?
- How can/must one protect his/her private sphere?
- Must we force him/her to better protect his/her private sphere? We find some interesting approaches to the definition and protection of the private sphere and the exposure to information. So has Steven Levy (Levy 1984) defined six basic rules:
- The access to computers and all systems, which can help you to learn more about this world, should be unlimited and complete. Practical experience should always be preferred.
- All information should be free.
- Mistrust authority – stimulate decentralization.
- Hackers should be judged according to their hacking activities only and not according to apparent criteria like certificates, age, race or social position.
- With computers you can make art and create beauty.
- Computers can turn your life for the better.
Objectives:
- Protect data and systems.
- Protect the rights of individuals.
- Guarantee the security of the society.
- Protect institutions.
- Protect values. OVERALL IMPACTS OF E-COMMERCE Questions with respect to the impact of ICT are:
- How does ICT change the world?
- What are the effects of bad software quality and bad data quality?
- How has the range of influence of ICT changed by the Internet?
- How much can we trust our ICT systems?
- Do we have to change our minds due to the powerful ICT?
- Can (global and digital) markets govern themselves? What must be governed by laws and international regulations?
- How does ICT influence support concentration of power and shift of power?
- How does ICT erode the monopoly of force of the states?
- How does ICT change social structures? Which social groups are preferred, which are discriminated?
- How does ICT influence social life and social behaviour?
- How does ICT in the end influence the evolution of the human race?
- What are the effects of ICT onto mental and physical health?
- Who is encouraged in organizations by ICT: owner, management or employees?
- Does ICT create jobs? Or does it finally eliminate jobs? MACROECONOMIC IMPACTS Let us first consider the size of E-Commerce. E-Commerce has increased considerably in the developed world in the last 20 years. B2B transactions continue to be the dominant form of E-Commerce across the world. In 2009, B2B E-Commerce sales were 3.1 trillion USD or 32% of all B2B transactions in the USA (US Census 2011). B2C E-Commerce in the US accounted for 298 billion USD or only 2.8% of all B2C purchases in 2009. Retail sales account for about half of the B2C figure, with the rest coming from services. Global B2C E-Commerce spending was estimated to be 708 billion USD in 2010 (IDC 2011). Since 2001 the growth in E-Commerce among developed nations has been dramatic. The USA witnessed a four-fold increase in E-Commerce sales. E-Commerce markets in Australia and South Korea both increased more than seven-fold (OECD 2011). Developing nations have yet to witness considerable gains from E-Commerce. E-Commerce is increasing in importance and cannot be ignored by strategists. First-mover advantages may be available in developing countries. Digitalization has increased productivity and caused economic growth. E-Commerce affects economies by increasing productivity (through additional capital formation) and may spur innovations in processes that will further increase productivity over the long term. Investments in ICT have clearly increased economic growth in many developed countries. The evidence is mixed in developing nations. While adopting ICT by itself may not confer lasting competitive advantage, failure to do so will surely put an organization at a disadvantage.
The threat from entrants on competing networks is reduced. E-Commerce may encourage subsidization of one side of a platform market. Entry barriers in the subsidized side of the platform fall. E-Commerce encourages the proliferation of two-sided (platform) markets, which may be subject to ‘‘lock in’’ of complementary goods. Application barriers to entry may arise from such vertical restraints. E-Commerce enables ICT outsourcing , converting fixed, sunk cost into variable cost. The threat from entrants increases as the importance of sunk costs declines. E-Commerce decreases the importance of physical location in prime real estate. Entry barriers fall. E-Commerce B2B vertical hubs may be owned and controlled by large incumbents. B2B vertical hubs may be able to dominate supply and distribution channels, effectively limiting opportunities for new rivals.
E-Commerce decreases the importance of face-to-face trained sales force. Entry barriers fall. E-Commerce and outsourcing decrease the importance of physical nearness to skilled labour. Entry barriers fall. Early entry into E-Commerce confers initial but not necessarily lasting advantages to incumbents. Entry barriers decrease over time. Power of suppliers E-Commerce may increase the number of suppliers and facilitate greater transparency of product prices and cost structures. Thus suppliers could see reduced power over industry. Suppliers (incumbents) may maintain control over B2B vertical hubs. Thus suppliers could see increased power over industry. E-Commerce reduces transaction costs between supplier and industry. Thus suppliers lose ability to extract rents from industry, as firms can more easily contract with competing suppliers. E-Commerce and vertical supply chain integration tightens bonds between supplier and customer. Supplier loses bargaining power due to the hold-up problem. E-Commerce reduces switching costs through the brokerage effect. Lower switching costs of customers reduce supplier power. Suppliers may make significant investments in vertical supply chain integration. Higher switching costs of customers increase supplier power E-Commerce can increase vertical disintegration through outsourcing. Reduced incentives for suppliers to enter downstream markets lower supplier power. Power of customers E-Commerce spurs disintermediation in industries such as travel agency service and brokerages. Intermediaries’ power (and even existence) is threatened. E-Commerce spurs re- intermediation through B2B vertical hubs. Intermediaries’ power is strengthened. Information and search costs are reduced with E-Commerce, and branding may become less important. Product differentiation through branding decreases, and customer power increases. E-Commerce allows new forms of product differentiation, such as online ratings supplied by past customers. Product differentiation increases, and customer power decreases. E-Commerce allows firms to offer greater customization of products and services, such as computers sold to order. Product differentiation increases, and customer power decreases. Informational problems such as adverse selection E-Commerce allows firms to offer greater customization of products and services, such as computers sold to order. Product differentiation increases, and customer power decreases.
Rivalry among competitors ICT, electronic market exchanges, and E-Commerce vertical hubs may enhance the market share of the largest incumbents. Where significant differences exist between firms, the impact of E-Commerce on market share will likely be greater. E-Commerce-enabled outsourcing and reduced capital requirements for entry may make market structure more competitive. Incumbent suppliers lose power and market share. In the wake of E-Commerce innovations, firms may attempt to capture a significant portion of the market share through aggressive pricing strategies , particularly for goods with very low marginal costs (e.g., information goods). Competitive rivalry among suppliers in the industry heats up, and supplier power in general decreases Firms may join a coalition of competing firms selling less close substitutes in a B2C exchange. The coalition can attract more customers to its site than any one company could, and supplier power increases. E-Commerce lowers variable cost relative to fixed cost, making overcapacity problems relatively greater. Overcapacity in industry leads to cutthroat pricing; competition among suppliers increases and prices fall. E-Commerce and non-profit organizations Non-profit organizations attempt to adopt E-Commerce practices from the for-profit sector, such as using terms like ‘‘checkout’’ when soliciting donations online. The commercialization of the donation process leads philanthropists to decline to contribute to the non-profit. Non- profits adopt ICT as a symbolic resource. The non-profit establishes legitimacy and improves its reputation among donors and accountability organizations. SPECIFIC IMPACTS OF E-COMMERCE Now let us consider some specific impacts of E-Commerce, which all have a bright side but a shady side as well. ATOMIZATION The units, which make sense economically, become smaller – due to the increasing data processing capabilities. Examples are:
- Letting of shelf space in the retail business with sales dependent prices,
- Demand driven pricing in retail business, transportation business or gas stations,
- Tracking & Tracing in the transportation business,
- Road charges.
COMMODITIZATION Complex, explanation needing and expensive goods and services become widespread available and easily applicable. Standardization and simplification will be profitable if sales management can enter mass markets via the Web. Commoditization is well known but is accelerated through the Web. Coverage and transparency in the market increase. However, atomization and strong competition may lead to individualized and personalized products, which are aggregated from commodity goods and services. By the way: There is a significant externalization effect if you book your tickets via the Web. The travel agency can reduce staff because now you are doing their job! CONFIDENCE Business partners are anonymous and do not know each other. They have to carry on efforts to build trust. This must be done on the background of the high speed of E-Commerce. Fundamentals Business transactions are only then conducted if all involved partners trust each other that the customer gets the contracted goods or services and the supplier gets the contracted revenues. Confidence is necessary because the accomplishment and the financial equivalent cannot be conducted completely simultaneously. As long as the transaction is running always one partner has a temporary advantage or disadvantage. Traditionally transactions with high values are protected with the help of custodians or notaries. Confidence in traditional businesses is generated as follows:
- The business partners know each other independently from the actual transaction. Possibly they have already conducted common business transactions successfully.
- The business partners catch up on each other’s seriousness at a third party.
- The business partners involve one or more trustable agents who shall ensure that the contract is successfully signed and the business conducted.
- The business partners make all activities transparent to the other business partner(s).
- However, there will always be a residual risk.
COST STRUCTURES If a “digital” infrastructure is up and running marginal costs become very low. The production of a software package is a very good example of this effect. Access costs, transaction costs and switching costs are reduced dramatically (see electronic catalogues). In the traditional economy we (normally) have low allocation costs and high transaction costs. The following example demonstrates it: Let the infrastructure costs be 1.000 currency units, and marginal costs of a single transaction be 10 currency units. If the result of a transaction is sold at a price of 15 currency units and a quantity of 1.000 is delivered, then total costs are 11.000 currency units and sales revenues are 15.000 currency units. In the digital economy we (normally and vice versa) have high allocation costs and low transaction costs. Now let the infrastructure costs be 10.000 currency units, the costs of a single transaction be 1 currency unit. Then with a price of 15 currency units and a delivered quantity of 1.000 total costs and sales revenues are again 11.000 resp. 15.000 currency units. What happens if the quantity is doubled? In the traditional economy sales go up to 30. currency units and costs increase to 21.000 currency units. In the digital economy sales go up to 30.000 currency units, too. But costs increase to 12.000 currency units only. What happens if selling goes down by 50%? In the traditional economy sales go down to 7.500 currency units and costs decrease to 6.000 currency units. In the digital economy sales go down to 7.500 currency units, too. But costs only go down to 10.500 currency units. Where is the break-even-point? In the traditional economy we have 15x = 1.000 + 10x and this equation leads to x = 200. In the digital economy we have 15x = 10.000 + 1x and this equation leads to x = 715. How do we have to interpret these results? What does this mean for the entrepreneur/ shareholder? The effect is not a new one: A reduction of variable/direct costs often leads to an increase of fixed/indirect costs. But in the electronic business this is exponentiated… If prices and profit margins are low the supplier has to sell high volumes in short times to generate profit. Profit expectations are high, but the risks are high, too.
DISINTERMEDIATION/RE-INTERMEDIATION In the digital economy value chains become shorter. This is already known in traditional businesses, but radicalness and speed of change have increased. See the disappearance of intermediary trade/wholesale trade and retail sale. Suppliers sell directly to the consumer. For digital goods the physical manufacturing is transferred to the consumer: I print my books at home. Traditional intermediates are eliminated. See the music business as another good example for this effect. However, at the same time the high volume of offerings and the high number of customers in the Web leads to the establishment of new intermediaries, e.g. electronic marketplaces (B2B und C2C) where demand and offerings are bundled. Value chains become longer (again) to benefit from synergies with respect to specialization. The reason for this paradox changes is that minimizing of transaction costs with ICT is realized and this may sometimes lead to a disintermediation, but sometimes vice versa to a re-intermediation. ECONOMY OF ATTENTION Providers of a specific service can often be found in direct neighbourhood (see car dealers, farmer’s market), because here it is easier for them to get the attention of potential customers. But if the market size increases every participant has to increase his marketing and advertising efforts to be noticed by potential customers. However, activities to get attention from potential customers will show an effect only if there are potential customers on the marketplace. This leads to the finding, that the really narrow good is the attention of the potential customer, nothing else. Subsequently it must be the objective of the supplier to get the attention of his potential customers. With this background we see a changed role perception: The customer offers his attention and is “paid” by the supplier with content (see commercial television). The supplier can sell his product or service if he first buys the attention of his potential customer. Examples of attention driven business models are:
- Subscription,
- Performance,
- Consulting and other intelligent services,
- Membership,
- Conferences and trainings,
- Customer service,
- By-product,
- Advertisement,
- Sponsors.
EMPLOYMENT Does E-Commerce really create jobs as it is stated quite often? Let us consider what really goes on. If the customer uses his free money to buy additional goods or services then he generates an additional demand. As long as this additional demand leads to a need of human workload the freed manpower can be allocated in new jobs. But… E-Commerce speeds up the price decrease. How long does it take until the free workload is allocated in new jobs? However, there is a second question: Can the free manpower be allocated 1:1 in other jobs? Or do the new jobs need other skills and a higher qualification? Are the job-seeking people qualified enough? Can they be qualified? Conclusion: There is a big social and political issue. But this cannot be solved by company owners. Because nobody can ask them not to make profit. It is a macroeconomic and political challenge. However, also business people as well as computer scientists have a social responsibility. EXTERNALITIES Let us start with a definition: Externalities are side effects of business transactions from which the parties involved in the transaction do not suffer but also do not have an advantage. However, third parties may suffer or benefit from those side effects. Examples of externalities are:
- Environment pollution of a manufacturing facility, from which the people around will suffer.
- Parking area of a shopping centre, which can be used for markets or sport events or just as a playground when the shopping centre is closed. Negative Externalities lead (hopefully) to legal consequences. Positive Externalities often generate new businesses. Internet examples of externalities are:
- Coverage raises advertising.
- Virtual Communities are attractive for focussed advertising.
- Initiation of “clubs”: economic advantages of membership (Who benefits?), appeal to human vanities (exclusivity).
GLOBALIZATION Technical standardization (see TCP/IP, HTTP, SMTP, HTML, XML) creates a global platform, which allows the cooperation of an infinite number of partners all over the world. Global coverage leads to global markets. Suppliers can and must produce in lowest cost locations. Jobs are transferred to low cost areas. INFORMATION DENSITY Data can be exchanged electronically. Media breaches can be eliminated. This leads to an information flood. Thus efforts to find the relevant information may increase or must be compensated by intelligent search agents. Information and knowledge management becomes more and more important. INTELLECTUAL PROPERTIES Intellectual properties are traditionally protected by patents, copyright and trade marks; this includes the economic application. There are ambivalent effects of the Web: Coverage and distribution speed increase, but digitalized results can be copied and manipulated arbitrarily. Alternative ideologies are discussed:
- Protection of ownership through appropriate technical procedures, e.g. databases, certificates,
- Free use as cultural assets; commercial compensation through follow-up business. However, there is a problem. Who funds the efforts to create intellectual properties? And who is the customer of the intellectual property? The one, who pays for an intellectual property, will claim that only he is allowed to use it. This is an old and not at all an Internet specific problem. And last but not least: How can we ensure that an intellectual achievement is assigned to the creator for a sufficient long time (copyright)? We have to state the basic problem of intellectual properties in the Web is that anonymity of users leads to intellectual theft (plagiarism). LEVELLING EFFECTS We have similar and cost efficient, sometimes even free, access to the electronic market(s) for all participants. Also small organizations have access to services (e.g. software), which outside the Web only big organizations were able to afford. Physical restrictions lose impact.
Let us try to answer the last question. As a consumer you have a specific need for products and services. Through E-Commerce you can buy this “package” cheaper. Therefore the supplier has to reduce his prices. Thus he has to reduce costs. As a consequence he forces his suppliers to reduce their prices and costs. All producers need people to do the work. Finally also the suppliers of human work have to reduce their prices. Sooner or later we have to talk about salary reductions and unemployment… TRANSPARENCY AND COOPETITION Coverage and speed of the Internet lead to better comparability of offers, harder competition and price pressure among suppliers and thus to lower costs on the customer side (which would be an advantage for the customers, if the personal income would not be reduced…). Transparency leads to price and profit reductions on the supplier side. Inflation is slowed down. Electronic business stimulates/requests virtual organizations, which are cooperations of autonomous legal entities who work together on the background of a common business understanding… From a customer’s point of view this looks like one homogeneous firm. This is already well known in traditional businesses, e.g. syndicates in underground construction. Competitors work together temporarily. This is described with the term coopetition. Business models:
- Prime contractor: manages initiation and execution,
- Broker: manages only the initiation. Criteria:
- Cooperation of autonomous companies,
- Partners holding their economic and legal autonomy,
- Optimal combination and use of resources,
- Open for everybody if he/she can contribute to the objectives,
- Closure after achievement of objectives (project management),
- Horizontal and vertical cooperation,
- No hierarchical structures, no one authorized to give instructions,
- High level of confidence among all members. Examples can be found in the publishing sector, construction industry, software industry, and consulting.
The Internet allows building groups, which can work on their objectives independently from the geographical distribution of members. We see a trend towards open-source-initiatives : elimination of commercial relationships and replacement by personal communication and free of charge experience exchange. Does a new countertrade economy come up? But where do those actors get their money from to finance their daily life? VOLATILITY Hollywood economics Digital goods must be completely ready when they enter the markets (see movies) and convince the customers. A supplier must be able to fund 3 to 4 flops with a blockbuster. Temporary monopolies Profit in E-Commerce will actually be possible in a monopoly situation (The winner takes it all) because of extreme competition and price pressure. Firms are forced to become monopolists: markets have to be occupied fast. Competition has to be avoided because it is ruinous for all participants. Monopolies will (normally) not stay forever because there are no essential entry barriers to the markets. Thus temporary monopolies will come up and will be replaced by subsequent temporary monopolies. Suppliers are forced to deliver unique products or services, thus they are forced to innovate. EXERCISES QUESTIONS FOR YOUR SELF-STUDY Q1: Are the statements on specific impacts of E-Commerce true? If yes, what are the prerequisites? If no, what are the reasons? Q2: Show examples for disintermediation and examples for re-intermediation. Q3: Do you agree with the macroeconomic impacts described here? Is the list of the described impacts complete or can you identify other impacts? Q4: Do you agree with the microeconomic impacts described here? Is the list of the described impacts complete or can you identify other impacts?
