I3 UPDATE / Entovation International News

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No. 42 July 2000

 

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Contents - Next Feature - Knowledge Digest

SPECIAL FEATURE

Market Creation in the Dotcom Economy

Piero Formica
International University for Entrepreneurship

(Editor's Note: These are extracts from the full article (a 179K Word97 document with embedded images. If there is sufficient interest, we will reformat it in HTML and reduce the image sizes, but it was put up 'as is' in the interests of early availability.)

Old economies look like hi-end dinosaurs that mainly compete for existing, often conservative and mature markets. In contrast, the new economies are focused on markets not already in existence that could be missed. Increasingly, only modest gains arise at the horizon of conventional markets. The impending scenario, which appears nowadays focused on e-commerce, shows pictures of a deep change to the traditional approaches and thinking in the modern interdependent world. It is going to bring fresh competition in the free market economy and to narrow down the international borders. Yet, this does not mean that novel markets lead to economic heaven. Indeed, for today's dot.commerce ventures the road to the Promised Land of prosperity is a navigation in troubled waters.

Up to now we have been plunged into a phase of explosive growth. Yet, the trend is towards a shake-out in the consolidation phase that will see the mastery of titans first, and then tyrants, even though the shape of the successful companies will not be comparable to the industrial giants of the recent past. The rules of what has been dubbed the "law of diminishing firms" will carve out the landscape of the incoming titans and tyrants. Within the net, leadership patterns - not size - bring about market dominance.

Online Markets

Different species of dotcoms populate cyberspace. The Economistís e-commerce matrix displays four market segments: business-to-business, business-to-consumer, consumer-to-business, and consumer-to-consumer. There are dotcoms that offer solutions to end-users whereas others provide the foundations (the electronic bricks and clicks of Internet) on which the e-merchants can built their niches. There are online businesses that rely on advertising (e.g. a portal site). By contrast, others become successful only to the extent that visitors make purchases (e.g. a web retailer, Lastminute.com, "had about 600,000 registered users by the end of 1999 but only 29,000 paying customers" reports the Financial Times).

Online markets can be built around buyers or around independent exchanges. The first have been called 'pyramid-shaped', biased markets, since they are characterised by a fragmented mass of SMEs which form different tiers of suppliers used to working alongside a few big buyers. These hold great market power, reinforced by their recent attitude to enhance virtual markets by consortia that replace stand-alone online efforts. For example, a retail consortium, called GlobalNetXchange, which will bring together $80 billion of annual purchases, was announced on February 28th by big retailers Americaís Sears, Roebuck and Franceís Carrefour. In contrast, online markets built around independent exchanges show fragmentation on both sides of demand and supply. The have been labelled 'butterfly-shaped', neutral markets in which online intermediaries are conjectured to play a key role.

B2B online trading: will smaller suppliers fall in desperation?

Teaming up, big corporations build their own online marketplaces. As a collective group of large buyers, they exercise a strong, short-term pricing pressure on their suppliers, affecting mostly those that provide commodity items easily framed in an online format. As a result third-party smaller suppliers will suffer from dropping prices in terms of lower profit margins. However, there are analysts to whom suppliers' pricing fears seem overemphasised. They outline that buyers need suppliers, so suppliers' margins can't be squeezed "to the point where suppliers would disappear".

How much perfect will competition be in the www.bazaars?

Digital markets in which dotcoms are embedded are expected to work in a way similar to that of the ideal competitive market, that is "perfect competition". Lack and imperfection of information, entry and exit barriers, regulatory restrictions, such as those for the use of time enforced by guilds in the retailing markets, and the like, make the difference between real and ideal markets. One-stop shopping, in which all information is immediately available, transaction costs are almost equal to zero and prices are never fixed once-for-all, makes possible a continuous interaction between a buyer and a seller. Both deal for price, as well as other factors, until they find the best match between demand and supply.

Thanks to digital technologies - such as "request-for-quote", a patented technology developed by Perfect.com, a dot com company unveiled on February 17th 2000 - in a very short time, just seconds, buyers can describe what they want in terms of different criteria: for instance, speed of delivery, supplier's reputation, warranty period, and price. Automatically the technology is capable of getting the best deals. Of course this does not mean that the Holy Grail of perfect competition is or might be in the consumer's hands. Digital markets are far from being frictionless.

Perfect.com type of companies

Perfect.com type of companies build networks of alliances or coalitions for the creation of new businesses, rather than a series of one-by-one relationships for the survival of their existing market position. Within coalitions they share the same view of the future and compete for market learning.

The origins of Perfect.com type of companies is a cosmetic rather than a taxonomic community in which orders, rules, procedures and collusion are replaced by chaos, serendipity, knovation (knowledge and innovation) and co-opetition (co-operation and competition). These are the best social endowments a cosmetic community provides to outsiders such as fresh start-ups to gain a foothold on the economic-growth ladder.

New business ideas generation is the outcome of a greater social interaction. Which means that a cosmetic community reduces mental and geographical distances, as well as distances between basic and applied research, and between researcher and entrepreneur.

Buyers and sellers: who is who?

In the industrial economy there is a clear divide between buyers and sellers. The landscape of digital economy shows a view on an alternative scenario. Boundaries between buyers and sellers are blurred. Acting as pro-active, organised communities of like-minded people, buyers are no more restricted to the passive role of product and price takers. Thus, a web community of world travellers can determine the kind of flight and accommodation they are looking for, and offer a price. Sellers will bid to win that offer. A pool of customers can first collect information about themselves and then sell it for a given price to companies. A cluster of customers focused on a particular product or service can deliver personalised messages to a specific company as for the quality and the price of its offer, pushing the company to upgrade the current product/service.

Search for experience

Market creation in cyberspace stems from dot companies that provide would-be customers with new experiences. The basic idea is that of building a website through which consumers of apparently similar goods can get an entire experience and learn their different features. Take the example of packaged goods such as tea, coffee, pasta and lookalikes. Their producers face two opposite pressures.

On one view, the big consumer goods companies make it very hard for a small company or a new one to beat their top-selling brands. On another view, as a consequence of imitation and commoditisation of those products at an accelerating pace, a growing number of individuals seem to be affected by the syndrome of "I-think-Iíll-buy-that-instead", which means replacing the brand name with a product "just like it, but a bit cheaper". Those two conflicting strands could be managed, thanks to software tools, by dotcoms capable of transferring an entire experience like Starbucks successfully provides for drinking coffee. Those are "personal shopping agents" who open up new markets by teaching consumers how to select, appreciate and find a specific product or service. Personalisation agents don't sell or ship any product or service. They are the consumersí trustworthy interfaces that organise a dialogue with them based on an interactive e-mail technology through which contents could be added or modified, and new product ideas developed.

Information and communication are the bread and butter of webentrepreneurs. Their e-programmes are a sort of Michelin Guide for the surfers in the Net who, beyond their intentional actions, can detect by chance things and features they didn't know existed or get in touch with people and organisations they weren't looking for, e.g.:

http://www.alexa.com A browser plug-in that provides on-the-spot information about sites and products as you browse.

http://www.flyswat.com Loading a Web page with any text in it, chances are to see some of the words underlined in yellow. Click once on this text and a small window will appear with a range of links to pertinent information.

http://www.neobutler.com Sends you e-mails suggesting similar Web sites, and stores pages you visit for quick recall.

http://www.thirdvoice.com Allows users to post invisible notes to any Web site their visit. Anyone else with the same software can read those notes.

(Source: Jeremy Wagstaff, The Wall Street Journal Europe, Thursday, March 16, 2000)

"Click-and-mortar" companies

Buyers and sellers are used to living in a climate of social interaction. So far, brick-and-mortar retailers (or "real" retailers) have been the providers of this opportunity, selling human relationships. They offer conventional options, including human touch and feel, that is face-to-face communication accompanied by gestures, body movements and facial expressions that enrich the speech. In sectors such as food and clothing consumers assign a high rank to these types of emotional experiences.

Pure e-tailers (or "virtual" retailers) draw attention to functional and price performance, unlocking value for buyers in terms of price reduction and greater accessibility to a broader spectrum of products and services available together with reliable delivery, even though at the expense of the emotional appeal of the offering. A third specie of retailers brings the merging of conventional and electronic options, still remaining attached to offline geographical clusters. Click-and-mortar retailers, as they are labelled, blur the boundaries between the 'functional' and the 'emotional' trading models.

Chasm, tornado, dead zone: how dangerous are the waters of digital markets?

Highfliers must surpass expectations. Webentrepreneurs, too. So, how many dotcoms will survive once the ascending wave of the e-economy has reached its peak? That depends on how well they navigate the turbulent waters from start-up phase to mainstream market as depicted in Geoffrey Moore's cyberspace business model. Today's webentrepreneurs resemble a modern day Candide in search of the best-of-all possible worlds.

The Dances of Capitalism

The dances of capitalism mark 500 and more years of market creation, from the weekly village markets to the 24 hours/7 days-global village e-markets. What we are seeing nowadays is a radical change both in consumer and producer behaviour. New electronic markets are reshaping the capitalist structure. A (quasi) perfect market seems a feasible goal. The business practice of a fixed list price settled by the vendor might be replaced by interactive pricing through negotiation between seller and buyer. That is, the customer too will determine price.

Webentrepreneurs acting as personal shopping agents for the consumers will profoundly affect the concept of brand. Not less dramatic will be the effect on the concept and use of time and space. Individuals and organisations keen to share the experience of the new dance will be able to multiply.

Email: formica@bo.nettuno.it

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© Copyright, 2000. David Skyrme Associates Limited and Authors - All rights reserved.

I3 UPDATE / ENTOVATION International News is a joint publication of David Skyrme Associates Limited and ENTOVATION International Limited - providers of trends analysis, strategic advice and workshops on knowledge management and knowledge innovation®

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