Outline And Learning Outcomes

Course Objectives

The objectives of this course are to:

  • Give you a sound understanding of the impact the Internet has had on business
    • Provide you with a solid microeconomic foundation and a set of business analytical skills which you can apply to analyze internet-related businesses
      • Why they succeed or fail
      • How an internet-related business can improve its chances of success
  • Give you a level of understanding of internet technology and terminology sufficient to understand the business implications of the technology
  • Prepare you for the internet-enabled workplace
    • Provide hands-on experience with internet tools
    • Provide experience at working on a collaborative research project using internet tools
    • Provide experience at analyzing real internet businesses
      • Market and competitor research
      • Financial performance

Course Learning Outcomes

At the end of this course you should be able to:

  • Explain why real internet-related businesses succeed or fail
    • Describe the business model of an internet business - costs, revenues, risks
    • Apply key concepts to analyze real businesses: profitability, fixed and variable costs, business model, competitive advantage, competitive strategy, marketing strategy and so on
    • Understand key economic factors that determine success or failure, such as economies of scale, shipping costs, customer acquisition costs
  • Conduct an informed discussion about how to successfully run internet-related aspects of a business with a prospective employer
  • Understand and interpret basic financial reports
  • Provide practical suggestions to a traditional business about how to use the internet
    • Internet marketing
    • Collaboration
    • Outsourcing
  • Explain the impact of the internet on various industries
    • Competitive environment
    • Business models
  • Understand the business implications of internet technology
  • Understand the basics of startups
    • Sources of finance
    • Exit strategies - IPOs, trade sales
  • Understand the impact of likely future developments in internet business
  • Understand how the internet affects the way people work
  • Demonstrate the ability to use wikis, blogs, internet survey software and basic web site development tools

Our Approach - Focus on Business, not the Internet

Business is about making a profit. You need to think about the internet and business in terms of the internet's impact on the profitability of a business.

Course Modules

  1. How to Analyze an Online Business
  2. Retail Businesses
  3. Cutting out the Middle Man - Disintermediation
  4. The Internet affects Competition and Pricing
  5. Internet Services Businesses - selling pans to gold miners
  6. Online Marketplaces - Making Money from being the Middle Man (Person?)
  7. Online Marketing
  8. Analyzing the Impact of the Internet on an Industry
  9. How the Internet has Changed how Businesses Work

How to Analyze an Online Business

Key Concepts

  • We'll start by looking at a simple business: DUB Pies, a small Brooklyn bakery that sells pies online. Analyzing this business will illustrate the following important points:
    • You can't understand a business until you understand how it makes a profit
    • Profit is revenue minus costs
    • Business financial performance is measured in financial reports
    • Revenue is the product of the price you get and the quantity you sell: revenue=price* quantity
    • Cost include fixed and variable costs
    • The internet can increase revenue from online sales for an existing business, but selling online also involves some extra costs
      • The most important costs include shipping and handling, customer acquisition and transaction costs
      • Customer acquisition cost is the cost of getting a customer
        • Customer acquisition cost depends on the cost of advertising and the conversion rate
        • Online advertising costs are frequently based on cost per impression or cost per click
    • Online businesses succeed through economies of scale
      • Cost per unit decreases as quantity produced increases
      • Examples: classroom size and online learning; take-out food
      • Critical feature of internet business is high fixed costs and low variable costs
    • To be successful a business needs a good business model. A business model answers two questions:
      • Who will buy and why?
        • People buy because of the value they get — that's the concept of a value proposition
      • Why will the business be profitable?
    • You figure out when an internet business is viable by looking at the extra revenue and extra cost incurred - see DUB Pies example and homework
    • All businesses - including online businesses - need a marketing strategy and a business strategy
      • A marketing strategy is a plan to acquire and retain profitable customers
      • A business strategy is a plan to beat your competition
    • You need to be able to calculate profitability using operating margin
      • Learn how to read the Statement of Operations (a.k.a Profit and Loss or P&L statement) for a public company
  • Internet businesses need a web site
    • You need to understand the basic elements of a web site:
      • HTML and CSS
      • Site content
      • Transactions

Learning Outcomes

  • Understand and be able to apply all the hyperlinked Key Concepts above
  • Understand how to analyze a firm's economics i.e. the factors that affect its profitability
  • Be able to interpret basic financial reports
  • Understand the two key concept of business strategy and marketing strategy
    • How to define them
    • How to determine a firm's business strategy and marketing strategy
    • Be able to evaluate whether they are appropriate for the business
  • Understand the basic elements of a web page
  • Understand how small retail businesses can use services such as Yahoo!Stores to simplify running an online retail store
  • Be able to make simple wiki edits

Assessment

Retail Businesses

Key Concepts

  • Why are the internet and the web of any interest to business? Communication!
    • The web and the internet are interesting to businesses because all business requires a transaction, and a transaction requires communication. A new way to communicate with customers presents new business opportunities
    • You should understand the difference between the internet and the web: the internet is a way for computers to communicate with each other, and the web is a set of hyperlinked documents
  • What is the purpose of a retail store?
    • An internet retailer needs to be able to do most of the things a brick-and-mortar retailer can do
    • Internet retailers can do some things better: help people search with customer recommendations, find low prices
    • But internet retailers are not as good at other things: delivery time, returns, providing and entertaining shopping experience
  • Retailing on the internet — online retailing — forces you to think about everything a retail store provides — order fulfillment, entertainment, help with search, reputation, returns… — and to figure out how you're going to do these things
  • An internet business needs a web site
    • You need to understand the basics of web site design
    • Small businesses use hosting services to sell via the internet
      • These hosting service provide "turnkey" solutions for creating a web site, payments processing, creating price lists and managing inventory
      • Yahoo! Stores is an example of a turnkey solution for online retailing
  • Amazon.com is a successful "pure-play" online retailer i.e. it only sells online (unlike Barnes and Noble or Wal-Mart): see Amazon.com slides
  • Amazon.com is a publicly traded company, which means it is easy to find information on Amazon's financial performance
  • Amazon's business model
    • Amazon's value proposition: people will buy because of lower prices, convenience, help with search (via customer recommendations too), excellent customer service, free shipping and reputation
    • Amazon is profitable (after many years of losses) because of economies of scale — the large upfront investment deters new competitors (that's called a "barrier to entry") — and repeat customers (which spreads the customer acquisition costs over many purchases)
    • Economies of scale are critical to Amazon's success: the more products it sells, the lower its cost per product
  • Amazon operated for many years at a loss - see Amazon.com slides
    • Those losses had to be financed by investors: initially venture capitalists but later by the public via an initial public offering of shares (IPO)
    • Startup companies are typically financed by "angel investors" — private individuals willing to lend or invest — or "venture capitalists" - firms that take the risk of investing in a new business in return for a percentage ownership
    • The investors had to be patient
    • Amazon warned that they were likely to run at a loss for years in the Prospectus they sent to people thinking of buying their shares!
  • Amazon's business strategy was "get big fast", so that they could achieve economies of scale and deter competitors
  • Amazon's marketing strategy (see the 4Ps):
    • Product: small, high value per lb, widest range, low risk (customers confident that Amazon's books as good as anyone else's)
    • Price: lowest prices
    • Promotion: invested heavily in the brand, but also used word of mouth and public relations (media); spent less than other online retailers
    • Place: go global as fast as possible
  • Online retailing was one of the first business models on the internet, but many businesses failed
  • Internet retailing makes sense for products with 1) High value to weight ratio (value per lb), which makes shipping viable, and 2) Low customer risk
  • Another advantage of selling online is the ability to sell a wide variety due to "infinite shelf space". Online stores typically make a higher proportion of their revenue from low-volume items than bricks-and-mortar stores, a phenomenon known as the long tail effect
  • Online retail seems to be "taking over the world", but accounts for only about four to six percent of all retail spending in the U.S. (depending on how you measure retail spending)
  • The largest segments are apparel, computers. and auto and auto parts
  • As customers get more used to shopping on line they will become less concerned about the risk and we should see more and more products for sale online
  • "Bricks and mortar" retailers who also sell online face the problem of "cannibalizing" their own sales — their online sales can subtract sales from their bricks and mortar stores

Learning Outcomes

  • Understand why Amazon.com is successful while CDNow.com and Pets.com were not
  • Understand why Amazon.com has been more successful that Barnes and Noble online (bn.com)
  • Be able to evaluate retail business' suitability for online sales
  • Understand how entrepreneurial ventures are initiated and financed and how they grow

Assessment

Cutting out the Middle Man - Disintermediation

Key Concepts

  • The internet allows manufacturers to sell directly to customers
  • When this cuts out existing retailers it's called disintermediation
    • People could sell their homes online, bypassing realtors
  • Many direct sales companies quickly migrated to the internet
    • Dell sells online, as does Charles Schwab
  • Companies that sell via distribution channels run the risk of alienating their partners if they sell direct - this is called channel conflict

Learning Outcomes

  • Be able to explain the issues companies face when attempting to bypass existing distribution channels
    • Why it's easier for those that already sell direct to sell via the internet
    • How other businesses try to cope with channel conflict

Assessment

  • Explain how Merrill Lynch responded to the challenge from Ameritrade and Charles Schwab

The Internet affects Competition and Pricing

Key Concepts

  • The internet affects prices too — primarily by increasing competition
    • There are many price comparison sites, making it easy to compare prices
    • But we still have price dispersion - different prices for the same products. Why?
      • Some people are unwilling to search
      • Quality and reputation are important factors in buying online
  • The internet makes it possible to sell to every online person in the world
  • That sounds like an easy way to make money, but there's a catch - everyone else can sell to those people too!
  • The internet can increase price competition, and hence reduce profitability (margins)
    • See Blue Nile case study
  • It's very important to have a competitive strategy to deal with the competition from online competitors

Learning Outcomes

  • Be able to explain how the internet affects competition and puts pressure on prices differently in different industries

Assessment

  • Group Project - Apply Porter's five forces analysis to the industry you are studying for your group project

Internet Services Businesses - selling pans to gold miners

Key Concepts

  • In the California Gold Rush, some people got rich while many did not
  • But the people who consistently made money were those that provided the supplies miners needed
  • The same was true in the internet gold rush
    • Companies like AOL, Cisco and others provided the technology and services everyone else needed to use the internet
    • So they made money even while their customers - the internet start-ups - ultimately flamed out
  • Looking at internet services businesses is also a good opportunity to understand how start-up businesses are financed
    • Many were financed by venture capital firms
    • Entrepreneurs needed a business plan
    • Financing needs are an important part of the plan
      • Specify your expenses and your revenue
      • Forecast when revenues will exceed costs - your break-even point

Learning Outcomes

  • Be able to explain the reasons for the success or failure of internet services business
  • Be able to describe their financial performance
  • Explain how they got started and how they grew

Assessment

  • Describe the evolution of a major internet services business
    • What was its initial value proposition?
    • How did it get started?
    • How was it financed?
    • How did it evolve?
    • What happened to it in the end? Who owns it now?

Online Marketplaces - Making Money from being the Middle Man (Person?)

Key Concepts

  • There are many "middle man" businesses — also known a agencies — such as travel agents, realtors, dating agencies and auction houses
  • These middle man businesses get paid for bringing buyers and sellers together
  • Online marketplaces (such as eBay.com and Amazon.com's used book market) act as the middle men between buyers and sellers
    • They rely on the network effect - the value of joining a network increases with the size of the network
      • Big networks tend to get bigger - the "snowball effect"
    • Benefits of networks - lower search costs
    • The internet magnifies the network effect
    • Many businesses work like online marketplaces e.g. travel sites, dating sites, job sites
      • Online markets compete by differentiating (being different from their competitors), or by being the biggest
  • Social networking sites are online marketplaces - providers and consumers of information exchange it on the social networking site
    • Business models - how do social networking sites make money? Are they profitable?
      • Most rely on advertising
      • Many are not profitable, including Twitter and Facebook!
    • However, these businesses have high market capitalization - someone thinks they will be worth a lot in the future
      • That may or may not be true - depends on the success of advertising

Learning Outcomes

  • Be able to explain the key success factors of online marketplaces
  • Be able to explain why dating site, job site, auction sites such as eBay and social networking sites are essentially similar businesses

Assessment

  • Homework 4 - analyze eBay's financial performance; demonstrate the network effect

Online Marketing

Key Concepts

  • Online marketing — acquiring and retaining customers online — is something that any business can do, not just "online" businesses
    • The customer buying process specifies the steps involved in people's decision to buy - you can influence each of these steps
    • The economics of attention - people will pay for attention. Much advertising is based on this fact
    • The funnel is a way to represent how many people you need to reach to generate a sale. You can use it to calculate customer acquisition cost
    • Marketing is matchmaking - bringing together two parties looking for something from each other
    • The internet on has had a big impact on marketing
      • Customer can now research online, so there are multiple influencers
    • You need to understand marketing basics - the 4Ps: prpduct, price, promotion, place
      • Marketing tactics: bring the customer to the firm or bring the firm to the customer
    • How online advertising works
      • Display advertising
      • Search advertising
      • How Google makes money
    • Online marketing tools and tactics and their pros and cons
    • Technology behind online marketing - cookies
    • Developing a marketing campaign
      • Select target
      • Develop budget
      • Select tactics
  • Advertising-supported business models
    • Why there is so much free stuff on the internet

Learning Outcomes

  • Be able to design the outline on an online marketing campaign
    • Select tactics
    • Estimate budget needed

Assessment

  • Homework 5 - use web site analytics software; explain tracking cookies; explain what DoubleClick does
  • Homework 6 - outline a marketing campaign

Analyzing the Impact of the Internet on an Industry

Key Concepts

  • How to analyze the impact of the internet on an industry
    • An industry is a group of firms that compete to satisfy similar customer needs
    • The profitability of an industry depends on its industry structure, which can be analyzed using Porter's Industry structure and five forces analysis
    • Industry and business research methods
      • Be able to estimate the total market size
      • Determine the profitability of companies in this industry
      • Understand why some companies are more profitable than others
      • It's critical to enter the correct search terms e.g. searching "music industry" (include the quotes when typing the query into a search engine) will provide more relevant information than just searching the term "music"
  • Information goods and information businesses like music and newspapers have been affected the most
    • An information good is anything that can be digitized, such as music and news - compare to physical goods, such as a gallon of milk
    • The internet has dramatically changed industries that produce information goods
      • How information is produced - now cheaper, easier, and more collaborative
      • How information is distributed - now via the internet instead of being printed on paper
  • The newspaper industry
  • The music industry
  • How the internet has affected producers of physical goods
    • Clothing stores such as Zara

Learning Outcomes

  • Be able to explain how the internet has affected the revenue, costs and hence profitability of an industry

Assessment

How the Internet has Changed how Businesses Work

Key Concepts

  • How the internet has changed the way businesses work
    • Where work is done: outsourcing, remote tools
    • How people work together: collaboration and collaboration tools such as wikis
    • Web services such as customer relationship management
    • Communication and information sharing
    • What people do - how job design has changed
    • Changing organizational structure
    • Impact on information technology - need security

Learning Outcomes

  • Be able to explain how the internet has affected the way businesses are organized, who does what, the kind of work people do and how people work with each other
  • Demonstrate the ability to collaborate effectively with your classmates using wikis and Google Docs

Assessment

  • Demonstrate the ability to collaborate effectively on the Group Project - your grade is a combination of your individual contribution and the overall quality of your group wiki
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