Outline And Learning Outcomes

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. Analyzing the Impact of the Internet on an Industry
  8. Online Marketing
  9. How the Internet has Changed how Businesses Work

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.

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
  • In theory, every business could sell direct to customers, and when internet business began many predicted that all retailers would be affected
    • People could sell their homes online, bypassing realtors
    • Airlines could sell tickets directly to passengers
    • Auto makers could sell direct, cutting out dealers
  • There are several advantages to selling direct
    • Cut out retail margin
    • Get direct information about customer demand
    • Allows "just-in-time" manufacturing e.g. the famous "Dell Direct Model"
    • Allows customized direct marketing
  • Many direct sales companies quickly migrated to the internet
    • Dell, Charles Schwab, LL Bean, GEICO were already selling direct via phone, so moving to the web was easy
  • Some businesses that continued to use retailers or distribution channels faced competition from direct sellers who could offer a lower price
    • Merrill Lynch faced price competition from Charles Schwab and Ameritrade (now TD Ameritrade)
    • AllState and other insurers that use agents face competition from GEICO, which claims to "save an average of 15% for auto insurance"
  • Businesses that used retailers or distribution partners risked alienating their current partners if they sold direct - this is called channel conflict
    • Financial advisers who sold a particular mutual fund could move their clients to other funds if the fund tried to sell direct
    • Car dealers could start selling competitors' cars
  • Direct selling creates challenges of its own
    • Manufacturers have to perform many retailing activities themselves e.g. marketing, customer service, inventory, retail distribution, dealing with credit risk. That's expensive.
    • Distribution costs are prohibitive for some goods e.g. direct distribution of mattresses is much more costly that bulk shipment to a local retailer
  • Further, not everyone is willing to buy direct online
    • Home owners that try to sell their homes online — cutting out the realtor commission — run the risk that some buyers willing to pay more will not see the house at all
    • People like to see some products before they buy them e.g. artwork, fashion clothing, designer furniture
    • Without some kind of intermediary, travelers have to visit many airline web sites to find the best price
  • Many companies preferred to focus on what they did best and leave the retailing to others.

Learning Outcomes

  • Be able to explain the advantages of selling direct
  • 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

The Internet affects Competition and Pricing

Key Concepts

  • 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 affects competition
    • Bricks-and-mortar businesses face competition from online businesses
    • Competitors have increased their reach e.g. California-based businesses can compete in New York, British newspapers can compete in the US, India-based accounting businesses can now compete with U.S.-based businesses
  • This increased price competition can reduce profitability (margins)
  • Use Porter's five forces model to analyze the factors that determine industry profits and see how the internet has affected them
  • Companies need a strategy to deal with online competitors
    • There are two basic strategies: achieve cost leadership (so you can still make money at the market price) or differentiate (what can you do that others cannot?)
    • Should they post prices online or not?
  • 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
  • Pricing strategies
    • Versioning: selling different versions at different prices
    • Switching costs: get pricing power by making it difficult for customers to switch to a competitor e.g. free trial version

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
  • See Midterm on Moodle

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. They made money by "selling pans to gold miners."
  • The same was true in the internet gold rush
    • Companies like Akamai, AOL, Cisco, Comcast, Netscape and others provided the technology and services everyone else needed to use the internet
      • Cisco sells equipment that allows companies to connect to the internet, notably routers
      • Akamai provides high-speed connections to companies
      • Comcast is a cable internet access provider
    • So many made money even while their customers - the internet start-ups - ultimately flamed out
    • Search engines such as Google provide internet services — it's difficult to use the web without a search engine — but almost all their revenue comes from advertising, so we'll look at them under internet advertising and online marketing
    • Dow Jones tracks an index of publicly traded internet businesses
  • Some of these businesses later failed due to increased competition
    • The Netscape browser was wiped out by competition from the free Internet Explorer browser
    • AOL lost customers as people migrated from dial-up to broadband internet access
  • 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

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, job agencies and auction houses
  • These middle man businesses get paid for bringing buyers and sellers together
  • The main benefit they provide is lower search costs
    • e.g. travel agents or travel sites reduce the amount of work required to find the right flight/hotel/vacation package
    • e.g. realtors reduce the amount of work required to find a house buyer or seller
    • Networks are faster to search than lists
  • Online marketplaces (such as eBay and Amazon.com's used book market) use the internet to 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"
      • The internet magnifies the network effect
      • The network effect means a single firm can dominate an industry, creating monopoly profits.
    • Their business model is based on transaction fees, also known as commissions
  • eBay is highly profitable for a number of reasons
    • Significant economies of scale: low variable costs (does not pay for shipping, no inventory, customer acquisition costs low [why?])
    • Little competition due to the network effect, both for markets and PayPal
    • Multiple revenue streams
    • Auction pricing – unique, creates interest and excitement
  • Many businesses work like online marketplaces e.g. travel sites, dating sites, job sites
    • Their key characteristic: many buyers, many sellers, business is the meeting-point of buyers and sellers
  • Online markets compete by differentiating (being different from their competitors), or by being the biggest
  • Social networking sites are online marketplaces - people exchange information (news, photos) instead of goods
    • Business models - how do social networking sites make money? Are they profitable?
      • Most social networks do not charge transaction fees (except for sending some special messages or gifts)
      • Most rely on advertising
      • These businesses have zero variable costs, so offer large economies of scale
      • Despite these low costs per user, many are not profitable because of low revenues, 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
      • They need the revenue per user to be greater than the cost per user

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

Analyzing the Impact of the Internet on an Industry

Key Concepts

  • An industry is a group of businesses that compete to meet the same customer need e.g. the airline industry, the fast food industry
  • The internet has affected entire industries, but some industries have been affected more than others
    • Physical goods industries: how has the internet affected the steel industry? The fruit industry? The clothing industry?
    • Information goods industries: music, television, books, newspapers?
    • Service industries: gardening, travel agents, banking, fast food, health services, hairdressing?
  • Industries that produce information goods — 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 how information goods are produced and distributed
      • Information goods can now be produced more cheaply and easily and more collaboratively
        • The first copy can be expensive to produce e.g. to produce a movie or a music album or a book can cost thousands or millions of dollars. However, digital technology has reduced even this cost e.g. anyone can make a video and upload it onto YouTube
        • But making the second copy is essentially free, as you can make a perfect digital copy
      • Information goods can be distributed via the internet instead of being printed on paper or vinyl or plastic disks
    • In some information industries this has led to greatly increased competition, new substitutes and lower profits e.g newspapers, music
    • The magazine industry has been hurt by lost advertising revenue, but the book industry has been less affected so far
  • Producers of physical goods have been able to use the internet to increase the speed with which they get customer feedback and develop new products e.g. fashion clothing manufacturers such as Zara
  • You need to be able to analyze the impact of the internet on an industry. The key question: how has the internet affected the profitability of the industry?
    • Industry and business research methods:
    • The profitability of an industry depends on its industry structure, which can be analyzed using Porter's Industry structure and five forces analysis. Analyze how the internet has affected each of the five forces: industry competition, threat of new entrants, threat of substitutes, power of customers, power of suppliers
    • Be able to estimate the total market size.
      • Market size is the total revenue of every company in the industry
      • You can sometimes get an initial estimate from the revenues of the largest few companies in the industry
      • Determine the profitability of companies in this industry
        • Look at income statements of public companies
    • Understand why some companies are more profitable than others
    • Analyze how the internet has affected costs and revenue in the industry
    • Analyze how the internet has affected the business models, business strategies and marketing strategies in the industry: e.g. look at business models before and after the internet
    • Forecast future developments in the industry
  • Industry analysis example: the newspaper industry
  • Industry analysis example: the music industry

Learning Outcomes

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

Assessment

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

  • Written homework assignment to come - see Moodle

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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