INTRODUCTION
In business and beyond, the Internet has been a - if not the - most influential technological change within the last two decades. It has greatly affected traditional industries at the macro and micro levels.
It has also created new markets such as online auctions, online gaming, search engines, social networks, online advertising, and digital marketplaces. In both new and old markets the Internet has changed traditional ways to gain competitive advantage. In particular, established firms struggle to adapt their business strategies and to reconfigure their value chains to embrace the opportunities offered by Internet-enabled information and communication technologies (ICTs). The fast and cost-efficient access to almost infinite amounts of data and information has affected almost every industrial sector, especially those business-to-business (B2B) and business-to-consumer (B2C) industries whose operations have been constrained by high transaction costs for gathering information, communicating, or controlling (Zerdick et al., 2000). Even stronger was the effect on markets whose goods can be digitally distributed. The Internet has not only emerged as an important distribution channel, it has also created new customer demands, made user-generated content globally accessible, and given rise to new forms of customer relationship and engagement.Many established companies are challenged with the question of how to use the Internet as a complement to or even full transformation (Dosi and Galambos, 2013) of their offline business and capture appropriate value from their Internet activities. This has proven difficult for established firms as the Internet has usually intensified competition due to new rivals’ entrance into formerly local or proprietary markets (Picot et al., 2008). Global communication networks enable companies to gain access to markets that were previously difficult to reach.
Hence, customers have more choices and many markets have become more transparent (Teece, 2010). This is why today private and organizational customers possess more bargaining power. The shift from seller to buyer markets is reflected by customers who have more demanding expectations of product or service quality and less understanding for organization-related coordination problems such as long delivery times (Picot et al., 2008). Thus, higher levels of customer orientation and flexibility from suppliers are required. Given that the cost of ICT will further decline and their performance will continue to increase, the division of labor between organizations and within markets will intensify. Already today we can observe corporate boundaries to blur and in some cases even to dissolve (ibid.). The Internet and related ICTs are a trigger and enabler of co-opetitive inter-firm arrangements, meaning that firms simultaneously compete and collaborate with each other in different stages of the value chain (Bengtsson et al., 2010; Brandenburger and Nalebuff, 2011). Co-opetition is particularly prevalent in markets in which digitalization drives the convergence of multiple technologies and accelerates product life cycles (Gnyawali and Park, 2011). Competing and collaborating at the365
same time is a competitive option that helps firms to keep pace with rapidly changing customer needs and technological innovations by sharing intellectual property and resources (ibid.). Thereby, co-opetition reduces risks and uncertainty caused by the convergence of technologies and it can also serve as an instrument to set industry standards and to build platforms (Gomes-Casseres, 1994; Lei, 2003; Mione, 2009), both of which are powerful means to achieve market dominance.
‘Platformization’ is a new phenomenon especially widespread on the Internet (Economides and Katsamakas, 2006; Gawer and Cusumano, 2008; Ceccagnoli et al., 2012). Well-known examples of Internet platforms include trading platforms, auctions, web search, recruiting and dating services.
Core elements of platforms are that (1) an intermediary links different groups of customers through a platform, creating a two- or multi-sided market, and (2) network externalities are present and decisive for a platform’s success (Katz and Shapiro, 1994; Evans, 2003; Rochet and Tirole, 2003; Armstrong, 2006; Eisenmann et al., 2006, 2011). Another characteristic is complementary innovation by which a platform’s functionality is extended (Gawer and Cusumano, 2008; Suarez and Kirtley, 2012). Facebook, for instance, opened its platform for third-party applications via an application programming interface (API) that allows others to offer a wide-range of new services based on the platform’s core. As a result, a thriving ecosystem around Facebook’s social network evolved that increased network effects and became a key differentiator.The Internet also enables hybrid competitive strategies beyond cost and differentiation strategies. Using Internet technologies enables firms to reconfigure their value proposition and to differentiate themselves from competitors. While some companies may choose to use the Internet to offer an advanced and at the same time more efficient service (e.g., Cisco Systems; Tax and Brown, 1998) some may use it to ‘mass customize’ products (Salvador et al., 2009; Franke et al., 2010). Dell, for instance, revolutionized the computer industry by manufacturing individually configured PCs distributed solely over the Internet. Miadidas.com allows customers to create their own shoes and on Mymuesli.com, cereal aficionados can mix their individual muesli. Dell’s example is especially worth a closer look. In contrast to Porter’s (1985) perspective, Dell managed to gain a competitive edge by delivering differentiated and moderately priced products to customers. It did so by embracing opportunities enabled by the Internet, such as global sourcing, virtualization, or on-demand manufacturing at low transaction costs. Beyond these, Dell used the Internet as single distribution channel.
Dell could do so as it did not have the constraints of upsetting existing distribution partners or resellers, which made it extremely hard for established competitors to imitate Dell’s business model. Interacting directly with customers over the Internet gave Dell a further competitive advantage. Dell learned about changing consumer needs faster and was thus able to provide superior service and value.Dell’s case makes obvious that in the digital era choosing an appropriate business model is crucial. Together with many other examples this case shows that to a very large degree the strategic and market-oriented innovation potential of the Internet has not been exploited by incumbent companies but by newly founded firms. Driven by an open spirit, lower costs of market entry, as well as network effects, new players conquered new, so far unexplored business opportunities throughout different markets, including B2C, B2B, consumer-to-consumer (C2C) and government to business/consumer (G2B and G2C) relationships. Start-ups and innovative entrepreneurs were more suited to experimenting with the vast prospects provided by the new Internet technologies compared to most existing firms with their specific path dependency. In this way and in a short period of time, new industries and new large and leading companies emerged mainly in developed countries, above all the USA.
In this chapter, we particularly focus on the question of how established firms and dot-coms can leverage Internet technologies and do business on the Internet to gain competitive advantage. In the next section we elaborate on how the concepts of business strategy, business model, and business process modeling are theoretically and practically interrelated to each other and show why doing business on the Internet is different from doing business ‘offline’. Section 17.3 looks at the strategic properties of the Internet. Section 17.4 outlines how Internet business models can be classified, and section 17.5 discusses the elements at the core of an Internet business strategy. The chapter concludes with a synopsis of critical success factors in the Internet business and provides an outlook on the future of doing business on the Internet.
17.2
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