• Economic and social consequences of Internet development
  • The dynamic of Internet sites
  • The Internet redefines the firms and their transaction costs

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    The Internet redefines the firms and their transaction costs

    The Internet modifies not only transaction costs on the end market (B to C : business to customers) but also on intermediate markets (B to B : business to business). The existence of an efficient digital network and a universal protocol (IP) alters the costs of transaction and coordination between firms.

    A firm is defined by all the activities which are more effectively coordinated by a hierarchical organization than by a market22; the development in information technologies will modify this frontier, bringing about an evolution in internal coordination methods - these will become freer and less restricted by procedural constraints - and in relationships with the outside world which will more so now than in the past, give way to closer and more strategic ties between firms.

    An analysis of this type, which has already been conducted in connection with the EDI, hints at a reduction in the average size of companies, more complex production processes and improved distribution of activities, each hierarchical entity concentrating on a specific activity of the value chain. What grounds are there for believing, today, that the development of the Internet23, intranets and extranets will be more successful than EDI was in its time and that it will be sufficient to bring about a closer relationship between firms?

    Previously, a company was characterized essentially by a specific strategy based on internal information. The Internet could deeply change this situation insofar as the exchange of strategic data:

    • becomes technically possible: progressive standardization of protocols and applications makes it possible to interconnect management systems, technical or commercial databases at extremely low cost and more efficiently than with EDI-type procedures;

    • often proves to be advantageous: companies actually have a difficult choice - either they keep such strategic data private, which gives them a long-term advantage over their competitors if they adopt the optimal policy; or, to a limited extent, they exchange their strategic information and use it cooperatively, which ensures greater efficiency, although advantages are distributed amongst all the parties involved. Such cooperation between competitors24 already exists in the field of technical research and standardization;

    • often appears to be the only choice: employees of hierarchical companies progressively give way to experts who are more independent and who are less an integral part of the firm which employs them. In order to carry out their work, they have to exchange information with their peers and ultimately have closer links with their profession than with their employer. It is at this level that the issue of secrecy or cooperative competition actually arises; moreover, the secrecy which surrounds internal communications is rendered less secure by modern means of coordination, such as e-mail, which make it possible to trace all strategic information exchanged within a company - such information can be used in the courts by a competitor (cf. the current dispute between Microsoft and Netscape).

    Companies will be increasingly characterized by the type of control they exercise over access to their strategic resources: technical innovations, and customer databases, projects, research and development, etc. Current debate on industrial espionage serves to illustrate companies’ confusion at their relative loss of control over their internal information. Some firms cling to the former model of a company at war with its competitors and carefully isolate their internal networks. Others, however, seek to take advantage of the increased efficiency provided by the networking of their strategic data. It is likely that the companies active in the intermediation sector will adopt this second type of model; indeed, this can already be seen in the dynamic of Internet sites.

    Economic and social consequences of Internet development

    An attempt will now be made to identify the economic and social consequences of Internet development by examining the current dynamic of Web sites, a dynamic which can be explained on the basis of observations made earlier. This will assist understanding of the economic model which, in the long term, will shape services on the Web.

    The dynamic of Internet sites

    Web sites which are accessible on the Internet are extremely numerous. A description of the current situation and of its evolution requires a distinction to be made between:

    • on the one hand, the sites which attract web surfers and channel them towards other sites of the network of whose existence they may previously have been unaware. These sites (sometimes called “portals”25) serve as entry points but also offer specific services beyond that of providing access to other sites (e-mail, games, news, ...);

    • on the other hand, sites that have practically no direct audience and receive their visitors from the portals. They form a motley set and there would be no point in listing them; they include homepages of universities and libraries, sites used for the institutional advertising of major companies, public sites (government agencies, for example), personal homepages, etc.

    The portals are also highly diverse in nature; they come from different backgrounds and have recently begun to evolve towards the common model whose characteristics were described earlier. These are principally:

    • browser default pages (for example, Netscape) or access provider pages (for example the Wanadoo homepage). These pages, however, act as portals only for those who do not deactivate them, since browsers gives one the opportunity to choose the address of this first page. Nevertheless, the number of users who do not modify the default choice is so great that access and browser providers now try to use this strategic position to convert such pages into entry points to all Web sites;

    • access providers, such as AOL, which seek to extend this activity by organizing virtual communities;

    • sites which provide more or less targeted news and information free of charge (for example C/NET or Disney) and which extend their services to search engines, virtual community, the free supply of software or games, targeted discussion groups, classified ads, etc.;

    • directories and search engines (such as Yahoo, Excite, Hotbot, Lycos, AltaVista, Ecila, Nomade, QuiQuoiOù, Voilà, etc.): these sites are the most visited because they are essential for Web surfers to navigate on the Web; they are financed principally by means of advertising banners. Nowadays, they are diversifying their offer and are proposing a whole range of services: free e-mail, games, software, chat-rooms, etc. and are seeking to provide e-commerce and to create communities whose members have similar interests;

    • free homepage hosting (for example Wanadoo26, Geocities or Tripod, purchased by Lycos, etc.): this type of offer is aimed principally at individuals who receive from 10 to 20 megabytes, various aids to help them build their homepage and who accept advertising banners in return. Using this basic model, the managers of such sites have sought to stimulate communities, grouping together personal homepages on the basis of similar interests into virtual cities (41 "neighborhoods" in the case of Geocities) and introducing shopping malls which are adapted to each community;

    • the sale of books (Amazon): a priori, this is not a portal in the sense described above, but Amazon’s case is interesting in that, from selling books (order and payment on line, using a mail-order system), this site has evolved and now provides a whole range of information for each available book - including links and reviews (sometimes written by purchasers themselves). Amazon is therefore attempting not only to provide products (books) but also to analyze the customer base and to offer each customer those titles he or she is likely to be interested in. This demonstrates the potential value of commercial files describing consumer profiles.

    Here, then, we have the emergence of the demand-generation model described above towards which all such portals converge. Moreover, to a lesser extent, personal homepages or institutional sites are also taking their inspiration from this general model whose principal characteristics are:

    1. the creation of a loyal customer base;

    2. analysis of this customer base (setting-up of customer databases);

    3. the building of virtual communities (games, message boards, chat rooms, instant messaging27, virtual cities whose districts are led by voluntary surfers, etc.);

    4. customer base development and exploitation.

    This latter stage ("customer base development") consists principally in:

    1. inciting the actual decision to buy (information on existing products, demonstration of these products, etc.);

    2. in the case of highly innovative products, providing collective apprenticeship within the community;

    3. involving communities in product design;

    4. organizing the production of products by customers themselves using ready-to-assemble elements (for example the means with which to construct an attractive homepage or to adapt software in the case of freeware);

    5. adapting the environment to the surfer’s profile: the surfer is not only directed towards web sites he is likely to be interested in but information is filtered, prepared and organized for him. In this way, a single Web site may be seen differently depending on the portal which has provided entry to it.

    In the future, the intermediation function as described above will be fulfilled on the Internet by a variety of players:

    • portals: as has been demonstrated, this is the logic behind their current development;

    • companies which, these days, design and manufacture products: such companies will actually seek to concentrate their activities on the upstream, high-added-value phase of demand generation, actual production functions being subcontracted;

    • department stores and retailers: these currently act as intermediaries and exploit customer bases, and will naturally attempt to extend this to virtual commerce on the Internet.

    Intermediation is an activity where the forerunners will benefit from know-how and a customer base which will place them in a dominant position for a long time. However, it will be noted that, on the Internet, customer bases are highly volatile - cancellations and renewals of subscription (churn) will undoubtedly be very high until communities are properly constituted and organized. Finally, it should be noted that existing department stores will experience an evolution in their trade: they will continue to play a role in the logistics involved in selling but will increasingly be in competition, on the Internet, in the crucial role of purchase catalyst.

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    The Internet redefines the firms and their transaction costs

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