49 3

External Analysis: The

Impact of the Internet on
the Macro-environment
and on the Industry
Structure of e-Business
Companies
Contents

3.1 Examining Trends in the

Macro-environment – 52
3.1.1 Political and Legal Environment – 53
3.1.2 Economic Environment – 57
3.1.3 Social Environment – 58
3.1.4 Natural Environment – 60
3.1.5 Technological Environment – 62

3.2 Examining Industry Structure with the Five

Forces Framework – 66
3.2.1 Industry Rivalry – 69
3.2.2 Barriers to Entry – 70
3.2.3 Substitute Products – 74
3.2.4 Bargaining Powers of Buyers and Suppliers – 77

3.3 Complementing the Five Forces Framework

with the Co-opetition Framework – 78

© Springer Nature Switzerland AG 2020

T. Jelassi, F. J. Martínez-López, Strategies for e-Business, Classroom Companion: Business,
https://doi.org/10.1007/978-3-030-48950-2_3
3.4 De ning Industries, Segmenting Markets,
and Targeting Markets in e-Business – 83
3.4.1 De ning an Industry – 83
3.4.2 Segmenting Markets in an Industry – 83
3.4.3 e-Business Concept 3.1 – 84
3.4.4 Targeting Speci c Markets in an Industry – 90

References – 94
Chapter 3 · External Analysis: The Impact of the …
51 3

Learning Outcomes
After completing this chapter, you should be able to:
5 Analyze trends in the macro-environment and explain their implications for e-
business ventures
5 Understand the value of the ve forces industry framework for the analysis of
industry attractiveness
5 Explain the key characteristics of the co-opetition framework and show how it
expands the ve forces industry framework
5 De ne industries, segment, and target markets for e-business applications

z Introduction

» When an industry with a reputation for dif cult economics meets a manager with a
reputation for excellence, it is usually the industry that keeps its reputation intact.
Warren Buffet

e-Business ventures, or any ventures for that matter, do not operate in isolation
from their environment. Instead, success depends not only on just what a company
does by itself but also on the actions of other actors in the industry, such as com-
petitors or suppliers, and on broader environmental developments such as changes
in technology or government regulation. While individual businesses can typically
at least partly shape the industry environment through their competitive behavior,
the broader developments in the macro-environment can rarely be in uenced.
To adjust accordingly to environmental changes, companies need to have a
clear understanding of important developments in their external environment. At
this stage, for e-business companies, technological changes are of critical impor-
tance, since, for instance, an increase in available Internet technologies (such as IoT
and smart home tech, AR/VR, machine learning, etc.)1 open up new possibilities
for creating new business models. At the same time, there are also societal changes
such as changing demographics and changes in government regulations that poten-
tially have an impact on the sustainability of e-business ventures.
Making sense of this very dynamic environment and deciding how to best do
business is a highly complex task; strategists need to lter the multitude of signals
to highlight the really important developments. This task becomes even more chal-
lenging due to the wealth of public information that is available through media and
online sites. As a result, there is just as much danger of information overload as of
information unavailability.
One important rst step is to organize information about new developments in
the macro-environment and cluster them in such a way that they will not be over-
looked. As a starting point for such a systematic analysis, this chapter rstly provides
a framework for analyzing the macro-environment. Secondly, it discusses Porter’s

1 For a detailed explanation of these terms, refer to Forbes Technology Council, “Top tech trends
in 2019: 11 experts detail what you need to watch,” Forbes, 20 December 2018.
 52 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

ve forces framework for analyzing the attractiveness of an industry. It also analyzes

the impact of the Internet on each force of Porter’s framework, i.e., industry rivalry,
barriers to entry, threat of substitute products, and the bargaining power of buyers
and suppliers. Thirdly, this chapter presents the co-opetition framework, which
offers an alternative perspective for industry analysis. Finally, it addresses the ques-
tion of how to de ne industries within which to compete and how to segment spe-
3 ci c customer groups that a business should target through its e-business offering.

3.1 Examining Trends in the Macro-environment

The macro-environment takes a broad perspective of the factors that in uence a

business strategy and its performance.2 Evolving trends in the macro-environment
can present signi cant opportunities and threats to a rm’s strategy. Therefore, at
the outset of any strategy formulation, it is useful to analyze the trends that char-
acterize the macro-environment in its different dimensions: political, legal, eco-
nomic, social, and technological (see . Fig. 3.1).

al Remote Macro
li tic t
po en environment
al & nm
g o
Le nvir
e

Industry
environment

Customers
t
men
iron

Company Competitors
l env
gica
nolo
Tech

. Fig. 3.1 e-Business companies are impacted by their industry and macro-environment. (Source:
Adapted from Hungenberg (2014), p. 90)

2 A good discussion of macro-environmental in uences can be found in Johnson et al. (2005). A

more e-commerce- speci c discussion of environmental factors is contained in Chaffey (2002),
pp. 143–156.
3.1 · Examining Trends in the Macro-environment
53 3
3.1.1 Political and Legal Environment

The political and legal environment relates to issues on different organizational

levels. At country and industry levels, it includes issues such as taxation, company
legislation (including monopoly legislation), government subsidies, and other
incentives for industries, tariffs, political stability, and interest rates.
Because of the complexity of cross-border regulation, taxation has been a dif-
cult issue in electronic commerce. Yet, because of the boundary-less nature of the
Internet, it presents a major issue for governments and a source of opportunity for
e-business ventures. For example, multinational companies such as Google,
Facebook, and Amazon have been involved in tax avoidance scandals. They report-
edly channel online revenue from sales within a country across borders to other
countries with a more favorable tax regime. This practice decreases their book prof-
its and subsequent tax payable where their international headquarters are. Upon
discovery of this nancial strategy, some multinational companies chose to cease
rerouting revenues and instead pay tax in the same country where the revenue is
generated. For example, Facebook used to reroute its advertising revenues via
Ireland and will instead pay tax in every country which has a local of ce where the
revenues are generated3. Similarly, the United Kingdom, government plans to cre-
ate a new taxation approach that taxes revenue rather than pro ts (see Financial
Times article titled “Big Tech faces UK tax on revenues, not pro ts”).

Big Tech Faces UK Tax on Revenues, Not Pro ts

Large technology companies such as Facebook and Google face a tax on their rev-
enues in the United Kingdom after a Treasury Minister said this was the “potentially
preferred option” after a government review.
Mel Stride, the Financial Secretary to the Treasury, said in an interview with the
BBC that the British government wanted “to move to a situation where we are taxing
those activities [of large digital businesses] fairly.”
He said: “[Digital platforms with lots of users are] driving a lot of value, so
you’re looking at social media platforms, online marketplaces, internet search en-
gines — where at the moment the tax regime is not taxing those activities fairly.”
His comments come 3 weeks after a government consultation closed on potential
changes to taxation of the digital economy.
The aim of the consultation is to tackle long-standing fears that large Internet
businesses, such as Amazon, Google, and Facebook, do not pay enough tax follow-
ing a series of tax-avoidance scandals involving those companies.
Mr Stride said a tax on revenues was the “potentially preferred route to go,”
although he did not want to do anything that would harm smaller businesses, ac-
cording to the BBC.

3 “Facebook to stop routing ad revenue via Ireland amid pressure over taxes,” The Guardian, 12
December 2017
 54 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

His comments bring the UK’s position on taxing Internet companies much clos-
er to that of its peers in Europe, led by France, which are attempting to introduce
a revenue tax that make it harder for US technology giants to cut their tax bills by
channeling pro ts between countries.
Dan Neidle, a partner at Clifford Chance, said that a UK tax on gross revenues
would help the government get around “the thorny problem that many internet com-
3 panies make little pro ts and [in some cases] huge losses.”
However, he also cautioned that some technology companies might respond by
restructuring their businesses so that they pay more tax in the United States and less
tax overall in the United Kingdom.
“If you want to be kind, this is a proposal intended to discourage the use of tax
havens but which won’t raise much UK tax. If you want to be less kind, it’s a pro-
posal that looks like it’s taxing digital businesses, but isn’t really,” he said.
Sanjay Mehta, a partner at Katten Muchin Rosenman, added: “If this new ap-
proach were to be implemented so that revenues were taxed rather than pro t, this
could dramatically increase the UK’s taxing base in the tech sector. However, it
would position the UK as an outlier in terms of international taxing standards.”
Amazon and Google did not immediately respond to a request for comment.
Facebook declined to comment.
In the United Kingdom, Facebook and Amazon have already changed their tax
structures to book more of their payments in the country after George Osborne, the
former chancellor, rst introduced a Google tax on overseas pro ts. However, their
bills are still a fraction of overall revenues.
Facebook in December became the rst US tech company to agree to pay more
tax outside Ireland by booking more of its ad sales in other European countries.
In 2016, it said it would book big advertising sales generated in the United
Kingdom locally, instead of through its European headquarters in Dublin.
Regulators around the world have attempted to develop coherent plans for in-
creasing their share of the tax paid by big US technology companies.
India this month said it could ask companies to pay taxes based on their “eco-
nomic presence” in a parliamentary bill accompanying the budget.
Source: Marriage and Ram (2018).

Let’s now assess how the legislative framework in a country may impact e-busi-
nesses. With regard to monopoly legislation, throughout the 1990s, Microsoft was
accused of violating its dominant position in the operating systems market by
leveraging it to move into other software markets at the expense of competitors.4
More recently, Google has been criticized for a similar dominance in the online
advertising market. When 7 Amazon.com entered the German market, it was
confronted with the price- xing regulation, which sets a common price for all new
books sold in the country. This made it impossible for Amazon.de to compete on
the price dimension with rival bookstores.

4 “Windows of opportunity,” The Economist, 15 November 2003, p. 61

3.1 · Examining Trends in the Macro-environment
55 3
Furthermore, in light of peer-to-peer le-sharing networks such as Kazaa or
eMule, the dominant incumbents in the music sector (music labels) continue to
rigorously criticize “pirates” who download music in violation of copyright laws.
Contrary to the interests of the music industry, however (considering the conve-
nience and range of les available) the online le-sharing practice is still highly and
widely popular. Filesharers who remix music to create new works provoke further
discussion on copyright protection and digital rights management tools. One solu-
tion to illegal music downloads is paid le streaming services, for example, another
multinational is Spotify, who pay copyright owners a royalty based upon the fre-
quency of plays of a song.
At the individual level, political and legal debates revolve around the extent to
which businesses should be allowed to intrude into the private lives of Internet
users. This includes topics such as the placement of cookies5 and aggressive mar-
keting via spam mails and aggregating and onselling user data.6 The European
Union (EU) addressed this to some extent with its complex General Data Protection
Regulations (GDPR) in 2018. The GDPR concerns data protection and privacy
for individuals within the EU and European Economic Area (EEA) and the export
of data outside of the EU and EEA. It aims primarily to give control to individuals
over their personal data and to simplify the regulatory environment for interna-
tional business by unifying the various regulations within the EU. It mandates that
businesses that collect personal data must put in place appropriate technical and
organizational measures to protect that data and users can request companies to
delete or change any data the business holds on them. Implementation of the leg-
islation led to many e-businesses changing their operations. Opinion on GDPR is
provided in the Financial Times article “Europe bets its data law will lead to tech
supremacy.”
In sum, businesses cannot overlook the role of government and legislation
when analyzing the external environment. Through the lens of government, some
aspects of e-business create challenges for regulation. Due to the virtual and bor-
derless nature of e-business, it is dif cult for governments to regulate, scrutinize,
and tax revenues coming from e-business activities fairly. The question of how the
“visible hand” of regulators should deal with e-business remains in contention.
Some countries or regions, for example, Europe, may introduce stricter regula-
tions to protect taxation and citizens’ rights (see the Financial Times article
“Europe bets its data law will lead to tech supremacy”). Others may view e-busi-
ness, particularly small and medium-sized e-business startups, as one of the most
important boosters of economic performance, for example, the United States and
China.

5 Cookies are text les stored on a PC that allow the website operator to identify that PC.
6 Spam is unsolicited e-mail messages
 56 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

Europe Bets Its Data Law Will Lead to Tech Supremacy

In several respects, Europe’s General Data Protection Regulation is a terrible piece
of legislation. Having been so long in the making, it appears outdated even before it
comes into effect on May 25. The GDPR is also overly sweeping in scope and largely
unenforceable in practice. That is not a great look for what has been billed as a land-
mark law intended to resound around the world.
3 Yet, in spite of its manifest aws, the regulation has already achieved one invalu-
able goal. It has forced us to focus on how we treat the most valuable assets of our
digital age: data. The law’s main aim is clear: to compel all organisations to be more
transparent and accountable in their use of personal data and to give consumers
greater control and choice.
The EU’s move seems timely following the outrage surrounding Cambridge
Analytica’s misuse of Facebook data. The casual way in which 87m users’ details
were accessed without their consent only reinforced the impression that the big so-
cial media companies regard personal data as mulch to be monetized rather than
property to be protected.
The very threat of the GDPR has forced every responsible business in Europe to
scrutinize how it gathers, stores, and uses data. That is a good thing. The prospect of nes
totaling up to 4 percent of global revenues has further concentrated corporate minds.
Yet there are several glaring drawbacks to the regulation. One test of any leg-
islation is how effectively it can be implemented. In that regard, the law is likely to
fall woefully short. Such is the complexity of the regulations that it is hard for any
company to know whether it is fully compliant. Pretty much any organization could
be found in breach.
In Brussels, even the champions of the GDPR privately admit that implementa-
tion is likely to be arbitrary and dependent on the effectiveness of national regula-
tors. Ironically, those regulators have been stripped of many of their most expert
staff by big companies desperate to hire more data protection of cers.
Second, as is often the risk with onerous regulation, the legislation may have the
perverse effect of sti ing competition and innovation, reinforcing industry incum-
bents rather than encouraging insurgents. The costs of compliance may also impose
barriers to entry.
Third, the GDPR is likely to hobble the short-term development of Europe’s
arti cial intelligence industry, recently identi ed as a strategic priority. Some trade
associations argue that by limiting data ows and raising legal risks, the regulation
will chill the sector. If data are the feedstock on which the algorithms gorge, then
Europe may be rationing its most precious commodity.
The conclusion of one US tech lobbyist that the GDPR would “kill people” be-
cause it would prevent the transfer of medical information may be extreme, but there
seems little doubt that Chinese AI companies, almost wholly unfettered by privacy
concerns, will have a raw competitive edge when it comes to exploiting data.
Europe’s counter-bet is that the GDPR will eventually become the global regula-
tory norm. Privacy will emerge as a new battleground for tech supremacy. But the
early signs are not promising. Outside Europe, the US tech groups seem more intent
on evading the law’s principles than abiding by them.
3.1 · Examining Trends in the Macro-environment
57 3
Nonetheless, some of Europe’s entrepreneurs are surprisingly gung-ho about
their chances of competing in what they call the next-generation Internet.
Jason du Preez, Chief Executive of Privitar, a London-based privacy engineering
company, argues that users will increasingly gravitate toward businesses that pursue
privacy by design. “GDPR is a massive shift and creates an opportunity for busi-
nesses to compete on the basis of privacy,” he says.
Marc Al-Hames, managing director of Cliqz, a German search engine, com-
pares today’s big US tech companies with the automakers of the 1960s. Sentiment
swung sharply against the American car industry following the publication of Ralph
Nader’s crusading book Unsafe At Any Speed, which exposed the manufacturers’
disdain for safety. That forced Congress to legislate and provided the opportunity
for safety-conscious European carmakers to thrive.
Mr Al-Hames argues that the GDPR should be the rst move in a bolder
European regulatory campaign to protect the consumer, install digital “safety belts”
on the Internet, and tame the big tech groups. “It is then the job of European entre-
preneurs to build better, and safer, alternatives,” he says.
He is right that only competition can complete what regulation has started. It
will be up to consumers to shape the future they want to inhabit.
Source: Thornhill (2018).

3.1.2 Economic Environment

The economic environment refers to broader economic developments within the

context of a country, region, or worldwide. Important factors in the economic
environment are interest and exchange rates, stock markets, and, more generally,
economic growth rates (e.g., gross domestic product, household discretionary
income and employment data). The favorable economic environment of the 1990s
and the resulting cheap availability of capital contributed strongly to the rapid rise
of Internet companies.
This rise came to an abrupt halt with the burst of the “dotcom bubble” and
NASDAQ market crash in March 2000 and the subsequent demise of a large num-
ber of Internet startups. For example, the launch of some Internet startups such as
the online fashion retailer 7 boo. com was feasible only because capital was acces-
sible so easily at the time. However, during the ensuing consolidation phase, which
was characterized by depressed stock markets and cautious venture capitalists, it
became much more dif cult to gain access to capital, even if the underlying busi-
ness idea was sound.
Following the NASDAQ crash, the e-business sector has clearly matured over
the last few years. For example, global retail e-commerce is projected to become the
largest retail channel in the world, with a value of US$4.5 trillion by 20217. In the

7 Orendorff (2017). See also: Grant (2018)

 58 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

more recent past, as e-business companies have shown their ability to operate prof-
itably, investors have once again started to fund young and innovative startups. In
contrast to the previous heydays of the Internet; however, investors now seem to be
more scally responsible and driven by promising business models. In addition to
venture capital companies, there are today established Internet companies that are
willing to invest in or acquire startups and integrate them into their existing busi-
3 ness portfolio. The US$3.1 billion acquisition of DoubleClick by Google or the
US$4.1 billion purchase by eBay of the VoIP8 telephone service provider Skype,
which was then sold in 2011 to Microsoft for US$8.5 billion, are prime examples of
this newly found con dence.

3.1.3 Social Environment

The social environment considers factors such as population demographics, income

distribution between different sectors of society, social mobility of people, and dif-
fering attitudes to work and leisure. Social developments were the main driver
behind the development of numerous e-commerce applications. For example, if,
due to their careers, members of a developed society increasingly become cash rich
but time poor, then businesses that address this speci c customer segment can cre-
ate substantial bene ts. For example, the online retailer 7 Tesco.com primarily
targets customers who do not have the time or the desire to shop systematically in
a physical grocery store.
Other important dimensions of the social environment that impact on the
development and use of the Internet are online usage patterns. These can be indi-
cated by the percentage of the population using e-mail or the web for information
or transaction purposes. These types of measurements provide good indications of
the evolution of the population toward forming an information society and estab-
lishing digital habits. For example, the United Kingdom has turned into a “nation
of online shoppers” (see the Financial Times article “UK turns into nation of
online shoppers”). An additional indicator of the social environment is the degree
of participation in online communities, such as Second Life9 or Kitely, where
Internet users come together in a virtual world.
The popularity of social networking sites such as Twitter, WeChat, Weibo, and
Facebook and professional networking sites such as LinkedIn shows, along with
their popularity, re ect that the Internet has become a place for people to interact
and share experiences. Unsolicited self-presentation and open communication
through social networking sites, apps, or weblogs reinforce the democratization of
the web and indicate an important paradigm shift in society, especially among

8 VoIP telephony stands for “Voice over Internet Protocol”. For acquisition details see Microsoft
News Center (2011) and Arrington (2005).
9 For an illustrative example, see, in the second edition of this book, the case study “Second life.
Mercedes-Benz enters the metaverse,” pp. 525–547.
3.1 · Examining Trends in the Macro-environment
59 3
teenagers and youngsters. Increasingly people aged 50 and above are using social
media and the Internet, for example, a study based on a large-scale sample of per-
sons aged over 50 in the United States found 70 percent use social media10, and a
similar pattern is emerging in other countries.

United Kingdom Turns into Nation of Online Shoppers

Britain spends more money online per head than any other developed country, but
the love affair with social media may be on the wane, according to research from the
UK’s communications regulator.
Consumers in the United Kingdom spend almost £2,000 online for goods
each year on average—50 percent more than the next-highest valued market of
Australia—boosted by widespread broadband access and the experience of home
shopping.
“There has been a traditional strong propensity for catalogue shopping among
UK consumers and this appears to be translating also to online,” said Kester Mann,
Analyst at CCS Insight. “There is a good perception and trust in UK postal service
to deliver parcels reliably and on time.”
The high use of debit and credit cards in the United Kingdom was also cited as
an important factor by Ofcom. On the back of the online shopping boom, Ofcom
found that two- fths of advertising spending in the United Kingdom was now on-
line—more than any of the other countries analyzed.
However, the annual report into the Internet economy by Ofcom also found a
surprising drop in the proportion of online adults in the United Kingdom access-
ing social networks each week from 65 percent in September 2013 to 56 percent in
October 2014. This was the steepest fall of any of the countries surveyed.
Ofcom suggested that this was because of the rise of less traditional means of
keeping in contact with friends that do not use networks such as Facebook and
LinkedIn. These include online video sites, games platforms, and instant messaging.
Social network use also fell in the United States, Japan, and China.
Ofcom said the popularity of online commerce was boosted by widespread
superfast broadband access in the United Kingdom, which is ahead of France,
Germany, Italy, and Spain. Nearly eight in ten UK homes have access to broad-
band services that provide connection speeds of at least 30 megabytes per
second.
“The internet has never been more important to the lives of people in this coun-
try, and the demand for better connections keeps rising,” said Ed Richards, Ofcom
Chief Executive. “We are making signi cant progress in this area. However, we all
acknowledge that there is more to do, and this will be the challenge for the coming
years.”

10 Anderson (2017). See also Waldhuter (2017)

 60 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

More British people also use Internet-connected televisions than in Europe.

Almost a quarter of UK consumers have a smart TV and about four- fths of those
have connected it to the Internet. One-third of the online population in the United
Kingdom use the Internet to watch TV programs or lms at least once a week, the
highest proportion of any European country.
Traditional viewing has suffered as a consequence, however, with TV viewing
3 declining more in the United Kingdom last year than in any other country surveyed.
Source: Thomas (2014).

3.1.4 Natural Environment

Minimizing their impact on the natural environment may be challenging for many
traditional businesses, particularly polluting businesses such as transportation and
logistics and product manufacturing rms. Yet low environmental impact is a sell-
ing point of e-business. e-Business can save customer commutes to physical stores,
and digital documents minimize use of paper. Furthermore, unlike brick-and-
mortar business, e-businesses may require less physical infrastructure and xed
assets and depend less on natural resources, which is very attractive to consumers
and regulators. For example, to create and distribute a physical music product
(compact disc or vinyl LP) requires time, chemical and plastic inputs, a pressing
plant, cardboard or plastic casing, and transportation. To create and distribute a
digital music product requires none of these things. As 3D printing gains mass
traction, in the near future consumers may purchase codes that they enter into a
3D printer at home and make goods from that.
To leverage off society’s increasing environmental awareness, many modern
e-business companies use a “green e-commerce” model that aims to minimize their
carbon footprint and maximize their sustained contribution to the natural environ-
ment. For example:
5 Ofo is a stationless bike-sharing company which aims to reduce carbon dioxide
emissions by providing stationless bike renting service.
5 Ecosia is an online search engine that plants a tree for every search made
through it.
5 Craigslist and eBay allow individuals to sell used items to others. This “circular
economy” concept is an e-commerce model that captures value from used items
and reduces expenditure and production on new items that consumes natural
resources. Most importantly, individuals’ needs can be met at a comparatively
low price as they do not need to buy a new one. (See the Financial Times article
“Luxury Goods Create New Online Market”).

Luxury Goods Create New Online Market

Luxury goods companies pride themselves on offering top-quality, exclusive prod-
ucts in sumptuous surroundings. But well-heeled consumers can now save them-
selves a trip to Bond Street or Fifth Avenue by choosing to buy a “vintage” Patek
3.1 · Examining Trends in the Macro-environment
61 3
Philippe wristwatch or a “pre-owned” Hermes Birkin bag with a simple click of the
mouse.
The idea of a secondary market for luxury fashion and accessories is largely
anathema to an industry built on the strength of its carefully cultivated brands. Yet
as online demand for used luxury goods grows, big brands are divided on how to
respond.
Michael Sheldon, Chairman and Chief Executive of Portero, an online trading
company that has been called “eBay for the af uent,” says some luxury brands are
worried about the effects on their primary market. “They seem to have the idea that
a luxury brand shouldn’t be doing this,” he says.
Portero, which trades luxury goods through eBay, says it was founded in 2004
“on the belief that buying luxury online should be effortless and without risk” and it
“certi es and guarantees every item” on the site.
Last year the company announced a deal with Tourneau, the watch retailer, to
authenticate luxury watches. “We believe [Portero] is legitimising the secondary mar-
ket of online auctions for luxury goods,” says Howard Levitt, Tourneau’s President.
“We recognise this is the future for buying and selling pre-owned luxury goods on-
line and a way for us to extend our brand to the secondary marketplace.”
Others are less sanguine. Lew Frankfort, Chief Executive of Coach, which de-
signs and sells luxury accessories, says: “We prefer our products to be sold in image-
enhancing environments only. We don’t consider these sites appropriate for the
brand.”
Yet as some companies speed up their introduction of new product lines, short-
ening the shelf life of luxury items, more women are looking for ways to empty their
closet of last season’s fashion and accessories—especially if those items have a resale
value.
Daniel Nissanoff, President of Portero and author of FutureShop: How the New
Auction Culture Will Revolutionise the Way We Buy, Sell and Get the Things We
Really Want, says Americans are increasingly trading their possessions in secondary
markets—a trend that has important implications for the makers of new goods.
Milton Pedraza, head of the Luxury Institute, agrees. Wealthy baby boomers,
he says, “want to forgo the burden of ownership” and “would rather collect experi-
ences,” so a secondary market makes sense when they tire of their goods. “They
would rather leave their heirs a portfolio of investments than a lot of possessions.”
The key issue, says Greg Furman, executive director of the Luxury Marketing
Council, a trade group in New York, is that a secondary market has to be “meticu-
lously controlled” because of the proliferation of knockoffs. In 2004 Tiffany’s sued
eBay for facilitating the trade of counterfeit Tiffany items on the site, claiming the
fakes eroded the reputation of its brand. The case is expected to go to trial by the
end of this year.
François-Henri Pinault, Chief Executive of PPR, the French luxury and retail
group, says that provided the product is legitimate, a secondary market could be
good news because it educates consumers about the brand. “It would be better to
have used products at a good price than fakes,” he says.
Cyrus Jilla, head of European consumer products practice at Bain, the manage-
ment consultancy, says a secondary market is “neutral to good news” for luxury
 62 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

brands. Many pre-owned items are old lines, he notes. “The truth is today’s luxury
consumer is very savvy and knows what today’s hot item is or not. So it won’t impact
on today’s sales.” Moreover, consumers still relish the in-store experience of buying
luxury goods, which is hard to replicate online.
Its effect in the long term may be “slightly positive,” he says, in that certain con-
sumers may be encouraged to buy a luxury item if they believe it has resale value.
3 “There are consumers who might nd it hard to spend $500-$600 on a luxury
item. A site like Portero might encourage them to buy it if they believe it has residual
value,” he says. “I could see a scenario where it supports luxury goods purchases. I
don’t think it displaces the typical consumer who goes into the store.”
For now, websites offering used luxury items are here to stay. As Mr Pinault says:
“You can’t stop a customer selling her bag to whomever she wants.”
Source: Foster (2006).

3.1.5 Technological Environment

For e-business ventures, the technological environment is of signi cant impor-

tance. Technological innovations (such as the Internet or wireless devices) led to
the emergence of new market opportunities and business models. During the early
years of the Internet, important drivers of technological developments were stan-
dards and languages such as the TCP/IP (Transmission Control Protocol/Internet
Protocol), HTTP (Hypertext Transfer Protocol), HTML (Hypertext Mark-up
Language), and XML (Extended Mark-up Language).11 More recently, new web
development techniques such as the Internet of Things (IoT) and smart home tech,
augmented and virtual reality, machine learning and arti cial intelligence, and 3D
printing open up new possibilities for e-business entrepreneurship. For example,
see the Financial Times article “Trying on the future.”

Trying on the Future

Just as fashion editors are having to become bloggers and tweeters, retailers should
be thinking not just e-commerce but also m-commerce—as in “m” for mobile. With
the advent of the 4G world, consumers are about to be able to shop for anything,
everywhere, all the time.
Imagine the following scenario, as envisioned by ng Connect, a consortium
founded by tech company Alcatel-Lucent to explore the potential of high-band-
width networks:

11 TCP speci es how information should be separated into individual packets and reassembled at
the destination. IP speci es how individual packets should be sent over the network. HTTP is a
method of jumping back between different les. HTML is a computer language for formatting
hypertext les. J. Cassidy provides an informative account of the most important Internet
standards and technologies in his book entitled Dot.con, Perennial, 2003, pp. 16–24.
3.1 · Examining Trends in the Macro-environment
63 3
» Hanna, a shopper, has her body mapped at an in-store kiosk and uploads a
virtual version of herself to the high-speed data cloud. She then goes shopping
on her mobile and tries items on virtually. Later, when she goes home, Hanna
continues shopping on her smart TV, chatting in real time with an online per-
sonal shopper and sending choices to her friends via social networks. Meanwhile
she takes in videos offering expert advice on L’Oréal beauty products from the
editors of Elle magazine.

This is not far-fetched. Already available in the US, 4G LTE (long-term evolution)
offers signi cantly higher speeds and reduced latency (lag time), which means videos
and web pages download instantly. In the United Kingdom, BT and Everything
Everywhere are trialing superfast broadband, with a national rollout planned for
2014, and near-4G networks have debuted in the United States, Japan, Sweden, and
Norway, with Russia leading the way thanks to Yota, an innovative provider.
“It’s not all about speed, but the services we can have when connected to the
cloud,” says Silvio Fernandez, head of ng Connect Americas. He says the shift to
mobile retailing is inevitable, as faster bandwidths make mobile phones our primary
connection to the digital world.
“Yes, for over 10 years there was a reluctance to embrace e-commerce, and there’ll
be a natural reluctance with mobile shopping, but the shift has already started,” he
says. “I can pay for a coffee with my mobile now in the US.”
James Hart, e-commerce Director at the online fashion retailer Asos, says 8 per-
cent of visitors to the sites arrive “via non-traditional sources” such as mobile de-
vices.
“And that number is going to grow exponentially, starting this year, with the
proliferation of tablets and cheap smartphones; connected TVs may even gain some
momentum this year. In emerging territories there are people accessing the internet
for the rst time via mobile who may never even use a PC.”
However, just as there is no “stop” button on an iPod (only a “pause”), a de-
fault “shop” state for consumers will have its pros and cons. According to Holition,
which describes itself as an “augmented reality retail specialist,” consumers will
have access to a wealth of money-saving promotional codes offering more eco-
nomical shopping.
But Lynne Murray, Brand Director for the London-based company, says there is
a less welcome side. “The user will be constantly pro led. The targeting of product
based on what you bought most recently may have a negative effect on consumer’s
attitudes as they switch off to a constant ambush of communication from retailers,”
she says.
Jonathan Chippindale, Holition Chief Executive, agrees. “Content will need to
be presented carefully so as not to appear to interfere or pester the individual with
products and services they do not want.”
Perhaps the greatest challenge for m-commerce is for mobile phones to be seen
as payment devices. So-called mobile wallet technology has yet to be proved secure.
Chances are that only when consumers stop leaving their mobiles on café tables
while they eat will mobile payments, and thus mobile shopping, come into their own.
Excerpt from: Harkin (2011).
 64 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

The actual network infrastructure of the Internet has also changed dramati-
cally. The spread of high speed Internet connections and the popularity of mobile
devices led to an increasing number of people spending more time online and
allowed for richer content to be created and viewed, in turn making it easier for
new startups to create new service sites based around user-generated content.
Compliance with common technological standards in wired e-business applica-
3 tions has become more widespread, and so attention has moved to creating and
agreeing on new technology standards for wireless devices. Businesses are less likely
to invest in technologies where there is no global agreement on standards for use
the Financial Times article “The Internet risks fracturing into quarters.”

The Internet Risks Fracturing into Quarters

Beijing, Brussels, Washington, and Silicon Valley have competing visions for the web.
The Internet, through its most common application, the worldwide web, seems
as reliable as electricity or drinking water, and it is recognized as critical infrastruc-
ture. But the Internet is not as substantial as it appears—it depends on a precarious
balancing act behind the scenes, where technical problems are addressed in the midst
of political squalls.
The Internet is a delicate and elaborate arrangement of hardware, software, pro-
tocols, standards, organizations, databases, security, telecommunications, and more.
The Internet is not just a technical system—it is also social, a massive, tangled in-
teraction involving half the world’s population. These people are often erroneously
called users; rather, they are participants in this conversation. The Internet in u-
ences society, and society in uences the Internet.
Why four internets, and not 400 or 4 billion?
Four ideologies are particularly in uential, because they have been adopted by
state-level actors with the resources to push their visions, fund the science behind
them, and, crucially, “sell” them to allies. The four Internets currently coexist in an
uneasy peace and even host a parasite. But they are not in equilibrium.
It is possible that one or two could drop out of the picture and one or two be-
come dominant, transforming online public space with repercussions for politics,
commerce, and civil society.
Internet technology has two major technical requirements: decentralization (no
one in charge, anyone can join) and identi cation (via a unique Internet protocol
address).
The original, what we call the “open Internet” of Silicon Valley, welcomes
decentralization and the openness and freedom it allows. But the identi cation
system has led to threats to privacy, and the openness has enabled trolling and
fake news.
So critics in Brussels and elsewhere demand a nicely behaved, regulated “bour-
geois Internet.”
Third, there is a “commercial Internet,” whose leaders prize the innovation facili-
tated by data collection and oligopoly but resist the West Coast vision.
3.1 · Examining Trends in the Macro-environment
65 3
The fourth, the “authoritarian Internet” championed by Beijing, uses the tech-
nology to monitor and in uence social interaction in order to address security, social
cohesion, health and well-being, transport, or climate change.
We must not leave out the parasite: an anarchic hacking ethic allied to paranoid
nationalism uses the Internet to spread mistrust. It does not care which Internet it
trolls, as long as there is one.
Nevertheless, the authoritarian Internet is the real dilemma. All governments
want to engineer good outcomes, and the Internet is a powerful tool for “nudging”
citizens to behave in particular ways. But nudging and social cohesion can cross
over into control and subjection. Eventually, the Internet’s essential openness may
be threatened. The Internet is a powerful tool for “nudging” citizens to behave in
particular ways technological trends make this a problem now.
I believe passionately that arti cial intelligence can be a force for good. AI algo-
rithms are fueled by data created by the web, e-commerce, and social networks. Data
are highly regulated in Europe, which is also a fragmented market. They are less so
in the United States, where the corresponding advantage accrues to its private sector.
In China, data regulation is very different, and its private tech giants conform to the
Communist party and government line. Beijing values aspects of the open Internet;
social networks often alert the government to problems. However, once alerted, it
acts quickly to close conversations down. The government is also seeking to tap
the power of social networking with schemes to rank the Chinese people in a social
credit system.
China is already using its Belt and Road Initiative to build infrastructure across
its hemisphere. We could soon see the addition of an information superhighway ini-
tiative where the Internet has room to grow, including Africa—Beijing’s in uence
is strong there—and India. Chinese tech rms have invested billions of dollars in
Indian startups over the past few years, and India’s Aadhaar ID system is almost
purpose-built for authoritarian uses. Even Apple and Google have bowed to Chinese
pressure to organize their data and services compliantly. This is not an anti-Chinese
argument. Beijing is entitled to regulate as it sees t, and all governments nd the
authoritarian Internet attractive to some extent.
A thriving Internet that puts people rst should draw on all of these cultures and
ideological preferences. We need to recognize this diversity while working hard to
ensure that standards remain open and governance conforms to common principles.
The technology can promote independence as well as social stability across different
societies, if it respects the values inherent in them.
Source: Excerpt from Hall (2018).
See also O’Hara and Hall (2018).

The factors mentioned within the ve dimensions above should serve only as a
starting point for a careful analysis of the macro-environment. Depending on the
industry and country being analyzed, the importance of these dimensions will
obviously differ. Needless to say, a comprehensive understanding of the macro-
environment is an essential prerequisite for the formulation of a sound e-business
strategy.
 66 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

3.2 Examining Industry Structure with the Five Forces

Framework
What does the pro tability of any given rm depend on? Firstly, a rm needs to be
able to create higher value than its rivals. Secondly, it also needs to be able to cap-
3 ture the value that it creates in the form of prices that exceed its costs. If a rm can
charge higher prices for its products or services compared with its costs, then it
captures large parts of the value it creates. If, on the other hand, prices are driven
down by competition, then consumers will capture most of the value.
This highlights the fact that pro tability depends not only on the internal com-
petencies and activities of an e-business company, which we shall discuss in detail
in 7 Chap. 4, but also on its environment, that is, the industry in which it competes.
In this context, an industry is de ned as a group of rms that produce products or
provide services that are close substitutes for each other.12
As an example, let us consider the personal computer (PC) industry. During the
past few decades, this industry has created immense value for consumers, in the
form of increased capabilities of desktops, laptops, and tablets. While performance
has also increased over the years, prices typically have not risen; instead, they have
actually decreased signi cantly over time, thereby placing heavy constraints on the
pro tability of most computer manufacturers. In contrast, there are industries
such as software development where businesses can capture large parts of the value
created. For example, Microsoft became one of the most pro table companies in
the world on sales of its computer operating systems. This stark contrast between
industries raises the question as to what determines the ability of a company to
capture value.
Michael Porter created a ve forces framework which outlines the main factors
determining a rm’s ability to capture the value it creates.13 In essence, this ability
is determined largely by the attractiveness of the industry in which a rm competes.
Obviously, the advent of the Internet has profoundly affected the structure of
many industries. Yet there are no general conclusions regarding how the Internet
affects the structure of different industries; instead, it is necessary to analyze each
industry individually.14

12 For a detailed discussion of industry analysis, see Porter (1998), pp. 3–34.
13 The ve forces industry framework is described in Porter (1998), p. 5.
14 R. D’Aveni suggests that levels of competition have risen in the past decade, leading to a
phenomenon that he calls “hypercompetition” (see D’Aveni 1995). However, G. McNamara,
P. Vaaler and C. Devers have empirically tested this thesis and have not found conclusive
evidence for an intensi cation of competition (see “Same as it ever was: the search for evidence
of increasing hypercompetition,” Strategic Management Journal, 2003, Vol. 24, No. 3,
pp. 261–278).
3.2 · Examining Industry Structure with the Five Forces Framework
67 3
The ve forces model provides a guiding framework for understanding the sus-
tainability of pro ts against competition and bargaining power. The ve structural
features that determine industry attractiveness are (1) industry rivalry, (2) barriers
to entry, (3) substitute products, (4) bargaining power of buyers, and (5) bargaining
power of suppliers. (See the Financial Times article “Michael Porter – Academic
who shares his values,” where Porter re ects on the contemporary suitability of his
framework, three decades after its publication.)

Michael Porter: Academic Who Shares His Values

Prof Porter’s reputation has put him near the center of discussions with both chief
executives and politicians about how to restore US growth and prosperity. Sitting
down at his own boardroom table, with a look that brooks no small talk, he blames
the depressed state of the economy in part on cyclical factors—retrenchment after
the real estate bubble, corporate boards’ caution about domestic investment—and in
part on “a more fundamental competitiveness problem.”
It is predictable that competitiveness is the lens through which Prof Porter sees
the problem. At the root of his success was his rst article in Harvard Business
Review, more than 30 years ago, which outlined the “ ve basic forces” that deter-
mine the state of competition in any industry (customer power, supplier power,
the threat of new entrants, substitute products, and rivalry between established
competitors). Companies—and subsequently countries—found it a simple and
useful way to assess their own strengths and weaknesses and plot forays into new
markets.
It still animates Prof Porter, whose steady, high-velocity delivery is punctuated
by a mime artist’s repertoire of hand gestures (sewing a button, screwing up a jar,
chopping a carrot). He points out that globalization has bene ted higher-income,
higher-skilled people like him. So, having started his career giving speeches on strat-
egy and competitiveness in the United States, he now gets invited all over the world.
“The market for me has increased exponentially,” he says, “because all these coun-
tries are looking for talent.” Lower- and middle-income workers, however, have suf-
fered. “We’ve let all kinds of obstacles fall in the way of the US as an effective and
ef cient and productive place to do business,” he says, citing skill gaps, poor infra-
structure, and the burdens of health bene ts, regulation, and litigation. At the same
time, “other countries have offered a better value proposition.”
While Prof Porter retains an underlying optimism, this loss of competitiveness
obviously pains him. “This is shocking for the US. If you go back 100 years, you
nd that the US really was a huge pioneer in public education … The US was a real
pioneer in creating a national, very deep university system … The US was a pioneer
in the interstate highway system … We stepped to the plate in the past and made
very, very bold investments in the fundamental environment for competitiveness. But
right now, we can’t seem to agree on any of these things.”
The nancial and economic crisis also sparked a bon re of many of the widely
accepted academic orthodoxies on which the developed world’s prosperity was built.
Has it shaken his faith in his theories?
 68 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

Not a bit. Prof Porter says his ve forces are, if anything, “more and more and
more fundamentally important and visible, because a lot of the barriers and the
distortions that would blunt or mitigate these forces and the need for strategy and
competitive advantage … have been swept away” by globalization, the increased ve-
locity and transparency of information, and the decline in trade barriers.
“What I’ve always tried to do, for better or for worse, is to get at the underly-
3 ing, fundamental, structural elements of competition and of how rms compete, in
a way that’s really invariant to whatever best practices happen to exist or whatever
trends are,” he claims. “So you can do a ve forces analysis in 1985 and you can come
to one conclusion based on the circumstances of the day, and you can take the same
industry in 2010 and it’s going to look very different.”
In 2008, Prof Porter revisited and revised his ve forces article, reviewing the
“vast literature” that had emerged around it and concluding that the original theory
was robust.
He has also not rested on his prominently displayed laurels. Having outlined the
ve forces’ impact on strategy, he became interested in the competitiveness of loca-
tions and nations, as well as in the business clusters that emerge around successful
companies. He parlayed this into analyses of inner cities, the compatibility of envi-
ronmental progress and economic growth, and his latest headline concept: “creating
shared value” (CSV)—the idea that corporate activities which advance society will
contribute to a positive cycle that allows everyone to grow faster.
Prof Porter insists “CSV” will underpin the creation of “a next and more sophis-
ticated view of what capitalism is all about,” but it has stirred up some resentment
in the established corporate social responsibility community. Advocates of CSR see
Prof Porter’s concept as neither new nor different. “It’s fundamentally different,” he
retorts, pointing to the many emails he receives from companies “energised by the
idea that they could think about all of these social issues in this different way.”
It is also different from his earlier work, which was grounded in data-based re-
search. The Economist, for example, criticized “the paucity of evidence.” The HBR
article Prof Porter co-authored in January cites a series of examples of best practice,
such as Nestlé’s support for coffee-growers in Latin America and construction com-
pany Urbi’s “rent-to-own” mortgage- nancing plan in Mexico. But as Prof Porter
himself says most examples of best practice are “constantly changing, so that means
a lot of management literature after a while starts to look a little bit stale.”
Could that be the fate of his work on CSV? He admits that nding empirical evi-
dence and support for the concept “is the preoccupation now”. But “if companies can
start to show the growth in market share [and] pro t improvements that they get from
pursuing these strategies, I think capital markets will become the biggest cheerleaders.”
Eventually, he says, the world will look back and consider the development of
CSV alongside China, globalization, and the economic downturn as “one of the big
discontinuities of this particular point of economic history.”
Few business people would expect to see their strategies outlast them. Prof Porter,
by contrast, has no doubt that his ideas will still be fueling corporate, economic, and
political strategy long after he has left his institute for the last time.
Source: Adapted from Hill (2010).
3.2 · Examining Industry Structure with the Five Forces Framework
69 3
3.2.1 Industry Rivalry

Industry rivalry occurs when rms within an industry feel pressure or the opportu-
nity to enhance their existing market position. High intensity of rivalry within an
industry results from the following structural factors:

z Large number of competitors

If there are numerous competitors in a given industry or business sector, then indi-
vidual rms may want to make a competitive move, for example, by lowering prices.
The Internet has reduced the importance of geographic boundaries, which tradi-
tionally limited the number of competitors within a region. Since competitors fol-
lowed the same strategy, competition became more intense.

z High xed costs

High xed costs (such as extensive physical infrastructure) create strong pressure to
ll capacity, even at the expense of having to cut prices. Consider bricks-and-
mortar retail stores, which have speci c capacities that must be utilized. To create
the necessary turnover, retailers often nd themselves in highly competitive price
wars. Through the Internet, the ratio between xed and variable costs shifts more
toward xed costs. Developing software has initially high costs, but rolling it out
across different markets has comparatively negligible costs. Thus, industry rivalry
tends to increase because e-business ventures want to optimize the use of their
capacity.

z High strategic relevance

Rivalry increases when rms have a strategic stake to succeed in a given industry.
One of the most prominent examples is Microsoft’s decision in 1996 to design all
its new products for Internet-based computing. This decision led to the browser
competition between Netscape’s Navigator, the incumbent browser software, and
Microsoft’s Internet Explorer, a competition that Microsoft was determined to
win. In order to beat Netscape, Microsoft offered for free the web server software
(which Netscape sold for $1,000) and put 800 people to work on an upgraded ver-
sion of Explorer. Ultimately, Explorer pushed most competing products out of the
market and became the dominant Internet browser worldwide. However, with the
rise of Mozilla’s Firefox browser and the subsequent launch of Google’s Chrome,
Microsoft’s dominant position was challenged. Fast forward to 2018 and the aver-
age usage share of these three desktop browsers is around 12.28 percent for
Explorer, 60.64 percent for Chrome, and 11.73 percent for Firefox.

z Little di erentiation between products

Rivalry also increases when there is little differentiation among products, which
then become like commodities. This situation leads to increasing substitution
among competing products, thus increasing consumers’ bargaining power (see
7 Sect. 3.2.4). For example, this is the case in the computer-chip industry where
pro ts are low compared with the value created.
 70 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

z Low growth rate of the industry

Intensity of rivalry also depends on the growth rate of a given industry. Fast-
growth industries can accommodate a larger number of providers since, as the
overall size of the market expands, each competitor secures a share of the market.
In slow-growth industries, rivalry tends to be intense because growth can be
achieved only at the expense of competitors.
3
z Excess capacity
When the Internet became an online platform for commercial use, scores of startup
companies in different industries embraced it, which resulted in highly intense
competition. Venture capitalists and stock markets provided cheap capital, which
led to an overinvestment in Internet startups, thereby creating overcapacity.
However, companies need not always be rivals and just that. As explained in
7 Sect. 3.3, some competitors cooperate with each other, hence the term “co-ope-
tition.”

3.2.2 Barriers to Entry

Barriers to entry determine the threat of new competitors entering the market of a
speci c industry. New entrants, bringing additional capacity and the desire to gain
market share, have two negative effects on the attractiveness of an industry. Firstly,
new entrants take away market share from existing incumbent companies. Secondly,
they bid down prices, which in turn reduces the pro tability of incumbents.
Consequently, the pro tability of any given industry tends to decrease as barri-
ers to entry are lowered and vice versa. The impact of the Internet on barriers to
entry, however, has been less clear-cut than initially assumed, when it was com-
monly thought that the Internet would wipe out most barriers to entry. In general,
high barriers to entry result mainly from the following factors:

z High xed costs

High xed costs deter many potential entrants because they do not have the
required capital and/or the willingness to invest large amounts of money in a risky
market entry. While it was necessary in the past to set up an extensive bricks-and-
mortar infrastructure to reach out to a large number of customers, the Internet has
reduced this requirement. This is especially true for digital goods which can now be
distributed online, for example, lms, music, news, books, banking, and informa-
tion services.
The rise of the online peer-to-peer le-sharing systems, such as Napster, illus-
trates how a single person (Shawn Fanning in this case) with an ingenious idea can
threaten a major, long-established industry with a complex and high xed-cost
physical distribution network. Through the Napster platform, individual Internet
users were able to exchange music les of their favorite songs, which undermined
the traditional business model of the music industry. Subsequently, music busi-
3.2 · Examining Industry Structure with the Five Forces Framework
71 3
nesses attempted to raise barriers to entry again by declaring le-sharing services
illegal, yet it is clear that the Internet has profoundly changed the way music gets
distributed (for a more detailed account of how the Internet has caused a paradigm
shift in the music industry, see the case study in this book on online le-sharing).
The pressure on music companies that rely on a physical distribution infrastructure
has become so strong that some of them—Bertelsmann’s BMG and Sony—merged
their music divisions in December 2003.
In contrast, the computer manufacturer Apple recognized that through online
distribution, the barriers for entry had been reduced substantially and that the
Internet would also be a viable channel to distribute music commercially. It suc-
cessfully developed the iTunes online music store, which became a highly successful
format for selling music online.
In industries that involve the distribution of physical goods or require a high
level of personal interaction, the impact of the Internet on barriers to entry is
more ambiguous. For example, 7 Amazon.com initially thought that it could
focus solely on the customer interaction aspects of its business and outsource to
external providers all activities that would have required substantial investment,
including logistics and distribution activities. However, 7 Amazon.com learned
that to guarantee a high level of reliability, it had to operate its own warehouses
and distribution centers, which in turn increased the required capital investment.
Setup costs for a warehouse averaged $50 million, and operating costs were also
signi cant. In order to nance these infrastructure investments, 7 Amazon.com
was forced to issue more than $2 billion in bonds. In contrast, China’s Alibaba
does not own any warehouse infrastructure and goods move directly from sup-
plier to customer.
Similarly, in banking, several direct banks initially thought that they could
acquire and service customers solely through online channels. The case study of
Nordea Bank, however, illustrates that an extensive physical branch network can
be crucial for the acquisition of online customers and the selling of more complex
nancial products. As a result, such physical assets created effective barriers to
entry for new online competitors.
Despite these examples of e-businesses using physical storefronts, the use of
information and communication technologies (ICT) contributes to reducing the
extent of capital that was traditionally required to enter into an industry. As ICT-
based outsourcing services become more widely available, the concentration in a
given industry decreases. In this context, the strategy of outsourcing non-core ele-
ments of a business and paying for services based upon the variable volume of
demand is increasingly being used, hence lowering the need for xed costs. Thus,
from a customer’s perspective, what used to be in some sectors (such IT services), a
xed cost has now become a variable cost. For example, cloud computing repre-
sents a signi cant change from xed (server) costs to variable (size in the cloud)
costs. This especially bene ts small and medium-sized enterprises who are highly
uncertain about future information storage needs. (See Financial Times article
“Cloud computing cuts start-up costs.”)
 72 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

Cloud Computing Cuts Startup Costs

Renting servers by the hour or megabyte removes barriers to entry, making it vastly
easier for entrepreneurs to launch, and expand, an online business.
Back in the days of the dotcom boom toward the turn of the century, an Internet
entrepreneur had to spend hundreds of thousands of pounds buying computer serv-
ers, set them up, launch the service, and then pray that he had guessed correctly on
3 what the uptake would be.
If the site attracted too many visitors, the servers would simply collapse under
the weight of traf c. If there were too few visitors, the company was left with a
roomful of expensive, underused equipment.
“I remember playing all those guessing games. I spent weeks trying to negotiate
different kinds of deals with internet hosting companies: could we have two serv-
ers for the rst two months, then six for the next two, not really being sure what
we would need,” says Lachlan Donald, a veteran technologist who is now Chief
Technology Of cer of 99designs, an Internet marketplace for graphic designers.
If a company got its calculations wrong, it could take days or weeks to get more
computer power. “At previous companies it was a nightmare.”
The difference is the arrival of cloud computing services, which allow companies
to rent computing power by the hour and by the megabyte, making it vastly easier
to launch an online business. Startup costs are much lower. “Companies had to bor-
row a lot of money to buy all those servers. It created a barrier to entry that cloud
computing has removed,” says Mr Donald. When he helped to launch 99designs,
using Amazon Web Services to run the website, the company was set up without any
external funding at all.
“Amazon Web Services has been the biggest boon to venture capital-backed
companies in recent years. It has meant you can now fund 10 companies for the
price of one, and you are seeing new applications being developed that would have
been dif cult to build cost-effectively in the early days,” says Michael Grant, Chief
Executive of Cloudscaling, a company that offers cloud infrastructure software.
These services also help to keep down staff costs. “If you are a fashion company,
your business is not information technology. Now, you don’t have to set up an IT
division that is not part of the core business. You can run with minimal IT staff,”
says Mr Raghavan.
Having computing power on tap like electricity or water has also helped edgling
companies to deal with sudden jumps in popularity. Zynga, a developer of games for
social networks, for example, turned to Amazon Web Services in 2009 when users of
its FarmVille game jumped from zero to 10m in 6 weeks, and the company had run
out of its own data center capacity. “If you are launching an app and you aren’t sure
how many people will be hitting the site, it makes sense. Even if it is 1m users you will
have the exibility to handle that,” Mr Raghavan said.
Mr Grant says that having unlimited amounts of computing power on tap has
also helped to spawn new types of companies that would not have been viable before,
such as biogenomics businesses offering specialized analysis of gene sequences.
3.2 · Examining Industry Structure with the Five Forces Framework
73 3
“If you are three guys in a garage and you need 10,000 servers because you are do-
ing some super-fancy algorithmic calculations, the cloud is fantastic for that,” he says.
Cloud computing can work for larger companies as well as small ones.
A number of Fortune 500 companies use cloud computing for some of their
operations, often where they have want to experiment with new types of services, or
create a website around a new product, without huge IT investment.
The cloud might also not work for companies that are too small. It can be com-
plicated designing software to run well on the cloud, warns Mr Donald, and this is
something that very small businesses could struggle with. “It is much more techni-
cally complex. You need to automate everything and assume everything is going to
fail. Although a whole ecosystem of software services companies has sprung up to
help with this, it is still has more complications,” he said.
Mr Raghavan agrees. “The cloud is not for everyone. If you have a solid business
case I would recommend it. But if you just have a concept and don’t really know
what your audience is, I would not recommend it, because the cloud is not free,” he
says. “It reduces your capital expenditure costs, but it is not free.”
Source: Excerpt from: Palmer (2012).

z Trust and brand loyalty

Trust and brand loyalty are essential for customer acquisition and retention. Bricks-
and-mortar companies are able to launch online activities more easily than Internet
“pure-play” ventures, since they already possessed a respected brand and consumer
trust. Pure online businesses, on the other hand, must build their brand which
requires investment in marketing. Building trust is even more dif cult for a pure
online business since, in case of problems, customers do not have a nearby physical
branch that they can visit or a customer adviser with whom they can interact face
to face. Companies such as Airbnb and Uber address this to some extent by using
customer and vendor reviews and ranking systems to enhance the trust of users.

z A steep learning curve

A steep learning curve gives a rm an advantage because they have greater experi-
ence in the market. A rm may nd ways to create more customer bene ts or
reduce its cost structure ahead of competitors. Any competitor that enters a mar-
ket needs to accept low returns, while it goes through the same learning experience
as incumbents. Alternately, it may nd ways to make the incumbents’ learning
experience obsolete by offering a new way of running the business. For example,
Amazon’s early start in online book retailing helped the company to stay ahead of
its competitors, such as BOL, the online book retailer of Bertelsmann. The latter
was never able to catch up with 7 Amazon.com and ultimately withdrew from the
online book retailing business.

z High switching costs and strong network e ects

High switching costs and strong network effects help an incumbent to keep its cus-
tomers, even if a new entrant offers a higher value. For example, if retail banking
 74 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

customers want to switch from one bank to another, they need to change their
automated bill payments to the new bank account and also inform relevant compa-
nies and individuals about the change. The effort associated with doing so could be
an effective deterrent for many customers to move to another bank even though the
latter offers better value. In the Internet context, the so-called stickiness of a website
refers to the switching costs involved with moving from one Internet site to the next.
3 High stickiness makes it unlikely that a user will move from one website to another
one. Similarly, strong network effects also tend to increase barriers to entry. The
network effects of e-business could be understood by the network externality of
Internet platforms. An Internet platform with a large number of users is usually
more valuable, and potential users would be more willing to select the platform with
a larger network of users, which eventually increases the scale of the user network.
For example, eBay has created strong barriers to entry for potential competitors
through the large global customer base it has created over the past few years. For
individual customers, it makes sense to switch to a new provider only if they know
that all or at least most other current users would make a similar switch as well.
Only then would they be able to enjoy the same type of market liquidity as they did
before. Similarly, through the creation of strong network effects, social networking
sites such as Facebook have established a leading market position. Once users have
built up a signi cant number of contacts and are active in different interest groups
on Facebook, it is unlikely that they will switch to another platform unless their
contacts migrate with them.

z Strong intellectual property protection

Strong intellectual property protection is essential for rms that sell products with
high development costs but low reproduction costs. This is the case with digital
goods such as music, video, and software. When intellectual property rights are not
actively enforced, barriers for new (albeit illegal) entrants are lowered, thus allow-
ing them to push cheap, pirated copies onto the market. Furthermore, without
strong intellectual property protection, it will be increasingly dif cult in the future
to entice creators to create if they will not be compensated adequately.

3.2.3 Substitute Products

About a decade ago, when re ecting on strategy and the Internet, Michael Porter
highlighted the role that the Internet could play in creating new substitutes for
industries. The intensity of pressure from substitute products depends on the avail-
ability of similar products that serve essentially the same or a similar purpose as
the products from within the industry. As the availability and quality of substitute
products increase, so pro ts generated within the industry tend to decrease. This is
due to the fact that substitutes place a ceiling on prices that rms within the indus-
try can charge for their products. However, the real substitutive power of products
must also be assessed taking into account the price of these products and buyers’
switching costs as well. The global Internet has helped to increase the pressure
from substitute products, especially for goods that are digital by nature or can eas-
ily be digitized, as this enhances the variety of products available to customers.
3.2 · Examining Industry Structure with the Five Forces Framework
75 3
For instance, online music-sharing has evolved quickly and become a formida-
ble substitute for compact discs, thereby threatening the core revenue generator of
the traditional music industry in its foundations. In the software arena, Microsoft,
the dominant producer of software for computers, faced new substitutes in the
form of mobile devices that increasingly provide many of the same functionalities
as traditional computers. However, the software for these products is not primarily
Microsoft-based.15 For example, Google developed a free package of online appli-
cations, including calendar, email, word processing, and spreadsheet functions that
operate as a substitute for Microsoft’s high-end Of ce software package. One
response that dominant industry incumbents use to disruptive new startups offer-
ing substitute products and/or services is to acquire them, for example, AOL’s
acquisition of TechCrunch, a web-based publication which offers technology news
and analysis; Microsoft acquiring Skype for its VOIP software and LinkedIn for
professional social networking; and Facebook’s US$1 billion acquisition of
Instagram, the mobile photo-sharing application. (See Financial Times article
“Facebook shows it gets the message with Instagram deal”.)
Apps are dominating the fast-growth of mobile-based e-business, with app rev-
enue quadrupling between 2013 and 2018. The best-selling game app, League of
Legends (owned by Tencent) received income of US$2.1 billion in 2017, which is
greater than many listed companies’ whole-year income.16 iOS and Google Play
(two of the most popular app stores worldwide) allow anyone to distribute their
app via their platform, reducing the barrier to enter the app market to negligible.
However there are also negligible switching costs initially; an app user who dislikes
an app can uninstall it immediately and is able to nd many other substitutes in app
stores. According to neoclassical economics, when a market is still proliferating and
pro table, and the entry cost is almost zero, more app developers and companies
will enter the market, which could create a “perfect competitive market.” Future
e-business companies need to consider how to build “an impermeable shield” to
protect their interest from other substitute apps in such an intensive competition
environment.

Facebook Shows It Gets the Message with Instagram Deal

Remember when it seemed crazy that Google was paying $1.65bn for YouTube?
Thanks to the incredible leverage of the web, an online video startup with only 65
employees had already amassed 20m regular users in less than 2 years—though it
had nothing in the way of revenue to show for it.
From the vantage point of today’s app world, that already looks so 2006.

15 “Software’s great survivor,” The Economist, 22 November 2003, p. 70

16 The source of the data involved in this paragraph is Statistica, 2018. Available at 7 https://
www.statista.com
 76 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

Enter Instagram. The photo-sharing app’s numbers are more eye-opening than
YouTube at the same stage. With only 13 employees, it has garnered more than 30m
members in its rst 18 months.
The revenue line may still be a big, fat zero—but that didn’t stop Facebook from
laying out $1bn to secure an icon that enjoys prime positioning on mobile screens
everywhere.
3 If the YouTube deal represented an early owering of what used to be called
user-generated content on the web, the acquisition of Instagram is a harbinger of
another new wave: the app that lives beyond the web. It is a place where the in uence
of the traditional web powers—even one in the ascendant, such as Facebook—is
muted, and different rules apply.
Apple ushered in this new world, with the launch of its App Store. The result-
ing app economy, without much revenue to show for itself, has been oated on a
tide of venture capital. But acquisitions like that of Instagram are a harbinger of
things to come. In a deal that was, in its way, even more eye-opening, social games
company Zynga paid about $200m for the startup behind a simple game called Draw
Something: launched only 7 weeks earlier, the game had already attracted more than
35m users.
The platform to support apps like this has come into being remarkably quick-
ly. Apple had sold some 80m iPhones and iPads at the time that Instagram was
launched: that number has since grown to 230m, and sales of devices using Google’s
Android software have exploded. Add in the social network effects that many new
services rely on, and this makes fertile ground for app phenomena like Instagram.
The speed with which they emerge and the simplicity of the experience makes
it easy to write off such endeavors as small, ephemeral jewels. Yet Instagram packs
a punch. As an alternative to importing their Facebook contacts, users can quickly
build a new network of people to share pictures with—something that re ects a
growing willingness of users to juggle different networks rather than export a single,
homogenous Facebook experience to each new online service.
And, thanks to the strong emotional connection that comes from browsing
through friends’ pictures, Instagram claims to have captured a surprising amount of
its users’ attention.
How to make money from this will be a big question. Mobile advertising has
been notoriously slow to take off. But image-centric services have an obvious appeal
to brands that want to create an emotional connection with users. Like the image
“curation” site Pinterest, Instagram is an obvious rst port of call for brand owners
looking to test out future advertising formats that will mix in commercial messages
with users’ own content.
So what does this $1bn deal say about Facebook? Coming the month before its
expected IPO, it should give potential investors pause for thought. Facebook has
always displayed a strong sense of paranoia—no bad thing, given the low barriers to
entry in its industry—and has used other acquisitions in the past to latch on to new
forms of online behavior.
Buying Instagram is an admission that, while its own mobile app is used by hun-
dreds of millions of people, Facebook was not built with mobile in mind. A com-
3.2 · Examining Industry Structure with the Five Forces Framework
77 3
plex, busy web service can’t hope to compete with the simplicity and delight of a
purpose-built app like Instagram.
That also explains why many Instagram users are unhappy about a Facebook
acquisition, and why Mark Zuckerberg has just picked a big management challenge.
Source: Adapted from Waters (2012).

3.2.4 Bargaining Powers of Buyers and Suppliers

The bargaining power of buyers and suppliers is two sides of the same coin; this is
why we discuss them jointly. The bargaining power of buyers tends to be high (and
that of suppliers low) if the industry displays the following characteristics:

z High concentration of buyers

High concentration of buyers, which allows them to leverage their purchasing
power through pooling. One important feature of many B2B e-marketplaces—
such as IBX, discussed in the case studies section of the book—is the aggregation
of buyers’ orders. This helps them to achieve better terms from suppliers than they
could obtain individually.

z Strong fragmentation of suppliers

Strong fragmentation of suppliers, which makes it dif cult to establish a joint
approach to pricing. In the personal computer industry, many producers are con-
stantly trying to gain market share at the expense of other competitors by undercut-
ting their prices. This in turn undermines the pricing power of the whole industry.

z A high degree of market transparency

A high degree of market transparency, which allows buyers to easily compare the
offers of different suppliers. Advanced search tools available on the Internet allow
customers to choose from a larger pool of suppliers and to compare prices instantly,
thus making it easier for them to nd the best deal. This is particularly the case for
highly standardized products that can be easily compared using search engines,
usually known as “price comparison services,” “price engines,” or “shopping bots.”
Some companies nd ways to create their advantage based on the transparency
of electronic markets. Two speci c actions can be mentioned here: modifying a
search engine’s outputs in order to increase a company’s visibility (e.g.,by purchas-
ing a certain position in search results) or practicing what is known as “obfusca-
tion.” The latter attempts to obstruct consumers’ searches or to at least reduce
damage to a company. For example, obfuscation practices increase search friction
in online markets. Some forms of obfuscation include complicating a product’s
description, preventing search engine access to pricing details, or creating several
versions of a given product with one of them being very basic and low-price to
attract customers but with add-on features with additional costs. These strategies
affect digital market transparency and thus may help increase the pro t of compa-
nies using them.
 78 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

z Products are increasingly becoming commodities

Products are increasingly becoming commodities, resulting in little or no differen-
tiation between different providers. The pricing of commodity products that do
not require extensive purchasing advice or after-sales service is especially affected
by a higher degree of market transparency and may increase the pro t of busi-
nesses using them.
3
z Low switching costs and weak network e ect
Low switching costs and weak network effect, which make it easy for buyers to
change suppliers.
Conversely, the bargaining power of suppliers is high if the opposite of all or
some of the above characteristics holds true. See also the Financial Times article
“Google buys UK price comparison website for £37.7m.”

3.3 Complementing the Five Forces Framework

with the Co-opetition Framework

While the ve forces framework focuses on the potential negative effects that mar-
ket participants might have on the industry attractiveness, the co-opetition frame-
work enriches this perspective by highlighting that interactions with other players
can also have a positive impact on pro tability.17 These interactions can include (1)
joint setting of technology and other industry standards, (2) joint developments,
and (3) joint lobbying:

z Joint setting of technology and other industry standards

Joint setting of technology and other industry standards which is often necessary
for the growth of an industry. For instance, the Germany-based wireless marketing
company YOC joined other wireless marketing providers to set up ethical and data
privacy industry standards on how to conduct marketing campaigns over the
mobile phone.

z Joint developments
Joint developments between different rms can offer the opportunity for improv-
ing quality, increasing demand, streamlining procurement, and sharing costs for
non-core activities. Through its Zshops, 7 Amazon. com made it possible for
other sellers, who are in principal competitors, to sell through the 7 Amazon.
com website. Similarly, competing car manufacturers (General Motors, Ford,
and DaimlerChrysler) collaboratively established an automotive procurement
platform to streamline their purchasing processes. It has subsequently been sold

17 The concept of ‘co-opetition’ was developed by A. Brandenburger and B. Nalebuff,

Co-opetition, Currency Doubleday, 1998. It entails simultaneously cooperating and competing
with other companies.
3.3 · Complementing the Five Forces Framework…
79 3
and expanded into e-procurement for other industries. (For more details on
Covisint, see the case studies section of this book.)

z Joint lobbying
Joint lobbying for favorable legislation is also frequently a prerequisite for growth
and market protection.
The value net framework, which is similar to the ve forces framework, focuses on
the positive aspects of interactions and seeks to identify opportunities for value cre-
ation through collaboration. Therefore, it provides a complementary perspective to
the one offered by the ve forces framework. The “value net” framework looks at four
categories of players, which, through their interactions, characterize the market envi-
ronment. These players are customers, suppliers, competitors, and complementors.

z Customers
Customers (who sometimes are the consumers) are the recipients of products or
services that a given business offers in the marketplace.

z Suppliers
Suppliers are companies that supply the business with resources, including labor
and (raw) materials.

z Competitors
Competitors are companies whose products or services are considered to be substi-
tutes to the business’s own offerings.

z Complementors
Complementors are companies whose products are complementary to a business’s
own offerings. The underlying idea is that customers value a given product more if
they can also buy a related complementing product from somebody else. This is the
case, for example, with ash storage devices and computers or earphones and
smartphones.
The role of competitors and complementors can change depending on the con-
text. For example, with the abovementioned Zshops, 7 Amazon.com changed
competitors into complementors. Instead of looking at them only from a “nega-
tive” (or zero-sum game) perspective, 7 Amazon.com decided that allowing these
companies to offer their products on its website would improve its overall value
proposition and create a win-win situation for both parties.
Similarly, mobile device manufacturers have complementary relationships with
app makers. Mobile devices would not as compelling without apps, see, for exam-
ple, the Financial Times article “Apple and Aetna team up on new healthcare app.”
In summary, well-established coalitions in e-commerce are generally more ben-
e cial for the concerned parties than non-coalition scenarios. Likewise, “non-
connex” coalitions, that is, those set up among rms with complementary business
activities, are more pro table than “connex” coalitions (those made among close
substitutes). One of the main justi cations for coalitions lies in the pricing strate-
 80 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

gies followed by the former coalitions, they are usually more able to attract con-
sumers and even take market share from the competition18.

Google Buys UK Price Comparison Website for £37.7m

Google has snapped up 7 BeatThatQuote.com, a price comparison website, for
3 £37.7m as the technology group looks to widen its range of services and strengthen
its foothold in the UK nancial products market.
BeatThatQuote helps users to compare a range of products including loans, insur-
ance, and utilities. It competes with bigger UK rivals such as 7 Moneysupermarket.
com and 7 Comparethemarket.com as well as providing the underlining technol-
ogy for price comparison services on other sites.
The BeatThatQuote acquisition, though small, will help Google build on an
existing credit card comparison business in the United Kingdom, which will give
search engine users faster access to relevant queries. Google has faced criticism from
those who claim that its algorithms favor its own products, something the US com-
pany denies. Google says its algorithms are impersonal, and it clearly labels its own
services. John Paleomylites, managing director of BeatThatQuote, said that by team-
ing up with Google “we think we can offer more transparency and better pricing
information than existing online offerings.”
Source: Excerpt from: Watkins (2011).

Apple and Aetna Team Up on New Healthcare App

Latest push by Silicon Valley tech company into healthcare sector.
Apple will gain access to a huge trove of detailed health data as part of a new
Apple Watch tie-up with US insurer Aetna.
CVS-owned Aetna and Apple have jointly developed a new app called Attain,
set to launch in the coming months. Attain will use the Apple Watch to provide per-
sonalized recommendations to users, based on both their health history and live data
generated by the wearable device, which offers heart-rate monitoring and workout
tracking.
To comply with US data protection regulations, Apple and Aetna have entered
into a “business associate agreement” that includes assurances that no personally
identi able information will be shared with the iPhone maker and that it will not
be sold, revealed to employers or used for making coverage decisions by Aetna. The
health information will be collected on a voluntary basis and only used to support
the Attain program, the companies added.

18 For a deeper analysis of these coalitions’ effects in the e-commerce context, see the chapter by
J. Prieger and D. Heil, published in F.J. Martínez-López (Ed.), op. cit.
3.3 · Complementing the Five Forces Framework…
81 3
The deal marks the latest incursion by Silicon Valley into the healthcare sector,
while insurance companies look to technology to improve preventive care that can
ultimately reduce their payouts.
Tim Cook, Apple’s Chief Executive, said on CNBC earlier this month he believed
Apple’s “greatest contribution to mankind” would come from its work in healthcare.
Using Attain will be voluntary for Aetna members but they will be provided
incentives to join, including earning back the cost of the Apple Watch that is re-
quired to participate. Spurring sales of wearable devices including Apple Watch and
AirPods is becoming more important for Apple at a time when iPhone revenues are
slowing.
Users will be able to opt in to sharing Attain data and their broader health his-
tory with Apple, providing fuel for analytics and machine learning that the compa-
nies need to improve the service. Attempting to head off potential privacy concerns,
the companies said that users’ health data will be encrypted and will not be used for
underwriting or calculating premiums.
“We believe that people should be able to play a more active role in managing
wellbeing,” said Jeff Williams, Apple’s Chief Operating Of cer. “As we learn over
time, the goal is to make more customised recommendations that will help members
accomplish their goals and live healthier lives.”
Source: Adapted from Bradshaw and Ralph (2019).

In the personal computer environment, Microsoft’s Windows operating system is

more valuable (faster and more reliable) when it runs on a computer powered by an
Intel microprocessor than on a computer with a lesser quality microprocessor. Yet,
Microsoft would typically not be part of Intel’s “ ve forces industry analysis”
screen and vice versa. However, whatever Microsoft does is of great importance to
Intel. In contrast to the ve forces framework where a decrease in the bargaining
power on the part of one of the ve players leads to an increased attractiveness of
the overall industry, this logic for complementors is more different. In the case of
Microsoft, Intel bene ts if Microsoft’s operating system becomes more successful
over time, since this also opens up new market opportunities for Intel’s micropro-
cessors.

Critical Perspective 3.1

Bene ts and Drawbacks of Industry Analysis Tools
Porter’s ve forces industry framework is one of the most widely used frameworks
in the eld of strategic management. The framework has numerous positive quali-
ties that have contributed to its far-reaching success. Most importantly, it is a sys-
tematic and comprehensive way to analyze industry structure. The ve forces that
the framework addresses are mutually exclusive and they cover the most important
players in a given industry. In addition, the framework claims that there is a mono-
tonic relationship between the power of each individual player and industry attrac-
tiveness. This means, for instance, that as the bargaining power of buyers or sellers
 82 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

increases, the industry becomes less attractive. Similarly, as competition increases,

the industry attractiveness also declines.
This required monotonic relationship between the power of the actors and indus-
try attractiveness is the main reason why Michael Porter decided not to include
government as a sixth force. In an interview,19 Porter explains why, to his mind,
3 government does not present a sixth force:

» After much further work using and teaching the framework, I have reaf rmed my
original conclusion that government is not a sixth force because there is no mono-
tonic relationship between the strength and in uence of government and the pro t-
ability of an industry. You can’t say that ‘government is high, industry pro tability
is low’, or that ‘government is low, industry pro tability is high’. It all depends on
what exactly the government does. […] And how do you assess the consequences of
what government does? Well, you look at how it affects the ve forces.

In essence, Porter states that government is a variable that has an impact on the
ve forces, which in turn impact on the pro tability of the industry. Yet, there does
not seem to be a direct and, most importantly, no monotonic effect of government
on industry pro tability. On the one hand, governments in many countries have
passed laws to deregulate industries, which has led to a strong increase in competi-
tion and reduced pro tability for incumbent companies. This was the case, for
instance, in the German telecom industry where the entry of numerous new players
in recent years is severely threatened the position of market leader Deutsche Telecom.
On the other hand, governments might also pass laws that prevent suppliers from
colluding and setting overly high prices. This, in turn, reduces the bargaining power
of suppliers, thereby making the industry more attractive for incumbents.
The comprehensiveness and clear structure that the ve forces industry frame-
work provides is especially valuable during the initial stages of a strategy project
when the task is to gain a quick and broad understanding of the relevant players
in an industry. Yet, there are also a number of drawbacks associated with the ve
forces industry framework, which one needs to be aware of. Most importantly, it
has been said that the framework is overly static in a rapidly changing business
world, where industries are in constant ux. Some academics 20 have questioned
Porter’s competitive advantage framework in business environments that are vola-
tile, uncertain, dynamic, and ambiguous (V.U.C.A.). It is, indeed, increasingly dif-
cult to de ne industry boundaries, which are becoming more blurred due to,
among other factors, mergers and acquisitions. This does not mean that the ve
forces industry framework has become irrelevant, since it still helps to pinpoint
competitive and industry conditions that are subject to change.

19 N. Argyres and A. McGahan published an interview they conducted with Michael Porter in the
Academy of Management Executive, 2002, Issue 2, pp. 43–53.
20 such as Rita Gunther McGrath of Columbia Business School
3.4 · De ning Industries, Segmenting Markets, and Targeting…
83 3

The framework assumes that competitors’ behavior and industry structure can
be explained by analyzing a single industry. However, frequently there is multi-
point competition where rms compete in more than one industry and, more
importantly, their behavior in one industry is sometimes determined by competi-
tion in other industries. For example, Apple competes in the music distribution
industry through its iTunes online store but also in the music player industry,
where it sells mobile devices that play music.

3.4 De ning Industries, Segmenting Markets, and Targeting

Markets in e-Business

3.4.1 De ning an Industry

As discussed in “Bene ts and drawbacks of industry analysis tools,” one important

challenge that we need to consider when conducting an industry analysis is to de ne
appropriately the industry boundaries. On the one hand, if we de ne our relevant
industry very narrowly, then there will be few competitors, and there is a high probabil-
ity that the industry will be rather attractive. Yet, there is potential risk that a company
from an adjacent industry might enter the industry. On the other hand, if we de ne the
industry too broadly, it becomes overly dif cult to reach any clear conclusions.
Consider the example of the networking platform LinkedIn, a narrow de ni-
tion of the market might limit the industry to online networking platforms, which
would focus the competitor analysis on a very small set of companies such as
Facebook. A broader de nition, including all companies that offer one or more
functionalities that LinkedIn offers, would lead to a vast competitive landscape
including platforms for job hunting, social networking, business news, and train-
ing. This example illustrates that, depending on the industry de nition, there could
be different customers and competitors that need to be considered.
The key question that always needs to be asked when de ning an industry is:
Which other products do customers consider are substitutes? Depending on the
task at hand, it is possible to use different types of de nitions for a given industry.
For example, for a more short-term external analysis, it might be sensible to scruti-
nize closely the main players in the direct environment and thus conduct a rather
focused industry analysis. However, if the task is to gain an understanding of lon-
ger-term competitive developments and threats, it might be more sensible to adopt
a broader industry de nition that includes also more remote substitutes and poten-
tial disruptive innovations that threaten industry incumbents.

3.4.2 Segmenting Markets in an Industry

Even narrowly de ned industries are frequently too broad a category to allow for
any meaningful analysis. Consider the car industry, which consists of a broad array
of different car manufacturers catering to different customer segments. To conduct
 84 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

an industry analysis that contains both high-end manufacturers (such as Porsche

and Jaguar) and mass producers (such as Toyota and Volkswagen) would provide
only very limited insights into the attractiveness of the industry. Similarly, lumping
together different types of customers, such as private consumers and corporate
customers, also does not provide much insight, since their needs are completely
different. To remedy this, we need to segment industries and markets within a spe-
3 ci c industry into ner units and then decide which ones to target.
Why is it sensible to divide markets into ner segments?21 We need to do so
because different people have different preferences regarding product features and,
therefore, appreciate different value propositions. To illustrate, let’s look at mobile
phones. A busy, young management consultant might value the possibility of
checking his/her bank account balance via a mobile phone, while a senior citizen,
who may be having some eyesight problems, may not be attracted by mobile
e-banking services and prefer to use a bigger computer screen. However, the senior
citizen customer group might see value in mobile phones that have enlarged dialing
pads, allowing them to key in phone numbers more easily. This example illustrates
how differences in customer preferences are the foundation for market segmenta-
tion. According to this, a market segment is de ned as a group of customers who
have similar needs.
Historically, segmenting markets and catering to different needs have not always
been as important as they are today. For example, in 1909, Henry Ford started
offering car buyers in the United States the Model-T Ford car “in any color they
wish, as long as it is black!” By 1926, Ford had sold over 14 million Model-T mod-
els. Obviously, with the advent of more sophisticated production technologies and,
more recently, the Internet, it has become possible and necessary to segment mar-
kets in a much ner way and to tailor different products and services to different
customer segments. (See e-Business Concept 3.1.)

3.4.3 e-Business Concept 3.1

z The e-business market segmentation matrix
The e-business market segmentation matrix22 provides an overview of the different
participants in electronic business. It differentiates three types of participants—
consumers, businesses, and government—who can act as both suppliers/providers
and buyers/recipients. This results in the nine quadrants shown in . Fig. 3.2.
Below, we shall explain each one of these con gurations, taking the perspective of
a supplier/provider who is dealing, respectively, with a buyer/recipient, who can be
a consumer, a peer or a citizen, as well as a business or a governmental agency. In
other words, we shall proceed with the description of the proposed matrix row by
row, rather than column by column.

21 For an extensive discussion of market segmentation, see Kotler (2005), pp. 251–296.
22 See also Hutzschenreuter (2000), pp. 28–29.
3.4 · De ning Industries, Segmenting Markets, and Targeting…
85 3
Buyer/recipient
Consumer/peer/citizen Business Government
Consumer-to-consumer
(e.g. ebay)
Consumer/ Peer-to-peer Citizen-to-government
Consumer-to-consumer
(e.g. Napster) (e.g. online tax
peer/citizen (e.g. Amazon.com)
Citizen-to-citizen return forms)
(French presidential
election 2007)

Supplier/ Business-to-government
Business Business-to-consumer Business-to-business
(e.g. online filing of
provider (e.g. Ducati.com) (e.g. Covisint.com)
corporate tax returns)

Government-to-citizen Government-to-business Government-to-

Government (e.g. information about (e.g. information about government
pension statements most recent legal (e.g. exchange of
of citizens) regulations) diplomatic information)

. Fig. 3.2 The e-business market segmentation matrix. (Source: Adapted from Jelassi et al. (2005),
p. 69)

z The consumer/peer/citizen as a supplier/provider

Through the Internet, consumers can act as suppliers themselves. Consumer-to-
consumer (C2C) e-commerce relationships are those where one consumer acts as a
supplier and sells goods to other consumers. The most prominent examples for
C2C interactions are online auction places, such as eBay, where consumers can sell
new and used products to other consumers. When interactions between consumers
are not of a commercial nature, we call them peer-to-peer (P2P) interactions. These
are voluntary in nature and are free of charge. Examples of P2P sites include
YouTube and online music-sharing platforms. Other forms of C2C interactions are
social networking sites. Although these interactions are not of a commercial nature,
they happen to take place on an online commercial platform that is brokering user-
related information.
The second relationship type in this segment is the consumer-to-business (C2B)
relationship, where, in general, consumers supply businesses with information
about their experiences with products or services. Examples of C2B interactions
are the book reviews at 7 Amazon.com and consumer reviews on Airbnb or Etsy.
The information that consumers provide is then shared with other consumers to
help them make more informed purchasing decisions. Furthermore, metadata of
information on the actual user behavior allows companies to cater to individual
needs. For example, collaborative ltering of metadata and algorithms enables
7 Amazon.com to recommend particular books to a customer by analyzing other
users’ buying and viewing patterns.
 86 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

The third category in this segment contains consumer-to-government (C2G)

interactions, such as the online submission of tax returns, car registrations online,
online collection of census data, and other citizen-to-government interactions. The
use of social media by politicians, where they interact with citizens on policy issues,
is another example of C2G interactions.

3 z The business as a supplier/provider

The most typical form of interaction is one where businesses act as suppliers to
other parties. In business-to-consumer (B2C) e-commerce interactions, rms sell
products and services online directly to customers.
Business-to-business (B2B) interactions relate to platforms for the online pur-
chase of operational or manufacturing inputs that other businesses need to create
their products and services. The e-marketplace platform Covisint which served car
manufacturers (as buyers) and component suppliers (as sellers) is an example of a
B2B platform.
Business-to-government (B2G) interactions include, for instance, the online
submission of corporate tax return forms, submissions to inquiries, and other dig-
ital forms of reporting.

z The government as a supplier/provider

Compared with the above two categories (consumers and businesses), there have
been relatively few examples of government e-commerce activities. However, this is
changing, and it can be expected that in the future many governmental agencies’
will interact with citizens and businesses online.
The e-business market segmentation matrix shown in . Fig. 3.2 provides a
classi cation of the different interaction types made possible through the Internet.
This allows e-businesses to position their own Internet operations within one or
more quadrants of the matrix and also to consider the spaces into which they may
want to expand.
For example, 7 Amazon.com commenced in July 1995 as a pure B2C business,
selling books online to customers. It soon added a C2B component by enabling
customers to post online reviews to the website. Later, 7 Amazon.com expanded
into C2C, when it allowed customers to sell used books through its website, using
the 7 Amazon.com online payment mechanism.
Another example is Nordea, which, like most other banks, was primarily offer-
ing retail (B2C) and corporate (B2B) banking services. Through the Internet,
Nordea now enables government-to-citizen (G2C) interactions through an online
connection with the Finnish government’s database that maintains the pension
records of Finnish citizens. Through this online link, Nordea customers have
instant access to their pension statements, an important feature when deciding, for
instance, on a savings plan for retirement. Coincidentally, Nordea bank also offers
savings plans for retirement.
There are two main reasons why it is useful to segment markets: (1) gaining
insights into customer preferences and (2) getting information about the potential
segment size. These two factors are now described brie y:
3.4 · De ning Industries, Segmenting Markets, and Targeting…
87 3
z Insights into customer preferences
Segmentation enhances the understanding of the target customer group and its
preferences. Firstly, this knowledge is helpful in determining how to shape a prod-
uct and its features (which differ depending on the target customer segment).
Secondly, customer preferences help when deciding which distribution channels to
select. For example, Nordea Bank identi ed that older customers were more likely
to start using the Internet for online banking services if the option was introduced
during a personal face-to-face conversation at a physical bank branch.

z Information about the potential segment size

Segmentation also helps to assess the potential market size. An estimation of the
number of customers who might use a product or a service is crucial to forecast
potential scale effects, the overall sales turnover, and subsequently the potential
return on investment. Webvan in the United States is an interesting case, since it
illustrates the disastrous effects of faulty market segmentation and sizing. Assuming
an immense potential market segment, Webvan built large, centralized warehouses
that could serve a huge customer base. However the number of customers attracted
to this service was much smaller than expected. As a result, the picking and pack-
ing facilities were underutilized and most of the delivery trucks drove around half-
empty. It led for bankruptcy after 3 years of operation.
Effective market segmentation that actually helps to meet customer preferences
is not easy. There are many different ways in which a market can be segmented.
Kotler (2005) proposes a number of different requirements that any type of seg-
mentation should ful l. A market segment should be:

z Measurable
It should be possible to measure the size of a de ned segment in order to determine
its purchasing power and its unique characteristics.

z Substantial
A segment should be large enough to justify that it be addressed separately. During
the Internet boom years, many category specialists entered speci c market seg-
ments with a very targeted offering. Yet, as it turned out, the targeted segments
were not large enough—at least then—to be served pro tably.

z Di erentiable
The segments must be exclusive and react differently to a variety of marketing
approaches.

z Actionable
It should be possible to develop sales and marketing approaches to serve speci c
segments. For instance, the mobile marketing company YOC designs mobile mar-
keting campaigns speci cally to target the segment of 15–25-year-old mobile
phone users.
As mentioned above, there are many ways to segment any market. However,
depending on the speci c product and context, some approaches are obviously bet-
 88 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

Segmentation type Criteria to be considered

Grographic segmentation Grographic regions (e.g. continents, countries, states)

Demographic segmentation Age, gender, income, life style

Psychographic segmentation Personality type and personal interests

(e.g. cash-rich, time-poor)
3 Behavioural segmentation Puchasing freqency, usage patterns, etc.

. Fig. 3.3 Segmentation variables are the basis for strategic customer analysis. (Source: Adapted
from Jelassi et al. (2005), p. 71)

ter than others. For example, it might be possible to segment the market of Ducati’s
customers based on hair color and identify blond, brown, black-haired, and bald
customers. In all likelihood, doing so will not provide much insight regarding dif-
ferent preferences and also will not be actionable. In this case, a segmentation
between male and female groups or between income groups would be much more
valuable. The point is that segmentation is not one-size- ts-all; instead, it requires
creative thinking to differentiate meaningful market segments.
Below, we outline the main possibilities for segmenting a given market using
traditional variables. These possibilities include geographic, demographic, psycho-
graphic, and behavioral segmentations (. Fig. 3.3).

z Geographic segmentation
Geographic segmentation entails the selection of speci c geographic areas—for
example, continents, countries, or speci c regions within a country—and tailoring
offerings according to the customer preferences within that area or territory. For
example, in Europe, certain countries (such as Finland and Sweden) have a very
high Internet penetration rate, while others (such as Italy and Greece) do not.
Segmenting according to countries or regions can bring out these differences and
help to design custom- t strategies for each region. Websites such as 7 Google.
com recognize whether a user is logged on from Germany or the United States, for
example, and displays relevant information in the local language, thus improving
the search experience of each individual customer.

z Demographic segmentation
Demographic segmentation focuses on different personal attributes of population
segments. Demographic segmentation can, for example, identify (1) age, (2) gender,
(3) income, and (4) lifestyle. To illustrate the age dimension, YOC has positioned
itself clearly to attract young mobile phone users to its mobile marketing services.
Regarding the gender dimension, there are social networks for women’s inter-
ests, including 7 ndSisterhood.com where women discuss motherhood, lifestyles,
and relationships and Women in Technology23, an Australian social network for
women who work in the technology sector.

23 The Women in Technology website is 7 https://www.wit.org.au/.

3.4 · De ning Industries, Segmenting Markets, and Targeting…
89 3
z Psychographic segmentation
Psychographic segmentation describes lifestyle characteristics such as describes
lifestyle characteristics such as personal interests. For example, the “cash-rich,
time-poor” segment of customers has been a primary target for online grocery
shopping services such as 7 Tesco.com. In order to save time for their social activ-
ities and hobbies, members of this segment are more inclined to shop online (and
pay the delivery fees) than spend hours in a physical supermarket.

z Behavioral segmentation
Behavioral segmentation segments customers based on their use of a product or
service. This can be done, for instance, according to usage occasions or usage rates.
Dell uses an occasion-based segmentation to group its customers into the following
segments: home of ce, small business, medium to large business, government, edu-
cation, and healthcare.24 Segmenting according to usage rates is often useful when
different customers show vastly different shopping behaviors. For many rms, 20
percent of customers make up 80 percent of revenues25. Placing frequent and less
frequent customers into different segments and providing them with different levels
of marketing or service may be appropriate. An illustrative example is the low-cost
smartphone introduced by Vodafone in association with Facebook that targets
heavy users of social networking sites (see Financial Times article “Vodafone and
Facebook team up on smartphone”).

Vodafone and Facebook Team Up on Smartphone

Vodafone and Facebook have teamed up to release a low-cost smartphone dedicated
solely to the social networking service, which the operator hopes will sell millions
of devices to younger customers and in emerging markets. The Vodafone 555 Blue,
manufactured by Alcatel Lucent, comes with a full QWERTY keyboard and a heav-
ily customized operating system that puts Facebook features into the heart of the
device, including placing Facebook messages alongside SMS in the same inbox and
a dedicated “F” button for sharing to the site.
The phone is expected to retail for around $100—seen as a crucial price point for
mass-market adoption—and is billed as the rst Facebook-centric device for pre-pay
customers.
The two companies hope that it will be popular not only in markets such as
India, South Africa, and Turkey where both Facebook and mobile data usage is
growing rapidly, but also more established markets such as the United Kingdom,
among teenagers and other social networking addicts. Reaching mobile phone users

24 This segmentation becomes apparent on the opening page of 7 www.dell.com, where visitors
can choose between different segments.
25 Based upon the Pareto Principle. See also Marshall (2013).
 90 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

in countries where xed-line Internet connections are scarce will be vital if Facebook
is to reach its target of 1bn users, from 750m today.
Patrick Chomet, Vodafone’s group terminals Director, said that its latest device
and Vodafone 360 were targeted at “very different segments.” “This is part of a
movement that we want to accelerate of empowering the mass market on data,” he
said. “It doesn’t do everything …but it will be better than your Facebook experience
3 on your smartphone because it’s not an app, it’s the whole phone.”
Adapted from Bradshaw and Digital Media Correspondent (2011).

3.4.4 Targeting Speci c Markets in an Industry

After dividing markets into individual segments, it is still necessary to determine

how to target a speci c market segment. There are two main choices associated
with market targeting. Firstly, we need to determine which market segment(s) to
target. Secondly, we need to determine how many different products and services
to offer to the selected market segment(s). As a manager at an online clothing busi-
ness, for example, you could decide to produce just haute couture for the upper-
income class. Another manager might decide that it is more appropriate to produce
also sportswear and activewear for other market segments. When deliberating the
choices, managers always need to keep two main questions in mind.
Is the market segment or the group of market segments attractive? The attrac-
tiveness of market segments can be analysed through the ve forces framework
(discussed in 7 Sect. 3.2). To assess the attractiveness of a segment, one could, for
example, analyze the overall growth of that segment, its current pro tability and
current competition within the segment.
Can we compete successfully in this market segment? This depends on a rm’s
capability and resources to create and capture value through the collaboration and
interaction between the rm and customers. For a detailed discussion of value
creation and value capture, see 7 Chap. 8.
Companies can choose from ve main possibilities to target market segments
(see . Fig. 3.4). These possibilities are (1) single-segment concentration, (2) selec-
tive specialization, (3) product specialization, (4) market specialization, and (5) full
market coverage.

kSingle-segment concentration
Premium providers, such as Net-a-Porter, which specializes in the curation and sale
of designer clothing for the higher-income market, frequently concentrate on sin-
gle segments of a market. This allows them to gain profound knowledge of cus-
tomers, develop specialized production know-how, and cater exactly to the needs
of their speci c customer segment. The Net-a-Porter brand is positioned clearly as
a premium brand, undiluted by mass market products, which allows them to charge
a premium price. Competitors with a broader positioning are likely to over- or
underserve this speci c customer segment. The downside of single-segment con-
centration is that if the targeted segment fails to generate the required revenues,
then the whole rm is endangered.
3.4 · De ning Industries, Segmenting Markets, and Targeting…
91 3
Full market coverage
Product specialisation (e.g. Nordea Bank,
(e.g. Spreadshirt.com) Amazon.com, Tesco.com)
M1 M2 M3 M1 M2 M3
Many P1 P1
P2 P2
P3 P3
Selective specialisation
Number of (e.g. Bertelsmann)
market M1 M2 M3
segments
served P1
(scale) Single-segment P2
concentration Market specialisation
(e.g. Ducati, Porsche) P3
(e.g. ING DIRECT)
M1 M2 M3 M1 M2 M3
P1 P1

Few P2 P2
P3 P3

Number of di erent products

Few and sevices o ered (scope) Many
P = Product
M = Market

. Fig. 3.4 Target-market selection depends on the number of markets served and the number of
different products and services offered. (Source: Adapted from Abell 1977)

kSelective specialization
A company that pursues selective specialization targets different market segments
with different product types. Doing so has the advantage of diversifying business
risk. However, it also poses the danger that the rm loses focus and may become
vulnerable to attacks by more focused competitors. For example, the German
media group Bertelsmann offers a wide variety of media products in the online,
print, TV, and radio channels, which target different customer groups.

kProduct specialization
A category specialist such as 7 RedBubble. com, which focuses on providing print-
ing services, concentrates on one type of service but wants to reach out to as wide
a market as possible. The goal of product specialists is to generate either economies
of scale or unique insights that differentiate them from competitors. One risk of
product specialists is that if their speci c product loses favor with customers, they
may not be able to cover the fall in revenues with revenues from other products.

kMarket specialization
Firms that concentrate on a speci c market segment aim to gain a strong reputa-
tion and trust with members of the targeted segment and then expand by offering
 92 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

a range of products to the same segment. Cross-selling can be a valuable option to

increase revenues, since it minimizes customer acquisition costs.

kFull market coverage

Firms that attempt to achieve full market coverage aim to sell a wide variety of
product types across the spectrum of target segments. The economic logic behind
3 full market coverage is to create economies of scope by leveraging existing produc-
tion capacities, technological platforms, and/or a strong brand name. Amazon is
an example of a full market provider. Although the company started out selling
only new books, it added used books and a wide variety of product categories
ranging from baby toys, to pet food, to consumer electronics. Amazon now covers
many promising business areas, and some of them are not pure e-business: cloud
service, web service, smart speakers, entertainment, groceries, ful lment, e-pay-
ment, and more.
Nevertheless, in conclusion, technological progress increasingly allows busi-
nesses to target segments of one and develop a personalized offer in a pro table
manner. In this case, companies would practice micro-segmentation or the market
segmentation taken to the extreme (e.g., see Financial Times article “Google
searches to become personalised”).

Google Searches to Become Personalized

Google has wielded its dominance of web search as a key weapon in its battle with
Facebook, with a new approach that draws information from its Google+ social
network directly into users’ search results.
By including more personal and social information in its results, the new feature
also takes Google a big step toward ful lling a dream long talked about by its top
executives: to create a personalized search engine that “knows” its users so well that
all the results are tuned directly to their interests.
Known as Search Plus Your World, the new approach marks the most direct at-
tempt yet by Google to use its core service to help it make up lost ground in social
networking. However, favoring its own Google+ network at the expense of rivals
could heighten regulatory concerns at a time when the company’s behavior is already
under the microscope in Brussels and Washington.
“They could have done this for Facebook and Twitter and they didn’t,” said
Danny Sullivan, Editor of Search Engine Land. “That will probably make some
antitrust people even more anxious over what [Google] is doing.”
Alex Macgillivray, Twitter’s General Counsel, tweeted that it was “a bad day
for the internet. I can imagine the dissension @Google to search being warped this
way.”
The immediate impact on the rivalry with Facebook is likely to be limited given
the newness of the Google+ network and the relative lack of content posted on
it, some observers said. “The intent [behind personalisation] is great but I’m not
sure today Google+ is of suf cient volume or sophistication,” said Martin McNulty,
General Manager at Forward3D, a UK search marketing rm.
3.4 · De ning Industries, Segmenting Markets, and Targeting…
93 3
Google said it would “certainly be open” to including other services, but justi-
ed the current exclusion because it “does not have access to crawl all the informa-
tion on some sites.” It also said it only has “persistent access to information from
Google+.”
With the new feature, content shared privately with contacts on Google+ will be
included in search results, though Google said it would ensure that it kept the same
levels of privacy as applied on its social network. Google also said it would be able
to show pro les of friends when a user enters a name in its search box and that it
would suggest interesting people or pages to follow on Google+ in response to some
standard search queries.
The changes are part of a shift toward including personal and social informa-
tion that marks “the most radical transformation ever” for Google’s search ser-
vice, Mr Sullivan said, while also meeting a long-held ambition of the company’s
leaders.
Eight years ago, Eric Schmidt, then Google Chief Executive, said: “We would
like to have a Google that knows you, that understands your preferences.”
Making search more personalized, meanwhile, could make it harder for brand
owners to use search engine optimization techniques to ensure their pages appear at
the top of “organic” or natural results for particular keywords, some experts warned.
As a result, advertisers are likely to switch some their marketing spending away
from optimization, said Stefan Bardega, Managing Partner at MediaCom, WPP’s
media agency. “All of this pours more money into the core business of Google,
which is the pay-per-click AdWords model. It will become almost impossible to get
the same level of effectiveness in organic results,” he said.
Source: Waters and Bradshaw (2012). - Chọn 01 công ty Việt Nam hoặc nước ngoài để nghiên cứu:
+ Phân tích môi trường vĩ mô
+ Phân tích 5 lực lượng cạnh tranh.
+ Phân tích ngành

FPT > BUs > Retails > E-Commerce> .......

Summary
5 This chapter addressed the question of where a rm should compete and offered
frameworks for analyzing the macro-environment, which includes political,
legal, social, and technological factors.
5 Secondly, the chapter discussed Porter’s ve forces as a guiding framework for
determining the attractiveness of an industry. It also analyzed the impact of the
Internet on industry rivalry, barriers to entry, threat of substitute products, and
the bargaining power of buyers and suppliers.
5 Thirdly, the chapter introduced the concept of “co-opetition,” which refers to
businesses that at the same time cooperate and compete with each other. It
illustrated how the Internet enables the implementation of such a concept and
how it supports the underlying interactions between the businesses involved.
5 Finally, the chapter addressed the issues of how to de ne industries within which
to compete and how to segment speci c customer groups that a company should
target through its e-business offering.
 94 Chapter 3 · External Analysis: The Impact of the Internet on the Macro-environment…

? Review Questions
1. Explain the impact of the Internet on the macro-environment.
2. Review the impact of the Internet on the ve forces industry framework.
3. How can the Internet enable companies to implement the co-opetition concept?
4. Outline the e-business market segmentation matrix based on its two underlying
dimensions.
3 5. Illustrate the ve forces industry framework through two e-commerce examples
drawn from the same industry: one of an Internet startup and the other of an
established bricks-and-mortar company.
6. Choose an e-commerce example and discuss how a company can use the Internet
to implement the “co-opetition” concept.
7. Provide a real-world example of your choice for each one of the nine quadrants
that make up the e-business market segmentation matrix.
8. De ne the industry of 7 Amazon.com. What are the major players in the
industry? What are possible substitutes?

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Further Reading
Brandenburger, & Nalebuff B. introduce the concept of co-opetition in their book Co-opetition,
Currency Doubleday, 1998.
For a detailed analysis of the macroeconomic and competitive implications of e-business, see Prieger,
J., & Heil D. (2013). Economic implications of e-business for organizations. In F.J. Martínez-López
(Ed.), e-Business strategic management. Springer.
For a more detailed coverage of electronic markets’ segmentation, see Aljukhadar, M., & Senecal, S.
(2011). Segmenting the online consumer market. Marketing Intelligence & Planning, 29(4), 421–
435.
For a more in-depth analysis of the ve forces, see M. Porter, Competitive strategy. Free Press, 1998b.
For an extensive discussion of market segmentation and market targeting, see P. Kotler. Marketing
management. Prentice Hall, 2005, pp. 251–296.
For readers interested in app business, see Roma, P., & Ragaglia, D. (2016). Revenue models, in-app
purchase, and the app performance: Evidence from Apple’s App Store and Google Play. Electronic
Commerce Research and Applications, 17, 173–190.
In order to provide practitioners and students a practical yet comprehensive set of templates for
applying ve forces framework for industry analysis, see: Dobbs, M. E. (2014). Guidelines for
applying Porter’s ve forces framework: A set of industry analysis templates. Competitiveness
Review, 24(1), 32–45.
Johnson, G., Scholes, K., & Whittington R. discuss the macro-environment of rms in Exploring
corporate strategy. 7th edition, Prentice Hall, 2005.
Speci c examples of segmentation variables in electronic markets are presented in Sen, S., et al.
(1998). The identi cation and satisfaction of consumer analysis-driven information needs of
maketers on the WWW. European Journal of Marketing. 32(7/8), 688–702.

Weblinks
https://blog.davechaffey.com contains updates about digital marketing and strategy.
https://techcrunch.com/ offers updated and rich information on technology news and experts’ analy-
ses.
https://www.ecommercetimes.com provides a sound archive of e-business-related articles and publi-
cations.
https://www.emarketer. com/articles/topics/retail-ecommerce provides all kinds of survey reports
related to e-commerce.
https://www.icompli. co.uk is a website concentrating on e-commerce laws.