Managing the Digital Firm, Seventh Canadian Edition
CHAPTER 10
E-Commerce: Digital Markets
and Digital Goods
LEARNING OBJECTIVES
After reading this chapter, you will be able to answer the following questions:
1. What are the unique features of e-commerce, digital markets, and digital goods?
2. What are the principal e-commerce business and revenue models?
3. How has e-commerce transformed marketing?
4. How has e-commerce affected business-to-business transactions?
5. What is the role of mobile commerce in business, and what are the most important
m-commerce applications?
6. What issues must be addressed when building an e-commerce presence?
Teaching Suggestions
The opening case, “Groupon’s Business Model: Social and Local,” illustrates the
evolution of e-commerce from that of simply buying goods or services online to creating
social experiences shared by hundreds, thousands, or millions of people. It also shows
how e-commerce is becoming more “localized” because of the vast amounts of data
Section 10.1, “E-Commerce and the Internet”
This part of the text stresses the use of the Internet and the World Wide Web for
electronic commerce and business. Ask your students to identify several of the many
Managing the Digital Firm, Seventh Canadian Edition
benefits that the Internet offers to organizations. Ask them to provide specific examples
that they have read about in the text or have personally observed. If you have a student in
your class who works for a company that participates in electronic business and
electronic commerce ask him/her to explain the company’s activities.
Discuss with your students how the Internet has unbundled the information about products
and services from the actual products and services. Ask the students to compare how they
would shop for a car today, as opposed to how they might have shopped for a car ten years
ago. Use this discussion to illustrate how the unbundling of information is disrupting
traditional business models. If you have the time, ask your students to visit the Autobytel.com
Web site and determine how these kinds of sites reduce information asymmetry.
Section 10.2, “E-Commerce: Business and Technology”
Students are introduced to electronic commerce categories and related terminology. Even
though millions of people use the Web every day, many companies have found ways to
personalize their interfaces with individual customers. That is a remarkable feat when
you think about it. Have students visit Web sites that offer such personalization and
report on the products or features they find. For instance, Web portals like Yahoo! and
Google let users customize the home page to fit their personal needs. Other e-commerce
Managing the Digital Firm, Seventh Canadian Edition
revenues. The section about social networking and the wisdom of crowds helps students
understand the most popular Web 2.0 service—social networking. Rather than looking at
WINDOW ON ORGANIZATIONS: WALMART, AMAZON, AND
EBAY: WHO WILL DOMINATE INTERNET RETAILING?
Case Study Questions
1. Analyze each of these companies using the value chain and competitive forces
models described in Chapter 3.
Walmart arguably wins over Amazon and eBay in the Traditional Competitor category
of Porter’s Competitive Forces Model. However, Amazon could be classified as a
traditional competitor in e–commerce because it’s been around the longest and has the
2. Compare the three companies’ e-commerce business models. Which is strongest?
Explain your answer.
Amazon primarily uses an e-tailer business model. Walmart combines the traditional
bricks-and-mortar model with an e-tailer model. eBay primarily uses the Market
Managing the Digital Firm, Seventh Canadian Edition
Creator business model although it is moving more toward the e-tailer business model
with its fixed-prices feature. However, Amazon adds to its mix a Market Creator
business model that provides a digital environment in which buyers and sellers can
3. Which company is likely to have the strongest retail e-commerce growth in the
future? Why?
All three companies are considered huge success stories in the history of online
e-commerce. And all of them have had their rough spots, only to come through
stronger and better.
However, when people think of online shopping, Amazon and eBay are the
WINDOW ON MANAGEMENT: SOCIAL COMMERCE CREATES
NEW CUSTOMER RELATIONSHIPS
Case Study Questions
1. Assess the management, organization, and technology issues for using social
media to engage with customers.
Management: Levi’s creating a “Levi’s Guy” to help build interest in the company’s
brand. Personalizing the company was a huge success. The company also created a
personalized Friends Store where shoppers can see what their friends “Liked” and
bought.
Managing the Digital Firm, Seventh Canadian Edition
Organization: Best Buy uses a dedicated team of Twitter responders to answer user
questions and respond to complaints. The company then mines the data through text
Technology: The online ad for the Mrs. Meyers cleaning brand used a different kind of
technology in which viewers placed their cursor over the ad, exposing an area that
2. What are the advantages and disadvantages of using social media for
advertising, brand building, market research, and customer service?
Advantages:
• Advertising: Twitter has developed new offerings for advertisers like Promoted
Tweets and Promoted Trends. These features give advertisers the ability to have
their tweets displayed more prominently when Twitter users search for certain
keywords.
• Starbucks’s social media contest backfired on the company when people posted
negative pictures of protesters holding signs criticizing its labour practices.
3. Give some examples of management decisions that were facilitated by using
social media to interact with customers.
Wrigleyville knows which customers respond to its promotions, how much they
4. Should all companies use Facebook and Twitter for customer service and
advertising? Why or why not? What kinds of companies are best suited to use
these platforms?
Before a company jumps into using Facebook and Twitter it needs to make sure the
“back room” mechanics are in place to process customer service requests. Best Buy
Section 10.3, “The Mobile Digital Platform and Mobile E–Commerce”
M-commerce consists of selling anything over a mobile wireless device or Net appliance.
It is also a method used by marketers to target advertising more directly to consumers.
Wireless mobile devices are turning up everywhere. The newer appliances integrate a
Section 10.4, “Building an E-Commerce Presence”
This may be the first time students are exposed to the mechanics of designing and
building an e-commerce Web site. No doubt they all have used e-commerce Web sites
before but probably have never thought about the challenges facing business managers
Managing the Digital Firm, Seventh Canadian Edition
who are responsible for building a successful online business. While this section doesn’t
offer a step-by-step guide to building a Web site, it does outline some of the
organizational and technological decisions that need to be made before the site goes live.
Review Summary
1. What are the unique features of e-commerce, digital markets, and digital goods?
2. What are the principal e-commerce business and revenue models?
3. How has e-commerce transformed marketing?
4. How has e-commerce affected business-to-business transactions?
5. What is the role of m-commerce in business, and what are the most important
m-commerce applications?
6. What issues must be addressed when building an e-commerce presence?
Key Terms
The following alphabetical list identifies the key terms discussed in this chapter. The
page number for each key term is provided.
Advertising revenue model 315
Affiliate revenue model 318
Customization 309
Digital goods 311
Managing the Digital Firm, Seventh Canadian Edition
Geoinformation services 329
Geosocial services 329
Indirect goods 327
Information asymmetry 309
Prediction market 319
Price discrimination 309
Price transparency 309
Private exchange 326
Review Questions
1. What are the unique features of e-commerce, digital markets, and digital goods?
Name and describe four business trends and three technology trends shaping e–
commerce today.
Students can answer this question by including information outlined in Table 10.1,
List and describe the eight unique features of e-commerce.
Table 10-2 outlines eight unique features of e-commerce which include:
• E-commerce technology is ubiquitous, meaning that it is available just about
everywhere a computer can connect to the Internet.
Managing the Digital Firm, Seventh Canadian Edition
• It is interactive, meaning it allows for two-way communication between
merchant and consumer and enables the merchant to engage a consumer in ways
similar to a face-to-face experience but on a much more massive, global scale.
Define a digital market and digital goods and describe their distinguishing
features.
Digital markets are said to be more “transparent” than traditional markets. Table 10-3
describes distinguishing features of digital markets. The Internet has created a digital
marketplace where millions of people are able to exchange massive amounts of
information directly, instantly, and for free. Information asymmetry is reduced.
2. What are the principal e-commerce business and revenue models?
Name and describe the principal e-commerce business models.
Table 10-5 identifies seven Internet business models.
• E-tailer: Sells physical products directly to consumers or individual
businesses.
Managing the Digital Firm, Seventh Canadian Edition
• Content provider: Creates revenue by providing digital content, such as
digital news, music, photos, or video over the Web.
Name and describe the e-commerce revenue models.
There are six e-commerce revenue models:
• Advertising revenue: Generates revenue by attracting a large audience of visitors
who can then be exposed to advertisements. It’s the most widely used revenue
model in e-commerce.
3. How has e-commerce transformed marketing?
Explain how social networking and the “wisdom of crowds” help companies
improve their marketing.
Networking sites sell banner, video, and text ads; sell user preference information to
marketers; and sell products such as music, videos, and e-books. Corporations set up
their own social networking profiles to interact with potential customers and “listen”
Managing the Digital Firm, Seventh Canadian Edition
products than a single person or even a small committee of experts. In marketing, the
wisdom of crowds concept suggests that firms should consult with thousands of their
Define behavioural targeting and explain how it works at individual Web sites
and on advertising networks.
Behavioural targeting refers to tracking the click-streams of individuals for the
purpose of understanding their interests and intentions, and exposing them to
advertisements which are uniquely suited to their behaviour. Ultimately, this more
precise understanding of the customer leads to more efficient marketing and larger
sales and revenues. Behavioural targeting of millions of Web users also leads to the
4. How has e-commerce affected business-to-business transactions?
Explain how Internet technology supports business-to-business electronic
commerce.
Business-to-business transactions can occur via a company Web site, net marketplace,
or private exchange. Web sites make it easy to sell and buy direct and indirect goods
Define and describe Net marketplaces and explain how they differ from private
industrial networks (private exchanges).
A net marketplace is a single digital marketplace based on Internet technology linking
many buyers to many sellers. The net marketplace is an important business model for
B2B e-commerce because some net marketplaces serve vertical markets for specific
Managing the Digital Firm, Seventh Canadian Edition
5. What is the role of m-commerce in business, and what are the most important
m-commerce applications?
List and describe important types of m-commerce services and applications.
The most popular categories of m-commerce services and applications for mobile
computing include:
• Location-based services: Users are able to locate restaurants, gasoline stations,
local entertainment, or call a cab.
M-commerce represents a tiny fraction of all online purchases because wireless mobile
devices can’t display merchandise very well. Mobile phones have tiny keyboards, small
screens, and slow data transfer speeds. Many merchants don’t yet offer m-commerce
6. What issues must be addressed when building an e-commerce presence?
List and describe each of the factors that go into the building of an e-commerce
Web site.
• Remain aware of the main areas that require decisions.
Managing the Digital Firm, Seventh Canadian Edition
List and describe four business objectives, four system functionalities, and four
information requirements of a typical e-commerce Web site.
Table 10-8 lists nine business objectives with accompanying system functionalities
and information requirements necessary for each. Four of the most common are:
• Display goods (objective) using a digital catalog (system functionality) for
dynamic text and graphics catalog (information requirements).
List and describe each of the options for building and hosting e-commerce Web
sites.
Figure 10-9 depicts the alternatives to consider when building and hosting an e-
commerce site. They include:
• Completely hosting and building the site in-house
Discussion Questions
1. How does the Internet change consumer and supplier relationships?
One clear change is that consumers can research products and services online and
then make their purchases either on the Internet or in physical stores. As the Internet
increases the richness and range of information that is available, it shrinks
information asymmetry.
2. The Internet may not make corporations obsolete, but the corporations will have
to change their business models. Do you agree? Why or why not?
Most students will probably agree, but whichever way they go, they must support
their case. If you have students on both sides of the issue, lead a discussion that
challenges the position of both sides.
The Internet is certainly driving tremendous changes, and it is important to note that
these changes are self-perpetuating and happening much faster than ever before.
There are seven megatrends where the Internet’s impact is changing how businesses
operate. These trends are found in every industry and every country around the world.
The megatrends include:
• New channels are revolutionizing sales and brand management.
3. How have social technologies changed e-commerce?
The sheer numbers of people using social networking, millions of users every day,
changes e-commerce business models and strategies. The networking sites sell
banner, video, and text ads; sell user preference information to marketers; and sell
Hands-On MIS Projects
Management Decision Problems
1. Columbiana: A small, independent Caribbean island that wants to develop its tourist
industry and attract more visitors. How can a Web presence help? What Internet
business model would be appropriate? What functions should the Web site perform?
A Web site has the potential to introduce thousands and millions of people to a little
known resort destination at a significantly lower cost than other forms of marketing.
2. Company-sponsored blog: Visit Canadian Tire, Nygard, Future Shop, AirCanada,
Tim Horton’s, and Priceline. Determine which would benefit most from adding a
company-sponsored blog to the Web site. List the business benefits of the blog.
Managing the Digital Firm, Seventh Canadian Edition
Specify the intended audience for the blog. Decide who in the company should author
the blog, and select some topics for the blog.
• Canadian Tire: This company would probably benefit from a blog that would
discuss different kinds of tools, do-it-yourself projects, and car maintenance. The
blog written by one or more of the company’s experts could help educate
Improving Decision Making; Using Spreadsheet Software to Analyze a Dot-Com
Business
Software skills: Spreadsheet downloading, formatting, and formulas
Business skills: Financial statement analysis
Achieving Operational Excellence: Evaluating E-Commerce Hosting Services
Software skills: Web browser software
Business skills: Evaluating e-commerce hosting services
You would like to set up a Web site to sell towels, linens, pottery, and tableware from
Portugal and are examining services for hosting small business Internet storefronts. Your
Web site should be able to take secure credit card payments and to calculate shipping
Managing the Digital Firm, Seventh Canadian Edition
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CASE STUDY: FACEBOOK AS THE START OF A NEW INTERNET?
Case Study Questions
1. Evaluate Canam Group’s need for better internal communication. What was
driving the need for an intranet?
The information on the current intranet was hard to find, the user’s experience was
not personalized and the content was limited to text with no options for photographs,
videos or graphics.
2. How did using Facebook for an intranet come about? Is that a good model for
every company to follow?
3. Do you think a champion was needed for this project? How many champions
were there for implementing the intranet?
4. Why do you think Canam Group implemented a new intranet in 2012?