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BATCH 3
MR JACK KOH
(IS3167) MANAGEMENT AND INNOVATION
OF E-BUSINESS(2012 Academic Year)
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Management & Innovation of E-Business(IS3167, 2790167 )
Slides (Set-3)
(Lectures 13 to 21)
Oct 2012 2Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
e-BUSINESS is built on two main
infrastructures namely the economic
infrastructure and the technology
infrastructure.
Lectures 13/14 present the economic
infrastructure represented by the transaction
cost theory.
In transaction cost theory (TCM), we are
largely interested in the cost of transacting
rather than the transaction itself.
Oct 2012 3Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
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A transaction (or exchange) is defined as the
transfer of property rights comprising ofUAIT properties from the seller to the buyer
Oct 2012 4Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Oct 2012 5Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Transaction costs (Ronald Coase, 1937) can
be viewed as the economic equivalent offriction in physical systems: the greater the
friction in the physical system, the more
impeded the movement (exchange of goods
& services); by the same token, the higher
the transaction costs.
Oct 2012 6Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
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TRUST exists
Oct 2012 7Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Transacting parties will optimize .
Mistrust exists in the forms of
Oct 2012 8Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
During the transaction life cycle (TLC): Search stage
Contract stage
Control stage
(Various frictions exist in these stages)
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Oct 2012 10Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Oct 2012 11Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Search stage: frictions ofuncertainty and
bounded rationality (no opportunistic
cost here) involved externalities.
Oct 2012 12Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Contract stage: frictions of uncertainty,
bounded rationality, opportunistic
behaviour, asset specificity, and small
numbers. Cost of bargaining, finding the right
price/qty/quality, due diligence of vendors , the
writing, finalising of contract terms are majors
activities here.
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Oct 2012 13Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Control (aka regulation) stage: frictions of
uncertainty, bounded rationality,opportunistic behaviour, small numbers,
asset specificity. Activities include the
execution and monitoring of the contract
terms.
Oct 2012 14Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Oct 2012 15Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Turn to Notes, page 100
Discuss the stages for the 2 screen-
dumps
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Oct 2012 16Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
How is ICT a mediating technology and an intermediary?
Oct 2012 17Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
In the transaction cost model, ICT is seen as a
factor that can decrease the costs of
transacting, thus improving the functioning
of the market. The logic behind this argument
is that the lower the transaction costs, the
more efficient the market will be.
Oct 2012 18Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
reduce transaction costs by eliminating
the need for intermediaries changes the role of intermediaries in
matching supply and demand.
reduce search costs, contracting cost,control and regulation costs throughfacilitating the exchange of informationbetween economic agents
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Oct 2012 19Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Intermediation, disintermediation, and reintermediation(another form of new intermediary). I am so confusedregarding how it leads to reducing transaction costs.
I understand that e-business/e-commerce facilitatesdisintermediation....then you have thetransaction brokers which are intermediarybrokers (ithought ecommerce facilitates DISintermediation?) , andthey aid in reducing transaction costs....then there is thesearch engines which are intermediaries that support inlowering of TC, and then (mentioned by Dr Antonio), I-Tunes are facilitating disintermediation.....
Oct 2012 20Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
also known as information brokers
Infomediary is an agent who works with the
customer to capture profiles about the
customers, helps them to manage those
profiles and maximize their value and helps
the customer to protect that information from
access by vendors.
two types of infomediaries
Oct 2012 21Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
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Oct 2012 22Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
increase information processing costs owing to
information overload? Hence, infomediaries
become relevant and useful. global connectivity and availability leads to a
high tendency to look beyond local sources
thus increasing complexity leading to higher
search, contracting, control cost
Oct 2012 23Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Is a compact set of concepts and a
uni fying languageto analyse and
interpret a variety of micro and macro
phenomena, such as vertical integration
between firms, employment contracts
Oct 2012 24Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
based on a sophisticated but still narrow view
of the agent as economic man, whomaximises utility despite the limits of their
rationality.
a static, comparative view of why different
economic institutions exist, develop or decay.
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Oct 2012 25Lect13/14: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
End of Lectures 13-14
Oct 2012 26Lect15: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
1. Identify examples of infomediaries that you regularly useor have come acrossdo not just copy the ones listed byChaffey (2011). What roles do these infomediaries play?How important are those roles to e-business?
2. Consider the impact of online grocery shopping on thevalue chain. Does it disintermediate? Or has it broughtforth new intermediaries (or infomediaries)?
3. Identify examples of where ICT does not disintermediatethe value chain. Why is this so?
4. In the context of a B2B transaction, what are the mainclasses of information processing costs? Give specific
examples of each of these costs, using the example of ashop buying Christmas trees from a supplier. When, andhow, might they be incurred in this case?
Oct 2012 27Lect15: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
5. How can transaction cost theory explain disintermediation andinfomediation?
6. Outline the myths that circulated during the dot.com boom.Which of these do you believe were completely unfounded, andcould never become a reality?
7. Consider this problem: if coordination costs encompass bothtransaction costs and information processing costs, couldinformation technology raise coordination costs despite reducingthe transaction costs? Discuss in detail how this might occur,justifying your answer with examples.
8. It has often been argued that information and communicationstechnology (ICT) is disintermediating electronic marketplacesInfomediaries are however increasing in electronic markets.Discus with examples.(SG Exam sample)
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Oct 2012 28Lect15: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
9. Transaction costs can be described as frictions in the
market. How can ICT (information and
communications technology) reduce these frictions?Discuss the theoretical model of transaction costs and
explain how and why ICT can reduce or increase
transaction costs. (2011)
10. Describe the phases of the transaction lifecycle.
Critically analyse, using examples, how ICT can
reduce the transaction costs associated to ONE of
these phases.(2012 prelim)
Oct 2012 29Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
e-BUSINESS is built on two main
infrastructures namely the economic
infrastructure and the technology
infrastructure.
Lecture 16 present the technology
infrastructure represented by Web 2.0 & ICT
technology
Oct 2012 30Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Web 2.0 is a concept that takes the network as a
platform for information sharing, interoperability,user-centered design, and collaboration on the World
Wide Web. A Web 2.0 site allows users to interact and
collaborate with each other in a social media dialogue
as creators and prosumers of user-generated content
in a virtual community, in contrast to websites where
users are limited to the passive viewing of content that
was created for them.
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Oct 2012 31Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Oct 2012 32Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Google AdSense
Flickr
BitTorrent
Napster
Wikipedia
blogging
search engine optimization
cost per click
wikis
tagging ("folksonomy") syndication
Oct 2012 33Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
1. treat Network platform as residing externally to
users PC2. major shift from passive consumption to active
participation by users facilitate business harnessingof collective intelligence of users
3. active participation by users also means thecollected data is constantly be reviewed andupdated
4. improved software tools and cloud computingfacilitate same apps execution on many variousdevices.
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Oct 2012 34Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
5. Provides an important form of social
marketing6. Embraces social communities
7. is the next step of information
revolution
Oct 2012 35Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Promote collaboration
Promote participation
How are these achieved?
Oct 2012 36Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Some Pros are free flow of information,
communication at minimal cost, content hasno expiry dates
Some Cons are information leakage , loss of
employee productivity, high level of
dependency of the Internet
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Oct 2012 37Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Lecture is to provide you with a brief
introduction to the information and
communications technology (ICT) underlyinge-business
careful not to become obsessed or blinded by
technological detail. Only key concepts
expected in this course !
Oct 2012 38Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Open up exciting opportunities for
communication, collaboration and markets.
Various types of networks: LANs, WANs,
intranets, extranets.
Why firewall?
Oct 2012 39Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
WWW not = the Internet
WWW = web browser = URL = HTTP =
Web1.0 or Web2.0
Facilitates the devt of client-server network
and P2P network
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Oct 2012 40Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Designed as peer2peer network architecture seen as
an external network platform of the local machine.
Involves delivering hosted services over the Internet
Three types : Infrastructure-as-a-Service (IaaS),
Platform-as-a-Service (PaaS)and Software-as-a-
Service (SaaS).
Oct 2012 41Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
todays mobile phones are effectively operate
like network computers
Mobile phonemobile commerce (M-
Commerce)
Type of applications
Limitations
Oct 2012 42Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
extranets are used to coordinate and manage supply
chains with firewalls EDI
RFIDautomatic identification of stock items
Enterprise Information system (ERP)
Ebusiness security
Cloud?
http://searchcloudcomputing.techtarget.com/definition/Infrastructure-as-a-Service-IaaShttp://searchcloudcomputing.techtarget.com/definition/Platform-as-a-Service-PaaShttp://searchcloudcomputing.techtarget.com/definition/Software-as-a-Servicehttp://searchcloudcomputing.techtarget.com/definition/Software-as-a-Servicehttp://searchcloudcomputing.techtarget.com/definition/Platform-as-a-Service-PaaShttp://searchcloudcomputing.techtarget.com/definition/Platform-as-a-Service-PaaShttp://searchcloudcomputing.techtarget.com/definition/Infrastructure-as-a-Service-IaaS7/29/2019 EBIZ - BATCH 3 HANDOUT
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Oct 2012 43Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Purposes of securing data transmission
Cryptography
TLS and SSL protocols
Oct 2012 44Lecture 16: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
End of Lecture 16a & 16b
Oct 2012 45Lecture 17: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
New technologies facilitate the reorganisation of
work and offer new opportunities in terms ofwhere, when and how work is carried out.
How do these new forms of organisation impact
internal organisational structures as well as
relationships between firms?
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Oct 2012 46Lecture 17: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
With many innovative, advanced electronic
technology over the last 2 decades, people workhave changed dramatically, but the way their
companies are organised lags far behind.
Oct 2012 47Lecture 17: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Outsourcing/Externalization
Partnership
Core competency
Efficient/smart technology like global networks, mobile
phone, video conferencing, computers, cloud
computing, social networks,
Reliable professional services
Open source
Crowd sourcing
Oct 2012 48Lecture 17: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
..current traditional organisational forms
would not suffice (although relevant)
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Oct 2012 49Lecture 17: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Researchers and practitioners faced with the
problems of organisational structure saw the
potential of IT, and later e-business, to improvecoordination and provide opportunities for new
organisational forms.
NOFS are often ambiguous, in that some people
may not be fulltime members, and they are
typically fluid, in that people join and leave as
requirements change.
Oct 2012 50Lecture 17: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
NOFS are typified by dynamic cross-functional
teams of experts set up to solve a particular
problem
NOFS also stretch outside the focal organisation
to encompass external relationships
move to the middle where organisations
construct structures that are between markets
and hierarchies
Oct 2012 51Lecture 17: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
1. Virtual Organisation
2. Virtual teams and off-shoring3. Teleworking
4. Mobile working
5. Open source
6. Crowd sourcing
E-business offers a significant opportunity for changein both social and organisational structures, inparticular regarding how and where work is done andorganised.
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Oct 2012 52Lecture 17: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
1. technological inflexibility and dependence
2. inter-organisational relationship problems
3. ambiguity4. Psychological aspects
5. Unclear lines of authority
6. Managerial implications
7. Data / confidential insecurity
Oct 2012 53Lecture 17: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
End of Lecture 17
Oct 2012 54Lecture 18: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
1. In what ways are web 2.0 technologies different to thoseof the first generation? Discuss, with examples
2. Social networking sites are purely for leisure purposesand companies should ban their use during workinghours. Discuss the validity of this statement.
3. What do you understand by the term web 2.0? Brieflydescribe the various collaborative components of web 2.0and show how each one exhibits the participative natureof web 2.0. (2011)
4. Why are many companies beginning to use web 2.0technologies? Give examples of web 2.0 technologiesthat companies are exploiting (2012)
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Oct 2012 55Lecture 18: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
5. Discuss the similarities and differences between the
internet and cloud computing. What are the main business
opportunities offered by cloud computing? Mobile
technologies offer new business opportunities. Discuss,
with examples, whether mobile technologies can be a real
substitute for traditional wired technologies.
6. A B2B company has found that after an initial surge of
interest in its intranet and extranet, usage has declined
dramatically. The e-business manager wants to achieve
these aims: a) Increase usage, b) Produce more dynamic
content, c )Encouraging more clients to order (extranet).
What would you suggest?
Oct 2012 56Lecture 18: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
7. Why are organisations increasingly considering new forms of
organisation (e.g. network organisations, tele-working)? What
are the problems in implementing them?
8. Discuss the benefits and drawbacks of mobile working (2012)
9. What are open source communities in the context of software
development? What do they offer in this context? What are the
problems in building and maintaining viable open source
communities? (2012)
10. Read the essential readings on traditional organisations and
open source, and then list all the potential issues that you can
think of when two such diverse forms of organisation are
encouraged to merge together. Think along the lines of control,communication, structure of both forms, and incentive and
sanctions methods.
Oct 2012 57Lecture 19: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
E-business security deals with the matter of
planning and managing security within and
around computer systems.
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Oct 2012 58Lecture 19: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Oct 2012 59Lecture 19: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Oct 2012 60Lecture 19: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Five goals of information systems security
Integrity: data are not modified without authorisation
Confidentiality: ensuring that only authorised
individuals have access
Availability: information is available when it is needed
Non-repudiation: guaranteeing that someone cannot
deny his or her participation in a transaction
Authenticityensuring data & transactions are
geniune
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Oct 2012 61Lecture 19: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
UOL/Ebiz concurs these goals can be
achievable through:1. technological implementations
2. organisational procedures
Oct 2012 62Lecture 19: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Adopt appropriate technical security
to the three layers:
1. Computer security layer
2. Network security layer
3. Internet security layer
Oct 2012 63Lecture 19: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
1.Covers the socio-technical dimensions
of e-business security to design securitywith needs of users in mind
2.Cost-saving should not be the major
concern
3.Mgt involvement
4.Information security policieswell
crafted (see ISO) and enforce.
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Oct 2012 64Lecture 19: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
1. User authentication technique such as
2FA2. Data integrity technique such as
Check-digit validation
Oct 2012 65Lecture 19: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
End of lecture-19
Oct 2012 66Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
A new business strategy involves evaluation of
all aspects of firms operations and environment,i.e. technologies, economics, and managementaspects. For our Ebiz studies, we are not veryconcern over how to use or implement the newtechnologies but more so the impact on theeconomics and management aspects (e.g.resources/budgeting - Marketing, scheduling -SCM, procurement, customers - CRM) for agiven e-business strategy.
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Oct 2012 67Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Oct 2012 68Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Chaffey: E-business strategy is a channel strategy
The e-business strategy document is often not a
long document as it does not contain detailed
plans or timelines.
Strategies are a result of careful analysis, it
defines a position in the marketplace, and aim atgaining a competitive advantage.
Oct 2012 69Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
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Oct 2012 73Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
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Oct 2012 75Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Adding valuethrough improved products or
services or from using information toimprove customer relationships.
Reducing coststhrough efficiency savings
(e.g. reduced inventory within the supply
chain).
Managing risks
Creating a new reality
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Oct 2012 76Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Oct 2012 77Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
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Oct 2012 79Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Oct 2012 80Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Oct 2012 81Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Dynamic environment like e-business, wherethere may be radical changes in:
customer tastes and behaviour technology developments capabilities of trading partners availability of resources, especially skills and
investment capital legal frameworks (e.g. copyright laws) competitors actionsproduct and service developmentsespecially
from new entrants to the market
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Oct 2012 82Lecture 20: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
End of Lecture-20
Oct 2012 83Lecture 21: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
1. Discuss the role of technology in enforcing informationsystems security. Explain why more investment in IT doesnot always lead to more secure information systems.
2. Discuss how and why biometrics can solve many securityrelated IT problems. Explain, with examples, whetherthere are any shortfalls in biometric security basedsystems
3. Discuss the main technical and security related problemsin internet based e-business activities. Critically discusswith examples (2011).
4. Discuss the main organisational threats to e-business
security. Support your answer with examples (2012)
Oct 2012 84Lecture 21: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
5. For each of the above six generic sell-side strategies, identify a
good example of a company that has successfully adopted that
strategy.
6. Imagine you are a consultant whose job is to design a new B2B
strategy in a firm which intends to open a buyer oriented
marketplace. Which factors would you consider in advising the
firm whether it is worthwhile pursuing such a strategy? Justify
your answer theoretically (2012).
7. You have been asked, as a consultant, to begin work on an e-
business strategy for a new pure-play, online, business-to-
consumer retailer. What areas would you examine regarding
this strategy? For each area, briefly discuss an issue that you
feel is likely to be important in this context (2012).
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Oct 2012 85Lecture 21: EBIZ - Mgt & Innovation eBusiness(by JackKoh)
8. Why do companies formulate e-business strategies?
Briefly outline how companies usually go about
formulating these strategies. What are the main
problems involved in e-business strategyformulation?
9. What is an e-business strategy? Which aspects of a
companys business should it cover? Who should
be involved in its preparation? Justify your answer.
10. How does e-business strategy differ from traditional
business strategy?
Oct 2012 86EBIZ - Mgt & Innovation eBusiness(by JackKoh)
Good luck !
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Management & Innovation of E-BusinessIS3167, 2790167 (2011) (assembled by Jack Koh)
Set 3 of 3 sets of Ebiz study notes Page 87/ 154
EBIZ Course Material for 2012 (Set-3)
Acknowledgment:
1) All text in italics are replicated from the UOL Study Guide, for easy references by students
2) All diagrams are taken from Chaffeys instructor guide
Lecture/
Lesson
Topics (chapter-no refers to the chapter of the UOL study guide)
1
(16/9/12)
Chapter-1: Introduction: growth of e-business and strategies
Group Mini-research Assignment: TripAdvisor.com (or Netflix.com or Facebook). Form a group of 2
members (or 3 maximum). Write a research report and post it on the Internet. The report should, at least,
explain briefly the nature of its business, and how the 8 key elements of the business model are addressed
by them. Seewww.uol-ebiz.blogspot.comfor sample layout-format of report. The leader shall submit their
url-link by the start of lecture-4 to Jack Koh ([email protected] cc [email protected] ).
Start-date: Lecture-1
Due/Deadline: Lecture-4
2-3 Chapter-4: Business-to-consumer (B2C) retail systems and strategies
4 Tutorial-1
5 Chapter-6: Business-to-Business (B2B) wholesaler models and strategies
Individual Assignment-1: Start-date: lecture-5, Due/Deadline: lecture-76 Tutorial-2
7-8 Chapter-5: Marketing for e-business (e-business strategy)
Individual Assignment-2: Start-date: lecture-8, Due/ Deadline: lecture-10
9 Tutorial-3
10-11 Chapter-7: Supply Chain Management
Individual Open-book Test-1: 2nd
half of Lecture-11
12 Tutorial-4
13-14 Chapter-3: Economic theories of e-business (economic infrastructure)
15 Tutorial-5
16 Chapter-8: Web 2.0 in business and society (technical infrastructure)
Chapter-2: e-Business, technology & infrastructure (technical infrastructure)
17 Chapter-9: New forms of organisation (Managing Change)18 Tutorial-6
Individual Open-book Test-2: 2nd
half of Lecture-18
19 Chapter-10: Security issues in the digital environment
20 - 21 Chapter -11: Conclusion & implications of e-business strategies
Tutorial-7
Appendix-1: Past year Exam & Discussions
Appendix-2: How to publish your group report on the Internet
Assignment and Test Schedule
You are advised to participate in assignments and tests. One of the benefits is these assignments and tests will add credits to
your personal testimonial and will greatly facilitate the writing of reference letter for you later on.
1. Group Mini-research Assignment: TripAdvisor.com (or Netflix or Facebook). Form a group of 2 members (or 3maximum). Write a research report and post it on the Internet.
Start-date: Lecture-1
Deadline: Lecture-4 (Participants will receive the Ebiz bible auto-email to them in Mar 2013)
2. Individual Assignment-1:Start-date: lecture-5
Deadline: lecture-7 (Participants will receive the Ebiz bible auto- email to them in Mar 2013)
3. Individual Assignment-2:Start-date: lecture-8
Deadline: lecture-10 (Participants will receive the Ebiz bible auto-email to them in Mar 2013)
4. Individual open-book Test-1: 2nd half of Lecture-11 (sample solution shall be auto emailed to participants later) 5. Individual open-book Test-2: 2nd half of Lecture-18 (sample solution shall be auto emailed to participants later)
http://www.uol-ebiz.blogspot.com/http://www.uol-ebiz.blogspot.com/http://www.uol-ebiz.blogspot.com/mailto:[email protected]:[email protected]:[email protected]:[email protected]://www.uol-ebiz.blogspot.com/7/29/2019 EBIZ - BATCH 3 HANDOUT
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Lecture-13 & 14: Supporting notes SG chapter-3/ Economic theories of e-business
(All text in italics are extracts from the UOL Study Guide, for your easy references)
(All diagrams are taken from Chaffeys instructor guide)
Suggested reading:
a) Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/Prentice Hall, 2009) fourth edition[ISBN 9780273719601] Chapter 2.
b) Cordella, A. Transaction costs and information systems: does it add up? Journal of Information Technology 21(3)2006, pp.195202.http://personal.lse.ac.uk/cordella/Transaction%20costs%20and%20information%20systems.pdf
Abstract: Transaction cost theory has often been used to support to support the idea that information and
communication technology (ICT) can reduce imperfection in the economic system. Electronic markets and hierarchies
have repeatedly been described as solutions to inefficiencies in the organisation of transactions in complex and
uncertain settings. Far from criticising this assumption, this paper highlights the limits associated with this application
of transaction cost theory that has been prevalent in IS research. Building on the concepts first proposed by Ciborra, the
paper argues that information-related problems represent only some of the elements contributing to transaction
costs. These costs also emerge due to the interdependencies among the various factors contributing to their growth. The
study of the consequences associated with ICT design and implementation, grounded in transaction cost theory, should
therefore consider the overall implication ICT has on these interdependences and not only the direct effect it has on
information flow, distribution, and management.
c) Cordella A. Does information technology always lead to lower transaction costs?http://csrc.lse.ac.uk/asp/aspecis/20010024.pdf
Abstract: This paper reconsiders the effect of information technology on transaction costs in view of IT externalities
and coordination costs. The aim of the paper is to show that IT has ambivalent (i.e negative) effects on the overall
transaction costs. This analysis is based on the idea that IT externalities have both positive and negative effects on
coordination and thus transaction costs. Two different strategies to use IT in an organizational setting are identified: one
to increase the amount of information available to decision makers thus to reduce the uncertainty and hence transaction
costs. The other to reduce the amount of available information to decrease the complexity faced and thus coordinationand transaction costs. Finally, the effects of IT externalities impose the awareness that one strategy is not a substitute to
the other rather that they can both coexist.
d) Malone, T.W., J. Yates and R.I. Benjamin Electronic markets and electronic hierarchies, Communications of the ACM30(6) 1987, pp.48497 or a copy of the article at website:
http://is.esade.edu/faculty/wareham/Teaching/StratNetComp/Readings/Electronic%20Markets%20and%20electronic%2
0Hierarchies.pdf
Abstract: By reducing the costs of coordination, information technology will lead to an overall shift toward
proportionately more use of markets - rather than hierarchies - to coordinate economic activity. New information
technologies are allowing closer integration of adjacent steps on the value-added chain through the development of
electronic markets and electronic hierarchies. Although these mechanisms are making both markets and hierarchies
more efficient, we argue that they will lead to an overall shift toward proportionately more market coordination. Some
firms will be able to benefit directly from this shift by becoming market makers for the new electronic markets.
Others will be able to benefit from providing the interconnections to create electronic hierarchies. All firms will be able
to benefit from the wider range of options provided by these markets and from the possibilities for closer coordination
provided by electronic hierarchies.
By the end of this chapter, and having completed the essential reading and activities, you should be able to:
explain transaction cost theory and identify the main types of transaction costs
analyse the impact of e-business technology on transaction costs
explain how and why disintermediation occurs in electronic markets
discuss the impact of e-business technology on the organisation of markets with examples from the real world explain the myths that were current during the dot.com boom.
http://personal.lse.ac.uk/cordella/Transaction%20costs%20and%20information%20systems.pdfhttp://personal.lse.ac.uk/cordella/Transaction%20costs%20and%20information%20systems.pdfhttp://personal.lse.ac.uk/cordella/Transaction%20costs%20and%20information%20systems.pdfhttp://csrc.lse.ac.uk/asp/aspecis/20010024.pdfhttp://is.esade.edu/faculty/wareham/Teaching/StratNetComp/Readings/Electronic%20Markets%20and%20electronic%20Hierarchies.pdfhttp://is.esade.edu/faculty/wareham/Teaching/StratNetComp/Readings/Electronic%20Markets%20and%20electronic%20Hierarchies.pdfhttp://is.esade.edu/faculty/wareham/Teaching/StratNetComp/Readings/Electronic%20Markets%20and%20electronic%20Hierarchies.pdfhttp://is.esade.edu/faculty/wareham/Teaching/StratNetComp/Readings/Electronic%20Markets%20and%20electronic%20Hierarchies.pdfhttp://is.esade.edu/faculty/wareham/Teaching/StratNetComp/Readings/Electronic%20Markets%20and%20electronic%20Hierarchies.pdfhttp://csrc.lse.ac.uk/asp/aspecis/20010024.pdfhttp://personal.lse.ac.uk/cordella/Transaction%20costs%20and%20information%20systems.pdf7/29/2019 EBIZ - BATCH 3 HANDOUT
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Introduction
e-BUSINESS is built on two main infrastructures namely the economic infrastructure and the technology infrastructure .
In lectures 13 and 14 we dealt with the economic infrastructure and in lectures 16 we cover the technology infrastructure.
Without these 2 main infrastructures, there would be no e-business commerce.
This chapter presents the economic infrastructure represented by the transaction cost theory.
What is a transaction? What is cost of transacting? In transaction cost theory, we are largely interested in the cost of
transacting rather than the transaction itself. However, we must be aware that the different type of transactions affects the
degree of cost of transacting. Can e-Business (through innovative use of IT) removes most or all of these transacting cost so
at to make market more attractive?
The transaction costs theoretical framework to explain the deployment of and challenges faced by e-business strategies. This
framework provides a robust explanation of the basic economics of e-business. On this basis, the chapter discusses how
information and communications technology (ICT) can be designed and deployed to reduce the costs of transactions and
hence to change the structure and dynamics of markets for products and services exchanged through e-business. The chapter
also discusses the theoretical implications of disintermediation and re-intermediation (the changing roles of intermediaries
or middle men), according to the economics of transaction costs.
The purpose of this chapter is to introduce the most common theories that have informed the management and economics of
e-business. The chapter will mainly focus on transaction cost theory and conceptual approaches to intermediation and
disintermediation. In order to match the literature on the theories, in this chapter we refer to e-business technology as ICT
(information and communication technology) and hence you should treat these terms as being synonymous.
The main economic theory you need to understand is the transaction cost model. Examining how markets are organised and
how and why ICT can be designed and implemented to facilitate the functioning of market mechanisms, we discuss thefundamental factors that produce electronic markets. We therefore present and discuss a limited version of transaction cost
theory, focusing on those factors that affect the exchange of goods and services in a market context.
We discuss the circumstances under which ICT can make market mechanisms more efficient. For a more detailed
presentation of transaction cost theory, you can refer to Ciborra (1993) and Williamson (1985). Cordella (2006) presents a
useful discussion of the application of transaction cost theory to information systems and we recommend that you read this
article.
The basic assumption of transaction cost theory is that economic agents (buyers and sellers) face costs to make the exchange
of goods and services possible (see Picot et al., 1997). These costs are not necessarily reflected in the price at which goods
and services are exchanged. These costs, called transaction costs, are mostly related to information processing costs: not all
the information needed by buyers and sellers about the object of the exchange is available; it is costly to process the
available information, etc.
We identify the different types of information processing costs that individuals face, namely search costs, contracting costs
and control costs.
We also elaborate on how ICT might contribute to lower transaction costs, which, in turn, makes the exchange of goods and
services more efficient, and therefore improves the overall efficiency of the economic system within which these exchanges
take place.
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After introducing the basic elements of transaction costs, we discuss how ICT can affect the roles of the different economic
agents involved in the exchange of goods and services. Disintermediation is a typical example: this is the process by which
the number of economic agents involved in an exchange (i.e. resellers, wholesalers and mediators)
is reduced. Disintermediation typically occurs because ICT does for free what intermediaries do for a fee.
Following the transaction costs argument, ICT provides better opportunities to process information related to the exchange,
reducing the need for support for buyers and sellers in managing the essential information needed for the exchange.
ICT therefore reduces the need for third party services and hence the costs faced by buyers and sellers. The first reason why
disintermediation occurs is therefore rooted in transaction cost theory. Moreover, building on Picot et al. (1997), we discuss
how and when ICT-led disintermediation occurs
What is a transaction?
A transaction (or exchange) is defined as the transfer of property rights [Picot/Dietl,Reichwald/ Wigand], whereas
property rights are the rights of individuals to the use, make alteration, income (make profit) and transfer (UAIT)of
resources [DeAlessi,/Franck].
A transactionis contract carried out between separate entities often involving the exchange of items of value, such as
information, goods, services and money. Today, transactions not only refer to the obvious cases of buying and selling, but
also day-to-day emotional interactions, not necessarily commercial like informal gift exchanges, etc.
Take an elementary unit of analysis the transaction or exchange between at least two individuals, we can appraise
management information systems in terms of the reasons why transactions use and produce information. If we consider the
organization as a network of exchanges and contracts between and among members, both co-operation and conflict can be
taken into account because individuals might withhold information while they are in the process of exchange.
The transaction-cost theory introduces the hypothesis of opportunistic behaviour according to which organization membersmight distort the use of information to achieve their individual goals. Human beings are not capable of listing down all
aspects of complexity and uncertainty accurately nor ascertain an exact true price.
Take the transactions of the sales of a table and a musical CD. We need to examine the exploit of the property rights. In
both cases, the new owner could use it, make alteration, make an income out of it, or transfer the ownership. The sale of the
table is likely done through a traditional marketplace. The table is physically limited in form and the new owner, in
exercising his ownership rights of the property, would likely be constricted when trying to vary its form or structure.
However, the transaction of the musical CD is different. The transaction has a greater opportunity of being exposed to
opportunistic behavior e.g. it can be burn to produce more copies, musically mixed to produce a new musical
version, duped as video background music, etc. In other words, it could be altered take on many other different market
forms. This results in increased complexity and uncertainty giving rise to further opportunism, and bounded
rationality.
Contracting Parties
In the ideal typical world of perfectly competitive markets where all contracting parties are deemed to possess all the
information required to make fully informed rational choices (about past, present and future contingencies), they are
indifferent between market and organizational co-ordination. It is when information is incomplete (and in practice it nearly
always is) that the choice is pertinent for contracting parties.
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A diagram below will help appreciate the possible distribution scenario of relevant information between contracting parties
call them A and B.
What is the cost of transaction?
The cost of transacting refers to the cost of incurred to conduct a transaction such as administration cost, IT processing cost,
information cost, transportation, manpower, coordination cost, storage, lost, replacement, insurance, damages, currency
exchanges, legal expenses, correspondences and visitations to intermediaries cost. Such cost are incurred from the time the
buyer takes an interest in a product or service until the time the product or service is satisfactory acquired by the buyer.
The cost of transacting is not the cost of product or service itself. The transacting cost adds to the final selling price of the
product or service. The cost of transacting rises with the level of opportunistic behaviours and mistrust associated between
the transacting parties. Transaction costs (Ronald Coase, 1937) can be viewed as the economic equivalent of friction in
physical systems:the greater the friction in the physical system, the more impeded the movement (exchange of goods
& services); by the same token, the higher the transaction costs. Costless transaction is impossible and can only take
place in an ideal world, where there are no frictions, impediments or barriers.
Where exchanges involved external parties, market uncertainty, processing, contractual obligations and other market-level
frictions normally get more complex. There are many reasons and factors of cost. Whereas, in an exchange or transaction
involving only actors within the organization, says the planning department placed a work order to the production floor, the
processes are regulated by rules and internal systems. Opportunism and mistrust are not real concerns here. The internal
processes are not as complex as issuing the purchase order to an external provider where the cost of transacting can be costly,
and hence the reason that some firm takes to internalization (or vertical integration) to save cost and minimize complexity.
The transaction cost model
Transaction Cost Theory was first introduced by Ronald Coase [1937]. Coase used it to develop a theoretical framework
for predicting when certain economic tasks would be performed by firms (internal), and when they would be performedon the market (external). Coase spoke of the cost of using the market mechanism for exchanging goods and services.
A complete contract is defined as one where all the relevant information (i.e. all possible contingencies,
past, present and future) are covered by both the contracting parties.
BA Rectangle =complete information
Bs private information
(asymmetric information)
Common information
Information not access by both
A & B
Imperfect market
Both A and B will have their own
private information. This leads to
information asymmetry between
the 2 actors. Their common
knowledge of the product lies in
the overlapped circles. But both
actors are unaware of the
information, represented by the
space between the rectangle and
the circles to attain completeinformation.
perfect market
Both actors will have access to
same information in market
Q. So how will A or B improve
their information space?
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In the transaction cost model, markets are viewed as organi sational structur eswhich coordinate buyers and sellers by
matching the reciprocal expectation related to the price-quantity/quality relationship. The transaction (exchange) is
therefore coordinated on the basis of a contractual arrangement which specifies buyers and sellers, the object of the
exchange and the price at which the transaction will take place. If you take as the elementary unit of analysis the
transaction or exchange between at least two individuals, you can envisage the information-related problems that create
uncertainty regarding the object of the exchange and the relationship between price and quantity/quality, which is
fundamental to the decision of the two parties to engage in the transaction.
Looking at the transaction as the unit of analysis, we can identify how and where ICTs can be used to facilitate access to
this information and why ICT can be used to reduce the transaction costs. If you consider the market as a network of
exchanges and contracts between buyers and sellers,both cooperation and conflict should be taken into account because
individuals might withhold information during the process of exchange. This in fact can generate extra profits and
higher revenues for either buyers or sellers. Every business activity is characterised by a certain amount of uncertainty
and this may stem from the task, the technology or the environment.
However, the transaction cost framework considers another, rather distinct, form of uncertainty, namely behavioural or
strategic uncertainty, which has its origins in the conflict of interests that exists between buyers and sellers. The information
that buyers or sellers receive or gather may well be unreliable, with the result that they have to undertake excessive
information processing in order to evaluate its reliability.
The fact that information is obtained from human sources means that it cannot be trusted a priori (i.e as facts). In fact,
humans can exploit the use of information to obtain extra profit.
This strategic consideration is due to the fact that interdependent strategic intents are affecting the exchange and use of
available information. Buyers and sellers cannot be seen as solo chess players whose only opponents are the technology, a
random environment or random nature. Put differently, in order to pursue individual interests, buyersand sellers are willing to manipulate, omit or even distort information to gain extra value from the exchange. In so doing,
they pollute the information setting within which the exchange takes place.
Needless to say, this generates the need to invest in sophisticated solutions to double check information. Buyers and sellers
cannottrustthe information that is exchanged, so they have to invest in solutions that reduce the risk of becoming exposed to
polluted information. This leads to an increase in transaction costs, which explains the design of
information systems that aim to make more reliable and transparent the information exchanged between buyers and sellers.
As we discuss below, specific intermediariesinfomediaries become highly relevant to facilitating transactions in
situations where complex information settings make it difficult for buyers and sellers to finalise the exchange.
Types of transaction costs
The transaction cost model assumes that the market is a bundle of transactions or exchanges between individuals who
behave so as to optimise their revenues from the exchange.
The transaction cost model defines this behaviour as opportunistic. As noted above, transactions entail costs in terms of
resources that need to be deployed to complete an exchange of goods or services between the parties (i.e. buyers and sellers).
Hence, transaction costs reflect the imperfections of the market mechanism in allocating resources on the basis of the price-
quantity relationship.
There is always some information-related problem that makes it difficult, and therefore expensive, to finalise the transaction.
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You may view transaction costs as the economic equivalent of friction in physical systems: the higher the friction in a
physical system, the more the systems movement is impeded. By the same token, the higher the transaction costs, the lower
the degree of economic activity occurring in the market.
Costless transactions only take place in an ideal world where there are no friction, impediments or barriers to the immediate
perception of the equity of the exchange (i.e. perfect knowledge of the price-quantity/quality relationship).
Factors that may contribute to the cost of a transaction in the real world can be identified as follows:
Searching for the product or service in question, as well as for the trueprice at which the sale/purchase ought to take
place. There are two types of search costs: (1) the costs associated with searching for the actual product or service, and (2)
the costs involved in determining the best price at which the product or service could be bought.
Carefully crafting the contract that regulates the exchange, so as to avoid later claims.
Monitoring its execution so as to pinpoint responsibilities and penalties if modifications have to be made to the original
contract.
Finally, checking the reputation of the partners in order to minimise subsequent surprises related to the undiscovered
properties of the transaction.
These costs are generally defined as the costs of gathering information, evaluating alternative options, negotiating
and contracting. They are the consequences of the complexityanduncertaintyof the economic system. Uncertainty and
complexity can be related to either human behaviour or environmental or unpredictable events.
More specifically, we may group the information-processing costs related to transacting through negotiation of an exchange
into four main classes:
search costs: the costs necessary to set up the minimal social unit for the exchange (i.e. identify the party with which one
wishes to conduct the transaction)
contracting costs: the costs related to the negotiation of the termsof the trade and drawing up the contract which regulates
the exchange
control costs and regulation costs: these costs relate to the implementation of the contractunder conditions of uncertainty,the policing of deviations from the contract terms and the enforcement of sanctions to restore conditions suitable to the terms
agreed.
Each of these affects a segment of the transaction lifecycle, which can be divided into three stages:
search
contracting
control/regulation.
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Therefore, transaction cost frictions occur in transactions (exchanges). Being able to realise their impacts, firm can exploit
and use them to compete effectively in e-business operations. These frictions occur during various stages of the transaction
cost, such as
- Search stage: frictions of uncertainty and bounded rationality (no opportunistic cost here) involved externalities.
- Contract stage: frictions of uncertainty, bounded rationality, opportunistic behaviour, asset specificity, and small numbers.
Cost of bargaining, finding the right price/qty/quality, due diligence of vendors , the writing, finalising of contract terms
are majors activities here.
- Control (regulation) stage: frictions of uncertainty, bounded rationality, opportunistic behaviour, small numbers. Asset
specificity. Activities include the execution and monitoring of the contract terms.
We can expand the activities in Coases transaction life cycle, thus
Stage-1: Cost of searching for buyers and sellers (vendors)
Searching, collecting, collating product information during procurement Comparing prices of product and services during the procurement process Marketing of services and products
Stage-2: Cost of selection of partner and writing the contract
Due diligence investigations: Research the background, reliability, dependability and tenure of partners Evaluation of reputation of partner Selection of partner Drafting the terms of contract Negotiate terms of contract Securing and writing the contract
Stage-3: Cost of monitoring and enforcing the contract
Sales order processing: capturing, monitor, supervising and allocating Delivery and transportation of goods Customer servicesFeedbacks Back-end processes with back-end partners. IT processing and coordination cost. Monitoring and enforcing contract. Control and regulation costs - costs relate to the implementation of the contract
(supply, storage, replacement, payment, etc) under conditions of uncertainty, the policing of deviations from the
contract terms and the enforcement of penalty to restore conditions suitable to the terms agreed upon
The diagram below summarise where frictions may occur during the transaction and between transacting partners:
Bounded Rationality: "The capacity of the human mind for formulating and solving complex problems is very small
compared with the size of the problems whose solution is required for objectively rational behavior in the real world --
or even for a reasonable approximation to such objective rationality." Hence, individual turns to their past experiences,
exposures, tried & tested methods and this has a limiting effect on getting the best value from the transaction.
-boundedrationality
- opportunism-bounded
rationality
- opportunism- Asset specificity- Uncertainty- Small numbers
Transaction
Partner A
Transaction
Partner B
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All human as decision makers has limited cognitive capabilities, and bounded rationality increases with incomplete
information in imperfect market [Simon, 1957; Selten, 1998]. In short, bounded rationality refers to an individuals
limited memory capacity, limited experience and inability to achieve maximal value on the information available. This
constitutes increased cost, particularly in the area of search (as in the examples of manual checking on airline arrivals or
checking the best value of a netbook at a IT-fair or Sim Lim Square), contract, and monitoring and control costs.
Individual, limited by bounded rationality and being unfamiliar with the market or not knowing what to look for, may be
actually conducting excessive searches and be overwhelmed with both
relevant and irrelevant information.
The graph shows that the more imperfect the market, bounded
rationality will increase. The same bounded rationality limits the
individual ability to negotiate and draft an elaborate contract which
can end up with higher cost eventually. Thus, humans are inclined to
make erroneous decisions. Error constitutes increase search, contract
and control costs.
Opportunism: Opportunism describes the human self-interest in taking actions, including cheating, lying and infringing
contracts [Williamson]. Satisfying one ego rather than monetary gain, like Nick Lesson rampaging trading and
subsequent destruction of Barings Bank, is another example of opportunism. Refers to the suggestion (widely associated
with transaction cost analysis) that a decision-maker may unconditionally seek his/her self-interests, and that such
behavior cannot necessarily be predicted.
This proposition extends the simple self-interest seeking assumption to include "self-interest seeking with guile" thereby
making allowance for strategic behavior (Williamson, 1975). Some examples are strategic manipulation of information
or misrepresentation of intentions; false or empty, i.e. self-disbelieved, threats or promises (Goffman, 1969), has
profound implications for choosing between alternative contractual relationships.
Opportunistic behavior contrasts with stewardship behavior that involves a trust relation in which the word of the party
can be taken as his bond. In a way, trust is informal rules. Formal rules, controls (i.e. hierarchy form) can help in
reducing cost.Opportunism increases contract, and control costs. Trust will lower contract, and control costs. The opposite is
altruistic behavior which TC does not take into consideration.
Uncertainty: Uncertainty is embodied in any kind of future action. Uncertainty feeds opportunism.
Uncertainty is reference to the lack of knowledge (ignorance) about the state of the environment or other decision
variables. Uncertainty about the future, uncertainty about other places, events, structures and other phenomena.
Risk is reference to the consequences of uncertainty, such as regret often expressed in terms of probabilities of such
consequences. Uncertainty then reduced to uncertainty about actual occurrence and, possibly, about the reliability of
probabilities.
It shall be suggested that "complexity" (at a point in time) and "instability" (over
time) are two different root causes of uncertainty and (following Lawrence &
Lorsch) that these two attributes of decision environments lead to
o poor quality of information, increases information asymmetry. The graphshows the reverse is true in reducing information asymmetry and
uncertainty.
o leads & lags in the economy resulting in delays in in formation feedback,and
o a lack of causal understandingo and thereby contribute to the individual's uncertainty and can be identified as more immediate "causes" for
uncertainty
The higher the uncertainty the impact of increasing cost, particularly in search, contract and control costs.
Bounded Rationality
Imperfect Mkt
TC
Uncertainty
Info Quality
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Asset Specificity: Asset specificity terms the significance of certain assets that support a specific transaction. These are
assets which cannot be transferred to or used within other transactions [Williamson]. The BBQ pit is highuse asset
specificity since it cannot be use in other forms (as a chair, a table?). Refers to the relative lack of transferability of
assets intended for use in a given transaction to other uses i.e. assets which cannot be transferred to or used within other
transactions (U.A.I.T). All specialized equipment has high asset specificity. Highly specific assets represent sunk costs
that have relatively little value beyond their use in the context of the specific transaction.
Asset specificity is a major theme of transaction cost based economic analysis for a very basic reason. The more
committed one becomes to a transaction, the more one stands to lose from unforeseen events and the possibility that
contracting partners may find it in their interests to renegotiate more favorable terms from you given that you have
committed (or sunk) assets the various forms of asset specificity make transacting parties fearful of making a
commitment that might later prove to be 'one way'. The other dimensions of transaction costs are more closely tied to the
importance of informational availability.
Williamson has suggested six main types of asset specificity.
o Site specificitytransactions that are specifically bound to a certain location. But the Internet facilitates transfersacross countries easily leading to the question of copyrights between countries with different legalities. E.g. Sales
of audio CDs mean for uses only in USA.
o Physical asset specificity e.g. digital content, a tableo Human asset specificity e.g. special skills for contract worker in middle of Timbaktuo Dedicated assets e.g. special tool for mega casinoo Brand names e.g. Sony, BMWo Temporal specificity: time dependent asset. Value expires after limited time. E.g. perishable goods and auction
items
High asset specificity requires strong contracts or internalization to combat the threat of opportunism. Here is an
example of the small subcontractors locating and investing next to the handful of 2 or 3 customers who could potentially
turn to alternative suppliers because of non-value maximizing reasons (supplier = site and physical asset specificity).
The most popular example for the consequences of assets specificity has been the relationship between General Motors
and Fisher Body between 1919 and 1926. After a 10 year contractual agreement was signed in 1919, GM's demand for
closed-body cars increased to extent that it became unhappy with the contractual price provisions and "urged Fisher to
locate its body plants adjacent to GM assembly plants, thereby to realize transportation and inventory economies (for
GM)." [Williamson].
Finally, Fisher Body was merged (internalized) into GM in 1926 after Fisher had resisted GM's locational demands. As
R.Coase recalls, "I was told [by GM officials] that the main reason for the acquisition was to make sure that the body
plants were located next to General Motors assembly plants." [R.H.Coase, "The Nature of the Firm: Origin", Williamson
& Winter. High asset specificity increases contract cost, and possibly control cost.
Small numbers: Small numbers is about monopolistic conditions where there are few suppliers. So, they are more
susceptible to opportunism. The firm can control and raise prices, in small numbers (small increases), and the customers
are unlikely to go somewhere else. Cases of Singapores NETS, StarHubs cablevision and SMRT.
NETS Fee Hike. Case of unfair monopoly? (TODAY, 5/6/07)
IT MAY seemed, at first, not to affect your pocket directly. But when the Network for Electronic Transfers
(Nets) raises its levy on businesses offering it as a mode of payment, the increased burden on retailers
could lead to higher prices for consumers, warned the Consumers Association of Singapore (Case). At a
press conference yesterday, Case president Yeo Guat Kwang minced no words in calling the three- to four-fold increase by Nets unacceptable and monopolistic.
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The watchdog is even considering the possibility of bringing the matter up to the Competition
Commission Singapore, the statutory board monitoring fair competition here. About 80 per cent of
HDB retail outlets accept Nets and no other debit cards or credit cards, said Mr Yeo. Even government
agencies accept Nets as a mode of payment.
He added: They have been given this monopolistic mode of operation becau se we see this as a basic
infrastructure, to provide a basic mode of payment for all Singaporeans. So, they cant just come out and
tell Singaporeans now I see this as ... a commercial decision.
Nets chief executive officer Poh Mui Hoon said Nets needed to respond effectively to competition, by
paying the interchange fee card-issuers expect from facilities like Nets.
Elsewhere in the world, domestic debit networks similar to Nets have been overtaken by international debit
networks offering higher returns to card-issuers, Ms Poh added.
But Mr Yeo disagreed with the justifications. They should consider other cost -saving methods (rather than
increase the levy), he pointed out. And what happens when other debit and credit cards adjust their fees
upward? Will Nets do the same?And it is not as if retailers can simply stop offering Nets as a mode of
payment, even if they want to.
With small numbers (few suppliers), the contract cost will be likely be high as contracting parties resort to establishing a
strong negotiation in the contractual terms, with customers trying to hold down price & quality. Low search cost applies
asit is futile to search for alternative suppliers in a monopolistic market, as there is only one or very few suppliers. In t he
above NETs situation, the retailers may bear the additional charges (owing to competition) and will incur more cost both
in the transaction and negotiating the contract terms.
With small numbers, sourcing and searching for new sources will unlikely score any success. In such monopolistic
condition, it would be futile to search, so the search cost is likely to be low or of no consequences from the customer,
retailer or middlemans perspective.
Within a country where there is a very limited number of available suppliers, investing in IT to expand search facilities
will not help. BUT in today context, the world is the very connected. Already in place are effective infrastructure (ITexternalities) such as the Internet, connected industries, public distributed databases where the world is becoming a "w/o
boundaries" - a dot community. Search extending to other new suppliers in other countries is very viable.
Outsourcing is another viable solution. This extended search, with some IT investment, will increase search cost but has
the effect of diminishing the conditions associated with "small numbers". Again, it also depends on asset specificity
factor. Small numbers in some assets may remain entrenched.
Small numbers also refer to situation where customers allowed themselves to be victims of the service
provider because they have complete trust in the provider. In such cases, the providers manipulate the
situation by raising small increases in prices. The customers are likely to accept the small number
increases and continue to use the services of the same provider.
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Quick check
Actually, Ronald coases transaction life cycle has 4 stages. The last stage on Maintenance is not of concern for the purpose
of the study in our course. Which stages of transaction are these screen referring to?
Externalities
In economics, an externality is a cost or benefit from an economic transaction that parties "external" to
the transaction receive. Externalities can be either positive, when an external benefit is generated, or
negative, when an external cost is imposed upon others. It is a form of indirect or side effects though not
necessarily an unintended consequence.
Example of positive externalities:
a) A beekeeper keeps the bees for their honey. A positive side effect or externality associated withhis activity is the pollination of surrounding crops by the bees. The value generated by the
pollination may be more important than the value of the harvested honey. The negative effect
for neighbours is the bees come and watch TV with them, and sometimes stink their children, so
they have to put up with some kind of screens (costs) on their doors and windows to keep the
bees out.
b) A neighbour planting an extensively attractive garden may provide positive benefits to hisimmediate neighbours and others living in the immediate vicinity, and even financial benefits in
the form of increased property values to property owners.
c) The government will build an MRT station near/in an estate. Houses around it will benefit botheconomically and practicallypositive externalities.
Examples of negative externalities:
a) Pollution by a firm in the course of its production which causes nuisance or harm to othersb) A public transportation resource (such as roads, rail tracks) laid across the estate, imposing
congestion, noise, and dust.
c) Centralise all crematoriam & wake activities in Upper Thomson area.IT related externalities:
a) Networks of Information can unintentionally lead to information overload (a negativeexternality) where executives are overwhelmed with too much information and do not know
how to use them effectively. Thus increasing cost! To correct the situation, more IT processing
will be required to analyse, collate, summarise into relevant concise effective information.
More cost!b) We can also said that the IT investment may have a negative impact on transaction cost
(although, the original objective of the investment was to reduce transaction cost!) as seen in
(a) above with more coordination effort.
c) Starhub cable network is a costly investment for starhub. But it provides an IT externalityfactor for competition -"competitor push" and "technology pull. If a Video Company decide to
exploit this externalities (technology pull) to provide a new service of VOD, its
implementation cost to hook on to Starhub cable is minimal, but it can cause a negative
externality on its competitors who do nothing or show indifferent to this competitor push
d) Investment in wired network is affected with new implementation of WIFI and WIMAXtechnology
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Information technology as a mediating technology
In the transaction cost model, we may conceive of information technology as a mediating technology because it mediates the
transactions or exchanges between the parties. Information technology can reduce the costs of transacting (i.e. the
information costs) because it enables more information to be communicated in the same amount of time.
1. Source: Ctrip.com. Hotel-room availability check
2. Source: Ctrip financial Report
3. TripAdvisor. Reviews posted bypasthotel guests
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Ciborra, Malone and Picot (1997) argue that information technology can be used to reduce transaction costs in different
economic organizations. This argument is based on the idea of using information technology to make more information
available to decision makers, thus contributing to the reduction of uncertainty.
Accordingly, the information problem that jeopardizes market efficiency can be fixed by supporting the system with
information technology. Information technology can be used to reduce the cost associated with transactions. Accordingly to
Malone, three different effects of IT on the exchange process can be identified:
o Communication effect: increase information per unit of timeo Electronic integration effect: easier linkage between buyer and sellero Electronic brokerage effect: the contracting process between seller and buyer becomes more efficient and effective
These effects increase the smoothness of the information flow so that, supported by IT, people involved in the economic
system, both market and hierarchy, can better use the existing information and deal better with the uncertainty they have to
face.
In the transaction-cost model, information technology is seen as a factor that can decrease the costs of transacting, thusimproving the functioning of the market or leading to market-like forms of organization. Market-like form of organizing
involves exploitation of intermediaries. The hierarchy form of organizing entails internalizing external processes and
reduction of intermediaries. The effect is thus providing the enterprise more bureaucratic control over the transactions and
processes.
Recall that the logic behind this argument is that the lower the transaction costs, the more suitable the market as a form of
organizing. In other words, markets as opposed to bureaucracies entail transaction costs, while bureaucracies replace
transactions with hierarchical decision-making, thus entailing a higher amount of managerial costs (agency cost) rather than
transaction costs. The more one uses information technology, the lower the transaction costs and, therefore, the more
efficient the market as an allocation mechanism.
However, we should consider that the increased amount of information being communicated in the same time uni tmight
increase the information processing costs that the transacting parties need to endure, information technology does not
necessarily lead to lower transaction costs.
In the transaction cost model, information technology is seen as a factor that can decrease the costs of transacting, thus
improving the functioning of the market or sustain ing market-like forms of organisation. The logic behind this argument
is that the lower the transaction costs, the more efficient the market will be. The more you use information technology, the
lower the transaction costs and, therefore, the more efficient the market will be as an allocation mechanism.
uncertainty
Transaction
CostMarket or Hierarchy
e-Market or e-hierarchy
For the same cost, more
uncertainty may be dealt
with in the e-market
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Strength & Weaknesses of TC economics
The strength of the transaction cost perspective is that it offers a compact set of concepts and a uni fyi ng languageto
analyse and interpret a variety of micro and macro phenomena, such as vertical integration between firms, employment
contracts and internal labour relations, anti-trust laws and interventions, and even the emergence and failure of economic
institutions.
Nevertheless, it has two majorlimitations.
First, transaction cost economics is based on a sophisticated but still narrow view of the agentas economic man, who
maximises utility despite the limits of their rationality. Therefore altruistic behaviour, for example, is beyond its
scope. See video of economistMiltonFriedmans arguments of capitalism over altruistic economics.
Second, the approach presents a static, comparative view of why different economic institutions exist, develop or decay.
Transaction cost economics suggests that, for a given level of uncertainty and trust between the parties, there are usually a
limited number of governance structures that are efficient and will survive in the long run. When circumstances change, an
efficient governance structure must adapt swiftly or it will be swept away by competition. The approach is silent, however, on
the forces that make certain economic organisations stickier than others. In sum, transaction cost economics seems to
assume an impli cit notion of f ri ctionless change. It ignores the widespread role of transition costs in socio-economic
organisations undergoing continuous change.
ICT and disin termediation
Traditionally, disintermediation in this context has been seen to occur when ICT implementations enable economic agents to
bypass third parties and directly engage in economic activities with their counterparties. In the context of the web, it has
come to signify the disappearance of a wide variety of middlemen, or intermediaries, and the creation of an enhancedsales
network in which customers deal directly with service providers. The result is supposed to be a frictionless economic
environment that reduces both inefficiencies and transaction costs.
Understanding the impact of e-commerce on intermediaries requires an appreciation that:
ICT supports many business activities and, as a result, it can lead to changes in market configurations; in particular, it
changes the role of intermediaries in matching supply and demand.
ICT can reduce transaction costs by eliminating the need for intermediaries that used to make the transaction possible:
disintermediation occurs because ICT does for free what an intermediary does for a fee.
Chaffeys Chapter-2 demonstrates the costs saved in a conventional producer-wholesaler-retailer-consumer value chain by,
first, disintermediating (eliminating) the wholesaler and then, secondly, disintermediating both the wholesaler and the
retailer. In the latter case, the price to the consumer becomes the same as that charged originally by the producer to the
wholesaler and is less than half the old price that the retailer charged the consumer.
This happens because ICT can reduce search costs, contracting cost, control and regulation costs through facilitating the
exchange of information between economic agents (described by Malone etal., 1987 as electronic communication effects)
and because it makes iteasier to match buyers and sellers (Malones electronic brokerage effects).
There are therefore valid economic incentives for both producers and consumers to bypass intermediaries and push them out
of the value chain. Intermediaries add significant costs to the value chain and, by suppressing them, the profit margins of
producers can increase while at the same time offering lower prices to consumers. Advanced uses of ICT and the evolution of
electronic marketplaces have reduced the transaction costs for producers, thus enabling them to internalise activities thathad to be served by intermediaries in a traditional market. This has created the opportunity to distribute profits within the
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value system by driving the intermediaries to extinction. Under such a scenario, producers can benefit from increasing their
profit margins and passing part of their savings to consumers who thus enjoy lower prices and greater choice.
An email from a student:
Intermediation, disintermediation, and reintermediation (another form of new intermediary). I am so confused regarding how
it leads to reducing transaction costs pertaining to E-Business.
I understand that e-business/e-commerce facilitates disintermediation....then you have the transaction brokers which
are intermediarybrokers (i thought ecommerce facilitates DISintermediation?) , and they aid in reducing transaction
costs....then there is the search engines which are intermediaries that support in lowering of TC, and then (mentioned by Dr
Antonio), I-Tunes are facilitating disintermediation.....
Jacks answer:
Disintermediate = removes intermediaries (in manual physical market place, often has long line of intermediate parties)
Intermediary = act as middleman between 2 parties. If you do everything yourself, then there is no need for any intermediary
to help you. BUT is this really possible? if you take a taxi to go to the a tour agent, who calls a wholesaler agent to book
hotel room from a Taiwan hotel... in this physical manual approach, you use three intermediaries to get to the Taiwan hotel
room. But, if you now use online B2C Asiaroom.com to book the Taiwan hotel, you use only one intermediary i.e. B2C
AsiaRoom.com, (an IT e-business) acting as the intermediary. In this case there is also disintermediation. Search engines act
as an intermediary replacing physical intermediaries like taking a taxi (an intermediary) all over town to many shops
(intermediaries) searching for the right item. iTunes dis-intermediates because you can now buy directly from the
manufacturer of the song titles instead of going through the supply chain involving retails and wholesalers. iTunes shop
happens to be the only intermediary now.
I nfomediari es and In termediaries
Intermediaries are profoundly affected by the adoption and diffusion of ICT(same as IT) in markets. ICT changes the way in
which information is accessed and therefore allows agents to bypass traditional intermediaries to execute transactions.
It must, however, be noted that a new form of intermediation is emerging alongside the wide adoption of ICT. Electronic
markets are characterised by a very rich information setting which, in certain circumstances, makes it difficult to find the
right information needed by the agents.
If you are looking for information on a specific product, you will find it difficult to identify the right website to support your
search without the use of a search engine such as Google. Search engines are intermediaries which reduce the cost of gaining
access to and using information.
These intermediaries, given the nature